TST MGT393 guide of midterm WINTER 2014 (1).pdf

5 Pages
Unlock Document

University of Toronto Mississauga
Manfred Schneider

MGT 393/RSM 225 – WINTER 2014- MIDTERM→ general guide → this is not intended to be a sample response but rather a general guide to issues that could be identified and discussed. NOT PROOFREAD A client, TailorSwifft, has attended at your office. The client explains that her sister, Carrie, was married to a National Hockey League player, Jacque Underwooden. Tailor, Carrie and Jacque were all from a small town outside of London, Ontario. In 2009, Tailor and Carrie decided to open up a cupcake/bakeshop call ed “Underwooden Cupcakes”. In order to proceed, it was decided to incorporate a company ,Underwooden Foods Limited (“UFL”). Tailor received 40 Class Avoting common shares of UFL and Carrie received 40 Class B voting common shares of UFL and Jacque received 20 Class C voting common shares of UFL. The share attributes were identical for each class; different classes were issued to provide some flexibility for tax planniTailor and Carrie were each initially elected as Directors , and Carrie was appointed President and Tailor, Vice- President. Jacque took on no active role inoperations, as he was primarily “the brand” (that is, he was a well- known professional hockey player) . The two sisters essentially agreed to have an equal say in decision making.POSSIBLE ISSUE→ Although we have not taken contract law yet in the course → students could consider if this a “shareholders agreement”. Analysis → could integrate into challenge some of the actions taken by Carrie later. UFL initially opened a store in Masonville, a large shopping mall in London, Ontario and subsequently a second location was opened at a highway stop on Highway 401 near Kitchener. Both locations were highly successful and generated significant sales, profits and cashflow. As a result, in October 2013 Underwooden Cupcakes caught the attention of Jim Tremclo, a successful businessperson, who also controlled the large franchise chain, Boston Italian Restaurante. Jim met withTailor and Carrie and told them that he was interested in investing in UFL, and wanted to turnUnderwooden Cupcakes into a franchise chain of stores. He saw no reason why it could not be as successful as Tim Horton’s over time. Jim suggested that they carry on for a bit longer before he invested and they started franchising, in order to fully establish a successful “track record”. Ontario law requires a franchisor to provide full disclosure to a potential franchisee and Jim thought it critical that the stores have a longer operating period/history before franchising started.Relevant fact → Opportunity to possibly get involved with Jim/franchise was made to both Tailor and Carrie (Directors/officers) All is not well. A few months ago, Tailorhad an affair with Jacque. Although they went to great lengths to keep it “a secret” – Carrie found out in late December 2013. Jacque and Carrie have two young children – and a generally happy family life. Jacque and Carrie wanted to “save their marriage”. Jacque felt so badly about the affair he had with Carrie’s sister, he gave Carrie his 20 Class C shares in early January 2014 as a sign of his love and “goodfaith”.Relevant fact → Carrie now becomes a majority shareholder. Aside Note: Though it is common for certain restrictions on transfer to be included in the Articles of Incorporation or even by-laws occasionally, such term is not required by law but utilized as a matter of business and legal acumen. Carrie was willing to forgive Jacque, but could not forgive her sister for what had happened. In mid -January 2014, Carrie met with Jim and his team of legal advisors. Relevant fact → Carrie is intentionally planning a strategy to essentially “freeze out” and potentially “oppress” Tailor. Motivation is not “best interest of the corporation” Based on the meeting, the following strategy was implemented: • Carrie held a Board of Directors meeting with only her in attendance and with her 60 shares/votes - elected herself as the sole Director. The Board then terminated Tailor as VP, despite the fact that she was doing important work;Relevant fact → Would not just be a Board meeting but also must have been a shareholders meeting if they elected Carrie as a sole director. As all shareholders are the same → all should have received notice of shareholder meeting. POSSIBLE ISSUE → Validity of Carrie as Sole Director; Analysis: The election of Carrie as a sole director was not completed by way of a proper shareholder meeting; failed to comply with the Act. Impact could be that subsequent actions taken by Carrie in her capacity as sole director are not valid (including the termination of Tailor.) This issue impacts other. Going forward this will not be repeated below – and assumed specific actions taken would be analyzed) [Aside – not expected of a bus law student → Tailor my have some rights under employment law as well for wrongful dismissal] • The Board then declared a dividend on the Class C shares, equal to the amount of cash in UFL; Relevant fact → nothing to indicate that this dividend violates solvency test or capital maintenance test. May be generally indicative of a more “oppressive” behaviour. Page 1 of 5 • Jim and Carrie then incorporated a new corporation, Boston Bakeries Inc. (“BBI”) with the two of them as equal shareholders. BBI then purchased all the assets (intellectual property, location leases) from UFL at fair market value. The sale to BBI was approved by Carrie as sole director of UFL. BBI is now in the process of developing a franchise system for the trademark “Underwooden Coffee and Bakery”. BBI has since opened six new Underwooden Coffee and Bakery - locations;POSSIBLE ISSUE: Dealing with the fundamental change. Analysis → The sale of all the assets of UFL would constitute a fundamental change. OBCA provides that a vote must be held to approve; If Tailor dissent → entitled to have purchased at fair value. Conclude →As this was not in accordance with OBCA – consider order for compliance. Aside Note: In respect of the fundamental change, a special resolution would be necessary for its approval such that Carrie having only 60% of the shar es of UFL would not be able to unilaterally approve the change. FURTHER ISSUE: Breach of fiduciary duty. Analysis → Jim and Carrie working together; shifting of the business concept and assets to BBI →→→ 1. Taking of corporate opportunity; 2 conflict of interest; 3. Failure to act as an officer and director in the best interest of the corporation; failure to act honestly; good faith EXPAND →→→ Corporation has been harmed by these actions – DISCUSS →→ DERIVATIVE ACTION (criteria likely can be met so Tailor can request authority to commence action in name of the corporation; may also be able to sue BBI;; OPPRESSION REMEDY – these events plus all other – unfairly ignores Tailor; are oppressive; • After paying all the creditors of UFL, the surplus cash in UFL was distributed as a “special” dividend to the Class B shareholders; Relevant fact → appears that UFL did pay their creditors. Dividend paid not likely a violation of solvency test or capital maintenance. (if a student discusses these tests – may indicate that they did not understand the tests and/or use the case facts) • UFL continues to exist as a corporation, but it is inactive. When Tailor tried to talk to Carrie, Carrie told her that the two of them were once partners – and now - if she did or said anything further, Carriewould have UFL commence a lawsuit against Tailor for breach of fiduciary duties. Aside → interesting – they are sisters – they were also shareholders – nothing to indicate that they were partners. Having an affair is not a breach of fid uciary duties in the business entity context. Note: If it is a corporation, then according the Partnership Act, it cannot be a partnership. Partnership 2. Partnership is the relation that subsists between persons carrying on a business in common with a view to profit, but the relation between the members of a company or association that is incorporated by or under the authority of any special or general Act in force in Ontario or elsewhere, or registered as a corporation under any such Act, is not a partnership within the meaning of this Act. R.S.O. 1990, c. P.5, s. 2. ROLE/REQUIRED IS IN THIS PARAGRAPH →→Tailor does not have an understanding of law, and more specifically corporate law. At this point, Tailor finds herself unemployed and broke. Her general sense is that Carrie cannot do what she has done. She knows that Carrie will soon be a
More Less

Related notes for MGT393H5

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.