Ch 16 Operational Matter

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Western University
Management and Organizational Studies
Management and Organizational Studies 2275A/B
Frederick King

Operational Matters 11/28/2012 11:42:00 AM Chapter 16 Corporate Liability  A corporation is a legal person in the eyes of the law  Liability in tort o Primary liability – when the corporation is the entity that actually committed the tort in question  Identification theory – specifies that a corporation is liable when the person committing the wrong is the corporation’s directing mind (the highest placed corporate officers) o Vicarious liability – when the tort has been committed by an agent or employee who is not a directing mind of the corporation  Liability in contract o Agency laws largely determine when a corporation is liable on a contract o A corporation is bound by the actions of the agent only if the agent is acting within his actual or apparent authority o Pre-incorporation contracts – contracts that have been entered into by the company’s promoters (someone who participates in setting up a corporation) on behalf of the corporation before it has even been created  Corporations can choose to adopt these contracts, assuming liability  The promoter can avoid liability if the pre-incorporation contract says they were acting on behalf of the corporation  Criminal regulatory liability o Criminal liability – the identification theory is adapted to the criminal law scenario  The corporation has committed a crime if the person who committed the crime was a directing mind of the corporation, and he committed it in the course of his duties for the benefit of the corporation o Regulatory offences – a offence contrary to the public interest  A corporation faces liability pursuant to a wide range of statutory enactments related to taxation, human rights, pay equity, employment standards, etc.  Regulatory offences have a criminal aspect because they involve some sort of punishable conduct that is contrary to the public interest Directors and Officers  Directors – elected by shareholders, manage/supervise the management of the business and the affairs of the corporation  Officers – carry out many of the directors management duties and exercise their powers  Fiduciary duty – require directors and officers to act honestly and in good faith with a view to the best interests of the corporation o They must not allow their personal interests to conflict with their duty to the corporation  Self-dealing contract – a contract in which a fiduciary has a conflict of interest o When someone is on both sides of the contract – looking to sell something to the corporation that he has in his personal possession (essentially selling something to himself), the corporation wants to buy it for the cheapest price, but he wants a high price for it o Self-dealing contracts are allowed when:  The contract is disclosed to the corporation in writing  The seller does not participate in any vote of the directors approving the contract  The contract is fair and reasonable to the corporation  Corporate opportunities – a business opportunity in which the corporation has an interest o These are opportunities to do business that the company can pursue or decline o If the directors or officers were permitted to take up any of these opportunities for themselves, self-dealing contracts problems could arise  The duty of competence – requires directors and officers to exercise the care, diligence and skill that a reasonable person would exercise in comparable circumstances  Liability of directors and officers o Liability in tort – directors and officers will almost always be responsible for their own tortious conduct even if they were acting in the best interest of the corporation o Liability in contract – the director doesn’t generally attract liability for the corporation’s contracts  A director faces personal liability on a contract if the facts indicate the director intended to assume liability:  When the director contracts on his own behalf, or on behalf of the company  When the director guarantees the contractual performance of the company  Avoiding liability o Indemnification – the corporate practice of paying the litigation expenses of officers and directors fo
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