Management and Organizational Studies 2275A/B Chapter Notes - Chapter 16: Legal Personality, Fiduciary, Income Tax

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The Corporate Form: Operational Matters
Corporate Liability
· Liability in Tort
o A corporation has primary liability for a tort when, in law, it is regarded as the entity
that actually committed the tort in question
o Identification theory: a theory specifying that a corporation is liable when the
person committing the wrong is the corporation’s “directing mind and will”
! Generally, it is the highly placed corporate officers who are classified as
“directing” minds, while low-level employees are not
o A corporation has vicarious liability when an agent or employee who is not a
directing mind of the corporation has committed the tort. Law of vicarious liability
does not distinguish between the natural employer/principal and the artificial
· Liability in 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 To avoid personal liability, the person signing a document on behalf of a
corporation should ensure that the document contains a clause clearly indicating
that the person is signing on behalf of the corporation and is not signing in her
personal capacity. This precaution is equally important in the case of pre-
incorporation contracts
o Pre-incorporation contracts are contracts that have been entered into by the
company’s promoter’s on behalf of the corporation before it has even been
o When adoption occurs, the corporation assumes liability on the contract
· Criminal and Regulatory Liability
o Criminal Liability
! A 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 and did so mostly for the benefit of the company
o Regulatory Offences
! An offence contrary to the public interest
Directors and Officers
· The directors, who are elected by shareholders, manage or supervise the management of the
business and the affairs of the corporation. They also have specific power and obligations set out
in legislation
· Directors are generally authorized to appoint officers to carry out many of their duties and
exercise most of their powers
· Duties of Directors and Officers
o The Fiduciary Duty
o Duty of Care (Reasonably)
o Contractual
o Do not owe a duty to shareholders
! Requires directors and officers to act honestly and in good faith with a view
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to the best interest of the corporation as a whole and esp. not just to a
particular group of shareholders
o The Self-Dealing Contract
! Self-dealing contract: a contract in which a fiduciary conflict of interest
! Individual’s contract to sell to his own company will be enforceable provided
· He discloses the contract to the corporation in writing
· He does not participate in any vote of the directors approving the
· The contract is fair and reasonable to the corporation
o Corporate Opportunities
! Corporate opportunity: a business opportunity in which the corporation
has an interest
o The Duty of Competence
! Requires directors and officers to exercise the care, diligence, and skill that
a reasonably prudent person would exercise in comparable
· Liabilities of Directors and Officers
o Liability in Tort and Contract
! When a director is acting on behalf of a corporation and commits a tort, his
actions may be attributed to the corporation itself by virtue of the
identification theory
! When the director enters into a contract, as agent for his corporation, his
actions make the corporation the other party to that contract and the
director slips out of the equation altogether
o Liability in Tort
! Directors are not personally liable provided that they were acting in
furtherance of their duties to the corporation and their conduct was
o Liability in Contract
! The director does not generally attract liability for the corporation’s contracts
—the principles of agency operate in such a way that the corporation is
liable to the outsider and the director who has acted as agent for the
corporation drops out of the transaction
! A director faces personal liability on a contract if the facts indicate that the
director intended to assume personal liability, as when:
· Director contracts on his own behalf, as well as on behalf of the
· The director guarantees the contractual performance of the
o Liability by Statute
! Numerous pieces of legislation place obligations on directors Ex. Income
tax laws
· Avoiding Liability
o Directors can reduce their exposure to personal liability by exercising care,
diligence, and skill in the performance of their duties
o Indemnification: the corporate practice of paying the litigation expenses of officers
and directors for lawsuits related to corporate affairs
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