Distributorship Vs. Sales Representative: Determining the Relationship

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Often suppliers and resellers tend to enter a symbiotic relationship for the sale of products usually within a jurisdiction. The effect of this is that while the supplier tends to enjoy the latitude of exposure and reaching a wider customer base through appointed resellers for their products thereby increasing sales output, on the other hand, resellers may either have the monopoly of distribution of the said products or opportunity to act independently of the initial reseller subject to agreed terms with regards to the products depending on the intention of the parties as contained in the agreement.

The two concepts of distributorship and sales representative are often confused with each other but a distributorship is a relationship between a supplier and reseller where the supplier grants a licence to the latter to sell its goods in a defined jurisdiction usually on a wholesale or retail basis at a predetermined cost which may be independent of the supplier. On the other side of the divide, a sales representative is an autonomous source for the sale the supplier’s goods at a price usually predetermined by the supplier. A key point to note here is that unlike a distributor, a sales representative may earn a commission which may take different forms, for their activity with the supplier.

In Canada, a distributor or reseller is protected by the Competition Act where price maintenance arises. Price maintenance occurs where a supplier precludes a distributor from selling the supplier’s goods below a marked price. However, for the Competition Act to apply, such supplier must have threatened, discriminated against, or refused supply of its goods to such reseller because of its low pricing strategy. Therefore, clauses in a distributorship agreement in Canada must be guided by the governing laws. On the Contrary, a sales representative agreement is divulged of any of the above stated formalities.

To adequately understand the two concepts, it is imperative to note that in a distributorship arrangement, the reseller takes title of the goods upon payment of consideration or such agreed terms. There is ownership of goods finalized upon sale and such reseller does not have the authority to bind the supplier but in the case of a sales representative, ownership of goods does not pass on to the sales representatives however, the sales representative has the authority to bind the supplier to a contract for the supply of goods.

Where there is a blur line between a distributorship and a sales representative agreement, the intention of the parties must be had recourse to. To illustrate this- Let us assume that A is a manufacturer and A gives its goods to B and C to resell. If B takes on the all or substantial portion of the goods and engages others in a distribution chain to resell the goods of A to consumers, then B is most likely a distributor of A but if C is engaged by A to resell the goods to consumers for a fee or other arranged incentives and C reports to A, we can conclude that C is most likely a sales representative of A. This illustration is subject to exceptions which are not discussed in this write up.

Although the two concepts are sometimes used interchangeably in commercial transactions, distributorship and sales representative have separate connotations and before a reseller enters a binding contract for the sale of goods on behalf of a supplier, such reseller ought to understand the nature of the relationship it has with the supplier to avoid a relationship that was not intended from the outset.

 

This article is intended for informational purpose only and does not constitute legal advice or a client-lawyer relationship.

 

Why Should You Organize Your Corporation?

It is so easy to set up a corporation: all you need to do is go online, file and there you have it, a brand-new legal person. While I do not totally disagree with this approach, what is usually discounted are the matters that need to be dealt with after the corporation must have been founded. Organizing a corporation from inception gives such corporation the confidence of corporate structure from the onset.

Organizing a corporation entails establishing and maintaining its corporate records according to which a corporation will be bound. The CBCA and OBCA places emphasis on corporations taking adequate precaution to avoid false or untrue information in its record. The form in which a corporate record may be kept may range from loose-leaf book, bound book, saved as electronic data or stored in the web cloud space. Whatever form chosen by a corporation to store its corporate information, such must be accessible by specified persons within a reasonable time in an intelligible form failure of which, such corporation may be liable under the prescribed law.

Usually most of the records may be approved at the first directors’ or shareholders’ meeting. The Records that may be included in a corporate book include articles, bylaws, resolutions, minutes of meetings, registers, ledgers and securities. It is crucial to note that corporate records not only serve as the constitution according to which a corporation may be governed, it also acts as checks and balances for corporations especially offering corporations whose records may be accessed by any person upon reasonable request.

Further, a corporation may want to be organized for the following reasons:

  1. To keep the corporation in line with federal or provincial laws to avoid unforeseeable and preventable liabilities.
  2. To maintain good corporate governance practices by having a structure of keeping up with corporate formalities in relation to resolutions, registers and ledgers.
  3. To have a centrally located Corporate record for search by persons qualified to view same including but not limited to directors, auditors and shareholders depending on the type of corporation which may lead to an increase in public confidence in such corporation.
  4. To serve as a point of reference or act as precedent as to the reason a decision affecting a corporation, or its shareholders was carried or avoided. This may be contained in series of minutes or resolutions.

The above is not exhaustive on why a corporation should keep corporate records nonetheless, corporate record keeping by a corporation is not optional, it is imperative. It is not enough to organize the corporate records of a corporation, but such corporate records must be updated frequently depending on the size of the corporation for it to have the anticipated effect of usefulness.

Based on the foregoing, the benefits of organizing a corporation and maintaining its corporate records from its inception far outweighs any inconveniences and the potential liabilities that may arise from not doing so. Still, failure to organize your corporation from its inception, better to be late. However, you may still want to ask: why should you organize your corporation? Because it is vital to the long term survival of your corporation.

This article is intended for informational purpose only and does not constitute legal advice or a client-lawyer relationship.

 

 

The effect of Minors as Shareholders of a Corporation Toronto Ontario Canada

Shareholders are the individuals or corporate bodies who have subscribed to the shares of a Corporation. A share is a portion of a larger amount to which people are subscribed. The CBCA prescribes the general condition that must be fulfilled before an individual may be appointed a director of a corporation including that the individual must:

  1. be at least 18 years of age;
  2. not be bankrupt:
  3. not be incapable; and
  4. be an individual.

Unlike directors of a corporation, the CBCA does not have any restriction as to who may own shares in a corporation. It follows therefore that any person, both individual and corporate entities are capable of validly owning shares in a corporation regardless of the conditions imposed on being a director in a corporation.

However, despite there being no restrictions on who may be a shareholder of a corporation, shareholders nevertheless have obligations to a corporation regardless of whether the shareholder is a minor. A minor is any individual who is less than 18 years old which is the age of majority. Obligations a shareholder may have towards a corporation include but not limited to attending the annual general meeting, executing contracts to bind the company, voting and execution of various document for the benefit of the corporation.

It is imperative to note any legal person including minors may enter into a contract as long as such person is capable. The problem lies in the capacity of a minor to enter into a contract in the first place and where a minor enters into a contract, such minor can decide to void such contract before they attain the age of majority without being held liable.

Again, shareholders have the right to approve, vote and ratify resolutions of the board of directors on behalf of a corporation. It is debatable if a minor by herself has the capacity to approve, vote on or ratify such board resolution which may include-

  1. any change or amendment to the articles of the Corporation;
  2. the change or amendment to the articles of the Corporation;
  3. the purchase by the Corporation or redemption of any shares of the Corporation; and
  4. any action that may result in a material change in the nature of the business of the Corporation.

Assuming but not conceding that a minor may be able to understand what is expected of them is any of the above scenarios yet, the major hurdle of scaling through the capacity to enter a contract will be tested.  Therefore, the effect of a minor taking up shares by herself in a corporation goes beyond the shares in itself and towards the capacity to undertake the responsibilities that come with owning a share in a corporation as highlighted above.

It follows that when contemplating whether to issue shares to a minor, recourse must be had to the obligations which comes with owning shares in a corporation and if a minor will have the capacity to fulfil same. In essence, while considering whether to allot shares to a minor, various ways a minor may hold shares in a corporation may be explored including but not limited to holding such shares in trust on behalf of the minor. It is also essential to consider the effect a minor shareholder may have in ratifying a corporate document without making such document voidable to the detriment of the Corporation.

 

This article is intended for informational purpose only and does not constitute legal advice or a client-lawyer relationship.

Ola Oshodi Law

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The Global Covid-19 pandemic has affected everyone in various ways in Canada including businesses and as we emerge from the imposed lockdown, one of the questions insolvent businesses may need to respond to is whether to file for bankruptcy.

No doubt, the government has been supportive of the economy by providing fiscal palliatives to keep businesses afloat which in turn has postponed key decision businesses have to make regarding their affairs. It is noteworthy that bankruptcy filing was at an all-year low in March 2020 despite the economic gloom. While this may seem like good news, the government’s fiscal palliatives to businesses are not infinite which will cause insolvent businesses to ultimately rethink strategies to continue to stay afloat.

In order to avoid the stigma of bankruptcy, businesses may decide to reorganize their business affairs to make it more profitable or negotiate with creditors so as to come up with better payment structure to keep the business thriving while servicing its debts. There are other alternatives a business may explore to avoid bankruptcy which is not discussed in this write-up and some alternatives may involve the full cooperation of secured creditors. Nonetheless, the decision a business decides to embark on is predicated upon its structure since there is no one size fits all.

In concluding whether a business is going to survive after the Covid-19 pandemic, recourse must be had to its fiscal status before the pandemic.  This is not in itself conclusive and as we mentally absorb the bankruptcies of retail giants all over the world, struggling businesses must endeavour to act with despatch regarding their business affairs. If you are unsure what steps to take, do ask a professional.

 

 

This article is intended for informational purpose only and does not constitute legal advice or a client-lawyer relationship.