Joan Smith and Tony Jones – lifelong friends – want to start a computer software business. They are both married and have young children, and their spouses are not working. Both Joan and Tony have computer expertise and want to be actively involved in the business. Both are employed by a very large software company and each earns employment income of about $50,000. They want to continue with this employment while they get their own business “off the ground.” Joan has no personal assets but Tony has just inherited a large sum of investments from his grandfather, and although some of that money will be used as startup capital for the business, Tony does not want to have personal assets at risk in the event the business is unsuccessful. Furthermore, Joan and Tony have prepared financial projections for the business which show that it will lose approximately $30,000 in the first two years of operations, and start making profits in the third year.
Joan and Tony come to you, their lawyer(s), and ask for an opinion as to how they should organize their business and any other important issues they should consider before starting their business. Write an opinion letter to them, and consider all possible issues and considerations. Assume for the purposes of your answer that (1) the business is to be located in Nova Scotia (2) if they did incorporate their business it would qualify as a “Canadian Controlled Private Corporation.”
It is now four years later. Joan and Tony incorporate their business as Islander Software Consultants (“ISC”). The authorized capital of the company is 1000 common shares with a nominal/par value of $10 per share, and the issued capital is 100 common shares. Joan and Tony each own 50 of these common shares. The company has started to turn a profit, but as of the most recent fiscal year ISC has retained earnings of only $23,000. Joan and Tony want to get involved in tendering for some provincial government contracts, but in order to do so need additional capital of approximately $200,000. Their Bank already has lent ISC $150,000 and taken a debenture as security, but is unwilling to advance additional capital. Joan thinks that they should offer ISC shares to the public. Tony does not think this is necessary. Tony lost all of his inheritance on bad stock market investments. However, Tony has a rich uncle, Lenny Trump, who is prepared to invest the $200,000 in ISC. Lenny tells Tony that he trusts him to run the company, but the truth is that Lenny is a “control freak” and if things don’t go well Lenny will want to control the company. Both Joan and Tony do not want to lose control over their company unless it is absolutely necessary. Lenny is a risk taker and rich enough that if he loses his $200,000 it is not the end of the world, and he does not need an annual income or money from ISC. Joan is a bit unsure of the idea of accepting Lenny’s capital, but Tony has told them that if he does not go along with the plan in some form then Tony will incorporate his own company and use Lenny’s capital to develop new spreadsheet software that Tony developed when they were a partnership.
(a) You are ISC’s corporate solicitor. From ISC’s perspective what is the best way or ways to structure Lenny’s capital in ISC, AND
(b) You are Joan’s solicitor. From Joan’s perspective (i) what is the best way or ways to structure Lenny’s capital in ISC (ii) what about Joan’s proposal to sell ISC shares to the public and (iii) what about Tony’s threat to incorporate a new company, AND
(c) You are Lenny’s solicitor. From Lenny’s perspective what is the best way or ways to structure Lenny’s capital in ISC.
minimum 5 pages, write in 1.5or2 space
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