2014 Winter Midterm - MGT 393/RSM 225 WINTER 2014 MIDTERM...

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Page 1 of 5 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 called “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 planning. Tailor 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 with Tailor 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
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