Winter
2012
Business Associations
Christopher Scott
Outline for LAW 315 A01, as taught by Professor Mark Gillen
Editor’s Note: This course has closed-book portions on its exam. This outline is directed at the open-book part of
the test. Although some closed-book material is covered, it is so voluminous as to be impractical to include here in
its entirety. Please refer to the Professor’s course notes.
University of Victoria Faculty of Law
Business Associations
Table of Contents
AGENCY
1
Actual Authority, Ostensible Authority and Breach of Warranty of Authority
Duties of the Parties
Duties of the Agent to the Principal
Duties of the Principal to the Agent
Termination of Agency Relationship
Ratification
Undisclosed Principal
Liability of Principals for Torts Committed by Their Agents
1
1
1
1
2
2
2
2
SOLE PROPRIETORSHIP
3
PARTNERSHIP
4
Relationship Between the Partners
Definition and Formation (or: Determining Whether a Partnership Exists at All)
Legal Status of Partnership
Name Registration and Actions Against Partnerships
Governance and Default Rules
Funding and Dissolution
Relationships Between the Partners and Other Persons
Liability of Partners in Contract and Tort
Existence of Partnership as it Relates to Third Parties (or: Determining Who is a Partner)
Subordination of Lenders for a Share of the Profits
Retirement of Partners
LIMITED PARTNERSHIP
4
4
4
5
5
6
6
6
7
8
8
9
LIMITED LIABILITY PARTNERSHIP
10
CORPORATION
11
Background
Jurisdictional Issues
Incorporation
Applying for Incorporation Under the CBCA
Applying for Incorporation Under the BCBCA
Naming and Post-Application Considerations
Advantages of Incorporation and Choosing Where to Incorporate
Reincorporation and Continuance
Extra-Provincial Registration in BC
Pre-Incorporation Contracts
Common Law
Statutory Modifications Under the CBCA
Statutory Modifications Under the BCBCA
Legal Status of Corporations
i
11
12
12
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13
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14
14
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14
15
15
16
Business Associations
Liability for Corporate Acts
Rhetoric of the Court
Circumstances and Policy Where Courts are More Inclined to Pierce the Corporate Veil
Gap-Filling and Implied Contractual Terms
Corporations Formed to Avoid Statutory Requirements
Affiliated Corporations
Representations of Unlimited Liability
Non-Consensual Claimants
Other Means of Getting Around the Corporate Entity
Policy
Share Capital
The Nature of Shares
Frequently Used Shares (Common, Preferred and Other Shares)
Dividends
Share Rights (Voting, Dissolution and Pre-Emptive Rights)
Issuing New Shares
Repurchase and Redemption of Shares
Series of Shares
Par Value Shares and Stated Capital Accounts
Debt Finance
Securities Regulation
Sources of Securities Regulation
Distribution of Securities to the Public
Continuous Disclosure
Regulation of Insider Trading
Takeover Bid Regulation
Governance
Objects, Powers and Agency (the Ultra Vires Doctrine and Authority of Corporate Agents)
Directors and Officers
Qualifications, Election and Removal of Directors
Authority and Powers of Directors
Directors’ Power to Delegate
Removal of Officers
Directors’ Meetings
How Boards of Public Corporations Operate
Shareholder Voting
Shareholder Meetings
Basics
Conduct of Meetings
Shareholder-Requisitioned Meetings
Meetings By Order of Court:
Proxy Solicitation
Shareholder Proposals
Financial Disclosure, Access to Records, and Other Forms of Disclosure
Closely-Held Corporations
Policy and Background
Treatment of Closely-Held Corporations
Shareholder Agreements
Share Transfer Restrictions
INDEX OF CASES
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ii
Business Associations
Agency
•
Definition: An agency relationship exists where one party (an “agent”) is able to affect the legal
relationships of another party (a “principal”) with respect to third parties (Fridman, The Law of Agency)
Actual Authority, Ostensible Authority and Breach of Warranty of Authority
•
•
•
Actual Authority: The principal will be bound if the agent has the authority to bind him/her.
o Express: Arising from the words of an agency agreement (explicitly or by inference)
o Implied: Arising from the usual or customary authority of such an agent.
 Usual: What this particular principal has allowed this particular agent to do in the past.
 Customary: The authority that this type of agent normally has, by custom.
Ostensible Authority: Even without actual authority, agents may still act on a principal’s behalf.
o Requirements: If the following are met, the principal will be bound by the agent’s actions:
 Representation: Principal must make or permit a representation re: the agent’s authority.
 Reliance: The third party must reasonably rely on that representation.
o Policy: This is aimed at least-cost avoidance of losses and protecting third party reliance.
Breach of Warranty of Authority: The agent may be still liable even if the principal is not.
o Requirements: If the following are met, the agent may be liable to third parties for their losses
 Representation: The agent represents that they have authority to bind the principal.
 Falsity: The representation is false.
 Reliance: The third party acts on the representation to their detriment.
o Remedy: Expectation damages are the measure of damages for such an action.
Duties of the Parties
Duties of the Agent to the Principal
•
•
•
•
Note: These duties are implied terms of the contract; can be varied expressly or by circumstances.
General Duty: To perform obligations under the terms of the agency agreement and according to
the instructions of the principal. Remedies as in contract (damages, specific perform., termination)
Duty to Perform with Reasonable Care: Remedy is damages. Standard is normal skill/diligence.
o Professionals are held to the standard of a reasonably competent lawyer/doctor/etc.
Fiduciary Duties:
o Duty of Loyalty: General duty to act in principal’s best interests. Two specific prohibitions:
 Conflicts of Interest: Remedies: accounting of profits, void contract, damages, injunction
 Secret Profits: Remedy is accounting of profits (i.e. profits go to principal)
o Duty Not to Delegate: Remedies include damages and injunction.
 Exception: If delegation is expressly or implicitly permitted. Permission may be implicit if
it is reasonable to read it in (e.g. reasonable to allow delegation of ship repair to craftsmen).
o Duty to Keep Proper Accounts: Remedy is an evidentiary presumption against the agent.
Duties of the Principal to the Agent
•
•
Remuneration: Usually needs express provision, as an agency relationship can be gratuitous.
o Exception: Implied where assuming gratuitous action isn’t reasonable in the circumstances.
o Performance: To get remuneration, the agent must be performing all required obligations.
o Effective Cause: To be remunerated for a contract/sale/etc, the agent must be its effective cause
 Note: “Exclusive” agencies don’t require this. Exclusivity usually requires an express term.
Pay Expenses and Indemnify Against Losses: It is required that the agent be acting within the
scope of actual authority and the expenses not be incurred as a result of the agent’s fault.
1
Business Associations
Termination of Agency Relationship
•
•
By Act of the Parties: If the agreement provides for termination, the agreement governs. If it
doesn’t, then by default the agreement is unilaterally terminable by either party.
o Note: If the relationship is also one of employment, then reasonable notice may be required.
By Operation of Law:
o Bankruptcy of either party: Termination is presumed.
o Frustration: Termination is presumed if the purpose of the relationship no longer exists.
o Death of either party.
Ratification
Ratification
Requirements
Required
Circumstances
•
•
•
Definition: A principal can ratify a contract that the agent did not have authority to make.
Requirements: Ratification can only arise from certain circumstances and has formal requirements
o The party entering the contract must have purported to be the agent of the principal.
o The principal must be in existence and ascertainable at the time of contract formation.
 Note: A corporation that is not incorporated at the time of contract formation fails this test.
o The principal must have legal capacity at the times of contract formation and ratification
o Ratification must be express, either by conduct or acquiescence (e.g. by performance)
 Note: If a principal is trying to take advantage of the third party by waiting to see if future
conditions are favourable before choosing to ratify, that waiting may be acquiescence.
o The principal must have knowledge of all relevant facts (this may not include minor details)
Consequences: The contract becomes retroactively valid (if there is no other defect in validity).
o Relates Back: The ratification is retroactively effective back to the time of contract formation.
 Thus, third parties are liable for breaches of contract committed prior to the ratification date.
o Sue and be Sued: The principal can sue the third party and can be sued by the third party.
o No Breach of Warranty of Authority: The agent isn’t liable to the third party for this breach.
o Agent Liability Relief: The agent isn’t liable to the principal for exceeding her or his authority.
o Principal Duties Apply: The duties of remuneration and indemnification apply to this contract.
Undisclosed Principal
•
•
•
•
•
Undisclosed principal can disclose agency relationship and assume contract’s benefits/obligations.
Requirement: The third party must not have been looking to the agent alone to perform the
contract. This is met if either of the following hold:
o The terms of the contract require that only the agent perform the terms that he/she agreed to
o The circumstances indicate that the third party clearly intended to contract with the agent alone
 e.g. The contract has some personal aspect or is for the services of the agent
 e.g. The third party would not have contracted if the principal’s identity were known.
Rights of the Third Party on Disclosure (or Discovery): They may sue the principal or the agent
(as a party to the contract). In an action by the principal, the third party may use against the
principal any rights or defences exercisable against the agent (e.g. debts, arguments of duress, etc)
Example: Movie critic is banned from theatre, gets an agent to buy tickets. Critic discloses
relationship. Theatre refuses to honour tickets; court sides with theatre.
(Sayeed)
Policy: Protecting the mutual benefit of both parties; preventing unjust enrichment of either party.
Liability of Principals for Torts Committed by Their Agents
•
•
Test: Principals are liable for their agents’ torts if the agents acted within their scope of authority.
Scope of Authority: The fact that the principal did not specifically grant authority for the tort is no
defence. The question is whether the agent was doing the sorts of things that one normally does in
carrying out the agent’s mandate? (e.g. Clerk drawing up documents for law firm [Lloyd v. Grace])
2
Business Associations
Sole Proprietorship
•
•
•
•
•
•
•
•
No Separate Legal Entity: The business is not able to own property or be party to contracts.
Liability: The proprietor owns all of the business assets, is a party to all contracts, carries all
liability for business activities, and is liable to creditors for business debts. There is no distinction
between the business’ assets and the proprietor’s assets, and both may be obtained in court actions.
Management: The proprietor has total control (nb: creditors may impost restrictions in contract)
Formation: No formalities required – just start carrying on business.
Dissolution: No formalities required – just stop carrying on business.
Business Name Registration:
o When Required: The business name must be filed with the Registrar if:
(BCPA s. 88)
 (a) The business is in the business of trading, manufacturing or mining; (b) it is not in
partnership; and
(c) the business name is not the sole proprietor’s own name, or
 Note: The term “trading, manufacturing or mining” is not defined in the Act, and has not
been given must consideration in courts. It appears to have a broad meaning, and might
apply to nearly anything one does for a living. If (b) and (c) apply, it’s best to register.
 The business name consists of a phrase indicating a plurality of persons.
o Prohibited Names: The Registrar may not register the name if it resembles the name of a
corporation in BC or if it is likely to confuse or mislead, unless:
(BCPA s. 89)
 The corporation consents in writing, or
 The business name was used before the corporation first used its name.
o Consequence of Failure to Register: Business isn’t invalidated or dissolved; there’s just a fine.
o Form of Registry: The Registrar must maintain a register with business names on the left side
and names of the persons associated with the business on the right side.
(BCPA s. 90)
Funding: Typically funded with proprietor’s personal funds, trade credit from businesses with
which the sole proprietorship trades, and loans from creditors (especially banks).
o Securities Regulation: Sole proprietorships are subject to disclosure requirements.
 In practice, it is very common for one of the following exemptions to apply:
 Banks have a special exemption – bank loans do not trigger disclosure requirements
 Personal loans from immediate family (e.g. parents, not aunts) are exempted.
 Loans for less than $150,000 have a general exemption.
 Note: The proprietor’s investment isn’t really an “investment contract” (no third party to
contract with), so that particular sum is not subject to disclosure requirements.
 See Also: For more on this topic see Debt Finance on p. 22.
Why Choose a Sole Proprietorship? For simplicity and tax benefits!
o Tax: Business expenses are deductible against the proprietor’s income from other sources.
o But What About Limited Liability? For businesses with small numbers of equity investors,
corporations’ limited liability may not confer a substantial benefit.
3
Business Associations
Partnership
Relationship Between the Partners
Definition and Formation (or: Determining Whether a Partnership Exists at All)
•
•
•
•
•
No Formalities: No formal action required to form a partnership; it arises from the circumstances.
Definition: “persons carrying on business in common with a view of profit”
(BCPA s. 2)
Factors: These flow from the definition in Partnership Act s. 2, above.
o Persons: This includes corporations, partnerships, individuals, etc. (BC Interpretation Act s. 29)
o Carrying on Business: Usually takes its plain meaning, but has some judicial consideration
 Plain Meaning: “a trade, a profession, a person’s usual occupation; buying and selling,
trade; a commercial firm; a shop.”
(Oxford English Dictionary)
 Black’s Law Dictionary: “to hold one’s self out to others as engaged in the selling of
goods or services.”
(cited in Backman)
 Common Law Test: Carrying on business involves the following:
(Gordon v. The Queen)
 The occupation of time, attention and labour,
(Gordon v. The Queen)
 Need not be a long period of time (could be a single transaction)
(Backman)
 Parties needn’t hold meetings, make decisions, or enter new transactions
(Backman)
 The activity may be passive and still qualify (e.g. receipt of rent)
(Backman)
 The incurring of liabilities to other persons, and
(Gordon v. The Queen)
 The purpose of a livelihood or profit
(Gordon v. The Queen)
o In Common: This is the difficult part of the definition.
 Silent Partners: Can be “in common” even if one partner does all the managing (Backman)
 Authority: The authority of any partner to bind the partnership is relevant (Backman, Martin)
 Representations: Do they hold themselves out as partners to third parties?
(Backman)
 Agreement by the parties that they are not partners is not determinative
(Pooley, Martin)
 Other Factors: (1) contributing skill, knowledge or assets to a common undertaking, (2)
joint interests in the business property, (3) sharing profits and losses, (4) filing income tax
returns as a partnership, (5) joint bank accounts and financial statements
(Backman)
 Determining Who is a Partner: See Existence on p. 7 for law and policy.
o View of Profit: Parties need an intent to profit; no actual profits are necessary.
(Backman)
 “Profit”: This term means “revenue less expenses” (nb: the Prof cares about this)
 Tax motivations in choosing partnership don’t necessarily invalidate it
(Backman)
 Profiting doesn’t need to be the overriding intention; it can be ancillary.
(Backman)
 Example: Group buys properties with the expectation that they’ll lose money (parties want
to deduct losses from tax). This is groups’ only activity. No view of profit.
(Backman)
Weighing of Factors: The above factors are not a checklist; they need to be considered together
and weighed in the context of all the circumstances.
(Backman)
Exclusion: The shareholders of a company do not form a partnership, and corporations (and other
forms of business associations) do not fall under the BCPA.
(BCPA s. 3)
Legal Status of Partnership
•
•
No Separate Legal Entity: The business cannot own property or be party to contracts
(Re Thorne)
Consequences:
o Each partner is personally liable for the debts/liabilities of the business.
(Re Thorne)
o A partner cannot be an employee (because he/she is also the employer)
(Re Thorne)
o Partners cannot contract with their partnership (and therefore cannot be creditors to it) (Re Thorne)
4
Business Associations
Name Registration and Actions Against Partnerships
•
•
•
•
Actions in the Firm’s Name: An action can be commenced and defended against a partnership in
the firm’s name, notwithstanding the lack of separate legal personality. (BC Rules of Court R. 20-1)
Registration is required for firms engaged in trading, manufacturing and mining.
(BCPA s. 81)
o Timing: Must be filed within 3 months of formation.
(BCPA s. 82)
o If the membership or name of the firm changes, it must file a statement of change. (BCPA s. 83)
Registrar’s Index: Has partnership names on the left and partners’ names on the right (BCPA s. 90)
Consequences of Failure to File Registration or Statement of Change: These include…
o Fine: $2000 fine for failure to comply with a statutory provision
(BC Offence Act)
o Liability: Shifts from joint liability (the norm) to joint and several liability.
(BCPA s. 87)
o Outgoing Partners’ Continued Liability to Creditors: Retiring partners are deemed to
continue being a partner with respect to the firm's debts, including new debts.
(BCPA s. 84)
Governance and Default Rules
•
•
•
•
•
Default Rules: BCPA ss. 21-34 give rules for the relationship between partners, and can be varied
by consent of all partners. Consent may be express or inferred from a course of dealing. (BCPA s. 21)
o Assumption of Equality: Default rules based on assumption that all partners have similar
contributions and rights to management and profits. If they don’t, variation might be inferred.
Partnership Property: Defined to be property that is brought into the partnership, acquired on
behalf of the firm, or acquired for the purposes of and in the course of the firm's business. (BCPA s. 6)
o Uses: Partnership property must be held/used only for the partnership's purposes (BCPA s. 23(1))
o Land held in one or more partners’ names is held in trust for the partnership
(BCPA s. 23(2))
o Property Bought With Money of the Firm is deemed to be partnership property (BCPA s. 24)
Capital, Profits, Losses, Management, Admission of New Partners and Record Keeping:
o Variation of Rules: These rules are subject to express or implied agreement
(BCPA s. 27[pre])
o Sharing in Capital, Profits and Losses: Partners share equally in these.
(BCPA s. 27(a))
o Indemnification: The firm indemnifies partners for payments/liabilities arising from the
ordinary and proper conduct of business or from preservation of firm property
(BCPA s. 27(b))
o Advances of Capital: Partners contributing more than agreed can get interest
(BCPA s. 27(c))
o Subscribed Capital: Partners don’t get interest for agreed capital contribution
(BCPA s. 27(d))
o Management: Every partner may take part in the management of the business
(BCPA s. 27(e))
o Payment: Partners are not entitled to remuneration for working in the business
(BCPA s. 27(f))
o Adding Partners: New partners cannot be added without unanimous consent
(BCPA s. 27(g))
o Voting: Decisions on ordinary business matters are decided by majority vote
(BCPA s. 27(h))
 Exception: Changes in the nature of the business require unanimity
(BCPA s. 27(h))
o Records: Partnership books must be kept at the principal location of business and all partners
must have access to them to inspect and copy them
(BCPA s. 27(i))
Removal of Partners: A majority of partners cannot remove a partner.
(BCPA s. 28)
 Variation of Rule: This rule can only be varied by express agreement
(BCPA s. 28)
Fiduciary Duties: Partners of a firm have a duty to…
o Act with fairness and good faith to each other in the business of the firm
(BCPA s. 22)
o Render accounts and full information on things affecting the partnership
(BCPA s. 31)
o Account for benefits derived without any other partners’ consent from transactions concerning
the partnership or from use of partnership property (nb: two branches – Rochwerg) (BCPA s. 32)
 Evidence: This obligation arises without proof of competing activity.
(Rochwerg)
o Account for profits from engaging in competing business and pay them to the firm (BCPA s. 33)
 Evidence: This obligation arises only if competing activity is proven.
(Rochwerg)
5
Business Associations
•
o Example: Partner becomes director of client, doesn’t disclose his entitlement to shares and
stock options. This “affects” the partnership (s. 31). The client was a client from the business,
so this “concerns” the partnership (s. 32). Not a conflict under s. 33.
(Rochwerg)
o Example: Lawyer is director of client corporations. He joins firm, they become firm’s clients.
Partner agreement allows for non-legal business outside the firm if notice is given. No notice
given, and some business was legal in nature. Violates ss. 31-33 (and agreement)
(McKnight)
Assignment of Partnership Interests: A partnership interest can be assigned. The assignee is
entitled to a share of the profits and a share of partnership assets on dissolution.
(BCPA s. 34)
o Note: The assignee is not made a partner, or given any other rights (e.g. management).
Funding and Dissolution
•
•
Funding: Similar to sole proprietorship. Partners invest equity and creditors (esp. banks) give loans
o Securities Regulation: This can apply. See Debt Finance on p. 22.
Dissolution:
o By Act of the Partners:
 Fixed Term: Partnership can dissolve after an agreed-upon period of time
(BCPA s. 35(a))
 End of Venture: If entered into for a single venture, dissolves on completion. (BCPA s. 35(b))
 Notice: Any partner can give notice of dissolution if neither of the above are provided for.
Dissolution occurs on date in the notice (if none given, it’s immediate) (BCPA ss. 29, 35(c))
o On Death, Bankruptcy or Dissolution of a Partner: Where there are more than two partners,
the remaining partners continue on under the same partnership agreement. The partnership is
only dissolved as between the continuing and exiting partners
(BCPA s. 36)
 Rationale: You don’t want to share in the losses of someone who can’t contribute to them.
 Elsewhere: Most jurisdictions wrap up the whole partnership. BC’s rule is special.
Relationships Between the Partners and Other Persons
Liability of Partners in Contract and Tort
•
Liability in Contract:
o Apparent Authority: Each partner is an agent for the firm (and therefore for the other partners)
for the purposes of the partnership business. Partners’ acts for “carrying on in the usual way
business of the kind carried on by the firm” are binding on other partners unless:
(BCPA s. 7)
 The partner had no authority to act for the other partners, and
 The third party either knew the partner didn’t have authority or didn’t think he was a partner
o Actual Authority: The firm is bound by (1) an act or instrument (2) relating to the business of
the firm (3) done or executed in the firm name, or in any manner showing an intent to bind the
firm, (4) by any person authorized to do so. (nb: this test includes partners and agents) (BCPA s. 8)
o Not Bound Without Ostensible or Actual Authority: If one partner pledges credit of the firm
for a purpose apparently not connected with the firm’s ordinary course of business then the
firm is not bound unless that partner was specially authorized by the other partners. (BCPA s. 9)
o Third Party Notice: If a third party has notice of restrictions on a partner’s power then acts by
that partner that exceed those restrictions do not bind the firm.
(BCPA s. 10)
 nb: Whereas s. 7 deals with the third party’s knowledge, this requires actual notice.
o Joint Liability for Partnership Debts: Partners are jointly liable for all debts and obligations
of the firm for as long as they are partners.
(BCPA s. 11)
 Deceased partners’ estates are also severally liable (after payment of their personal debts)
o New Partners are not liable for partnership debts arising before they joined the firm(BCPA s. 19(1))
o Retiring Partners continue to be liable for debts incurred before they retired
(BCPA s. 19(2))
 This is subject to agreement between creditors and remaining partners
(BCPA s. 19(3))
 Such agreement may be express or inferred from the course of dealing
(BCPA s. 19(4))
6
Business Associations
•
o Dormant Partners (those not involved in management) are still liable for partners’ actions (Cox)
Liability in Tort:
o Test: The firm is liable for wrongful acts or omissions where a partner…
(BCPA s. 12)
 Acted with the authority of co-partners (actual authority), or
 Acted in the ordinary course of business of the firm (ostensible authority)
o Joint and Several Liability: Required by the BCPA (and usual for joint tortfeasors) (BCPA s. 14)
Existence of Partnership as it Relates to Third Parties (or: Determining Who is a Partner)
•
•
Statutory Provisions on Existence: See Statutory Presumptions on p. 4.
Liability for Representation: A person who makes or knowingly allows a representation of
himself as a partner will be liable to anyone who has relies on it to give credit.
(BCPA s. 16)
o Form: The representation may be oral, in writing, or by conduct.
(BCPA s. 16)
o Note: This does not give rise to a partnership; it merely establishes partner-like liability.
• Determining Who is a Partner: Even where a partnership has been shown to exist, it may not be
clear whether some involved parties are partners or merely creditors. Factors to consider:
o Test: The basic question is whether trade has been carried on by persons acting on the alleged
partner X’s behalf (agency). If such a relationship exists, then X is likely a partner.
(Cox)
o Agreement by the parties that they are not partners is not determinative
(Pooley, Martin)
o Factors Favouring Partnership: Note that these are from Martin, where non-partnership won.
 Consultation: A right to be informed of business conduct and be consulted on big decisions(Martin)
 Veto: The power to veto business decisions (even if only particularly risky ones)
(Martin)
 Option to Join: Having an option to formally join the partnership (with some interest)
o Statutory Presumptions: BCPA s. 4 essentially serves to clarify “business in common”
 Common Ownership of Property: Does not, in itself, create partnership
(BCPA s. 4(a))
 Example: If each person can deal with their property interest without consent of other
parties, then it is co-ownership and it is inconsistent with partnership.
(A.E. Lepage)
 Sharing Gross Returns: Insufficient, on its own, to establish partnership
(BCPA s. 4(b))
 “Gross Returns”: Revenues before deducting expenses
 Sharing Profits: Creates presumption of partnership (rebuttable – Cox)
(BCPA s. 4(c))
 Exceptions: The following situations, on their own, don’t give rise to partnership:
 Shares or Payments Contingent On or Varying With Profits
(BCPA s. 4(c)[beg.])
 Payment of Debt or Fixed Amount Out of Profits
(BCPA s. 4(c)(i))
 Profit-Based Remuneration (Bonuses) for Agents or Employees
(BCPA s. 4(c)(ii))
 Annuities for Spouses/Children of Dead Partners Out of Profits
(BCPA s. 4(c)(iii))
 Loans with Profit-Based Interest Rates: A lender isn’t a partner only because of
(1) a loan of money (2) to a person [about to be] engaged in business (3) on a
See “When Lenders are
written contract (4) between that person and the lender (5) signed by or on behalf of
Partners”, below, to
distinguish loans from
all parties (6) where the lender is to receive a rate of interest varying with the profits
partnership interests
or a share of the profits from the business.
(BCPA s. 4(c)(iv))
 Payments for Goodwill Out of Profits (e.g. for franchises)
(BCPA s. 4(c)(v))
o When Property isn’t a Contribution: Property given to a partnership may be considered a
partnership contribution (and may thus indicate a partnership interest), unless…
(Martin)
 Returnable: Providing for the return of contributions is inconsistent with partnership
 Collateral: Providing partners with security interests for their contribution is unusual
 No Mingling: Contributions by partners mingle as part of partnership property
 Accounting: Proceeds/revenues of partnership assets don’t usually go to particular partners
 Separate Dealings: Partners can’t usually deal separately with parts of partnership property
 Substitution: Partners can’t usually substitute other property for their contribution
o When Lenders are Partners: Factors suggesting a “loan” is really a partnership interest: (Pooley)
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Business Associations
•
 Lenders receiving interests in partnership capital.
 Lenders able to enforce the partnership agreement (this gives control over the business)
 The return on the lender’s investment varying with the size of the investment
 Terminating the loan agreement upon the lender’s bankruptcy
 The loan’s term is the same as the partnership’s term (if the partnership has a term)
Policy: Involving third parties leads to several considerations re: existence of a partnership:
o Reliance on participants in the business of whom the third party has…
 Knowledge: Lender may assume he is contracting with all participants in the business.
 Example: None of participants’ actions suggest partnership; reliance unreasonable.(A.E. Lepage)
 No Knowledge: Lender may look at business assets and assume that some came from nonlender persons. If the “partners” are really lenders, this lender can’t get at the assets of the
business (since they are really loans that must be repaid) or at the “partners” personal assets.
 Example: No knowledge of prior creditors shows no reliance on them being partners (Cox)
 Example: New creditors join mid-dealing, business doesn’t change. No reliance. (Martin)
o Unjust Enrichment: If you got the profits of a business that went bankrupt but aren’t liable to
lenders, you profited at their expense (or, at the least, benefitted from their investment). (Pooley)
 However, if lenders choose to loan money based only on the creditworthiness of the known
partners, then there’s a counterargument that the lender would be getting a windfall
[unjustly] if the unknown participant were made liable.
o Least Cost Avoidance: Who is in the better position to avoid losses: partner or creditor?
 Position to Assess and Control for Risk: Persons involved in business are in a good
position to control for risk (they have knowledge + power), but uninvolved lenders aren’t.
 Example: One participant approached for sale of communal property. Participants have
limited control over it. Court says it would be easy (low-cost) for creditor to verify the
state of affairs with the group of participants. Risk put on creditor.
(A.E. Lepage)
 Lowering Overall Cost of Credit: Making the persons who are best positioned to avoid
risk liable makes it cheaper for creditors to offer credit, and is more efficient overall. (Pooley)
o Other: For firms in financial difficulty, courts may treat new creditors as non-partners because,
otherwise, no one would come to the aid of troubled firms – too much liability.
(Martin)
Subordination of Lenders for a Share of the Profits
•
Statutory Provision: If a person to whom money is advanced in the manner described in BCPA s.
4(c)(iv) or a person buying goodwill becomes (1) insolvent, (2) enters into an arrangement to pay
creditors less than 100 cents on the dollar, or (3) dies in insolvent circumstances, then the lender
(or seller of goodwill) cannot recover until other creditors’ monetary claims are satisfied. (BCPA s. 5)
o Written Contract Not Required: This provision applies also to verbal contracts.
(Re Fort)
o Excluded Lenders: Doesn’t apply to lenders who only get paid out of profits enough to cover
the principal and interest at prime rate (i.e. no additional repayment) (Canadian Commercial Bank)
o Security Interests: Lenders with security interests take priority over unsecured creditors (but
only to the extent of the security interest). This is because creditors can look them up.
(Sukloff)
 Note: Sukloff dealt with registered security interests. This might not apply if unregistered.
Retirement of Partners
•
For BCPA s. 4(c)(iv), see p. 7.
Note: BCPA s. 39(3) exempts dead and insolvent partners
Continuing Liability: Parties dealing with a firm after a change in partnership may keep treating
apparent members of the old firm as partners until they receive notice of the change. (BCPA s. 39(1))
o “Apparent” means “apparent to that party”, not “apparent to the whole world” (Tower Cabinet)
o Parties with No Prior Dealings: For these parties, notice in the Gazette suffices. (BCPA s. 39(2))
 Filing a new registration statement also provides notice to these parties.
(Dominion Sugar)
o Parties with Prior Dealings: Actual notice is required for these parties.
(Tower Cabinet)
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Business Associations
•
o Unknown Partners: If a retiring partner was not known to the party, he isn’t liable(BCPA s. 39(3))
Failure to Register Change: The firm’s registration statement is evidence that the listed partners
are, in fact, partners. Thus, failing to register a new statement after retirement leads to continued
treatment as a partner.
(BCPA s. 84(b))
Limited Partnership
•
Rationale for Limited Liability: Some parties may be willing to contractually agree that partners
will not be personally liable. It’s expensive and slow to craft individual contracts that allow for this,
so instead we provide an alternative form of association where it’s the default.
o Notice: We make such associations carry a cautionary suffix so that creditors aren’t deceived.
• Structure:
o Partners: Consists of one or more general partners and one or more limited partners (BCPA s. 50)
o Liability of limited partners limited to amount contributed or agreed contribution.(BCPA ss. 57, 63)
 Liability of general partners is unlimited
• Formation: Limited partnership can only be formed by filing a certificate.
(BCPA s. 51)
• Protection of Third Parties:
o Cautionary Suffix: Name must end with “Limited Partnership” (or French)
(BCPA s. 53(1))
o Firm Name: Cannot include the name of a limited partner unless it (a) is also the surname of a
general partner or (b) was part of the firm name before the limited partner joined. (BCPA s. 53(2))
o No Services: Limited partners cannot contribute services (only money/property)
(BCPA s. 55)
o No Management: Limited partners cannot take part in management
(BCPA s. 64, c.f. Zivot)
 Liability on Breach: Breaching this leads to liability as a general partner
(BCPA s. 64)
 Officers of Corporate General Partner: Where limited partners are also officers of a
corporate general partner, they may be found to be taking part in management.
 Specific Reliance: It is no defence to say that a third party did not specifically rely on
Note: Salomon
the personal liability of a limited partner who engaged in management (Haughton, Nordile)
principle applies
for liability as an  Distinct Action: If a limited partner “acts solely in their capacity as officers of the
officer
general partnership” then they are not liable as limited partners (only as officers) (Nordile)
o Listed Partners: The certificate must give the name/address of all limited partners (BCPA s. 51)
o Listed Contribution: The certificate must state total contribution of limited partners (BCPA s. 51)
 Prof: This isn’t useful; in the course of business liabilities might exceed this number.
o No Abandoning Ship: No returning capital if doing so would make the firm insolvent(BCPA s. 59)
• Relationships Between the Partners:
o Separation of Ownership and Control: Limited partners often contribute the majority of the
capital to the business (and thus “own” it), but their ability to monitor the business’ activity is
constrained by statute and (if there are many small contributions) may not be incentivized.
 Issue: General partners may take advantage of limited partners
 Possible Responses: Protective terms in partnership agreements or mandatory regulation.
 BC Legislative Response: Subject to consent by all partners, general partners cannot (1) do
an act that makes it impossible to carry on business, (2) consent to a judgment against the
partnership, and (3) possess partnership property for non-partnership purposes. (BCPA s. 56)
 Winding Up Order: General partners may obtain a court order for dissolution of a
limited partnership (BCPA s. 38). Limited partners have the same right. (BCPA s. 58(1)(c))
 Prof: This is likely a mandatory right (i.e. not waivable by agreement), because parts
of it are based on frustration. Also allows dissolution where “just and equitable”.
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Business Associations
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o Rights to Disclosure and to Inspect Books: Limited partners have a right to inspect and make
copies of the firm’s books and a right to be given “true and full information” of all things
affecting the limited partnership.
(BCPA s. 58(1)(a),(b))
 Not Mandatory: Based on general partner’s right in s. 27(i), which is waivable (BCPA s. 27)
o Assignment of Partnership Interests: Subject to the partnership agreement, an interest in a
limited partnership cannot be assigned without consent of all partners.
(BCPA s. 66)
o Admission of Additional Partners: General partners cannot admit new general or limited
partners without all partners’ consent (unless right to do so is given in certificate) (BCPA s. 56(d))
 Admission of limited partners is subject to the terms of the partnership agreement (BCPA s. 65)
 Newly admitted limited partners must be entered into the register under s. 54(2)(a)(BCPA s. 65)
o Share of Profits: Subject to the partnership agreement, limited partners share in the profits and
in returns of capital in proportion to their contributions
(BCPA s. 61)
Why Use Limited Partnership? Tax benefits (deductions against income) and limited liability.
Limited Liability Partnership
•
•
•
Origins: Some professions couldn’t use corporations, but they needed limited liability. Voila.
LLP Structures Generally: In ON, AB, SK and many places in the US, there’s “partial shield”:
o "Partial Shield": Partners not liable for malpractice of fellow partners unless they were directly
overseeing the activity (and, similarly, not liable to indemnify co-partners for malpractice)
 Partners remain personally liable for the other debts of the firm (and their own malpractice)
o Full Shield: Partners not liable for ordinary debts or obligations of the firm
 Partners remain personally liable for their own negligent or wrongful acts
 Partners may be liable for fellow partners’ negligent or wrongful acts if they knew of them
and did not take reasonable steps to prevent them.
o Limitation to Professional Partnerships: This is the norm in most (but not all) jurisdictions.
LLP Structure in BC: “Full shield” limited liability
(BCPA s. 104(1))
o Personal liability for one’s own negligent or wrongful acts, and no relief from liability where
one knew of a fellow partner’s wrongful/negligent act and did not take reasonable steps to
prevent.
(BCPA s. 104(2))
o Subject to Partnership Agreement: May opt out of all/part of full shield protection(BCPA s. 104)
 Prof: There are tax reasons to do this. In full shield, deductible losses are limited to the
amount of the partner’s contribution. In partial shield, it’s unlimited.
o No Professional Restriction: Anyone may form an LLP in BC.
o Registration Required: An LLP is defined to be a partnership registered as an LLP. (BCPA s. 94)
 Extra-provincial LLP partners are liable as general partners if not registered in BC.(BCPA s. 114)
o Name: Must have the cautionary suffix "Limited Liability Partnership" (or "LLP") or the
French equivalent.
(BCPA s. 100)
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Business Associations
Corporation
Background
•
•
•
•
Structure: Equity interests divided into shares. Shares can carry many different rights; three
essential rights are voting, dividend and liquidation rights. Shareholders elect directors (the “mind”
of the corporation), who appoint officers (agents for the corporation) for day-to-day management.
Key Features: (1) limited liability, (2) separate personality, (3) perpetual existence.
Benefits of Limited Liability: Limiting liability provides a societal benefit. Increasing costs/risk
to investors results in demands for higher profits, which inflates product prices. Decreasing
costs/risk results in lower product prices. There are many ways limited liability reduces costs/risk:
o Valuation Costs: It’s harder to assess the value of a business where the participants are all
personally liable; need to assess each person’s value. Corporate value limited to business assets.
 Also, for unlimited liability, more investors means more assessments. Not for corporations.
o Monitoring Costs: It’s expensive to monitor each investor’s changes in wealth. Costs increase
with more investors. Plus, unltd. liability encourages higher monitoring costs on management
o Diversification: Modern investment theory depends on diversification. Unlimited liability
makes this nearly impossible – don’t want unlimited liability in multiple businesses.
o Liquidity: Liquid (easily divestible) assets are more efficient, require less overhead costs.
Unlimited liability hurts liquidity by encouraging restrictions and increasing assessment costs.
o Market Price: The market value of stocks is a good indicator on the strength of the investment.
Not so for unlimited liability; if you buy out an investor, you change the value of the business.
o Economies of Scale: By allowing many investors, we can increase per-unit efficiency.
History:
o UK Development:
 Pre-15th c.: Crown Charter for public/church bodies. Separate personality; not for business
 Also merchant guilds (really just private regulators – not separate persons, no business)
 14th c.: Joint Trading (investing for a share of profits); a sort of single-venture partnership.
 Also societas (incl. HBC); permanent partnerships, member agency, unlimited liability.
 16th c.: Crown Charter for foreign trade. Originally organized like merchant guilds; each
investor has individual account. Later on, would use joint stock to split profits.
 Originally single-venture, but by 17th c. multi-venture would exist (e.g. East India Co.)
 16th c.: Joint stock companies created without Crown charter (just specialized partnerships).
Limited liability obtained via contract with third parties. Freely tradable partnership interest
 17th c.: Domestic charters issued (essentially corporations created by special statute)
 19th c.: General Statutes of Incorporation (e.g. 1844 Joint Stock Companies Act) enacted;
allows “registered joint stock companies”. 1855 Limited Liability Act grants limited liability
 Why the 19th c.? Pressure to accumulate capital was increasing quickly. The industrial
revolution (incl. steam engines, rail) were enabling massive production of goods and cheap
transport, allowing for whole new markets to develop. Explosive economic growth. New
machinery was expensive and needed substantial investment.
 Plus, many nouveau riche (newly wealthy merchants) needed a place to invest.
o Canadian Development: In addition to Crown Charters and special statutes, Canada uses…
 Letters Patent: Similar to Crown Charter; government official has discretion to register
new companies. Letters patent lay out capital structure, bylaws provide governance rules.
 Memorandum of Association: Agreement between shareholders. Memo lays out capital
structure, articles provide governance rules. Based on joint stock. Incorporation as of right.
 Articles of Incorporation: American approach; articles set out capital structure, bylaws
provide governance rules. Incorporation as of right. Now the most popular form worldwide.
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Business Associations
o British Columbian Development: We still use a variant of the memorandum approach
(although we replaced the memo. with “incorporation agreement” and a “notice of articles”).
Jurisdictional Issues
•
Basis for Provincial Power of Incorporation: Legislatures in each province may make laws in
relation to "the incorporation of Companies with Provincial Objects"
(Constitution Act s. 92(11))
o Scope: Provinces may create corporations with the power, but not the right, to operate outside
of the province (e.g. BC can’t give a company the right to operate in AB)
(Bonanza Creek)
• Basis for Federal Power of Incorporation: The federal government may make laws in relation to
all matters not falling under an enumerated class in ss. 91 & 92 (residual power) (Citizens Insurance)
o Scope: Feds can only create corporations with a right to operate throughout Canada (John Deere)
 Restrictions on Extra-Provincial Corporations: Provincial legislation cannot prevent
Note: These
federal corporations from carrying on business in the province (esp. via licensing) (Great West)
cases are hard
 But: Federal incorporation does not confer general immunity against provincial laws.
to reconcile.
Provinces can require federal companies to get a license to operate in the province(John Deere)
 Obiter in Great West suggests that licensing requirements would be valid if they also
applied to local corporations – invalid if it only targets extra-provincial corporations.
 Example: License required to maintain an action provincially; doesn’t apply (Great West)
 Example: License required to sell securities provincially; doesn’t apply(AG Can. v. AG Man.)
 Example: Requiring corporate securities be sold through licensed brokers does not
prevent the company from selling shares; applies to federal corporations.
(Lymburn)
 Example: Requiring prov. registration of federal corporate names is valid(Constitution Ref.)
 Example: Provincial fines for not licensing extra-provincial businesses are valid (Royalite)
 Laws of General Application: Provincial prohibitions on operation that apply equally to
federal companies and companies from within the province are valid
(Canadian Indemnity)
 Example: No corporation may sell auto insurance in BC. Valid.
(Canadian Indemnity)
 Identical Laws: Provincial statutes that are identical to federal laws can apply to federal
corporations; the federal law doesn’t “occupy the field” if there is no conflict.(Multiple Access)
o Single-Province Operations: A federal company is not obligated to carry on business in more
than one province.
(Colonial Building and Investment Assn.)
o Ancillary Legislation: Federal statutes re: takeover bids, directors’ liability, etc are valid.
 Broad Federal Legislation (that applies to non-federal companies) is invalid (Securities Ref.)
Incorporation
Applying for Incorporation Under the CBCA
•
•
Steps in the Incorporation Process: Applicants (“Incorporators”) may incorporate a corporation
by signing articles of incorporation and complying with section 7.
(CBCA s. 5)
o Applicants: One or more individuals (s. 5(1)) or bodies corporate (s. 5(2))
(CBCA s. 5)
 Individuals must be 18 or over, have sound mind and body, and not be bankrupt(CBCA s. 5(1))
o Articles of Incorporation: Must be filed “in the form the Director sets out”(CBCA s. 6(1), c.f. Form 1)
 Contents: Corporate name; restrictions on business; classes of shares; rights/restrictions
shares; province of registered offices; share transfer restrictions; number of directors(CBCA s. 6(1))
o Complying with Section 7: Director must be sent the articles of incorporation and… (CBCA s. 7)
 Notice of the Registered Office in the form required by the Director(CBCA s. 19(2), c.f. Form 2)
 Notice of Directors in the form required by the Director
(CBCA s. 106(1), c.f. Form 2)
o Filing Fee: $200 for online form, $250 otherwise
(Regulations s. 97; Schedule 5)
o Name Search: If the corporation doesn’t have a numbered name, it must file a NUANS report.
Meaning of “Director”: Not a corporate director; a government-appointed official(CBCA ss. 2(1), 260)
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Issuance of Corporate Certificate: After receiving the required documents and determining that
they meet the requirements of the Act (incl. naming), the Director must issue a certificate (CBCA s. 8)
o Timing: The corporation comes into existence on the date shown on the certificate
(CBCA s. 9)
Applying for Incorporation Under the BCBCA
•
•
•
Steps in the Incorporation Process: Includes filing the following documents:
o Incorporation Agreement: Each incorporator must take one or more shares (BCBCA s. 10(1), (2))
o Incorporation Application: Must be filed. Application includes:
(BCBCA s. 10(1), (3))
 Full names and addresses of the incorporators
 A completing party statement (a completing party is a person who examines articles and
verifies the incorporators have properly endorsed the incorporation agreement) (BCBCA s. 15)
 Name of company
 Notice of articles, including: corporate name, name/address of directors, location of records
office, location of registered office, share structure, share rights/restrictions
(BCBCA s. 11)
o Articles of Incorporation: These include rules for the conduct of the company and any
restrictions on the business or powers of the company. Can adopt articles in Table 1 (BCBCA s. 12)
Timing: Incorporation occurs on the date and time that the application is filed
(BCBCA s. 13(1))
Incorporation is as of right; the registrar must issue a certificate of incorporation (BCBCA s. 13(2))
Naming and Post-Application Considerations
•
Post-Incorporation Steps: Directors must hold a meeting after the certificate is issued. At this
meeting, the directors may: make by-laws; adopt forms of security certificates and corporate
records; authorize issuance of shares; appoint officers; appoint an auditor (in officer until the first
meeting of shareholders); arrangement banking; and transact any other business
(CBCA s. 104)
• Corporate Name Approval: The director has the power to refuse prohibited or deceptively
misdescriptive names (and can also order existing corporations to change their name)
(CBCA s. 12)
o Prohibited Names: These are defined in the Regulations, and include the following:
Including Prohibited Words: Contains obscene words, listed names (“Parliament Hill”,
Note: These 
Reg numbers
“Air Canada”), and names that suggest government approval/sponsorship/etc (Reg ss. 21-23)
are all wrong,

Too General: Names that merely describe a quality of goods/services, are merely the name
but they’re
used by the
of an individual or geographic area, or are otherwise too general.
(Reg. s. 24)
course text.
 Likely to be Confused with Other Names: Confusing with other corporate names, trade
names or business names (goal is to avoid people looking at wrong spot in register) (Reg s. 18)
o Misdescriptive Names: Misdescribes the business, goods or services provided, the conditions
under which the goods or services will be produced or supplied or the place of origin. (Reg. s. 25)
• Notes on Names:
o Suffix: Names must include a listed suffix – Ltd., Inc., Corp., or French equiv.
(CBCA s. 10(1))
o Reservations: You can reserve a corporate name up to 90 days in advance
(CBCA s. 11)
o Doing Business As: Businesses may do business under other names, but (in BC) must file a
registration no later than 3 months after beginning to use that name.
(BCPA s. 88)
Advantages of Incorporation and Choosing Where to Incorporate
•
Advantages of Incorporation: Corporations are expensive to create, but have several benefits:
o Limited Liability: A corporation provides limited liability for its shareholders
o Perpetual Succession: The body corporate can exist perpetually, not merely indefinitely
o Ease of Transfer of Shares: It's easier to transfer shares than it is to terminate partnerships.
o Shareholders Cannot Bind the Corporation: A shareholder cannot obligate the corporation
o Shareholder can Contract with a Corporation: Corporations are separate legal entities.
o Ability to Raise Capital: Corporations raise capital by selling shares and debentures.
o Tax Advantages: Some corporations qualify for the small business tax deduction.
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Business Associations
•
Choosing between the CBCA and the BCCA: For most corporations, this doesn't really matter.
o CBCA: Grants limited name protection; no restrictions on maintaining an action in other
jurisdictions; lawyers and shareholders in other provinces are familiar with it
o BCCA: BC lawyers are more familiar with it; Victoria has nicer people and more overlapping
hours than Ottawa; it's cheaper (CBCA will require one more extra-provincial registration)
Reincorporation and Continuance
•
•
•
Purpose: These are both methods by which a corporation in one jurisdiction can move to another.
Reincorporation: Doesn’t require legislative support. Follows a simple (but inconvenient) process:
o Incorporate company A in the home jurisdiction and company B in the new jurisdiction
o Conduct a share exchange: Shareholders of A sell their shares to B in exchange for stock in B
o Wind up and dissolve A. As a result, assets and liabilities of A get transferred to B. Done!
Continuance: A streamlined process to change jurisdictions provided by statute:
o Leaving Federal Jurisdiction:
 Obtain a resolution from the shareholders permitting the continuance (CBCA s. 188(1), (5))
 Obtain approval from the Director
(CBCA s. 188(1))
 Register in the other jurisdiction. Incorporation documents may be need amendments.
o Entering Federal Jurisdiction:
 Comply with other statute’s process (often shareholders' approval and registrar approval).
 Apply to the Director for a certificate of continuance
(CBCA s. 187(1))
 This is done by filing articles of continuance and notice of directors
(CBCA s. 187(3))
Extra-Provincial Registration in BC
•
•
Registration Mandatory: “Foreign entities” must register as an “extra-provincial company” within
two months of beginning to “carry on business” in British Columbia.
(BCBCA s. 375)
o “Foreign entities”: Corporations (with shares) and LLCs incorporated outside of BC(BCBCA s. 1(1))
o "Carry on business" is described with a number of examples and specific cases:(BCBCA s. 375(2))
 Non-Exhaustive: Definition includes “otherwise carries on business” (BCBCA s. 375(2)(d))
 Inclusions: Business whose names appear in a phone book or advertisement along with a
BC address or phone number, who have agents resident in BC, or who have warehouses,
offices or places of business in BC.
(BCBCA s. 375(2)(a)-(c))
 Exclusions: Shipping goods into BC is not "carrying on business"
(no case cited)
Registration Requirements: The foreign entity must…
o Reserve its name, file a registration statement, and appoint one or more attorneys (BCBCA s. 376)
 Attorneys: Must be resident individuals or corporations with address in BC (BCBCA s. 386)
 Appointment is optional if the company’s head office is in BC.
(BCBCA s. 386(1)(b))
 Attorney Agency: Each attorney is deemed to be authorized to accept service for legal
proceedings in BC and to receive notices to the company
(BCBCA s. 388)
o File notices of any changes (e.g. attorneys, name, amalgamation)
(BCBCA ss. 381, 382)
o File an annual report updating its filed information
(BCBCA s. 380)
Pre-Incorporation Contracts
Common Law
•
Ratification: A person can ratify a contract entered into by another person on his or her behalf if:
o The other person purported to act on behalf of the person who seeks to ratify
o The person who seeks to ratify must have been in existence and ascertainable at the time the
other person purported to act on his/her behalf (nb: This is the critical branch)
(Kelner)
o The person who seeks to ratify must have the capacity to do the act both at the time the other
person acted and at the time of the ratification.
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Business Associations
•
•
No Ratification for Pre-Incorporation Contracts: A corporation cannot ratify a contract entered
into before its incorporation date (nb: for CBCA corporations, this is the date on certificate) (Kelner)
Promoter Liability: A promoter can be liable on a pre-incorporation contract if it was intended
that the promoter would be a party to the contract (Kelner, as cited in Newborne, Black and Wickberg)
o In such a case, the promoter can be liable for breach of warranty of authority (Black, Wickberg)
 Limitation of Damages: Damages may be nominal if the corporation is bankrupt (Wickberg)
o Example: Promoter signs contract for wine “on behalf of” a hotel. Hotel not yet incorporated;
post-incorporation ratification invalid. There was intent for a contract, so promoters liable (Kelner)
o Example: Promoter (company’s owner) signs his name on contract, adds corporate name under
his own. No evidence of intent to bind the promoter; not liable.
(Newborne)
o Example: Directors of [not-yet-incorporated] company sign contract with company name and
their own names, indicating they’re directors. Not liable. Court suggests breach of warranty of
authority might be another way at the issue (but that wasn’t argued, so no decision there) (Black)
o Example: Employee hired for non-incorporated company by a promoter. Sues for wrongful
dismissal. Intent was to be in contract with Co., so no promoter liability via Kelner. Court finds
liability via breach of warranty of authority. Damages limited (company bankrupt).
(Wickberg)
Statutory Modifications Under the CBCA
•
•
•
•
Promoter Liability: A person who enters (or purports to enter) into a written contract on behalf of
a corporation before it exists is bound by and entitled to the benefits of the contract (CBCA s. 14(1))
o Subject to Contract: Parties can agree that the promoter is not bound
(CBCA s. 14(4))
o Codifying Common Law: The “purports to enter into” language codifies the “rule of law”
approach to Kelner (i.e. evidence of intent isn’t needed; promoter always liable) (Landmark Inns)
Adoption: Corporation can adopt the contract within a reasonable time of coming into existence.
The promoter is no longer liable, and the corporation assumes the obligations/benefits (CBCA s. 14(2))
o Repudiated Contracts: The contract cannot be previously repudiated.
(CBCA s. 14(2))
Apportionment: The court can apportion liability between corporations and promoters however it
sees fit, regardless of whether the contract was adopted or not. (nb: protecting 3Ps) (CBCA s. 14(3))
o Example: Lender puts mortgage on home and lends money to unincorporated company. It
incorporates, issues a promissory note to lender. Company goes bankrupt. No apportionment:
lender wasn’t mislead, she knowingly took the risk of company going bankrupt.
(Bank of NS)
Issues with the Application of the CBCA:
o Constitution Issue: CBCA s. 14 deals with a contract prior to incorporation. Isn’t this before
the CBCA applies? Also, aren’t contracts under provincial jurisdiction?
o Conflicts of Laws Issues: What if the contract is in BC, and…
 The incorporation is under the CBCA; does paramountcy apply?
 The incorporation was intended to be under the CBCA, but actually ended up being in SK?
 The incorporation was intended to be in BC, but ended up being in under the CBCA?
o Note: You can write the governing law into your contract. That might solve a lot of issues.
Statutory Modifications Under the BCBCA
•
•
Prof: This largely codifies Wickberg; liable for breach of warranty of authority.
Promoter Liability: The person who purports to enter into a contract (nb: not necessarily written)
is deemed to warrant to the other parties that the corporation will come into existence and adopt the
contract in a reasonable time. Promoter is liable for breach of warranty of authority (BCBCA s. 20(2))
o Measure of Damages: Assessed as if the company had existed at the time of formation, the
person had no authority to bind the company, and the company did not ratify. (BCBCA s. 20(2)(c))
o Subject to Contract: The contract can expressly make the promoter not liable (BCBCA s. 20(8))
Adoption: Company may adopt the contract within a reasonable time of incorporation(BCBCA s. 20(3))
o Consequence of Adoption: Promoter is relieved of liability.
(BCBCA s. 20(4))
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o Consequence of Non-Adoption: Promoter can apply to court to get the benefits received by the
company under the contract.
(BCBCA s. 20(5))
Court Orders: Court can make promoter and company jointly and severally liable, apportion
liability (20(6)), or make any other order it considers appropriate (20(7))
(BCBCA s. 20(6),(7))
Legal Status of Corporations
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•
•
The Rule: Corporations are separate legal entities (“The Salomon Principle”)
(Salomon)
Implications of Separate Personality:
o A shareholder can also be a creditor (or secured creditor) of a corporation
(Salomon)
o A shareholder can be a director, officer, and employee; corporation is still a separate person (Lee)
o The corporation owns the business assets, not the shareholders
(Macaura)
Potential Problems: Unscrupulous shareholders might use separate personality to other’s detriment
o Shareholders can be [secured] creditors (sharing equally with or preempting other creditors)
o Distributions to shareholders might make the company insolvent to the detriment of creditors
o Shareholders can enter into contracts with company (conflict of interest).
o Thin capitalization may lead to the potential detriment of involuntary creditors
o Persons might be deceived into thinking the business is of a type with unlimited liability
o Incorporation might be used to avoid personal obligations or restrictions (e.g. contract/statute)
Liability for Corporate Acts
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•
Exceptions to the Salomon Principle: These are recognized where it is “too flagrantly opposed to
justice” to apply the Salomon principle. No unifying principle behind the cases.
(Kosmopolous)
o Note: Exceptions to the Salomon principle are rare; it has stood firm for over 100 years.
Approach: Be sure to repeat this three-pronged approach on the exam!
o Rhetoric: Apply the stated reasons of previous decisions to the facts at issue.
o Circumstances: Draw analogies between the facts of previous cases to the facts at issue.
o Policy: Consider the underlying policy rationale behind previous decisions.
Rhetoric of the Court
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Agency, Alter Ego, Puppet, Instrumentality, Sham or Cloak: Effectively arguing that the
corporation is an agent of the shareholder, so the shareholder is liable as the principal.
(c.f. Gilford)
o Shareholders are shielded from liability as shareholders; the CBCA does not shield them from
liability arising otherwise, such as from being agency relationships.
(CBCA s. 45(1))
Disregard of Corporate Entity by the Shareholders or Directors: The shareholders or directors
appear to have disregarded the corporate entity (not using the corporate name in dealings, not
holding corporate meetings, not filing the corporate information filing, etc)
Conduct Akin to Fraud: Not technically fraud; requirements are unclear. See Gregorio, below
Affiliated Enterprises: Courts are often more willing to disregard corporate entities in order to
regard a group of corporations as a single “corporate enterprise” (esp. for parent/child corps.)
o Smith Test: A parent and subsidiary corporation are the same person if the subsidiary is just an
agent of the parent company. Six tests (factors) to consider:
(Smith, Stone and Knight)
 Were the profits treated as the profits of the parent company?
 Prof: This is an accounting requirement; parent companies always do this.
 Were the persons conducting the business appointed by the parent company?
 Was the parent company the head and brain of the trading venture?
 Did the parent company govern the trading venture, decide what should be done and what
capital should be embarked on the venture?
 Did the parent company make profits by its skill and direction?
 Was the parent company in effectual and constant control?
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o Prof: The Smith test is stupid. It’s almost always true for wholly-owned subsidiaries.
o Smith Test Insufficient: Absent “conduct akin to fraud” or “other circumstances”, meeting the
6 tests from Smith is not sufficient to ignore separate legal personality.
(Transamerica)
 Other Circumstances: Smith tests are not enough to ignore separate legal existence of a
subsidiary. Even if met, it will only be ignored in certain circumstances.
(Alberta Gas)
 Conduct Akin to Fraud: If a wholly-owned subsidiary is “merely a conduit” for the parent,
by which it enacts conduct akin to fraud, then that element (on top of the Smith test) is
enough to ignore separate legal personality.
(Gregorio)
Circumstances and Policy Where Courts are More Inclined to Pierce the Corporate Veil
Gap-Filling and Implied Contractual Terms
• Courts might disregard separate legal entity in order to overcome a gap in the contract’s language
(i.e. to get a result harmonious with the contract)
• Policy: Contracts can’t cover everything, and it’s a bad idea to try; bigger contracts take more
time/money to draft and negotiate. Courts fill gaps to reduce transactions costs.
• Example: ∆ has non-compete contract with π, gets his wife to incorporate in order to compete
through the corporation (contract doesn’t cover this). Court pierces the veil, ∆ liable.
(Gilford)
o Note: ∆ wasn’t even a shareholder. This is a “cloak or sham” (i.e. agency) case.
• Example: π makes a loan to ∆. ∆ gets in economic trouble, creates a subsidiary to move money
around and avoid payment obligations to π. Court fills contract gap to cover this.
(SK Econ. Dev.)
Corporations Formed to Avoid Statutory Requirements
• As with the above, courts will try to interpret statutes harmoniously with their overall scheme.
Sometimes this means filling gaps.
• Example: Transport Commission only allows a person to hold one license, but there are multiple
types. π has a license, creates a subsidiary to get a different one. π applies for mandamus, gets
rejected. Parent and subsidiary are the same person.
(British Merchandise)
• Example: There was a period where the ITA had many gaps, and courts regularly pierced the
corporate veil to fill them. They’ve been filled, but it’s a good precedent for courts’ willingness.
Affiliated Corporations
• See also Affiliated Enterprises under Rhetoric of the Court, p. 16.
• Example: ∆ owns 10 taxi companies, each with 2 cabs and $10,000 insurance (to comply with
minimal state regulations). π gets hit by a taxi, suffers damages far in excess of insured value. π
sues ∆, the owner, for damages. Court rejects claim – separate legal personality.
(Walkovsky)
• Example: Similar to Walkovsky, except that ∆ is a corporation with a 60% ownership stake and
there was some driver negligence causing π to crash. Court disregards separate personality not just
between parent and child, but between all sibling corporations as well.
(Mangen)
• Note: Walkovsky had an individual owner; Mangen had a corporate majority shareholder.
• Policy: Courts are more willing to pierce the corporate veil when only corporate entities are being
made liable. They are less willing if individuals would be made personally liable
(Walkovsky)
o Studies: Courts almost exclusively find liability with 1–3 corporate shareholders.
Representations of Unlimited Liability
• Theory: Creditors will often require higher fees from a limited liability party. This gives
corporations incentive to misrepresent their liability. Legal requirements for disclosure of limited
liability save creditors the “screening cost” associated with investigating. Equity investors ought to
be made liable (even when inadvertent) on the theory of least-cost avoidance.
o Example: ∆ buys cars from π. Mid-dealing, ∆ incorporates without informing π. ∆ defaults, π
sues shareholders personally. Court pierces corporate veil – π mislead by ∆
(Gelhorn Motors)
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o Example: π stores watch at ∆’s business. Watch destroyed in fire. Ticket doesn’t indicate
limited liability. Court pierces corporate veil; ∆ didn’t inform π of corporate status
(Chiang)
o Example: π signs contract with non-existent company (wrong name); ∆ signs as director. Court
finds ∆ treated company as though it didn’t exist; made personally liable
(Tato Enterprises)
o Example: π has contract with ∆, but ∆ is just an unincorporated division of a corporation.
Corporation’s shareholders made personally liable for misrepresenting nature of ∆.
(Roydent)
• Failure to use the Cautionary Suffix: Corporations must set out their names on all contracts (and
certain other documents), including the cautionary suffix.
(CBCA s. 10(5); c.f. s. 10(1))
o Consequence: Failure to do so is an offence under CBCA s. 251, but some courts have used this
as a basis to find personal liability (e.g. as in Tato Enterprises)
• Misrepresentation in Tort:
o Example: π is injured in a sports complex, sues the corporation’s shareholder ∆ in tort. ∆ found
liable on the basis that statutory requirements were not met (no advertising, signage, tickets or
other communications used the corporate name).
(Wolfe)
o Policy: Courts often focus on corporate formalities and talk about “misrepresentation”, but in
tort cases like these it looks like the aim is compensation for individual claimants.
Non-Consensual Claimants
• Courts are particularly sensitive to the claims of tort victims who were not consensually engaged
with the corporation. Policy issues include:
o Compensation: If the business has few assets, the court may want to make shareholders liable.
o Incentive Costs: Corporations might incentivize risky behavior (e.g. encouraging delivery
drivers to speed). Imposing liability on the corporation encourages risk-mitigating behavior, but
if the corporation has limited assets that effect is attenuated. Personal liability fixes that.
Other Means of Getting Around the Corporate Entity
• Tort Claims Against Directors, Officers and Employees:
o Officers have a duty to ensure the safety of employees and are liable for negligence.
(Berger)
 Example: Company officers have ice on the walkway. President orders removal, but
doesn’t monitor. Employee slips, falls; sues President. President liable.
(Berger)
o Said Exception: Servants (directors/officers/employees) of a company who perform an act in
the bona fide best interests of the company are not liable for the act’s consequences.
(Said)
 Example: Directors move assets out of corporation and then fire π (who can now claim no
assets). π sues directors. Said exception doesn’t apply (not bona fide). Liable.
(McFadden)
 BC: A director is personal liable only if he is acting outside the scope of his authority on
some personal interest contrary to the interests of the company (independent tort)
(Rafiki)
 Example: π relied on ∆’s misrepresentations when advancing funds to the company that
∆ is an officer of. Not personally liable; no separate interest.
(Better Off Dead)
 Ontario: The Said exception is restricted to the particular tort in that case (the tort of
inducing breach of contract); directors and officers can generally be liable.
(ADGA)
 This has not been adopted in BC; Rafiki and Better Off Dead are post-ADGA.
o Policy: If directors are made personally liable, they may over-spend corporate funds on
“excessive insurance” (i.e. they may spend $1,000,000 of the company’s money to avoid
$100,000 in personal liability). This is inefficient – better to limit directors’ liability.
• Knowing Assistance in Breach of Trust: Directors who are knowingly involved in a breach of
trust may be held personally liable for breach of trust.
(M&L Travel)
o Example: ∆ puts π’s money into their general account instead of a trust account, despite signing
a trust obligation with π. ∆’s directors liable for breach of trust.
(M&L Travel)
• The Oppression Remedy: The court can make an order to compensate a person to whom a
corporation has acted in an oppressive or unfairly prejudicial way.
(CBCA s. 241)
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o Example: π wrongfully dismissed by corporation; directors strip the corporation of its assets to
avoid payment to π. Oppression remedy granted; directors liable.
(PCM Construction)
Statutory Provisions Creating Personal Liability for Directors and Shareholders:
o Directors can be personally liable for:
(CBCA s. 118)
 Issuing shares without receiving payment.
(CBCA s. 118(1))
 Making any of a variety of share-related payments, paying indemnities or directors or
officers, or providing financial assistance if certain insolvency tests are failed (CBCA s. 118(2))
 Shareholders who received payments contrary to s. 118(2) are liable to indemnify a
director who is liable for making those payments.
(CBCA s. 118(4))
o Directors are liable for up to 6 months' unpaid wages if the company is insolvent (CBCA s. 119)
Policy
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•
Voluntary Relationships – Consensual Claimants:
o Avoid costs of transacting around avoidance of obligations: It’s impossible (or at least
expensive) to construct a contract that accounts for every attempt to avoid obligations.
Sometimes piercing the corporate veil on a gap-filling basis can increase efficiency.
o Avoid costs of gathering information: Promoters are in the best position to inform parties of
the corporate (limited liability) nature of the organization. The liability for misrepresentations
regarding that fact should lie with them in order to promote efficiency.
Involuntary or Non-Consensual Claimants:
o Companies with Few Shareholders: Since the benefits of limited liability increase with the
number of investors, courts may be more willing to pierce the corporate veil where the benefits
of limited liability are small.
o Liability of Corporate Parents Preferred: By avoiding making individual shareholders liable,
investors can keep the benefits of diversification (which are critical to modern investment).
Share Capital
The Nature of Shares
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Bundle of Rights: A share is not an ownership interest in the company itself, but rather a bundle
of rights exercisable against the company. This bundle of rights is highly variable.
(Sparling)
Essential Rights: Each of these rights must be given to at least one class of shares: (CBCA s. 24(4)(b))
o Voting: Right to vote for directors and certain other matters requiring shareholder votes
o Dividends: Right to receive dividends when declared by the board of directors
o Dissolution Proceeds: Right to receive corporate property at dissolution (after creditors repaid)
Classes of Shares: Shares can be organized into classes with different rights.
(CBCA s. 24(4))
o One Class: The shares are presumed to be equal and carry all the essential rights. (CBCA s. 24(3))
o Multiple Classes: The articles of incorporation must set out their rights/etc.
(CBCA s. 6(1)(c))
Presumption of Equality: Shares are presumed to be equal in all respects unless otherwise
indicated.
(CBCA s. 24(3) for single class, Bowater for multiple classes)
o Differences between classes are explicitly permitted
(CBCA s. 24(4))
o Distinguishing between classes: If one or more rights differ between two classes of shares,
then those classes are distinguished (and the presumption of equality doesn’t apply).
(McClurg)
 Distinguishing Through Treatment: Even reserving a discretion to directors to treat two
(otherwise-identical) shares differently is enough to distinguish. (Prof: That’s odd) (McClurg)
Share Certificates: Shareholders have the right to receive acknowledgement of their right to
receive a share certificate (and may receive a certificate if they request one)
(CBCA s. 49(1))
o Listed Rights: The certificate must list the rights and restrictions of the shares or indicate a
right to receive a copy of the rights and restrictions on the shares on request.
(CBCA s. 49(13))
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Shareholder Register: Corporations must maintain a shareholder register that shows the names
and addresses of shareholders, their shares, and the particulars of issue and transfer.
(CBCA s. 50)
o The shares must be kept at the registered office or records office of the corporation (CBCA s. 20)
o Shares must be in registered form (i.e. person on certificate owns it, not the bearer)
Frequently Used Shares (Common, Preferred and Other Shares)
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These are not
presumed
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Common Shares: Gives the shareholder the right to share in the dividends and proceeds of
dissolution on a pro rata basis. Also confers voting rights. Bears no preferences.
Preferred Shares: Shares bearing a preference over other (subordinate) shares.
o Preferences: Rights that get executed before subordinate shares' rights get executed.
o Presumption for Dividends Beyond the Preferred Amount: Shares with a preference for a
fixed amount of dividends are presumed to not share in the excess.
(International Power)
o Presumption for Proceeds on Dissolution Beyond the Preferred Amount: Preferred shares are
presumed to share equally in the excess (i.e. post-preference) proceeds.
(International Power)
o Typical Preferred Share Features:
 Cumulative: If a shareholder receives less in dividends in one year than their preferred
shares entitle them to, the remaining entitlement carries forward into later years.
 Presumption: Shares with preferences on dividends are presumed to be cumulative (Webb)
 Participating: Participating preferred shares take their preferred amount, but then also share
in the excess amount with the subordinate shares.
 Presumption: Preferred shares are presumed to be non-participating(International Power)
 Convertible: The preferred share can be converted into a different type of security.
 Retractable: The shareholder can require the company to purchase the share from them.
 Redeemable: The company can require the shareholder to sell their share to the company.
 Note: Articles often call shares “redeemable”, but actually describe a retraction right.
Other Frequently-Used Types of Shares:
o Non-Voting Common Shares: These are popular where a minority wants to retain control.
 Dual Class Recapitalization: A situation where a new voting class of shares is created (via
majority vote) and the old voting class has its voting right stripped. There’s a concern that a
majority can use this to strip voting rights from minority shareholders.
 Dual Class Share Issuance: Not problematic; voting and non-voting shares created initially
o Special Voting Shares: Shares receiving more than one vote per share.
Dividends
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Cash, Specie and Stock Dividends: Dividends can be cash, or in non-cash goods or services ("in
specie"). A common type of in specie dividend is payment in stock.
Power of Directors to Declare Dividends Unless Otherwise Provided: Not explicitly given, but…
o Interpretation: CBCA grants shareholders specific powers, but does not grant them a right to
declare dividends. Directors have a general management power (residual power) (CBCA s. 102(a))
 Delegation of the dividend declaration power from the directors is prohibited by s.
115(3)(d); this suggests that the directors’ power to declare is implicit.
(CBCA s. 115(3)(d))
The Directors are Not Obligated to Declare Dividends: Directors have a fiduciary duty to
consider the best interests of the company when deciding whether to declare dividends.
(Dodge)
o Example: Withholding dividends to drive down prices (but not raise profits) violates the duty to
act in the best interests in the company (which requires making profits)
(Dodge)
o Oppression Remedy: If refusal to issue dividends is oppressive (e.g. husband trying to prevent
wife from collecting after separation), directors may be required to declare dividends. (Fergusson)
Declared Dividends Become a Debt: Companies are obligated to pay shareholders as creditors.
Dividends Can Only be Paid Out of Profits: Profits include retained earnings from previous years
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Dividends Cannot Be Paid if Payment Would Leave the Company Insolvent:
(CBCA s. 42)
o Test: Unable to pay liabilities as they come due, or assets less liabilities is negative. (CBCA s. 42)
o Liability: Directors are personally liable to repay dividends violating s. 42. (CBCA s. 118(2)(c))
 Indemnity: Directors can sue shareholders for return of the dividend amounts(CBCA s. 118(5))
Record Date and Ex Dividend Date: Directors may set a “record date” when declaring dividends.
Persons who are shareholders on the record date get paid dividends.
(CBCA s. 134(1))
o If No Record Date Set: Deemed to be the close of business on the declaration date.(CBCA s. 134(3))
o “Ex Dividend”: Any following purchasers of stock are ex dividend and do not get paid.
Share Rights (Voting, Dissolution and Pre-Emptive Rights)
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Voting Rights: Each share is presumed to carry one vote unless otherwise provided (CBCA s. 140(1))
o Weighting Votes: Shares can have differently weighted voting rights, subject to the
presumption of equality. There is conflicting case law on this point: (Bushell, Jacobsen, Bowater)
 Example: One class of shares. Directors get triple vote weight. Valid.
(Bushell)
 Example: One class of shares. Shareholders can vote at most 1000 shares. Invalid. (Jacobsen)
 Example: Multiple classes. Special class gets 10 votes, unless held by someone other than a
particular shareholder (i.e. a transferee). Invalid.
(Bowater)
 Interpretations: Bowater is now the leading case and stands for the presumption of
equality of shares within a class. However, it’s not clear whether it requires that all shares
in a class get equal rights (narrow view) or must merely be treated equally (broad view).
 Some subsequent courts have adopted the narrow view (not cited in text)
Dissolution Rights: Shares have a default right to share in dissolution proceeds on a pro rata basis.
o Note: Recall that participation is presumed for dissolution (but not dividend) rights.
Pre-Emptive Right: If the corporation issues more shares, existing shareholders with a preemptive right may purchase a pro rata portion of those new shares. Must be pro rata. (CBCA s. 28)
o Note: This right is not presumed; it must be provided for in the articles.
Issuing New Shares
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Directors Power to Issue: Subject to the articles, bylaws or unanimous shareholder agreement, the
directors decide when to issue shares, who to issue them to and for what consideration(CBCA s. 25(1))
o This only applies to new shares of an existing class. Need shareholder approval for new classes
o Non-Delegable: The directors cannot delegate this power.
(CBCA s. 115(3))
Authorized Limit: At incorporation, the articles can (but are not required to) set out an authorized
limit. Directors cannot issue more shares than that limit. Shareholders can increase it.(CBCA s. 6(1)(c))
Consideration: Shares cannot be issued until consideration is paid. They may be paid for in cash,
property or past services. Non-cash payment must be equivalent to the cash amount. (CBCA s. 25(3))
o Promissory notes and promises to pay aren’t “property”; no consideration.
(CBCA s. 25(5))
o Liability: Directors who vote in favour of allowing non-cash consideration are jointly and
severally liable for any amount by which that payment falls short of equivalence (CBCA s. 118(1))
 Defence: If the directors (a) didn’t know and (b) couldn’t reasonably have known of the
shortcoming then they are not liable.
(CBCA s. 118(6))
o Penal Sanctions against the directors are also available.
(CBCA s. 251)
Assessability: Shares are non-assessable, meaning that shareholders cannot be required to make
further contributions to the company in order to maintain their shares.
(CBCA s. 25(2))
Repurchase and Redemption of Shares
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•
Repurchase: A corporation is permitted to repurchase its own shares so long as it would not make
itself insolvent (defined as unable to pay liabilities or assets < liabilities + stated capital)(CBCA s. 34(2))
Holding Own Shares: A corporation cannot own shares in itself; repurchased shares are cancelled
or (if there’s an authorized limit) reverted to “authorized and unissued” status.
(CBCA s. 30(1))
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Redemption: A corporation’s articles can expressly allow it to repurchase shares (s. 36(1)), but a
different insolvency test is used (s. 36(2)): (a) unable to pay liabilities as they come due, or (b)
assets < liabilities + prior claims of any other classes of shares on dissolution.
(CBCA s. 36(1),(2))
Director Liability: Established under s. 118. See “Liability” under Dividends on p. 20. (CBCA s. 118)
Series of Shares
•
Series a Class: The articles may authorize directors issue shares within a class in series. (CBCA s. 27)
o Restriction: No series within a class may have a preference to dividends or dissolution
proceeds over any other series in the class.
(CBCA s. 27(3))
o Series Rights: Series may have separate rights and restrictions from the rest of the class.
o Presumption of Equality: Shares within a class are treated equally.
(Bowater)
Par Value Shares and Stated Capital Accounts
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Concept: Shares used to be assigned par value. Shareholders could buy shares for this value, or
could pay part of the value and be liable for the remaining value. It was intended to be a ready
source of finance and a convenient basis for determining a company’s available capital.
Problems: Issuing shares for less than par value was soon judged to be fraudulent, so corporations
started assigning token par value. As a result, the number became meaningless. It also deceived
investors who thought it represented the value of the share. “Contributed surplus” accounts held
cash from sales above par; investors might be deceived to think these added extra protection.
Today: Only shares without par value are provided for in the CBCA.
(CBCA s. 24(1))
Stated Capital Account: The modern version of par value. Company keeps a record of the value
for which shares were issued and the number of shares issued, redeemed or acquired. (CBCA s. 26(1))
o Reducing the stated capital account (e.g. by returning capital to shareholders) must be approved
by shareholders via special resolution. Must also pass an insolvency test.
(CBCA s. 38(1))
Debt Finance
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•
Common Types of Corporate Debt Finance:
o Bank Loans: These includes lines of credit (“revolving loans”) and lengthier “term loans”.
 Banks will often require security interests in collateral assets (can be the corporation’s or
even personal assets), impose restrictions on the kinds of business the corporation can
engage in to reduce risk, and/or include “acceleration clause” for full repayment on default.
o Commercial Paper, Bonds and Debentures: Corporations sell these debt instruments.
 Commercial Paper (“Notes”): Promissory notes that promise to pay a certain amount at a
certain time. Usually short term (1-3 months). Negotiable (i.e. transferable).
 Bonds and Debentures: Like a long-term loan from a bank, except that it's sourced from
many different parties in relatively small pieces. Contractual; may have virtually any terms.
Enforcement of Bond Terms: Where there are many investors this can give rise to problems.
o Problems: Small stakes problem (each individual investor’s stake is small, provides no
incentive to enforce) and free rider problem (each investor waits for someone else to enforce)
o Solution: Issuers of bonds can appoint a trustee to enforce the terms on behalf of bondholders
 Qualification: Trustees must be incorporated under trust company statutes
(CBCA s. 84)
 Conflict of Interest: Trustees can not have a conflict of interest with the issuer (CBCA s. 83)
 Access: Trustees must be permitted access to the list of debenture holders for the purpose of
communicating with them re: voting or other enforcement matters.
(CBCA s. 85)
 Power to Demand Evidence of Compliance: Trustees must have this power (CBCA s. 86-88)
 Notice of Default: Trustees must give bondholders notice of corporation’s default(CBCA s. 90)
 Duties of Loyalty Care: Trustees must act honestly and in good faith for the interests of
debt holders and with the care skill and diligence of a reasonably prudent trustee (CBCA s. 91)
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Securities Regulation
Sources of Securities Regulation
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•
•
Provincial: The provinces all have similar legislation, under which regulations are passed by the
Lt. Governor in Council. Rules are created by the Securities Commission and usually have the
same effect as regulations. Policies are non-binding documents created by Securities Commissions.
National (but not federal): The Canadian Securities Administrators (a joint meeting of provincial
securities regulators) produce National Instruments. These are not legal per se, but each
provincial regulator creates a rule on the effective date that adopts the instrument. If not all
provinces adopt it, it’s called a Multilateral Instrument. Companion Policies accompany
National Instruments and describe their general intent (but are not legally binding).
Stock Exchanges and Alternative Trading Systems: Listing in an SX or ATS requires signing a
contract with the listing entity. That contract will require compliance with additional rules.
Distribution of Securities to the Public
•
•
Prospectus Requirement: A prospectus is required when there is a “distribution” of a “security”.
This includes distributions by “persons”, not just corporations.
(e.g. BC Securities Act s. 61)
o Scope: Very broad. The statutory definitions try to capture as much as possible:
 “Security”: Shares, debentures, other well-known securities, and "investment contracts"
 “Investment Contract”: Not further defined, but there are several common-law tests
 Common Enterprise Test: This is the most-used test.
(Pacific Coast Coin Exchange)
 A contract, transaction or scheme whereby a person invests;
 In a common enterprise; and
 The efforts of a promoter or third party are undeniably significant in providing
the profits the person expects from the investment.
 Example: Company selling “interests in land” (parcels of orange grove). Land is tended
by the company; profits from the grove are distributed to lot-owners on a pro rata basis.
Court: This is an investment contract. (US case adopted in Pacific Coast Coin Exchange)
 “Distribution”: A trade in a security of an issuer that has not been previously issued
 “Trade”: Any sale or distribution of a security for valuable consideration.
 Note: Given the above, even getting a loan can give rise to the prospectus requirement.
Receiving loan money is consideration, so entering the contract could be distribution.
o Exemptions: Because the requirement is so broad, there are many exemptions.
 Standardization: Exemptions have been largely standardized between provinces. (NI 45-106)
 Small Business Exemptions: The primary exemption is the private issuer exemption: If
the securities have share transfer restrictions, the issuer has fewer than 50 shareholders (not
including [former] employees) and the securities have only been distributed in reliance on
this exemption then no prospectus is required if distributing to certain parties.
(NI 45-106)
 Parties: Include [listed] immediate family, business partners and close personal friends
of a director or officer of the issuer, accredited investors (banks; governments; persons,
trusts or limited partnerships with more than $5 million in net assets).
 Private Placements Exemption: Issuers that have already published a prospectus may
distribute shares to accredited investors without issuing a new prospectus.
o Process: The prospectus must disclose all material information. If there is an omission, the
statute deems all the requirements (reliance, negligence, causation of damages) for a Hedley
Byrne tort claim in negligence to be made out; the only defence is due diligence.
Stock Exchange Listing: Not mandatory upon creating a prospectus, but popular.
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Continuous Disclosure
•
Disclosure Requirements: Every “reporting issuer” (i.e. issuer of a prospectus) must…
o Give a quarterly financial statement every three months
o Give annual disclosure statements, annual statement forms and other disclosures annually.
o Timely Disclosure: Any time anything significant happens, a press release must be issued and
filed with the regulator “as soon as possible” (usually on the same day).
Regulation of Insider Trading
•
•
•
Note: “Insiders” is used in the US, but that term isn’t used in Canada (except informally)
Scope: Applies to directors, officers, anyone in a “special relationship” with the issuer (“insiders”)
o This includes “tipees”; persons who have received inside information from insiders.
o BC: "Person Connected" approach (i.e. list of insiders). Includes employees at issuer's law firm.
Prohibited Activities: Insiders cannot do either of the following activities:
o Trading: Performing trades using non-publically-disclosed (i.e. “inside”) information.
o Informing: Knowingly disclosing inside information (unless necessary in course of business)
Penalties: Criminal, fines (3x profits!), private actions by issuer, and administrative sanctions.
Takeover Bid Regulation
•
•
•
Scope: Applies if a person tries to buy 20% or more of the shares in any class of shares.
Rules: The bid must be kept open for at least 35 days, and…
o If less than all the shares are being bought, then they must be purchased on a pro rata basis
o The purchaser must issue a disclosure document ("takeover bid circular").
Poison Pill Plans: A scheme where shares carry a right to buy more shares at a heavily discounted
rate, but only if someone owns more than 20% of the shares (and that person doesn’t get the right).
o Regulators sometimes allow these, but only if they are not done in a way that blocks trade. If
they choose to intervene, they can issue a cease trade order on the offending rights.
o Purpose: This significantly devalues the shares of the purchasing corporation.
Governance
Objects, Powers and Agency (the Ultra Vires Doctrine and Authority of Corporate Agents)
•
•
•
Objects and Powers: An object is a type of business that the corporation was created to do. Powers
are the methods by which the corporation can carry them out. These are no longer set out in articles.
Agency and Capacity: Agents derive their authority from the corporation (i.e. from the directors’
instructions). Capacity refers to the scope of authority that the corporation can provide agents.
The Ultra Vires Doctrine: Any action by a corporation that lies outside its objects is void (Asbury)
o Example: Corporation has object to make “railway plants”, enters contract to make a railway.
Ultra vires; contract is void (i.e. never existed), company not liable for repudiation
(Asbury)
o Example: Corporation has object to provide services to festival-visitors. Has power to borrow
funds for purposes of objects. Borrows money to breed pigs. Ultra vires.
(Re Introductions)
o Justifications: Protecting creditors from unexpected changes of risk, constraining quasi-public
corporations to their purpose, and reducing risk of bankruptcy for important corps. (e.g. banks)
o Problems: Huge risk for third parties, substantial due diligence costs (for both sides), and
ineffectiveness (if both sides are happy with the arrangement, there’s no enforcement)
o Practical Response: Companies got long lists of powers, courts became more flexible
o Legislative Response: A corporation has all the powers of a natural person
(CBCA s. 15)
 Restrictions: The articles may include restrictions on the powers of a company(CBCA s. 16(2))
 Validity: An act is not invalid merely because it breaches the CBCA or articles(CBCA s. 16(3))
 Note: This effectively repeals the ultra vires doctrine for federal corporations, but
companies created by special statute (e.g. crown charter, letters patent) are still subject.
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
Question: CBCA companies cannot conduct business of a bank, or business covered by the
Insurance Companies Act or Trust and Loan Companies Act. Is this ultra vires? (CBCA s. 3(4))
• Authority of the Corporation’s Agents: Constructive Notice and Indoor Management
o Constructive Notice: Third parties are deemed to have notice of the contents of memoranda
and articles of association (because they are publicly filed).
 Legislative Modification: The doctrine of constructive notice doesn’t apply to documents
of CBCA-incorporated companies (nb: doesn’t include non-CBCA companies) (CBCA s. 17)
o Indoor Management Rule: Third parties are not deemed to know of any in-house (“indoor”,
i.e. non-publicly-available) restrictions on the authority of directors and officers.
 Legislative Modification: Unless a person has [ought to have] knowledge of the constraint
by reason of a relationship with the corporation, the corporation cannot assert that:(CBCA s. 18)
Note: Indoor
management is an  Articles, by-laws or unanimous shareholder agreement have not been complied with
exception to
constructive notice  The place identified as the registered office of the corporation in the most recent notice
of the registered office sent to the Director is not the registered office of the corporation
Directors and Officers
•
Role of Directors: Directors manage, or supervise the management of, the corporation (CBCA s. 102)
o Appointing Officers: Directors appoint officers, who are agents of the corporation (CBCA s. 121)
Qualifications, Election and Removal of Directors
• Legal Status, Age, Mental Competence, Financial Status, Share Qualification, Number:
o Legal Status: Directors must be individuals (i.e. natural persons).
(CBCA s. 105(1)(c))
o Age: Directors must not be less than 18 years of age.
(CBCA s. 105(1)(a))
o Mental Competence: Directors must not be adjudicated to have unsound mind(CBCA s. 105(1)(b))
o Financial Status: Directors must not be bankrupts
(CBCA s. 105(1)(d))
o Share Qualification: Directors are not required to have qualifying shares
(CBCA s. 105(2))
 Variable: The articles can provide for a share qualification for directors
(CBCA s. 105(2))
o Number: Non-distributing corporations require at least 1 director. Distributing corporations
require at least 3. The articles can set out a fixed number, or a min. and max.
(CBCA s. 102(2))
• Residency: At least 25% of the directors must be “resident Canadians”
(CBCA s. 105(3))
o Less then 4 Directors: At least one director must be a “resident Canadian”
(CBCA s. 105(3))
o “Resident Canadian”: Includes citizens of Canada who are ordinarily resident in Canada,
citizens who aren’t ordinarily resident but are listed in Regs., and permanent residents (except
those who are eligible for citizenship but haven’t applied for it)
(CBCA s. 2(1); Reg. 13)
• Election of Directors: This is a mandatory duty of the shareholders.
(CBCA s. 106)
o First Directors: At incorporation, a list of the first directors is sent to the CBCA Director in the
notice of directors. These are the first directors of the corporation.
(CBCA s. 106(1))
 Term: Hold office until the first annual meeting of the shareholders
(CBCA s. 106(2))
 Note: This must be held within 18 months of incorporation
(CBCA s. 133(1))
o Subsequent Directors: At every annual shareholders’ meeting the directors are elected by
shareholders via an ordinary resolution (defined as 50%+1 vote: s. 2(1))
(CBCA s. 106(3))
 Term: By default, directors’ terms begin at election and end at the next annual meeting of
shareholders. Articles can provide for term of up to three years
(CBCA s. 106(3), (5))
o Failure to Elect: If shareholders fail to elect directors at a meeting where they are supposed to
elect, the incumbents remain in office until successors are chosen
(CBCA s. 106(6))
o Unlimited Re-Elections: The CBCA provides no limits on the number of re-elections.
o Staggered Boards: The articles may provide that not all directors get elected at the same
meeting. (nb: this will require increasing the directors’ terms)
(CBCA s. 106(4))
o Court Application: Corporation, shareholder or director may apply to court to resolve any
controversies re: election or appointment. Court can make any order it sees fit.
(CBCA s. 145)
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•
Ceasing to Hold Office: Persons cease to be directors mid-term when they die, resign, become
disqualified or are removed from office upon a resolution of the shareholders
(CBCA s. 108)
• Removal of Directors: A director can be removed by ordinary resolution
(CBCA s. 109(1))
o Mandatory: The articles can’t change the size of the majority required for this
(CBCA s. 6(4))
o Note: Recall Bushell; directors had identically-classed shares that were supposed to get 3x
voting rights on resolutions to remove the director holding them. This violated presumption of
equality, but it would still be valid to create new classes with the same right. In this way, it
might be possible to circumvent the CBCA s. 6(4) prohibition by re-weighting votes.
• Filling of Vacancies: The directors have the power to fill vacancies on the board
(CBCA s. 111(1))
o Exception: Directors can’t fill vacancies resulting from increases in the [min.] number of
directors, or from failure of shareholders to elect the [min.] number of directors (CBCA s. 111(1))
o On Removal: Vacancies resulting from shareholders’ removal of a director may be filled by the
directors if the shareholders didn’t fill it in the same meeting as the removal
(CBCA s. 109(3))
Authority and Powers of Directors
• Management: This is a broad (basically residual) power. It is not further defined.
(CBCA s. 102)
o Implicit Powers: Directors are not permitted to delegate the following powers. They are not
mentioned elsewhere in the statute, so they presumably implicitly fall under s. 102(CBCA s. 115(3))
 Submission to the shareholders of questions/matters requiring approval of the shareholders;
 Declaration of dividends;
 Purchase, redemption or other acquisition of shares issued by the corporation;
 Approval of a management proxy circular;
 Approval of a takeover bid by the corporation or a directors’ circular (connected to same)
 Approval of any financial statement put before the shareholders.
o Subject to: This can only be reallocated by unanimous shareholder agreement (CBCA s. 102)
• Adoption, Amendment or Repeal of the By-laws: Subject to articles, bylaws, U.S.A. (CBCA s. 103)
o Qualification: Any changes must be put to the shareholders at the next annual meeting. The
changes are only effective after that point if approved (prior to meeting they are also effective)
o Non-Delegable: Directors may not delegate this power (it may be reallocated) (CBCA s. 115(3)(j))
• Power to Borrow: Subject to articles, bylaws, U.S.A.
(CBCA s. 189(1))
o Delegable to a director, a directors’ committee or officer (subject to restriction) (CBCA s. 189(2))
• Power to Issue Shares: Subject to articles, bylaws, U.S.A.
(CBCA s. 25)
o Series: The directors may issue shares in series if that power is granted in the articles (CBCA s. 27)
o Non-Delegable: Directors may not delegate this power except insofar as it has been authorized
by the directors (it may be reallocated).
(CBCA s. 115(3)(c) [shares], (c.1) [series])
• Appointment of Additional Directors: If the articles allow it, directors may appoint additional
directors, but only up to 1/3 of the directors elected at the last annual meeting
(CBCA s. 106(8))
o Non-Delegable: Directors may not delegate this power (it may be reallocated)(CBCA s. 115(3)(b))
• Filling a Vacancy on the Board of Directors: The directors have the power to fill vacancies on
the board resulting from the death or resignation of a director
(CBCA s. 111)
o On Removal: Vacancies resulting from shareholders’ removal of a director may be filled by the
directors if the shareholders didn’t fill it in the same meeting as the removal
(CBCA s. 109(3))
o Non-Delegable: Directors may not delegate this power (it may be reallocated)(CBCA s. 115(3)(b))
• Filling a Vacant Auditor’s Position: The directors can replace resigning auditors (CBCA s. 166(1))
o Subject to: Articles can require that vacancies be filled by shareholders’ vote
(CBCA s. 166(3))
o Non-Delegable: Directors may not delegate this power (it may be reallocated)(CBCA s. 115(3)(b))
• Calling of Meetings of Shareholders: Directors call annual and special meetings
(CBCA s. 133)
o Mandatory: This is not subject to amendment by shareholders; no “subject to” text (CBCA s. 133)
o Delegable: Pursuant to the general power to delegate
(CBCA s. 121)
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•
Appointment and Compensation of Officers and the Delegation of Powers: Subject to articles,
by-laws or U.S.A., the directors designate offices, appoint officers and delegate powers (CBCA s. 121)
o Compensation: Directors determine compensation of directors, officers, employees (CBCA s. 125)
o Delegable: Pursuant to the general power to delegate
(CBCA s. 121)
Directors’ Power to Delegate
• Statutory Limits: Certain powers cannot be delegated (see above).
(CBCA s. 115(3))
• Common Law Limits: Courts are concerned with (1) length of delegation, (2) extent of delegation,
and (3) to whom the rights are delegated.
o Delegation to Management: Directors cannot delegate all or substantially all of their powers to
management. They can safely delegate powers related to ordinary business transactions. (Hayes)
 Degree: The directors can delegate their power to act, but not their power to govern(Kennerson)
 Timing: The longer the power is delegated, the less likely it is to be acceptable
(Sherman)
o Delegation to Outsiders: Powers can only be delegated to persons outside the corporation for a
limited time, and the directors cannot too many of their powers to outsiders.
(Sherman)
o Example: Directors delegate “full powers” of the board to a committee; court restricts this to
mean those involved in ordinary business transactions. Acts involving removing officers,
determining officers’ compensation and calling shareholders’ meetings not included
(Hayes)
o Example: Directors delegate underwriting and executive management to an outside contractor
for 20 years. Court rejects; too much power for too long. Contrary to public policy
(Sherman)
o Example: Employment contract includes delegation of power to manage all matters including
bookings, personnel, admission prices, salaries, contracts, expenses and all operational policies
for five years. Court: this confers practical control of all corporate powers. Rejected. (Kennerson)
o Policy: Is the delegation freezing out shareholders, putting too much power in hands other than
those of the directors (who the shareholders elected and expect to remain accountable)? (Hayes)
Removal of Officers
• Policy: There is a tradeoff between the ability to remove officers and the benefits of long-term
contracts (increased security allows for lower compensation; length of term encourages officers to
build human capital). Solution: Officers can be dismissed, but it’ll cost.
• Breach of Employment: Directors can remove a person from office or agency but, if they remove
them from employment, that person may claim damages for breach of contract
(Re Paramount)
• Wrongful Dismissal: Persons dismissed from office can get damages on the basis that, where a
person enters into an arrangement that depends on the continuance of an existing state of affairs,
there is an implied obligation on his part to do nothing to end those circumstances.
(Shindler)
Directors’ Meetings
• Mechanics Follow Bylaws: CBCA leaves these details of meeting conduct to the bylaws
• Place: Subject to articles/bylaws, directors can meet at any place with any notice
(CBCA s. 114(1))
• Quorum: Subject to articles or bylaws, a quorum is a majority of the board (or, if the articles sets
out a minimum number of directors, a majority of that number)
(CBCA s. 114(2))
o Residence: At least 25% of the directors present must be resident Canadians.
(CBCA s. 114(3))
• Notice: Generally, the purpose of a meeting does not need to be given in the notice.
o Listed Matters: If directors' meeting is dealing with any of the matters listed in s. 115(3),
notice of the meeting must indicate that such matters are being dealt with.
(CBCA s. 114(5))
o Waiver: Directors may waive notice of a meeting of directors in any manner
(CBCA s. 114(6))
 Directors attending a meeting are deemed to have waived notice unless they have explicitly
attended for the purpose of objecting that the meeting was not lawfully called.
• One Director: If there is only one director, that director may constitute a meeting (CBCA s. 114(8))
• Resolution in Lieu of Meeting: If all directors sign a written resolution in lieu of meeting, no
actual meeting needs to be held (nb: This is common for closely-held corporations)
(CBCA s. 117)
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•
Number of Meetings Annually: CBCA doesn’t require a particular frequency of meeting, but
failing to meet for too long can lead to a breach of the duty of care
(CBCA s. 122(1)(b))
How Boards of Public Corporations Operate
• Problem: In reality, management often controls the board, and the board rarely
monitors/fires/disputes recommended appointments of officers. Persons with full-time jobs can’t
effectively hold more than 2-6 directorships, but many presidents hold dozens.
• Suggestion (Eisenberg, American Law Institute): Require a majority of directors be outsiders.
Also, give independent directors sole control over communication with shareholders.
• CBCA requires 2 outsider directors for distributing companies. Doesn’t scale.
(CBCA s. 102(2))
• Disclosure Requirements: Corporations must disclose the identities of all independent and nonindependent directors, whether a majority is independent, whether the chair is independent, what
directors’ other directorships are, attendance records, etc.
(NI 58-101)
Shareholder Voting
•
•
•
Shareholder Control Over Directors:
o Power to Manage: Directors have general management power (s. 102). Directors are not the
shareholders’ agents; shareholders cannot dictate management decisions(Automatic Self-Cleansing)
 Example: Shareholders vote to sell off the assets of the corporation. Motion is brought
before the directors' meeting; directors reject the motion.
(Automatic Self-Cleansing)
 Reallocation to Shareholders: Only by unanimous shareholder agreement. (CBCA s. 102)
 In Case of Deadlock: It is unclear whether there might be a residual power for shareholders
to make management decisions if the board is deadlocked and action is required for the
company’s continuing viability. In Barron v. Potter, they just elect a new board.
o Election of Directors: Shareholders have this power. It cannot be reallocated (CBCA s. 106(1),(3))
o Amendments to Bylaws: By default, directors initiate amendments and shareholders ratify
them at their next annual meeting. Can be reallocated in articles, bylaws or U.S.A. (CBCA s. 103)
 Proposals: Even if not reallocated, shareholders can propose changes
(CBCA s. 103(5))
Fundamental Changes: These require a special resolution (defined as 2/3 majority – CBCA s. 2(1))
o Listed Changes to Articles: Changes to corporate name, corporate office, business restrictions,
number of directors, or share transfer restrictions; creation of new class of shares. (CBCA s. 173)
o Other Changes: Certain other provisions require special resolutions. These include:
 Approving an amalgamation of the corporation with another corporation
(CBCA s. 183)
 Sale or lease of all or substantially all of the corporation’s assets
(CBCA s. 189(3))
 Continuance of the corporation under the laws of another jurisdiction
(CBCA s. 188)
 Liquidation and dissolution of the corporation
(CBCA s. 211)
Class Voting Rights:
o When Class Voting Rights Arise: Class votes are required in order to …
(CBCA s. 176(1))
 Increase or decrease any authorized limit on a class of shares
 Exchange, reclassify or cancel shares
 Add, change or remove rights, privileges or restrictions on a class of shares
 Increase rights/privileges of any class of shares with equal or superior rights
 Create a new class of shares that are equal or superior to a particular class
 Make an inferior class of shares equal or superior to a particular class
o Series Vote: Where a series of shares is affected by a resolution in a manner different from
other series of the class then that series has the right to vote separately as a series (CBCA s. 176(4))
o Other Aspects of Class or Series Voting Rights:
 Mandatory: Even classes that don’t have a voting right get to vote as a class (CBCA s. 176(5))
 Separate Votes: Each class that has a right to vote must vote separately; every class of
shares must approve the amendment on their own special resolution
(CBCA s. 176(6))
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Business Associations

Class Voting in Fundamental Changes: Any change under s. 173 (listed above) gives rise
to a class voting right. However, this list is not exhaustive; other circumstances include:
 On an amalgamation
(CBCA s. 183(4))
 A sale, lease or exchange of [substantially] all of the corporation’s assets(CBCA s. 189(7))
 A continuance (to the extent that it affects the relative rights of the class) (CBCA s. 118)
 A liquidation and dissolution
(CBCA s. 211(3))
o The Significance of Voting Rights: There’s a policy basis for protecting voting rights.
 Shareholder Monitoring: Shareholders have small stakes; it doesn’t make economic sense
for them to engage in costly monitoring activities (“rational shareholder apathy”)
 But: large shareholders (e.g. banks) can’t easily sell stock, so it makes sense to monitor.
 Transaction Cost Theories: Investing carries costs (investigation). Voting rights let
shareholders protect that investment by preventing losses of their other rights.
 Market for Corporate Control: Distributing voting shares exposes corporations to the risk
of takeover. This is a good thing; poorly-run corporations get bought out and improved.
Shareholder Meetings
Basics
• Annual Meetings: Annual meetings must be held no more than 15 months after the previous
annual meeting and no sooner than 6 months after the end of the fiscal year.
(CBCA s. 133(1))
o First Meeting: Must be held within 18 months of incorporation
(CBCA s. 133(1))
• Special Meetings: Any meeting that isn't an annual meeting
(CBCA s. 133(2))
o Memoranda of association companies call these “extraordinary meetings”
• Ordinary vs. Special Business: Ordinary business is election of directors (CBCA s. 106(3)),
consideration of financial statements, and appointment of auditors.
(CBCA s. 162(1))
o Special Business is any business that isn't ordinary business
(CBCA s. 135(5))
o Resolutions: Ordinary business uses ordinary resolutions, special business uses special
resolutions (50%+1 majority for ordinary, 2/3 majority for special)
(defined in CBCA s. 2(1))
• Place: Meetings must be in Canada, subject to articles or shareholder agreement
(CBCA s. 132(2))
o Selection: Directors choose the place in Canada, unless designated in by-laws
(CBCA s. 132)
• Quorum: Subject to by-laws, a majority of the voting shares must be represented (CBCA s. 139(1))
o Partial Attendance: Quorum doesn't need to be there for the whole meeting
(CBCA s. 139(2))
o Start with Quorum: If there is no quorum at the beginning of the meeting then the
shareholders can adjourn the meeting but they cannot transact other business
(CBCA s. 139(3))
• Notice: Must give at least 21 days but no more than 60 days of notice
(CBCA s. 135(1), Reg. 44)
o Record date may also be set not more than 60 days ahead of the meeting
(CBCA s. 134)
o Notice of special business must state nature of business in sufficient detail to allow a shareholder to make a reasoned judgment on whether to vote for/against the resolution(CBCA s. 135(6))
Conduct of Meetings
• Voting: Voting is done by a show of hands unless a poll is demanded
(CBCA s. 141(1))
o Timing: A poll can be demanded before or after a vote by a show of hands
(CBCA s. 141(2))
• Minutes of shareholder meetings (signed by meeting chair) must be kept
(CBCA s. 20(1)(b))
• Meeting Chair: The chair of the meeting must: (1) act in good faith, (2) be impartial, and (3)
allow shareholders to speak (for reasonable time) on any discussed matters before the meeting (Wall)
o Example: Vote goes against chair’s interest; chair refuses to tabulate votes, rules that no
quorum is present and adjourns. Violation of duty of impartiality.
(United Canso)
o No Duty to Look Behind Title: The chair doesn't have to go behind the legal title of shares to
see if the beneficial owner's instructions have been followed.
(Re Marshall)
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Business Associations
o Vested Interest: A chair’s vested interest in the outcome of a vote (e.g. an interest as a director)
does not automatically make his decisions not bona fide. Go to the facts.
(Blair)
 Example: Chair gets legal advice on how proxies should vote. Advice is incorrect, but chair
acted in good faith and acted impartially. No breach of duty.
(Blair)
o Legal Advice does not automatically exonerate the chair; still has the above duties.
(Blair)
Shareholder-Requisitioned Meetings
• A group of shareholders can requisition a meeting if, together, they hold 5% or more of the total
voting shares.
(CBCA s. 143)
• Requirements: The shareholders must: (1) prepare a document setting out the purpose of the
meeting; (2) sign the document; and (3) send the document(s) to each director and to
the registered office of the corporation.
(CBCA s. 143)
• Result: The directors must call a meeting, unless: (1) They have already set a record date for notice
of meeting, (2) They have given notice for a meeting, or (3) The purpose of the shareholder
requisitioned meeting is one that the directors would refuse a shareholder proposal for
under CBCA s. 137(5)(b)–(e)
(CBCA s. 143)
o If not called within 21 days, any shareholder who signed requisition may call the meeting.
o The cost of meeting is incurred by the corporation unless the meeting resolves otherwise.
Meetings By Order of Court:
• The court to call a meeting where it is impracticable to call one in the manner prescribed or where
the court otherwise deems it fit to call a meeting.
(CBCA s. 144)
• Standing: Application may be made by shareholder, director, or CBCA’s Director.
(CBCA s. 144)
• Deadlock: Where a majority shareholder wants to call a meeting to exercise a shareholder power
(e.g. replacing directors), but minority shareholders prevent the meeting from being held (e.g. by
not attending, preventing quorum), courts may order a meeting
(El Sombrero, Opera Photo)
o Note: These are UK cases; Canadian courts are more reticent to intervene (see below)
• Intervening in Battles for Control: Courts will not exercise their discretion for the purpose of
placing one of two or more contending factions of shareholders in control.
(Re Morris)
o Locking In: Court won’t change a quorum if it would lock one party into the company (Re Barsh)
o Note: The intervening and deadlock cases are factually similar (all involve corporations with
quorum requirements such that some minority shareholders must attend, but they all refuse to).
This might indicate a difference in approach between Canada and UK.
• Intervention on the Basis of Fault: Where a chair acts inappropriately (e.g. continuing without
quorum, rejecting proxies, etc), the court may call a meeting on the basis of fault.
(Re Routley’s)
• Widely-Held Corporations: Even if the board is in a battle for control, the court may call a
meeting so that it can file its required securities filings (nb: may require scutineers, etc)
(Javelin)
• Powers of Shareholders at Court-Ordered Meetings: A court can order meetings, but cannot
grant shareholders powers that they would not ordinarily have.
(Charlebois)
o Example: Articles only allow directors to be elected at annual meetings, not extraordinary
meetings. Shareholder application for extraordinary meeting to elect directors rejected(Charlebois)
Proxy Solicitation
• Definitions and Basics:
o “Proxy”: A form signed by a shareholder that appoints a proxy holder
(CBCA s. 147)
o “Proxy holder”: A person appointed to act on behalf of a shareholder
(CBCA s. 147)
o Appointment: Any shareholder entitled to vote at a meeting can appoint a PH
(CBCA s. 148)
o Proxy Holders’ Rights: Same as the shareholder, subject to the grant of authority (CBCA s. 148)
 Constraints: If a proxy holder holds proxies that require different votes, they cannot vote in
a show of hands. If necessary, the proxy holder can demand a poll
(CBCA s. 152(2))
30
Business Associations
•
Who Must Solicit Proxies: The management (i.e. directors and officers) of the corporation must
solicit proxies from each shareholder entitled to vote.
(CBCA s. 149(1))
o Exception: Non-distributing corporations with 50 or fewer shareholders entitled to vote do not
need to solicit proxies.
(CBCA s. 149(2))
o Failure to solicit proxies is an offence.
(CBCA s. 149(3) & (4))
o Enforcement: Solicitation of proxies can be enforced via a compliance order
(CBCA s. 247)
• Form of Proxy: National Instrument provides the requirements for the form of proxy:
(NI 51-102)
o Clearly indicate that persons other than those designated can be appointed
(NI 51-102 s. 9.4(3))
o The person soliciting proxies must state who is soliciting
(NI 51-102 s. 9.4(1))
o Must allow voting for or against resolutions or include a bold-face indication of how the
proxy holder will vote the shares
(NI 51-102, s. 9.4(4))
o Must provide a means by which the shareholder can vote in favour of or withhold voting with
respect to the appointment of an auditor or the election of directors
(NI 51-102, s. 9.4(6))
• Proxy Circulars: A document that must be sent to voting shareholders.
o Issued By: Proxy circulars must be sent by anyone who solicits proxies
(CBCA s. 150)
o Contents: Must contain sufficient information to allow shareholders to make a reasoned
decision on each matter of business to be voted on at the meeting
(CBCA s. 150; Regs. 61, 57)
 Misrepresentations: Court can make any order it sees fit to remedy misreps. (CBCA s. 154)
o Meaning of Solicitation:
 Definition: Broadly defined; includes the following:
(CBCA s. 147)
 A request to execute, not execute, or revoke a proxy.
(CBCA s. 147(b))
 Sending a form of proxy or other communication to a shareholder under circumstances calculated to result in procuring, withholding or revoking a proxy (CBCA s. 147(c))
 Example: Letter saying “We ask you not to sign any proxy for the Buckley slate of
directors” held to be a “solicitation” within the meaning of the definition above.
(Brown)
 Legislative Response: Added flexibility for shareholders to communicate with each other,
indicate how they intend to vote without being “solicitation”
(CBCA s. 147(b)(v)–(vii))
Shareholder Proposals
• Who can Submit: Registered or beneficial shareholders can submit proposals
(CBCA s. 137(1)(a))
o Requirements: One or more shareholders can submit a proposal if: (CBCA s. 137(1.1); Reg. 46)
 Shareholder(s) has ≥ 1% of voting shares or market value of shares is at least $2,000 and
 The shares have been held for at least six months
• Published in Circular: Proposal must be set out in management’s proxy circular (CBCA s. 137(2))
o Can include supporting statements in circular; up to 500 words
(CBCA s. 137(3); Reg. 48)
• Nominating Directors: Shareholders with more than 5% of the shares of a voting class (or 5% of
all voting shares) can nominate directors.
(CBCA s. 137(4))
• Requirements: The proposal must…
o Be submitted at least 90 days ahead of meeting
(CBCA s. 137(5); Reg. 49)
o Not be for primary purpose of redressing a personal grievance,
o Relate in a significant way to the affairs of the corporation
(CBCA s. 137(5)(d); Regs. 50, 51)
o Not be similar to any proposal from the past two years that did not get a specified minimum
level of support.
(CBCA s. 137(5)(d); Regs. 50, 51)
o Not be for the purpose of securing publicity
(CBCA s. 137(5)(e))
• Corporate Refusal: If the corporation refuses the proposal it must give notice
(CBCA s. 137(7))
o Shareholder Application: If the corporation refuses the proposal then shareholders can apply
to court for a consideration of whether the proposal was properly refused
(CBCA s. 137(8))
o Corporate Application: The corporation can also choose to apply to court to determine
whether the proposal can be properly refused
(CBCA s. 137(9))
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Financial Disclosure, Access to Records, and Other Forms of Disclosure
Note: “reporting issuer” is the provincial equivalent of “distributing corporation”
• Financial Disclosure:
o Annual Statements: Directors must put before shareholders annual financial statements(CBCA s. 155)
 Director Approval: Financial statements must be formally approved by directors(CBCA s. 158)
 GAAP: Statements are prepared according to “Generally Accepted Accounting Principles”
 Public Companies: Statements be certified by CFO and CEO of reporting issuers (i.e.
statements, to their knowledge, fairly present financial condition of the issuer)
(NI 52-109)
o Auditor: Only distributing corporations are required to appoint an auditor
(CBCA s. 162, 163)
 Guidelines: Auditor must make any examinations necessary to report on the annual
financial statements in accordance with CICA Handbook guidelines
(CBCA s.169)
 Put to Shareholders: Auditor’s report is to be put before the shareholders
(CBCA s. 155)
 Conflict of Interest: Auditor can’t have a conflict of interest with the company (CBCA s. 161)
 Public Companies: Auditor of a reporting issuer must be public accounting firm that has a
written agreement and complies with Canadian Public Accountability Board
(NI 52-108)
o Audit Committees: Distributing corporations must have an audit committee consisting of at
least three directors, majority of whom are not officers/employees of the company (CBCA s. 171)
 Review: They must review the financial statements before directors’ approval (CBCA 171(3))
 Auditor is entitled to be notified of and attend every committee meeting
(CBCA s. 171(4))
• Access to Records:
o Record-Keeping: Records must be kept at registered address or with records officer(CBCA s. 20(1))
o Records Include: Articles, by-laws, unanimous shareholder agreements, securities register,
minutes of shareholder and director meetings, and notice/resolutions of directors (CBCA s. 20(2))
o Access: The following persons must have access to the records of the company…
 Non-Distributing Corporation: Shareholders, creditors and the Director (except records of
directors’ meetings, accounting records and directors’ resolutions)
(CBCA s. 21(1))
 Distributing Corporation: Any person (with the above exceptions as well) (CBCA s. 21(1))
o Access to the list of shareholders must be for a “corporate purpose” (i.e. one connected to an
economic interest in the company). Wanting to impose political views isn’t valid.
(Honeywell)
o Access to the list of shareholders cannot be unreasonably refused
(Cooper)
• Securities Law Requirements: These impose additional requirements on access and disclosure.
Closely-Held Corporations
Policy and Background
• Terminology: “Closely-held corporation” is a conceptual term; it is not used in legislation.
Legislation uses functional descriptors (e.g. “distributing”, not “widely-held” or “public”).
• Characteristics: Closely-held corporations have relatively few shareholders; the shareholders are
generally active in management of the business; there is no established market for the shares of
the corporation; and there is usually a restriction on transfer of the shares.
• Policy Behind Different Treatment:
o Large Stake: Because there are few shareholders, each usually owns a large stake (and,
accordingly wants to be involved in management). This avoids the rational apathy trap.
o Separation of Ownership and Control Problem Not as Severe: Same reasons as above
o Desire to Control Who One is in Business With: It's hard to sell shares of closely-held
corporations, so you want to ensure that your business partners are compatible with you.
Treatment of Closely-Held Corporations
• Commonly-Used Provisions: These provisions are primarily used by closely-held corporations:
o Waiver of Notice: Shareholders may waive right to notice of shareholder meetings (CBCA s. 136)
o One Shareholder Meetings: If only one shareholder, s/he can constitute a meeting(CBCA s. 139(4))
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o Unanimous Consent in Writing to Resolutions in Lieu of Meeting: Instead of a meeting, the
shareholders can unanimously consent to a resolution in writing.
(CBCA s. 142)
o No Auditors: Non-distributing corporations aren’t required to appoint auditors
(CBCA s. 163)
o No Audit Committee: Non-distributing corporations aren’t required to have these (CBCA s. 171)
o No Proxy Solicitation: Management is not required to solicit proxies if the corporation is nondistributing and has fewer than 50 shareholders. Though they can, if they want to. (CBCA s. 149)
Shareholder Agreements
• Voting Agreements: Shareholders can contractually agree to constrain how they’ll vote(CBCA s. 145.1)
o Public Policy: This is not contrary to public policy (nb: and is now permitted by statute) (Ringuet)
o Voting Trusts: An alternative arrangement where all shares are held by a trustee and the trustee
votes the shares according to the terms of the trust instrument.
 Note: Adverse tax treatment means that this is rarely used in Canada.
• Voting Agreements that Constrain Directors’ Powers: Voting agreements that constrain how
directors will vote as directors (i.e. in directors meetings) is contrary to public policy; this violates
the duty to act in the corporation’s best interests. As such, this is prohibited.
(Ringuet)
• Constraining and Reallocating Directors Powers under the CBCA:
o Directors’ management power is subject only to unanimous shareholder agreement(CBCA s. 102)
 Shareholders may use a U.S.A. to reallocate management powers to themselves (CBCA s. 146)
 Shareholders’ management power is subject to any voting agreements. (CBCA s. 146(6))
o Other Directors' Powers: These can be reallocated using the following instruments:
 Borrowing Power: Articles, bylaws or unanimous shareholder agreement
(CBCA s. 189)
o General Approach to Reallocating Powers: (1) Identify the power, (2) find the provision
granting that power, (3) see what methods the provision allows, (4) determine which is most
appropriate (nb: normally a U.S.A.), (5) determine how shareholders agree to vote on the matter
and put the terms of that agreement into the shareholders’ agreement.
 Note: Amending the articles only requires a special resolution, but there’s a filing fee.
Share Transfer Restrictions
• Reasons to restrict share transfers in a closely-held corporation: The shareholders want to…
o Control who they're in business with (and limit number of shareholders to avoid prospectus)
o Allow transfers in some capacity (and not prohibit them outright)
o Allow forced buyouts (esp. to resolve deadlocks or remove troublesome shareholders)
o Allow buyouts at the occurrence of particular events (e.g. on death, so it doesn’t pass to estate)
o Provide for a mechanism by which to determine what the fair price of the shares is
• Validity: Transfer restrictions are generally valid (except absolute, maybe) (Edmonton Country Club)
o Presumption: Shares are presumed to be freely transferable.
(Edmonton Country Club)
• Types of share transfer provisions:
o Absolute: No transfers permitted at all.
o Consent: Only transferrable with the consent of certain parties (usually the board of directors)
o Shot Gun: A person who receives an offer has a right to either accept it or impose the same
terms on the offeror (i.e. to reverse the trade and force the other party to accept)
o First Option: If a shareholder gets an offer and wishes to accept, the other shareholders first
have an option to buy up those shares on the same terms (split on a pro rata basis).
• Typical share transfer provisions:
o Forced Buyout: Requires a shareholder to sell their shares to the other shareholders.
o Event Options: Other shareholders buy the shares of a shareholder on certain events (usually
an event that would have them transfer to another party – death, divorce, bankruptcy)
o Price Determination: Method to determine a fair price for the shares, especially for a forced
buyout or event option. Can involve arbitration or valuators and provide valuation rules.
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Index of Cases
Short Name
Ct./Year
Keywords
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