CORPORATIONS CAN – Henderson Winter 2014
TABLE OF CONTENTS
Introduction .................................................................................................................................................. 3
Separate Legal Entity ................................................................................................................................ 3
Corporate Structure .................................................................................................................................. 4
Types of Business Organization .................................................................................................................... 4
Corporations ............................................................................................................................................. 5
Sole Proprietor .......................................................................................................................................... 5
Partnership................................................................................................................................................ 5
Public Benefit Corporation........................................................................................................................ 5
Factors to Consider ................................................................................................................................... 5
Corporate Theories ....................................................................................................................................... 5
Posner ....................................................................................................................................................... 6
Shareholder Primacy ................................................................................................................................. 6
Team Production....................................................................................................................................... 6
Public Institution ....................................................................................................................................... 6
Partnerships .................................................................................................................................................. 7
Ordinary Partnerships ............................................................................................................................... 7
AE LePage v Kamex ............................................................................................................................... 7
Volzke v Westlock ................................................................................................................................. 8
Lansing v Ierullo .................................................................................................................................... 8
Backman v Canada ................................................................................................................................ 8
Re Thorn and New Brunswick Workmen’s Compensation Board......................................................... 9
Limited Partnerships ................................................................................................................................. 9
Haughton Graphic v Zivot ..................................................................................................................... 9
Nordile Holdings Ltd v Breckenridge..................................................................................................... 9
Limited Liability Partnerships (LLP) ........................................................................................................... 9
Corporations ............................................................................................................................................... 10
Salomon v Salomon............................................................................................................................. 10
Lee v Lee’s Air Farming Ltd ................................................................................................................. 11
Macaura v Northern Assurance Co Ltd and others............................................................................. 11
Piercing the Corporate Veil ..................................................................................................................... 12
Clarkson v Zhelka ................................................................................................................................ 12
Big Bend Hotel v Securities Mutual Casualty Ltd. ............................................................................... 12
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CORPORATIONS CAN – Henderson Winter 2014
Rockwell Development v Newtonbrook Plaza .................................................................................... 13
642947 Ontario v Fleischer ................................................................................................................. 13
De Salaberry Realties v Minister of National Revenue ....................................................................... 13
Walkovsky v Carlton ............................................................................................................................ 14
Wolfe v Moir ....................................................................................................................................... 14
Process of Incorporation ............................................................................................................................. 14
Articles of Incorporation ......................................................................................................................... 15
Pre-Incorporation Contracts ................................................................................................................... 15
Wickberg v Shatsky ............................................................................................................................. 16
Sherwood Design v 872935 Ontario Ltd ............................................................................................. 16
Corporation’s Authority to Act ............................................................................................................... 16
Ashbury Railway Carriage & Iron Co. v Riche ...................................................................................... 17
Authority of Individuals to Act ................................................................................................................ 17
Indoor Management Rule ....................................................................................................................... 17
Sherwood Design v 872935 Ontario Ltd ............................................................................................. 17
Corporate Criminal Liability ........................................................................................................................ 17
Westray Mine Disaster........................................................................................................................ 19
Metron Construction .......................................................................................................................... 19
Corporate Social Responsibility .................................................................................................................. 19
Financing the Corporation .......................................................................................................................... 20
Private Corporations ................................................................................................................................... 22
Unanimous Shareholder Agreement ...................................................................................................... 23
Corporate Governance................................................................................................................................ 23
Shareholder Voice ................................................................................................................................... 24
Best Interest of the Corp......................................................................................................................... 25
BCE Inc v 1976 Debenture Holders ..................................................................................................... 25
Duty of Care (“shirking”) ............................................................................................................................. 26
People v Wise .......................................................................................................................................... 26
YBM Magnex v Ontario Securities Commission ...................................................................................... 26
Business Judgement Rule........................................................................................................................ 26
Indemnity and Insurance ........................................................................................................................ 27
Peoples v Wise .................................................................................................................................... 27
Liability for Breach of Duty of Care ............................................................................................................. 27
Derivative Actions ................................................................................................................................... 27
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CORPORATIONS CAN – Henderson Winter 2014
Barnes v Andrew ................................................................................................................................. 28
UPM Kymmene Corp v UPM Kymmene Miramichi Inc ....................................................................... 28
Smith v Van Gorkom (US Case) ........................................................................................................... 29
Misappropriation (“looting”) ...................................................................................................................... 29
Interested Contracts (Conflicts of Interest) ............................................................................................ 30
Aberdeen Railway v Blaikie Brothers .................................................................................................. 30
North-West Transportation Co v Beatty ............................................................................................. 30
Corporate Opportunities......................................................................................................................... 31
Peso Silver Mines v Cropper ............................................................................................................... 31
Canadian Aero v O’Malley................................................................................................................... 31
Remedies..................................................................................................................................................... 32
Derivative Action..................................................................................................................................... 32
Re Northwest Forest Products ............................................................................................................ 32
Oppression Remedy ................................................................................................................................ 33
First Edmonton v 315888 Alberta ....................................................................................................... 33
Downtown Eatery v Ontario ............................................................................................................... 34
West v Edson Packaging Machinery ................................................................................................... 34
Ferguson v Imax .................................................................................................................................. 35
Brant Investments v KeepRite Inc ....................................................................................................... 35
Ford v OMERS ..................................................................................................................................... 35
BCE v 1976 Debenture Holders ........................................................................................................... 36
Ichan v Lions Gate ............................................................................................................................... 37
INTRODUCTION
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Characteristics of a corporation
o Separate legal personality
o Limited liability for shareholders
Can incorporate provincially (Alberta Business Corporations Act), or federally (Canadian Business
Corporations Act)
Separate Legal Entity
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The corporation is treated as a person under the law (can sue, be sued, assert constitutional
rights)
Shareholders are not personally liable for debts of the corporation (limited to investment)
o This is a statutory protection, the result of political motivations, not a requirement
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CORPORATIONS CAN – Henderson Winter 2014
Corporate Structure
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Shareholders invest money in the corporation; buy shares and share in the profits and losses
o Sometimes referred to as the owners, but this is not necessarily accurate
o Essentially betting on the success of the corporation
o Under the law, shareholders have very little to do with running the corporation,
although shareholders may also be on the Board of Directors
The shareholders elect the Board of Directors
The Board of Directors appoints the officers (C-Suite)
The officers manage the employees
Creditors lend money, to be repaid with a determined amount of interest
o They are not betting on the success of the corporation; have to pay regardless of profits
Board of Directors are responsible for the running of the corporation
Officers include CEO, CFO, CCO, etc.
o Sometimes the officers are referred to as management; sometimes the officers and the
board of directors are collectively known as managements
Stakeholders: groups that are affected by the corporation; ex: shareholders, community,
environment, customers, suppliers, creditors
TYPES OF BUSINESS ORGANIZATION
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Corporations
o prominent, perhaps dominant, form of business organization
o Separate legal entity
o Limited liability
o Exist in perpetuity
Sole proprietor
o One person running a business
o Sole proprietor is responsible for the debts of the business
o Business assets can be used to pay personal debts
Partnership
o The partners own the assets used in the business
o Has more than one equity investor
o Default is that the partners share the profits equally, can be altered by agreement
o Each partner is an agent for the partnership and each individual partner
o Partners have unlimited liability
o Legal agency
 One person (agent) legally binds another (principal)
o Economic Agency
 The person doing the work isn’t reaping (all) the rewards
 May decide to do less work/slack off, resulting in less profits
Public Benefit Corporation
o Part of mandate includes some public good; ex: hire people who would otherwise have
difficulty finding employment
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Corporations
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Have the corporation and the incorporator separated by the “corporate veil”
Some jurisdictions require a certain amount of shareholders for a corporation (Canada does not)
Private corporations only sell shares privately
Public corporations sell shares publically through stock exchanges
The corporation, and not the shareholders, own all the business assets
o Shareholders have a right to the profits, not the assets
Because the corporation is its own person, it continues perpetually
Corporations can have criminally liable
Sole Proprietor
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The sole proprietor legally owns all the business assets
The sole proprietorship dies with the proprietor, or when the proprietor no longer owns the
business
Sole proprietor does not have formal process to be wound up – can just close doors
Partnership
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Partnerships end with the death/leaving of a partner; even if a new partner comes in, or the
remaining partners continue without, there is a new partnership
Public Benefit Corporation
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For profit corporation, but part of the mandate includes some social good
o Hiring people with mental disabilities, recovering addicts, others that may have
difficulties finding employment
Concerns that shareholders may want to require you to act only in the interest of shareholders,
and give up the social purpose
Can create legislation that protect public benefit corps
o Some jurisdictions have, including Delaware, which is the leading state in corporate law
Factors to Consider
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Liability – unlimited or only investment
Involvement/responsibility
Taxation
o In partnerships/sole proprietorship can deduct losses from other sources of income
Formality
o Partnerships and sole proprietorships do not require formal requirements
o Incorporating requires a formal process, which can be expensive
CORPORATE THEORIES
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Overarching policy
o Encourage positive human activities while limiting the negative ones
o Positive: wealth creation, jobs, goods and services
o Negative: environmental impacts, exploitation of workers or investors
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Posner
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The main goal is wealth maximization
Concerned about over regulation impairing the free markets
Look to what rules are acceptable ahead of time, before knowing who will benefit and be
burdened
o Some will be harmed, but that’s acceptable if all agree ahead that it’s best overall
Nexus of contract: the corporation is a convenient centre for contracts with all the stakeholders
Remedies are dealt with in contract
o Contractual terms will be dictated by market forces
o Corporate law can set out rules, but largely the market should be allowed to rule
Shareholder Primacy
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Directors should act in the best interests of the shareholders alone
Shareholders have undetermined returns that cannot adequately be dealt with in contract
The shareholders elect the B of D
o Why make them responsible to the shareholders if not intended to act in their interests
Advantages: simple, gives a clear explanation of how to make decisions
Disadvantages: oversimplified; fails to account for inputs and effects on others
Team Production
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Still starts from assumption that goal is wealth maximization, but look to all the stakeholders,
who make firm, specific contributions
o If stakeholders are ignored, they are less likely to make firm contributions in the future
B of D acts as a hierarchal mediator between the different stakeholders
The B of D is given wide discretion, despite having fiduciary duty to shareholders (really
accountable to shareholders?)
Attributes shareholder primacy to a shift in power, and fall of the labour union rather than
because it is actually better for wealth maximization
Disadvantages: can be difficult in practice and create a power struggle
Public Institution
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Lochner decision (USSC)
o Law introducing minimum wage for bakers in New York challenged as unconstitutional
o Ruled that imposing a minimum wage was an unconstitutional invasion into the
freedom to contract
o Emphasis on private law versus public law in dictating when laws can interfere
o Same argument by Posner for arguing that the free market, not corporate law, should
govern corporations to the extent possible
The corporation is not just a nexus of contract – it is also a quasi-public institution or a social
institution
Corporate law should not focus on wealth maximization while ignoring other social impacts
B of D should take all stakeholders into account
Two options: hold B/D liable to all stakeholders or bring other stakeholders onto the B/D
(favours the second)
Advantages: acknowledges the negative impacts of corporations
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Disadvantages: difficult to implement, no clear guidelines
PARTNERSHIPS
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Several types of partnerships
o Ordinary, limited, LLP
Can sue in the name of the partnership, rather than name the individual partners
o Simplifies, still actually suing the partners
Partnership Property: property in which all the partners have undivided interest in the whole
Ordinary Partnerships
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Partnership: the relationship between persons carrying on business in common with a view to
profit
o Business: includes any trade, occupation, or profession (PA definitions)
o In common: doesn’t require equality, but distinguishes from other relationships like
creditors
o Intent to profit: excludes organizations that are not for profit; doesn’t require actual
profits, just the intent
o Notice that an express agreement is not required for a partnership
Things that do not, by themselves, mean partners (section 4 PA)
o Joint property, share in growth returns, payments that are contingent on profits
o Receiving share of the profits is strong prima facie evidence, but rebuttable
PA creates default rules for governing partnerships (typically permissive)
o Section 28 subject to an agreement (implicit or explicit), the profits are shared equally
o Section 29 subject to an explicit agreement, partners cannot be expelled by a majority
Each partner is an agent for the partnership and the other partners, and can legally bind the
rest, unless
o The partner had no authority to act; and
o The person dealing with the partner did not know or believe the partner to be a partner
 Goes to the reasonableness of the belief that the partner had the ability to bind
the other partners
All partners jointly liable for the debts of the partnership (unlimited liability)
AE LePage v Kamex
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Page 77
One co-owner of a property signed an exclusive property listing, stating that he signed on behalf
of all the partners
LePage is looking to collect its fees from the other co-owners, as partners
The mere fact that they owned property in common and were selling for profit does not mean
they were carrying on business together with the intent to profit
Looking to all the facts, did they intend to become partners
o There was no intention to carrying on business in common
o They held the property separately, and were capable of disposing of their interest
 First right of refusal does not mean they could not dispose of their own interest
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Volzke v Westlock
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Page 80
General contract is suing for the remaining amount owed for work done on a shopping centre
o Suing Westlock as a partner to the shopping centre
Westlock argued that didn’t have signing authority, and since it didn’t have control, was not a
partner
o There can be silent partners; control is not a requirement for partnership
Look to all the factors
o Westlock took on part of the risk, and part of the profit
o Dealt with complaints of tenants
o Sent proposed new tenants for approval
o In another dispute, Westlock appeared to be arguing that they were a partner, making
this seem disingenuous
Looking to all the facts, they were a partner, despite not having signing authority
Lansing v Ierullo
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Page 83
Defendant believed they were in a joint venture, not a partnership
o Joint ventures are not a legal concept
One person held himself out to be in a partnership and entered into a credit arrangement and
received building supplies on credit
There was an agreement between the parties that explicitly stated they were not in a
partnership (not determinative)
Look to all the circumstances
o Court found there was an intention to carry on business in common
o The parties held property in common, and were not completely free to deal with
property as they wished
 Shot gun arrangement, where one could name a price, and the other either had
to buy or sell at that price
o Shared in profits
Second issue was whether he had the authority to enter into the agreement
o Evidence that he was only allowed to take $5000 in credit, but here took $18,000
o Held himself out as being in a partnership, and having authority, and taking credit of this
kind was part of his usual course of business
o The fact that he didn’t have authority wasn’t determinative
Backman v Canada
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Page 88
Group of Canadians purport to enter into a partnership by buying a failing business venture in
Texas
o Wanted to deduct the losses from taxes
Can enter into a partnership for tax purposes, but still require to fall within the definition of
partnership
o If there is no partnership, can’t deduct the losses
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The Canadians buy and sell the venture in one transaction, and invest a small amount in an oil
and gas operation, which is not producing
Carrying on a business
o Can be a single transaction, but require a business
o Can be ancillary, but can’t even find that here
View to profit
o The motivation was tax purposes, but that is not a bar
o Again, just need an ancillary view to profit
o Had the oil and gas operation been successful, this may have been met, but in the end
there was just too little
Re Thorn and New Brunswick Workmen’s Compensation Board
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Page 97
Can a partner in a partnership be an employee of the firm?
The partnership is not a separate entity, and cannot employ yourself, therefore cannot be both
a partner and an employee
Limited Partnerships
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Dealt with in Part 2 of the Partnership Act in Alberta
Must file a certificate with the registrar
One or more general partners (can be corp) with unlimited liability and manage the business
One or more limited partnerships with liability limited to the amount invested
o Limited partners are passive investors and cannot control of the business
o Limited partners cannot have their name in the partnership name because that may
lead third parties to believe they can rely on that person
Haughton Graphic v Zivot
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Page 115
Zivot was a limited partner, and the majority shareholder in general partner
Zivot was an officer in the general partner corporation, and controlled the limited partnership
As a limited partner, Zivot is allowed to transact business with, but not on behalf of, the
partnership
The plaintiff does not have to show that he actually relied on the name of the limited partner
Because Zivot was controlling the partnership, he lost the protection of limited partnership
Nordile Holdings Ltd v Breckenridge
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Page 120
Limited partners were both officers in the general partner corporation
Made clear in sales agreement that they were acting solely in their capacity as officers of the
general partner, therefore they were found to be limitedly liable
o Hard to reconcile with Haughton Graphic
o Must make clear what capacity you’re acting in, and then only act in that capacity
Limited Liability Partnerships (LLP)
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As a limited partner, cannot take part in the control of the business, and cannot provide services
o This approach doesn’t work for professions where partners need to take part
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CORPORATIONS CAN – Henderson Winter 2014
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Certain professions cannot form corporations
o Makes sense if you assume that the partners are looking over each other and ensuring
they are not negligent to hold liable for each other’s work
o Especially important in self-governing professions
o As a firm grows, no longer reasonable to assume partners are aware of the actions of all
other partners
Eligible professions
o Section 12 of the Partnership Act says that if the profession allows for professional
corporation (no limited liability), then can also have LLP
o Why limit to certain professions?
 The professions can’t gain protection through incorporation
 Professional responsibility because of reputational concerns?
LLPs are shielded from the debts of the partnership arising from negligence, unless they knew at
the time, and failed to take reasonable steps or are directly responsible for the negligence
Still liable for ordinary debts of the corporation (in Alberta, other jurisdictions offer more
protections)
Concerns
o Lawyers favouring lawyers
o Gives incentive to be less diligent, and ignore what the other partners are doing
o Large firms gain the most, but are also the best able to put in place monitoring systems
for accountability
o May still have incentives to review other partners (firm representation)
CORPORATIONS
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Limited liability rational
o Encourage investments, less likely to invest if can’t protect personal assets
o Historically incorporated for projects requiring high capital (railways)
o Gives ability for people who are not independently wealthy to start business
Downside
o Unsecured creditors have no recourse to recoup their losses
o Encourage speculative ventures, invest in poor opportunities knowing that loss is limited
Encouraging risk taking is good, downsides may work selves out through self-interest (getting
personal guarantees, unlikely to invest if you think you’ll lose money)
Statutory exemptions or protections
o B/D personally liable to pay dividends if solvency requirements not met (s 118 ABCA)
o Court can order shareholders to repay dividends contrary to solvency requirements
(118(6) ABCA)
o B/D liable for up to 6 months of unpaid wages to employees (s 119)
Salomon v Salomon
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Page 135
Salomon was a boot manufacturer who wanted to incorporate with his wife, his 4 sons, and one
daughter each getting 1 share, and himself getting the rest
o Statutory requirement of 7 shareholders at the time, which was met, even though the
other 6 shareholders had only one share each, and were family members
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CORPORATIONS CAN – Henderson Winter 2014
o
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Salomon sells his company to the corporation for some shares, some cash, and some
debentures (secured debts)
The company fails, the corporation is wound up, and has less assets than debts
o Only has enough to pay the debentures
o Other creditors were claiming that the debentures were fraudulent, and Salomon
should be held personally liable
Trial/CA
o Thought Salomon was getting the benefits, without the burdens, of running a business
o One day he’s a sole proprietor with unlimited liability, the next he’s a majority
shareholder with limited liability, and a secured debt
o Using the corporate form to get around liability
o Find that the corporation is essentially acting as agent for Salomon, even though the
formal requirements to incorporate are met
o Concerned that creditors had dealt with him as a sole proprietor, and may be relying on
past deals with him to make deals in the future
HL
o Reject CA
o He followed the statute, nothing in the Act requires the shareholders to have a certain
amount of shares or be independent from each other
 Corporations are statutory creations, look to the statute to see if the
requirements are met
 He complied, and it is not uncommon for shareholders to be persons who are
not independent
 Adding more requirements (need more than one share, can’t be family) begins
to be complicated (better for legislature than court)
o Doesn’t follow that the corporation is an agent for the majority stakeholder
 The corporation is either valid, and therefore separate entity, or it’s invalid
o Doesn’t matter what Salomon’s motive was, just that the requirements are followed
 CA made a big deal about attempting to limit liability; HL points out that’s one of
the main purposes of incorporating
There were also problems with valuation, but HL rejected fraudulent argument, and said that
would give a cause of action to the shareholders, not the creditors
o Creditors had a responsibility to protect themselves, could have contracted for secure
debts, checked and found out the debentures existed, who the shareholders were, how
much each had
Lee v Lee’s Air Farming Ltd
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Page 157
Lee owned all the shares except one in the corporation, then hired himself as a pilot
Lee died in the course of his employment, and his wife is trying to claim under WCB
Court: the corporation is a separate legal entity, therefore Lee was contracting with the corp,
not himself
o Remember from Thorn that can’t contract with self in a partnership
Macaura v Northern Assurance Co Ltd and others
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Page 160
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Who owns the corporate assets?
Shareholder made a personal insurance contract to protect corporate assets
o Shareholder has no legal interest in the corporate assets
o Shareholder owns shares, not a proportion of the assets (even if they’re a sole
shareholder)
Since the shareholder hasn’t lost anything, the shareholder can’t collect on the insurance
o Kosmopolous relaxes this rule a bit, but only with respect to the insurance portion, the
corporation still owns the assets
Piercing the Corporate Veil
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When will the courts look past the corp. to the owner (or vice versa)?
o Insisting on separate legal entities is too flagrantly opposed to justice
o Just because a corp is a shell, or doesn’t have assets, doesn’t mean they will pierce
o Will pierce if created for fraudulent purposes (hiding assets from creditors)
o Will pierce if using to shield from wrongful conduct (fraudulent, misrep.)
o Won’t turn on the detriment to the person asking the court to pierce the veil, but the
relationship between the shareholder, corporation, and party
Strong presumption of separate entity
o Concerned about undermining the purpose of the corp
Clarkson v Zhelka
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Page 169
Selkirk owned several companies, then went bankrupt and the creditors want to access his
corporate assets to pay his personal debts
Court said the corps may have been suspicious (problems inc’ing, money moving from corp to
sister), but not fraudulent
o Didn’t form corp to hide personal assets from creditors
The purpose of corps is the ability to separate assets of the corp from the person, even in case
of sole shareholder
There were problems in the management, but that may have given the shareholders, not the
creditors a cause of action – not enough to lift the veil
Big Bend Hotel v Securities Mutual Casualty Ltd.
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Page 174
Sole shareholder wanted to get insurance on his hotel, but was having problems because a
previous hotel, under a previous corp, had burned down
The insurer asked if there had been any previous claims, and he left it blank
o In questioning admitted he knew he was supposed to put previous fire there, and that
leaving it off was a material misrep.
Hotel burned down, and the insurer, finding out about the previous claim, refused to pay
Argued that it wasn’t a misrep. because the fire was for a different hotel, under a different corp,
therefore accurate to say no previous claims
Court refuses to allow the plaintiff to use the corp to shield from wrongful conduct (insurance
fraud or material misrep)
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Rockwell Development v Newtonbrook Plaza
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Page 179
Plaintiff and defendant enter into contract, disagree on terms, then go to court
Costs awarded to Newtonbrook, but Rockwell can’t pay so Newtonbrook tries to collect from
shareholders personally
o Claim they were the actual persons behind the contract and litigation
There was no evidence they used the corp for their own personal benefit, they were taking
actions on behalf of the corp, not the other way around
Doesn’t matter that there were irregularities, as long as acting for the corp’s benefit
o No resolutions of the B of D to enter into contract or pursue litigation
642947 Ontario v Fleischer
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Page 182
Trying to create a sale between # co and Fleisher, and Sweet Dreams seeks to have an injunction
because they had first right of refusal
o Parting seeking an interim injunction must undertake to pay losses if they end up losing
the ultimate issue
Eventually # Co backing out of sale because market crashes, Fleischer tries to enforce the deal
When SD undertook to pay damages, it was implicit that the corp had the assets to pay, which it
didn’t
o Essentially fraud against the court
On appeal: losses stemmed from market failures, not from the inj’n
o The court was prepared to hold the owners personally liable if the damages has
stemmed from inj’n
o Would have had to pierce the corp veil twice since SD owned by two corps and Court
was willing to hold the owners of those corps personally liable
The Court isn’t entering into contracts with the corps, they have no real way to investigate and
protect from false undertakings, have to rely
The fact that the owners were a lawyer and a sophisticated businessman may have affected the
court’s decision
De Salaberry Realties v Minister of National Revenue
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Page 188
Corporate pyramid structure with parent, grandparent, subsidiaries
Two family trusts own the top corps
De Salaberry (a sub-subsidiary) bought, sold property, and tried to tax as a capital gains
o Revenue claims this is business income, not revenue
Corp said they were trying to build a shopping mall, but the court found that, on a whole, the
businesses bought and sold land, and didn’t really care if the deal succeeded
Top companies set the objectives, directors, and gained the profits from lower corps
o De Salaberry was a puppet of the parent company, not its own entity
There’s a fine line between benefiting from tax laws, and manipulating them to avoid paying
taxes you should have to pay
Doesn’t mean the courts will always pierce the parent/child corp veil, but in this case it was so
clear that they were not independent
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Walkovsky v Carlton
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Page 196
Carlton owned a group of taxi Cos, each owning two cabs and the minimum amount of
insurance
Walkovsky was injured, damages beyond the insurance, wants to hold Carlton liable
Court distinguishes between being part of a group of corporations, and being a dummy
corporation
Strong dissent
o Ignoring the legislative purpose – to protect innocent injured
o There’s inherent risk in running a cab co, should have to pay for foreseeable losses
o Majority thinks this is up to legislature, not courts, to assess sufficiency of minimum
insurance
Wolfe v Moir
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Page 203
Wolfe was injured at a roller rink, sued Moir as the owner
Business name showed “Moir’s Sport land”, but technically was owner by Chinook Sports Ltd,
which was used for billing, but did not appear on the outside, advertisements, or tickets
o There was a statutory requirement to put the corps name on official publications, which
was breached here
o Now don’t have this requirement, but if you hold out under your own name, may be
liable, must include inc, corp, or ltd
Moir held himself out as running, and he was well known/respected, so his name may have
been relied on
Court critical of him for trying to cash in on his name, but hide behind limited liability
Held Moir personally liable
PROCESS OF INCORPORATION
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Two possible regimes for statute: mandatory and enabling
o Enabling sets out default rules that can be altered explicitly or implicitly by the parties
 Makes sense if assume that the market will ensure the corp has its own ideal
rules (nexus of contract)
 Relies on all parties having all information to establish best practices
o Mandatory requires following, tends to apply to public corporations
 Tends to be more popular in wake of disasters (Enron, financial crisis)
 Recently see more in securities than in corp leg
 A lot of mandatory rules are process based
Can incorporate federally or provincially
o May want to incorporate federally if doing business out of country
o If you incorporate, and want to do business in another jurisdiction, need to register
 Note that CBCA is extra-jurisdictional from Alberta, still have to register
 Section 277(1) ABCA sets out when will be considered to be carrying on business
in Alberta (own property, selling goods, have an Alberta phone number)
 Section 295(1) says you can’t start or continue a cause of action unless you’re
registered
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If you become registered, can sue on a contract formed before you
registered
 Max fine of $5000
Historically needed a special act of parliament to incorporate for a specific purpose
Overtime relaxed; so long as the proper docs, pay the fee, no discretion not to incorporate
Articles of Incorporation
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Section 6 – articles of incorporation
Section 10 – name
o Have to do a name search to see if anyone else has that name
o CBCA will check across all jurisdictions, ABCA will only check Alberta
o If you don’t care about the name, you can get a #, which will take less time
Shares
o Section 6, s 26(4), s 29 for classes
o You can set a maximum number of shares, but if you have to change, you’ll need to
amend the articles, which can be difficult
Share transfer
o Can have securities benefit for private corp, requiring maximum 50 shares
(shareholders?)
Directors
o Section 101(2) requires one or more directors
o Distributing corps need at least 3
o 101(7) requires a fixed number if there’s cumulative voting
Restrictions in areas of business
o Section 17(2) allows articles to restrict a corporation to or from areas of business
o 17(3), 18 third parties are not bound by those restrictions (eliminates ultra vires)
o Actions are not invalid because the articles limit
Other rules
o Can put bylaws in the articles if you want, but articles are harder to change
o Pre-emptive rights allowing shareholders first option to buy if the corp is issuing more
shares
Discretion
o Section 8 says if get all information required, the fee then shall (not may) issue the
certificate of incorporation
Date
o The corp comes into existence on the date listed on the certificate of incorporation
o Can be important with regards to pre-incorporation contracts
Pre-Incorporation Contracts
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Sometimes want to enter into the contract before incorporation
At CL: can’t act on behalf of someone who doesn’t exist, promoter themselves becomes party
ABCA s. 15 says that the promoter provides a warrantee that the corp will come into existence,
and will adopt the contract
o Section 15(2) says the promoter will be liable for breach of warrantee
o No longer requires the promoter to be party to the contract
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Corp can adopt the contract by doing anything signifying its intention to be bound
o Doesn’t need to be a formal resolution, needs to be more than coming into existence
CBCA makes the promoter party to the contract until the corp comes into existence, unless the
contract provides otherwise (section 14)
Wickberg v Shatsky
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Page 275
Before the act, so under CL
Plaintiff contracted with the corp (never existed) for employment
Later told operating under a different name, which dropped the LTD from the name
o Should have been an indication that there was a problem
Business was failing, plaintiff refused to work on commission alone, was terminated
o Plaintiff tries to enforce the contract against the defendants personally
Court found that there was never any intention for the contract to bind the individuals
Found that there was breach of warrantee, but that the losses stemmed from failing business,
not the breach of warrantee
As soon as was put on notice that there was a problem with the corp, should have taken further
steps
Sherwood Design v 872935 Ontario Ltd
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Page 279
ABCA 15(3) requires some act or conduct signifying intent to be bound – what does this require
Contract for the sale of Sherwood Designs assets on behalf of a corp that will come into
existence
Go to lawyer, get shelf co (# Co)
Lawyer creates a resolution adopting the contract, send it to Sherwood, but it’s never signed,
and the deal falls through
Because deal fell through, put the shelf co back, then give it to another client
Sherwood sues the # Co
Holds the # Co liable
o Document purporting to adopt the contract coming from lawyer, who should be able to
speak for Co
o Know that the lawyer’s liability insurance is the real person to pay out
o Not followed
Dissent
o No act coming from the corp – docs not signed
Corporation’s Authority to Act
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Ultra Vires doctrine
Historically incorporated for a specific purpose, and couldn’t act outside of that purpose
o Now can, but are not required, to limit
Result was that the contract was void – making business with corps risky, which goes against
purpose of corps
Outside of the corp’s authority if it violates the articles of incorporation
Section 17(3) ABCA says no act is invalid solely because it violates the articles
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o
In large transaction, may still request certified copies of articles/bylaws/B of D
resolution as protection
Ashbury Railway Carriage & Iron Co. v Riche
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Page 291
Had a memo of association (articles of incrop.) saying the purpose/ability of the corp to
build/sell railway cars
Entered into a contract to build a railway, and the shareholders complain
Ashbury says that’s ultra vires, tries to get out of contract, Riche tries to enforce
Court agrees that the contract is ultra vires, therefore void – never existed
Use interpretation tool to interpret general terms in light of specific
o “general contractor” interpreted in light of building and selling railway cars
Protects shareholders/creditors from investing in businesses they don’t want to
Authority of Individuals to Act
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Corps can only act through persons, and, unlike partnerships, there’s no default rule that all
partners can bind the firm
B/D gets authority, can delegate, usually to officers, who delegate down the ladder
Authority to bind the corp where
o Confers full authority (B of D)
o Appointed as officer
o Authority to make decisions usual for that position (buyer, seller…)
o Section 116 says can’t claim no authority because of irregularity in position
o Beyond normal authority, but with knowledge and acquiescence of the corp
o Representation by the corp that the actor had authority
Indoor Management Rule
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Where, on the face, there is authority to bind, the outsider is not required to investigate further
ABCA s 19 corp can’t claim that the directors named on public file don’t have authority to bind
Having to constantly verify deals with undermine the purpose/benefit of dealing with corp
Can be difficult in practice to apply
Sherwood Design v 872935 Ontario Ltd
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Page 299
Majority judge
o Entitled to rely on the doc coming from corp’s lawyer, which looked valid on its face
Dissent
o It wasn’t signed, which was enough to put on notice that there may be a problem
o Didn’t look valid on its face, therefore couldn’t rely
o They had never dealt with an agent for 872935, as far as they knew, the corp didn’t exist
CORPORATE CRIMINAL LIABILITY
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Can have tort or crim liability
Tort can use vicarious liability, which is well understood, but that’s not available for criminal
o Tort doesn’t have the mental requirement that criminal has
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Three types of criminal liability
o Absolute – proof of the act occurring if sufficient, don’t need evidence of intent
 Presumption against, needs to be clear in the statute
o Strict – proof of the act is sufficient, subject to the defence of due diligence
 Common in regulations
o Full mens rea – traditional criminal, requiring the guilty act and guilty mind
 Problems showing corporate intent since the corporation can only act through
agents
 Solution seems to be to transpose the guilt of one or more individuals to the
corporation
Common Law “identification theory”
o Look for the “directing mind or will” of the corporation
 Attribute the corporate actions to the actions of the directors or controlling
officers
o Connect criminal intention to the policy and authority (B/D, executives, officers)
o Don’t need the policy to be criminal, but need some way to distinguish corporate
criminal intent, from the intent of the authority to defraud the corp
o Defence when only the authority benefits, rather than the corporation
o Sometimes can’t identify a single guilty mind making it difficult to have corporate
criminal liability
Criminal Code amendments (22.1)
o Negligence offences
 Make it easier to hold a corporation criminally liable
 Negligence provisions define “representative” broadly; allow for aggregate,
rather than requiring a single directing mind
 No longer need single directing mind, but do need a senior officer (exec, B/D)
departed markedly from the standard of care that would have prevented
o Intent based offences
 Senior officers directed or knew of actions that constituted an offence, failed to
stop
 Impose a legal duty on those who direct others to prevent harm to those
persons
Sentencing
o Problems that when the corporation is punished (fine or dissolution) the people who
suffer the most (or at all) are those least likely to have been involved
o Factors to consider (718.21)
 Advantage to the corp
 Degree of planning involved in carrying out the offence
 If the organization attempted to conceal assets
 Impact of sentence on the economic viability of the organization and continued
employment
 Regulatory penalties imposed on the corp in respect of the offence
 Whether the organization, or it’s representatives who were involved, were
convicted of similar offences
 Any penalty imposed by the corporation for their role in the commission
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Any measures taken for restitution
Measures taken by the corp to reduce the likelihood of subsequent
Westray Mine Disaster
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May 9, 1992, 26 miners were killed in a mine explosion
Acts leading to the explosion were not the result of a single directing mind
Widespread disregard for safety, given two weeks to fix, 10 days later the explosion
People were upset with the lack of criminal liability, lead to amendments in the criminal code
Metron Construction
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On TWEN
6 workers on scaffolding designed to hold four people
The scaffolding collapsed, four were killed, one was seriously injured
 Corporation plead guilty On site supervisor failed to enforce safety, met the definition of
senior officer (was one of the people who died)
What factors should be considered in sentencing?
o Trial: $200,000
 Didn’t want to bankrupt the corporation
o Appeal: $200,00 is unfit - $750,000
 Wanted the punishment to reflect the severity, even if bankrupted the corp
CORPORATE SOCIAL RESPONSIBILITY
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Corporations have both positive and negative effects on society
o CSR aims at reducing the negative effects
CSR is any action going beyond the mere compliance with legal requirements
May not be entirely voluntary
o Not legally enforceable, but may result in being kicked out of an industry organization,
or become part of market standards
Social licence
o CSR used to be largely philanthropy, but now is considered more
o Telus Global Reporting Initiative outlines sustainability development
o Look for environmental, social, governance (ESG) factors
Anti-thesis (Milton Friedman)
o Only being “socially responsible” as a means to make money
o Don’t want the corporation, not accountable to the public, to be responsible for
deciding what’s in the public good, and taking actions with others (shareholder) money
o Goes against wealth maximization
o Used to get around the legislative process
o Free market protects autonomy, CSR is used to coerce social good
Joel Bakan (The Corporation)
o CSR leads to the conclusion that we don’t need legally enforceable requirements
because corporations are already complying
o The problem isn’t that regulations can’t achieve, but that there aren’t enough and they
aren’t strong enough
o Talking about CSR is a way to avoid talking about regulations
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 Tobacco corp donate huge amounts of money to distract from negative effects
Business case for CSR
o Most profitable corporations are responsible
o CSR is good for PR
o Doing things for PR may not have the desired effects and undermines CSR
 Cantor Fitzgerald lost employees in 9/11, cut out the pay checks to the
employee’s families
 Only way to take care is by having a corporation
 In the end, able to give more benefits
 At the time was unpopular, but ultimately helped
 If had gone with public opinion, may have gone under
Corporate impact on human rights
o “Protect, respect, remedy”
o Intended to apply to all business organizations
o Owe a responsibility to human rights separate from all legal duties
 Corporation owes respect, as opposed to governments who owe protection
o Held to an international standard, even if the state imposed laws are lower
o Required to
 Avoid causing or contributing to adverse human rights impacts
 Seek to prevent or mitigate adverse impacts linked to operations, products,
services, even if they don’t contribute
 Just because you’re at the end of the supply chain, doesn’t mean you’re
not responsible, although to a lesser standard since you have less
authority
CSR Due Diligence
o Look for steps to be taken to mitigate, put the steps in place, follow up to ensure they’re
effective
o Include respect for HR in policy, and communicate the policy
o Framework gives def’n of respect, process that exist outside of locale state authority
International standard may be evidence of a duty of care
o Can have competing industry standards
o Want to be the best recognized, so need lots to sign on to your standard, so there may
be motivation to lower the standards
o “green washing”
 Duped into thinking you’re buying products that are environmentally friendly or
ethical when they really aren’t
o If products can’t be distinguished from the cheaper product by the customer, there’s
little incentive to meet the higher standard
FINANCING THE CORPORATION
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Capital: the money or assets put into the corporation
o Number of shares x market cost of shares
Capital Market: part of financial system concerned with raising capital in shares, broad, longterm investments
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Security: shares or a series of shares or debt obligation. Can also refer to a document evidencing
share/debt
Debt
o Don’t vote
o Interest paid is deductible
 Must pay interest
o Must pay money back
o Paid first on windup of the corporation
o Protected by contract
o Fixed return
Equity
o Shareholder/investors vote
o Dividends are not tax deductible
 Not required to pay dividends
o Not paid back
o Only get benefit after debts paid on windup
o Protected by statute
o Return based on company worth (may be nothing)
Why issue more debt
o More certainty that shares
o May not want to dilute the shares
o May be easier than meeting security regs (if currently privately owned corp)
Authority held by B/D to issue new debt/shares unless the articles, bylaws, unanimous
shareholder agreement to the contrary
Debt securities: right to periodic payments of interest with return on specific date with terms
and contributions
Shares: a “bundle of rights”
o vote at meetings, profits, inspect the books
o don’t have possessory rights, don’t manage, therefore shareholders are not owners
 United Fuel Investments v Union Gas Company of Canada
 Holding company held union gas wanted to distribute assets (shares in
Union Gas) rather than liquidate
 Only have a right to the money from selling, not the assets themselves
o 26(3) all rights (vote, dividends, dissolution) have to be attached to some kind of shares,
but no class needs all (typically common have all)
Formalities of capitalization
o No minimum requirement under corporate law, unless industry legislation requires
(banks, insurance)
o Minimum requirements wouldn’t achieve goals if could take it out after formed
o Could discriminate against small businesses who have less capital
o No justifications for the requirements for corporation but not sole practitioner or
partnership
Authorized share is the amount the corporation can issue (no limit required, so typically don’t
have one)
Issued shares are the amount actually sold
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Statutory requirement 27(3): shares are not issued until they are fully paid
o Concerned about fraud
o Rules allowing non-monetary payment, but it can’t be less in value that the shares are
worth or else the directors may be held liable
27(5): can’t use promissory note or promise to pay
o Generally speaking, if the money eventually gets paid the shares are valid
Classes of shares
o Presumption of equality within a class of shares
o Common shares: have all rights attached
o Preferred: no voting rights, but have other rights (dividends, paid principle on windup…)
o These are standard rights – no legal definition
o Series
 Differentiation within a class – can have different rights, just can’t be better
than the class as a whole
Dividends
o A portion of the earnings/profits distributed prorate to shareholders
o 44 can be cash or property (share in a subsidiary or the corporation)
o Up to B/D to pay if they see fit, but not required; decide how much, when, how
frequently
o Restricted when they can pay (43)
 Won’t be able to pay debts as they come due
 Less realizable assets than liabilities
 Statutory protection for shareholders
 B/D can be held personally liable or shareholders can be required to pay
back the dividends
 There are similar restrictions on the corporation for repurchasing the
shares
PRIVATE CORPORATIONS
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Also referred to as closely held or close corporations
Not distributing, which is defined in the ABCA (private corp has no legal definition)
Characteristics
o Relatively few shareholders
o Most or all shareholders participate actively in management
o No established market for the shares
o Restrictions on share transfers
 May want exemption under security law
 The only restriction on distributing corporations is to Canadians
Private only needs one director, distributing needs 3 total, 2 outside
Private shareholders can dispense with the audit requirements
o Audit there to ensure management isn’t stealing or mismanaging, but the shareholders
likely are management, or capable of watching over themselves
Can have a resolution instead of AGM, if signed by all voting shareholders
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Ability not restricted to private corps, but unrealistic for largely held corps to have all
voting shareholders sign
Can waive the financial statement requirement, by unanimous shareholder agreement
o Again, not legally restricted to private, just practically
Unanimous Shareholder Agreement
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Many ABCA provisions are subject to unanimous shareholder agreements (USA)
USA: written agreement, all shareholders party to that provides for matters set out in 146
o How shares will be voted
o Restrict the powers of B/D
 Under CL, wasn’t clear that shareholders could restrict powers of B/D – statute
clarifies
 If shareholders are taking on the duties of the B/D, they also take on the
potential liabilities
New shareholders are deemed parties to the USA, even if they didn’t have knowledge
o If the new shares were issued by the corp, can rescind in a reasonable amount of time,
get money back
o If purchased, have a right to fair market value (not necessarily what was paid) for the
shares within 30 days
CORPORATE GOVERNANCE
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Goal to minimize agency costs
Often procedural rules
o Substantive dictates outcome, procedural is how it’s done
Public corp
o Different shareholders and B/D
o Passive shareholders
o B/D supervises management
o Disputes arise between the shareholders and the B/D or officers
Private Corp
o Same individuals as shareholders and B/D
o Active shareholders
o B/D is management
o Disputes typically arise amongst the shareholders
Directors
o First directors will serve until the first meeting (ABCA 106(2)), which must be within 18
months of incorporation (132(1)(1))
o Director are elected at AGM by an ordinary resolution (majority) (106(3))
 As opposed to special resolution, which requires 2/3
o If unstated, the term is one year, can be re-elected indefinitely (can have up to 3 year
term)
o Directors must hold the next AGM within 15 months since the last AGM
o Articles may provide for one or more directors to be elected/appointed by the
employees or creditors
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Those directors may give special consideration to those groups, but not
exclusive consideration
o Majority voting: require that directors receive 50% + 1 of votes cast, otherwise required
to resign (corp law only requires 1 vote)
o Staggered board: not all directors elected at AGM
 Allows continuity, but can never replace entire B/D, difficult to hold accountable
o Removal
 Need a special meeting (can be part of AGM), (109(1))
 Shareholders can put forward own nominees (109(3))
o Qualifications
 Over 18, of sound mind, an individual, not bankrupt (105)
 Other regulations may require committees, which may have more requirements
Board diversity
o In 2012, women accounted for ~10% of directors for publically traded
o According to Toronto Stock Exchange index, 41% of publically traded companies had no
women on their B/D
o There is evidence that corps with more diverse B/D perform better, but despite this
often have a small group of people who form the B/Ds for several companies, and
largely act as rubber stamps
o Solutions
 Put quotas in place – France required 40% of B/D be women (substantive)
 Comply or explain regulations (procedural)
Directors appoint the officers, set compensation
o Now required to disclose compensation, but this requirement resulted in an overall
increase because officers wanted to be compensated as their counterparts elsewhere
were
o Shareholders are now more inclined to request a “say on pay” and vote on
compensation packages
Shareholder Voice
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Shareholders have the most incentive to ensure that B/D are not shirking their duties or looting
o Creditors/employees only have incentive to ensure the corp makes what they’re owed
Collective action problems: everyone benefits, even if they don’t put in the effort
o Why put in effort and incur costs, if have to share benefits with others
o Most prevalent in widely held corporations
Management (B of D) control of coting process
o Have to have AGM, but B of D decides when that takes place, put forward B/D, sets
agenda for meeting
Voice versus exit
o May do so at a loss after putting money in
o If own a significant number of shares, may be difficult to exit; may have to sell a little at
the time, but doesn’t have the same effect
o If you exit, you no longer have any control or ongoing influence
o Norway public pension plan has an exclusion list of corps it refuses to invest in
Access to corp records (ABCA 23(1))
Requisition meeting, can try and displace board
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CORPORATIONS CAN – Henderson Winter 2014
o
o
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ABCA 142
Need minimum 5% of voting shares (significant amount of shares in widely held corp),
then B of D must call meeting, unless regards s 136(5)(b)-(e) (personal claim or to
address personal grievance or promote general social causes)
Shareholder proposal, with right of discussions (although often vote by proxy)
o Registered or beneficial owner of prescribed number of shares for prescribed period and
prescribed level of support
 1% of all voting, or $2000 worth for at least 6 months, support from 5% of
shareholders (from Regs)
 Registered listed on share registry, now, typically bought through an
intermediary, or from the registered owner, and you hold the beneficial owner
o Exclusions: personal grievance, promoting general economic, political, racial, religious,
social or similar causes
 Some relaxation, allow to the extent that affects the overall success of the corp
Power to make bylaws, amend articles (ss 102(5) and 175(1))
Shareholder meeting
o Quorum (ABCA 138(1)), majority of shares entitled to vote, or as defined in bylaws
o Certain amount of notice, typically 21-50 days ahead of meeting (ABCA 134(1))
Best Interest of the Corp
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Legal duties applicable to B/D; holds accountable for how they manage/monitor management
Best interest is the fiduciary duty or duty of loyalty (ABCA 122(1))
Who’s interests are really at issue with the best interest of the corp
Duty to the shareholders, with regards to the long term, including the environment, employees,
reputation, need the act fairly
UK approach (enlightened shareholder values)
o Duty of the directors is to shareholders and stakeholders
BCE Inc v 1976 Debenture Holders
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On TWEN
Put itself up for auction, chose highest bid, which was structured as leveraged buyout
Result was to downgrade rating of Bell Canada’s Debt
o Issued a number of bonds, seen as safe investments
o Debt holders challenged as oppressive, saying the corp failed to consider their interests
o Do B/D need to take into account debt holders, or just act in the best interest of
shareholders
SCC: heard on expedited basis, released decision on expedite basis, year or so released reasons
o Reiterated decision in Peoples
o Duty owed to corporation, not shareholders
o Long term interests, not short term
o Duty to meet statutory obligations
o Duty to treat all stakeholders fairly (consider the impact of the decision on all
stakeholders)
 Found that they considered the impact on debt holders, but determined,
overall, the leveraged buyout was in the best interest of the whole
o Also references duty to act as a good corporate citizen (not really clear how this
language got in, or what this means)
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CORPORATIONS CAN – Henderson Winter 2014
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Director may be obliged to consider the impacts on corporate stakeholders
DUTY OF CARE (“SHIRKING”)
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CL duty owed by B/D was essentially gross negligence
o Concerned that no one would want to be a director if faced with potential liability
Statute: Care, diligence and skill of a reasonably prudent person in comparable (ABCA 122(1)(b))
o Higher than gross negligence, lower than a professional standard
 There’s a wide range of corporations, with low Director requirements
o Objective test (Peoples), taking into account the surrounding context (haste required,
prevailing socio-economic circumstances)
Business judgement rule
o In Canada, have preconditions to apply the business judgement rule
 Reasonably informed, within a range of reasonable decisions
o In US, assume the preconditions are met
People v Wise
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Wise purchased Peoples; Wise brothers B/D implemented a new policy for purchasing that
required lending large amount of credit to wise
B/D was held liable for breach of duty to creditors
o Duty of care was owed to the people that interacted with the corp
o The QB Civil Code gave a cause of action, outside of QB, no cause of action for breach of
statutory
 Would have to use derivative action on behalf of corp, or oppression remedy
 Only the corp has a statutory cause of action
YBM Magnex v Ontario Securities Commission
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Failed to disclose the corporation was under investigation for ties to the Russian Mafia in the US,
and that they were formed for the purpose of defrauding investments
Given the chair’s training as a lawyer, knew the test for materiality – held to a higher standard?
If on a committee, and had greater knowledge?
o made out the defence of due diligence, so no definitive answer
Business Judgement Rule
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Courts will often defer to the B/D
o Don’t want to judge decisions based on their outcome, with the benefit of hind sight
o Instead judge on the way the decision was made, not on the outcome
Concerned that too much interference will make B/Ds too risk adverse
Look for reasonable, not perfect, decisions
US Rule
o Directors are presumed to have met the duty of care, acted in the best interest
Canada
o Rule of deference, if pre-conditions (informed basis, reasonable decision) are met
UMP Kymmene
o B/D in better position that courts to understand and guide corporate affairs
BCE Inc v 1976 Debenture Holders
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CORPORATIONS CAN – Henderson Winter 2014
o
o
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Duty is to the corp – may be obliged to consider stakeholders
Business decision to determine who’s likely affected, duty of care to those affected
 Business judgement rule may provide deference to the decision on whose
interests are at stake
Why lower the standard
o Ultimate shareholder remedy is to sell shares
o Economic loss, not person or property
Indemnity and Insurance
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Corporations will indemnify B/D for costs incurred, so long as they were in good faith and in the
best interest of the corp (124(1))
o Even for offences, so long as the D had reasonable grounds for believing lawful (124(2))
o Also entitled to be indemnified for defence against the corporation
Entitled to the defence of relying on financial documents and professions opinions (123(3)
Defences and the ability to indemnify make the costs for suing for breach of duty high (see also
oppression remedy)
Peoples v Wise
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Implemented the procedure for reliance on reports
Don’t want to make the defence so broad that any internal report is sufficient, although the use
of internal reports likely add to due diligence
Still have to review the report, can’t just blindly adopt the result – doesn’t relieve of duty of care
LIABILITY FOR BREACH OF DUTY OF CARE
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Why do we want liability
o Want to reduce agency costs, have governance committees
o If the B/D is not maximizing wealth, assume that someone will come in and take control
o These method may not be enough – need low share prices for a hostile takeover,
governance structures have limited ability to review
o Liability provides a personal motivation to meet the duty
o The liability cases are few and far in between
 need corporate governance rules and take overs too
 difficult to enforce, but most people have an inherent desire to obey laws
also want B/D to be risk neutral and take risks that may increase the value
o management has more to lose, therefore may be more risk adverse
 In light of financial crisis, maybe people are not/should not be too concerned
about being overly risk adverse….
 In practice, investors often sell after a problem – maybe they are more risk
adverse than econ theory would suggest?
Some US jurisdictions though Van Gorkom wasn’t differential enough – allow for articles to say
the B/D is not liable for breach of duty
o In Canada, the articles can’t lower the standard, which represents an outer limit
Derivative Actions
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Only the corporation has a statutory action
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CORPORATIONS CAN – Henderson Winter 2014
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o B/D takes action on behalf of corporation, and not likely to sue themselves personally
Section 240 ABCA allows for derivative actions
o Shareholder (or other) can bring an action on behalf of the corporation without
approval from the B/D
Foss v Harbottle didn’t allow for derivative actions when could be ratified by shareholders
Duty of skill is that of a reasonably prudent person (122(1)(b) ABCA)
o No specific skill required
o Re Brazillian Rubber (Referred to on page 484)
 No liability arising from mistakes coming from a complete ignorance of rubber
o Some special committees will have requirements (financial literacy for audit committee)
Failure to attend meetings
o CBCA deems ascent if you’re not present, unless dissent
o In ABCA s 123(1) deems to ascent only if you’re at the meeting, unless you have a formal
dissent on the record
 If fail to go to meetings you’re not deemed to have accented, but if you never
attend, you likely aren’t meeting the duty of care
 Attendance records are part of election packages
Barnes v Andrew
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Page 487
Outside director claimed to have breached his duty of care because he was generally inattentive
as a director
Found a positive obligation to remain informed in some way
Part time director may not need to know all the day to day details, but need to know something
Would have expected him to be more informed since he’s an investor, but he wasn’t (can’t just
rely on self-interest)
UPM Kymmene Corp v UPM Kymmene Miramichi Inc
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Page 497
One director wants to get his friend as the chair on the B/D, along with an excessive
compensation package
At first meeting B/D dissents, second meeting approves the package
B/D changes, and sue for breach of duty when approving the compensation package
B/D says they were relying on a report from a compensation consultant and recommendations
of a compensation committee
o Compensation consultant is not an expert, therefore not an expert report
o Report contained “red flags” like referring to “unique” things, at “high end” of the scale
o The B/D didn’t actually have or read a copy of the report
o Can use reports, but can’t rely on blindly, still need to consider
Business judgement rule
o Need to actually exercise some business judgement to gain benefit from the rule
o Grating deference doesn’t mean the courts won’t examine at all
o Positive duty on B/D to make some inquiries and inform themselves
o Wouldn’t have to dig too far to see that the corp couldn’t afford
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CORPORATIONS CAN – Henderson Winter 2014
Smith v Van Gorkom (US Case)
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Page 503
Trans Union was looking for a buy out; Van Gorkom was the CEO, Chair of B/D, close to
retirement; found that $55/share was the amount that could be used for a leveraged buyout,
and paid off in a reasonable amount of time
Calls for a meeting, B/D had no advance notice of the subject
o had to accept the deal within three days, for 90 days could accept, not seek, better offer
o Deal is accepted after a 2 hour meeting, then had a subsequent meeting several months
later where they ratified the deal
What’s the time frame
o CA looked to whole period from first meeting to ratification
o Appeal: look to the first meeting in isolation (no notice, didn’t have docs), subsequent
conduct may be cure deficiencies
Didn’t get an independent valuation of the company
o Market price was $38/share, so there was a substantial premium, but no evidence that
it was a reasonable price, all agreed $38 was undervalued
Majority: no documents, no procedures to back up the decision, didn’t know the $55 had been
suggested by Van Gorkom , no independent valuation, didn’t question need for the haste
Relying on report
o Define report liberally, could be a presentation, but there is limitations on when you can
say you’re relying on a report
Subsequent events
o Even on a standard of gross negligence, B/D was uninformed at the first instance
o Had a market test, but no one else came forward (knew there was a deal, didn’t know
they could accept a better offer), so that doesn’t show that $55 is reasonable
o Never actually reviewed the written agreement
o At the later meeting when the ratified, they were already bound, therefore there was no
decision to be made at the time
Procedures: don’t need an independent valuation, but likely would have saved the decision if
there had been
Dissent: look to the fact that there was a substantial premium
o Too little emphasis on the B/D’s inherent knowledge of the business and comparison to
the market price
Criticism
o Too focused on the process
o Didn’t consider whether $55 was actually reasonable
MISAPPROPRIATION (“LOOTING”)
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Wide range of possibilities
o Perks – corporate vehicle, jet, lush carpets above value added
o Fraud/theft
o Conflict of interest
o Taking corporate opportunities
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CORPORATIONS CAN – Henderson Winter 2014
Interested Contracts (Conflicts of Interest)
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Problem when have a conflict of interest
Majority rule: shareholders say is final (can ratify interested contract)
o Shareholders are allowed (and expected) to act in their own best interest
o Securities: require that some contracts (worth > 25% of market capacity) to be ratified
by a majority of the remaining shareholders (don’t count interested parties)
Cook v Deeks
o Distinguished between selling property to the corp, and selling corporate property (???)
o Couldn’t allow shareholders who are also directors to ratify, even though hold the
majority
Rule in Foss v Harbottle says can’t bring derivative action if have shareholder ratification; statute
requires leave, shareholder ratification won’t necessarily result in a stay of action (ABCA 243(1))
Best practice is to have it reviewed by an independent committee
Disclosure requirements (ABCA 120)
o Look for material contracts (more than trivial), relevant to the decision making process
o Must disclose nature/extent of interest in writing
o Interest has to be material, but not necessarily pecuniary (can be relationships)
o Interested D cannot vote (some exceptions, like B/D remuneration)
o Failure to disclose does not make voidable on own
 Court can set the contract aside or require the director to pay
o Even without disclosure, deal is fine if
 Approved by a special (2/3) shareholder vote
 With disclosure to voting shares
 The contract is reasonable and fair
Aberdeen Railway v Blaikie Brothers
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Page 522
Don’t want to enter into a deal that benefits the B/D more than the corporation
Blaikie Brothers selling chairs (rail parts) to Aberdeen, also on the B/D
Because of conflict, impossible to say if they were truly acting in the best interest of the corp –
therefore the contract is void(able)
Even though approved by B/D as whole, still not bound (absolute rule)
North-West Transportation Co v Beatty
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Page 524
Beatty was on the NW B/D, and owned a steamer that he was selling to NW
o Evidence that NW needed a steamer, and that Beatty’s was the only one readily
available
Beatty was also the majority shareholder, and transferred shares to two other people to make
them qualified as directors
o No evidence of bribery, but chose people who were in favour of the deal
The deal was ratified by a shareholder vote
o Ratification used to distinguish between interested contracts, and contracts in the best
interest on the corp, even when the majority shareholder is an interested party
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CORPORATIONS CAN – Henderson Winter 2014
o
Nothing in the articles prevented Beatty from acquiring more shares, and it’s
inappropriate to disregard the will of the majority in favour of the minority
Corporate Opportunities
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Taking opportunities that properly belong to the corp, not the D
What if the corporation already turned down the opportunity?
No absolute prohibition if the corporation gave up the deal
o Concerned that B/D may be motivated to turn down deals for own benefits
o Often have the same player in different companies, so blocking B/D from obtaining even
after the corp turned down may sterilize the deal
o Could create disincentives for joining B/D
Corporate impossibility may not allow D to take for self
o Don’t want B/D to walk too close to the line
o Irving Trust
 If impossibility is based on financial position, then in control of directors
 Don’t want to make it too easy to point to lack of financing, since under control
of directors (raise financing, more equity…)
o Abbey Glen Property v Stumborg
 Have policy not to deal with public corp, directors form own private co
 Impossibility didn’t preclude liability
o Robinson v Brier
 Impossibility did preclude
Peso Silver Mines v Cropper
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Page 547
Deal offered to Peso, they turned it down; Cropper, on B/D, later approached, and accepted
Once deal successful, Peso claims the deal more properly rested with them – sough to obtain
profits Cropper received
There were good business reasons for Peso to turn down
o Deal was speculative, didn’t want to bet with shareholder money, but Cropper can bet
with his
o Peso wanted to focus on developing claims they did have rather than acquiring more
Cropper didn’t use any confidential information acquired by his position on B/D, he was well
known to take on speculative claims, approached separately and apart from his position
o Couldn’t say that he was approached because of his position
o No evidence that Cropper had in mind getting the deal for himself at the time
Canadian Aero v O’Malley
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Even if can say impossibility, doesn’t mean haven’t breached fiduciary duty
o Higher that regular legal duty
o Utmost duty of loyalty to act in best interest of recipient of duty
o Issue not just that Corp in fact lost opportunity, but have you met this duty
Canaero is a subsidiary of US corp, O’Malley and Z officers
Canaero working on getting contract from Can gov’t
O + Z resign, form own corp, Terra, and win contract; Canaero sues for breach of fiduciary
Issue 1: properly characterized as officers, given the level of control of US parent corp?
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CORPORATIONS CAN – Henderson Winter 2014
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o Held: officers, not mere employees, therefore owe fiduciary duty
Issue 2: What’s the content of the duty
o Similar as directors
o Can’t take opportunity from the corp, particularly when they participated in getting the
opportunity for the corp
o Must avoid all conflicts of interest
o Can’t avoid by resigning
 Duties continues for some length of time after resign
Issue 3: breach of duty?
o Didn’t use confidential information
o Confidential info not necessary for breach fiduciary duty
o Not clear on corp impossibility
o Distinguish from Peso Silver because the opportunity was rejected in good faith
o On the facts doesn’t look like could have started from scratch
o Not truly a separate opportunity; only slight differences in tender
Issue 4: liability
o Unnecessary to show factual loss, or causal factor in not getting contract
o Quantum: generally damages are not based on profits lost, but on profits gained
 Concerned about the behaviour of officers, not the loss to Canaero
o Opportunities to behave in this manner are often presented to directors/officers
o Problem that shareholders only exercising oversight at AGM once a year
 Weak oversight compared to scope for abuse, strictly enforce fiduciary duty
o Public interest in corporation being run well
 Corps provide jobs, goods, services, want them to be run well
Factors
o Position of the person (director officer)
o The nature of the opportunity (ripeness, specific to corp, relationship of director/officer)
o Knowledge
o Circumstance
o Re: termination of office look to timing, reasons (to pursue other opportunity)
REMEDIES
Derivative Action
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Statutory action on behalf of the corp
Requires leave of the court (240)
o Must give notice/chance to act to B/D
o Made in good faith
o In the best interest of the corp (won’t be dismissed out of hand) (Primex)
Re Northwest Forest Products
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Page 582
Notice to B/D must be sufficient for them to decide for themselves the merit of the action
The cause of action filed was substantially the same, but used different wording than what was
provided in notice to the B/D
Court found that it was sufficient to provide the nature of the action
Relevance of ratification
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CORPORATIONS CAN – Henderson Winter 2014
o
o
o
Tried to vote to bring the action, but failed
Not clear whether the interested directors voted, or who voted against
Ratification is not determinative for leave for the action (but can be taken into account,
and is relevant to interim costs (241))
Oppression Remedy
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Broadest, most comprehensive shareholder remedy in any common law jurisdiction
Most common in private corporations
o Minority shareholders in public corps have less reasonable expectations
o If met the duty to act in best interest of corp, can’t really say reasonable expectations
weren’t met
o In private corporations, may have reasonable expectations beyond acting in the best
interest of the corp because of relationships
Concerned with the effect on a specific stakeholder
(shareholder ratification less relevant)
The oppression remedy is designed to protect those reasonable expectations and help protect
fair treatment of stakeholders
o The reasonable expectation doesn’t have to be a legal right
Issue 3 in UPM Kymmene (see above)
Don’t need leave of the court, can bring on your own behalf
ABCA 242(2) satisfied that the act or omission
o (a) the effects result (doesn’t depend on intent)
o (b) have been carried out
o (c) duties were exercised in a manner
o That is oppressive or unfairly prejudices or unfairly disregards the interests of any
security holder (shareholder), creditor, director, or officer, the court may make an order
to rectify the matters complained of
Must be a complainant (s 239)
o (i) Security holder
o (ii)Director or officer or former director or officer
o (iii) A creditor
 For oppression, creditor must fit under (iv)
o (iv) Any other person who is a proper person to make an application
Proper person analysis can sometimes get wrapped up in the merits of the case
o Relies on having interests as a shareholder/creditor/etc (First Edmonton)
o Also look to whether justice/equity requires
 Downtown Eatery wasn’t a creditor at the time, but knew that was likely to be
o Consider if there were other steps could have taken to protect self (First Edmonton)
versus being an involuntary creditor (Downtown Eatery)
Look to the specific relationship between the complainant and the “oppressor”
o What’s oppressive to one person, might not be to another (Ferguson)
Oppression remedy sometimes combined with duty of care, especially in public corporations
First Edmonton v 315888 Alberta
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Page 634
Deals with who is a proper person
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CORPORATIONS CAN – Henderson Winter 2014
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Inducement for a corp to enter into a 10 year lease on the understanding that it will be sublet to
the lawyers who are on the B/D (never happened)
Corp was given money to make improvements to a building, but instead used to give dividends
to the B/D
Landlord brings claim in oppression
Proper person is someone who had a reasonable expectation, which was breached
o Clearly had an expectation, but wasn’t in writing, no actual promise
o Hope or discussion of a possibility not the same as a reasonable expectation
Who can be a proper person is broad, but 242 is more specific when it refers to the interests
that have been treated unfairly
o Need to be a creditor at the time of the oppressive conduct
o Here the landlord gave several months’ rent free, the oppressive conduct happened
before they became a creditor (when rent due)
The corporation with the lease had an interest in the money being used for improvements –
may be able to bring a derivative claim
o Once paid the dividends out, had no money to pay debts as they came due (rent), could
either hold B/D liable, or force shareholders to pay back, then make a claim for breach
of contract
Downtown Eatery v Ontario
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Page 643
Corporation was facing a potential wrongful dismissal suit
o Empties the corporation of assets, fires the lawyer
o Argued that the restructuring was done for other purposes, not for the purpose of
emptying the corporate assets
 Oppression looks to the effect, not just the intent
Timing – wasn’t a judgement creditor at the time they emptied the assets
o They knew about the suit, was reasonable to expect they wouldn’t empty the
corporation of assets
o Seems to relax the timing requirement from First Edmonton
o No explicit mention, but may be more willing to relax the rules when the complainant
was unable to otherwise protect his interests
West v Edson Packaging Machinery
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Page 649
West and Dallas were management (Employees/shareholders) in Edson and bring oppression
claim
Practice was for employees to hold shares that were bought back at fair market value on
retirement
o There was pressure for West and Edson to buy these shares as people retired, on the
understanding that theirs would be bought back when they left (never happened)
Timing: weren’t shareholders when it was misrepresented that the shares would be bought back
o The oppressive conduct continues because the corp did not buy back the shares when
they left, and they were shareholders then
o The allegedly oppressive conduct was what gave rise to the relationship
Courts will liberally interpret proper person test – but not unlimited
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CORPORATIONS CAN – Henderson Winter 2014
o
Oppressive conduct must relate to their interests as a shareholder, not just employee
Ferguson v Imax
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Page 675
Closely held corporation, incorporated by three couples
The wives (including Ferguson) got class B shares, with preferential dividends, then sharing
equally, non-voting
Ferguson’s ex-husband wants to change the shares to get 9% preferred, then not share equally
o One of wives sold her shares to her husband, ex’s childhood friend, other wife is ex’s
sister – resolution was going to pass
Ferguson brings a claim in oppression to stop the meeting
o Fails at trial, have meeting, resolution passes; ultimate remedy was to prohibit the corp
from ever implementing the resolution
In disregarding her interests as a shareholder in dividends, was unfairly oppressive
Decision of the B/D as a whole, but rest of B/D just following what ex wanted
Oppression cases turn on facts
o May have been different if she was a new shareholder, instead of founding member,
who had worked for years, largely unpaid
Imax had an expert give business reasons for the change
o The evidence on the facts suggested these weren’t the reasons for Imax to make the
change
Brant Investments v KeepRite Inc
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Page 673
KeepRite selling shares at below market value, otherwise no one will buy, and need capital
o Minority shareholder brought oppression claim to stop
Neither the B/D nor the majority shareholders owe a fiduciary duty to the minority shareholders
o Could create a conflict with the ability to work in own best interests (shareholders) and
duty to the corporation (B/D)
Don’t have to show bad faith for oppression (but it will help)
Here there was a purchase from the majority shareholder
o Does the fact that the deal was non-arm’s length shift the onus to the corporation to
show that there was no oppression
o No – onus remains with the complainant
o B/D had evidence that were acting in the best interests of the corp
 Had an independent committee, including a well-respected lawyer, that came to
the conclusion that it was in the best interest of the corp
Business judgement rule somewhat in conflict with the oppression remedy
o Trial said B/D not subject to microscopic scrutiny – but still looked to the procedures,
steps, and approach, therefore reasonable
o Seems as though oppression and duty of care have been collapsed together, at least for
large corporations
Ford v OMERS
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Page 688
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CORPORATIONS CAN – Henderson Winter 2014
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Canadian subsidiary of US corp had a transfer profit agreement that resulted in the US corp
getting all the profits, and the Canadian corp taking a loss every year
OMERS was a shareholder, claiming oppression
Business judgement rule
o Claimed that Ford Ca was not in a position to try to get a better deal from Ford US
o An independent company would have attempted to renegotiate based on changing
economic conditions
 Ford US had renegotiated with other companies in Canada
o No deference if haven’t actually exercised business judgement – can’t just accept bad
deal without trying to get a better deal
Expectations
o Had an expectation that the price transfer agreement would be based on arm’s length
 Said so in the public disclosure, expected could rely on that
The effects were unfairly prejudicial – caused them to lose out on their share of the profits
Also looks like B/D failed to act in the best interest of the corp
BCE v 1976 Debenture Holders
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Publically traded corp, looking to sell, got three bids, all leveraged buyouts, resulting in
downgrading of debt
Two step inquiry
o 1. Evidence supporting reasonable expectations
 Expectation is an objective test in this context
 Can debenture holders in a public corp ever expect more than that the B/D will
act in the best interest of the corp
o 2. If the expectations aren’t met, if that oppressive?
Expectation
o Must be reasonable with the facts, relationships, context, including any conflicting
claims (deal looked good for shareholders)
o Shareholders had the reasonable expectation to be treated fairly (included in duty of
care)
o Couldn’t establish that there was a reasonable expectation that the debt would remain
at the same grade
 Had representations that the debt was at a certain grade, but with warnings
that that could change
 Could have gotten contract that said had to keep the debt at a certain grade
o There was a reasonable expectation that their interests would be considered, but here,
that expectation was met
That is oppressive
o Turns on the facts – not every unmet expectation is oppressive
 Nature of the corporation (public versus private)
 Relationship (think Ferguson)
 Past practices (there may be good reasons to change)
 Preventative steps that could have been taken (First Edmonton)
 Representations and agreements (Ford)
 Resolution of conflicting interest (act in best interest of corp)
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CORPORATIONS CAN – Henderson Winter 2014
Ichan v Lions Gate
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Ichan is a well-known activist shareholder; some of the companies don’t fare well after his
involvement (Blockbuster)
Ichan trying to take over Lions Gate, in negotiations with B/D
Come to a standstill agreement (Ichan doesn’t buy more shares, Lions Gate doesn’t issue more)
Standstill ends at midnight, 12:01 B/D meets, increases equity, diluting Ichan’s shares
Reasonable expectation that wouldn’t act for improper purposes
o By diluting Ichan’s shares, also entrench selves as B/D
B/D claims acting in the best interest of the corp
o Considered the effects, but were concerned about Ichan becoming more involved
o Wanted to reduce debt (which was one of the changes Ichan wanted)
o There were actual business purposes beyond getting Ichan out
CA: given BCE, looks like oppression and derivative actions have been largely collapsed
o Allegations of self-interests, boils down to best interest
o Ichan was a hostile bidder, the only reasonable expectations he had was that the B/D
would do all they were legally entitled to stop a proxy war
o Actual allegation is self-interest, seems better as derivative, but BCE suggest that it’s also
appropriate as a oppression
37