BUSINESS ASSOCIATIONS SUMMARY 2013
Table of Contents
Agency Doctrine ...................................................... 20
Constructive Notice Rule ..................................... 20
Indoor Management Rule ................................... 20
OVERVIEW OF ENTERPRISE STRUCTURES ..... 4
(A) SOLE PROPRIETORSHIP ................................... 4
(B) PARTNERSHIPS.................................................... 4
Royal British Bank v Turkland ..................................... 20
Sherwood Design Services Inc ..................................... 20
PRE-INCORPORATION CONTRACTS ........................... 21
(C) LIMITED PARTNERSHIP ................................... 5
(D) CORPORATIONS .................................................. 6
Kelner v Baxter .................................................................... 21
Black v Smallwood ............................................................. 22
Newborne v Sensolid ........................................................ 22
Wickberg v Shatsky and Shatsky ................................ 22
Delta Construction Co v Lidstone ............................... 23
AGENCY PRINCIPLES .......................................................... 5
PARTNERSHIP LAW ................................................ 8
Definition of Partnership: ...................................... 8
General factors that indicate the existence of
a partnership:.............................................................. 8
PARTNERSHIP ACT................................................... 8
ONTARIO BUSINESS NAMES ACT:..................... 8
RELATIONSHIP AMONG THE PARTNERS
AND THE PARTNERSHIP AGREEMENT .......... 8
Thorne v New Brunswick Workmen’s
Compensation Board ........................................................... 8
A.E. LePage v Kamex Developments ............................ 9
Volzke Construction Ltd v Westlock ............................ 9
Pooley v Driver .................................................................... 10
Relationships between Partners ...................... 10
Liability towards third parties ......................... 11
Agency theory........................................................... 12
Freeman & Lockyear v Buckhurst Park Properties
(p 226) ..................................................................................... 12
Joint ventures ........................................................... 12
CMHC v Graham .................................................................. 12
LIMITED PARTNERSHIPS .....................................13
Haughton Graphic v Zivot [1986] ............................... 14
Nordile Holdings Ltd. v. Breckenridge ..................... 14
LIMITED LIABILITY PARTNERSHIPS (LLPS) 14
CORPORATIONS .................................................... 16
BASIC PRINCIPLES OF CORPORATIONS .........16
Corporate personality and Limited Liability
......................................................................................... 16
Salomon v Salomon & Co ................................................ 16
Why limited liability?............................................ 17
HALPERN ON LIMITED LIABILITY................. 17
CREATION OF A CORPORATION ...................................18
Jurisdiction of Incorporation: Federal v
Provincial incorporation..................................... 18
The Mechanics of a Corporation ..................... 18
WHO CAN INCORPORATE? ..................................... 18
STEPS OF INCORPORATION................................... 18
ARTICLES OF INCORPORATION: ......................... 18
CORPORATE NAMES: ................................................ 19
POWERS OF THE CORPORATION .................................19
Ultra Vires doctrine ............................................... 19
Common law position ........................................... 21
Summary of Common law: ................................. 23
STATUTORY REFORMS ................................................. 23
Landmark Inns v Horeak ................................................ 24
1394918 Ontario Ltd v 1310210 Ontario Inc ....... 24
Szecket v Huang .................................................................. 25
DEALING WITH PRE-INCORPORATION
CONTRACTS ON EXAM! ....................................... 25
RATIFICATION:........................................................ 26
CORPORATE CRIMINAL/TORT RESPONSIBILITY ..... 26
CRIMINAL RESPONSIBILITY ............................. 26
LIFTING THE CORPORATE VEIL .................................. 27
WHAT IS THE CORPORATE VEIL? ....................... 27
WHY PIERCE THE CORPORATE VEIL? .............. 27
Clarkson Co v Zhelka ......................................................... 27
Transamerica Life Insurance Co of Canada v
Canada Life Assurance Co............................................... 28
Rockwell Developments Ltd v Newtonbrook Plaza
Ltd .............................................................................................. 28
Walkovsky v Carlton ......................................................... 29
Lee v Lee’s Air Farming Ltd ........................................... 29
De Salaberry Realties Ltd v Minister of National
Revenue ................................................................................... 30
Shell v Canada (1999) ...................................................... 30
Lynch v Segal ........................................................................ 30
SUMMARY: ...................................................................... 30
Adams v Cape Industries ................................................ 31
Said v Butt .............................................................................. 31
ADGA Systems v Valcom ................................................. 31
MANAGEMENT STRUCTURE .............................. 32
DIRECTORS .................................................................... 32
WHO CAN BE A DIRECTOR ..................................... 32
Bushell v Faith ...................................................................... 33
Powers of Directors and Officers ..................... 34
Kelly v Electrical Construction Co .............................. 35
Automatic Self Cleansing Filter Syndicate Co Ltd v
Cuninghame .......................................................................... 35
Hayes v Canada-Atlantic & Plant S.S. Co .................. 35
Sherman & Ellis v Indiana Mutual Casualty ........... 36
Kennerson v Burbank Amusement ............................ 36
Realty Acceptance Corp v Montgomery ................... 36
Southern Foundries (1926) Ltd v Shirlaw ............. 37
Shindler v Northern Raincoat Co ................................ 37
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CUMULATIVE AND CLASS VOTING FOR DIRECTORS 37
SHAREHOLDERS.......................................................38
LEGAL RELATIONSHIP BETWEEN
MANAGERS AND SHAREHOLDERS ................ 38
CONTRACTARIAN ....................................................... 39
LEGAL TOOLS IN STATUTE TO REGULATE
CORPORATE CONDUCT ............................................ 39
VOTING RIGHTS ...................................................... 39
PRE-EMPTIVE RIGHTS......................................... 42
EQUALITY OF SHARES ......................................... 42
Jacobsen v United Conso Oil & Gas Ltd .................... 43
Bowater Canadian Limited v R.L Crain and Craisec
Ltd .............................................................................................. 43
OTHER SH RIGHTS ...................................................43
MEETINGS ................................................................. 43
Definitions and General Notes on SH Meetings
.............................................................................................. 43
Resolutions: .................................................................... 43
Business meetings can be conducted in 3 ways:
.............................................................................................. 44
Minutes:............................................................................ 44
What is a minute book? ............................................ 44
MECHANICS OF SHAREHOLDER MEETINGS
......................................................................................... 44
A. Place (s. 132) ............................................................ 44
B. Annual meetings (s. 133(1)) ............................. 44
C) Special meetings (s. 133(2))............................. 44
D) Record date (section 134)................................. 45
E. NOTICE OF MEETING (S. 135) ......................... 45
F. WAIVER OF NOTICE (S. 136) ........................... 45
G. QUORUM (s. 139) ................................................... 45
VOTING (s. 141) ........................................................... 45
RESOLUTIONS IN LIEU OF THE MEETING (S.
142) .................................................................................... 46
SH REQUISITIONED MEETINGS (Section 143)
.............................................................................................. 46
Airline Industry Revitalization Co v Air Canada.. 46
Telus Corporation v Mason Capital ........................... 47
PROXIES .......................................................................47
BROWN V DUBIE ................................................................ 48
CP RAIL LTD.......................................................................... 49
SH PROPOSALS ..........................................................49
Corporation Refusal of Proposal .......................... 50
Varity Corp v Jesuit Fathers of Upper Canada ...... 51
Verdun v Toronto Dominion Bank............................. 51
CONDUCT OF MEETINGS AND THE RIGHT OF
DISCUSSION ................................................................51
Wall v London and Northern Assets Corp. ............ 52
National Dwellings Society v Sykes ........................... 52
Blair v Consolidated Enfield Corp .............................. 52
ACCESS TO CORPORATE RECORDS ..................53
SALE OR OTHER DISPOSITION OF SHARES ...53
RESTRICTIONS ON THE TRANSFER OF
SHARES.........................................................................54
Smith & Fawcett Ltd ......................................................... 55
Case v Edmonton Country Club Ltd. ......................... 55
SHAREHOLDER AGREEMENTS ..........................55
ROLE OF PROFESSIONAL ADVISORS .............. 57
AUDITORS ................................................................... 57
FINANCIAL DISCLOSURE, APPOINTMENT OF
AUDITOR & ROLE OF AUDIT COMMITTEE .... 57
AUDIT COMMITTEE .............................................. 59
LIABILITY OF THE AUDITOR .............................. 59
Hercules Management v Ernst & Young .................. 59
DUTIES AND RESPONSIBILITIES OF
CORPORATION MANAGERS ............................... 60
DUTY OF CARE FOR DIRECTORS AND OFFICERS ...... 60
Common Law ............................................................ 60
City Equitable Fire Insurance Co Ltd ........................ 60
Re Brazilian Rubber Plantations and Estates Ltd 61
Statutory Reform .................................................... 61
Peoples Dept. Stores v Wise .......................................... 61
BUSINESS JUDGMENT RULE ........................................ 63
Smith v Van Gorkom (Transunion) – US CASE ..... 63
UPM-Kymmene Corp v UPM-Kymmene Miramichi
Inc............................................................................................... 64
Brant Investment Ltd v Keeprite Inc ......................... 64
Director participation ................................................ 64
Liability to Employees for Unpaid wages .... 65
Defences ...................................................................... 65
Other Liabilities Under Corporate Law Statutes
............................................................................................... 65
Other Liabilities Under Regulatory Statutes ... 65
DIRECTORS AND MANAGERS ............................ 67
INDEMNIFYING & INSURING MANAGERS AGAINST
LIABILITY ....................................................................... 67
COMPENSATION ............................................................ 67
DIRECTOR OF MANY CORPORATIONS ....................... 68
London and Mashonaland Exploration Company
Ltd v New Mashonaland Exploration Company .. 68
Abbey Glen Property corp v Stumborg .................... 68
Slate Ventures Inc v Hurley (1996) ........................... 68
Cranewood Financial Corp v Norisawa .................... 68
FIDUCIARY DUTIES: CONFLICTS OF INTEREST ......... 68
Common Law and Basic Self Dealing ............ 68
Statutory Disclosure Requirements for SelfDealing ........................................................................ 69
Corporate Opportunities and Director’s Self
Interest ........................................................................ 69
Regal (Hastings) v Gulliver ............................................ 69
Peso Silver Mines v Cropper.......................................... 69
Canadian Aero v O’Malley ............................................... 70
SHAREHOLDER REMEDIES................................. 71
DERIVATE ACTIONS ..................................................... 71
Common Law: The Rule in Foss v Harbottle ......... 71
Northwest Transportation v Beebee......................... 71
STATUTE ........................................................................ 72
Judicial Interpretation ......................................... 73
Re Northwest Forest Products Ltd ............................. 73
Re Marc-Jay Investments Inc and Levy .................... 73
Re Bellman and Western Approaches Ltd .............. 73
THE OPPRESSION REMEDY ......................................... 74
Ferguson v Imax Systems Corp .................................... 74
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Ebrahimi v Westbourne Galleries Ltd ...................... 75
Pente Investment Management Ltd v Schneider
Corp........................................................................................... 75
Westfair Foods Ltd v Watt ............................................. 75
Scottish Cooperative ......................................................... 77
BCE Inc., Re,........................................................................... 77
POINT OF BCE CASE ................................................... 78
5 Types of SH remedies: ........................................... 79
PERSONAL ACTIONS .....................................................79
Farnham v Fingold............................................................. 79
Goldex Mines Ltd v Revill ............................................... 80
Hercules Management Ltd. v Ernst & Young ........ 80
RECTIFICATION OF CORPORATION RECORDS ...........80
COMPLIANCE & RESTRAINING ORDERS ....................81
Goldhar v Quebec Manitou Mines .............................. 81
INVESTIGATIONS ...........................................................81
WINDING UP ..................................................................81
APPRAISAL REMEDY .....................................................82
Determination of Fair Value ............................. 83
Domglas Inc v Jarislowsky, Fraser & Co .................. 83
APPORTIONMENT OF LIABILITY .................................83
CONTROL TRANSACTIONS/MERGERS &
ACQUISITIONS ....................................................... 84
RATIONALES AND TECHNIQUES..................................84
TAKE-OVER BIDS ..........................................................85
DEFENSIVE TACTICS AND ROLE OF BOD ..................87
POISON PILL – TARGET COMPANY ATTEMPTS TO
MAKE STOCK LESS ATTRACTIVE TO BIDDER BY
DILUTING THE SHAREHOLDINGS OF WHOEVER
TRIGGERED THE RIGHTS PLAN; WILL BE A BARRIER
TO ANYONE WANTS TO ACQUIRE CONTROL WITHOUT
BACKING OF EXISTING SH CONTROL
GROUP/MANAGEMENT GROUP ................................... 87
AMERICAN CASES .................................................. 88
CHEFF ....................................................................................... 88
Unocal v Mesa Petroleum Co ......................................... 88
Revlon Inc v MacAndrews & Forbes Holdings Inc.
..................................................................................................... 89
Paramount Communications v QVC Network Inc89
Canadian Framework........................................... 89
Teck Corp Ltd v Miller ..................................................... 89
Pente Investment Management v Schneider Corp
..................................................................................................... 90
CORPORATE STAKEHOLDERS AND CORPORATE
SOCIAL RESPONSIBILITY ............................................. 91
Dodge v Ford Motor Company ..................................... 92
Parke v Daily News UK case .......................................... 92
Miles v Sydney Meat Preserving Company (AUS)
..................................................................................................... 93
Teck v Miller.......................................................................... 93
CN Rails* ................................................................................. 93
Wise v People’s Department Stores ........................... 93
BCE Inc v 1976 Debentureholders ............................. 94
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OVERVIEW OF ENTERPRISE STRUCTURES
(a) SOLE PROPRIETORSHIP
Single person – legal entitlement to all profits; manages business exclusively (unless he gives up rights
under contract)
 Not a separate legal entity
Formation: Comes into existence when someone starts the business
Name: No need to register the SP business EXCEPT if carryin out a business under a name that is not your
own name  need to register the name you will be operating under (Business Names Act, section 2(2) –
no individual shall carry on business under a name that is not his/her name unless that name is registered)
- Rationale: for people to know who is behind the business and who to track down; modest name
protection to ensure that you are not passing off
Disadvantages:
-
Unlimited personal liability
All liabilities of the business are responsibility of the sole proprietor
SP is personally liable for all debts and liabilities incurred in business
Personally responsible for performance of all contracts
Responsible for all torts
SP’s PERSONAL assets are available to creditors of the business
Business dissolves upon owner’s death
Advantages:
- Easy creation and dissolution
o Dissolution: SP can keep whatever assets remain after paying creditors
- No governing statute, just create the business; few formalities
- Income from other sources can be used to offset business costs/losses
- Tax advantages: taxes are computed in personal income of the SP and business losses can be
deducted against income of other sources
(b) PARTNERSHIPS
Definition (s. 2):
(1) Two or more persons;
(2) Carrying on business
(3) With a view to profit
 Cannot include a charitable organization
 Not a separate entity
Name & Formation: Same as SP
Regulated: Common law, partnership contracts, Legislation (ON Partnerships Act)
Ontario Partnerships Act
- Provides general framework to govern
o (1) Relations amongst partners themselves (ss. 20-31)
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o (2) Partners and partnership obligations to 3rd parties (clients and creditors)
o (3) Dissolution (Ss. 32-35)
 The PA is the starting point and provides a default set of rules which can be deviated from and modified
by Partnership Agreements. However, Partnership agreements cannot modify parts of statute that provide
for obligations that partners have to 3rd parties – they are designed to protected others and are
mandatory.
Advantages:
- All benefits of partnership accrue to partners
- Tax implications (Bankman Article): flow through benefits to partners because not a separate
entity
Disadvantages:
- Unlimited personal liabilities for obligations and debts of the partnership
- Liable to perform contractual obligations of the partnership
- Liable for torts of the partners
- All personal assets of partners may be seized to satisfy partnership obligations
Dissolution (Partnership Act Ss. 32-35)
Partnership will dissolve:
- If it’s entered into for a fixed term and you have reached the expiration date
- If partnership entered into for single purpose or undertaken and that undertaking is completed,
then the partnership dissolves
- If partnership has no defined time, any partner can give notice to other partners of notice to end
the partnership and that dissolves the partnership
- If a partner dies or becomes bankrupt, the partnership also dissolves
 But people often override this stuff in their partnership agreements
AGENCY PRINCIPLES
Section 6 of Partnerships Act
In common law every partner is an agent for the other partners. Each partner in partnership can bind the
other partners with its actions. Partners can manage the business themselves if they like or choose the
partners to be in management or can agree to outsources management.
(c) LIMITED PARTNERSHIP
Is a partnership but is a creature of statute (a general partnership isn’t creature of statute). Formed under
the Limited Partnership Act
Sources of law are limited partnerships governed by:
- Common law principles that apply to regular partnerships (but those rules have been overridden
by statute)
- Partnership Act still applies as well except to extent that it’s overridden by Limited Partners Act
- Limited Partners Act
LPs don’t exist unless you file a declaration under the Limited Partners Act.
- As with general partnerships, you can create limited partnership agreements that would set out
the affairs for the business and terms
LPS are not legal entities. Just as general partnerships, LPs are a flow through entity.
Partnership of LP:
In limited partnerships there are 2 kinds of partners and you MUST have at least one of each
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a) General partners: Unlimited responsibility for the debts and obligations of the limited partnership
and is responsible for managing the business affairs of the partnership
b) Limited partners: Liability is limited to the amount contributed (or the amount they agreed to
contribute) and limited partners must be passive and cannot take control of the business or active
part in the business or he/she will risk losing limited partner status and be liable as general
partner
o Section 13.1 of the Limited Partners Act: a limited partner not liable as a general partner
unless in addition to exercising rights as limited partner, the limited partner takes part in
control of the business, that person will lose limited liability status and have general
liability just as the general partner
(d) CORPORATIONS
CREATION:
The corporation is a creature of statute (not available in the common law) – federal (CBCA) and provincial
statutes (OBCA). Creation by incorporation
o CBCA and OCBA called statutes of general application
o The governing statute of the corporation depends on whatever Act you’ve incorporated
under
o For instance, if you register under the OBCA but only end up practicing in AB, you will be
under the OBCA and not the Alberta Act. Other AB laws will apply but you are still under
the OBCA
File articles and by-laws to registry system (which is a public record)
 Share holders can customize relationships among themselves and the corporation through
contract- Shareholder Agreement
 Don’t have to file name under OBNA unless the corporate name is different than the business
name
ADVANTAGES
 Separate legal entity: corporation can sue or be sued or criminally charged
o Distinct from SHs, directors and officer
o Corporation carries on business, possesses rights and enters into K in its own name
o SH can be employee or creditor of corporation
o Taxed separately on its profits. Only if a dividend is declared by the corp. do the SHs see
any of that profit
 Perpetual Succession
o Corporation continues to exist regardless of changes/deaths or retirement of SHs
o Has ability to continue forever
 Limited Liability
o SHs have limited liability for all debts and obligations of the corp. (rarely is there a piercing
of the corporate veil)
o Liability to limited to extent of the SH’s investment in the corp.
o Shifts risk of business activity from SHs to other stakeholders (STH)
o Ability to attract greater amount of capital into a business w/o downside risks
DISADVANTAGES
 Separate entity status creates a double taxation system on the corporate profits
o Corp. is taxed on income and profits paid out to SHs (dividends) also taxed
 Can only act through individuals/agents
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
There are many formalities:
o Must apply for corporate status and file documents
o Extra-provincial licenses
o Transaction costs
o Requirements to hold meetings, elect directors and inform SHs
SHAREHOLDERS
- SHS are loosely called the owners of the corp.
- SHs establish and set up corp. and provide intial funding
- Corps can have 1 or more SHs (unlimited)
- BUT SHs don’t own the corp.’s assets and have no right to those assets
- SHs own shares
- Shares: bundle of rights that entitle the SH to something in relation to the corporation
o There may be different classes of shares with different rights attached
- Share provisions are drafted to the attach rights to the shares
- 3 basic rights must attach to at least one class of shares:
o 1) Voting rights: someone has to be able to vote
o 2) Dividends: distribution of the corporation’s profits
o 3) Liquidation Rights: when corporation is dissolved and assets are distributed, creditors
get paid first and whatever is left will go to SHs with liquidation rights
- SHAREHOLDERS HAVE LIMITED LIABILITY – SHAREHOLDERS NOT RESPONSIBLE FOR THE DEBTS
AND OBLIGATION OF THE CORPORATION. Liability is limited to the amount invested in the
corporation
DISSOLUTION:
Corporations have perpetual existence.
- Sole proprietorships can end with the sole proprietors
- Corporations can be brought to an end by dissolution but in theory it could live forever
because it is its own entity
CORPORATION MANAGEMENT
- Officers and directors manage
- Directors are elected by shareholders. One of the most important rights of shareholders is to elect
the directors as the directors run the company. Shareholders can be directors.
- Directors make policy decisions, hiring and firing of key employees etc, approving transactions
etc…
- Directors appoint officers and officers are people responsible for the day to day operations and
workings of the business.
- President, CEO and CFO are officers – the people who run the company
- Officers appointed in law by the directors
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PARTNERSHIP LAW
Definition of Partnership:
S. 2 of Partnership Act – persons carrying on business in common with a view to profit
- (1) Persons (not individuals): could be a couple of partnerships or corporations in partnership
- (2) Carrying on business in common
- (3) With view to profit
KEY: The legal determination of the existence depends on the actual intention of the parties which is
revealed by the parties’ conduct
- Courts look at the conduct of the parties and the intention of the parties
- Remember: Partnership is not a separate legal entity
General factors that indicate the existence of a partnership:
- Sharing profits
- Sharing responsibility for losses
- Participating in management
- Stating intention to be partnership
- Using an distinct name
- Holding yourself out as a partner
PARTNERSHIP ACT
Partnership Act
Sections 2-5: Nature of partnership
Sections 6-19 describe relation of partner to third parties
Sections 20-31: Mechanics between partners
Sections 32-44: Dissolution of the partnership (this is often what partners try to contract out of in
partnership agreements)
Section 45-46: Misc.
YOU MUST CONSIDER BOTH STATUTE AND COMMON LAW SIDE BY SIDE IN PARTNERSHIP LAW
ONTARIO BUSINESS NAMES ACT:
- Applies to partnerships.
- Purpose of that statute is to establish public records that can be used by parties contracting with
private entities.
- When a partnership is not using names of the partners, they must register the name. This is
important when dealing with creditors. Without the registration can be subject to fines.
- With a partnership you cannot bring an action in a court unless you have registered.
RELATIONSHIP AMONG THE PARTNERS AND THE PARTNERSHIP AGREEMENT
Thorne v New Brunswick Workmen’s Compensation Board
Pg 16
FACTS: Thorne was in oral partnership and it was agreed that both partners would receive $75/week. and
8
was injured and applied to the WCB claiming he was a worker
ISSUE: Was this actually a partnership and not Thorne working for someone? Can Thorne be an employee?
DECISION: NO
- Thorne was in a partnership and partners cannot be employees
- Court upholds common law rule- partnerships aren’t separate legal entity from the partner and
therefore cannot contract with them
o  There is no separation of business and partners in Partnerships
o  A person cannot occupy position of employer and employee/ partners cannot hold
position of owner and employee
A.E. LePage v Kamex Developments
Pgs 5-9
FACTS: Apt bldg. held in trust by corp- various owners with equal ownership and rights of refusal
(obligation to sell to other owners first). March, a co-owner entered listing agreement with agent and
agent tried to enforce. Other owners said March did this without authority and therefore void.
- If pnshp – all partners bound; but not binding if agent knew March lacked the authority
ISSUE: Did this co-ownership of property amount to partnership?
DECISION: NO – LACK OF INTENTION!
- The co-owners weren’t partners because the intention was to maintain rights as co-owners and
the written agreement was for regulation of rights as co-owners.
- They pointed to facts that they kept separate interests f
- The co ownership was signed only by one person who wasn’t a partner
 Courts looked at their conduct to see how it reflected the parties’ intentions.
Volzke Construction Ltd v Westlock
PGS 9-13
FACTS: Bonel Properties planned to build expansion on mall and approached Westlock Foods (owners of
IGA) and offered them space. Principal SH of W wanted to have some ownership so he made offer to B for
a 25% interest in the mall. B accepted and was paid $32,000 for the ownership interest. Volzke was a
general contractor
- V sued W claiming that W was in a partnership with Bonel and THF Bonel’s actions were binding
on W
o B and W had opened a joint bank account (but only officers of B had signing authority)
o All accounts submitted to B and all of appellant’s accounts paid until SH died
o After SH died, his wife carried on the business activities, HWR she had no signing authority
on the bank account
o B paid for and undertook all repairs
o B was responsible for 80% of the mortgage
ISSUE: Was there a partnership?
DECISION:
- Trial court: Bonel and Westlock were co-ownerse and not partners and THF W couldn’t be liable.
There was no intention for parties to enter into pnship; W also couldn’t be a partner because W
had no control over the business
- Court of Appeal: Nothing in the definition of partnership requires that each partner have control
9
over the business
o Receiving a share of the profits is a prima facie proof of partnership
o The two partners referred to each other as partners
o INTENTIONS OF THE PARTIES ARE AN IMPORTANT BUT NON-CONCLUSIVE INDICATION
OF WHETHER OR NOT A PARTNERSHIP EXISTS
 Therefore, one must also examine the circumstances surrounding the operation of
the business
Pooley v Driver
Pgs 13-21
FACTS: The loan agreement described the lenders, the Driveres as partners. When the business was
liquidated, Pooley, whom the business owners had owed money, sought to recover his debt from the
Drivers, claiming that the Drivers were partners in the enterprise.
ISSUE: Was this just a money lending situation or was there a partnership?
Driver argued that they were lenders based on a contract in writing THF not partners. The problem was
that the loan agreement was not executed
DECISION:
- The Drivers were partners and therefore liable
- The case was open to contextual factors
- RATIO: REGARDLESS OF WHAT YOUR INTENTION IS, THE BEHAVIOUR AND ACTUAL
RELATIONSHIP OF PARTIES CAN CREATE A PARTNERSHIP
Relationships between Partners
P 29-31
Sections 20-31 of the Partnership Act
The partner relationship is based on: equality, consensualism, fiduciary character, personal character, and
good faith
-
Equality:
o Partners a jointly and separately liable (also get benefits)
o Partners have right to share equally in benefits and losses (s. 24.5) and have right to
participate in the management of the business
o Any partner can bind the others (s. 26)
o Partners to have access to partnership books
o Duty to provide full accounts of everything happening in the partnership
-
Consensualism:
o Partners express consensualism by coming together and setting the relationship they want
o S. 20 – the duties of the parties can be set out by the parties otherwise you are bound by
the Partnership Act
o Variations can be contracted in Partnership Agreements or through behavior and
intentions
o Key things usually set out in Partnership Agreements:
 Name of partnership
 Ownership arrangements
 Provisions for allowing new partners in partnership
10
o
o
 How to deal with profits and losses
 How to deal with management
S. 20 – can deviate from statute rule
S. 24- unanimity: all partners to agree to bringing in new partners and changing the
fundamental character of the business
-
Fiduciary Character:
o Idea that as partners you owe a great deal to each other. You have duty to account to
each other
o S. 29: you must account for the benefits you get from the partnership
o S. 29(1)
o S. 30: non competition – when you are a partner you cannot also be involved in a
competing organization
-
Personal Character:
o S. 31 – a partner cannot trade interest to a 3rd party without the agreement of the other
partners
o Unless you contract otherwise, once one partner leaves, the partnership dissolves
Liability towards third parties
P 32-33
(a) Pre-partnership Liabilities:
- PA s. 18(1): a person who is admitted as a partner into an existing firm doesn’t thereby become
liable to the creditors of the firm for anything done before he became a partner
- HWE, retirement doesn’t exonerate you from debts/liabilities incurred while D was a member –
PA s. 36
(b) Liability as a Partner
- PA s. 10: A partner is jointly liable with the other partner(s) for all debts/obligations of the firm
incurred while he is a partner
- PA ss. 10(1) & 18(2): partners who retire or leave are still liable for debts, obligations incurred
while they were in the partnership
- PA s. 6: actions of one partner can bind the other partners
- PA s. 11 & 12: Liability of the firm and therefore of its partners, for wrongful acts and omissions of
a partner
(c) “Holding out” liability
- PA s. 15(1): Every person who by words spoken or written or by conduct represents himself as a
partner in a particular firm, is liable as a partner to any person who has on the faith of such a
representation given credit to the firm
o Either an individual represented himself as partner or allowed such a representation to be
made
o To establish holding out liability, third party who has incurred loss must also have relied on
that false representation and advanced credit to the firm
o Tower Cabinet v Ingram
(d) Posthumous Liability
- PA ss. 36(3) A deceased partner’s estate is not liable for any post-death partnership debts, only
debts that were incurred before death
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Agency theory
Who can bind the firm?
- S. 6: every partner is an agent of the firm and other partners for the purposes of the partnership
(usual) business;
o But a partner who has no authority cannot bind the firm AND the person dealing with the
partner is aware of this lack of authority or has reason to doubt the purported authority
- S. 9: if A cannot bind the firm, and X is aware of that, then X cannot rely on A’s authority
- S. 15: if A holds themselves out as a partner and X has no reason to disbelieve that representation,
then X can go after A ( A liable as a partner and only A is liable, not the partnership)
- Partners without actual authority can act as agents of the partnership and bind the partnership
Freeman & Lockyear v Buckhurst Park Properties (p 226)
FACTS: F & L enter into K with Kapur (manager) as architects but Kapur doesn’t ay them. Company claims
they never entered into the agreement but Kapur did and he wasn’t authorized.
ISSUE: Is the company liable?
DECISION: By allowing Kapur to act as managing director even though he wasn’t, the board effectively
represented that Kapur held this authority and therefore the contract should be valid
- Test to entitle enforcement of contract entered into on behalf of company by an agent who had
no actual authority:
o (1) A representation that the agent had authority to enter into K on behalf of the company
o (2) That such a representation was made by a person or persons who had actual authority
to manage the business
o (3) That he (the contractor) was induced by such a representation to enter into the
contract (he relied upon the representation)
o (4) Under its articles, the company wasn’t deprived of the capacity either to enter into a
contract of the kind sought to be enforced or to delegate authority to enter into a
contract of that kind to the agent
Joint ventures
Term used to describe relationships created by contract that are designed to avoid the application of
partnership law
- Generally an attempt to work together, not in corporation form and without PNship consequences
- No precise legal definition of either – no statute/legislation creating or regulating these
- Not a separate legal entity
- To be effective, MUST STATE THAT PARTIES DO NOT INTEND TO BE ASSOCIATED IN A
PARTNERSHIP
CMHC v Graham
Pg 46
FACTS: CMHC lends the builder money and there is a mortgage in favor of CMHC to Bras D’or. With each
sale, the purchaser would assume a portion of the debt owed to the CMHC and Bras D’or would be
released from their debt to that extent. But Graham found the house was defective and refused to
continue to pay the mortgage on the house. CMHC commenced foreclosure and Graham counterclaimed
and said CMHC was liable for the defects in the house because CMHC was involved in a joint venture.
Court found that the relationship in this case satisfied a number of factors that made the relationship a
12
joint venture and as a result CMHC would be liable for the actions of it’s joint venture – kind of akin to a
partnership. This didn’t make it a partnership but because it was a JV it took on characteristics that made
it feel like a partnership and court drew principles from partnership.
- The characteristics they found for a joint venture: (this is not exhaustive and doesn’t mean that
there couldn’t be other characteristics)
o Contribution of both parties of money, time, skill etc…
o A joint interest in subject matter of the JV
o Both had mutual control in management; limited to this one project
o Expectation of profit
o Sharing of the profit in some proportion
- Main point: Even if you don’t call it a partnership, it can attract partnership like liability.
Sometimes your actions alone will attract a certain liability
LIMITED PARTNERSHIPS
Pgs 34-44
LPS are Creatures of statutes
- LPs don’t exist unless you take steps under the Limited Partnership Act to form one
o LPA s. 3(1): Must be created by express action, namely the filing of a declaration of limited
partnership
o LPA s. 3(3): Declaration renewed every 5 years
- LP requires that at least one partner have unlimited liability (the general partner) and one limited
partner
o The limited partner has limited liability. Their liability is limited to the capital that they
contribute
o Limited partners are passive and not entitled to actively take part in
control/management of the LP – LPA s. 13(1)
o Should a limited partner engage in the active control of the partnership, he may lose
limited partner status and be held as a general partner- LPA s. 13(1)
 S. 5: a person may be a general partner and limited partner at same time in the
same partnership
 S. 12(2)(a): a limited partner can advise as to the partnership management
 S. 10: Limited partner has same rights as general partner to be given true and full
info on all matters concerning the partnership
 Limited partner can dissolve the LP
 s. 18: the limited partner can assign interest but only if pnship agreement allows
- s. 15 of LPA sets out circumstances when a partner can withdraw
o Dissolution
o Partnership agreement
o Partner gives 6 months notice
o All other partners consent
 In a LP no partner (either limited or general) is allowed to withdraw unless there
are sufficient finds to cover the liability of the partnership
Why enter into a LP?
- Tax reasons drive the selection of a LP
o Income flows back to all partners
o Avoid double taxation and only get taxed once
o Individal partners take their share of profits and losses (called a flow through)
13
Haughton Graphic v Zivot [1986]
Pgs 37-41
FACTS: P, Nash sues 2 limited partners of Printcast Publishing, Zivot and Marshall.
- D, Zivot incorporated Lifestyle Magazine as sole general partner of Printcast
- HVR, Zivot introduced himself as Printcast’s president and Marshall as the VP
- Nash’s company printed the first 5 issues of LS magazine, then PC went into bankruptcy leaving
Nash unpaid
DECISION:
- Zivot and Marshall were the directing minds of Printcast and were in complete control
- THF, Zivot was effectively liable as general partner
Nordile Holdings Ltd. v. Breckenridge
FACTS:
- Limited partners Breckenridge and Rebiffe were minority SHs and directing officers of the general
partner (Arbutus) of the LP (Arman Rental Properties)
- Nordile didn’t get paid and sought to hold Breckenridge and Rebiffe personally liable. N claims
that B and R were in control of Arman’s business and should be liable as general partners
DECISION:
- “Acting solely in one capacity necessarily negates acting in any other capacity”  They were
minority SHs of the gn’rl partner
- B and R were not the directing minds behind Arbutus, THF thy can’t be held liable as gen’l partners
in Arman
-  YOU CAN ACT IN VARIOUS CAPACITIES AND RETAIN YOUR LIMITED LIABILITY PROTECTION.
THE KEY IS THAT THEY MAINTAINED THEIR SEPARATE CAPACITIES. THEY WERE ACTING AS
OFFICERS/DIRECTORS
o To avoid result in Haughton, maintain your separate capacities
LIMITED LIABILITY PARTNERSHIPS (LLPS)
LLPs are often law firms and accounting firms
LLP legislation was first enacted in ON in 1998
LLPs are new incarnation of partnership: like ordinary partnerships, not a separate legal entity
- Individuals are not liable for the negligent actions/omissions of persons not directly under their
supervision and control. Instead, the firm as a whole is liable
- Partners are liable for their own negligent actions or omissions
Section 10 of the Partnership Act creates/governs LLPs
- PA s. 10(1): Except as provided in (2), every partner in a firm is jointly liable with other partners for
all debts and obligations of the firm incurred while the person is a partner and after the partner’s
death, their estate is also severally liable for such debts and obligations so far as they remain
unsatisfied
-
PA s. 10(2): Subject to (3) A partner in a limited liability partnership isn’t liable by means of
indemnification, contribution, assessment or otherwise, for:
14
o
-
Debts, obligations and liabilities of the partnership or any partner arising from negligent
acts or omissions that another partner or an employee, agent or representative of the
partnership commits in course of the partnership business while the partnership is a
limited liability partnership or
o Any other debts/obligations of the partnership that are incurred while the partnership is a
limited liability pnship
You are only on the hook for your own negligence
PA s. 10(3): Limitations
Sub (2) doesn’t relieve a partner in a LLP from liability for:
o The partner’s own negligent or wrongful act/omission
o The negligent or wrongful act or omission of a person under the partner’s direct
supervision or
o The negligent or wrongful act or omission of another partner or employee of the
partnership if:
 The act or omission was criminal or fraudulent or
 The partner knew or ought to have known of the act or omission did not take the
actions that a reasonable person would have taken to prevent it
15
CORPORATIONS
BASIC PRINCIPLES OF CORPORATIONS
Corporate personality and Limited Liability
Federally incorporated companies have right to carry on business across the country but provinces can still
require that federally incorporated companies get a license to carry on business in their provinces
- Provincially incorporated companies will almost always require licenses from other provinces they
wish to operate in
Name Protection:
- Federal companies have right to carry on business under their corporate name in any province and
a province cannot refuse to allow that business to carry on under that name if that name is similar
to an existing company
- HWE, that Federal company can possibly be sued for passing off
Unincorporated Associations:
- Like partnerships, are not separate legal entities
- One or more people carrying on business but not with view to profit
KEY FEATURES OF CORPORATIONS:
- Separate legal personality
- Limited liability for SHs
o SHs not liable for the debts/obligations of the corporation
o Concept of limited liability  CBCA s. 45(1)
 SHs not liable for any liability, act or default of the corporation except...
Salomon v Salomon & Co
FACTS:
- Shoemaker has sole proprietorship, sets up corporation, sells his existing business to the
corporation. Corp pays for the business’ assets partly with cash and part supplemented by
borrowing 10 000 pounds from the shoemaker
- Shoemaker secures his loan by the assets that he sold in (note: secured lenders rank ahead of
unsecured lendors)
- Company goes bankrupt
ISSUE: Was shoemaker entitled to payment ahead of other creditors? Was Shoemaker liable to pay the
other creditors because the company went bankrupt instead of him?
DECISION:
- Trial court:
o Corporation was shoemaker’s agent
- House of Lords:
o  THE COMPANY IS AT LAW, A DIFFERENT PERSON ALTOGETHER FROM SHS
o  THE COMPANY IS NOT THE AGENT OF THE SHS, NOR ARE THE SH’S LIABLE
NOTWITHSTANDING EXCEPTIONS
16
o
It was the intention of the legislation that the corporation have legal entity separate from
its SHs
 A SH can be a director
 A SH can be creditor of the corporation
 Once a corporation is formed, it is a separate entity and that continues until the corporation is
dissolved
 The debts of the company are not the debts of the SHs
Why limited liability?
-
-
(1) It encourages risk taking
o If you know liabilities are contained, you’re more likely to be innovative
o Flip side: it creates a moral hazard – someone may take more risks if they know someone
else will take the brunt of the failure bc their own assets not at risk
(2) You can get more investors as limited liability corporation
o People more likely to invest if they’re not worried about losing their assetes
(3) Investors have liquidity
(4) Encourages diversification
o Can invest in a variety of different companies and not be personally liable for multiple
companies
HALPERN ON LIMITED LIABILITY
-
A limited liability regime, as general rule is most efficient regime
o An unlimited liability regime would create a significant measure of uncertainty in the
valuation of securities and threaten existence of organized securities markets
A limited liability regime will create incentives for owners to exploit a moral hazard and transfer
uncompensated business risks to creditors, therefore inducing costly attempts by creditors to
reduce these risks (in case of small tightly held companies)
The case for unlimited liability regime for smaller class companies isn’t as compelling as case for LL
for large, widely held companies given that with small companies, with fewer parties involved,
most creditors and owners can contract around either regime at low cost, THF making the choice
of liability regime relatively inconsequential
CAUTIONARY SUFFIX:
All companies must inform the public that they have limited liability by using an Corp, Limited,
Incorporated or their suffixes in their name
- Rationale: the public should know when they are dealing with a corporation and there is limited
liability
BNA s. 2(1): no corporation shall carry on business under a name other than its corporate name unless
that name is registered under the corporation
Section 2(6) of the BNA
CBCA s. 10(5)
- Consumer protection rationale, want to alert 3rd parties that they’re dealing with a limited liability
entity
Capital Maintenance Requirements:
17
There is no obligation to fund company with particular amount of money, but corporation must have
enough money to pay off liabilities as due
- If there’s not enough $, SHs could be obligated to return the funds
Creation of a Corporation
Jurisdiction of Incorporation: Federal v Provincial incorporation
Jurisdiction: can incorporate federally or under any of the provincial statutes
- It matters fairly little as the statutes are fairly similar
- Both the CBCA and the OBCA statute require that at least 25% of a company’s directors be
resident Canadian
The Mechanics of a Corporation
CBCA ss. 5-13, 149-160
WHO CAN INCORPORATE?
CBCA s. 5
- (1) One or more individuals or corporations
o (a) Individual must be 18 or older
o (b) Must not be of unsound mind (as determined by a court in Canada) and;
o (c) Must not be bankrupt
- May incorporate a corporation by signing articles of incorporation and complying with s. 7
CBCA s. 5(2): One or more bodies corporate may incorporate a corporation by signing articles of
incorporation
STEPS OF INCORPORATION
-
-
Incorporators submit an application to CBCA Official (CBCA ss. 8 & 262)
o File notice of registered address of corporation
o File notice of directors
o Pay fee (regulation 97)
o File a NUANS Name Status Report
o Send articles to Capital Director (CBCA s. 7)
Official reviews the app and ensures it’s in order
Official issues certificates of incorporation
Corporation is thus born
CBCA sets the corporate birth date
o S. 9: A corporation comes into existence on the date shown in the certificate of
incorporation
ARTICLES OF INCORPORATION:
-
CBCA S. 6 outlines what information the articles must contain:
o (a) Name of corporation
o (b) Province in Canada where the registered office will be
o (c) Classes and max number of shares that corp is authorized to issue
 If more than one share of classes, the rights/privileges/restrictions/conditions
attaching to each class of shares
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
o
o
o
If class of shares issued in series, the authority of the Ds to fix the number of
shares and rights/privileges attaching to the shares of each series
(d) Statement declaring If issue/transfer/ownership of shares of the corp is restricted
(e) Number of D’s – max and min number
(f) Any restrictions on the business that the corporation may carry one
 Articles are the primary constitutional document of the corporation – they are called the constating
documents of the corporation
- They are key documents to govern the corporation
CORPORATE NAMES:
CBCA s. 10(1): The word or expression “Limited”, “Limitée”, “Incorporated”, “Incorporée”, “Corporation”
or “Société par actions de régime fédéral” or the corresponding abbreviation “Ltd.”, “Ltée”, “Inc.”, “Corp.”
or “S.A.R.F.” shall be part, other than only in a figurative or descriptive sense, of the name of every
corporation, but a corporation may use and be legally designated by either the full or the corresponding
abbreviated form
CBCA s. 12(1): A corporation shall not be incorporated or carry on business under a name:
- (a) that is prohibited or deceptively misdescriptive; or
- (b) that is reserved for another corporation or intended corporation under section 11
Names that are prohibited or deliberate misdescriptive include:
- Names with obscene words
- Names that give connotations of government, universities or financial institutions
- Names that are too general and not distinctive enough
- Names of an individual (unless that is your name)
- Names that are primarily a geographic name
- Names that are confusingly similar to other corporate/business/trade names
- Names that are deceptively misdescriptive- names likely to mislead the public as to conditions
under which goods/services will be produced or supplied, or the place of origin of the
goods/services
o Your name shouldn’t imply something that is not true
Powers of the Corporation
CBCA s. 15(1) - A corporation has the capacity and, subject to this Act, the rights, powers and privileges
of a natural person
Ultra Vires doctrine
STATUTE HAS OVERRIDEN THE COMMON LAW
- Ultra vires doctrine restricted the corp from doing business outside of what was specified in its
articles- CBCA s.16(2)
- But s. 16(3): No act of a corporation, including any transfer of property to or by a corporation is
invalid by reason only that the act or transfer is contrary to its articles of this act
o Basically, lessens third party need to research to know if a transaction may be valid
COMMON LAW: Corporations were NOT bound by contracts entered into by agents who EXCEEDED their
authority  the contract would be ULTRA VIRES
- This imposed third party obligation to check the articles to determine the objects of incorporation
to ensure the agent was acting in the authority of the system (very inefficient)
19
Agency Doctrine
-
Corporations are artificial entities so they have to act through people to complete things and do
business. So directors and officers are the agents of the corporation and corporation acts through
those people
o The principal is the corporation
o In agency law, principals are liable for the acts of their agents, if those agents had actual
or ostensible authority from the corporation to commit those acts
o Actual authority in concept of the corporation might be in the articles/bylaws/directors
resolution/SH’s resolution
o Ostensible authority is authority with which the agent has been cloaked. It is an implied
authority
 One example was when a corp. puts a person in position, or gives title/role that
would normally give that individual authority of a particular kind
Constructive Notice Rule
Third parties were deemed to have knowledge of any publicly filed constating document and other related
documents publicly filed of a corporation they were dealing with. Outsider cannot plead ignorance
OVERRULED BY STATUE!
Indoor Management Rule
This limited the application of the constructive notice rule
- It provided that the 3rd party wasn’t deemed to have knowledge of any indoor restrictions on the
authority of directors or officers of a corporation
Royal British Bank v Turkland
FACTS:
- A corp borrowed $ from a bank and two of the corp’s directors signed the relevant documentation
- Under the articles of that company, directors were permitted to cause the company to borrow
money, HWE, the articles said that directors could borrow money but only under SH resolution
- SH resolutions weren’t public so the bank didn’t have access to them
- The bank sued for their money and the company tried to argue that borrowing the money wasn’t
an authorized act
DECISION:
- Court found that the CN doctrine doesn’t apply here
o According to the Indoor Management Rule: bank COULD assume that all necessary steps
referred to in the articles had been taken
o 3rd party (bank) didn’t have to satisfy himself that internal regulations of the corp had
actually been complied with
Sherwood Design Services Inc
FACTS:
- Client wants firm to act for them in purchasing real estate – and wants to use a corp; law firms
have corps “on the shelf” that they can transfer to client through a resolution; purchaser’s lawyer
engages with vendor’s lawyer surrounding transaction, and sends over documentation in draft
form (incl numbered company that will buy land) – lawyer still only SH in this corp, and including
resolution authorizing the transaction; purchaser defaults; corp goes back on shelf; new client gets
20
corp – then vendor from original transaction sues corp for default (presumably learnt of new
owner, who had assets); innocent third party SH
ISSUE: Can this corp with a new SH be liable for the previous defaulted transaction?
DECISION: YES
- A corp. with a new SH can be liable for the previous defaulted transaction, given 3rd parties should
be able to rely on the authority of the corporation
- OBCA s.19 – Indoor Management
o Pre-incorporation contract became valid
o Reliance on authority of corporation – draft document was sufficient to allow the vendor
to think that they were dealing with a corporation
Pre-Incorporation Contracts
CBCA ss. 5 & 14; CB 166-184
Pre-incorporation contracts deal with situations where promoters (founders – people who founded the
business) enter into K’s on behalf of the proposed corporation before the corporation is actually formed.
This happens because sometimes there is time sensitivity
- Scenario 1: the promoter is aware the corporation isn’t formed but 3rd party isn’t aware
- Scenario 2: neither promoter nor 3rd party is aware the company isn’t formed
- Scenario 3: both parties know that the company doesn’t exist yet
- Some situations where the corporation is never formed; or the corporation is formed and purports
to ratify (adopt) the contract
Common law position
Kelner v Baxter
FACTS:
- Kelner was a wine merchant, sold product to hotel (but really, to promoters) – both parties were
aware the hotel was not yet incorporated – but urgent (hotel needed wine); contract for
immediate delivery, signed on behalf of the company to be incorporated; co incorp subsequent to
the wine delivery, and the corp ratified the contract as their obligation; company went insolvent
before the wine was paid (900 pounds); Kelner wants to collect – lawyer advises to go after
principals, who signed the contract on behalf of an unincorporated company (theory: could not K
with non-existent entity, so must have been contracting with promoters; personal liability)
ISSUE: With both parties aware that the company was not yet incorporated, coud the pre-incorporation K
be attributed to the promoters?
DECISION: YES
- The directors held liable for the K
- The directors couldn’t have been acting as agents for the company when they signed the K bc the
company didn’t exist
- There was no principal at that time so under agency principle, the company wasn’t liable and
therefore the directors were liable or the company would be completely inoperable
o Court must assume that the directors intended to be personally liable
 A COMPANY CANNOT RATIFY A K ENETERED INTO ON ITS BEHALF IF THE COMPANY WASN’T IN
21
EXISTENCE AT THE TIME THE COMPANY PURPORTED TO RATIFY IT
Black v Smallwood
FACTS:
- Black and other entered into K to sell some land and they signed the K with the name of the
company and their names below as directors
- Everybody thought that the company had been incorporated, although it wasn’t (in Kelner, they
knew the company hadn’t been incorporated)
- The deal fell apart and sellers sued – argued Kelner
DECISION:
Court held in favour of the defendants
- Distinguished from Kelner because everybody knew the corporation didn’t exist- that showed an
intention for the directors to be personally liable
- In this case, there was no intention by either side for the promoter to be personally liable. The
intention was to contract with the corporation
-  A corporation isn’t capable under common law of contracting prior to incorporation, THF not
liable on pre-incorporation contract
Newborne v Sensolid
FACTS:
- The Newborn company entered into K with Sensolid to sell tinned ham. Price of tinned ham fell
and S backed out of the K
- The Newborn company sued and the action was dismissed when it was discovered that the
company hadn’t been formed
- Leopold Newborn (the promoter, sued in his own name to enforce the K.
DECISION:
- English court of appeal rejected this, similar to Black case
- Test: whether it was intended that the promoter be a party to the K or not
- Given the way the K was signed, it was intended to be a K with the company and not with the
promoter personally. THF, Newborn couldn’t enforce the K in his own name and the K was void
Wickberg v Shatsky and Shatsky
FACTS:
- S & S hires W as a manager. K was drawn up on company letterhead and signed by Shatsky as
president
- Shortly after K was signed and W worked for then, S notified W that the company hadn’t been
incorporated
- The business collapsed and they asked W to work on commission and he refused so they
terminated him
- W sued - 2 claims
o (1) S personally liable for signing a K on behalf of non-existent principal
o (2) Shatskys were liable for breach of warranty because they warranted to him that the
company existed.
DECISION:
First argument: S liable bc he signed K on behalf of non existent principle:
- Court said NO
22
-
In this case S knew the company had not been formed
The reasoning of Black was applied
In this case, neither party intended that Shatsky be liable, they all intended that the K be formed
with the corp
Second argument: S liable for breach of warranty
- S was liable for breach of warranty
- Court only awarded nominal damages because there was no connection between W’s loss and
the breach of warranty of authority
o Even if the company had been formed, the outcome would have been the same – the
company would have failed
o No causal connection between the damage suffered by the P and the breach of warranty
Delta Construction Co v Lidstone
FACTS: Defendants signed their articles to form company called Algo Enterprises Ltd. and left the
documents with their lawyer to file. In may, this company represented by Mr. Lidstone, hired Delta to do
work for Algo. L assumed the papers had been filed and the company was formed. Both parties thought
company was formed. Discovered in Aug that the papers hadn’t been filed – lawyer eventually got the
papers through. Business failed and Delta wasn’t paid – sued Lidstone
DECISION:
- The parties never intended that Lidstone be personally liable on the K
- Like Shatksy case they found L did breach warranty of authority but only nominal damages were
awarded because even if the company had existed, Delta still wouldn’t have been paid
Summary of Common law:
The rule of law interpretation of Kelner was not the one ultimately adopted by the courts that promoters
were automatically liable. It is the rule of interpretation – look at the contract, did it promote any
intention that promoters be liable.
A corporation also cannot ratifty a contract before the corporation came into existence. Can only ratify a
contract that the company could have legally entered into in the first place.
Promoter can be liable only if it can be said he intended to be liable but he can be liable for breach of
warranty of authority.
Statutory reforms
Lesson from above cases:
- Agents – be clear, if signing a contract before incorporation, be clear that you are NOT personally
liable
CBCA s. 14 – Provisions to reduce uncertainty
CBCA s. 14(1): Subject to this section, a person who enters into, or purports to enter into, a written
contract in the name of or on behalf of a corporation before it comes into existence is personally bound by
the contract and is entitled to its benefits.
23
CBCA s. 14(2): A corporation may, within a reasonable time after it comes into existence, by any action or
conduct signifying its intention to be bound thereby, adopt a written contract made before it came into
existence in its name or on its behalf, and on such adoption
- (a) the corporation is bound by the contract and is entitled to the benefits thereof as if the
corporation had been in existence at the date of the contract and had been a party thereto; and
o As if it had been a corp. from inception
- (b) a person who purported to act in the name of or on behalf of the corporation ceases, except as
provided in subsection (3), to be bound by or entitled to the benefits of the contract
 A company can ratify a K made before its existence
 On the adoption the corporation is bound by the contract as if it had been in
existence at time K was signed and the promoter ceases to be bound by or
entitled to the benefits of the K- except as provided in sub 3
CBCA s. 14(3): Subject to subsection (4), whether or not a written contract made before the coming into
existence of a corporation is adopted by the corporation, a party to the contract may apply to a court for
an order respecting the nature and extent of the obligations and liability under the contract of the
corporation and the person who entered into, or purported to enter into, the contract in the name of or on
behalf of the corporation. On the application, the court may make any order it thinks fit
- Allows a party to apply to the court to pin something on the promoter
NOTE: THIS ONLY APPLIES TO WRITTEN CONTRACTS BECAUSE THE PROVISION STIPULATES IT. THIS DOES
NOT APPLY TO ORAL CONTRACTS
CBCA s. 14(4): If expressly so provided in the written contract, a person who purported to act in the name of
or on behalf of the corporation before it came into existence is not in any event bound by the contract or
entitled to the benefits thereof
- This overrides the court’s jurisdiction in 14(3)
- Third party and agent can agree amongst themselves that the agent is bound
Landmark Inns v Horeak
FACTS:
- H enters into contract for lease with Landmark using corporation that doesn’t exist – signed K as
chairman of the corporation
- The lease required the landlord to make renovations which it did
- Before commencement of lease, H decided not to lease with them
- Landmark sues for cost of the renos and 6 months worth of lost rent
o H incorporated the company and adopted the contract to try and avoid personal liability
under section 14(2)
o H argued 14(4) –he wasn’t personally liable bc he signed in the name of the corp
DECISION:
- S. 14(2) didn’t apply because although the company purported to adopt the contract, the lease
had already been repudiated
o The K was already at an end so there was nothing for the corp to adopt – No adoption
- S. 14(4) didn’t apply because putting the name of the corp on the K wasn’t enough to remove
liability – needs to be something more express
- H held personally liable
1394918 Ontario Ltd v 1310210 Ontario Inc
This case contradicted Landmark Case. The decision in Landmark said a repudiated contract can’t be
24
adopted. This case was only briefly noted on page 181
FACTS:
Agreement of P and S for land. The purchaser was noted as Raymond Stern in trust for a company to be
incorporated and not in his personal capacity. The vendor repudiated the contract and Stern representing
the P, accepted the repudiation, incorporated the company, and assigned rights to the contract to the
corporation and had new company sue the vendor for the breach of contract.
COURT: Because he included “not in his personal capacity” – the court found that he was not liable. He
didn’t have the burdens or the benefits of the contract
- If you are clear and expressly exclude personal liability then you are not held liable
The vendor challenged the ability of the corporation to sue.
ISSUE: Whether the corporation had effectively adopted the contract.
DECISION:
The company had adopted the contract by virtue of commencing the action against the vendor. Common
law principles shouldn’t be introduced in analysis under section 40 of the CBCA. Common law principles
should be applied literally.
On repudiation part, court had to look at common law and found that repudiation doesn’t result in a K
being void. It means at point of repudiation, the parties are relieved of future performance of the K, but
there is still a claim for damages against the repudiating party. There were still rights for adoption by the
corporation.
 REPUDIATION IS NOT ABSOLUTE BAR TO RATIFICATION
Szecket v Huang
FACTS:
-
Involved a license agreement where Szecket and G granted a licence to a company to be
formed allowing that company to provide services in Taiwaan.
Huang entered into K acting on behalf of the company to be formed.
The P’s wanted H personally liable for the contract
H rejected that guarantee and it was negotiated out of the K but he didn’t include express
statement in the K that he was not to be personally liable. But his intent was clear.
DECISION:
Court said: we don’t need to determine if he intended to be personally liable- that was common law. To
the extent that provisions apply we shouldn’t be using common law principles. H is liable unless a
corporation was formed that adopted the K or he excluded his liability under the CBCA provision.
DEALING WITH PRE-INCORPORATION CONTRACTS ON EXAM!
The statute changed analysis
- LOOK AT STATUTE S. 14 WHEN ANALYZING PRE INCORPORATION CONTRACT ISSUES
- s. 14 – prima face- promoter who signs K on behalf of corp before corp. comes into existence
is liable- subject to liabilities and benefits unless at outset of the K the parties agree that the
promoter will be liable. NEED TO BE EXPLICIT ABOUT IT
25
-
Corporations are entitled within a reasonable time after incorporation to adopt the preincorporation contract and that relieves promoter of liabilities and benefits of the K
Judicial Interpretation:
- How have the courts interpreted s. 14
o Two most important cases 1394138 and Szecket case
o The statutory provisions were intended to replace the common law
o Looking at the intention is not applicable anymore. But we do need to see if there’s an
explicit exemption of liability for the promoter set out in the K
o But remember, if there is an oral contract, section 14 of CBCA doesn’t apply
RATIFICATION:
-
You pass a director’s resolution adopting the contract – that would be formal
In Sherwood case, court found that the lawyer writing the letter on behalf of Shelfco, was
sufficient ratification of the K
In 139 case, the court found that the party commencing the action also signified its intention to
adopt the contract
Landmark Case:
- Landmark and 139 appear to contradict each other
- In Landmark case, court said repudiated K cannot be adopted
- In 139 court didn’t distinguish L case but analyzed similar situation different
- A repudiated contract doesn’t void
o It can be adopted retroactively
Corporate Criminal/Tort Responsibility
The corporation must act through individuals and vicarious liability applies to corporations. A corporation
is vicariously liable for the torts of its officers, directors, employees and other agents if those individuals
commit the tort in the scope of their assigned duties (authorities, role in the corporation).
- This can also apply in the case of fraud. If the fraud occurred by the person in carrying out the
duties that were entrusted to them by the corporation, the corporation can still be liable for that.
- The corporation doesn’t have to benefit from the tort for that vicarious liability principle to
apply
CRIMINAL RESPONSIBILITY
Vicarious liability principle doesn’t apply to criminal offences.
- This is particularly difficult when talking about mens rea offences- how can a corporation be guilty
of a crime requiring a guilty mind because a corp doesn’t have a mind?
Identification theory provides that a corporation may be found personally liable for a crime if the human
being who took the actions may be described as a directing mind and will of the corporation acting in the
scope of his authority
- A corporation is an abstraction with no minds of its own. It’s will can be found in the person who is
the directing mind
- This will be senior people with decision making authority
- Officers and directors  People who can impact corporate policy
26
Can a corporation be convicted of a mens rea offence?
- Court affirmed that it could and affirmed principle of identification theory
3 categories of offences
- (1) Absolute liability offences: the act constitutes entire offence – no need to show MR
- (2) Strict liability: absolute liability offence with due diligence defence
- (3) Offences requiring mens rea: more difficult to find a corp guilty of a mens rea offence.
Prosecution would have to establish that the act was committed by corp through its agents and
also that the menes rea was present
Lifting the Corporate Veil
Pgs 87-113
WHAT IS THE CORPORATE VEIL?
-
Term used to describe the shield, that protects shareholders from liability
Piercing the corporate veil refers to disregarding that separate existence and finding the
shareholders liable for the debts and obligations. It’s disregarding the Salomon case
WHY PIERCE THE CORPORATE VEIL?
3 standard situations
- (1) To satisfy the debts of a corporation where the assets of the corporation are insufficient
- (2) In some cases shareholders themselves may ask the courts to pierce the corporate veil in order
to seek some kind of benefit that would be denied if the separate existence were to be upheld
- (3) Statutory interpretation:
Clarkson Co v Zhelka
FACTS:
- Selkirk owns multiple companies (not uncommon for real estate owners); Industrial buys piece of
land, getting an advance from another Selkirk company to complete this purchase; land sold to
Zhelka (S’s sister) for a promissory note of 120k; Z mortgages land (borrows money from third
party, securing loan with land), likely uses money to pay off promissory note, mortgage then falls
into arrears so Z sells piece of land to discharge mortgage (not entire land); S goes bankrupt –
Clarkson Gordon’s bankruptcy subsidiary is trustee – decides to go for Z’s land (now paid off);
trustee argues Industrial and Z are mere agents of S – therefore S’s land, available to creditors
DECISION:
- Court refused to lift the corporate veil
- Courts do not like to pierce veil when there is inadequate differentiation between companies; in
absence of fraud, left with the statute
o This isn’t a case where a debtor has transferred his assets to a corporation of his own
making to avoid personal liabilities or obligations
o Relationship of S’s relationship with Industrial is legally find
- No fraud or misrepresentation
- Key: If a company is formed for express purpose of doing and wrongful/unlawful act or if when
formed those in control expressly direct a wrongful thing to be done, the individuals
(shareholders) and the company are responsible to those whom liability is owed
o Having a controlling interest doesn’t establish this kind of agency or façade
27
Transamerica Life Insurance Co of Canada v Canada Life Assurance Co
FACTS:
- P, Transamerica made a number of mortgage loans to borrowers, many of whom defaulted. CLMS
was the broker who put Transamerica and arranged these loans. T claimed that CLMS was
supposed to have underwritten the loans (done the due diligence and investigated the
creditworthiness of the borrowers). CLMS denied that duty and said that it was T’s duty- they
were to do their own due diligence
T argued that it should be able to look through the wholly owned subsidiary to the parent co and
impose liability on the parent
COURT:
Court rejected “justice and equitable” as any kind of test – too loose and ill defined.
- Court did say they would disregard a separate personality of a company where the company is
o (1) Completely dominated and controlled by the shareholder and
o (2) Being used as a shield for fraudulent and improper conduct
- The element of complete control requires more than just ownership. Rather, the subsidiary must
be shown not to function independently
- Court noted that CLMS had it’s own head office, it had its own bank accounts, it was managed and
operated independently from Canada Life. The directors of CLMS were executives at Canada Life
and the presidence of CLMS was an employee of Canada Life but that wasn’t unusual or would tip
the scales.
o Some of the operations were done by Canada Life but CLMS was billed for that and
had to pay for that from its own revenues
- The actual business of CLMS was done by CLMS employees only and Canada Life was involved
DECISION: Court ruled against Transamerica. Court concluded that CLMS conducted business separate and
distinct from it’s parent and CLMS was not a mere puppet of Canada Life. Also noticed that if that
complete control was there they would have to look to see if there was fraud and there was no evidence
of any fraud by CLMS
Rockwell Developments Ltd v Newtonbrook Plaza Ltd
Similar outcome as in Clarkson v Zhelka
FACTS:
- Kelner was shareholder and his corporation Planet Development Corp. Ltd. owned another
corporation, Rockwell.
- R was a real estate development company and its shares were owned by Planet and Planet
was owned by Kelner
- R signed agreement of P and S for land owned by N
- Kelner signed contract on behalf of R in his capacity as secretary. Deal fell through R sued N
for specific performance.
- The TJ dismissed R’s claim and ordered R to pay costs to N
- R failed to pay the costs and N made motion for order requiring Kelner to pay the costs
personally. Court granted that order and Kelner appealed.
DECISION:
- Court noted at time of signing APS, Rockwell didn’t have any assets and the finds didn’t go
through any bank accounts of R
- But court didn’t find appropriate basis for lifting the veil
28
-
The one-man company was legitimate form
The K was made with Rockwell and not with K personally
o K couldn’t have sued upon it, nor could he have been sued
Walkovsky v Carlton
FACTS: Plaintiff, W, severely injured by NYC cab owned by Seon Cab Co of which defendant, Carlton was
SH and 9 other cab companies. Each corp had 2 cabs each.
- Each cab had minimum mandatory amount of auto insurance; Seon had little capital, insufficient
to compensate W so W wanted to get to Carlton
o W argued that although the companies were ostensibly independent, they operated as
single large corporate entity designed to defraud the general public
o Sought to have court disregard corporate entity and assign personal liability to Carlton
DECISION: Court refused to pierce the corp. veil
- The fact that C owned the fleet through multiple corps rather than one doesn’t make piercing the
corp veil any easier
- The separate legal personality won’t be disregarded bc the corp’s assets are insufficient to
compensate
- Court said that where a corporation is a fragment of a larger corporate structure which actually
conducts the business or where the corp at issue is a dummy for its individual stockholders who
are in reality carrying on the business in their personal capacities, then courts would be justified in
piercing the corp veil
- Courts will pierce if necessary to prevent fraud – but not fraudulent to only have min liability
insurance – that is the legislatures doing
DISSENT:
Keating J: SHs should be held individually liable. "A participating shareholder of a corporation, vested with
a public interest, organized with capital insufficient to meet liabilities certain to arise [in the course of]
business … The only types of corporate enterprises [discouraged will be those] designed solely to abuse
corporate privilege at the expense of the public interest." [social entity model]
Lee v Lee’s Air Farming Ltd
FACTS:
Lee was director, officer and only employee. He was the sole shareholder of Lee’s Air Farming Ltd. He was
engaged by the company as a pilot. He had a K with the company and was paid wages by the company and
this was documented in the company’s books and records.
This shows that the shareholder treated the company as separate (this is a helpful fact). Lee died in
carrying out the aerial top dressing and his widow made claim under Workman’s compensation- he was
employee and died in course of employment. Board denied the claim- Lee wasn’t a worker under the
meaning of the statute because he employed himself and was following orders from himself. A person
following and giving orders can’t be the same person – he wasn’t really.
DECISION:
Court found that Lee and the company had separate legal existence. It wasn’t Lee giving orders but the
company giving orders through its agent, Lee. If others were involved, Lee’s employment K would have
survived. This case reaffirms Saloman principles
29
De Salaberry Realties Ltd v Minister of National Revenue
FACTS: Two families and each had a complex corporate structure. Separate companies, each of which
would buy some land. The purpose for the land purchases was to develop shopping malls. However,
frequently the companies would purchase land that was too big for the needs of the mall and sell off
parcels of the land.
- If CRA could successfully argue that these subsidiaries were in business of selling land, then the
profits would be taxed as income.
ISSUE: Are these companies operating independently or part of a whole?
DECISION:
- Court noted that potential buyers often approached the holding companies for land purchase
opportunities, not the subsidiaries
o Court took that as indication that the group was known for selling excess parcels of land.
- The court did disregard the corporate veil and found that the subsidiaries were instruments of
the upper tier companies
o The subsidiaries were thinly capitalized (only given enough money to do what they had to
do)
o They looked at pyramiding of the corporate group, the B’s dictated the course of conduct
and decision making of the subsidiaries
Shell v Canada (1999)
-
Absent a specific provision to the contrary it’s not the court’s role to prevent tax payers
from relying on the sophisticated structure of their transactions as long as they’re
arranged so the particular provisions of the Act are met
Court shouldn’t prevent tax payers from relying on those provisions simply because it
would be unfair to other taxpayer’s who chose not to structure that way
Lynch v Segal
FACTS:
Segal defaulted on spousal/child support obligations. He had no assets in his name but set up corporations
to buy properties. Court referred to shareholders as mysterious and not to be named foreign investors.
DECISION:
Court found S was creating impression that someone else owned the assets. So court pierced the veil and
found that S and his corporations were one and the same.
- Court said a more flexible approach is available in family law context particularly where the
corporations are completely controlled by one spouse for that spouse’s benefit and no third
parties are involved.
SUMMARY:
Courts reluctant to lift the corporate veil, so there needs to be compelling facts
Courts may pierce the veil:
- Where an argument is made that the corp is merely an agent of the shareholder
- The corporation has been formed to engage in fraud
Just having ownership of a company doesn’t mean that you dominate a company and the two entities
are the same.
30
One factor the courts may look at to determine the domination is whether the SH’s treated the
corporation as a separate entity – were corporate resolutions passed for instance, how are the accounts
and books kept
If a corporation is formed in order to evade existing liability you have good argument as opposed to
potential liability, as in the Carlton Case
- In Clarkson, the court said that the Industrial Corporation was created much before S went into
bankruptcy
- Timing is important!
Another factor: Where the corporation is thinly or inadequately capitalized in the context of the business
(De SalaBerry, Carlton dissent)
- It is not extremely compelling but a factor, maybe a legislative issue
Another factor:
- When the corporation is one of a group that may be viewed collectively as a single enterprise. This
was argued successfully in De Salaberry but unsuccessfully in Carlton
More cases:
Adams v Cape Industries
Pg 100
Court said the corp veil shouldn’t be lifted against a company that’s a member of a corporate group
merely because the corporate structure has been used to ensure that legal liability in respect of future
activities of the group would fall on one member over the others
- I.e. isolating the parent from liability is okay
Said v Butt
Pgs 73 & 79
FACTS: Plaintiff, Said, had ongoing dispute with theatre and was banned from performances at the
theatre. So he bought ticket through ticket agent and when he appeared, the manager kicked him out and
offered to compensate him for his ticket. He sued the manager directly for wrongfully procuring the opera
company to breach agreement of purchase and sale.
DECISION: Court held that where a corp. is liable for breach, the actor that caused the corporation to
breach the contract, couldn’t be held liable as long as he was acting in the best interest of the company,
within the scope of authority.
ADGA Systems v Valcom
Pg 78
In this case, it was held that basically, officers/directors/employees are responsible for their tortious acts
even if the act was in the best interest of the company but the exception is the Said v Butt exception – the
tort of inducing breach of contract.
- You cannot sue a company for breach of contract and then sue the employees who caused the
corporation to breach that contract
- Policy basis is that directors/officers may have legitimate reasons to terminate a contract
31
MANAGEMENT STRUCTURE
Directors
Election and Removal of Directors (CBCA ss.6(3), (4), 105-109, 111-114)
CBCA s. 102(1): Subject to any unanimous shareholder agreement, the directors shall manage,
or supervise the management of, the business and affairs of a corporation
CBCA s. 102(2): A corporation shall have one or more directors, but a distributing corporation
shall not have less than 3 directors, at least 2 of which aren’t employees of the corporation or its
affiliates
- The goal there is to have independent directors
CBCA s. 6(4): The articles may not require a greater number of votes of shareholders to remove
a director than the number required by section 109.
- CBCA s. 109(1): the shareholders of a corporation may by ordinary resolution at a special
meeting remove any director or directors from office.
WHO CAN BE A DIRECTOR
CBCA s. 105(1): The following persons are disqualified from being a director of a corporation:
- (a) Anyone under 18 years old
- (b) Anyone of unsound mind
- (c) A person who is not an individual
- (d) A person who is bankrupt
CBCA s. 105(2): Unless the articles otherwise provide, a director of a corporation is not required
to hold shares issued by the corporation.
CBCA s. 105(3): Subject to subsection (3.1), at least twenty-five per cent of the directors of a
corporation must be resident Canadians. However, if a corporation has less than four directors,
at least one director must be a resident Canadian.
CBCA s. 106 – Setting of Directors
- S. 106(1): At the time of sending articles of incorporation, the incorporators shall send to
the Director a notice of directors in the form that the Director fixes, and the Director shall
file the notice.
- S. 106(2): Each director named in the notice referred to in subsection (1) holds office
from the issue of the certificate of incorporation until the first meeting of shareholders.
- S. 106(3): SHs of a corporation shall, by ordinary resolution at the first meeting of
shareholders and at each succeeding annual meeting at which an election of directors is
required, elect directors to hold office for a term expiring not later than the close of the
third annual meeting of shareholders following the election
- S. 106(5): A director not elected for an expressly stated term ceases to hold office at the
close of the first annual meeting of shareholders following the director’s election.
CBCA s. 109 – Removal of directors
- S. 109(1): Subject to para 107(g), the shareholders of a corporation may by ordinary
resolution at a special meeting remove any director or directors from office.
32
-
S. 109(2): Where the holders of any class or series of shares of a corporation have an
exclusive right to elect one or more directors, a director so elected may only be removed
by an ordinary resolution at a meeting of the shareholders of that class or series.
CBCA s. 114 – Guidelines for directors meetings
-
-
-
-
S. 114(1): Unless the articles or by-laws otherwise provide, the directors may meet
at any place and on such notice as the by-laws require.
S. 114(2): Subject to the articles or by-laws, a majority of the number of directors or
minimum number of directors required by the articles constitutes a quorum at any
meeting of directors, and, notwithstanding any vacancy among the directors, a
quorum of directors may exercise all the powers of the directors.
S. 114(3): Directors, other than directors of a corporation referred to in subsection
105(4), shall not transact business at a meeting of directors unless,
o (a) if the corporation is subject to subsection 105(3), at least twenty-five per
cent of the directors present are resident Canadians or, if the corporation
has less than four directors, at least one of the directors present is a resident
Canadian; or
o (b) if the corporation is subject to subsection 105(3.1), a majority of
directors present are resident Canadians or if the corporation has only two
directors, at least one of the directors present is a resident Canadian.
S. 114(4) Exception: Despite subsection (3), directors may transact business at a
meeting of directors where the number of resident Canadian directors, required
under that subsection, is not present if
o (a) a resident Canadian director who is unable to be present approves in
writing, or by telephonic, electronic or other communication facility, the
business transacted at the meeting; and
o (b) the required number of resident Canadian directors would have been
present had that director been present at the meeting.
S. 114(5): Notice of meeting
o A notice of a meeting of directors shall specify any matter referred to in
subsection 115(3) that is to be dealt with at the meeting but, unless the bylaws otherwise provide, need not specify the purpose of or the business to
be transacted at the meeting.
Bushell v Faith
CB Pgs 200-206
FACTS:
- 3 SHs (siblings) own 100 shares each and all are directors
- All shares equal EXCEPT for provision in articles that provided that for the removal of a director,
any shares held will carry 3 votes/share
- 2 SHs wanted to get rid of the other but because of the variation, they couldn’t
ISSUE: Is this special provision void?
COURT:
- The articles are valid
- Court wants to leave max space for private agreements- since they all agreed, it should remain
- Dissent: concerned that director’s can be irremovable
o Look at the relevant statutory provisions with more purposive approach – what are the
meanings behind the the statute
- This case reflects judicial deference to governance issues
33
Powers of Directors and Officers
CBCA SS. 102-104, 110, 114, 115, 117, 121, 189(1-2)
Duty to manage or supervise management
S. 102(1): Subject to any unanimous shareholder agreement, the directors shall manage, or supervise the
management of, the business and affairs of a corporation.
By-laws
S. 103 (1): Unless the articles, by-laws or a unanimous shareholder agreement otherwise provide, the directors may,
by resolution, make, amend or repeal any by-laws that regulate the business or affairs of the corporation.
- (2): The directors shall submit a by-law, or an amendment or a repeal of a by-law, made under subsection
(1) to the shareholders at the next meeting of shareholders, and the shareholders may, by ordinary
resolution, confirm, reject or amend the by-law, amendment or repeal.
- (3): A by-law, or an amendment or a repeal of a by-law, is effective from the date of the resolution of the
directors under subsection (1) until it is confirmed, confirmed as amended or rejected by the shareholders
under subsection (2) or until it ceases to be effective under subsection (4)
- (4): If a by-law, an amendment or a repeal is rejected by the shareholders, or if the directors do not submit a
by-law, an amendment or a repeal to the shareholders as required under subsection (2), the by-law,
amendment or repeal ceases to be effective and no subsequent resolution of the directors to make, amend
or repeal a by-law having substantially the same purpose or effect is effective until it is confirmed or
confirmed as amended by the shareholders.
- (5): A shareholder entitled to vote at an annual meeting of shareholders may, in accordance with section
137, make a proposal to make, amend or repeal a by-law.
Organization meeting
S. 104(1): After issue of the certificate of incorporation, a meeting of the directors of the corporation shall be held at
which the directors may: make bylaws, adopt forms of security certificates, authorize the issue of securities, appoint
officers, appoint auditor until the first annual meeting of SHs, make banking arrangements and transact other
business
Attendance at meeting
s. 110 (1): A director of a corporation is entitled to receive notice of and to attend and be heard at every meeting of
shareholders.
Meeting of Directors
s. 114 (1): Unless the articles or by-laws otherwise provide, the directors may meet at any place and on such notice
as the by-laws require.
Delegation
s. 115(1): Directors of a corporation may appoint from their number a managing director who is a resident Canadian
or a committee of directors and delegate to such managing director or committee any of the powers of the directors.
Resolution in lieu of meeting
s. 117(1): A resolution in writing, signed by all the directors entitled to vote on that resolution at a meeting of
directors or committee of directors, is as valid as if it had been passed at a meeting of directors or committee of
directors.
- (2): Filing resolution: A copy of every resolution referred to in subsection (1) shall be kept with the minutes
of the proceedings of the directors or committee of directors.
- (3): Evidence: Unless a ballot is demanded, an entry in the minutes of a meeting to the effect that the
chairperson of the meeting declared a resolution to be carried or defeated is, in the absence of evidence to
the contrary, proof of the fact without proof of the number or proportion of the votes recorded in favour of
or against the resolution.
34
Officers
s. 121(1): Subject to the articles, the by-laws or any unanimous shareholder agreement
- (a) the directors may designate the offices of the corporation, appoint as officers persons of full capacity,
specify their duties and delegate to them powers to manage the business and affairs of the corporation,
except powers to do anything referred to in subsection 115(3)
- (b) a director may be appointed to any office of the corporation; and
- (c) two or more offices of the corporation may be held by the same person
s. 189(1): Unless the articles or by-laws of or a unanimous shareholder agreement relating to a corporation
otherwise provide, the directors of a corporation may, without authorization of the shareholders
- (a) Borrow money on credit of corp
- (b) Issue, resell, sell, pledge or hypothecate debt obligations of the corporation
- (c) Give guarantee on behalf of corp. to secure performance of obligation
- (d) Mortgage, hypothecate, pledge or otherwise create a security interest in all or any property of the corp
s. 189(2): Notwithstanding subsection 115(3) and paragraph 121(a), unless the articles or by-laws of or a unanimous
shareholder agreement relating to a corporation otherwise provide, the directors may, by resolution, delegate the
powers referred to in subsection (1) to a director, a committee of directors or an officer.
Kelly v Electrical Construction Co
PG 206-208
FACTS: Directors passed bylaw about deposit of proxies, didn’t get it confirmed at next SH meeting- THF it
ceased to have force; several years later, SH purport to pass the same bylaw
ISSUE: Can a company’s SH purport to pass a bylaw that had been previously passed but not ratified
DECISION:
- A company’s SH cannot pass a bylaw that had been previously ungratified
- It became ineffective when it wasn’t ratified at next SH meeting
o The bylaw was never valid because it wasn’t confirmed
- SH lack authority to deal with proxy rules
Automatic Self Cleansing Filter Syndicate Co Ltd v Cuninghame
PG 208-210
FACTS: At a general meeting a resolution approving a sale was passed by a simple majority of SHs. The
directors were of opinion that the terms of the sale was not for benefit of company and they refused to
carry it out. Majority SH went to court to try to force them to carry out the wishes of the majority of the
SHs.
Issue: Where the directors bound to carry out the terms of the sale?
Court of Appeal: SH’s couldn’t compel management. The mandate couldn’t be altered under simple
majority. If SH wanted to alter powers of directors it had to be done by extraordinary resolution. Directors
are not the agents of majority SH, they are agents of all SH’s, including minority.
 CANNOT VARY THE MANDATE OF DIRECTORS THROUGH ORDINARY RESOLUTIONS
Hayes v Canada-Atlantic & Plant S.S. Co
Pgs 211-213
FACTS:
- 3 directors, 1 treasurer (Perry) who was also majority SH
35
-
The other 2 directors purport to remove Perry from office, appoint themselves and pay
themselves a lot of $
They set up exec. Committee of 2 and purported to ice Perry
ISSUE: Can these 2 directors set up special committee to try and remove a director?
DECISION:
Even though their provision said ”full power” it can’t be construed as having no limitation
- A delegation of powers is permitted but a board can’t delegate powers over EVERYTHING
- Court interpreted FULL powers as ordinary course of business
- It is intolerable to maintain that the words “full powers” in the provision for the appointment of
the executive committee, practically divested the directors of all their functions
- Even though the term that created the exec. Committee referred to “full powers of the board”,
these only referred to the ordinary business transactions of the company
- The board has residual responsibilities
Sherman & Ellis v Indiana Mutual Casualty
Pgs 214-215
FACTS: The board of directors outsourced the management of the company to the Plaintiff insurance
company for 20 years
ISSUE: What is the extent to which management may be vested in third parties?
COURT: The outsourcing of power wasn’t legitimate bc the board failed to retain residual control. Bc they
delegated it away for such a long time, court decided that the outsourcing had gone on for too long
- Nothing of importance was left for the directors
MAIN POINT  DECISIONS TO DELEGATE CAN’T FETTER THE BOARD. THE BOARD HAS TO RETAIN
RESIDUAL CONTROL OVER THE MANAGEMENT OF THE CORP AND THE DURATION OF THE DELEGATION
HAS TO BE CONSIDERED
Kennerson v Burbank Amusement
Pgs 215-216
FACTS: A business (single theatre) where the board purports to delegate essentially everything to one
person, subject only to requirement that that person sometimes report back to the board; basically
Kennerson given full control
RATIO: Board cannot completely delegate away – that is basically sterilizing the board
- Any such contract is void
- The requirements of period reports by Kennerson to the Board doesn’t constitute sufficient
retention of control over discretionary corporate policy to comply with the rule
- The Board may grant authority to act but cannot delegate its function to govern or K is void
“In asmuch as the directors must exercise and maintain control over corp affairs in good faith, they are
prohibited from delegating such control and management to others and any K so providing is void
Realty Acceptance Corp v Montgomery
Pgs 217-220
36
FACTS: Montgomery (P), seeks to recover from Realty, damages for breach of contract.
- R employed M as president
- Main breaches complained of: removal of M from presidency by the boards of directors and the
non payment of salary
- Defendant argued that M’s removal was carried out in strict conformity with the bylaws and that
the bylaws were valud and were part of the L
ISSUE: the relationship between the individual’s contractual rights and the company’s rights to amend or
repeal its bylaws/articles. Does the K prevail over the bylaws?
DECISION: The defendants beached the contract
- The K was not against public policy
- The K made by the defendant prevailed over the bylaws
o The court found that the contract was made by the directors who have power to amend
the bylaws of the corporation and they entered into contract that was inconsistent with
the bylaws. If they hadn’t wanted M to assume the presidency, they could have amended
the bylaws
Southern Foundries (1926) Ltd v Shirlaw
Pgs 220-223
FACTS: person appointed as managing director for a fixed term of 10 years, authorized in articles; new
board enters – initiates change to articles to get rid of Shirlaw (md) (SH must change)
ISSUE: does a director have rights as an employee separate and distinct from their rights pursuant to the
articles of incorporation?
DECISION: Amending the articles doesn’t relieve corp’s responsibilities as an employer
- Shirlaw was hired on 10 year K, the company had liability as employer to pay/compensate him
- You cannot change alter contracts or relieve contract liabilities by simply altering the articles
- You are accountable for the consequences of amending articles
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Shindler v Northern Raincoat Co
Pgs 223-224
FACTS: S sold the company to Loyds who pursuant to a power in the company’s articles appointed him the
managing director for 10 years. Loyds later sold company to Maudlebery Ltd who didn’t wish to employ S.
- S contended he was wrongfully dismissed
DECISION: Although the SH’s changed, the corporation was still bound by their contract with him
Cumulative and Class Voting for Directors
CBCA ss. 107, 109(2)
CB pgs 574-576
CBCA s. 107 – provides for cumulative voting and sets out detailed rules for how such voting is to be carried out –
“Where the aticles provide for cumulative voting”:
(a) the articles shall require a fixed number and not a minimum and maximum number of directors;
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(b) each shareholder entitled to vote at an election of directors has the right to cast a number of votes equal to the
number of votes attached to the shares held by the shareholder multiplied by the number of directors to be elected,
and may cast all of those votes in favour of one candidate or distribute them among the candidates in any manner;
(c) a separate vote of shareholders shall be taken with respect to each candidate nominated for director unless a
resolution is passed unanimously permitting two or more persons to be elected by a single resolution;
(d) if a shareholder has voted for more than one candidate without specifying the distribution of votes, the
shareholder is deemed to have distributed the votes equally among those candidates;
(e) if the number of candidates nominated for director exceeds the number of positions to be filled, the candidates
who receive the least number of votes shall be eliminated until the number of candidates remaining equals the
number of positions to be filled;
(f) each director ceases to hold office at the close of the first annual meeting of shareholders following the director’s
election;
(g) a director may be removed from office only if the number of votes cast in favour of the director’s removal is
greater than the product of the number of directors required by the articles and the number of votes cast against the
motion; and
(h) the number of directors required by the articles may be decreased only if the votes cast in favour of the motion to
decrease the number of directors is greater than the product of the number of directors required by the articles and
the number of votes cast against the motion.
CBCA s. 109(2): Where the holders of any class or series of shares of a corporation have an exclusive right to elect
one or more directors, a director so elected may only be removed by an ordinary resolution at a meeting of the
shareholders of that class or series.
SHAREHOLDERS
LEGAL RELATIONSHIP BETWEEN MANAGERS AND SHAREHOLDERS
CBCA ss. 102, 103, 146(2)-(5)
S. 102(1): Subject to any unanimous shareholder agreement, the directors shall manage, or supervise the
management of, the business and affairs of a corporation.
S. 103 (1): Unless the articles, by-laws or a unanimous shareholder agreement otherwise provide, the directors may,
by resolution, make, amend or repeal any by-laws that regulate the business or affairs of the corporation.
CBCA s. 146(2): If a person who is the beneficial owner of all the issued shares of a corporation makes a
written declaration that restricts in whole or in part the powers of the directors to manage, or supervise
the management of, the business and affairs of the corporation, the declaration is deemed to be a
unanimous shareholder agreement.
- (3) A purchaser or transferee of shares subject to a unanimous shareholder agreement is deemed
to be a party to the agreement.
- (4) If notice is not given to a purchaser or transferee of the existence of a unanimous shareholder
agreement, in the manner referred to in subsection 49(8) or otherwise, the purchaser or
transferee may, no later than 30 days after they become aware of the existence of the unanimous
shareholder agreement, rescind the transaction by which they acquired the shares.
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(5) To the extent that a unanimous shareholder agreement restricts the powers of the directors to
manage, or supervise the management of, the business and affairs of the corporation, parties to
the unanimous shareholder agreement who are given that power to manage or supervise the
management of the business and affairs of the corporation have all the rights, powers, duties and
liabilities of a director of the corporation, whether they arise under this Act or otherwise,
including any defences available to the directors, and the directors are relieved of their rights,
powers, duties and liabilities, including their liabilities under section 119, to the same extent.
 Unanimous SH Declaration – strips power from director and places it with the SHs (that includes
liabilities). If the SH wants to control the corporation and run the corporation- they do that through the
unanimous SH declaration:
- It must be in writing
- Can be done in part
- Still need to have a director but all activities are through SHs
CONTRACTARIAN
3 Main agency problems
- How do you impose discipline on management of a widely held corporation
- Directors/managers may use their authority to further their own interests at cost of the principals
o Directors managing company has control over operation of the business
- Controlling SHs: How do you ensure the controlling SH doesn’t exercise his/her control in manner
that benefits him disproportionately to other SHs?
o CSH can hire themselves as CEO and pay themselves whatever
o Can cause company to buy asset from himself at inflated price
There are market and legal tools to handle this potential conflict that managers may use their authority to
pursue their own interests at expense of principal
LEGAL TOOLS IN STATUTE TO REGULATE CORPORATE CONDUCT
You can restrain opportunism of managers by imposing ex post costs on managers through the statute.
- (1) Statute provides for that the SH’s have ability to determine who the board of directors are and
the board determines who the managers are
o They have opportunities to replace directors if they are frustrated with the current ones
- (2) Statute entitles SHs to vote on certain fundamental changes
- (3) Unanimous SH agreement – an opportunity for SHs to take control away from managers (and
have liabilities flow). Owners can have all rights and responsibilities of managers
VOTING RIGHTS
CBCA s. 1, ss. 24(3) & (4), 27, 140, 173, 176-186, 188, 189(3)-(9), 190(2)-(2.1), 210, 211
CB pgs 554-559
Ordinary Resolution: Resolution case by majority of SHs (more than 50%)
Special Resolution: A majority of not less than 2/3 of SH
CBCA s. 24: Sets out the rights attached to shraes
- (3) Default is, if there is only 1 class of shares, the rights of the holders will be equal in all respects
and includes:
o Right to vote, to receive dividends and right to receive remaining property of the corp at
dissolution
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(4) You can have more classes of shares, the rights in sub (3) shall be attached to at least 1 class of
shares. Those rights need to attached to one class of shares or another
CBCA s. 27: The articles may authorize that the issue of any class of shares can be done in one or more
series- You can have series of shares within the classes
CBCA s.140: Each share of a corporation entitles a shareholder to one vote at SH meetings (unless articles
provide otherwise)
- Section 140 is the default if you choose not to elect out of it, it is the basic assumption
There are 3 ways a manager could abuse their power:
(1) Managers could give themselves excessive compensation
(2) Could be paying insufficient attention to running the business
(3) They could choose less or more risky routes. Less risky might minimize the probability of financial
loss. Or they could choose more risky routes because it’s not their money
Two forms of statutory responses:
Form 1: The rights that mandatorily give shares the right to vote for certain activities: amalgamation (183),
sale of assets (189), continuance (188), dissolving corporation before it starts business (210), liquidation
and dissolution(211) and amending the articles to create class voting (176)
- Section 176) You give shares that didn’t have the right to vote, the right to vote
Form 2: Certain fundamental actions have to be approved by each classes of shares: amendment to
articles (176), amalgamations (184), sale of assets (189 only if triggering 176), dissolution, Section 210,
liquidation and dissolution
CBCA s. 173: Amendment of Articles
- This section discusses when you can amend the articles of a corporation
- It has to be done by special resolution because this is amending the constating documents
s. 173(1) Subject to section 176 and 177, the articles of a corporation may by special resolution be amended to:
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(a) change its name;
(b) change the province in which its registered office is situated;
(c) add, change or remove any restriction on the business or businesses that the corporation may carry on;
(d) change any maximum number of shares that the corporation is authorized to issue;
(e) create new classes of shares;
(f) reduce or increase its stated capital, if its stated capital is set out in the articles;
(g) change the designation of all or any of its shares, and add, change or remove any rights, privileges, restrictions and
conditions, including rights to accrued dividends, in respect of all or any of its shares, whether issued or unissued;
(h) change the shares of any class or series, whether issued or unissued, into a different number of shares of the same class
or series or into the same or a different number of shares of other classes or series;
(i) divide a class of shares, whether issued or unissued, into series and fix the number of shares in each series and the
rights, privileges, restrictions and conditions thereof;
(j) authorize the directors to divide any class of unissued shares into series and fix the number of shares in each series and
the rights, privileges, restrictions and conditions thereof;
(k) authorize the directors to change the rights, privileges, restrictions and conditions attached to unissued shares of any
series;
(l) revoke, diminish or enlarge any authority conferred under paragraphs (j) and (k);
(m) increase or decrease the number of directors or the minimum or maximum number of directors, subject to sections
107 and 112;
(n) add, change or remove restrictions on the issue, transfer or ownership of shares; or
(o) add, change or remove any other provision that is permitted by this Act to be set out in the articles.
CBCA s. 176 – Class Vote
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The holders of the shares of a class (unless the articles provide otherwise) are entitled to vote separately
as a class or a series on proposal to amend the articles
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(a) increase or decrease any maximum number of authorized shares of such class, or increase any maximum number of
authorized shares of a class having rights or privileges equal or superior to the shares of such class;
(b) effect an exchange, reclassification or cancellation of all or part of the shares of such class;
(c) add, change or remove the rights, privileges, restrictions or conditions attached to the shares of such class and, without
limiting the generality of the foregoing,
o (i) remove or change prejudicially rights to accrued dividends or rights to cumulative dividends,
o (ii) add, remove or change prejudicially redemption rights,
o (iii) reduce or remove a dividend preference or a liquidation preference, or
o (iv) add, remove or change prejudicially conversion privileges, options, voting, transfer or pre-emptive rights,
or rights to acquire securities of a corporation, or sinking fund provisions;
(d) increase the rights or privileges of any class of shares having rights or privileges equal or superior to the shares of such
class;
(e) create a new class of shares equal or superior to the shares of such class;
(f) make any class of shares having rights or privileges inferior to the shares of such class equal or superior to the shares
of such class;
(g) effect an exchange or create a right of exchange of all or part of the shares of another class into the shares of such
class; or
(h) constrain the issue, transfer or ownership of the shares of such class or change or remove such constraint.
s. 175(5): This applies whether or not a class or series otherwise carry the right to vote
S. 181 – Amalgamation
- Amalgamation is blending businesses: two or more corps come together and the end result is a
new corporation formed. The amalgamated corp is the end result corp
o All of the liabilities and responsibilities of the underlying corporations aren’t extinguished.
o The law basically says that whatever you had when you were separate, when you come
together, those things all travel and follow.
S. 182: Each corporation proposing to amalgamate shall enter into an agreement setting out the terms
and means of effecting the amalgamation
S. 183: The directors of each amalgamating corporation shall submit the amalgamation agreement for
approval of SHs
S. 184(1): A holding corporation and one or more of its subsidiary corporations may amalgamate and
continue as one corporation without complying with sections 182 and 183 if
- (a) the amalgamation is approved by a resolution of the directors of each amalgamating
corporation
- (a.1) all of the issued shares of each amalgamating subsidiary corporation are held by one or more
of the other amalgamating corporations
o  Vertical short form amalgamation (holding corp + subsidiary)
o A holding corporation and one of its subsidiaries may amalgamate without complying with
183/184 provisions if its approved by resolution with each of amalgamating corporations
 Has to be wholly owned
 And resolutions pro vide for, the shares of each amalgamating subsidiary will be
cancelled and the articles of amalgamating corporation conform to the articles of
the amalgamating holding (the buy guy)
 Basically, you eliminate subsidiaries and are left with amalgamated corporation
that looks like the original holding corporation. It’s efficient way of sweeping up
the subsidiaries without tax consequences
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s. 184(2): Two or more wholly-owned subsidiary corporations of the same holding body corporate may
amalgamate and continue as one corporation without complying with sections 182 and 183
o  Horizontal short form amalgamation (sister corporations)
o If you adopt sister one, you have to adopt all of either corporations bylaws or draft its
own
o The articles of amalgamation become the constating documents for the corporation
Note: The separate property of the amalgamating corporations becomes property of amalgamated
corporations. The amalgamated corporation has the liabilities of the amalgamating companies
S. 188: Process for amalgamation
- (4): Everyone participates in amalgamating vote
s. 189(3): Sale, lease of all assets and property of the corporation requires approval of all SHs
- A sale, lease or exchange of all or substantially all the property of a corporation other than in the
ordinary course of business of the corporation requires the approval of the shareholders in
accordance with subsections (4) to (8)
S. 210(1): Dissolving the company before commencing business – A corporation that hasn’t issued any
shares may be dissolved at any time by resolution of all the directors
- (2) A corporation that has no property and no liabilities may be dissolved by special resolution of
the shareholders or, where it has issued more than one class of shares, by special resolutions of
the holders of each class whether or not they are otherwise entitled to vote.
S. 211: Liquidation and Dissolution
- The directors may propose or a SH entitled to vote may make proposal for voluntary dissolution
and liquidation of corp
o (3) Protection for non voting SHS – when there is more than one class it requires a special
resolution of non-voting SHs
PRE-EMPTIVE RIGHTS
CBCA s. 28
CB pgs 561-569
S. 28: If the articles so provide, no shares of a class shall be issued unless the shares have first been offered
to the shareholders holding shares of that class, and those shareholders have a pre-emptive right to
acquire the offered shares in proportion to their holdings of the shares of that class, at such price and on
such terms as those shares are to be offered to others
- A corporation can alter
- This is an optional provision
Purpose of this: avoid dilution and impose some constraints on controlling SHs or boards from issuing
shares for improper purpose at improper values
- This right is only as good as each SH’s ability to pay
EQUALITY OF SHARES
All shares within a class MUST be equal
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Jacobsen v United Conso Oil & Gas Ltd
Pgs 561-569
FACTS: United was a public company and had a bylaw that restricted SH votes to 1000 regardless of how
many shares were owned.
ISSUE: Can the number of votes be restricted to a max regardless of the # of shares held?
DECISION: Cannot be restricted because all shares within a class (or series) MUST HAVE SAME VOTING
RIGHTS
- Voting entitlements can only be differential when there are different classes of shares
- The rights/entitlements of shares attach to the shares and not individuals that own them
Bowater Canadian Limited v R.L Crain and Craisec Ltd
Pg 569-579
FACTS: Craisec controlled Crain for 30 years with 10 vote shares that had a step-down provision (if the
shares were sold they became common shares). Bowater wants to acquire Crain (majority of votes) but
cannot do so unless Craisec allows. Bowater goes to court challenging validity of 10 vote shares- arguing
it’s unacceptable bc there shouldn’t be different voting rights based on who the holder is
DECISION:
- 10 vote shares are acceptable
- Step down provision is not acceptable – offends common law principle of equality of shares
within a class
OTHER SH RIGHTS
MEETINGS
CBCA ss. 132-136, 138-144
CB pgs 592-593, 629-638
SHs have voting rights over some fundamental matters like who directors will be. To exercise those voting
rights SHs need to be able to gather and express their concerns. Statutes govern SH meetings.
- Other tools available for SH’s when they feel the company is underperforming
o Includes power to requisition their own SH meeting (usually it’s directors that call SH
meeting)
o They also have ability to put forward their own proposals – matters they wish to be
discussed at the meeting (this is usually done by directors)
Bylaws contain procedural info and provisions regarding the holding and calling of meetings
- For public companies, securities legislation has its own layers of provisions
Definitions and General Notes on SH Meetings
Resolutions:
Resolutions are the way important business of a corporation is approved at a meeting of directors or
meeting of SHs. They are statements of proposed action or business which then get voted on. They might
be voted on by way of special or ordinary resolution depending on what the issue is.
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Business meetings can be conducted in 3 ways:
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A physical meeting
Electronic meetings
Written resolution signed by all of the SHs (or in case of directors resolution, all of the directors)
o Small companies often don’t have physical meetings but written resolution
Minutes:
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Minutes are a series of notes, usually compiled by secretary of a corporation which summarized
the business conducted at a physical meeting
Minutes must be signed by the chair of the meeting
They must be filed in the minute book of the corporation
Section 20(1)(b) of CBCA discusses minutes
Physical meeting gets recorded by minutes.
What is a minute book?
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The central corporate record’s book
Each corporation has one
Contains original articles, bylaws, SH register, director and officer register, written resolutions
passed by the corporation and some other things
The minute book often is maintained by the law firm that formed the company
MECHANICS OF SHAREHOLDER MEETINGS
A. Place (s. 132)
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Generally, meetings held in Canada
Can be held outside of Canada if the articles say so or if all the SHs agree to a place for a meeting
outside of Canada
If the bylaws of the corp. provide, meetings can also be held by electronic means
o Described in s. 132(5) as a telephonic, electronic or other communication facility that
permits all participants to communicate adequately with each other during the meeting
B. Annual meetings (s. 133(1))
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This requires SH meetings to be held at least once a year
First one must be held within 18 months of the incorporation date
And thereafter, within 15 months from the last annual meeting
Not more than 6 months after the end of the corporation’s financial year
S. 133(2) Directors may call SH special meeting at any time
S. 133(3) Corp may apply to court for order extending time to call annual meeting
Business that is mandatory to be transacted at an annual meeting (called ordinary business) is:
- (1) s. 106(3): The election of directors
- (2) s. 155(1): consideration of financial statements and
- (3) s. 162(1): appointment of auditors
o Only PUBLIC companies are required to have an auditor
o S. 163 For private companies SHs can dispense or waive the auditor requirement
 You’re either appointing the auditor or dispensing with the auditor
C) Special meetings (s. 133(2))
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Special business is anything that is not ordinary business.
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This is something important that might arise in between annual meetings like approving a
fundamental change or amalgamation.
D) Record date (section 134)
-
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The term record date refers to the date set by the directors or if the directors don’t set a date, the
default date as provided by section 134 for determining. For purposes of determining which SHs
are entitled to get notice of the meeting, vote at the meeting, receive a dividend, participate in
liquidation distribution or some other purpose
Section 43 of the regulation ties into section 134 and prescribes some outside dates for setting the
record date
The directors need to fix the record date not less than 21 days before the meeting and not more
than 60 days before the meeting
S. 134(3): unless the SHs waive this requirement, the record date must be advertised in a newspaper and
if it’s a public company the record date needs to be published on the stock exchange
E. NOTICE OF MEETING (S. 135)
Directors must send notice of time and place of each SH meeting to each SH entitled to vote at the
meeting, to each director and to the auditor
S. 135(6): provides that notice of a special meeting, for special business, the notice itself must state the
nature of the business in sufficient detail to allow a SH to make a reasoned judgment on whether or not to
vote on the resolution and the text of the resolution must be included as well.
F. WAIVER OF NOTICE (S. 136)
SH’s can waive notice and their actual attendance at a meeting is deemed to be waiver of the notice. By
attending the meeting, it means they got the notice.
For private, small, closely held corporations
G. QUORUM (s. 139)
Refers to number of SHs that have to actually attend the meeting either in person, or by proxy in order for
the meeting to be held.
- Unless the bylaws of the corporation provide otherwise, the default rule is that a quorum for a
meeting of SHs is the holders of a majority of the shares entitled to vote at the meeting
- It’s not a majority of SHs but a majority of shares
If there is no quorum at the beginning of the meeting, then the meeting needs to be adjourned. You can’t
transact business at a meeting where there is no quorum. However, if there’s quorum at the beginning
and someone leaves, you can continue. Quorum is needed throughout the whole of the meeting.
VOTING (s. 141)
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Unless the bylaws say otherwise, voting at a meeting of SH’s shall be by a show of hands, unless a
ballot is demanded by a SH
Voting by electronic means also provided for in the statute
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RESOLUTIONS IN LIEU OF THE MEETING (S. 142)
Section 142 allows SHs to dispense with the physical meeting and do all those matters normally required
to do at a meeting by way of unanimous written resolution.
- You need every SH to sign on to written resolution. This is most common in closely held company
context – it’s convenient, effective and inexpensive
SH REQUISITIONED MEETINGS (Section 143)
This is an important tool for SHs
- Normally directors call the meetings however there is a tool to allow SHs to requisition request
their own meeting to raise business the directors might be reluctant to raise themselves (like
replacing them for example or to consider takeover bid)
S. 143(1) allows SHs of not less than 5% of the shares carrying the right to vote may requisition the
directors to call a meeting of SHs. To do this they must:
- (1) SHs must prepare documents that state the business they want transacted at the meeting
- (2) Sign it
- (3) Send it to each director and to the registered office of the corporation
S. 143(3) – when the directors receive a proper requisition, they must call the meeting unless:
a) They’ve already set a record date for a notice of meeting (already a meeting coming up)
b) They’ve already given notice of an upcoming SH meeting
c) If the business of the meeting as stated in the requisition includes matters described in section
137(5) (b through e) the directors don’t have to call the meeting
- If the primary purpose of the meeting is to enforce a personal claim or grievance, if the
meeting business doesn’t significantly relate to the business or affairs of the corporation, if
the same matter was already brought up or failed, if requisition process is being abused to
secure publicity
If the directors don’t call the meeting within 21 days after receiving the requisition (and no exceptions
apply) then any SH who signed the requisition can call the meeting themselves (section 143(4))
- The cost of holding that meeting, is reimbursed by the corporation unless the SHs at the
meeting resolve otherwise (section 143.6)
- The default is that the corporation has to pay unless it’s decided that the SHs who
requisitioned the meeting should pay
Court ordered meeting (Section 144)
The court can order a meeting of SHs if its impractical to call the meeting within the timeframes required
by the act or if its impractical to conduct the meeting as required by the act and the bylaws or if the court
calls the meeting for any other reason.
- An application to the court to order a meeting of the SHs can be made by any director, any voting
SH or the director under the CBCA
- When the court orders a meeting it can set the rules for the meeting as it sees fit – gives the court
a lot of flexibility
Airline Industry Revitalization Co v Air Canada
FACTS: American Airlines wanted to acquire Canadian Pacific and Air Canada (but airlines cannot be
foreign owned); teamed up with Onyx (private equity firm in Canada) to establish Airline Industry
Revitalization Co (AirCo); competition legislation basically limits ability of airlines to discuss mergers –
Minister had given a 90 day window for this case – AirCo wanted to use this period; Air Canada
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immediately fixed record date for SH meeting, put it just outside 90 day window; after this, AirCo
requisitioned meeting so SH could vote on merger (fun change); Air Canada: record date set, 143(3)(a)
applies
ISSUE: whether or not Air Canada should be required to hold a meeting in response to the AirCo
requisition, and if so, when it should be held
DECISION:
As SH can call the meeting themselves when the corp does not (ex: they have their own remedy), the
court will not intervene to exercise discretion and call meeting); SH onus
- Court would not exercise jurisdiction under s 144(1), because AirCo could have called meeting
under s 143(4) instead of litigating – by judgment, too late
Telus Corporation v Mason Capital
FACTS:
One of Telus’s SHs was Mason and Telus was going to amend their articles but it was opposed by Mason.
Mason had hedged their interest in Telus so that they couldn’t lose. They had no economic stake anymore.
Mason had 20% of the votes (HUGE) but in reality, almost no economic stake in the company. Mason
trying to submit proposals and Telus challenging that.
The point is the concept of empty voting! This was a big point of Telus. They argued that Mason had no
economic interest and therefore, their 20% of votes doesn’t count and had no substance.
-
Empty voting- refers to situation where a SH’s voting power has become uncoupled with its
economic stake in the company.
COURT:
 There was no conclusion on this empty voting issue but the trial court was very critical of Mason’s
position and said that the practice of empty voting is a challenge to SH democracy. Your interests may
not align with the best interests of the company if you don’t have an economic stake in the company
PROXIES
A proxy is a stand in or substitute for a SH who can’t attend meeting in person
S. 147 – what is a proxy?
- A proxy is a form (piece of paper) signed by SH that appoints a proxy holder to attend and act
on the SH’s behalf at a SH meeting
- The form of proxy is dealt with in section 54 of the CBCA regulations and it refers you to a
section of securities policies
S. 148(1): Who can appoint a proxy?
- A shareholder entitled to vote at a meeting of shareholders may by means of a proxy appoint a
proxyholder or one or more alternate proxyholders who are not required to be shareholders, to
attend and act at the meeting in the manner and to the extent authorized by the proxy and with
the authority conferred by the proxy.
- (4) A SH can revoke a proxy
o (a) by depositing an instrument or act in writing
 (i) at the registered office of the corporation any time up to and on day preceding
the meeting
 (ii) with chairman of the meeting on day of meeting or
o (b) in any other manner permitted by law
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S. 152(2) – The rights of a proxy holder
- A proxyholder or an alternate proxyholder has the same rights as the shareholder by whom they
were appointed to speak at a meeting of shareholders in respect of any matter, to vote by way of
ballot at the meeting and, except where a proxyholder or an alternate proxyholder has conflicting
instructions from more than one shareholder, to vote at such a meeting in respect of any matter
by way of any show of hands.
S. 149 – Mandatory solicitation of proxies
- Essentially, for each SH meeting, management must solicit proxies from each SH entitled to vote
 Mandatory
- Unless the corporation is not a distributing corporation and the company has 50 or fewer SHs
- Soliciting proxy means – they mail the proxy form to each SH who is entitled to vote at the same
time they mail a notice of the meeting
o This is important because SH’s need the ability to participate in the meeting and the onus
is on management to give SH the opportunity to participate in the meeting. It’s a way of
protecting the SH democracy
The protection provided by the Act in section 150 is that anyone who solicits proxies (asks people to sign a
proxy and appoints them) must provide an information circular at the same time as sending the proxy
form.
- This is a fairly lengthy document designed to contain sufficient information to allow a SH to make
a decision on the business for which the proxy is being solicited
- A disclosure document
If management is soliciting the proxies it’s called a management proxy circular. If anyone other than
management is soliciting proxies it is called a dissonance proxy circular
- Circular must send to auditor
- Dissonance- sent to corporation itself
…If soliciting from 15 or less proxies or they convey their solicitation by public broadcast, speech or
publication
S. 154 – Misrepresentation in an information circular
Provides that where there’s an untrue statement of a material fact or an omission of a material fact that’s
needed to make the circular not misleading, then an interested person can apply to the court and the
court could make any order it sees fit like adjourning the meeting or ordering that the circular be
corrected.
BROWN V DUBIE
FACTS: SHs soliciting proxies by sending out a letter, stating that they had formed a committee, think
current management is bad, so soliciting proxies to turf out board; they were subject to both US and
Canadian (securities) laws, had complied with US
ISSUE: does this letter, indicating desire to turf the board, constitute a solicitation that must be bound by
CBCA requirements?
COURT: attempt to influence voting, therefore solicitation; complying with US not enough
- Does not comply with CBCA – complying with US law doesn’t give you a free pass
- This letter was attempt to influence how SHs vote in terms of electing directors and THF is
solicitation
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Two main things:
o Illegal proxy solicitation
o Won’t enjoin anything
CP RAIL LTD.
Had a SH and CP rail was profitable but underperforming. And in fall of 2011 Perching had discussions with
management to see if they could influence them and it got acrimonious and the discussions broke down.
In Jan 2012, CP Rail announced it’s annual meeting of SHs on May 17. So Perching filed a dissonant
information circular and started trying to solicit proxies to overthrow the board. CP rail filed its
management information circular to preserve it’s position and convince SHs to reelect them. Before the
meeting it was clear that Perching Capital had major support and was going to win. It’s nominees would be
replacing directors. Five of the directors decided to resign before the meeting
 Directors can recuse themselves
CBCA Part XIII
CB pgs 576-592
SH PROPOSALS
CBCA s.103(5), 137, 175
CB pgs 610-617, 618-619
NOTE:
Registered owner of shares:
- The person whose name is on the share certificate, in the SH register.
Beneficial owner of shares:
- Often same as registered owner. But there can be a situation of trust and the beneficial owner
doesn’t have name on the certificate but is entitled to all of the benefits of being a SH – has all of
the economic interest.
S. 103(5): A shareholder entitled to vote at an annual meeting of shareholders may, in accordance with
section 137, make a proposal to make, amend or repeal a by-law.
S. 137(1): a registered holder or beneficial owner of shares that are entitled to be voted at an annual
meeting of shareholders may
- (a) submit to the corporation notice of any matter that the person proposes to raise at the
meeting (a “proposal”); and
- (b) discuss at the meeting any matter in respect of which the person would have been entitled to
submit a proposal
s. 137(1.1) To be eligible to submit a proposal a person
- Must be a SH
- Can be either a registered holder of shares or benefical owner of shares
- Shares must be voting shares representing at least 1% of the total number of voting shares of the
corporation OR
- At least $2000 fair market value of the shares
- Have to have had the shares for 6 months prior to submitting the proposal
S. 175: Subject to subsection (2), a director or a shareholder who is entitled to vote at an annual meeting
of shareholders may, in accordance with section 137, make a proposal to amend the articles.
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Proposal and Proxy Circular
The proposal must be included in the proxy circular. The proposal can include a supporting statement of
up to 500 words.
- There is a higher threshold if the proposal relates to the election of directors. If the SH proposal
includes nominations for election of directors, then the proposal must be signed by SHs holding at
least 5% in the aggregate of the voting shares.
- This rule doesn’t preclude a SH making a proposal on the floor
There are a series of circumstances where management wouldn’t be required to include your proposal
in the management proxy circular. If you submit a proposal it must be included unless (exceptions):
- (1) Proposal must be submitted at least 90 days before the anniversary date of the previous year’s
notice of annual meeting
- (2) If the primary purpose of the proposal is to enforce a personal claim or redress a personal
grievance against the corporation or its directors, officers or security holders
o The SH meeting is not the proper forum for this
- (3) If proposal doesn’t relate in a significant way to the affairs of the corporation
- (4) If proposal submitted by someone who submitted another proposal in the previous 2 years
which was included in proxy circular (as required) but that person failed to appear and present
their proposal at that earlier meeting
- (5) If substantially the same proposal had been submitted in the past 5 years and didn’t receive
the minimum support specified in the regulations
o If substantially the same proposal brought forth in past 5 year, voted on in the meeting
and in regulation 51.1 – if it was only voted on once and didn’t get at least 3% of the vote,
you can’t bring it forward again. If its been through rounds twice and didn’t receive at
least 6% you can’t bring it forward again. If it’s been around 3 times and didn’t get at least
10% you can’t bring it around again.
- (6) If the proposal rules are being abused to secure publicity
o 35.1 – if proposal submitted by someone who had previously submitted another proposal
in connection with a meeting held within the last 2 years, if that person proposing failed
to hold the requisite number of shares continuously from date of submitting previous
proposal to date of the meeting
Corporation Refusal of Proposal
If the corporation refuses to include the proposal either because the SH doesn’t qualify or one of these
grounds is present, then it must give notice of its refusal with the reason(s) within 21 days after receipt of
the proposal. Or, under s. 137(7) corporation can ask for proof to verify the SH verification. If they ask for
proof, the 21 days begins after they receive the proof from the SH.
- Within 14 days after receiving a proposal the corporation can request the proof and the SH then
has 21 days to provide the proof
S. 137(8): On the application of a person submitting a proposal who claims to be aggrieved by a
corporation’s refusal under subsection (7), a court may restrain the holding of the meeting to which the
proposal is sought to be presented and make any further order it thinks fit.
s. 137(9): the corporation can also choose to apply to court to get ruling on whether they can properly
refuse a proposal or not.
There are other provisions of CBCA for proposals of more specific matters:
- (1) Bylaws: the normal process for bylaws (section 103(1) and (2)) is that they’re made by directors
and submitted to the SHs to be confirmed/rejected/amended. However section 103(5) allows SH
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entitled to vote at annual meeting to make a proposal to make/amend/appeal a bylaw. This
proposal would still need to comply with section 137 however.
(2) Amendments to the articles – section 175(1): This section gives a SH entitled to vote the right
to make a proposal to amend the articles of the corporation in accordance with section 137
(3) Dissolution (section 211(1)) – this section allows SHs entitled to vote to propose the voluntary
liquidation and dissolution of the corporation in accordance with section 137
SH Proposals for Bylaws- Even if the proposal is approved by majority of SHs it constitutes no more than
advice or recommendation to the board of directors, legally, But practically speaking, if a SH proposal is
voted on by overwhelming majority, the directors should heed it.
The Act isn’t clear but arguably, those proposals if passed by a certain number of SHs would be binding.
Articles proposals (section 135)- There is concept of dissent rights that implies that a SH proposal to
amend articles would be binding but it is not binding. Most people think it could be binding.
Dissolution s. 211(3): a corporation can liquidate or resolve by special resolution of SHs. So if proposal to
liquidate or dissolve was brought and approved by 2/3s of SH, then it would be binding. Most clear
Varity Corp v Jesuit Fathers of Upper Canada
FACTS: V was corporation that had investments in South Africa. The Jesuit Fathers were SHs of Verity and
sought to put forward a SH proposal to terminate Verity’s investments in South Africa. The proposal itself
began with a long preamble regarding apartheid – their objection was based on fact that SA had regime of
apartheid and didn’t want to support that regime. Verity refused to include the proposal on basis that it
was submitted primarily for a political cause – the abolition of apartheid.
COURT:
Court agreed with the corporation. The corporation was entitled to refuse to entertain the proposal
because it clearly appeared that the proposal was for a political purpose.
- The JF tried to argue that the proposal did relate to general abolition of apartheid but also of
specific goal to end Varity’s dealings in SA. But the court said, the PRIMARY purpose was political
Michaud v National Bank of Canada
Verdun v Toronto Dominion Bank
FACTS: V had a substantial stake in TD bank, he had 2000 shares but he was beneficial owner
only. His name wasn’t on the share certificate. He submitted a number of corporate governance
related proposals. He was an active shareholder, but the management refused to circulate the
proposals bc he was beneficial holder only and the statute required proposals to be brought only
by registered holders.
COURT: The courts agreed that the statute meant he wasn’t qualified to bring the proposal.
CONDUCT OF MEETINGS AND THE RIGHT OF DISCUSSION
CBCA s. 137(1)(b), 140-142
CB pgs 599-609
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CBCA 137(1)(b): Subject to subsections (1.1) and (1.2), a registered holder or beneficial owner of
shares that are entitled to be voted at an annual meeting of shareholders may (b) discuss at the
meeting any matter in respect of which the person would have been entitled to submit a proposal
Chair controls the proceedings. The bylaws specify who the chair of the SH meetings would be- usually
director or one of the senior officers.
First thing typically done at a SH meeting is to approve the minutes of the last meeting.
Even before approving the minutes, they would make sure that quaram was present- usually known ahead
of time. But it’s done as a formality and put on the record and stated.
At annual meeting they go through the ordinary business: (1) election of directors [directors may be reelected each year], (2) consideration of financial statements [those are presented to SHs and voted on to
approve them], (3) Appointment (or reappointment) of the auditors of the corporation – this is mandatory
for public company
Voting is typically done by a show of hands unless a ballot is specifically requested
Wall v London and Northern Assets Corp.
FACTS:
-
Resolution before the meeting to sell the assets of the company and there was some debate
People starting yelling at chairman to put it to the SHs to stop discussing the matter and vote
Vote was overwhelmingly for shutting down the discussion
One of the dissenters commenced action to declare that the resolution was invalid because
chairman didn’t allow adequate time for debate
DECISION: Court agreed that majority shouldn’t have shut down minority without properly hearing them
out but the chairman has right to terminate discussion where he determines in good faith that the right
of discussion is being abused
National Dwellings Society v Sykes
FACTS: None the SH’s approved the financial statements and the chair stormed out of the room even
though items on agenda hadn’t been dealt with. Remaining SHs elected a replacement chair and then
resolved to adjourn the meeting and they proceeded with business.
ISSUE: Can a chair arbitrarily terminate a meeting before all conduct has been dealt with
DECISION: NO
Court said it was okay for meeting to continue and replace the chair if the chair has improperly left. It’s the
duty of the chair to preserve order and to make sure that proceedings are conducted in a proper manner.
This doesn’t include the power to stop the meeting at the chair’s will before the business to be transacted
has been addressed. The chair acted improperly before storming out and they were okay to appoint
replacement and continue.
Blair v Consolidated Enfield Corp
-
Court said the proxy holder has discretion to vote as they saw fit just as if the SH was
there in person that’s because the SH didn’t say how to vote for on the form
o They could do what the SH could do as proxy
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Court commented on role of the chair and said, basically the duty of the chair is to act
honestly and fairly to all individual interests and to the best interests of the company
They also discussed the reliance on legal advice – did that absolve him?
o They held that relying on legal advice doesn’t automatically sanctify the conduct.
However, if you rely on legal advice that is reasonable and in good faith, that will
establish that you were acting honestly and fairly
 Here they found that this was sophisticated counsel and it was reasonable
for Blair to rely on their advice although the advice was wrong and the
votes for Price did carry
ACCESS TO CORPORATE RECORDS
CBCA s. 20-21, 263-266
CB pgs 637-639
S. 20(1): Refers to what records need to be kept: articles, bylaws, minutes, resolutions, securities register
 (2): Also requires that the corporation maintain minutes of directors meetings and accounting
records
S. 21(1): The SHs and creditors and directors have access to records in 20(1) but not 20(2)
 This highlights the separation that SHs aren’t owners, they just have interest in the corporation
SALE OR OTHER DISPOSITION OF SHARES
CBCA ss. 48, 49, 51(1), 60, 65(3), 66, 76(1), 78(1)
SHARE CERTIFICATE
- Share certificates are paper that are evidence of a person’s owner interest in a corporation
- Share certificate says how many shares, name of corporation, class of shares, the act under which
the corporation was formed/amalgamated (some reference to the CBCA)
S. 49(7): Lists those things that need to be on the share certificates
- (a) the name of the corporation
- (b) the words “Incorporated under the CBCA” or “subject to the CBCA)
- (c) the name of the person to whom it was issued
- (d) the name and class of shares and the designation of any series that the certificate represents
S. 49(13): There shall be stated legibly on a share certificate issued by a corporation that is authorized to
issue shares of more than one class or series
- (a) the rights, privileges, restrictions and conditions attached to the shares of each class and
series that exists when the share certificate is issued; or
- (b) that the class or series of shares that it represents has rights, privileges, restrictions or
conditions attached thereto and that the corporation will furnish a shareholder, on demand and
without charge, with a full copy of the text of
o (i) the rights, privileges, restrictions and conditions attached to each class authorized to
be issued and to each series in so far as the same have been fixed by the directors, and
o (ii) the authority of the directors to fix the rights, privileges, restrictions and conditions of
subsequent series
S. 49(8): Requires a share certificate to set out any restrictions there might be on the transfer for shares
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How do you effect an actual transfer/sale of shares?
There are two ways to convey shares in law
- (1) By endorsing the share certificate itself
o Similar to endorsing a check
- (2) To sign a separate document that assigns the transfer of the shares to another party
o s. 65(3)- An endorsement of a security in registered form is made when an appropriate
person signs, either on the security or on a separate document, an assignment or transfer
of the security or a power to assign or transfer it, or when the signature of an appropriate
person is written without more on the back of the security.
o s. 66: to complete the transfer, the share certificate needs to be delivered to the
purchaser
 An endorsement of a security whether special or in blank does not constitute a
transfer until delivery of the security on which it appears or, if the endorsement is
on a separate document, until delivery of both the security and that document.
o In practice, you can endorse the share certificate, it’s more common to go with the
separate document/instrument – the share transfer form (option 2). It is a notice to the
corporation and it’s preferred because that document gets filed in the minute book so it is
better for record keeping.
o S. 76(1) - once the endorsed certificate or transfer form are submitted to the corporation
with related info that the corporation may or may not ask for, then the corporation is
required to register the transfer on the securities register
 However, if the corporation has notice of an adverse claim on the shares, the
corp. has duty to inquire before registering the transfer. Cannot just ignore
adverse claim
 Adverse claim = claim that the transfer was wrongful
Title of the purchaser
- S. 60: on delivery of a security, the purchaser acquires the rights in the security that the transferor
had, except a purchaser party to fraud or who had notice of an adverse claim
- S. 60(2):
o If you are a buyer and are bonified and don’t know of other claims, you take that security
free from those adverse claims
o Even if someone had a claim, if you didn’t know about it, your title to those shares is not
tainted
o This is important because historically, the courts took position that purchasers took their
shares subject to the equity – your title is only as good as the person before you. One flaw
in the chain of title could screw over a purchaser down the road
Sale of Assets v. Sale of Shares
- Corporation owns assets, the SHs don’t own the assets – SHs own shares of the corp
- To sell shares, the transaction involves the SH entering into agreement with 3rd party and 3rd party
buys shares from SH with result that new buyer owns part of the corporation which still owns the
assets
- In sale of assets, seller would be the corporation – the K would be between the corp and the 3rd
party with the final result that the 3rd party would own the asets
RESTRICTIONS ON THE TRANSFER OF SHARES
CB pg 668-677
Differences between widely and closely held corporations:
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For public companies there are no restrictions on who can own those shares - they are traded on
the public market
For private companies, they almost always have restrictions on the transfer of shares so SHs can’t
sell to anybody
If there are restrictions on the transfer of shares, they need to be set out in the articles
Why restrictions?
o Need these restrictions to avoid unwanted business associates and to preserve the
interests of SHs
Smith & Fawcett Ltd
Facts: articles provide for directors to exercise absolute and uncontrolled discretion in approving or
refusing transfer of shares; here directors basically blackmailing vendor (executor of estate of SH who
died, and wanted to transfer his father’s 4001 shares to himself – directors refused to approve unless he
sold 2000 shares to x person at certain price)
Issue: can the directors use absolute and uncontrolled discretion to restrict share transfer?
Ratio: test: when something in articles gives directors discretion, the discretion must be exercised in the
best interests of the company, and not for an improper purpose
Reasons: On evidence, could not find collateral or improper purpose (case not made)
Case v Edmonton Country Club Ltd.
Facts: articles gave directors the power to control transfer of shares to decide who becomes member of
club; discretion to deny transfer if fees not paid (trial court: some discussion about whether this
contravened limited liability – W: prob should have made them membership rules); absolute discretion to
refuse a transfer
SCC: memberships in club – arbitrary power to control transfers of shares was fine unless demonstrate
evidence of bad faith (same standard, but different context)
 Dissent (Laskin): transfer restriction unreasonable (in effect, not decision: discrimination)
SHAREHOLDER AGREEMENTS
CBCA s. 146(1), (2) & (5)
CB pg 678, 683-692
-
Agreement between SHs to vote in a certain way
2 types of SH agreements
o Ordinary agreement: among some subset of SHs saying they will pool their shares and
vote for some SH manager – sometimes called pooling or voting agreement
 At common law this was fine but if you were a director and a SH and you entered
into a SHs agreement there was a risk that some parts of the agreement would be
invalid. If you were agreeing to vote a certain way on a matter that was essentially
in the purview of the directors.
 Directors cannot agree in advance to vote a certain way because it would be
fettering their discretion. They need to act in the best interests of the corporation
at that moment
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
o
But the CBCA and other statutes have clarified things by introducing concept of
unanimous SH agreement
Unanimous SH agreement
 S. 146 of CBCA
 This section says that if all SHs of a corp. sign an agreement that tries to remove or
restrict powers of the directors, that is okay (as long as unanimous)
 All SHs can enter into agreement that restricts power of directors and reallocates
those powers to SHs
 Liabilities go along with those powers
 In that situation, the fettering issue is resolved
 S 146(6) a SH would be acting as a director but its okay if they decide to do things
ahead of time
 Unanimous SH agreements form part of constating documents of a corporation
and are on par with articles and bylaws and directors are required to comply with
these agreements
 These are seen in closely held corporations
TYPICAL PROVISIONS IN SH AGREEMENT
- Often deal with management matters
- Shotgun provision
- Preemptive right: something that says the corporation can’t issue new shares to non SHs without
first giving SHs the opportunity to prescribe to those shares
Hard offer
Right of first refusal in SH agreement
Piggy back/tagalong rights: rights you can’t put into SH agreement. Most common when you have majority
SH
Drag along right- A is selling to E but E wants the whole company. But if there is a dragalong right, A can
force the others to sell to E
BE CLEAR WHO YOU ARE ACTING FOR
At common law, a regular SH agreement is fine
- Ringuet v Bergeron (seminal common law case)
- Motherall v Schoof
o If those agreements have directors fettering their discretion then they aren’t valid
TRANSLATING BUSINESS OBJECTIVES INTO A SH AGREEMENT
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Role of Professional Advisors
AUDITORS
CBCA ss. 20, 122, 123(4)-(5)
FINANCIAL DISCLOSURE, APPOINTMENT OF AUDITOR & ROLE OF AUDIT COMMITTEE
CBCA ss. 155-172
CB pgs 640-645, 646 (Note 2) – 653
CBCA s.20(2): In addition to the records described in subsection (1), a corporation shall prepare and
maintain adequate accounting records and records containing minutes of meetings and resolutions of the
directors and any committee thereof.
S. 122(1): Directors owe a duty of care to act honestly and in good faith for best interests of the
corporation and exercise the care, diligence that a reasonably cautious person would exercise in similar
circumstances
- Directors and officers must comply with the act and they cannot contract out of the liability and
duty to exercise care.
Courts have found that relying on personal advisors can relieve some responsibility. But it’s not clear who
is a personal advisor in each circumstance
S. 123(4): Director has complied with their duties (isn’t liable) under 122.2 if director exercise care,
diligence and skill that a reasonable prudent person would exercise. Including relying on financial
statements of auditor that fairly represent the financial condition of the corporation
- It’s fair to say that if you are a member of a profession and you present advice/findings to the
board, that report could be relied upon
- We expect directors to be prudent when relying on advice of professionals
S. 155- Annual financial statements
- At the end of the year every corporation has general meeting
- S. 155(1) – directors shall give SHs at end of every meeting financial statements, the report of
auditor and any more information of the operations required by bylaws, SH agreements etc…
o The directors commission the financial statement (s. 20)
o S. 157- addresses parent and subsidiary relationship
 If you are parent corporation with subsidiaries, the parent can keep the records of
subsidiaries in a consolidated statement that would reflect the accounts of the
subsidiaries and parent together
o S. 158 – the directors shall approve the financial statements and one or more of the
directors must sign the statements.
 This is holding the directors responsible
 Corporations shall not issue copies of the financial statements unless they are
approved and signed and have an auditor’s report accompanying those financial
statements
o S. 159 – corporation shall send a copy of the documents referred to in 155 (financial
statements, report of auditor and other requirements) within 21 days before a SH meeting
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
This is mechanism to prevent SHs from being blindsided, they need the
information in advance
Post Enron and such companies, to respond to the dangers that SHs face from rogue auditors and
accountants, there has been an introduction of law that has increased rigour and put more attention and
obligations and describes more who can participate in audit committees
Functions of auditor are to assess the financial statements that were commissioned by the directors (to be
put before the SHs). The auditor is an independent 3rd party. Auditor is to present their opinion on the
validty of the statements.
- They also report on the accuracy and reporting of the statements.
- They must state if the statements have been prepared in accordance with GAAP- S. 167 of CBCA
o Generally Accepted Accounting Principles (GAAP)
S. 247: duties of the auditors can be enforced by application to the court
S. 153: provides auditor with explanations and information required to make their reports on the financial
statements
- Directors shouldn’t restrict auditor’s ability to dig
S. 170: Auditor can demand information from directors/officers
- They have the right to attend the SH meetings and be heard on any matters that is of concern to
them
S. 172: Auditors have qualified privilege
s. 171(4): Auditor also has right to appear before any meeting of the audit committee and may be
required by the committee and auditor has right to call meeting (s. 171(5))
S. 161 provides that a person cannot be an auditor of the corporation if it is not independent of the
corporation or any of its affiliates
- They must be INDEPENDENT
- There is no such requirement for the accounts that prepare the financial statements however
- (4): A party who is interested may apply to the court for an order declaring that an auditor be
disqualified
S. 162(1): the SHs by ordinary resolution at an annual meeting appoint an auditor to hold office until the
next meeting
- Appointment of auditor is annual and only for a year
S. 162(4): the remuneration of auditor is fixed by the SH’s and if not SH’s then by directors
S. 167: If a corporation doesn’t have an auditor, court may on application of SH or Director, appoint and fix
remuneration of auditor until one is appointed by the SHS
S. 168: auditor’s entitled to receive notice of every SH meeting, and attend and be heard on matters
relating to their duty at company’s expense
- (2): If a director/SH gives written notice not less than 10 days to auditor, the auditor shall attend
the meeting
S. 169: an auditor shall make the examination that is necessary to be able to allow them to report…
- Auditors have positive obligation to decide what they need to do
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Under 169(2) an auditor may reasonably rely on report of an auditor or body corporate
S. 170(1): Present or former directors/officers or mandatories shall provide any information or
explanations that are necessary for auditor to make the examination required and those parties are
reasonably provide
- (3): A person who in good faith makes an oral or written communication under subsection (1) or
(2) is not liable in any civil proceeding arising from having made the communication
AUDIT COMMITTEE
Public corporations HAVE to have an audit committee. Some large private corporations will opt to have an
audit committee although it is not required.
- Some corporations will also have a governance committee
Audit Committee: Review the financial statements before they’re signed by the directors and presented to
SHs
S. 171: Sets out requirements of the audit committee – must be independent of the company
- (1): A corporation in sub 102 of CBCA (public), shall, and any other corporation must have 3
directors of the corporation (who aren’t employers/officers or affiliates)
- (2): Corporation can apply to dispense with audit committee if the corporation applies to the
Director. It will be approved if Director is satisfied that the SHs won’t be prejudiced
- (4): The auditor of a corporation is entitled to receive notice of every meeting of the audit
committee and, at the expense of the corporation, to attend and be heard thereat
If auditors have found a mistake, they must tell the directors. Then the directors need to prepare the
refined statements. If director/officer fails to comply they are guilty of a fine.
LIABILITY OF THE AUDITOR
Hercules Management v Ernst & Young
CB 747-750
FACTS: H is public company, has audit done by EY. H goes bankrupt and SHs sue EY claiming audits were
negligently prepared. Brought action in tort and contracts
ISSUE: Were the appellants owed a duty of care by EY?
DECISION:
 It was not foreseeable that SH would rely on the audit
 To establish liability, would need to establish that the individual claimant (each individual SH)
actually relied on the statement in making their decision, and that reliance was reasonable
 Purpose of audit is to assess and assist corporation in assuring integrity of management; not to
guide individual SHs
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DUTIES AND RESPONSIBILITIES OF CORPORATION MANAGERS
CBCA s.122(1): Every directors and officer of a corporation in exercising their powers and
discharging their duties shall:
 a) Act honestly and in good faith with view to the best interests of the corporation
 b) Exercise the care, diligence and skill that a reasonably prudent person would exercise in
comparable circumstances
Duty of Care for Directors and Officers
Common Law
(CB pgs 269-275)
Two broad types of duties for directors
 Fiduciary duty of loyalty: Directors need to act honestly, in good faith and in the best interests of
the corporation
 Duty of care: How much skill/diligence needs to go into a decision
In common law, the DOC was a pretty lax standard. If there was good faith it was pretty much impossible
to penalize a director for a bad decision. The standard was low and it was subjective. It depended on each
director’s particular skill or expertise level. This was shown in the Brazilian case and the City Equitable case
City Equitable Fire Insurance Co Ltd
FACTS:
- Case involved an insurance company that failed and an investigation revealed some bad
investments and more importantly that the managing director was stealing money from the
company and committing fraud
- The liquidator (who winds up the affairs of the corporation in an insolvency situation) took up
action against that director but also sued the other directors for breaching the duty of care –
failing to detect that the managing director had been diverting funds
- The court looked at the question – what degree of care is a corporate director expected to
exercise
COURT:
Court found 4 propositions:
o (1) Reasonable care – the degree of care is to be measured by the care an ordinary person
might be expected to take in circumstances of his own behalf
o (2) Degree of Skill – A director need not exhibit any degree of skill that may be reasonably
be expected of a person of that director’s knowledge and experience
 Held to what is reasonable given your business expertise and skill levels. What
would a reasonable person of your level have done?
o (3) Degree of Attention – how much attention does a director have to put into its duties
as a D
 D not expected to give continuous attention. Their duties are of intermittent
periods
o (4) Reliance on officers – court said for duties that might properly be left to someone else
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to do, a D is justified in trusting that that officer has performed their duties honestly
unless there are some grounds for suspicion
Court did find that some of the directors had been negligent and breached the common law duty
of care but the articles lowered the standards so they weren’t liable
Re Brazilian Rubber Plantations and Estates Ltd
FACTS: Four directors relied on a report for acquisition of a rubber plantation and the report overreported
the actual acreage of the plantation. This report was prepared by a party with an interest in the
transaction.
COURT: Court looked at standard of care and reiterated proposition 1 from city equitable – the care an
ordinary person might take in reasonable circumstances on his own behalf and the second proposition
(page 274)
Statutory Reform
S. 122(1)(b)
- Every director/officer of a corp, in exercising their powers shall
o Duty of loyalty
o Exercise the care, diligence and skill that a reasonably prudent person would exercise in
comparable circumstances
S. 122(2)
- A director/officer cannot contract out of the statutory duty of care
o Subject to 146.5 – no provision in a contract, articles, bylaws etc… relieved D from duty to
comply with this act or a liability for breach
Peoples Dept. Stores v Wise
FACTS:
- Wise buys shares of Peoples from Marks & Spencers. $5 million to be paid on closing with $17
million more to be paid over 8 years
- Peoples to be fully amalgamated with Wise AFTER the full amount fully paid
- 3 Wise bros are the main SHs, officers and directors – they become sole directors of Peoples
- Marks & Spencers initiate bankruptcy proceedings for Peoples and Wise but Peoples trustee files a
petition against the Wise brothers claiming the W brothers favoured the interests of Wise over
Peoples to the detriment of People’s creditors, in breach of their duties as directors under CBCA s.
122(1)
ISSUE: Do directors of a co. owe fiduciary duty to the corporation’s creditors in addition to the
corporation?
RATIO: Best interests of a corp. does NOT amount to favouring any particular group
COURT:
- Directors do not owe a fiduciary duty to creditors
- Creditor’s interests are contractual
- The standard is an objective standard
-  The court will look at the factual aspects of the circumstances surrounding the actions and
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decision. The words “in comparable circumstances” requires this context be taken into account
and doesn’t introduce a subjective element relating to the competence of the director
 Look at the surroundings but look at them objectively
The court said the director’s decisions were reasonable and didn’t find the directors to be in
breach
SCC clarified that the duty of care owed not only to the corporation but to others including
creditors. This is in contrast to duty of loyalty which is owed expressly to the corporation???
CBCA s. 118 – Sets out circumstances where a director might face personal liability
- (1): Directors of a corporation who vote for or consent to a resolution authorizing the issue of a
share under section 25 for a consideration other than money are jointly and severally, or solidarily,
liable to the corporation to make good any amount by which the consideration received is less than
the fair equivalent of the money that the corporation would have received if the share had been
issued for money on the date of the resolution.
o Failure to receive full payment for shares or issuing shares at an undervalue
o D’s determine whether or not to issue shares of the company (unless those powers have
been taken away by SHs) and shares must be issued for money, property or past services
o When corporation issues shares for property or past service, the directors have to figure
out the value and ensure that the value of the property or past services isn’t less than the
amount of money the corporation would have received if the shares had been issued for
money
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S. 118(6): A director who proves that the director did not know and could not reasonably have
known that the share was issued for a consideration less than the fair equivalent of the money that
the corporation would have received if the share had been issued for money is not liable under
subsection (1).
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S. 118(2): Lists things that directors can be liable for:
o Paying dividends
o Purchasing/redeeming shares of a corporation
o Things that the corporation are doing that the directors have authorized
 Example: corporations allowed to pay dividends (distribution of profits to SHs)
there is a solvency test that must be met before a corporation can pay dividends
(section 2 of CBCA), essentially directors can’t have corporation pay dividends if
there are reasonably grounds for believing that (1) the corporation is unable to
pay its liabilities as they become due, (2) if the realizable value of the
corporations’ assets would be less than the aggregate of its liability and stated
capital of all its classes – if the company has more debts than it has assets and
equity, you cannot funnel cash out of the company
Note: In Canada, there is not a rebuttable presumption that directors are acting in good faith. However,
there is in the US. Shown in the Goerkm case.
- Canada has adopted basic concept of BJR
- So, as a director if you allegedly breached your duty of care, you should show there was no bad
faith involved and you made a prudent, reasonably informed decision
- BJR can be used when director being personally sued
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Business Judgment Rule
Courts are reluctant to second guess the substantive merits of business decisions (the judgment calls that
directors make) because:
- (1) It’s incompatible with corporate governance – directors given power to manage affairs of the
corporation. It’s not for courts to scrutinize any decision the director makes. If the director is
incompetent, the SH’s should replace
- (2) If there was no margin for error for decision making, how would decisions ever be made.
Directors would become risk adverse or dissuade people from accepting board positions because
they’d be too scared of liability
- (3) Courts are ill suited or maybe even unqualified to second guess the application of business
expertise to a decision
- (4) Hindsight is 20/20 – it’s unfair to assess a business decision that was made in real time
o The BJ Rule was described in 1999 OCA decision in Maple Leaf Foods (quoted in the
People’s Case, para 65)
 The court looks to see that directors made a reasonable decision not a perfect
decision. Provided the decision was reasonable, the court won’t substitute that
decision over the board’s. Deference accorded to the board’s decision. This is
called the Business Judgment Rule
 (Para 67) SCC further commented: Directors won’t be held to be in breach of duty
of care if they act prudently and on a reasonably informed basis. The decisions
they make must be reasonable in light of all the circumstances that the D’s knew
or ought to have known.
Smith v Van Gorkom (Transunion) – US CASE
FACTS:
- The board was looking at whether to sell Transunion. CFO of T presented some rough calculations
to the board suggesting a share price of 50-60$ per share.
- V approached a potential buyer and negotiated price of 50$. The market price of T was 38$ so this
was a significant premium.
- Management considered the market price to undervalue the true value of the company.
- V presented the proposal at a meeting of the board. Board wasn’t given prior notice of the
purpose of the meeting and V gave 20 minute oral presentation and said that 50$ was in the fair
price range.
- A draft merger agreement was in process but not ready in time for review.
- The company’s lawyer said that an independent fairness evaluation wasn’t required by law and
they could be sued if they turned down the offer and it was in the best interest of the corporation.
- After 2 hours, the board approved the merger. Of the 10 directors, 5 were insiders and 5 were
outsiders but overall it was a well qualified board.
- Merger was challenged by SHs
ISSUE: Was the merger protected by the business judgment rule?
COURT:
- The directors did breach duty of care
o They approved the sale based on 20 min presentation with only 2 hours consideration
without any real crisis/emergency
o There was a time limit but board didn’t attempt to seek a time extension or even used the
full time
- Board didn’t inform themselves
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Directors held liable for damages
UPM-Kymmene Corp v UPM-Kymmene Miramichi Inc
FACTS: Board approved lucrative employment contract for new hire that had golden parachute that would
if in effect, would have bankrupted the co.
- Board made the decision w/in 30 mins, relied only on recommendation of compensation
committee that itself relied on opinion of the consultant that hadn’t been given full details
ISSUE: Did the directors breach duty of care in approving this employment K?
DECISION:
- Court said the BJ Rule only protected directors who are scrupulous in their deliberations and
show diligence in arriving at decisions.
- The rule can’t apply where the board acts on advice of a committee that makes an uniformed
recommendation. Just because the committee recommended it wasn’t enough.
- With minimum effort the D’s could have looked at the agreement and found it wasn’t in best
interest of company. THEY DID BREACH DUTY OF CARE
Brant Investment Ltd v Keeprite Inc
FACTS: Intercity Gas (ICG) a public co, owns 65% of KR (controls it), KR also has public SH; ICG has other
fully owned cos that are losing money – merges these two with KR; directors of KR try to satisfy
themselves that decision to merge company is in best interests of KR and other SH, too because CSH in
conflict of interest – so set up committee of independent directors (got financial advice, independent legal
advice, actually negotiated – required KR attributed value to be increased – which ICG does); minority SH
claim breach of duty
COURT: Court said D’s not required to consider every available alternative. As long as the decision was in a
range of reasonableness and reasonable alternatives. The fact that one of the alternative proposals would
have turned out better is irrelevant unless it was clearly and definitely available and more beneficial
 PROCESS IS GOOD! IF YOU CAN SHOW SUFFICIENT HAND WRINGING TO SHOW YOU ACTED
DILIGENTLY.
Director participation
Directors need to be active and attentive at board reasons. For 2 purposes:
- If they don’t participate actively they may not be able to use the business judgment rule
- A director absent from a meeting, the law may deem him to have acted one way or another:
o S. 123(1): a director present at a meeting is deemed to have consented to any resolution
passed at the meeting unless they file a formal dissent
o S. 123(4): if a director was absent at a meeting where a resolution was passed, he is
deemed to have been in favour unless he files a formal dissent
Key areas of personal liability are:
- Employment law
- Provincial Employment Standards Act
- Pensions
- EI, CPP, Income Tax (under employment law)
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Environmental (directors can be found liable for environmental damage caused by a
corporation)
Securities law (misrepresentation in prospectus or insider trading)
Liability to Employees for Unpaid wages
CBCA s. 119(1) & (2)
S. 119 – Employee Wages
- S. 119(1): Directors of a corporation are jointly and severally, or solidarily, liable to employees of
the corporation for all debts not exceeding six months wages payable to each such employee for
services performed for the corporation while they are such directors respectively.
- S. 119(2): Director won’t be liable for the 6 months wages unless:
o Corporation has been sued for the debt w/in 6 months after it has become due
o Employee won and judgment hasn’t been satisfied (the corp. doesn’t have the $ to pay
the wages)
- S. 119(3): A director isn’t liable if an EE sues the director after more than 2 years after the person
ceases to be a director
S. 119 refers to directors being liable for 6 months wages but remember s. 146(5) – if the powers of the
directors have been removed from the directors and vested in some SHs, then the intended liabilities also
pass to those SHs to whom those powers have vested in
Defences
CBCA ss. 123(5) & (4)
Two main defences: good faith reliance and reasonable diligence defence (s. 123(4))
Good faith s. 123(5)
- Director has complied with his duties under sub 122.1 if the director relied in good faith on
o a) Financial statements of the corporation - Written report of auditor of corporation
failing to reflect the status of the corporation
o b) Reliance on a report by a person who is a professional (lawyer)
Reasonable diligence s. 123(4)
- A director not liable under ss. 118 or 119 and has complied with duties under 122(2) if director
exercised care, diligence and skill that a reasonably prudent person would have exercised in
comparable situation if relied on financial statements or relied on report by professional
o This defence applies to 122(2) and section 118
o This defence encompasses the good faith reliance defence from 123.5
Other Liabilities Under Corporate Law Statutes
CBCA s. 118(1), (2), (6)
CB pg 306
Other Liabilities Under Regulatory Statutes
Key areas of personal liability are:
- Employment law
- Provincial employment standards Act
- Pensions
- EI, CPP, Income Tax
- Environmental
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Securities
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Directors and Managers
Indemnifying & Insuring Managers Against Liability
CBCA s. 124
CB pgs 335-340
How do we incentive people to actually want to be directors/officers? Directors have personal liabilities so
how do we get them to want to be directors
 Directors can be indemnified and/or
 Insurance to protect directors against certain risks
We have these two mechanisms to encourage responsible people to become directors so they can use
those tools to mitigate the fears of liability.
S. 124: A corporation may indemnify a director or officer of the corporation, a former director or officer of
the corporation or another individual who acts or acted at the corporation’s request as a director or
officer, or an individual acting in a similar capacity, of another entity, against all costs, charges and
expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by the
individual in respect of any civil, criminal, administrative, investigative or other proceeding in which the
individual is involved because of that association with the corporation or other entity.
- S. 124(3): A corporation may not indemnify an individual under subsection (1) unless the
individual:
o a) acted honestly and in good faith with a view to the best interests of the corporation, or,
as the case may be, to the best interests of the other entity for which the individual acted
as director or officer or in a similar capacity at the corporation’s request; and
o b) in the case of a criminal or administrative action or proceeding that is enforced by a
monetary penalty, the individual had reasonable grounds for believing that the
individual’s conduct was lawful.
- S. 124(5): Despite subsection (1), an individual referred to in that subsection is entitled to
indemnity from the corporation in respect of all costs, charges and expenses reasonably
incurred by the individual in connection with the defence of any civil, criminal,
administrative, investigative or other proceeding to which the individual is subject because of
the individual’s association with the corporation or other entity as described in subsection
(1), if the individual seeking indemnity:
o a) was not judged by the court or other competent authority to have committed any
fault or omitted to do anything that the individual ought to have done; and
o b) fulfills the conditions set out in subsection (3)
 There is mandatory indemnification 124(5) – obligation on corporation to
indemnify their officers in certain circumstances
 S. 124(3) - permissive indemnity
- S. 124(6): Corporation may purchase and maintain insurance for directors
Compensation
CBCA ss. 125, 120(5)
S. 125: subject to articles/blyaws/SH agreement, the directors of a corporation may fix the remuneration
of the directors/officers of the corporation
There is mechanism is section 120 – this section speaks to conflict of interest.
- 120(1) says that if there is a conflict they must make disclosure that there is a conflict.
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Section 120(5) – if you are making a disclosure then you shall not vote on any resolution that
o This is a mechanism where D’s can vote on their own compensation and won’t get caught
by conflict of interest provisions
Director of Many Corporations
CB pgs 384-391
London and Mashonaland Exploration Company Ltd v New Mashonaland Exploration
Company
-
Court held that unless it is set out in articles or you can prove that the director used info from
company to another, it was okay from one person to be the director of rival corporations
Abbey Glen Property corp v Stumborg
-
This case distinguishes the Mashonaland decision
The director would likely infringe its fiduciary duty when acting as director for two competing
corporation so it is better not to
Slate Ventures Inc v Hurley (1996)
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Court rejected the Mashonaland case
Sets out propositions:
o In absence of contract, a director has right to compete with the corporation but that right
could be displaced in evidence establishing an actual conflict and therefore a breach
Cranewood Financial Corp v Norisawa
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Determine if there was breach of fiduciary duty by determining if there is actual or potential
conflict of interest and whether that opportunity resulted from the director’s positions
Fiduciary duties: Conflicts of Interest
CBCA s.122(1)(a)
CB 341-352, 393-401
Common Law and Basic Self Dealing
(CB 352-357)
Basic self dealing:
- Selt dealing transactions involve contracts or transactions concluded netween the directors and
officers of a corp. either directly or through their interest in another entity, and the corporation
itself
o Danger is that insiders contracting with the corporation have strong incentive to cause the
corp. to enter into transactions on terms that favor the insider
- Although requiring directors to hold a direct stake in the corp. will dull the incentive to
appropriate wealth via self dealing, it will not eradicate it because when self dealing the loss will
most likely be offset by the gains
- Simplest form of self-dealing is the sale of an asset to the corporation by a director at a price that
exceeds the asset’s fair market value (or converse, the purchase of an asset from the corporation
at price below fair market value)
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Statutory Disclosure Requirements for Self-Dealing
CBCA s.120, CB pgs 353-357
- This section is legislative attempt to regulate contracts with directors/officers through a full
disclosure mechanism
- (1) A director or an officer of a corporation shall disclose to the corporation, in writing or by
requesting to have it entered in the minutes of meetings of directors or of meetings of committees
of directors, the nature and extent of any interest that he or she has in a material contract or
material transaction, whether made or proposed, with the corporation, if the director or officer
- (2) & (3): Timing of that disclosure
- (4): If a material contract/transaction wouldn’t require approval by SHs normally, a D or O
shall disclose the nature/extent of his interest in writing immediately after he becomes
aware of it
Corporate Opportunities and Director’s Self Interest
CB pgs 357-380
There may be opportunities that directors divert from the corporation for their own personal interest
Regal (Hastings) v Gulliver
FACTS:
Company owns one movie theatre and wants to lease 2 more (through subsidiary to limit liability).
landlord of the other two theatres wants one of two things from the subsidiary (which had nothing in
them): either 5000 pounds into the company that signs the lease (so substance in the company), or
personal guarantees of directors; parent company not in position to invest more than 2000 pounds so
directors put in another 3000 pounds personally, instead of giving personal guarantee; not ratified by SH;
same meeting: they sell Regal – net effect: for every pound they put in subsidiary, they get 3 back or
something; SH sued (remember, Regal could NOT afford to sign lease)
DECISION:
- Directors breached their fiduciary duty, the duty of loyalty
RATIO:
 DIRECTORS SHOULD NOT BE ABLE TO PROFIT FROM PROPERTY ACQUIRED BY REASON OF THEIR
RELATIONSHIP TO THE COMPANY AS DIRECTORS
Peso Silver Mines v Cropper
FACTS: This case narrows the scope of Regal
- Corp. where board rejected an offer to buy into company bc of limited funds; director of Peso
(Cropper) is also director for other company, Crossbow
- Crossbow bought into the opportunity and acquired the claim
- Control of Peso was bought over by Charter Oil and CO demanded that Cropper turn over his
shares in Crossbow because he profited from them only because he was director of Peso
- Cropper refused and CO commences action and dismisses him as managing director
ISSUE: Did the acquisition by Cropper constitute a breach of fiduciary duties
COURT:
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There was a fiduciary duty
But Cropper acted in good faith in both transactions and didn’t act to profit himself
KEY: he acquired the claim AFTER Peso decided not to pursue
He didn’t get the interest because he was director of Peso
 Acquiring knowledge in your capacity of director doesn’t preclude director from pursuing an
opportunity that the corp. refused
o As long as the first Corp rejected it, you won’t be precluded from taking the opportunity
Once a board rejects an offer for legitimate reasons, the corporation ceases to have an interest in
it so a director who was involved can later take the offer w/o breaching their duty of loyalty
Canadian Aero v O’Malley
FACTS:
- Two men, Pres and Exec VP of Canaero – which was in topical mapping business, were assigned by
Canaero to negotiate a new deal for mapping deposits with Indiana; two men resign from Canaero
and set up their own company, shortly after bidding for Indiana project (opportunity they had
become aware of as president and exec VP of Canaero
COURT: Clear breach of loyalty
- They were agents, not just employees. There was a fiduciary aspect.
- He was charged with this initiative and had these responsibilities so because he had this intricate
role he had duty to avoid conflict and self interest and that doesn’t end by resigning from the
corporation
- He had duty, he breached duty and as a director he was precluded from obtaining any property or
business opportunity from the company
 This distinguishes Peso because they found in that case that the interest in the property was passed on.
Here the company was pursuing the interest
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Shareholder Remedies
Derivate Actions
Allows SH in the name of and on behalf of a corporation to bring an action. It lets the SH step into the
shoes of the corporation for the purpose of making a law suit and claim. The cause of action is the
corporation’s cause of action – it’s not a wrong done to the SH but a wrong done to the corporation
Common Law: The Rule in Foss v Harbottle
CB 702-705
English Case involving corporation formed under a special statute. The directors (or some of the directors)
had sold properties that they owned to the corporation at an inflated price. The corporation financed this
which the directors caused by getting a bank loan and putting a mortgage on the land. The directors were
enriched and the corporation was in trouble. Some of the minority SHs tried to sue the directors. It was
held that they couldn’t and they weren’t proper plaintiffs since it was the company that was harmed and
not the SHs. This reiterates the Solomon principle.
Ratio:
(1) When there is a wrong done to the corporation, it’s the corporation that has to sue
(2) The decision to sue should have been done by the majority SHs. The majority SHs at a meeting
could resolve to have the corporation bring the suit
NOTE: Common law rule has been altered by the statutory derivative action
Northwest Transportation v Beebee
If your complaint is that the majority SH has done an improvident transaction with the corporation, the
majority gets to decide to sue!
Exceptions:
- (1) If the act constituted a fraud on the minority, then the minority might be allowed to bring an
action. But fraud was hard to prove
- (2) Where the impugned act was ultra vires the company
- (3) If the specific corporation statute gave a particular subset of SHs the right to determine a
matter
But the distinction between a personal wrong and the wrong to a corporation can be murky so minority
SHs had no power to address a wrong done by the majority of the board under the Foss v Harbottle case.
However, statute was created that overrode this so this is no longer the case.
Policy concerns governing the statute:
- Legislation trying to balance SH democracy and management accountability with proper
functioning of corporate governance (management of the company without SH interference)
o Balancing of costs and benefits and trying to make it easier for minority SHS to bring
derivate actions but trying to week out vexatious claims
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o
o
The legislators want to avoid vexatious claims and avoid SHs trying to usurp general
powers of directors and officers to manage the corporation
Also individual settlement risk that is concern behind this statute. It is the risk that one or
a few SH if they sue, and they sue in the name of the corporation, there is risk that the
directors might just settle personally and the SH will get more out of that and the director
may pay less than if the D had to pay the corporation
Free rider problem: since it costs so much to bring a lawsuit, a SH may hope someone else will bring an
action. So it is a deterrent from minority SHs to bring a derivate action.
Small stake problem: SHs might be reluctant to bring action because they have small interest so any
benefit will by minor to them so they don’t want to be the one incurring the cost
ALL OF THOSE ISSUES ARE INTENDED TO BE ADDRESSED BY THE STATUTORY PROVISIONS.
Statute
CBCA ss. 238-240, 242
CB pgs 706-707
S. 238 – Tells you who is allowed to get leave from court to bring derivative action. Term used is
“complainant”
- When a SH is applying to undertake a derivative action, you first need to get leave from the court
to bring the action on behalf of the corporation
- Term “complainant” means
o (a) Registered holder/beneficial owner (former or present), of a security of a corp. or any of
its affiliates
o (b) A director or an officer (present or former)
o (c) The director (capital director)
o (d) Any other person who, in court’s discretion, is a proper person to make application
under this part
S. 239(1) – Subject to section 239(2), a complainant may apply to a court for leave to bring an action in
name of and behalf of a corporation or any of its subsidiaries or intervene in an action, for purpose of
prosecuting, defending or discontinuing the action on behalf of the corporation
- Sub (2) no action may be brought unless court is satisfied that
o (a) Complainant has given notice to directors of corporation of complainant’s intention to
apply to the court for derivative action, no less than 14 days before bringing the action. If
the Ds of the corporation don’t defend the action then you are entitled to apply to the
court for leave
o (b) Complainant must be acting in good faith
o (c) It appears to be in the interests of the corporation that the action be brought,
defended or discontinued
S. 242(1) –states that SH approval of an alleged wrongdoing isn’t conclusive, but evidence of SH approval
may be taken into account by the court in making an order
S. 240 discusses the possible range of court orders
- Court may make any order it thinks fit including: (a) order authorizing the complainant to control
the conduct of the action, (b) order giving directions of the conduct of the action (c) order
directing that any
- (d) – court can order corporation to pay reasonable legal fees incurred by the complainant in
connection with the action
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242(3) and (4) – also touch on costs in context of derivate action
An applicant can get leave of court without getting majority SHs to bring the action or convince directors.
Weeding out vexatious claims
For protection against vexatious claims, the statute attempts to weed them out by:
(1) requiring leave from the court (2) requiring complainant to make some effort to get corporation to
bring the action (3) by requiring good faith
Settling/dismissing derivate action claim
Once you have leave to bring a derivative action, you need courts approval to settle or dismiss the action.
Courts will not be favorable to payout to one SH at expense of the corporation.
Judicial Interpretation
CB pgs 707-720
Re Northwest Forest Products Ltd
FACTS:
NW was corporation that owned 51% of the shares of Fraser Valley. FV had other SHs and NW had its SHs.
The business of FV was sold to another company at an alleged undervalue (below market value) and the
SHs of FV didn’t challenge it but approved it. But the SHs of NW didn’t like it and they petitioned NW to
vote against the sale of FV. The directors voted their shares for the transaction. The actual derivate action
wasn’t brought by SHs of FV but of NW and they wanted to bring a derivative action for NW on the
directors of NW for their agreement of the transaction.
COURT:
- Court did grant leave
- Main question was “was it in the interests of NW to allow the D action to proceed” :
- The application must adduce sufficient evidence which on the face of that evidence discloses that
it is so far as can be judged from the first disclosure in the interests of the company to pursue the
action
- It’s a prima facie type test – it must APPEAR to be in the interests- you just have to how enough
evidence that shows on it’s face that it’s enough
Re Marc-Jay Investments Inc and Levy
The applicant (Mark J) owned 12.9% of the shares of Levy Industries. Another company called Seaway that
owned a company called Premium. The board of directors of Levy and the BOD of Seaway were identical.
Levy purchased the shares of Premium from Seaway at an alleged inflated value. The SH’s of Levy were
upset and tried to bring a derivate action and applied to the court for leave.
When the court is looking at whether or not to grant leave, they can’t decide the whole case. It is a very
summary procedure. The court doesn’t have to try the action and the court will not deny leave because
on a weighing of the evidence available the court thinks it’s unlikely the action will succeed
Re Bellman and Western Approaches Ltd
Dispute among two groups of SHs each of whom had nominee directors. Court said it must be satisfied
that it appears to be in the interests of the corporation to bring the suit. It must be shown that an
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arguable case exist.
The Oppression Remedy
CBCA ss. 238, 241
The oppression remedy is another step in struggle to deal with corporate law. That historical struggle is to
balance fairness against the interest of businesses to do what they want to do.
Originally weight was in favour of minority rights. In partnerships, courts demanded unanimity for
changing anything of the partnership. This was translated into the corporate context.
- Courts moved a bit further and moved to concept of majority rule
The pendulum then swung far into majority rule. Then that was coupled with the rule of Foss v Harbottle
and the concept was that: if there’s a harm to the corporation, it’s only the corp. itself that can sue.
- Courts analogized that concept to SH rights concept
- The Foss case made sense if you had breach of contract
- Court then took that concept to the SH Rights area and said “if X breaches a contract and only
corporation can sue, the same principle should apply if D engages in self-dealing because that is a
harm to the corporation so only corp. ought to be able to sue
- Courts then added “if the conduct that you’re complaining about is capable of ratification by SHs,
then we’re not going to interfere because what good will it do us to interfere if the majority could
only come in and ratify whatever we complained us”
o This put minority SHs in a bind
 BC only company could complain about wrongs of directors and on top, there was
concept that if the conduct is capable of ratification, courts won’t hear you even if
you’re alleging fraud
 Basically meant that min. SHs had VERY limited rights
In 1945 Cohen committee brought up the Oppression Remedy to deal with this. They ended up bringing in
limited oppression remedy in 1945. There was another committee, the Jenkins committee that reiterated
what the Cohen committee said. In ON, there was a committee
- The fed gov. stepped up with the Dickerson committee and introduced an oppression remedy
- It was introduced into the CBCA in 1975 and in 1979 it was followed by the introduction into ON
There has been long standing reluctance of legislators to introduce Oppression Remedy. That concern of
how to balance fairness hasn’t changed.
Courts had to ask: what kind of conduct does this deal with?
WHAT DOES OPPRESSION MEAN?
- Conduct is oppressive, unfairly prejudicial or unfairly disregards something: this is routed in
concept of unfairness
Ferguson v Imax Systems Corp
CB pg 515-522
FACTS: Company formed initially by 3 couples. One of the couples goes through a messy divorce and the
husband is the directing mind of the company but he doesn’t want his former wife to have any benefit
from the company. She has shares in the company that the company cannot redeem or take back.
Husband goes to the other owners and tries to get all of the owners of class B shares will have their shares
redeemed and he will replace other SH’s shares with a different class of shares that will receive dividends.
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The wife goes to court, claims oppression and succeeds.
DECISION:
Court held that if you (SHs) are going to exercise a corporate power they still need to do so fairly. Court
tries to give fairness some content – you must exercise that power in good faith and in best interest of the
company.
 There has to be some sort of valid corporate purpose to what you are doing and excluding your ex
from dividends isn’t a valid corporate purpose.
Ebrahimi v Westbourne Galleries Ltd
CB pg 509-514
FACTS:
3 individuals who had formed a business as a corporation and one of those individuals was for some
reason no longer getting along with the others and the others then excluded him from the business,
removed him from management as a result of which he no longer enjoyed the profits of the business. The
majority justified their decision because the excluded person was interfering with the administration of
the business.
It focused on development of expectations and said: when you invest in a company you’re doing it on
more than the strength of what the bylaws/articles say. You’re doing it based on a whole bunch of either
explicit or implicit understandings between people. In this case there was nothing in writing that said that
SHs had the right to participate in management.
- Court found that people enter into these relationships based on unwritten understandings and
these unwritten understandings are worthy of protections and are called unwritten expectations
- “The foundation of it all lies in the words just and equitable…the courts may have sometimes been
too shy in giving those words force. The words are a recognition of the fact that a limited company
is more than a judicial entity. There is room for recognition that behind it are individuals with
rights/expectations/obligations which aren’t necessarily submerged in the company structure
COURT:
This case said that the best interests of the corporation are really irrelevant if someone has an expectation
or a quasi-contractual right. It’s often in the best interest of the company to breach a contract but the
corporation cannot walk away scott free but must pay damages.
- If a SH has this expectation and others think its in best interest of corporation to violate that
expectation, the corporation must compensate (often in form of share buy-out)
Court says that expectations are like a contract. They are a quasi-contractual claim
INTERESTS OF CORPORATION  DON’T TRUMP THE EXPECTATIONS (YOU HAVE TO GIVE
COMPENSATION)
- That concept found its way in Canadian and ON corporate law
Pente Investment Management Ltd v Schneider Corp
Adds concept now of reasonable expectations. The expectation can’t be something you have subjectively
there needs to be an objective basis for it before you can enforce it
Westfair Foods Ltd v Watt
This case is an example of the court dealing with expectations in a public company.
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-
The court struggles with concept of unfairness and how to deal with that
See page 777:
Court cites Peterson texts dealing with unfair prejudice and disregard and the court says: the author
contends that unfairly disregards implies that some disregarding is fair! I reject that… Court says that
unfair disregard/prejudice doesn’t mean that you can do out and disregard/prejudice
- But you have to be able to prejudice/disregard at sometime
Page 778- gives some examples of benchmarks for fairness
- Court discusses (para 1): we can’t allow judge to impose personal statutes of fairness
- Para 2 – we have to tie concept of fairness to values that have seemed to have gained wide
acceptance and we can look to other legal concepts and although they mightn’t be directly
applicable we can still get guidance because they reflect widely accepted values
- Court notes that in this case we have not an individual who has been targeted but an entire class
of shares that is in competition with another group of stakeholders in the company
FACTS:
- There were two different classes of shares, one of them having a $2 priority on dividends – then
the rest to both classes rateably (expectations here); company had longstanding policy of paying
dividends but decided to hold earnings back a lot to grow, do acquisitions, whatever – and board
decides to distribute everything out (in effect removing preference); class A says not fair, taking
away preference – they had indirect interest in co retaining earnings, this policy was inconsistent
with past conduct and reasonable ex
- Here the competition was common shares (that could get all the profit of the company) or the
oppressed party who were preference SHs and all they got were specific benefits.
COURT:
- Court says, they are entitled not to be disregarded
o Here, the Directors had disregarded the preferred SHs and did this by writing in the
financial statements, that the company in which these preferred SHs had shares, was a
wholly owned subsidiary of the parent and this was wrong because it wasn’t wholly
owned.
- Court finds that although the preferred SHs didn’t have right to keep the money in the bank, they
had been disregarded unfairly because the company ignored them and acted as if they didn’t
exist. This amounted to oppression for which the preferred SHs gained the right to be bought out.
Page 778: Court deals with another source of these expectations
- One deserving case of protecting expectations is when the company has nourished the hope of
the minority
- If you’re giving representations to someone (nourishing hope), that’s another source of
reasonable expectations on the part of the SHs
o  Nourishing hope = representations
Page 779: This test of reasonable expectations will always be helpful in cases where interests collide. If
you have a collision of interests between different SHs, expectations are always going to be helpful in
resolving that
-  WHERE INTERESTS COLLIDE

Principle: “one clear principle that emerges is that we regulate voluntary relationships by regard to the
expectations raised in the mind of a party by the word or deed of the other, and which the first party
ordinarily would realize it was encouraging by its words and deeds….’reasonable expectations’, or
expectations deserving of protection…all words and deeds of the parties are relevant to an assessment of
reasonable expectations, not necessarily only those consigned to paper and not necessarily only those made
when the relationship first arose.”
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Scottish Cooperative
Pg 525
In this case there was parent (Scottish Coop) and the parent wanted to get into the Rayon business at end
of WWII. They didn’t have experience in it so they found a guy with experience, Mayer. They asked him to
help him build their Rayon business and in exchange they would set up a subsidiary and give him shares in
that subsidiary and that sub will be the Rayon sub. After a few years, it’s a successful business but after a
few years rayon loses it’s importance. They find that they no longer need Mayer and don’t want to share
their profits with him. They decided to have the parent go into the rayon business and instead of
channeling the rayon business through the subsidiary, they will do it all through the parent. The subsidiary
would wither away and parent would take all the business so they wouldn’t have to share with Mayer
anymore.
COURT:
Lord Denning looks at the conduct of the directors (who were the same in both the parent and the sub)
- Page 527 – it’s clear that the directors couldn’t do their duty by both companies and they didn’t
do so. They put their duty to the parent above their duty to the sub in the sense that they did
nothing to defend the interests of the sub against the conduct of the parent.
- Directors of sub can’t sit by idly and let parent take opportunities. They had duty to defend
sub’s rights to the business.
- He says the directors though that as nominees of the parent, their first duties were to the parent.
Denning rejects that and says oppression could be passive (as well as aggressive) – failing to do
something
o As a director, you have duty to defend the sub. Can’t let parent just use the sub
o Directors have to try, cannot say that if they had tried it wouldn’t have done any good
 DIRECTORS OF SUB OWE DUTY TO SUB (EVEN IF THEY’RE DIRECTORS OF THE PARENT)
BCE Inc., Re,
BCE was a parent and sub situation. BCE was public company with public SHs and its wholly owned sub
was Bell. Bell generated all of the revenue (BCE was pure holding company with no business of its own).
All of its business was conducted through Bell. Bell had bondholders. BCE then was going to be taken over
by a leverage buy out.
Leverage buy-out: the person buying the company doesn’t actually have the money so they borrow money
and put all the debt into the company and use the company’s revenue to pay off the acquisition debt.
Here the debt, was going to be $32 billion. BCE had no means of paying this debt, the only revenue source
was Bell. So Bell had to give guarantee for this debt. The bond holders didn’t like that because they had
debt that was called investment grade debt. Investment Grade debt pays low interest because the theory
is that you have a financially strong company and there is little risk. Here the BHs were actually pension
funds so the problem was that as a result of this guarantee of this debt, the bonds were going to lose their
investment grade status. As a result of this transaction the value of these bonds fell by 20%. These BHs are
now forced to sell the bonds at a loss because they’re no longer allowed to sell them bc of regulatory
requirements.
A few years earlier, SCC came out with a ruling on case:
If you are a sub providing financial assistant to your parent, you have to ask yourself, is it in the interest of
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the sub to provide that financial assistance?
The directors of Bell and BCE are identical. The directors of Bell admitted on cross examination that when
they considered whether to give the guarantee, they didn’t consider the interests of Bell separate from
BCE because they viewed Bell and BCE as one of the same. They also admitted that in a takeover, they
didn’t consider Bell because they had overriding duty to the SHs. They believe they are allowed only to
think of the SHs and no one else. To do so is illegal.
- But remember in the People’s case: when you are providing financial assistant as a sub to parent,
you have to do so (look at best interests) from the perspective of the sub and not the parent.
At Court of Appeal:
- This is unfair and we will not allow it
- They focused on a few things:
o They focus on investments. Bell had said over the years they were committed to
investment grades ratings; they were focused on investment grades – this is what Bell said
to BHs
o The marketplace says that these statements are things that investors rely on and Bell is
making these statements with the design to give comfort
- COA found that Bell and BCE refused to talk to the BHs because if the directors did, they would be
ignoring their duty to act solely in the interest of SHs
- COA adopts analysis of Scottish Coop
o The board has more extensive duty- they have duty to consider all interest (PEOPLE v
WISE) and when you have a sub, you need to consider from their perspective
- Even though there was no bad faith, this was wrong and cannot proceed
SCC:
-
-
SCC in para 103: the evidence shows that the directors DID consider the interest of the debenture
holders as they sent letters to the board expressing their concern
One of the directors met with one of the BHs
It falls to directors of corporation to resolve conflicts between stakeholders
o When you have colliding interests you don’t resolve them by looking at the expectations
of the parties but by looking at the best interest of the corporation. If the directors think
it’s in best interest to defeat a reasonable expectation, they can do this
 This goes against Westfair and Ebrahimi
Concept of expectations: Court says, even if reasonable, not every unmet expectation gives rise
to an oppression claim. The section requires that the conduct complained of amount to
oppression or unfair disregard/prejudice. The court says you need to ask 2 questions:
o (1) Does the evidence support the reasonable expectation?
o (2) Does the evidence establish that the reasonable expectation was violated by conduct
falling in the terms oppression unfair prejudice/disregard
On its face this case seems to be rewriting oppression law
- Colliding interests not resolved on expectations but fairness
- But, this case has had little impact
o Often courts pair down the language
o Courts say that BCE doesn’t stand for proposition that a D may violate the reasonable
expectations of a party because he thinks its in the best interest of the corporation to do
so. They simply say, that is just not what BCE stands for
POINT OF BCE CASE
-
(1) Oppresion remedy and the test
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-
(2) Fiduciary duty- confirms the duty to treat individuals affected by corporate actions should be
treated fairly. Did directors have regard to the relevant considerations?
(3) The BJ Rule- there will be some deference accorded to the judgment of directors
5 Types of SH remedies:
(1) The Wallstreet rule:
If you don’t like what the company is doing you can sell your stock. If publicly traded company, you can
call your broker and sell it.
- However, there are limitations
o In private company setting there may not be a market for those shares
o There may be limitations on who you can sell your shares too
  this is most obvious remedy
(2) Derivative Actions:
- To extent that there is a harm to the corporation the corp can bring a derivative action arguing
that the rights have been contravened
(3) Oppression Remedy:
- This is relatively recent but it’s unlimited in scope
(4) Personal Rights
(5) Other Statutory Remedies
The main issue underlying SH remedies is whom the harm has been done to? Has it been done to SHs or
the corporation? Who the harm has been done to drives and determines the remedies available but
sometimes it’s not easy to distinguish where the harm flows.
Personal Actions
CB 729-753
Personal Rights: The issue here is: does the SH have the right to make a claim in his personal capacity?
- Few personal actions tend to be brought because you have to show a personal wrong done to SH
– you have to show that the harm done was specific to SHs in their capacity as SHs.
Advantage: can be brought as a class action (representing a whole class of SHs)
Key: You have to show that there is a separate and distinct claim raised for the wrong
Farnham v Fingold
Pg 736-741
FACTS:
Plaintiffs alleged that the directors (majority SHs) breached their F duty and received a control premium
on the sale of the shares. Ps brought personal action to undo the transaction. Sought damages against
defendants for conspiracy to injure Ps and other SHs
Court:
The claims aren’t personal actions but are actual derivative actions and the P’s were standing in the shoes
of the corporation, not in their individual capacities and that is how they should have done it- through
derivative action
If you are seeking relief for wrongs done to corporation, that will put you in derivative action category.
And derivate actions covered in statutes
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Goldex Mines Ltd v Revill
CB pgs 741-747
FACTS: Plaintiff was SH of Probe Mines and there was dispute among Probe Mines director. Plaintiff
alleged there was breach of duties by those directors and the majority SHs. P argued that there was
misleading information in the information circular.
ISSUE: where the acts of the Ds and majority SHS caused damage to SH and to the company, is the action
brought by that SH personal or derivative? – where is the line between personal and derivative
DECISION: a SH does have a right to a personal claim but they failed to plead that in their pleadings.
- Plaintiffs lost because the personal claim wasn’t pleaded in the court so court said they couldn’t
speak to that
What this case stands for:
Every wrong to company is indirectly a wrong to the SH but not every wrong to SH is a wrong to the
corporation.
- You have to be outside of wrong to corporation and bring a claim that is separate and distinct
- The harm done to the SH doesn’t have to be unique to that particular SH – could be more than
one or even a whole class of SHs
- It can’t just be because the corporation has been harmed
 YOU MUST SHOW: Injury to SH that wasn’t incidental to injury of corporation and you must specify if
you are pleading a personal action
Hercules Management Ltd. v Ernst & Young
FACTS: Claims made against EY for negligently preparing financial statements. The SHs argued that had
they had known the true situation they would have intervened and might have saved the corporation and
protected their investment.
ISSUE: Does the negligence of auditors in preparing the financial statements give rise to a personal claim?
Was there something separate and unique about the harm caused to the SHs from the corporation?
DECISION: NO
- The harm wasn’t unique to them!
- It doesn’t give rise to a personal claim
SH’s not entitled to bring personal actions where they are acting in managerial role in the interest of the
corporation
The bar is really high to bring a personal action
Rectification of Corporation Records
CBCA s. 243
CB pg 815
S. 243(1): if a person’s name wrongly entered or omitted from corporation records, a security holder or
any … person may apply to court for order that the records by rectified
- Policy reason: the security records of a corporation supposed to be accurate
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-
Procedure: Section 243 discusses the applicant has to give director notice and director is entitled
to appear and be heard
S. 243(3): allows court to make an order it wants like allowing records to be rectified, restraining meeting
to be held until the register is rectified
Compliance & Restraining Orders
CBCA s. 247
CB 808-814
S. 247: If a corporation or any director, officer, employee, agent or mandatary, auditor, trustee, receiver,
receiver-manager, sequestrator or liquidator of a corporation does not comply with this Act, the
regulations, articles or by-laws, or a unanimous shareholder agreement, a complainant or a creditor of the
corporation may, in addition to any other right they have, apply to a court for an order directing any such
person to comply with, or restraining any such person from acting in breach of, any provisions of this Act,
the regulations, articles or by-laws, or a unanimous shareholder agreement, and on such application the
court may so order and make any further order it thinks fit.
Goldhar v Quebec Manitou Mines
Issue: Can you use section 247 (compliance/restraining order) to deal with breaches of the duty of care?
Decision: No
- Restraining orders was only for simple mechanical decisions and should be used to deal with
summary decisions
Investigations
CBCA Part XIX
CB pg 816
There are powers under the CBCA for interested parties to ask court to appoint an inspector to conduct
some investigations and look into factual matters.
- A security holder (a SH, possibly a creditor) may apply either with or without notice to a court for
order directing investigation to be made of the corporation and any of its affiliated corporations
- S. 230 provides power of the courts – court may make any order it sees fit
- If an investigator is ordered, that person is the agent of the court and doesn’t act for the
complainant nor for the corporation
Winding Up
CBCA ss. 212-214
CB pgs 825-829
In context of SH remedies, the dissolution order is most drastic form of relief.
s. 212(1): Subject to subsections (2) and (3), the Director may
- (a) dissolve a corporation by issuing a certificate of dissolution under this section if the
corporation
o (i) has not commenced business within three years after the date shown in its certificate
of incorporation
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o
o
-
(ii) has not carried on its business for three consecutive years
(iii) is in default for a period of one year in sending to the Director any fee, notice or
document required by this Act, or
o (iv) does not have any directors or is in the situation described in subsection 109(4); or
(b) apply to a court for an order dissolving the corporation, in which case section 217 applies.
s. 212(2): The Director shall not dissolve a corporation under this section until the Director has
- (a) given one hundred and twenty days notice of the decision to dissolve the corporation to
the corporation and to each director thereof; and
- (b) published notice of that decision in a publication generally available to the public.
s. 212(4): The corporation ceases to exist on the date shown in the certificate of dissolution.
s. 213(1): The Director or any interested person may apply to a court for an order dissolving a
corporation if the corporation has
- (a) failed for two or more consecutive years to comply with the requirements of this Act with
respect to the holding of annual meetings of shareholders;
- (b) contravened subsection 16(2) or section 21, 157 or 159; or
- (c) procured any certificate under this Act by misrepresentation
s. 214(1): A court may order the liquidation and dissolution of a corporation or any of its affiliated
corporations on the application of a shareholder,
- (a) if the court is satisfied that in respect of a corporation or any of its affiliates
o (i) any act or omission of the corporation or any of its affiliates effects a result
o (ii) the business or affairs of the corporation or any of its affiliates are or have been
carried on or conducted in a manner, or
o (iii) the powers of the directors of the corporation or any of its affiliates are or have
been exercised in a manner
- that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any
security holder, creditor, director or officer; or
- (b) if the court is satisfied that
o (i) a unanimous shareholder agreement entitles a complaining shareholder to demand
dissolution of the corporation after the occurrence of a specified event and that event has
occurred, or
o (ii) it is just and equitable that the corporation should be liquidated and dissolved
Appraisal Remedy
Statutory Scheme
CBCA s. 190
CB 821-822
- An appraisal right is the right of a SH to require the company to purchase his shares at an
appraised price if the company takes certain triggering actions from which he dissents
- The right works as a device to reconcile the majority’s need to adjust to changing economic
conditions with the right of the members of the minority to refuse to participate in ventures
beyond their initial contemplation
o This right is intended to avoid the difficulties of trying to restrict an abuse of power
detrimental to minority SHs by the directors or by majority SHs where SH approval is
required
- S. 190: SHS can dissent if corp. resolves to:
o Add/change/remove ownership of shares
o Change to resolution
o Amalgamate
o Sell/lease all of property
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Determination of Fair Value
CB 823-825
Domglas Inc v Jarislowsky, Fraser & Co
-
Court discussed 4 different accepted and recognized approaches to the valuation of
corporate shares
(1) Using the market value, the quoted market price of each shares is used as basis of
valuation
(2) Assets approach – analyses the fair market value of the net assets of the corp. to
provide valuation of shares
(3) The earnings or investment value approach- uses the expected earnings of the
corp. to asses share value
(4) Combination of each of the other 3 approaches
Apportionment of Liability
CBCA Part XIX.1
- S 237
- Primarily put into statute regarding audit concern about liability (might be overblown – remember
Hercules and courts’ reluctance to impose liability based on reliance on financial statements)
- S 237(3) essentially provision allocating damages based on degree of responsibility for the loss
(amongst defendants, ex auditors only liable for their proportion of contribution)
- S 237.3(2) discretion – to the extent that you cannot collect against one of the defendants, you
can look to another
o (3) formula for re-allocation
o (4) cap! Maximum that can be reallocated is 50% (of the original) – so if person liable for
50% cannot pay it back, another defendant may owe the whole 50%
- None of this applies in fraud – where it is still joint and several for anyone engaging in the conduct
- S 237(5) joint and several liability (can only collect once, but against any of the defendants) for
certain things specified, up to a prescribed amount – ex: misleading financial statements and
misleading financial information
o Prescribed  regs s 95 - $20 000
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Control Transactions/Mergers & Acquisitions
Rationales and Techniques
TECHNIQUES
Asset Transaction
You can have an asset transaction where a corporation purchases some or all of another entity’s assets
- Asset transactions can be better for purchaser because they can pick and choose what assets they
want to buy
o There might be encumbrances over the corporation but they can take only the assets out
of the corporation
o Sometimes there are issues with regulatory stuff
Share transaction
- One corporation purchases all shares of another corporation
- In private companies you are negotiating with SHs of that company
- With public companies, it becomes somewhat of a takeover
- The bid can be made with cash or something else (like debt instruments)
- The bid can be full or partial – you can take enough shares to maintain control (like 90%) to
squeeze out the remainder of the SHs
Plan of arrangement
- Getting court approval for your plan
- When you have court approval you can do whatever you want, you don’t necessarily have to
comply with securities law
- Gives certainty of execution that doesn’t often happen with public takeover bids
- The challenge is, you are taking this to a court and asking for approval and its possible that court
could reject this and the other parties may allege oppressive conduct
Typically, the most common way to proceed with mergers and acquisitions are share transaction and
asset transaction
Rationale:
- You can eliminate costs by reducing staff and housing
- Diversification – you want to take advantage of business relationships
One example of a share transaction
- Used in BCE – Leverage Buyout (LBO):
- Teachers pension plan which was existing SH decided they wanted to buy BCE so they got a small company
and put a little equity in it. Teachers arranged financing from a variety of financers to launch a takeover bid
for BCE. If they acquired 2/3s of the shares they were going to amalgamate (the two separate corporations
would come together and the new corporation would have all assets/debts/liabilities of both). The teachers
company had many debts but BCE had assets, so by amalgamating they would have assets from BC
Securities law has many rules for takeover bids.
Basically the statutes define takeover bids as typically: where somebody (either existing SH or 3rd party)
comes in and wants to buy somewhere between 10-20% of the shares of the company. Because that’s
where they can get control enough (especially if the corporation is widely held). Once a bidder seeks to
buy up this 10-20% ownership take in the corporation, that makes bidder subject to prescribed rules.
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-
-
-
Professor: “Take-over bid” is generally defined in securities law as an offer to acquire voting securities
made to 1+ persons, if the securities subject to the offer + securities held by the offeror = 20% or more
of the outstanding securities of that class at the date of the offer = makes bidder subject to prescribed
rules
If get 90%+ shares of target (excluding bidder’s shares), then “squeeze-out” remaining SH
o Remaining SH paid same consideration paid for shares purchased under bid or SH can apply to
court for appraisal.
If less than 90% of shares are tendered to the bid –
o get between 66.67% and 90% of shares, then need a second-stage transaction or “goingprivate” transaction (e.g. amalgamation, arrangement, consolidation, etc.) requiring a SH to
surrender its shares
 need to provide information circular to SH, prepare independent valuation, approval
by the minority of SH
Two fundamental policy objectives in security rules:
(1) Make sure investors are able to make informed decisions. Make sure they have adequate
information and time to make that informed decision
(2) Make sure the bidder providing equal treatment to the shareholders (but in the US they permit
the bidder to pay a control premium to those SHs who have control)
What is a CONTROL PREMIUM?
Control premium: is the idea that a controlling interest is more valuable than just owning the minority
shares.
- The 20% interest is worth more than 5% because you can drive change, because your interests will
be more attended you.
- In the US somebody who wants to come in and buy a public company may pay more to the party
with higher percentage of shares
o This is not the case in Canada. We don’t allow control premiums to be paid. Payments
must be made equally – everyone gets paid based on their proportionate shareholdings
o Rationale: ensure that minority SHs have confidence in the market. Want to encourage
minority SHs
 If you offer premium, you need to offer it to everyone in Canada
o Counter-argument: that is the policy and courts interfering in private rights between
parties. SHs with greater holdings have taken on greater risk and should therefore benefit
more
 If they’re willing to stake more, they should get more of the game
 Idea that this shakes market confidence
EQUAL TREATMENT: Business law vs. Securities law
In corporate law the controlling SH has no duty to the minority SH. However, in security law, in the narrow
context of control premium the majority SHs not allowed to take premium from minority SHs
- Highlights a tension between corp. law & sec. law:
- In corp. law, controlling SH has no duty to minority SHs
- In sec. law, majority SH not allowed to take premium from minority SH
Take-Over Bids
CB 401-404
Generally between 10-20% but you want to look at the statute
There are 3 Major Components of Take Over Bid Rules:
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1) First component of TO bid rules: Equal treatment of all SHs – implemented through 3 mechanisms
o Control premium – shared among all SHS
o Coattail provisions - since TO bids are tied to classes of shares, create coattail provisions
so when a bid is made/accepted by a surperior voting class of shares, the inferior class
automatically converts to the superior class
o Equal payment just before and after bid –
 Prebid integration – must pay same price for any shares paid in past 90 days
 Postbid integration- if purchase within 60 days after – can’t pay more than did in
TO
o No collateral benefit – prevents methods to get around “no control premium” rule
2) Second component of TO bid rules: Heightened disclosure
o To extent that a bid is made to all SHs of a company, and all SHs can tender their shares,
but there is need to ensure that SHs have all info and aren’t coerced. They need to have
a lot of information to understand what they’re tendering their shares for and to. It’s a
very exhaustive disclosure.
 Idea that an insider would have an informational advantage so this heightens the
disclosure requirements
 When a bidder wants to make a TO bid, they need to make a disclosure circular.
The bidder needs to give SHs 35 days, which may also allow for other bids to
come in. If they want to amend bid, they need to give out an amended circular
and keep bid open for another 10 days after the variation. Need to put out
adequate disclosure so the SHs can be informed decision.
3) Third component of TO bid rules: Increased responsibility of target company’s board
- Board will have increased duties to the SHs to maximize the SH’s value
- It’s increased because there are inherent fiduciary duties
- They will be personally incented to refuse the TO and contrast that with their duty to act in the
best interest of the corporation
- Increased obligations /duties on target BOD to shareholders to maximize value because of the
inherent conflicts in fiduciary duty owed to corporation and self interest (to remain managers of
corporation) once “put into play”
- Respond to offering circular with management circular – comments on the deal either
recommending acceptance/rejection, wait or stay neutral
Two types of TOs – Friendly or Hostile
- In friendly transaction, the investors may have courted this transaction or they aren’t adverse to it
o The directors will probably write a management circular and explain why they negotiated
the deal
o There can still be divergence of interests
Takeover bids – a 3rd party or existing party tries to buy a majority of shares
- They may want to own enough just to drive the direction of the corporation or they may want to
own all shares
TO occurs mostly in securities context:
There are two goals of the TO bid rules
To ensure that SH’s when being asked to tender to a takeover bid are making an informed decision and
bidder is treating all of the SHs equally.
First bidder rarely wins – often just gets the auction going
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Friendly take-overs or white knights (second bidder) may negotiate some safeguards
- lock-up agreements with significant SHs to have those SHs agree to tender bid, even if better offer
comes along
- break fee payable to bidder: if bid fails, pay unsuccessful bidder $$ or certain assets = reward for
starting the auction
Board of Directors has duty to act in best interest of corpn – can’t compromise its duties with lock-up
agreements and break fees
- preserve ability to run auction; need flexibility to respond to better bids if come along
- once in auction, means to get the best price
Defensive Tactics and Role of BOD
CB 406-412
Board may adopt defensive tactics (pre-emptively or reactively) to discourage bidder
- Securities law: Once company put into play, duty of board is to get best price for SHs (NI 62-202)
- Corporate law: Can adopt defensive tactics, but only as far as defensive tactics used to acquire the
best price for bid
Poison Pill – target company attempts to make stock less attractive to bidder by diluting the
shareholdings of whoever triggered the rights plan; will be a barrier to anyone wants to acquire control
without backing of existing SH control group/management group
POLICY:
- Ensure all SH treated equally - avoids
o Two-Tier Bids – bids for sufficient amount at high price; and second tier are generally lower creates incentive for shareholders to be part of first bid
o Partial Bids – reduces public float, creating illiquidity - transforms partial bid to two tier bid
- Provide more time for BOD of target to create auction, find alternative to sale
o BUT regulators decisions suggest that once poison pill extended time to pursue alternatives,
pill has to go and commissions would intervene and cease trade the pill
Two types of Poison Pill
1. Rights Offering – when company wants to raise funds, can go to its SH and offer rights – e.g. the right
plus some amount of money will entitle SH to buy shares at any time in next ‘X’ months
o OK from securities perspective because treats all shareholders equally – existing can purchase
ratably to current ownership
o does public offering without diluting shares of current shareholders
2. Rights Plan – typically in place before a takeover bid comes in (in anticipation of hostile bid)
o Entitles shareholders except shareholder that triggers rights to acquire shares for a nominal
fee (i.e. a penny a share)
o Rights attached to existing shares notionally (so can’t be traded separately)
o Must be approved by a majority of SH within 6 mo of adoption by BOD or terminated
o What is the Trigger? – defined by directors; typically when someone acquires more than a
specified percentage (i.e. 20% - which is the threshold for takeover bids) of shares
o Can avoid tripping poison pill by making a permitted bid
 permitted bid: made to all SHs for all shares, without conditions; kept open for at
least 60 days; at least 50% of shares held by independent SH must be tendered; if get
50%, then get another 10 days for remaining SH
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Board's discretion to adopt defensive tactics – the summary, in broad strokes
1. Wide scope: Board has wide scope to decide what is in best interests of corp and can try
to frustrate a bid that is not in best interests (Teck v. Millar)
 Directors must act in good faith AND must be reasonable grounds for belief that
conduct was in corp.'s best interests
 Board not bound to follow majority SH and can favour a bid other than the one favoured
by controlling SH - Majority SH can always vote out board
2. Proportionality test: Defensive tactic must be proportional to the threat posed In assessing
threat, may have regard to identity & past behaviour of bidder (Unocal) *May not apply in
Canada
3. Business judgment: Board can exercise its reasonable business judgment even if not
rational (Schneider)
4. In play concept: Once the sale of the corp. becomes inevitable, must end using defensive tactics;
heightened duty to maximize value (Revlon) *May not apply in Canada
5. Long-term strategy: Existence of a long-terms strategy is enough reason to reject takeover bids,
even if lose out on short-term SH profit (Paramount)
AMERICAN CASES
The US cases are largely informed by emphasis on respecting the business judgment rule and managers
are best suited to make decisions about the company.
- To the extent that someone wants to challenge the decision of the board that person needs to
show that the decision was made with fraud, self-dealing etc…
- And the onus shifts to the management to show their decision was in best interest of the company
- This is onus shifting device
CHEFF
FACTS: There was a SH threatening to acquire control so the board decided to repurchase some shares at
a premium from the SH who threatened control. The other SH’s did not like this
DECISION:
- Court: the repurchase was permissible because it was proper exercise of control
- Director has BoP to show that they acted in good faith and here they showed there was danger to
corporate policy
- Directors satisfied the burden of proof and showed reasonable grounds to believe danger to
corporate policy and effectiveness and existence and good faith
- Will not be penalized for honest mistake of judgment if it appeared reasonable at the time
Unocal v Mesa Petroleum Co
CB pgs 435-439
FACTS: 3rd party made two tier offer to sHS
ISSUE: Did the Unical bard have the power and duty to oppose a TO threat it reasonably believed to be
harmful? If so, is its action entitled to protection under the business judgment rule?
DECISION:
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-
Trial- You cannot make different offers to different SHs (this is what a Canadian court would say)
Appeal – Business purposes were valid; selective exchange offer was reasonably related to the
threat posed
 Defensive tactics are legitimate as long as proportional to circumstances – can the board demonstrate
that it exercised due care and not conflicted
Revlon Inc v MacAndrews & Forbes Holdings Inc.
CB pgs 439-446
 This case modified the Unocal decision
FACTS: This was a leveraged buyout (they set up special purpose corporation and got it to borrow money
to launch TO bid for another corporation) they merged the companies together and PP launched TO bid
for Revlon. R resisted through a number of defensive actions (tendering for their own debt) and they
ended up locking themselves up with a private entity firm (a white-knight bidder) to help fend off the TO
bid.
ISSUE: What is the board’s duty when it’s inevitable that there will be a sale of the company?
DECISION:
- The duty is to obtain the best possible price
- The board started offering unconditional rights and reducing the assets of the company. That
demonstrated that the board was willing to break up the company
- The court applied the proportionality test that was applied in Unicall and court found the board’s
actions were in best interests of the corporation but when it became apparent that the company
would be sold the board would need to shift its focus from searching for other bidders to
obtaining the best price
o Once it becomes inevitable your roles switches from being defensive to getting best price
Paramount Communications v QVC Network Inc
FACTS: Bidding contest for QBC networks. Q defended themselves and said they had long term plan that
they didn’t want to abandon. QBC said that the long term plan was in best interests of SH and they said no
to the bid and refused to do anything to find alternate bids.
ISSUE: Can a company just say no to a bid?
DECISION: Yes – if they have not put the corporation into play (by finding other bidders) and shows a long
term plan they can reject a bid
Enhanced Scrutiny Test
- The court will take a more direct and active role in scrutinizing actions taken by directors to ensure
their course of action is reasonable in 2 circumstances
o Where corporation itself initiates active bidding process to sell itself or effect a business
reorganization involving break up of company
o Where corporation adopts defensive measures in response to bid for control
Canadian Framework
Teck Corp Ltd v Miller
CB pgs 427-435
ISSUE: What is the duty of the target Board of Directors in response to a hostile takeover bid?
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DECISION: Despite protests from controllings SHs, BOD had exercised their duties properly
 Absent a finding of good faith or conflict of interest, the court won’t question the judgment of the BOD
Pente Investment Management v Schneider Corp
CB pgs 450-461
FACTS:
Maple leaf made bid for Schneider, the family rejected the bid but indicated they would be open to
appropriate bids (the SHs did). They prepared to tender to Smithfield although that bid was for less price.
They did this on basis that Smithfield would be a better Steward for the company. The family was
concerned for the welfare of their suppliers, employees and customers and were concerned that M
wouldn’t preserve these things but Smithfield would.
In 1987 there was Canadian Tire decision that described coattail provisions and the S family created
coattail provision that was a right to convert non voting shares into voting shares. That gave all shares
right to turn into voting shares in event of TO bid. Gave them a right to invoke this in event of TO bid. ML
(one of the minority SHs) brought oppression action saying that minority SHs were violated by allowing
the lower bid.
ISSUE: Should management be allowed to negotiate with a bidder? Was there a duty to conduct an
auction of the shares of Schneider by the company’s Board?
DECISION: Management can tender with whatever bidder it wants and board acted properly in accepting
the second best offer. Board didn’t need to take higher dollar offer. Controlling SH doesn’t have obligation
to sell. Board had to find deal that controlling SHs would accept (or deal wouldn’t have been successful).
- They referred to Paramount in terms of recognizing what the best value is: this is a flexible
standard that recognizes that particular circumstances are available in determining the best deal
and non monetary considerations are acceptable
- Sole driving factor isn’t the monetary deal
- The family did do a market canvass to see who else would be out there to put a satisfactory bid
but that didn’t mean the family agreed to share their stake so the sale wasn’t inevitable and there
was no obligation to sell and no reasonable expectation on minority SHs that the board was going
to hold an auction
o The sale was always conditional before they would tender their shares
o The company wasn’t in play, there wasn’t reasonable expectation that the board would
hold an auction
Controlling SH is under no obligation to sell when the company searches for bids (step away from Revlon).
The majority SHs don’t owe duty of care to minority SHs.
Duties Owed by Controlling Shareholders
Background
CB pgs 495-504
Brant v KeepRite
BC pgs 505-508
Duties Owed Under Oppression Remedy
CB pgs 508-529
Ebrahimi v Westbourne
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Ferguson v Imax
Scottish Cooperative Wholesale v Meyer
Brant v KeepRite
Role of Security Regulators
CB 536-542
Commentary
CB 542-547
Corporate Stakeholders and Corporate Social Responsibility
Responsibility to Stakeholders
CB pgs 231-232, 237-267
Corporate social – extent to which directors should have regards to non-shareholders when making
decisions in the best interest of the corporation
- One of the biggest debates in that discussion is do we think of SHs as owners or are they just
someone with interest akin to ownership? Who is responsible for corporation actions?
- There is a traditional view – a business is a business- best interest of corporation is maximizing
profit and other laws protect other areas (employment law)
- This is adopted in the Ford decision
- Prof says it’s generally accepted by corporate law but the tide is turning
TRADITIONAL APPROACH
- Rationale: assures accountability and provides a measure because profit maximization is
quantifiable
- It ensures accountability bc if you focus on one thing, you’re likely to get it right
o Corporations aren’t experts in wealth distribution
o Corporations best at generating profits
Critiques:
- Other side of spectrum say corporations have duties to society at large
- They need to act and consider society and communities that they operate in
- Even if someone costs more but reduces cost of the injury, that would be good business logic
- The corporation should respond to non SH interest by expanding purposes of the corporation
- Perhaps they should include non SHs in decision making processes
- They should impost limits on limited liability that SHs enjoy and expand their roles
- The idea is to subject corporations to public governance, expanding SH responsibilities, putting
aside some positions on the board for non SHs (even if they’re not voting, they can be a part of
the discussion), also changing voting rights to make one vote available to one SH (so its not based
on votes/share)
o These arguments met with counterpoints
o Imposing limits on liability, may need legislative support
o Stakeholder representation – who would actually be able to sit at the board?
o Changing voting patterns – this denies SH rights and would require change in law that
would be driven by policy
Corporations should look at putting money back in the community, enforcing infrastructure
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Dodge v Ford Motor Company
FACTS:
Ford increased the stock capital and dividends and directors were declaring cash dividends of 60% per
year and occasionally declared special cash dividends. After 1916 Ford wanted to reduce the price of cars
because he wanted to bring cars to more people, expand the assembly line and keep people employed. He
had many non-profit motives. 2 minority stockholders, the Dodge brothers, brought suit to compel Ford to
declare additional dividend of more than 75% of profit.
ISSUES: Should management be concerned with interests outside of the concerns of SH
DECISION: NO, should be concerned with best interest of SHs
- The plan to reduce price of cars and expand the assembly line didn’t speak to creating a more
profitable business
- It would have diminished the value of the shares and reduced returns to SHs
RATIO: It wasn’t within the powers of board of directors to shake the corporation for the primary purpose
of benefitting others. Primary purpose should be to SHs
- Primary focus has to be SHs
Extra notes: this was a private company
- There is some argument that this case shouldn’t be held up for the profit motive above all else
- Result: Ford bought out the Dodge brothers and did declare a dividend (not as big as they wanted)
 Best interest of corporation are best interest of the SHS
Parke v Daily News UK case
CB pg 237
FACTS:
Facts: Newspaper co not profitable, so board shuts down and sells all of assets; paid off all obligations, and
used surplus to pay employees what was, in effect, severance, even though there was no contractual
obligation to do such; SH get nothing, minority SH sues
Note: There was no contractual obligation to pay the money to the SHs
ISSUE: Did the board breach their duty to act in the best interests of the corp by giving the surplus to
employees, rather than SH? Can directors choose to distribute money to EEs and not SHs?
DECISION: NO
- Breached duty to act in best interests of corp because disregarded SH to confer benefit (not
entitlement) on employees; best interests of corp = best interests of SH
- Management owes primary duty to SHs and shouldn’t be primarily interested in interests of other
stakeholders
- Court looks at test from Lee, Barons and Co Ltd to decide whether or not the decision was validly
taken:
o Is the transaction reasonably incidental to the carrying on the business
o Is it a bonified transaction?
o Is it done for benefit of and to promote the company?
- Court looks at test from Lee, Barons and Co Ltd to decide whether or not the decision was validly
taken:
o Is the transaction reasonably incidental to the carrying on the business
o Is it a bonified transaction?
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o Is it done for benefit of and to promote the company?
Miles v Sydney Meat Preserving Company (AUS)
Company started out as not for profit and the articles said that they were supposed to set aside an
amount and clear profits were to be paid to SHs for dividends but some money was allowed to be set
aside for other things. Company never paid dividends and it had a settled agreement signed by majority
SHs (this could be the distinguishing factor from the other cases) that the SHs didn’t complain about. The
settled policy was that the amount, instead of being paid to SHs. Minority SH complained
Issue: Can business be carried on for other than profit
Decision:
- Yes
- There was no contractual duty for them to have to pay out the dividends
- The court said they wouldn’t step in and interfere with business judgment
Teck v Miller
-
It’s important to appreciate that there was mention toward considering stakeholder as
well as SH interest
It would be a breach of their duty for directors to disregard SHs but you are allowed to
show decent respect for interests of other stakeholders with an interest in the company
CN Rails*
Does CNR have responsibility to communities?
- No responsibilities to communities unless the law specifically sets that out
Commentary: we can change the law and make laws that require them to consider the impact on the
community
- But absent specific requirements that doesn’t impose duties on D’s to look after anybody but SHs
Note: certain US states and South Africa have introduced amendments to statutes – to address a whole in
the corporate law. Idea there is that, it overrides corporate law and allows corporations to consider
interests of non SHs in making decisions. But most of the statutes in the States are permissive and not
mandatory so it’s just opening the door.
In Canada, there is debate as to whether we should be broadening the CBCA to allow for taking into
account non SH interests. In 2001, it was recommended not to make that change. From Tech v Miller,
people thought that the law would evolve but it’s only recently that the discussion has picked up.
- In the UK, it requires directors to take into account other interests and in South Africa as well
Wise v People’s Department Stores
Insolvency case
FACTS:
- Wise department stores acquired Peoples. W paid part in cash and part in IOU. Wise wanted to
merge the two companies (Wise is owned by 3 brothers) because there were a lot of synergies to
realize. But that required that the debt would have to be paid before the companies could be
merged so they ran the two as separate companies. In order to realize the synergies they set out
inventory allocation program so one of the parties (Wise) purchased all inventories and allocated
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it to the other.
Eventually W gave up on people and filed for insolvency
The trustee for People’s (remember they were separate legal entities) whose purpose was to look
after P asserted claim against W because it had ability to decide where inventory went and that
gave them preference to W over the arms length creditors.
- Suppliers given protected status in insolvency law so they can priority over third party general
creditors
- So Wise had this status because of that but they were still related
o Wise was related insider and preferred its interest over the innocent third party banks
Court of appeal
The directors had acted in best interest of the corporation because there was a valid reason for acting in
that way and it wasn’t done to defraud creditors.
- There’s not duty when acing in best interest of company to think of creditors
-
SCC upheld
DUTY OF CARE
o There is no need to read in fiduciary duty since there’s other remedies available for creditors
o Fiduciary duty doesn’t refer to the quality of management but personal conduct
o Ds don’t owe fiduciary duty to creditors even when People’s was in zone of creditors
o In this case, the wise brothers acted in good faith for the objects of the corporation and showed
no reckless disregard
Fiduciary duty
- The D’s didn’t breach their duty of care because it has objective and subjective components
- They had a pressing need to find a solution and there was logic in what they were doing
- The inventory system was recommended by finance director and the implementation of the
system was positively received by People’s and by Marks and Spencers
In applying F duty and DOC, courts recognized that D’s have right to be mistaken but if they commit a
gross fault or were negligent, t hen they will be personally liable. But as long as they show farr and
reasonably diligence and acted honestly, they won’t be personally liable.
BCE Inc v 1976 Debentureholders
ISSUE: Did the D’s have obligation to take into account the interests of the creditors?
COURTS:
Trial Court Decision:
- The creditor’s interests are contractual
- They bought debentures knowingly
Court of appeal – reversed decision and found for bond holders and found that the board had duty to take
into account the creditors and they should have looked to see if the deal could have been constructed to
take into account creditors
SCC – reaffirmed trial decision
- The duty applies to treat individuals affected by corporate actions fairly
- But it’s not absolute
- Whether D’s had regard for relevant considerations including need to treat affected stakeholders
in fair manner commiserate with their duties as corporate citizen
- We are moving away from Dodge
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-
The D’s were acting in good faith so they wouldn’t upend their decisions
Capitalization of the Corporation
CBCA ss. 24-45
Rights attaching to shares
Consideration for issue of shares
Stated capital
Options and rights
Acquisition by a corporation of its own shares
Dividends
Fundamental Changes
Amendment of Articles
CBCA ss. 173, 176, 178-179
Amalgamation
CBCA ss. 181-186
Continuance
CBCA ss. 187-188
Borrowing Powers
CBCA s. 189(1)
Extraordinary Sale, Lease or Exchange
CBCA s. 189(3)-(9)
Right to Dissent
CBCA s. 190
Arrangement
CBCA s.192
Dissolution
CBCA ss. 210-212
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