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Business Associations– Winter 2006
Professor: Wendy Adams
Notes: Laurence Bich-Carrière
These notes are en bilingue et en couleur
and include Prof. Adam's lecture notes. Oh
yeah, and hard to follow.
Table of Contents.
0. Introduction. ................................................................................................................................ 1
WHY TRANSYSTEMIC BUSINESS ASSOCIATIONS LAW? .................................................. 1
1. Five features of Corporations...................................................................................................... 1
1.1. Legal personality (298 CcQ) ................................................................................................ 1
1.2. Limited Liability (309 CcQ) ................................................................................................ 1
1.3. Transferable Shares .............................................................................................................. 2
1.4. Delegated Management under the Board Structure (CBCA, part X, s. 102) ....................... 2
1.5. Investor Ownership (CBCA, s. 24(3)) ................................................................................. 2
2. Conflicts that can happen in the corporation. ............................................................................. 2
I. The Form and Function of Corporate Law .................................................................................. 2
CORPORATE LAW AS THE CONSTITUTIONAL LAW OF MARKET ACTORS ............. 2
What is the role and function of corporate law? ............................................................................. 2
The first two readings explore corporate law as the constitutional law of market actors. This
analogy gives shape to the course, which will consider the corporation as a locus of
governance and authority. .......................................................................................................... 2
1. What are the objectives of Corporate Law? ................................................................................ 3
2. What is the relationship between state law and the corporation’s internal rules? ...................... 3
2.1 Corporate Law as the Constitutional Law of Actors. ........................................................... 3
2.2. The Salomon case: can there be a sole-person corporation?................................................ 3
2.3. The Private vs. Public Law Debate ...................................................................................... 4
The Concession Theory .......................................................................................................... 4
The Contract Theory ............................................................................................................... 4
II. The Theory of the Firm. ............................................................................................................. 6
Why Firms, Why Corporations and Why Separation of Ownership and Control? .................... 6
1. Allocation of powers between managements and shareholders ................................................. 6
1.1. General rules regarding the Agency problem ...................................................................... 6
1.2. Controlling Management's Discretionary powers ................................................................ 7
1.2.1 The duty of loyalty and the corporate opportunity doctrine. ......................................... 7
1.2.2 Director's decisions: errare humanum est and the business-judgement rule.................. 8
1.2.3 Proxies............................................................................................................................ 8
2. Regulatory arbitrage.................................................................................................................... 8
2.1. What is regulatory arbitrage? ............................................................................................... 8
2.2. Corporate Law as a State-Offered Product. ......................................................................... 8
2.2.1 Is it a good thing that States compete in such a way? .................................................... 9
2.2.2. Which law governs the corporation incorporated and carrying business in two places?
............................................................................................................................................... 10
2.2.3. Cases and Countries .................................................................................................... 10
2.2.3.1. Why Delaware Rocks. ......................................................................................... 10
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2.2.3.2. Canada's Corporate Karma. ................................................................................. 11
2.2.3.3. The US ................................................................................................................. 11
2.2.3.4. Europe .................................................................................................................. 11
3. Why are there firms rather than a web of individual contracts? .............................................. 13
4 What are the different legal forms of business association? ...................................................... 16
4.1.1. The trust. ..................................................................................................................... 16
4.1.2. Principle and agent. ..................................................................................................... 16
4.1.3. Un/secured creditors. .................................................................................................. 17
4.2. Four types of business. ....................................................................................................... 17
4.2.1. Sole proprietorships. ................................................................................................... 17
4.3.2. Partnerships. ................................................................................................................ 18
4.3.3.Corporations. ................................................................................................................ 19
4.3.4 Trusts (income, business, other, reit?). ........................................................................ 19
5. Separation of Ownership and Control....................................................................................... 22
5.1. What is being criticised: the Dominant View of the Corporation. .................................... 23
5.2. Response to the Agency Problem: property analysis or contracts? ................................... 24
5.2.1. What is the Agency Problem?..................................................................................... 24
5.2.2. The traditional property analysis ................................................................................ 24
5.2.3. The economic analysis ................................................................................................ 24
5.3. Texts................................................................................................................................... 24
5.3.1. Berle & Means ............................................................................................................ 24
5.3.2. Chandler, Managerial Hierarchies .............................................................................. 25
5.3.3. Testy, Feminist Legal Theory and Progressive Corporate Law ................................. 26
5.4. Conclusion and Wrap-Up .................................................................................................. 27
III. The Emergence of Legal Personality of the Corporation. ...................................................... 28
COMPARATIVE HISTORY, JUSTIFICATION AND RELATION TO SOCIOECONOMIC
FACT ......................................................................................................................................... 28
1. The Basic Problem: Dispersion of O'ship because it's separated from Control........................ 28
2. The stages of capitalism and the much-needed Protection flowing from it .............................. 28
2.1. Clark's Thesis ..................................................................................................................... 28
2.2. The Sarbanes-Oxley Act: monitoring the monitors. .......................................................... 30
2.2.1. The Fifth Stage ............................................................................................................ 30
2.2.2. Is this a good response? .............................................................................................. 31
3. Comparative history of corporate legal personality and limited liability? ............................... 31
3.1. Have LL and LP always gone hand in hand? .................................................................... 31
3.2. Historical account going back to limited liability. ............................................................. 32
3.3. Piercing the Corporate Veil ............................................................................................... 33
3.4. Moral persons and real-person rights. ................................................................................ 34
4. Legal personality in Quebec ..................................................................................................... 34
5. What is the legal, economic and social significance of corporate legal personality? ............... 36
5.1. Introduction. ....................................................................................................................... 36
5.2. Ce que divers auteurs en penser. ........................................................................................ 36
5.3. Ce que ça change. .............................................................................................................. 37
5.4. Samuel & Miller ................................................................................................................ 37
5.5. Lizée ................................................................................................................................... 39
IV. Agency, Fiduciary Relations and the Corporation: The Duty of Loyalty .............................. 42
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THE DEPLOYMENT, ORGANIZATION, AND REINFORCEMENT OF TRUST ............. 42
0. Legislation................................................................................................................................. 42
0.1. Recall QCA Art. 123.83, CCQ Art. 321, 322, 2138, ......................................................... 42
0.2. CBCA s. 122(1)(a) ............................................................................................................. 42
1. What is the role of fiduciary relationships within the corporation?.......................................... 43
1.1. Whose Duties? ................................................................................................................... 43
1.2.What duties?........................................................................................................................ 43
1.3. Duties to Whom? ........................................................................................................... 44
2. How does the law protect corporate fiduciary obligations?...................................................... 44
2.1. Peoples. .............................................................................................................................. 44
2.1.1. My summary ............................................................................................................... 44
2.1.2. Ian Rose from Lavery, de Billy's Points ..................................................................... 45
2.1.3. Wendy Adams's Overview: What is the relationship between corporate fiduciary
obligations and corporate governance? ................................................................................. 46
Shareholders, stakeholders and private ordering .................................................................. 48
A critique of the economic approach: too much personification? ........................................ 48
2.2. US Steel. ............................................................................................................................. 49
3. For what range of stakeholders are corporate fiduciary obligations recognized and protected?
....................................................................................................................................................... 49
4. Relation between the duty of loyalty and corporate social responsibility ................................ 49
4.1. What is corporate social responsibility? ............................................................................ 49
4.2. Gunther says....................................................................................................................... 49
4.2.1. Problem-based, not interest-based. ............................................................................. 49
4.2.2. The process of the decision ......................................................................................... 50
4.3. Teubner's proposals (see “solutions”) ................................................................................ 51
1. The economic theory of agency costs ................................................................................... 53
V. Corporate Governance. ............................................................................................................ 54
Economics, Management And Comparative Law Perspectives On The Legitimacy Of Power In
The Corporation........................................................................................................................ 54
1. What is the relationship between corporate fiduciary obligations and corporate governance? 54
2. What are the legal contours of the problem of corporate governance? .................................... 56
3. What light does the Management literature shed on the problem of corporate governance? ... 59
3. 1. Deux approches différentes............................................................................................... 59
3.1.1. Le rôle des actionnaires .............................................................................................. 59
3.1.1.1. Des propositions des actionnaires ........................................................................ 59
3.1.1.1.1 La législation .................................................................................................................. 59
3. 1.1.1.2 Quelques exemples ....................................................................................................... 60
3.1.1. 2. Les configurations organisationnelles................................................................. 60
3.1.2. Le CA .......................................................................................................................... 61
VI. Takeovers ................................................................................................................................ 61
1. Un peu de vocabulaire .............................................................................................................. 62
2. L'OPA et le marché efficace comme mesures disciplinaires de l'administration ..................... 64
2.1. La méthode «Wall Street» ................................................................................................. 64
2.2. L'OPA. ............................................................................................................................... 65
2.3. Coffee and unstable coalitions ........................................................................................... 65
2.3.1. Le principe. ................................................................................................................. 65
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2.3.2. L'administration et les actionnaires ............................................................................. 65
2.3.3. L'administration. ......................................................................................................... 66
2.3.4. Les employés. ............................................................................................................. 66
2.4. Lorsque les cours s'en mêlent: défenses il/légitimes aux OPA .......................................... 66
2.5. Le régime de l'OPA............................................................................................................ 67
3. L'alternative à la règle de Wall Street, le recours en cas d'abus/pour oppression (oppression
remedy). ........................................................................................................................................ 69
3.1. Avantage sur la méthode Wall Street................................................................................. 69
3.2. Le test ................................................................................................................................. 69
3.3. Exemple ............................................................................................................................. 69
4. What does one learn from a comparison of leading domestic corporate governance regimes? 70
1. Transition .................................................................................................................................. 70
1.1. Conclusion. ........................................................................................................................ 70
1.2. Deux grandes questions. .................................................................................................... 70
1.2.1. Comment la gouvernance d'entreprise influence-t-elle les marchés? ......................... 70
1.2.2. Les principes de gouvernance d'entreprise sont-ils universels? .................................. 71
2. Comment la gouvernance d'entreprise influence-t-elle les marchés? ....................................... 71
2.1. Quelques postulats: ............................................................................................................ 71
2.1.1. La théorie de l'agence ................................................................................................. 71
2.1.2. Entre l'actionnaire et l'autre partie prenante (stakeholder).......................................... 72
2.2. Dedans ou dehors? ............................................................................................................. 73
2.2.1. Réalisme et contrôle de l'administration ..................................................................... 73
2.2.1.1. De l'importance des marchés secondaires ............................................................ 73
2.2.1.2. Qui peut assurer la surveillance? ......................................................................... 73
2.2.1.3. Le problème de l'action à court terme. ................................................................. 73
2.2.2. Nominalisme et contrôle des actionnaires-propriétaires. ............................................ 74
2.2.2.1. Collusion de la majorité et long terme ................................................................. 74
2.2.2.2. Le rôle des banques. ............................................................................................. 74
2.2.2.3. Relations à long terme et holding intragroupe. .................................................... 74
2.3. Quelques autres problèmes empiriques ............................................................................. 74
2.3.1. Market for corporate control and firm performance ................................................... 74
2.3.2. Managerial compensation and firm performance ....................................................... 75
3. Les principes de gouvernance d'entreprise sont-ils universels? ................................................ 75
Qu'est-ce l'OCDÉ et quels sont ces principes de gouvernance? ................................................... 75
Multinationales et droit des entreprises international ................................................................... 77
VII. The Globalized Firm: Multinationals and Networked Firms ................................................ 77
1. Transition: Does contemporary corporate governance reflect injustice in corporate law? ...... 77
1.1. Quelques principes philosophiques avant de commencer et ce que ça change. ................ 77
1.2. Quelques principes juridiques. ........................................................................................... 78
1.2.1. La responsabilité de l'entreprise et non de ses membres ............................................ 78
1.2.2. La responsabilité des tiers. .......................................................................................... 78
1.2.3. Percer le mur de la responsabilité limitée. .................................................................. 78
2. Is there an emerging transnational corporate governance regime? Retour sur le droit
international privé de la gouvernance d'entreprise........................................................................ 79
2.1. Quel droit? ......................................................................................................................... 79
2.2. Harmonisation ou globalisation? ....................................................................................... 79
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2.3. Transition la convergence .................................................................................................. 79
3. C'est bien beau de parler de tout ça, mais est-ce que ça arrive ou pas? .................................... 80
3.1. Oui, il y a convergence et c'est correct: Hansmann&Kraakman ....................................... 80
3.2. Cernat: non, ça n'arrive pas, ça n'arrivera pas et si ça arrive, ce sera hybride ................... 81
4. Compagnie mondialisée et firme globalisée ............................................................................. 81
4.1. Début de ce cours-ci replacé à la fin qui répète probablement ce qui suit......................... 81
4.2. Qu'est-ce qu'une multinationale? ....................................................................................... 81
4.3. Comment créer une multinationale? .................................................................................. 82
4.3.1. Equity-based. .............................................................................................................. 82
4.3.2. Contract-based. ........................................................................................................... 82
5. Comment réguler les règles de gouvernance d'entreprise dans ces matières internationales? . 83
5.1. Introduction ........................................................................................................................ 83
5.2. Les défis de la régulation. .................................................................................................. 83
5.2.1. Qui régule? .................................................................................................................. 83
5.2.2. L'OMC. ....................................................................................................................... 83
5.2.3. Approches territoriales et extraterritoriales. ............................................................... 84
5.2.3.1. Et la souveraineté du voisin, alors?...................................................................... 84
5.2.3.2. Geographically-complex fact-pattern. ................................................................. 84
5.2.3.2. Exemples concrets. .............................................................................................. 84
a. Bhopal. ...................................................................................................................................... 84
b. Child-labour and extraterritoriality. .......................................................................................... 85
c. À ce sujet, voir les conflits de Aramco et de Sumimoto. .......................................................... 85
6. Les nouvelles obligations en droit international. ...................................................................... 86
6.1. Une compagnie peut-être violer des droits humains? ........................................................ 86
VIII. Corporation Social Responsibility. ...................................................................................... 86
FROM LEGITIMATE GOVERNANCE TO RESPONSIBLE CITIZENSHIP ...................... 86
1. What is the legal foundation of corporate social responsibility and corporate citizenship? ..... 86
1.1. Introduction par le général ................................................................................................. 86
1.2. Introduction par le Code civil ............................................................................................ 86
1.3. Introduction par le cours .................................................................................................... 87
2. Définir la RSC........................................................................................................................... 87
2.1. Des intérêts en jeu .............................................................................................................. 87
2.2. Ces intérêts sont-ils vraiment opposés? ............................................................................. 88
2.3. Pourquoi la RSC?............................................................................................................... 88
2.4. Responsible for what? ........................................................................................................ 89
2.5. Permissive or mandatory? .................................................................................................. 89
3. Mécanismes............................................................................................................................... 89
3.1. What legal mechanisms?.................................................................................................... 89
3.2. Les incitatifs à la RSC........................................................................................................ 89
3.3. Les gestionnaires de fond ont-ils les chiffres comme seul critère? ................................... 90
3.3.1. Les fonds éthiques....................................................................................................... 90
3.3.2. The answer is not in the market: Minnows and mammoths ....................................... 90
4. Du cumul des fonctions par l'entreprise .................................................................................... 91
Corporate social responsibility: From legitimate governance to responsible citizenship......... 91
What is the legal foundation of corporate social responsibility and corporate citizenship? ..... 91
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0. Introduction.
WHY TRANSYSTEMIC BUSINESS ASSOCIATIONS LAW?
This text illustrates one way in which comparative law enters into the practice of a trans-national
business enterprise. Read it with a view to thinking about how a trans-systemic approach to
business associations could improve the conceptual apparatus of the jurist and practitioner.
SAINTE-FARE GARNOT, Rémy, Des juristes au service d'une entreprise industrielle opérant au plan
international [R. 7]
Dans les faits (car c'est le témoignage d'un praticien), voici le droit dont ont besoins les corporations.
Il y a trois problèmes à résoudre afin que soient appliquées les règles: (1) connaître et faire connaître les
règles (2) en démontrer l'utilité réelle (3) les rendre concrètes et applicables. D'où l'importance des
conseils extérieurs à l'entreprises, conseils qui devront faire preuve d'imagination et de hardiesse: il
n'existe pas de supradroit, on a droit au mélange et plusieurs règles sont à inventer («espace de liberté»).
Parfois, fractionner les responsabilités ou les joindre peut permettre de segmenter ou de contourner des
difficultés, tant au niveau de la compréhension qu'au niveau de la méthode. Pragmatiquement, il importe
de bien définir ses objectifs et d'avoir des solutions cohérentes, ce qui permettra d'instiller une dose de
sécurité dans la liberté précédemment mentionnée.
Why the Trans-Systemism: Because when there are no rules and you have to fix your own, it can't be
bad to have more than one system to pick out from…
1. FIVE FEATURES OF CORPORATIONS
HANSMANN&KRAAKMAN, Reiner, What is Corporate Law
As a normative matter, the overall objective of corporate law – as of any branch of law – is
presumably to serve the interests of society as a whole. More particularly, the appropriate goal of
corporate law is to advance the aggregate welfare of a firm’s shareholders, employees, suppliers, and
customers without undue sacrifice – and, if possible, with benefit – to third parties such as local
communities and beneficiaries of the natural environment. This is what economists would characterize as
the pursuit of overall social efficiency.
Look at it as you wish, take it under any angle, any society, there are five features that make
corporate law what it is, five trans-systemic features.
1.1. Legal personality (298 CcQ)
The fact that a physical person can enjoy a legal personality seems quite normal, but a
corporation is only a few sheets of paper sitting in the registrar's office: it can't sign sheet. This
juridical personality is essential to have people act in the name of the corporation (not in theirs).
It would be too burdensome to have all shareholders sign whenever a decision has to be made, so
we created a fiction, the corporation, considered as a whole, as one moral person.
1.2. Limited Liability (309 CcQ)
If you are a shareholder investing in the corporation, there is a risk. There is always a risk (no
risk, no revenue). It is statistically certain that some corporations will fail. Obviously, as a
middle-class investor, or as a pension-fund manager, you wouldn't want to invest and risk losing
your house, therefore a corporation usually1 is only risking the assets it holds.
1
Not all corporations have limited liability (until the 70s, Amex didn't), but most do.
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The risk is on the creditors, who should know their business and who'll charge more if the
risk is higher.
1.3. Transferable Shares
There are two types of corporations, the closely held one (where a bunch of friends get
together and only them or people they approve of can get shares) and the publicly traded ones
(where there is no restriction about buying and selling, except, of course, access to the stock
exchange).
1.4. Delegated Management under the Board Structure (CBCA, part X, s. 102)
It is the right of the shareholders to elect the managers, that is, the directors of the Board that
will supervise whatever methods the appointed executive officers2 have of carrying out the
business plan.
1.5. Investor Ownership (CBCA, s. 24(3))
In the business literature, especially in the US, the shareholders are often referred to as the
owners. Stricto sensu, this doesn't make sense: the corporation is a moral person and no one can
own a person. What the shareholders own are shares, not fractions of a corporation, but
representations of the rights (vote at the meetings, get dividend and receive any remaining
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property after the dissolution of the corporation) they have vis-à-vis that corporation
2. CONFLICTS THAT CAN HAPPEN IN THE CORPORATION.
Basically, there are three poles in the Corporate structure, the Corporation (things take place
in its name), the shareholders (input of capital) and the directors and officers (input of
management expertise)4. Three main possible types of conflict:
 conflict between the shareholders (usually too disperse to have any sort of control) and
the managers;
 conflict between the majority and minority shareholders: we said corporate law was like
constitutional law, where there is a debate about the rights of the minority in a democratic
(i.e. majority-ruled) society –this seems no concern here: minority shareholders are to be
protected from oppression.
 conflict between the creditors5 and the employees (they input labour but are not part of
the corporation): both will want to be paid, who should be prioritised?
I. The Form and Function of Corporate Law
CORPORATE LAW AS THE CONSTITUTIONAL LAW OF MARKET ACTORS
WHAT IS THE ROLE AND FUNCTION OF CORPORATE LAW?
The first two readings explore corporate law as the constitutional law of market actors. This
analogy gives shape to the course, which will consider the corporation as a locus of governance
and authority.
2
They are like employees of the corporation, just paid more.
The shareholders are the lowest in the chain of creditors.
4
Germany also includes the employees and their input of labor, but let's not get into that.
5
They appear in the triangle of the Corp, but in a small, meaningless way.
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1. WHAT ARE THE OBJECTIVES OF CORPORATE LAW?
The usual answer is "growth and enhancement". Yes, but whose?
Hansmann & Kraakman think it's "to maximise the overall social welfare". This cannot be
entirely true because if a plant is not making profit, even if the whole economy f the city
surrounding it is dependant on it, it will be closed down: even if maximizing social welfare is an
objective, the best interest of the corporation will prevail over the interest of the employees in
case of conflict.
The opposing view is that the goal of corporate law is much narrower, it's only about
maximizing the wealth of the shareholders. This also cannot be entirely true because they can't
be sued (limited liability) and they are the last creditors on the list6. And talking about only long
or short-term profit would be too narrow.
2. WHAT IS THE RELATIONSHIP BETWEEN STATE LAW AND THE CORPORATION’S INTERNAL
RULES?
The corporation is both given its constitution and gives itself its constitution. These readings
explore the relationship between state law and the corporation’s internal law. Roberta Romano,
in particular, canvasses the "market" among jurisdictions for the chartering of corporations and
thus how state law can be seen as a product catering to corporate preferences.
2.1 Corporate Law as the Constitutional Law of Actors.
EISENBERG, Melvin A., The Structure of the Corporation [R. 13]
Corporate law is like constitutional law in the sense that its role is to organise a working body, its
relations (internal and external, to a certain extend). «Its dominant function is to regulate the manner in
which the corporate institution is constituted, to define the relative rights and duties of those participating
in the institution, and to delimit the powers of the institution vis-à-vis the external world». Problem is,
whatever rules we have, they are not definite enough: shareholders, Board and managers all have
different roles that are too often mingled and mixed. Also, the present model treat closely held
corporations the same as publicly held ones.
In what way does Eisenberg justify his definition of corporate law as constitutional law?
Einseberg states that corporate law is like constitutional law for the market. Of course,
constitutional law has to be seen as more than charters, rather about the organising of powers.
The "Constitution" of corporations is made of the enabling legislation (about the registration),
and the articles of incorporation7.
2.2. The Salomon case: can there be a sole-person corporation?
Salomon v. Salomon & Co. [1897] A.C. 22 (HL) [WebCT]
Facts. Salomon was the sole proprietor of his shoe-making business. His assets were his equipment, his inventory
and a fund. He decided to create a corporation, Salomon & Co, and sold it all its assets. In order to buy them, the
newly-founded corporation had to issue shares, the buying of which would give it money. Salomon bought all the
shares, and named himself officer and director8. Salomon & Co. also had a debenture9 from Salomon. When
Salomon & Co. went bankrupt, Salomon told his creditors: the debenture makes me a secured creditor. Had this
6
It is usually accepted that corporate law can't deal with everything. Labour law and unions will be its reverse
sometimes. On the corporate point of view, the tax already paid for social security has prioritised the employees
over the creditors.
7
Before you needed patent letters (really hard), but this is over.
8
I'm simplifying, you actually needed at least seven people in a corporation, so he took his sons and wife in the
business, but it's bottom-line the same.
9
Def. Loan secured against the assets of the corporation. Basically it's pay me, or I take your stuff. First.
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been sole proprietorship, the normal creditors would have gotten their money back (because you can't loan yourself
money).
Issue. Is this a corporation or a sham? Did Salomon abuse the incorporation process?
Holding. No (HL unanimously).
Reasoning. The corporation was constituted properly, there's no fraud. There was an "& Co" (or a Inc., or a Ltd.), so
the creditors should have known they were now dealing with a company and not with Mr. Salomon alone anymore.
Ratio.
Comments. Though widely accepted today in most of the Western world, the idea of a one-person corporation (i.e.
the business is exactly the same, except you have limited liability), it is only recently that China made one-person
corporations legal and Romania accepted the idea only two years ago.
It is most probably accepted because our corporate culture likes to foster entrepreneurship (if that's the value, it
might be worth putting the risk on someone else's shoulders). Also, maybe this is one-hundredth of the creditor's
portfolio but all the wealth of the entrepreneur.
On the other hand, the one person probably knows the risks better and corporations first took form because you
can't have a thousand shareholders sign every decision –but in the case of a one-person corporation, this rationale for
the legal fiction doesn't exist.
Adams says: follow the risk.
BOTTOMLEY, Stephen, The Birds, the Beasts and the Bats… [WebCT]
Key-metaphor: the Aesop fable of the fight between the Beasts and the Birds and how the Bat, that
shared characteristics with both, was simply treated as an enemy by both parties. The two theories at
"war" here are the concession theory and the contract theory. Though both theories offer some insight,
they are simplistic and too restrictive.
Salomon v. Salomon Corp. Inc. [1897] AC 22
2.3. The Private vs. Public Law Debate
Should the State have anything to do in corporations? There are two theories.
The Concession Theory
The Contract Theory
 The corporation is a privilege given by
 All of corporate law can be duplicated
the State. It is not a right. It is an
by contract law. Joint corporate activity
entirely artificial entity used for public
is private ordering and has nothing to
ordering.
do with the Sate, who, at best, provided
a default-model.
 The State made it, it can break it
(strong state interaction). If it's public
 Aside from that and public policy
(premise, first point), it can be
(fraud and mistake), it should not
regulated at will by the State.
interfere, it has no role.
This is an old debate (since 1912 with Nexus of Contracts). It can hardly be said today that
the corporation is entirely either.
 Fear that the devolution of power to
 If the corporation were all contracts, then
the State has gone too far: who, of
how could external third parties (not
bureaucrat and entrepreneurs, know
contractually linked) be taken into
the risks best? who is better placed
account? This is what the State is there
to judge the market?
for.
 Also, very few today agree that the market
should be privately ordered from A to Z.
Some sort of state intervention is accepted.
 This is why we say the corporation is like a constitutional law: it allows both inputs and
is a major mediation factor (between the private and the public interests, the interests of
the shareholders and the creditors, etc.).
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
This does lead to Richard Eells's article about corporate justice.
o First, we know that it works both ways: if the government can influence corporations,
corporations can also influence the government (lobbies, planning of the economy,
etc.).
o But, given this power, they should be regulated (that is was constitutional law is about,
regulating powers and using powers to control powers).
o We also know that constitutional law ends at the public door.
 There are also two governmental views: the republic one (deliberative government,
merit?), where the government listens to all the positions and chooses the best course of
action and the public choice one where the government chooses a compromise in a battle
of interests (compromise?). Either way, corporate law provides a method for
negotiating.
 People had more property (or control over their property) before corporations: before
you owned your business tools, now, you own your house, over which you have control
and your pension fund, over which you have very little control.
EELLS, Richard, The Government of Corporations [R. 17]
The norms of corporate policy (and thus, corporate justice) are not drawn from natural law: it is, at
best, the product of many compromises to solve clashes of interests. There are many interests at stake
and many oppositions and questions (glose on "enlightened self-interest" and the environment [p. 254]).
First the private/public opposition: is a state-held company more public than all the citizens of Quebec
having Nortel shares? Which is more centered? This dichotomy is more important on a theoretical level –
communism or capitalism. In this question, there is one about the role of the stockholders: one extreme is
to say they enjoy indefensible privileges for doing nothing; the other extreme is to say they should get
more because they are, bottom line, the owners. The separation of ownership and control also changed
the rapports de force: as a matter of fact, the share system and the pool capital have transformed the
traditional property system to a power one (though not completely).
There is also a question of freedom inside the corporation (by inside, we mean, the people that make
it work daily, the management and the employees and not the shareholders who invest and act at annual
assemblies): can scientists say and publish what they want? What can be uttered? Is freedom having no
constraints or having a set-up that guarantees certain things we'll be free to do? Intellectual freedom,
esp., is necessary, but it goes with economic rewards and clearance, from discoveries to a fraternal
community or think and do-alike's (whether political or work-related).
Bottom line, making settlements and managing a corporation is about setting policies and norms that
sometimes go further than mere compromises.
Questions: How does Eells define corporate justice? Why is it not sufficient for corporate
management to rely on bargained compromises between competing claims involving the corportaion to
achieve corporate justice? Eells identifies in the separation of ownership and control of corporations a
change in the manner in which individual private property is used to generate personal wealth. What is
the nature of this change, and why does Eells view the change as a matter of concern for corporate
justice? What are Eells concerns in relation to employee freedoms? Are these the type of responsibilities
which should be assumed by corporations? Why or why not?
10
See sheet + Discusses Letters Patents (part I of the QCA), people complained and they
added part IA (like the other parts of Canada), but most of the letter patents are still good (s.
123.6 QCA). It's a mess: some sections are said not to applied, but are not repelled and part I and
IA are not in the same order. And the CcQ always supplements.
10
Random notes she gave at beginning of class.
5
6
Discusses the beauty of Muse, what it stands for (if it stands for anything) and The Wall
Street Journal.
These are the shareholders' rights. However, not all shares have all rights.
1. Right to vote
2. Dividend (if management says yes)
3. Residual value.
You can have voting (class A) and non-voting11 (class B) shares, thus raising capital but
giving no power away. Same for dividends: non-voting focuses on revenue, voting, on control.
You just have to make sure on the whole that all your shares have at least one of the
characteristics.
Fact pattern. Mr. A has voting shares and is an officer. B, C, and D are institutional non
voting shares (but they have overall more shares than A). They complained about A always
agreeing with himself12 and want one class of shares, payment of dividends (cash dividend of
1$/sh.) and a board representative. Basically, B to D can't do anything about it: their shares are
non voting shares (unless it directly touches the nature of their shares).
Q: Is the CBCA unfair in its allocation of powers between shareholders and directors? Well,
when you buy shares, you should know what you are getting yourself into.
s. 241 CBCA Oppression remedy, unique to Canada. Basically, if you're a shareholder (or a
director or a creditor), you can bring action saying: no violation has occurred, but my
expectations as a shareholder are not being met, my needs are ignored and the actions of the
managements are pressuring me. Court has almost complete discretion13.
II. The Theory of the Firm.
Why Firms, Why Corporations and Why Separation of Ownership and Control?
1. ALLOCATION OF POWERS BETWEEN MANAGEMENTS AND SHAREHOLDERS
1.1. General rules regarding the Agency problem
Corporate law legislation provides for a division of powers between the relevant parties in a
corporate structure. For example, the legislation determines the balance of power between the
directors and the shareholders by allocating most of the decision-making ability to the directors
while reserving limited powers for the shareholders. Recognizing, however, the agency problem
resulting from a separation of ownership and control, legislation also constrains the directors’
power by placing them under certain obligations to act for the benefit of the corporation and the
shareholders and not in their own interest.
While the corporation is an ideal legal form for conducting joint economic activity,
particularly large-scale enterprises (complex transactions14), the separation of ownership (the
shareholders) from control (the board of directors and senior managers) may lead to internal
conflicts not present in other types of business associations.
The biggest problem is the agency problem: the managers are supposed to be working hard
for the shareholders to make more money, but they are too widely dispersed to be watching the
11
Denmark doesn't allow non-voting shares.
CCA this is a job for people with multiple personalities (dixit Valérie Simard).
13
End of the above-mentioned random notes.
14
Lien Coase.
12
6
7
managers, when control and ownership is separated, you risk shirking problems: if you are
playing with someone else's money, you might not be as careful as you'd be with your own, you
might even steal15.
Thus, the most significant objective of corporate law is to set out the internal governance
mechanism of the corporation. This involves both allocating power to various parties and
subjecting various parties to constraints. The most significant regulatory difference between
jurisdictions is the balance struck between the degree of discretionary power granted to
management (the board of directors and senior officers) and the protection accorded
shareholders, including protection of minority shareholders and the types of corporate
transactions for which shareholder approval is required.
MILLSTEIN, Ira M. and Salem M. KATSH, Organic State and Federal Constraints… [R. 29]
While the corporation is an ideal legal form for conducting joint economic activity, particularly largescale enterprises, the separation of ownership (the shareholders) from control (the board of directors and
senior managers) may lead to internal conflicts not present in other types of business associations. Thus,
the most significant objective of corporate law is to set out the internal governance mechanism of the
corporation. This involves both allocating power to various parties and subjecting various parties to
constraints. The most significant regulatory difference between jurisdictions is the balance struck between
the degree of discretionary power granted to management (the board of directors and senior officers) and
the protection accorded shareholders, including protection of minority shareholders and the types of
corporate transactions for which shareholder approval is required.
The state and federal laws govern the creation of the corporate entity and define its organic powers
and responsibilities (and accountabilities). Creature of the law, the business corporation is a "floating"
thing (limited liability, unlike partnership). There is always a question of the role of shareholders vs. Board
directors. Delaware (1st place of incorporation) is very Board-oriented, whereas New York (2nd place) is
more shareholder oriented (but nothing as restrictive as California). Thirty-five states have actually
adopted the Model Business Corporation Act.
Corporate Formalities. Creation of internal governance rules: when are the managers acting ultra
vires? The elections of directors is made by the shareholders (rules on vacancies, new directorships and
dismissal with/out cause vary from state to state), mergers must be accepted by shareholders. Certain
issue have to be dealt with in front of the whole Board and there are rules regarding the disclosure and
the notices of meeting. Filing of the annual franchise tax report is another rule. The Board members must
be loyal, careful and fair. But so must the majority shareholders towards the minority ones (no corporate
freezeouts: when you vote, it must be for the good of the corporation, not to throw some people out [p.
11]). This being said, unless there is a conflict of interest, or bad faith, courts and shareholders should not
substitute their judgements to those of directors.
Increasingly, corporations are face with a form of forum shopping, they have a choice of law: should
they chose the state where they are incorporated or the state where most of their shareholders are? Also,
there are more and more securities rules and proxy rules at the federal level.
Basically, when it's business as usual, it's dealt with by management. Anything special will
have to be accepted by the shareholders (merger, sale of all the assets of the firm, major capital
changes16, descending shareholders17, etc.).
1.2. Controlling Management's Discretionary powers
1.2.1 The duty of loyalty and the corporate opportunity doctrine.
Nice assumption of the economists on human nature…
The way the shares are divided. More than just an investment, a share is a bit of control over the corporation.
Otherwise, the directors could get rid of any majority shareholder by just issuing more shares and diluting his power.
17
If you are really against a decision, you can have the corporation buy you out and butt out.
15
16
7
8
To deal with business, management has a certain amount of discretionary powers. To make
sure there is no abuse, directors and officers have two duties imposed on them: loyalty and care.
The duty of loyalty (which ties in with the whole moral person idea) is so strong that it
forbids directors to take opportunities that are the corporations': more than about imposing a very
strong duty, it's about being able to judge that loyalty. The corporate opportunity doctrine states
that if the Board of which you are a member refuses to carry an idea, you (or your wife, or your
best friend) cannot then carry it by yourself18. The rationale is that you only found this
opportunity because you were sitting in that chair at the corporation).
1.2.2 Director's decisions: errare humanum est and the business-judgement rule
However, decisions don't have to be perfect. As a shareholder, you can't complain every time
you lose money. You can't complain about the business judgement of the directors, only about
the way the decisions were made (not careful enough, not enough expertise seeked, etc.).
Otherwise, it wouldn't be manageable: any bad decision, every so-so decision, every lost would
be ground for litigation.
So here comes the business judgement rule: judges will not look at the substance of the
business decision, only the procedure. This rule was confirmed by the SCC (Peoples) but it
raises a lot of tension. You can't second-guess a business decision19.
1.2.3 Proxies
A proxy is a paper by which you give someone else the power to vote in your name on
certain issues. That way, you don't have to show up for the AG (or if it's in a mutual fund…).
You can either make selections on given issues or give management the choice.
It was designed in a time where corporations were smaller and had more control, but today,
most people don't even read their proxies and don't take the time to investigate all the directors.
The further the shareholders got from the corporation, the more artificial these rules seem.
Some jurisdictions (esp. in Canada), allow shareholder to put proposals on the agenda
[shareholder activism].
2. REGULATORY ARBITRAGE
2.1. What is regulatory arbitrage?
The relationship between state law and a corporation’s internal rules becomes more complex
when one considers that many jurisdictions permit directors to engage in regulatory arbitrage
(with the approval of the shareholders). The directors may decide to incorporate in a jurisdiction
with a favourable regime for internal corporate governance (favourable to directors, with limited
rights for shareholders or other groups), and yet carry on its business in a jurisdiction with a
favourable regulatory environment for other areas of corporate concern, such as labour and
environmental law.
2.2. Corporate Law as a State-Offered Product.
ROMANO, Roberta, The Genius of American Corporate Law – Explaining American Exceptionalism [R. 39]
18
And you can't quit. Context might be taken into account (if you proposed it, accepted it, pushed a lot, sincerely
thought it was brilliant), but it's hard to prove.
19
However, you can do it for nurses and doctors? What is the difference in principle? Perhaps a reality/closeness
principle (yeah, but what about negligent manufacture, e.g. Pinto decision (1978). Weird car. It blew up when you
were rammed into. Ford new about it but it figured that the cost of the recall what more than the cost of damages for
negligence litigation. [Learned Hand decision].)? The fact that business needs risk?
8
9
Engages in a ridiculous political analysis: there are fewer corporations in Quebec because of the
lurking evil of separatism. About the European Community: while some states are trying to become little
Delawares (corporate charters countries), most European nations are concerned with more than
shareholder wealth, requiring the representation of employees and shareholders in corporate decisionmaking. But note that Germany (who is very strong on that) also has a different way of calculating
pension plans (not on company shares, but on balance sheets). Also, managers are harder to sue in
Europe. Also, undercapitalization of Europe.
Other point: the relation between productivity and governance (only on the macro-scale). Productivity
is affected by (1) the national savings rate (2) education of the labour force (3) R&D. US do that well,
Europe has concentrated ownership and West Germany heavy banking, Japanese firms have extensive
cross-holdings. In any case, American corporations are very good at creating institutions that circumvent
or minimize the effects of political constraints on economic development.
United States corporate law is characterized by something known as the Delaware effect. Many
corporations decide to incorporate in the state of Delaware, even though they carry on business in other
locations (including Canada). Commentary is both extensive and mixed as to the reason for Delaware’s
success in attracting corporate charters. Some argue that Delaware offers incorporation legislation that in
comparison with other states is the most management-friendly, that is to say in allocating the balance of
power between management and shareholders, it places the least constraints on management. Others
argue that this can’t be the case, because firms with a reputation for sacrificing the interests of
shareholders in favour of management’s interests will have difficulty attracting investors. Still others argue
that Delaware has the optimal corporate law, meaning that Delaware corporate law generates the most
shareholder wealth. At this point, one fact which cannot be denied is that Delaware has built up a highly
specialized and efficient bar and judiciary for dealing with corporate governance disputes, and this fact
alone might influence some corporations to incorporate in Delaware.
Questions. What is regulatory competition for corporate charters, and why does Romano think it is a
good thing? Why would different jurisdictions compete for incorporation? If there is less regulatory
competition for incorporation in Canada than in the United States, does this mean that Canadian
corporate law is not as effective as United States corporate law? What does effective mean in these
circumstances? Assume that a corporation in incorporated in State A but conducts all of its business in
State B. Why would a corporation decide to carry on business this way? Assume that the shareholders,
who are all located in State B, have a complaint against the manner in which management (the board of
directors and the senior officers) is running the company. Assume that the shareholders are bringing a
suit against management in State B. According to the real seat theory of jurisdiction, what law of
corporate governance applies? What law of corporate governance applies according to the registered
office (or incorporation) theory? Why would either management or the shareholders care which law
applied? Romano holds a particular political view (as do we all) of the role of state regulation in corporate
governance and economic development. What does she see as the genius of United States corporate
law?
2.2.1 Is it a good thing that States compete in such a way?
States offer corporate law as a product to corporations and others question the public value of
such offering. The most significant regulatory difference between jurisdictions is the balance
struck between the degree of discretionary power granted to management (the board of directors
and senior officers) and the protection accorded shareholders, including protection of minority
shareholders and the types of corporate transactions for which shareholder approval is required.
On what basis can States compete with one another? Remember the triangle of shareholders,
directors/officers (management) and the corporation itself? Well, of course, management would
prefer less constraints on their discretions (they are managers, they have skills, it's their job, they
know about it and would prefer to carry on their business without interference; on the other
hands, the shareholders will want to say things because it's their money).
How comfortable are we about States competing between one another? How comfortable are
we with regulatory arbitrage? Do we like the idea that a company we consider Canadian is
9
10
incorporated in Delaware? Is regulatory competition a good thing? Should states compete to
offer a legal product to corporation? Bottom line, at issue is whether corporate governance
disputes should be resolved by the corporate law legislation of the place of incorporation or the
place of doing business. Romano thinks competition offers the best, the most responsive
corporate law. Why would they do this (all you get is an incorporation fee and specialised
litigation), is not answer (50 states contra one Europe)20?
2.2.2. Which law governs the corporation incorporated and carrying business in two places?
If a corporation incorporated in State A (place of incorporation) but carrying on business21 in
State B (real seat) can rely on the law of State A for settling internal corporate disputes22, does
this frustrate the policy objectives of State B in regard to its corporate governance legislation?
The shareholders want a suit against the directors. The Real Seat theory says apply law of
State B, the incorporation theory says State A. So A or B?
A
B
 Outside source (regard de l'étranger), emotional  Multiple local connections to
distance.
activities
 Stability (if you change your real seat, it's still  Most
favourable
to
the
always the state of incorporation, or many loci of
shareholders
business)
 Law evasion/avoidance (giving it
A would enable a sort of
 No interference with the expectation of the
corporation (there was a reason why we chose D.)
"diplomatic" immunity, unlike k,
the shareholders don't really have
 Encourage competition (forum-shopping) – slip
autonomy to chose).
side of Law evasion.
 Less expensive
2.2.3. Cases and Countries
2.2.3.1. Why Delaware Rocks23.
Why do companies with no link to Delaware24 choose to incorporate there?
(1) Management decides where to incorporate and they are going to go where the legislation
is corporate-friendly (courts and shareholders have less power to interfere). Then it's a bad thing
for the shareholders, because interferences are not always bad, there must be some kind of
oversight.
(2) Management-friendly, sure, but if it's too friendly, the shareholders (esp. pension funds)
won't invest, so it can't be that bad: some checks and balance must exist. What matters is
shareholder value: Delaware producers the greatest shareholder wealth. Shareholders have no
say but guaranteed income: fair enough.
(3) They have a very specialise bar (bunch of lawyers), judges that are fast and familiar in
these manners.
20
Like why would you want the best family law?
And by carrying business, we mean everything, the selling of course, but also the HQ and the plants. Only the
papers are in State A.
22
F. ex. how often do you elect directors, how do you get rid of a director, etc.
23
I honestly never thought I would say something nice about Delaware. Well, it does rhyme with square (and
impair, and
24
A large part of D.'s revenue comes from incorporation fees.
21
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2.2.3.2. Canada's Corporate Karma.
If there is less regulatory competition for incorporation in Canada than in the United States,
does this mean that Canadian corporate law is not as effective as United States corporate law?
What does effective mean in these circumstances?
For Canada, one prof said yes there was competition; the other said no and they agreed.
There is less regulatory competition is Canada under the Charter. Does that mean our corporate
law is less good? It probably depends on what you want to achieve: the best corporate law for
whom? The public at large25? The officers? The shareholders? On what basis? Today? Threeyear forecast? Wealth from the share only? Public well-being? Or that Hausmann & Krackman
idea about meeting the needs of all the corporate constituencies including the(ir) environment?
2.2.3.3. The US
Best corp. law -- Romano says the genius of US corplaw: when states regulate the economy,
they restrict it (reduce the value for everyone). Some states will have more involvement than
other. Competition allows you to reduce the number of law you have to avoid to do your
business (regulatory arbitrage is about checking: oh, this one has one law, this one has three, this
one has seventeen –I'll choose state one and I'll have less work to work around state legislation).
Easier time avoiding interference of the state economy, she says it's genius. [R. ] "…extraneous
regulations…".
2.2.3.4. Europe
Inspire Art has fundamentally changed to corporate law landscape in the EU. Until this
decision by the ECJ, regulatory arbitrage was not possible. Following the ECJ’s decision that
discrimination against inbound corporations is a violation of the principle of freedom of
establishment, EU commentators and practitioners are divided in their opinion of whether the
result in the decision will lead to a European Delaware.
CASE COMMENT: Kamer Van Koophandel En Fabrieken Voor Amsterdam v. Inspire Art Ltd. (E.C.J. September
23, 2003) (2004/2005) 11 Col. J. Eur. L. 187. [WebCT]
Inspire Art has fundamentally changed to corporate law landscape in the EU. Until this decision by
the ECJ, regulatory arbitrage was not possible. Following the ECJ’s decision that discrimination against
inbound corporations is a violation of the principle of freedom of establishment, EU commentators and
practitioners are divided in their opinion of whether the result in the decision will lead to a European
Delaware.
The European Union (EU) does not yet have the U.S. equivalent of Delaware (fairly common to
incorporate, regardless of where business is done, second is Nevada26. There are two opposing "place"
of business theories, the theory of domicile (Sitztheorie), i.e. the a legal dispute involving a corporation is
governed by the law of the state in which the company has established its actual headquarters; and the
much broader and less restrictive theory of foundation (Gründungstheorie), i.e. the place of incorporation
governs whether or not a corporation may (a) take part in a lawsuit and (b) enjoy the shell protections and
limited liabilities that incorporation grants. Here, the HQ is a commodity (tax, convenience) and Ops can
be carried out anywhere.
In Inspire Art, the HQ of IA was in England, but it carried business as an undeclared"pseudo-foreign
company" in the Netherlands, which went against some Act. The European Court of Justice said a
company that is established in one state is a company of that state, and it enjoys the right to exercise
freedom of secondary establishment wherever it may choose to relocate within the EU. As long as it
complies with the local law, it has all the freedoms that local law entitles and no other law can limit it
25
26
Except in Quebec were, are a legal person, it's private law.
Doesn't this contradict the other article?
11
12
(otherwise, it'd place illegal restriction on someone else's law!). Basically, the ECJ said the Sitztheorie
was about to die off (but that means Labour Law and Corporate Law are really different now) and that in
the case of dual-resident corporations, the HQ is deemed to be the place from which the person or
persons charged with overall management responsibility exercise their functions, whereas the
administration is commonly defined as the place at which fundamental management decisions are
effectively translated into externally recognizable actions, generally the place at which the management
body and its members are located.
Germany has a two-tier Board where both the employees and the shareholders are
represented. In order to make sure this will apply, Germany follows the Real Seat theory: the law
of the country in which the business is carried and the HQ situated will apply.
In Inspire Art, the ECJ basically said this requirement (in-bound corporation27) was wrong
because it violated the freedom of establishment28. Basically, the company that chose to
incorporate elsewhere would be (was) stripped of its corporate form (all the liabilities are gone)
whenever it's sued in Germany, it meant that your incorporation in country A meant nothing:
since you were not incorporated in Germany.
Bottom line, the ECJ agreed to move towards the US conception of corporate law, accepting
the idea of regulatory arbitrage. The commentator of this decision fears however that this will
lead to a race to the bottom to be the European Delaware, which will ultimately affect the ability
of states to achieve these sorts of public policy objectives: protection of employees,specific
financing of different countries (in Germany, f.e.x, the financing comes from large banks rather
than institutional investors).
Armour answers this by saying Inspire Art will favour competition, but not in the race to the
bottom kind. He thinks the various corporate cultures of Europe and the lack of harmonization of
corporate law will result in different states offering different niches for different market
products: they won't try to get everyone, they will each offer different models, and this is better
than uniformity29: not all corporations and capital markets are the same, and you should have
different models for all these different objectives.
Secondly, Armour says the primary motivation for the regulatory is the minimal
capitalisation requirement, that is, to incorporate, you must provide a minimum amount of
capital (for creditors, whether in/voluntary). Because of the limited liability, if you sue a
corporation that has no money (voluntary creditors don't really care, but if you're getting hit by a
truck), you won't get anything, they are broke.
In order to protect people, a lot of the countries ask for a minimum of capital.
ARMOUR, John, “Who Should Make Corporate Law: EC Legislation v. Regulatory Competition” ESRC Centre
for Business Research Working Paper 2005.
Some commentators are very much in favour of regulatory competition in the EU, but for somewhat
different reasons that those typically cited in the United States. Armour, for example, does not see
competition as a race to find the one optimal form of corporate law, but rather an opportunity for different
Incorporate in state A and carry out business in state B –this is bad.
Outbound fact-pattern is: incorporated in state A and you do want to be incorporated in state B, but state A won't let
you without punishing you (leave the country, but you'll be taxed on your assets as a capital gain which will stay
there) –but this is ok.
28
Corporations, like persons, have freedom of establishment; real-state theory makes people not want to move; tax
is ok because corps are creatures of the law and must follow it.
29
(better than Canada's one model, but for NS, BC and Qc when to the CBCA – no real diversity with the difference
that Quebec doesn't have the oppression remedy).
27
12
13
jurisdictions to offer a variety of corporate law models, all of which meet the needs of different types of
corporations. Similar to his United States counterparts, however, he does predict a clear “winner”.
[summary of the abstract] EC Legislation might soon have to céder le pas to regulatory competition:
corporations will chose the national company law they want to apply and apply it. Though London might
get a lot of business out of this, it is not feared one country will "dominate" the others, as Delaware has in
the US, rather, specialists think they'll see a specialisations of the countries. There will be procedural
safeguards, of course, and the welfare questions should be left to the Member States.
(1) The EU is rapidly moving towards a framework within which companies will be both willing and
able to locate their registered offices as to secure a company law that is favourable to their requirement.
It's all about avoiding barriers and capital maintenance rules. (2) There will be regulatory competition to
attract the companies (Delaware used tax revenues; UK will use professional service firms). In response,
other Member States will remove inefficient rules or develop the complementarities of their systems. (3)
This won't lead to a race to the bottom: national legislators will engage in mutual learning and suboptimal
rules will be discarded. (4).
[for a definition of company law, go to p.4]. Company law's role is to regulate and facilitate the
opration of business firms: establishing the structure of the corporate forms and preventing opportunism.
Questions: How does Armour define corporate law (or company law)? What significant difference
exists (and was not affected by Inspire Art) between regulatory competition involving start up corporations
and those involving reincorporation? Will states have an incentive to compete to attract corporations
involved in regulatory arbitrage?
3. WHY ARE THERE FIRMS RATHER THAN A WEB OF INDIVIDUAL CONTRACTS?
Coase, R.H., "The Nature of the Firm" in The Firm the Market and the Law, 2 (1998) The University of Chicago
Press, 33 [R. 57, based on Wikipedia]
Nobel Laureate30 Ronald Coase’s classic work on the nature of the corporation proposes a widely
accepted transaction cost model to explain the nature of the firm.
30
Nobel prize 1991: The Nature of the Firm and the 'Coase theorem' (dans un monde sans coût de transaction,
l'allocation des droits de propriété se fera automatiquement de manière optimale, par le jeu des échanges et des
marchandages auxquels les agents procèdent, et ceci quelque soit la répartition initiale de ces droits.). Wrote 12
papers in his 60 year career Walid pense que c'est un sophisme parce que ce sont des gros articles, géniaux et encore
enseignés. He wrote The Nature of the Firm as an undergrad. He was chatting with Mister Ford and thought: How
can Lenin be wrong in running a country like one big firm when many big firms (like Ford) exists in the US and
work just fine. His answer was voluntary association (+ price mechanism + transactions costs).
A famous Coase example is the following. Consider a railroad that passes through wheat fields. The
passing trains let off sparks which can burn the wheat. If the legal rights are on the side of the farmers, then they
could require the trains to buy and install spark catchers to eliminate these fires. However, if that is expensive (i.e.
more than the value of the burned wheat), the train owners may just pay the farmers for the damage done to the
crops. If the legal rights are with the trains, the farmers may just put up with burned crops or (if that is expensive)
they could pay the trains to put on spark catchers. Either way, the socially efficient outcome (install spark catchers
or burn crops) is what happens and the legal rights just determine who has to pay.
Consider two business that are next door to one another. One is a doctor's office, the other a candy maker. The candy maker uses machinery which
grind up sugar and other ingredients and which produce a low rumbling noise. The doctor needs to be able to hear quiet sounds like heartbeats and
joint movements. For years these two got along fine until one day one of two things happened (it doesn't matter which). Either the doctor desired to
start treating patients in the room right next to the wall between her office and the candy maker or the candy maker started running a grinder right next
to a wall adjoining one of the doctor's treatment rooms. Either way, the grinding noise made it difficult for the doctor to carry on her business in that
one room.
Whichever one of the two parties who felt aggravated could take this matter to court and see how the law would be applied. The law might
state that it is impermissible for noises to pass from one establishment to another and so tell the candy maker to shut down that grinder. On the other
hand, the law might say that the candy maker is allowed to do anything he wants on his own property as long as it doesn't endanger the health of
anyone else. In this case, the doctor would be told to do without that treatment room.
Coase points out that whichever way the decision goes, it serves a rather arbitrary notion of fairness and fails to serve the perhaps more
important goal of serving the larger social welfare. What would be better for society? It would be optimal if the scarce resource (in this case a location
where sound is important) went to producing the more valuable (socially desired) output. Rather than forcing one or the other to give up trying to
produce in a given location, they should be allowed and encourage to work out some mutually advantageous agreement.
Suppose that value of output produced by the candy maker in the disputed location is $20,000 per year and that the doctor would produce
value of $15,000. Here a judicial decision that would force the candy maker to shut down would clearly create an inefficient allocation of resources.
However, the cost to society of lost output is bourn by the doctor in the form of the opportunity cost she faces by using that room. She might realize
13
14
The question of the organizational form of economic activity is of interest to economists. In particular,
why should market actors choose to organize themselves into firms for the purpose of producing goods
and services instead of accomplishing the very same tasks independently, though a series of contracts?
As is evident from Coase’s theory of the firm, the question is not whether it can be done, as indeed
the same economic activity carried out by the organizational form of the firm could be undertaken at the
level of individual market actors contracting with each other. The question instead is which method is
more efficient? Coase argues that the organizational form of the firm is more efficient than activity carried
out at the individual level because it is expensive to use the market for complex activities requiring a great
deal of coordination.
In other words, it is profitable to establish firms because there is a cost to using the market.
Given that "production could be carried on without any organization at all", why are there many
business firms and not simply many more (a myriad, a multitude) independent, self-employed people
intercontracting? Why so many business firms? And why do they emerge? Under what conditions?
First, you need an entrepreneur that hires people. But why would he do that? Again, if the market
were perfectly efficient (i.e. those who are best at providing each good or service most cheaply are
already doing so), if would be cheaper to contract than to hire. However, you must take transaction costs
(costs of R&D, bargaining costs, trade secrets, policing, etc.) into account, you see the market price is
higher than the actual price. And you can lower (or avoid) transactions costs by doing it all internally.
Of course, you can't do everything internally, and there's always the risk that the manager will make a
mistake in allocating the resources. You need some external things too. The balance will give the size of
the firm. According to Coase, a bigger firm is better at the beginning but "decreasing returns […] will
prevent its infinite growth".
«Other things being equal, therefore, a firm will tend to be larger: (1) the less the costs of organizing
and the slower these costs rise with an increase in the transactions organized. (2) the less likely the
entrepreneur is to make mistakes and the smaller the increase in mistakes with an increase in the
transactions organized. (3) the greater the lowering (or the less the rise) in the supply price of factors of
production to firms of larger size.»
Coase does not consider non-contractual relationships, as between friends or family members.
Basically, firms exist because the market is not perfect: it has transaction costs which can be lowered
by collective structures
For Coase, the capitalized economy is “self-steering, that is you don't need a centralized
authority; individuals make decisions and choices by responding to prices and that's the only
coordination you need.
that it is worth any amount up to $20,000 to the candy maker for the right to run a grinding machine near that area. Thus her using that room to treat
patients costs her and society $5,000.
Suppose still that the candy maker would make more profitable use of the scarce resource and that the doctor and the candy maker can
bargain with each other. From a social standpoint, it does not matter with whom the law sides. Either way the scare resource should go to the candy
maker. The only difference the decision of the law makes is which of the two, the doctor or the candy maker, is relatively advantaged. If the law
supports the candy maker, the doctor is annoyed and the candy maker is delighted and much candy is made. If the law supports the doctor, the doctor
is delighted and the candy maker is annoyed. However, the candy maker buys the right from the doctor and again, much candy is made.
This can be broken down even further. Suppose that it would cost the candy maker $20,000 to shut down or move to where noise wouldn’t
be a problem, it would cost $12,000 to improve the candy maker’s machine to be very quiet, it would cost $10,000 to buy the physician high-powered
instruments that can overcome the noise, and it would cost $15,000 to the physician to shut down or move to a quieter location. Socially, the best
outcome is to get the physician new instruments. Who should pay for it? Socially, that’s just a matter of a transfer. As long as transactions costs are low
enough, the socially optimal outcome will prevail regardless of how the law stands, the only question that law bears on here is which party has to pay
off the other.
But what about the question of transactions costs? If the cost of working out a deal where something low like $100, and the law favored
the candy maker, the physician would buy new instruments. If the law favored the physician, then the candy maker would pay for the instruments.
Either way, we get to the social optimum. On the other hand, if we lived in a world where it cost $25,000 for the parties to negotiate, then we might
not reach the socially optimal outcome. If the law favors the candy maker, the physician will buy the better instruments for $10,000. On the other
hand, if the transactions costs are that high and the law favors the physician, the candy maker will end up paying $12,000 to buy a quieter candy
machine, resulting in a social dead weight loss of $2,000.
Coase makes the point that which ever way the law interprets the property rights, as long as these rights are well defined and the
transactions costs of enforcing and transferring them are not too great, society's resources will be used most efficiently by just letting private agents
work out these problems to their own mutual benefit.
14
15
You could do without firms, but you'd need to have a plethora of contracts. For instance, if
you wanted to make shoes, you'd need material to build the shoes (one contract per material) +
delivery contract with a guy with a big bicycle (transport) +designer + buy the tools +
shoemakers + place to manufacture + electricity/heating/water + packaging +
marketing/publicity + transport to retailers + retailers + contracts with customers.
In order to coordinate all this, you can either use the firm or the price mechanism (i.e. a
system of bidding and asking for goods and services and matching and negotiation, a way of
coordinating everyone's offer and acceptance). This gets you the most efficient price, it's selfsteering.
Why can't you just use contracts all around? Because of transaction costs, for instance search
and information costs (finding the people with whom you'll want to contract), bargaining and
decisions costs, policing and enforcement costs. These transaction costs can be removed by
creating firms, that is coordinating ensembles. Some things will remain cheaper when contracted,
for others, it'll be cheaper to hire (e.g. you don't have to litigation for performance, you can fire).
Hiring or contracting are the two coordinating mechanisms exist for organizing economic
activity?
 Can you explain in your own words the difference between production being directed by the
price mechanism and production being directed by entrepreneur-coordinators?
Why is the firm organizational form more likely to be adopted in transactions involving long
term contracts?
Why do companies do joint ventures or buy off their competitors (what is the problem of
long-term contract31?)? Why vertical integration? So you can control them, decide what they do
(and thus, be able to rely more on them)? Long-term contracts and control of uncertainties?
Does Coase contemplate practical limits on firm size? Are these limits reflected in reality?
Does a satisfactory explanation exist for any discrepancy?
Tout ce qui monte redescend? At one point, too big to control without replicating the
transaction costs, decisions can't be made quickly, making mistakes in coordination. You know
the saying, too big to compete.
Take GE, operates business in over 100 countries, 21 different businesses (fridges, weapons,
light bulbs), 313000 employers, 645$ billions in assets; market capitalization (value of all the
shares), 390$ billions32.
Take the federal government in 2004, revenue of 194$ billions, 1700000 employees, 105$
billions in assets.
Coase’s economic theory of the firm is that it is profitable to establish a firm because there is
a cost to using the price mechanism. What is Knight’s alternative explanation for the
organization of firms?
Knight says it's fine to say there are efficiencies for using the market, but risk is more
dangerous than transaction costs. Risk and people's ability to take risks and expand their gains
(and potential losses). Some people are willing to give their liberty (of entrepreneurship) for a
31
32
Buying all the steps in the value chain.
According to Wawa's Website, they'll reach a trillion dollars in 2006.
15
16
paycheck. Coase says this doesn't make sense because people wouldn't need to be hired by riskloving entrepreneurs; they could hire "risk-consultants"33.
What are negative and positive externalities? How is the relative efficiency of the firm over
the price mechanism of the market affected by positive and negative externalities? What factors
other than transaction costs might make it cheaper to use the firm and more costly to use the
market?
Actions  benefits (positive externalities, benefit of a party not doing the action)
 costs (negative externalities, e.g. pollution).
Link with limited liability and Salomon. Can the risk that you shift on your creditors be
considered an externality?

No one theory explains all of human behaviour, not even economics. Do other, noneconomic explanations exist to explain the presence of firms?
34
4 WHAT ARE THE DIFFERENT LEGAL FORMS OF BUSINESS ASSOCIATION?
This reading presents a somewhat technical account of the sole ownership, partnership and
incorporation and paves the way for a discussion of legal personality of the corporation, which
is the focus of the next section of the course.
4.1. A few reminders and ideas.
4.1.1. The trust.
In order to avoid fees associated with transaction of lands, the title in the land was bifurcated
title in legal (with a very strong fiduciary obligation over the trust property) and equitable title
(beneficiaries).
The trust is absolutely foreign to civil, but Quebec adapted it for its new Code (art. 1260
CcQ35). Slightly different from the administration of the patrimony of another (where you
manage a patrimony that is not yours, but it's not an autonomous patrimony). [see ]
A business trust is a trust in which the property is business-related (a corporation, for
instance).
4.1.2. Principle and agent.
Necessary to understand partnership. In civil law, it's the mandate (art. 2130(1)36). In a
"normal" situation, A binds himself with B; in a mandate situation, A, mandatory (principal) asks
the mandatory (agent) to do stuff that'll bind him to B. Creating a legal relationship with a third
party and you have the ability to do so. Why would you do this? Time, efficiency, secret
33
Which explanation do you find more compelling? Plus maybe 60 years ago but today, there's risk even being
employees.
34
Why does it pay to be in the Board room? Pay is 172 000 to go to 8-9 board meetings. But you usually sit in 4 or 5
of them. And a lot of liability.
35
" A trust results from an act whereby a person, the settlor, transfers property from his patrimony to
another patrimony constituted by him which he appropriates to a particular purpose and which a trustee
undertakes, by his acceptance, to hold and administer."
36
Mandate is a contract by which a person, the mandator, empowers another person, the mandatary, to
represent him in the performance of a juridical act with a third person, and the mandatary, by his
acceptance, binds himself to exercise the power.
16
17
principal, amongst others. If the mandatory doesn't exceed his role, he's not liable, because he's
only acting upon instructions (it's important because it's the mandatory who signs the contract).
4.1.3. Un/secured creditors.
A secured creditor is someone who has a first claim to your assets37. Now, if the lender is not
sure about being repaid, he'll take a security interest (pay us back or we'll take your stuff back),
by doing that, they have less risk. Also, if this unfortunate event called bankruptcy happens, they
get whatever's left of the assets before unsecured creditors can hope to see the color of their
money38. To be a secured creditor, you only have to register –the biggest barrier for starting a
business is the General Security Agreement (GSA) with the bank which would take the first part,
so it's not really worth it; for pay-later things (good credit?), the secured creditor is the
manufacturer39. It's like Lavoisier: if the bank's risk goes down, the unsecured creditor's goes
that, but capital also gets up (from the bank). Also, unsecured creditors might do business with
many people.
4.2. Four types of business.
It is up to the entrepreneur to choose the form of business association to meet his needs.
Factors to consider include the need to raise capital, one’s desire to retain control, issues of
liability and taxation concerns (we will not be dealing with these latter issues). Note as well that
a business may change its form of association throughout the life of the business. A company
that begins as a sole proprietorship may become a corporation, and a corporation may become a
business trust, depending upon the needs of the investors and those responsible for the
management of the business.
4.2.1. Sole proprietorships.
KLEIN, William A. and COFFEE, John C. Jr., Business Organization and Finance – Legal and Economic
Principles, (1993) Westbury, New York, 5, 51 [R. 69]
The sole proprietor. That is one owner (which doesn't mean that owner cannot hire many people). It
can be the owner of the business, of what is sold (though it could also be a form of consignment). Most of
the assets in a sole proprietorship have been acquired in an open account (or trade account), that is a
non-guaranteed payment arrangement (goods are purchased and delivered without payment, which will a
good faith purchaser will do later). Even if she keeps separate records for her business and her personal
assets (to know where she's going in business and for tax purposes), her assets can be mixed by
creditors: there is no veil between them. The liability is unlimited (unless the loans were nonrecourse
loans, that is directed at specific assets, which is unlikely in a sole proprietorship situation).
Equity is the difference between the value of the business and the amount of the debt, between the
capital and the obligations between the market value of a property and the claims held against it (the
original value will count as "historical record").
Leverage: financial advantage of an investment that controls property of greater value than the cash
invested (usually achieved through borrowed money).
No separation between control and ownership, no separate legal personality. You just start to
work and voilà, your business is in ze pocket. All the benefits also go to your pocket, minus, of
course, the obligations, towards your creditors and your employees (because you can hire, you
37
Independent film, Rose's Legal something whose motto was: "if you're a 100,000$ in debt, it's your problem; if
you're a million dollars in debt, it's the bank's problem. "
38
Professor Walsh calls them "the Great unwashed".
39
Note that for the employees, the directors are personally responsible to up to six month wages for the employees
(which is why they usually pay the employees before the creditors).
17
18
could even hire a manager, so there would be separation of ownership and control, but also an
employer-employee relationship). For tax purposes, you can deduct your business from your
personal tax declaration (Canada likes entrepreneurs).
However, since there is no separate legal personality, the liability of the sole proprietor is
unlimited (you get all the blame), personality.
4.3.2. Partnerships.
KLEIN, William A. and COFFEE, John C. Jr., Business Organization and Finance – Legal and Economic
Principles, (1993) Westbury, New York, 5, 51 [R. 69]
Partnership [73]. Managing a business might be a lot of risk for a sole proprietor, who could want to
share the risk (and the control) with someone. The partnership rules were designed for small firms
(because very often the personal relationship is an important element of the formation of the partnership),
but not big firms might also try it in a joint venture (in such situations, the parties will most probably have a
detailed agreement about their relationship, but anything left unsaid will fall back on the default rules, so
they are still relevant).
But why join ownership? To acquire more resources? Possibly, but not quite enough. Because we
need to assemble risk and capital. Note that with risk comes profit, but it might be better than debts and
loans.
This is joint economic activity (in the sense of capital contribution, no labour40). Partnerships
are like mutual agencies (and they are sometimes even called so): any partner can bind any/all
other partner. Partners are not always equal; you can negotiate your risk and control (if you want
to limit your liability, stay away from control).
Why partnerships? More flexibility for capital41, risk spread on two people (though there still
isn't any separate legal personality), and perhaps tax rationales. Capital from elsewhere probably
mean that control will have to be given away, but not necessarily, some people do not want
control (and thus liability because “control follows risk”), they are willing to exchange an
investment for benefits and that's it.
Name/Genre
General
partnership
Limited
partnership
Limited
liability
Common law
Usually established by contract.
Note that if two people carry on business with
profit, there's a partnership (because of third
parties, who might have thought the assets were
joint).
To join a partnership, you have to pay42.
One general partner, with control and taking the
risks, and several limited partners, just giving
capital: flexilbity with the hability to raise capital.
LPP/sencrl
All the partners are only responsible for their
40
Civil law
Société en nom collectif,
art. ; 2198 et s. CcQ.
Usually established by
contract.
To join a partnership,
you have to pay43.
Société en commandite, art.
2236 CcQ
undeclared
parterniship/société
Note that stricto sensu, you can't talk about "partnership property" (formed used because of the capital influx)
because it's not a legal person, so he can't own anything, the property is to the use of the partnership, it doesn't
belong.
41
Note that the partnership might come from the person with the capital instead of the person with the money
42
But law firms lend it to you.
43
But law firms lend it to you.
18
en
19
partnership
own negligence (otherwise, it's mutual agency).
Often
however,
partners
will
have
indemnifications agreements (but this is not law
imposed). This is a creature of the legislations (the
others came from common law).
participation, art. 2250
mais 2253 très important
COPIER: mutual agency is
not the default here, but
default, you are responsible
for yourself unless the third
party thought you were a
partnership
Example of [Pam; Walter; Abe and Bill]
Pam gives 20 out a purchase price of 200; Walter has a secured loan for 150; Abe&Bill give
15 each; A&B are going to charge a significantly increased interest rate –but by puttng a higher
burden, Pamela will stress and the burden will be too heavy, they can't push her to banruptycy,
she can't be insulated from harm bevause she ony gave 20, she has to have the moral hazard 44 of
the 200 (it's like insurance and deductibles); so Pam A&B will form a partnership].
4.3.3.Corporations.
Only one with a legal personality. See the rest of this class. The modern corporation is quite
different from its historical antecedents. Perhaps the most significant difference is the separation
of ownership and control that comes with the rise of managerial capitalism and dispersed share
ownership. The most significant problem, according to many commentators, is that of agency
costs. Those who control the corporation but do not possess significant ownership interests may
not be sufficiently motivated to work hard to ensure the optimum performance of the
corporation. They may also be tempted to divert some of the profits of the corporation for their
own interests instead of the interests of shareholders. Similarly, shareholders are subject to a
collective action problem, given that their ownership interests are generally much less than a
controlling interest and therefore do not justify the degree of monitoring necessary to ensure that
management works in their interests. The solution is to look to corporate law to impose
obligations upon management to address agency costs by ensuring that managers remain loyal
and act carefully so as to engage in only necessary risk-taking.
4.3.4 Trusts (income, business, other, reit?).
FLANAGAN, “Business Applications of the Express Trust” [WebCT]
The number of trusts is hard to assess because they don't have to be declared and they can arise
anywhere, in business or in a testamentary matter, f.ex. They are useful: separation of legal and equitable
title, absence of significant statutory regulation and default fiduciary status of the trustees (to avoid
opportunism problems), avoid problems due to the privity of contract, possibility of joint control,
investment vehicle (mutual funds), creditor-proofing (asset protection), tax reduction (but legislation tries
to make it useless).
What is meant by the term, “moral hazard”?
A hazard arising from any nonphysical, personal characteristic of a risk that increases the possibility of loss.
A situation in which someone insured against risks will purposely engage in risky behavior, knowing that any costs
incurred will be compensated by the insurer. A financial system which offers "rescue packages" may encourage
borrowers and lenders to undertake low-quality or high-risk investments, thus increasing the likelihood of a crisis.
A situation in which one of the parties to an agreement has an incentive, after the agreement is made, to act in a
manner that brings additional benefits to himself or herself at the expense of the other party.
44
19
20
Professor Flannigan has argued that the so-called "control test" from U.S. jurisprudence should be
applied to trusts in Canada to determine whether or not beneficiaries can be held liable. So long as the
beneficiaries remain passive in the conduct of the business, their direct liability is limited to the value of
their interest in the trust property. However, limited liability is lost if the beneficiaries exercise control over
the enterprise in which they are interested. The "control test" from the U.S. jurisprudence is analogous to
the control test which is statutorily applied in Canada to limited partners in a business carried on through
a limited partnership. Other point, where the trust is bare (trustee's only function is to hold the legal title),
the beneficiary will be held liable (by applying agency principles). Where the trustee has significant
fiduciary powers or responsibilities and that the beneficiary can't interfere, Flanaghan thinks a third party
cannot sue the beneficiary directly, but rather must pursue his or her remedies against the trustee as
legal owner, and the trustee will then have rights against the trust property.



What business purposes are met by using the trust form of business association?
Who is liable for obligations incurred during the operation of the trust, and to what extent?
What is the relationship between settler or beneficiary control and liability for obligations
incurred during the operation of the trust?
MCCUNN, Timothy J.. “The Business Trust: Nature and Uses” Borden Elliot Scott & Alyen. November 19 - 20,
1999 [WebCT]
What is a Business Trust? It's a trust (i.e. an equitable obligation binding a person [the trustee] to deal
with property over which he has control and legal title [the trust property] for the benefit of persons [the
beneficiaries]) used for business purposes (e.g. mutual fund, pension trusts, securities and asset
protection, property holding, voting trusts 45, charities etc.). Thanks for the truism.
Aside from the usual characteristics of a trust (a settlor, an unequivocal intention to create a trust, a
disposition of property to a qualified trustee and identified beneficiaries), the Declaration of Trust would
include matters such as centralized management, continuity of existence despite death or retirement of
trustees, freely transferable interests in the trust property, and the limited liability of beneficiaries
(necessary, as was in corporations).
The trustee is liable to third parties with whom he deals and can be compensated (the trust is not a
separate legal entity unless made so by a particular statute). There is also a difference with the creditors's
reaching of the assets.The business trust is less popular in Canada than it is the US for three reasons: (1)
uncertainty (you need a minimization of risk and there is some uncertainty with regards to liability of
beneficiaries and enforceability); (2) unfamiliarity; (3) separation of benefits and control (if you invest a lot
of money, you'll want control and thus interfere with the autonomy of the trustee).
Why the engouement? Tax treatment and the lack of statutory regulation (lack of shareholder
meetings, annual corporate filings and all of the other types of statutory rights and obligations contained
in our corporate statutes). Also, the trust has separate existence, a beneficiary has no direct liability;
perpetual existence; and freely transferable ownership.
The liability issue is unclear (aside from what was said above). See Flanaghan, above. About,
enforceability, same uncertainty. A trust is not a legal entity, more like a big agency (all contracts are with
the trustee acting as a principal, and all actions based on that contract are against the trustee personally).
The trustee has a right to indemnification out of the trust property, unless he misconducted himself. «The
law in Canada is clear that even in circumstances where a trustee will be entitled to claim personal
indemnity against the beneficiaries, creditors of the trustee will not be subrogated to the trustee's right of
indemnification but will be able to reach the trust property through the trustee's right of indemnification out
of the trust property […] By using a corporation many of the trustee liability concerns disappear.»

Against whom can creditors (both voluntary and non-voluntary) enforce obligations? Can the
obligations ever be enforced against the beneficiaries?
45
voting trust: when a group of shareholders wish to act jointly for a single purpose, a trustee arrangement is often
the best vehicle (often these arrangements are also a "bare" trustee type of arrangement).
20
21
LEVIN, J.A. "Business Trust Financing and Restructuring in Canada: Key Banking and Insolvency Issues" 63
Fasken Martineau DuMoulin March 21, 2005. [WebCT]
Business trusts are being used extensively in Canada as unincorporated alternatives to corporations.
The trustees' role won't be very different from the directors and the beneficiaries will get to vote on what
the shareholders voted. Why the engouement then? Because they offer «high yields, particularly in an era
when yields on debt (which embody the risk of equity security) instruments have significantly fallen»,
interesting tax deferrals (not considered income but return of capital) and (for managers) no oppression
remedy. Also, a trust is not a “legal person”, unlike the corporation (cannot be a “debtor” or “insolvent
person”: the analogies in the domain of insolvency are harder to make –the business trusts can seek
relief under insolvency statutes but it's unavailable to the creditors: greater long-term value but
enforcement is hard.

All other things being equal, if a lender was faced with a choice between lending funds to a
business trust and lending funds to a corporation, which would be the better choice?
Not a legal entity, a relationship. The trustee has a very strong fiduciary duty (stronger than
for directors of a corporation; hard to monitor is they are acting if your best interest); income but
no control. In all these trusts, the beneficiary is the settler.
Why would you use it? You can hold property holding a transaction???; strict fiduciary rules
(Phipps v. Boreman46) which take care of the agency behaviour problem, it can be used to
maintain an objective, asset protection (can't transfer the title to creditors in the normal course of
business), tax advantages.
The trustee will only be liable if he exceeds his authority, even if he signs all the documents.
If he contravenes with the trust instrument, then he won't be indemnify by the trust fund.
Trust liability and third parties: where is the risk going? If the benef is taking part in control
of the trust (i.e. they instruct the trustee what to do), the trustee becomes a bare trustee, he is
stripped of his liability, which is shifted on the beneficiary-who-talked-to-much. There is
however a control test (evidentiary threshold).
Business as a Third (or sixth) Language: Vocabulary Exercise. Define the following:
Market. It is the sphere of commercial activities, the place where goods and services can be
traded, bought and sold. It operates under the mechanism of supply and demand, which allocated
the resources according to a price mechanism that makes bidding and asking match.
Capitalism. Economic system based on the private ownership (and control) of the means of
production. Also said to be a social system because of the behaviour the maximisation of profits
leads to47.
46
The trustee thought of a good idea, but the terms of the trust made said the number of shares couldn't be changed,
so the trustee bought, with his own money the majority of the shares, fired management, changed a few things
around, and realised a profit for the beneficiary (as well as for himself). Well the courts decided it was a breach of
duty and that he owed the beneficiary all the money.
47
You have two cows. You sell one and buy a bull. Your herd multiplies, and the economy grows. You sell them and
retire on the income.
AN AMERICAN CORPORATION -- You have two cows. You sell one, and force the other to produce the milk of four cows. You are surprised
when the cow drops dead; FRENCH CORPORATION -- You have two cows. You go on strike because you want three cows; A JAPANESE
CORPORATION -- You have two cows. You redesign them so they are one-tenth the size of an ordinary cow and produce twenty times the milk.
You then create clever cow cartoon images called Cowkimon(tm) and market them world-wide; A GERMAN CORPORATION -- You have two
cows. You re-engineer them so they ve for 100 years, eat once a month, and milk themselves; A BRITISH CORPORATION -- You have two
cows. Both are mad; AN ITALIAN CORPORATION -- You have two cows, but you don't know where they are. You break for lunch; A
RUSSIAN CORPORATION -- You have two cows. You count them and learn you have five cows. You count them again and learn you have 42
cows. You count them again and learn you have 12 cows. You stop counting cows and open another bottle of vodka; A SWISS CORPORATION
-- You have 5000 cows, none of which belong to you. You charge others for storing them; A HINDU CORPORATION -- You have two cows.
You worship them; A CHINESE CORPORATION -- You have two cows. You have 300 people milking them. You claim full employment, high
bovine productivity, and arrest the newsman who reported the numbers; AN ARKANSAS CORPORATION -- You have two cows. That one on
21
22
Vertical integration. Organisation of production where one company acquires (owns, controls) all
the stages of production and distribution of a product.
Horizontal integration. Organisation in which one company acquires products at the same level
of processing.
Holding company. Company whose sole purpose is to hold (control) other companies (owning its
securities, in most cases with enough shares to secure voting control).
Merger. Combination of two or more corporations in which one of the corporations survives and
the other corporations cease to exist. The surviving one acquires all the assets (and liabilities) of
the disappearing entity.
Trust deed. The instrument given by a borrower (trustor) to a trustee vesting title to a property in
the trustee to ensure the borrower’s fulfillment of an obligation.
Trust certificate. Document evidencing the beneficial ownership of a trust estate of an equity
participant (or owner participant, trustor owner, or grantor owner) in an owner trust
Share certificate. Document issued to a shareholder of a company indicating his ownership in a
specific number of shares of the company, therein described.
5. SEPARATION OF OWNERSHIP AND CONTROL48.
This involves a controversial claim: why should all the benefits go to those who are in
ownership? or rather, what about the stakeholders? This is the subject of some criticism.
the left is kinda cute; ENRON CORPORATION -- You have two cows. You sell three of them to your publicly listed company, using letters of
credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows
back, with a tax exemption for five cows. The milk rights of the six cows are transferred via an intermediary to a Cayman Island company
secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The annual report says the
company owns eight cows, with an option on one more. Sell one cow to buy a new president of the United States, leaving you with nine cows. No
balance sheet provided with the release. The public buys your bull; ARTHUR ANDERSON, LLC -- You have 2 cows. You shred all documents
that Enron has any cows, take 2 cows from Enron for payment for consulting the cows, and attest that Enron has 9 cows;
FeudalismYou have two cows. Your lord takes some of the milk; Pure SocialismYou have two cows. The government takes them and puts them
in a barn with everyone else's cows. You have to take care of all the cows. The government gives you all the milk you need; Bureaucratic
SocialismYour cows are cared for by ex-chicken farmers. You have to take care of the chickens the government took from the chicken farmers.
The government gives you as much milk and eggs the regulations say you should need; FascismYou have two cows. The government takes both,
hires you to take care of them, and sells you the milk; Pure CommunismYou have two cows. Your neighbours help you take care of them, and
you all share the milk; Real World CommunismYou share two cows with your neighbours. You and your neighbours bicker about who has the
most "ability" and who has the most "need". Meanwhile, no one works, no one gets any milk, and the cows drop dead of starvation; Russian
CommunismYou have two cows. You have to take care of them, but the government takes all the milk. You steal back as much milk as you can
and sell it on the black market; PerestroikaYou have two cows. You have to take care of them, but the Mafia takes all the milk. You steal back
as much milk as you can and sell it on the "free" market; Cambodian CommunismYou have two cows. The government takes both and shoots
you; MilitarianismYou have two cows. The government takes both and drafts you; TotalitarianismYou have two cows. The government takes
them and denies they ever existed. Milk is banned; Pure DemocracyYou have two cows. Your neighbours decide who gets the milk;
Representative DemocracyYou have two cows. Your neighbours pick someone to tell you who gets the milk; British DemocracyYou have two
cows. You feed them sheep's brains and they go mad. The government doesn't do anything; BureaucracyYou have two cows. At first the
government regulates what you can feed them and when you can milk them. Then it pays you not to milk them. Then it takes both, shoots one,
milks the other and pours the milk down the drain. Then it requires you to fill out forms accounting for the missing cows; Pure AnarchyYou
have two cows. Either you sell the milk at a fair price or your neighbours try to take the cows and kill you; Pure CapitalismYou have two cows.
You sell one and buy a bull; Actual CapitalismYou don't have any cows. The bank will not lend you money to buy cows, because you don't have
any cows to put up as collateral; EnvironmentalismYou have two cows. The government bans you from milking or killing them; Political
CorrectnessYou are associated with (the concept of "ownership" is a symbol of the phallo centric, war mongering, intolerant past) two
differently - aged (but no less valuable to society) bovines of non-specified gender; SurrealismYou have two giraffes. The government requires
you to take harmonica lessons.
Random recap of what we've seen so far: Part I. Five common features; …; Investor "ownership"; Is corporate law
a legal product (Delaware effect); Part II. Broad strokes of the structure; why does it take this form (Coase) [Most
jurisdictions don't allow doctors and lawyers to incorporate, for liability purposes (can't have limited liability).
Ontario allowed its doctors for a while (that or a strike). And the LLP was a compromise.]; Corporate law is the
constitutional law for private actors. If it's a competing form of law, you will have a conflict (we saw that with the
real-seat theory). Secondly, the corporation as the replacement for the price mechanism (the invisible hand has
become the visible hand of management);
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5.1. What is being criticised: the Dominant View of the Corporation.
BERLE, Adolf A. and MEANS, Gardiner C., The Modern Corporation and Private Property, 1-4 (1967)
Harcourt, Brace & World, Inc., New York, 293 [R. 77]
Discuss the problem of the Agency: because of the separation of ownership (shareholders) from
control (managers and directors), managers who might run the corporation incompetently or in their selfinterest rather than in the shareholders' best interests. There are also concerns about free riders and
other collective-action impediments to widely dispersed shareholders' abilities to hold management's feet
to the fire on their own.
The shareholder primacy norm: Directors are charged first and foremost with protecting the
shareholders' interests. Shareholders are the residual claimant, as such, they are encouraged to detect
and punish dodging (which will enhance their residual claim; that's why we say they have the ultimate
monitoring authority).
What can you also do to minimize the agency problem? Impose duties of the Board as a whole: the
twin duties of care (duty to not be negligent in managing the corporation) and loyalty (duty not to be
"selfish", e.g. to not divert corporate opportunities for personal benefit or to engage in transactions where
the director has a conflict of interest.), in addition to the obligation of good faith. However, these duties
are lessened in practice where directors enjoy substantial protections from liability for breach of duty
(business judgment rule, indemnification and insurance, exculpatory provisions in the articles of
incorporation, good faith reliance on expert advice, and insurance contracts).
This is what the article was picked up for. However, it also pondered whether other interests than the
shareholders should be served [293] "…other or wider group"Duties of the Board as a whole: the twin
duties of care (duty to not be negligent in managing the corporation) and loyalty (duty not to be "selfish",
e.g. to not divert corporate opportunities for personal benefit or to engage in transactions where the
director has a conflict of interest.), in addition to the obligation of good faith. However, these duties are
lessened in practice where directors enjoy substantial protections from liability for breach of duty
(business judgment rule, indemnification and insurance, exculpatory provisions in the articles of
incorporation, good faith reliance on expert advice, and insurance contracts).
There are two competing logics within the firms. First, the traditional property logic [293], that says the
corporation should be managed for the benefits of the people to who it belongs, the shareholders (and in
a certain stretched way, the stakeholders as well). However, the separation of control and ownership
permitted the ones in possession of control to use it against the owners: trust-like rules were developed to
avoid such situations where the risk is also severed from management (not doing too good, breach of
fiduciary duty is hard to prove because corporations are so diversified it's hard to come up with a single
fixed standard –and courts are afraid to review it).
Second, the logic of profit, however, is the one economists would use (and is the one the author
seems to favour). The socially beneficent results come not from the wealth itself but from the efforts to
acquire wealth. While the owners of a private business receive the profits (just like the shareholders), it is
important to remember that they perform management functions. However, in a corporation, where
control and ownership are distinct, how can you have incentives to act efficiently if the profits are
earmarked for the security holders? It would make more sense to have only a fair return to capital
distributed to the owner, and the rest would go to management (interests to managers, wages of capital
to stockholders).
There two logics are competing and our system makes no sense. Why? Because it's based on Adam
Smith's theories, which disregarded big firms, which have become the most part of our economy. (a)
Today's private property includes passive property (shares, interest but no responsibility) and active
property (plants, good will, the organisation itself, etc.), with are owned by different people, which
changes the risk-control-capital picture. (b) today's wealth is often mostly intangible and easier to
exchange (control is different) (c) the private enterprise can today be held by thousands of people (d) not
everything can work on the individual initiative (an army? a corporation?) (e) the desire for profit is not
everything [delicious zing quote] "it is probable that more could be learned […] studying the motives of an
Alexander the Great, seeking new worlds to conquer, than by considering the motives of a petty
tradesmen of the days of Adam Smith"; (f) competition is not the sole regulator of the industry, or the best
for that matter: today's competition is shaped by big actors (oligopoly).
Consequently, the corporation should be reconceptualised. No one is a permanent owner and
ownership has become depersonalised. Three choices: (1) only the owners, i.e. the shareholders, or, in a
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wider sense, the security holders, should be recognised as the object of corporation activity and thus get
profits (strict property view); (2) corporate development has created a new set of relationships, giving to
the groups in control powers which are absolute. This is freaky and could lead to a lot of evil; (3) BUT
neither control nor ownership can stand against the paramount of the interest of the community.
5.2. Response to the Agency Problem: property analysis or contracts?
5.2.1. What is the Agency Problem?
Basically, the agency problem is based on the assumption that you won't work as hard for
other's property and that there's also the temptation to divert profits for yourself.
5.2.2. The traditional property analysis
The legal response to this terrible human problem is the traditional property analysis: by
imposing duties such as loyalty and care, you are guaranteed your property. However, such
limits imposed on directors and officers will make them take less risk, so they won't be blamed,
and the rendement is less strong because the level of risk taken is suboptimal. Put bluntly, what
do you prefer: risk and stealing or no stealing and no profit?
Also, applying the traditional legal conception of property, whether common or civil law, to
the modern corporation, the profits of the corporation belong to shareholders and to them only:
they are the only ones who invested, who own, it should only benefit them (exclusivity of
property).
5.2.3. The economic analysis
However, on the economist's point of view, property rights are irrelevant, since what you
want is the most efficient outcome: in giving all the benefits to the shareholders, you might be
overcompensating them because they don't invest differently if they get a 5,5% rendement or a
6,5%. Given that there is no difference and that managers will get the same pay, why would the
Board work harder? On the other hand, if they get incentives (e.g. part of the profit).
So we see that the legal (which says all profit must go to shareholders) and the economic
(which says the directors and officer should get some) analyses offer opposite responses! Berle
and Means say we should work with a mixed approach because no matter the business, it's still a
social enterprise, with a form of firm identity (but this wasn't picked up in the article), and this
would be consistent with property because when deciding to invest, you waived (implicitly) your
right to control: you have the separation of ownership and control and the idea of residual profits
that you split up.
5.3. Texts
5.3.1. Berle & Means
Berle and Means refer to a new concept of a corporation which involves both a concentration
of power similar to that held previously by religious and political entities, and the integration of a
wide variety of economic interests. This leads to demands for greater accountability in the
exercise of corporate power. What three alternatives do Berle and Means consider as possible
responses to such demands? Which do they prefer, and why?
[313] "the law of corporation might well be considered…economic statementship"
Yes, the corporation (and management) owe obligations to the shareholders, but also to
employees, creditors (in/voluntary), the community and other states, about for (a) the distribution
of profit; and (b) considerations in decision-making. Of course, these people can be the
same/interrelated (so decisions would be easier if only the shareholders were concerned –also the
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others don't have a say in the corp, whereas the shareholders have a choice). Social justice (not
too many incentive expect maybe the idea that you have to pay because the system is designed
for you to make money49).
5.3.2. Chandler, Managerial Hierarchies
CHANDLER, A.D. Jr., "Managerial Hierarchies", Organization Theory – Selected Readings, ed. by D.S. Pugh, 7
(1990) Penguin Books, UK, 95 [R. 77]
Major sections are (and have probably always been) dominated by big business, who are under the
control of managers ("The visible hand of managerial direction has replaced the invisible hand of
marketing mechanisms in coordinating flows and allocating resources."). Chandler: why, when, how did
this happen?
What does Chandler mean when he talks about family capitalism, financial capitalism and managerial
capitalism? Can you give an example of each?
Family capitalism (Rockefeller, Standard Oil & Antitrust law), financial capitalism (banks) and
managerial capitalism (professional class of managers and MBA students).
Manager enterprise and managerial capitalism. A modern business enterprise (1) contains many
departments distinct from one another (2) has managers (middle and/or top) to supervise these units
(new class of businesspeople). The modern business enterprise began and expanded by internalizing
activities and transactions previously carried out by a number of separate businesses 50 (higher profit
through a centralized hierarchy than by decentralized market mechanisms). If it's successful (high profits),
it's powerful. On the other hand, they also got more specialized (thus more dependant), and capitalism is
no the owner/decision-maker symbiosis it used to be (esp. now they are not family-owned). Managerial
capitalism now dominates producing and distributing sectors in every major market economy.
The US. Before extensive communications (see next section), the American economy couldn't have
come with (and supported) multiunit enterprises or salaried managers. But the specialization of
businesses (necessary move to avoid competition), increase in volume and development technology
made them stray from the reach of the invisible hand of market. In sectors dominated by the new, large
enterprises, the top-level managers of a few multiunit companies made the decision previously made by
thousands of small firms.
Transportation and communications. Distribution. Production. For Chandler, the managerial hierarchy
first emerges in the 1850 with the railroad, telegraph, telephone, are consolidated in the 1880s with
networks allow new modes of distribution to emerge and mass productions being integrated with mass
distribution (Sears, Macy's, Quaker, GE). Transactions become routine (transactions costs go down –
LIEN COASE). The domination of managers only comes with industrial firms built through mergers. Also,
all these developments created a need for external cooperation among managerial hierarchies
(sometimes it worked, sometimes not), but this meant the creation of sub-levels of managements
(feudalism, here we come!).
The integrated industrial enterprise. Around the 1880s enterprises that integrated mass production
with mass distribution produced only four categories of goods: low-priced, semiperishable, packaged
products; processors of perishable products for national markets; manufacturers of new mass-produced
machines; and makers of high-volume producer goods. New firms adjusted their production to fit
customers' needs. The limits to effective administrative coordination were directly related to scheduling
and marketing needs. Ça sonne oligopole et cartel. Esp. since mergers started and a lot of them. Then
the Sherman Antitrust Act was passed in 1890: it declared trusts associations (or anything else that
served the same purpose of restraining trade) illegal. New Jersey’s general incorporation law, passed in
1889, permitted a company formed to hold stock in another to receive a charter simply by filing a form
and paying a fee (no more governmental approval). This ended the mergers and replaced horizontal
acquisition with vertical integration (and created a managerial hierarchy through the operating units
instead of a ruling class in an industry).
What was the legal significance of the Sherman Antitrust Act of 1890 and New Jersey’s general
incorporation law in 1889? Does it seem odd that once again, the business trust is gaining in popularity?
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50
Oh boy…
From Danielle Moubarak's compiled summary. Danielle@mbrk.net.
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It was thought you could regulate the economy by regulating the corporations (couldn't have
regulated companies, couldn't have a company hold another company, you needed a charter to create a
company, networks of control to make sure the corporations wouldn't be too big, the trust came in to go
around this). For Chandler, it's not the legal system, it's the market. Higer concentration = managerial
capitalism. US = more mass production; how do you get your capitals (loan or shares, etc.).
At the time this article was written, managerial capitalism was less developed in Europe than the
United States. What reasons does Chandler give for this difference? In particular, how has regulation of
the permissible forms of business associations in both the United States and Europe account for the
different concentration of managerial capitalism?
The rise of the managerial enterprise in Europe. The managerial hierarchy was a reality long before
the war, but time made almost all enterprise work under that model after WW2. In Europe, however, the
late 19th century families and financiers continued to make critical decisions, so the managerial class
remained much smaller. Also, administrative techniques and personnel were transferred directly to
business from government. And mass production/distribution were less often integrated (less
growth/diversification). And socio-cultural factors. But it now appears that managerial capitalism is
becoming the dominant system in Europe, though there are still differences.
5.3.3. Testy, Feminist Legal Theory and Progressive Corporate Law
TESTY, Kellye Y. Case Studies in Conservative and Progressive Legal Orders: Capitalism and
Freedom- For whom? Feminist Legal Theory and Progressive Corporate Law. 67 Law & Contemp.
Prob. 87 [WebCT]
Many think public corporation is like an economic survival of the fittest. Testy (yeah, that's her name)
thinks "every economic decision and institution must be judged in light of whether it protects or
undermines the dignity of the human person". Enron-like frauds and the Sarbanes-Oxley Act might give
more voice to the nascent criticism of our corporate shareholder-centered model. But what is that model?
The traditional Berle-Means view of the corporation has been so dominant as to prompt some scholar
to pronounce "the end of history". What is meant by “contractarianism”, and how has this concept affected
the dominant model of corporate law in the United States? By seeing the nature of the firm as a nexus of
contracts (contractarianism), an aggregate of various inputs rather than an entity, it makes law not
mandatory anymore (default rules). It is slowly being more and more criticised, but this criticism
(concerned about illegality, immorality, concentration of powers, environmental degradation, increasing
wealth, lack of democracy) is not integrated.
Some solutions exist outside the realm of corporate law, but if we see the corporation as an (at least)
quasi-public entity, it would have to be regulated in accordance with public interest: instead of solely
shareholders, we'd have stakeholders (workers, creditors, the community, and society as a whole), and
managers would be seen more like trustees for the society in which the "corporate" entity is situated
(major change in role).
Note that in the CBCA and the QCA (as supplemented by the CCQ), directors and officers of the
corporation (“officers” are the senior executives and are employees of the corporation, hired by the
directors; the directors are elected by the shareholders) owe the duties of care and loyalty directly to the
corporation, and not to the shareholders. The interests of the shareholders and those of the corporation,
however, often (but not always) coincide. (Recall the statement from Caldwell Partner’s board member
that the board was interested in long-term corporate profit, while the shareholders were interested only in
short-term shareholder profit).
Feminist Legal Theory and Corporate Law and Governance «One of the goals of a feminist approach
to law is the elimination of gender-based classifications in order to promote both formal and substantive
equality. Furthermore, as feminist legal theory has progressed, it has increasingly focused on power
relationships, group-based oppression, and systemic subordination.» This being said, feminist haven't
fostered much change in the corporate culture. Main article in this area (i.e. corporate law and not women
in corporations) was Theresa Gabaldon's The Lemonade Stand: Feminist and Other Reflections on the
Limited Liability of Corporate Shareholders discusses the concept of limited liability, doesn't want it to be
repelled, but she argues for shareholder empowerment and enhanced insurance requirements for
business enterprises.
Today there are three key points: What are the three key insights that feminist legal theory
contributes to progressive corporate law? (1) challenge to shareholder primacy and an argument that
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corporate decision-making should consider a wider array of constituents without the hierarchy of the
shareholder primacy model; (2) The second is a critique of the shortcomings of existing fiduciary duty law
(care and connection should be increased); (3) critique of concentrations of undemocratic corporate
power together with an argument that to the extent that power works hardships on individuals in society.
Le tout mâtiné de considérations sur les femmes du «troisième monde» («Commitment to Equality and
Human Flourishing»).
Such considerations, are very close to the progressive critique of corporate law. Therefore, it must be
made «clear that a progressive vision of corporate law is a feminist vision» [I insist I'm not the one saying
this].
Things to be challenged. The dominant model of the corporation as a vehicle for shareholder wealth
maximization presumes that the modern, well-funded corporation has no public interest dimension. Is this
position defensible? (1) Public/Private Dichotomy (what is private becomes public because the public is
made of private beings); What are some of the legal rules which limit the liability of directors in terms of
the duty of care and the duty of loyalty? (2) Limited Liability (bad because you shouldn't be able to escape
personal responsibility for harms caused to others –should be changed back to protecting human
shareholders and not corporate persons) ; (3) Board of Directors' Duties and Composition: their duty of
care must be redefine: «The dominant conception of directors' duties looks rather much like the traditional
conceptions of a father's parenting role: sitting in an easy chair, feet up, martini in hand, and glad that no
one is telling him that there is any trouble in the house. Duties of care and loyalty need to move from a
fatherly configuration to a motherly one. Loyalty would mean more what Judge Cardozo (demonstrating
that feminist values are not confined to biological females) thought it meant: "the punctilio of an honor the
most sensitive."»; (4) Corporate Personhood: debatable; (5) Corporations and the Political Processes: «in
the United States, government is supposed to be of the people, by the people, and for the people, not the
corporation.»
5.4. Conclusion and Wrap-Up
Progressive law is not an attempt to reject capitalism; it's just an attempt to improve
capitalism. Basically, this comes down to duties and rights. Progressive law has set itself against
the nexus of contracts (the view that internal51 corporate law is nothing more than default
contract rules for the parties): then it would be entirely a private law model and it would make
the rules permissive rather than mandatory. Why is this wrong (if the shareholders all agree to
buy shares nonetheless)? According to the progressive, it's because there is something public.
But where in the corporate triangle do public actors kick in? Environmental, criminal,
community law are all outside the corporation. The only explanation is that the shareholders are
not protected and that you need to impose a fiduciary duty on the directors and officers to protect
vulnerable shareholders.
Too often, the critique comes down to a distribution critique: that's not a criticism of the
corporate governance, but of taxation, or of capitalism. The insight from feminist legal theory is
the idea that you want to challenge the shareholder primacy model: there are other stakeholders.
In some say, it's an economic critique (it en a against the providers, but not against the way the
management is done).
You need a mandatory duty of loyalty and duty of care. What is very odd in corporate law
legislation is that directors and officer gets a contract of indemnity and a few shares (as long as
they act in good faith).
Pay attention to demographics: there is no diversity on the Board of directors. Also need an
awareness of diversity amongst corporation. Out of fairness, should the duties on small family
corporation (mistake you make because you don't know what you are doing) and the duties on a
big d/o for a big firm who knows what he's doing (mistake = other sources, to put it politely).
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Contractarianism
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Also the public/private dichotomy (comes from feminist family law theory). Opening what is
otherwise considered private to be more accountable (should the salary, stock options and perks
of the directors be disclosed –under the idea that they are not private persons, but public, i.e.
corporate, persons).
III. The Emergence of Legal Personality of the Corporation.
COMPARATIVE HISTORY, JUSTIFICATION AND RELATION TO SOCIOECONOMIC FACT
1. THE BASIC PROBLEM: DISPERSION OF O'SHIP BECAUSE IT'S SEPARATED FROM CONTROL
What if Canada had decided that the environment was a legal person52? It's easier to regulate
the interest of a legal person53. It's very convenient for some legal problems (think partnerships
and statements of claim to file a lawsuit having to be signed by everybody).
What legal personality first did was separate ownership from control. But then, the
ownership got more and more dispersed. Legal personality helps solve many coordination
problems, but it also institutionalizes the separation of ownership (shareholders become mere
passive investors rather than entrepreneurs) and control as the directors (directors and officers
become managers who act on behalf of the corporation alone).
Also, since the corporation has interests of its own, the shareholders' are just about
investment (rather than control).
2. THE STAGES OF CAPITALISM AND THE MUCH-NEEDED PROTECTION FLOWING FROM IT
Basically, as soon as you have something between the people and their money, you need to
regulate to protect the shareholders.
2.1. Clark's Thesis
Harvard Law Dean Robert Clark’s oft-cited account of the four stages of capitalism is a useful
backdrop not only to the theme of corporate personality but ultimately to the central problem of
corporate governance which will be the main substantive theme of the course.
CLARK, Robert Charles, "The Four Stages of Capitalism: Reflections on Investment Management
Treatises" (1981) 94 Harvard Law Review 561 [R. 111]
Capitalism had four stages in the past 200 years. With each comes an increase in division of labour,
increase in participation in fruits, and concentration of discretionary power. It's more efficient (empirically,
seems specialisation makes wealth increase).
stage
1st
(start)
time
19th C
who/what
“entrepreneur”
invests,
promotes,
manages
legal/academic correlates
 rise of the corporation as a
business organization
 increased enactment of
incorporation statutes
regulatory strategies
 individual charters from the legislature
 limits on powers and personality of
corporation
 anti-trust laws
Transition: “As the second stage split entrepreneurship into ownership and control, and
professionalized the latter, so the third stage split ownership into capital supplying and investment, and
professionalized the investment function.” (109)
2nd
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early
20th C
“professional
business
manager”
appeared after
 modern publicly held corporation
 development of stable
relationships between
professional managers and public
 affirmative disclosure requirements
 antifraud rules
 government control over immediate
market participants
Saint Lawrence River, LP [legal person]?
Litigation guardian of Big Oak in Westmount Park? However, it takes four pieces of paper to register a corp.
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split between
ownership and
control
investors (dual purpose to keep
managers accountable, but also
to give them full power)
 enactment of federal securities
law
 development of modern concept
of corporate law
 development by courts of fiduciary
duties
 conflict of interest rules
Transition: “As the third stage split the capital ownership function into the decision to supply capital
funds and active investment management, and professionalized the latter, so the fourth stage seems
intent upon splitting capital supplying into the possession of beneficial claims and the decision to save,
and professionalizing the savings decision function.” (109-10).
3rd
1960s
“portfolio
manager”
decides how to
invest others’ $$
 characteristic institution is the
institutional investor, or financial
intermediary
 “basic regulatory approach can be
summed up in the concept of
soundness. By a variety of methods,
public suppliers of capital are insulated
from the consequences of financial
failure by intermediaries.”
Transition: “this sharing … of the benefits of capitalist enterprise has been accompanied by an evergreater concentration of important discretionary powers in the hands of professional managers and group
representatives.” (111)
4th
1980s
“savings
planner”
 demonstrated by increasing
predominance of group (as
opposed to individual) life and
health insurance policies;
increasing use of EE pension
plans
 increased sharing of benefits,
decreased power of individuals to
control investments.
 consumer protection: most importantly,
disclosure requirements that inform the
consumer of the terms of their
participation and their particular
expected benefits.
Clark's thesis is that this separation did not spring out of the blue. For Clark, the law responds
to rather than initiates economic changes. The shareholders became passive so the law gave more
discretionary powers to managers. All these are interrelated and proportionate (1) increased
dispersal of ownership (2) decreased sharing of power (3) increasing regulation. Why (3)? (a)
Protection of tiny shareholders against harm; (b) response to economic disasters; (c) control
management because it's difficult to exercise
How do the emergence of and changes to the corporate form relate to changes in economic
relationships? People have the idea that the law regularises the market; Clark says it's the
opposite: you need a mature economic phenomenon and then the law adjusts. There are,
according to him, four stages of capitalism (you are getting more and more people investing all
along these stages).
Stage 1: the promoter/investor/manager: the person who has the idea, invests and manages
from himself, it's you own business, of which you stay in charge (like sole proprietorship).
Transition: you need to attract investors to create business corporations (incorporation
statutes).
Stage 2: the professional business managers: people no longer want to manage; they only
want a return on their investment.
Transition: you need securities regulations (the securities rules can be more demanding than
the internal corporate governance rule), you can almost think of it as consumer protection
law for shareholders (the point is to protect the share-buyer). After, you'd also want to
regulate institutional investors.
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Stage 3: the financial intermediaries (another layer of separation between management and
control), the institutional investors will have to be regulated.
Stage 4: the savings planner, this is when you start getting into pension funds (pay off your
mortgage first, then toll up your RRSPs, etc.). They will also have to be regulated.
The fifth stage  As many scandals (Enron, WorldCom, Tyco) have showed us, it might be
time to monitor the monitors (Sarbanes-Oxley). It's not enough to have oversight of the
corporation: you need to oversight that person. (at the beginning, what we preferred was to focus
on share transferability rather than on limited liability or on liability punto).
2.2. The Sarbanes-Oxley Act: monitoring the monitors.
2.2.1. The Fifth Stage
The readings on the Sarbanes-Oxley Act are meant to prompt the question as to whether
current developments in corporate law correspond to a “fifth” stage of capitalism. The Sarox54
is doing it through securities regulation and not on corporate. One of the problems was that the
accounting firms auditing the financial statements would perform audit services for the
corporation and they would also do other consulting work for the corporation (conflict of interest
and pressure to say the statements are correct). What is the objective of corporate governance
reform? So you want to regulate not only the companies but also the auditors who were failures
are gatekeepers.
New measures: auditors are now personally liable (the statements said to be correct better be
correct); whistle-blower protection (you are guaranteed not to lose your just for reporting
malfeasance).
AGUILERA, Ruth V. “Corporate Governance and Director Accountability: an Institutional
Comparative Perspective.” British Journal of Management, Vol. 16, S39–S53 (2005) [WebCT]
There will be changes in the post-Enron era. We have seen that «organizational democracy is likely
to be in jeopardy when a given stakeholder group has too much power». Consequently, there will be
more surveillance, more responsibilities on management. For what purpose and to whom should boards
be accountable? What is the role of the boards of directors?
The corporate organization is a social system or collective entity with pluralist interests and some
common goals. Corporate governance refers to the distribution of rights and responsibilities among
the different actors involved in the corporate organization. It will generate conflicts and it is a good thing
for interests to be align in order to deter opportunistic behaviours. Markets changes might be an
opportunity to change or realign these. Many critical challenges await. First, the flawed relationship
between directors and shareholders and their ‘independence paradox’ (to obtain information to verify
accountability, non executive director must depend on exec directors, whom they should be less
dependent on!). The dilemma goes further because non-executive directors are meant to increase the
firm’s social capital, which might be constrained by the rigidity of the system (should the rule be one-fitsall?). Danger of board becoming overwhelmed by hard laws such as the US Sarbanes-Oxley Act.
Professional groups such as auditors, lawyers and accountants
try to restore legitimacy (and avoid being sued) and, consequently, to introduce further rigidity in the
system. Overregulating corporate governance will detract flexibility and risk-taking (to the point some
firms even consider going private), or deter foreign companies. But it is necessary to restore investor
confidence by raising the accountability. Some legal scholars argue that no one can legislate for ethics
and integrity and, instead, that there must be a system of trust in place (Romano, 2004): corporate
governance is recognized as a vital factor in economic growth and financial stability and our efforts should
be put in the corporate culture (reshaping it with more balance).
Question. According to Aguilera, what questions need to be asked before proceeding with a regime
of corporate governance reform?
54
Applies to all companies on the NY Stock Exchange (so extraterritorial portée).
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2.2.2. Is this a good response?
Isn't it loaded legislation with costs of compliance way to high? Aguilera’s article reminds us
that for all its attention and extra-territorial reach, Sarbanes-Oxley remains a US legal response
rooted in US economic culture), and that a “one size fits all” approach to accountability may not
be appropriate.
First, all corporations are not on the same model55. So, maybe the US “you can you this” list
(a checklist approach) has 100% certainty and takes no time to comply this, but it might be fit to
the needs of certain corporations. It is a lot easier to comply with than the vague
Canadian/European “you must provide a fraudless report” approach, but it is also a lot easier to
go around.
Perhaps the real problem (says Clarkor the other author?) is the lack of accountability?
Perhaps we should just remove liability altogether.

Do you think it is a good idea for the CEO of a corporation to be the Chairman of the Board
as well? Why or why not?

Do you think that independent directors make the Board of Directors more accountable?
Why or why not?

Do you think that increased regulation of directors and executives will make them more
accountable to investors? Do you think such regulation will improve the performance of
corporations? Why or why not?
3. COMPARATIVE HISTORY OF CORPORATE LEGAL PERSONALITY AND LIMITED LIABILITY?
3.1. Have LL and LP always gone hand in hand?
Legal personality and limited liability did not always go together. There has always been a
wall between the creditors and the shareholders, but it used to be a chain-link wall, though which
it was possible to poke. But with limited liability, the wall is concrete. Put otherwise, as a legal
person, you get rights, one of which might be limited liability, but it's not the limited liability that
gives you right.
The limited liability approach is not unfair (except for the involuntary creditors), because it’s
the creditors who are in the best position to assess the risk (and they'll get paid first: the
shareholders have protected their assets for a less good take at the company's).
55
In some jurisdictions: Say you have the shareholders, the directors (including the chair of the board, elected by the
shareholders) and the officers (including the CEO, supervising the employees). And you can have the directors be
the officers. Very efficient (because it's often hard to send the officer info to the board). But not always allow
(collusion?). [Wawa parle de Ms] Also, idea that agency principle is based on a certain moral view (perhaps in some
areas, the directorship is meant as a stewardship). In Europe, more stakeholder law. NOTE that the disparity
between the officers and the employees = highest in US. F.ex. in the US, the shareholders can't nominate the
directors on their own (they can only say yes or abstain on the proxies). If you want something else, you need a
dissident shareholder who will send his own proxies everywhere (a little expensive). Director accountability of
directors that can't be elected? At best, you can have shame of resigning. In Canada, you can have a shareholder
resolution from the floor.
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3.2. Historical account going back to limited liability.
PERROTT, David L., "Changes in Attitude to Limited Liability – the European Experience", Limited
Liability and the Corporation, ed. by Tony Orhnial, London & Canberra, 81 [R. 123]
Recall that Hansmann and Kraakman were able to identify five functional characteristics of the
modern corporation that exist across different jurisdictions and legal systems. Two of those functions are
legal personality and limited liability. The entrenched status of these characteristics, however, is a
relatively recent development. As historical accounts of the rise of the modern legal form of the
corporation indicate, limited liability and legal personality were often viewed with mistrust. That these
characteristics are now seen as not simply desirable but essential legal features for the proper functioning
of the modern corporation should not be taken as a sign that these developments were inevitable,
particularly with the case of legal personality.
Thesis: the concept of limited liability56 has not always been crucial to the corporate organization of
business investment and risk taking. But today it is (1860-1960). But Perrot thinks it's temporary. The
main argument is that it encourage investments. Counter-argument, that it's unfair for the creditors, esp.
unsecured. Perrott says (1) it's an economic argument against a moral argument (i.e. a matter of
ideology); (2) managers can be liable for certain things to creditors; (3) moral argument loses force if the
creditors are companies.
History. Roman Law. A first form of agency began with slaves, who could act for their masters but
not hold anything. From mid-republican times, there was a clear notion of limited liability in business
transactions (both for free incorporation and by concessions from the government). Corporate personality
also existed, as well as the societas (partnership), an unlimited business association –the were
unlimitedly liableto third parties but the consent of one of the partners didn't give you the consent of the
other(s). Mandate was also there (and thus personal liability of free agents, not slaves). Romans didn't
relate their two well-developed concepts of limited liability and corporate personality.
Guilds became increasingly involved economically and powerful. At first, they received concessionary
incorporation, then were regulated by charters. They only had limited liability is some joint stock trading
operations, but the purpose of a guild was a monopoly for the members and brotherhood (e.g. though
each member traded on his own account, they'd be liable for the widows and orphans). It happened that
limited liability be granted only if the charter specified so, confirmed in Salmon v. Hamborough Co Case
(1671). Northern Italy. The compera was a form of joint stock operation around the late Middle Ages. It
was first a way of raising a public loan at fixed interest but was eventually converted into genuine joint
stock shareholders with limited liability. Commenda. Its distinctive feature is a mixture of limited and
unlimited liability imposed on different members (interesting allocation of risks). It became widely used all
over continental Europe to finance overseas trade or other high risk enterprises. There was another form
where only labour and no capital was provided (just as today's directors can get shares of the corporation
without giving money, but simply by working).
The medieval societas and compagna. This alternative type of partnership (societas or compagna)
grew out of Roman societas and all partners had unlimited liability for partnership debts. This was now
coupled with a developed theory of agency, whereby each partner was regarded as the agent of all other
partners for the purpose of binding the partnership to third parties.
The societe en comandite (Kommanditgesellschaft). The commenda form of partnership never took
root in England. The English attempted to achieve part of the commenda principle, the attraction of the
form to the non-managing capital investor, by grafting the concept of the elaborate trust on the simple
common law partnership.
England. C18: After the guilds came the investment economy, with a lot of confusion between
partnership, trustees and business associations like the corporation ("we no longer pay each other in
silver, we pay each other in promises" --perhaps an overstatement as loans existed). At first, people didn't
care about limited liability (which could always be obtained by contract), they wanted transferability of
shares.
56
Limited liability in relation to companies is usually taken to mean the principle whereby a member of a company
cannot be made personally liable for the debts and other liabilities of the company beyond a certain amount. The
member’s liability is limited by the shares that he holds in the company, the liability is normally limited to the
difference between the amount already paid to the company on the share, and its fully-paid up value, plus any
premium.
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But this was new and people distrusted it: you needed a charter from the government.
So it was really hard to get, and much harder to diversify, as you always needed legislative
intervention. Tricks came down some sleeves to go around your charter (even if you were not supposed
to): you could acquire a dying company by charter and distorted the meaning of the old charter for new
business opportunities (legal uncertainty as to intraviresness of acts of corporation!) –you then didn't need
to obtain a new concession from the government.
However, there was some abuse, esp. with the South Sea company, which was in competition with
the bank of England. The SS made almost no money from what it was allowed to do by its corporate
charter, but managed to create a bubble (people thought it was doing well so they rushed to buy the
stock: buying the perception). And then the bubble burst.
People complained. As a response, the government enacted the Bubble Act, 1720, the main aim of
which was to restrain claims of any kind to corporate personality on the part of unincorporated
associations. Its effects were to increase the number of petitions for charters and the number of attempts
to introduce private bills in parliament.
England, C19: In R. v. Dodd (1808), the relevant partnership trust deeds provided that “no party
could be accountable for more than the sum subscribed under the regulations therein stipulated.” Lord
Ellenborough referred to this hopeless attempt to provide limited liability without incorporation as a
delusion. Limited liability in this time was not seen as desirable or undesirable, merely as technically
unobtainable, outside formal incorporation by charter or act of parliament.
The Bubble Act was only repelled in 1856 with the Limited Liability Act which gave both limited liability
and free incorporation by agreement of the members.
And then came Salomon v. Salomon (1897): «The House, in choosing not to interfere with principles
of limited liability and corporate personality, allowed economic ideology to triumph over moral argument.»
England, C20: also recognizes the company limited by guarantee. More flexibility, yet (surprisingly
perhaps, the number of unlimited companies has increased these last years).
C20, France [where partnerships have another patrimony, thus a form of distinct
personality]/Germany: Societe: must be formed for the purposes of profit-making (not so for
association).The SCA, SA, and Sarl are always commercial companies and subject to rules of
commercial and civil codes. All societies are regarded as having a corporate personality distinct from their
members. SCA and SA are societes de capitaux, so the identity of the investing members is irrelevant
provided that due capital is provided. The other forms are societes de personnes, where the members’
personalities are important to the business operation. Societe en nom collectif: simple partnership with
unlimited liability, corresponding to Roman societas. Societe en commandite simple/
Kommanditgesellschaft (KG): partially limited partnership, with mixed limited and unlimited liability, from
Italian commenda. Societe en commandite par action (SCA)/ Kommanditgesellschaft auf Aktien
(KGaA): a limited partnership with mixed liability but also with transferable shares for the limited partners.
Societe anonyme (SA)/ Aktiengesellschaft (AG): true public company with limited liability and freely
transferable shares. Societe à responsabilité limitée (Sarl)/ Gesellschaft mit beschrankter Haftung
(GmbH): private company with limited liability. Variety of forms follows French system, but Germans have
shown more ingenuity for reasons of tax avoidance, producing hybrids, and combinations of existing
forms. Gesellschaft des burgerlichen Rechts (GbR): simple partnership with unlimited liability. Offene
Handelsgesellschaft (OHE): simple partnership with unlimited liability, restricted to purely commercial
enterprises and regulated by commercial code, has some corporate personality. Stille Gesellschaft
(SG): silent or dormant partnership with mixed liability, where silent partner is effectively a mere external
loan creditor of a partnership business.
Conclusion. The future – a retreat from limited liability. Certain developments in the commercial
world seem to justify a prediction of further erosions of the limited liability principle: (a) The rise in
numbers, individual size, and market power of enterprises has produced a countervailing demand for
more efficient legal means of control of the activities of such undertakings, particularly ensuring that the
management and ownership of a group be made more accountable for the activities of subsidiaries. (b)
Creation of European Economic Community, which constitutes an organization of devastating legal
novelty.The fact that many have seen this kind of supranational legal power as the only effective antidote
to the rise of multinationals.
3.3. Piercing the Corporate Veil
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Another LL/LP problem is the multinational corporation. Say A, located in the US and
having there is 1080$ in assets57, is the mother of subsidiaries A1 and A2, located in Nigeria and
India and having 100$ in assets. If you want to sue A, the mother (a lot richer, so actually worth
it) for some slave pharmaceutical labour going on at A1 or for a tremendous chemical accident
that happened at A2, you can't, because as A's shareholders have LL, that is there is a wall (the
corporate veil) between A and its subsidiaries.
3.4. Moral persons and real-person rights.
HOVENKAMP, Herbert, Enterprise and American Law, 1 (1991) Harvard University Press, 11 [R. 142]
Mercantism: economic doctrine in which the state must regulate, all corporations are creatures of the
states and corporations have public obligations.
C19: no need for state charter, you owe nothing to the state, but it doesn't help you.
Classical political economy: laisser-faire is the best way to encourage economic development and
capital naturally gravitates to the best investment
Classical model of the corporation: it's not a privilege from the state, it's a method of organisation of
business. Corporations are cooler because they can raison their own capital more directly than others.
Consequently, no more of that ultraviresness/quo warranto, separation of ownership andcontrol and more
interstate activity.
Questions. Can you identify the relationship between economic beliefs and conception of nature of
the corporation? Why does Hovenkamp state that with the separation of ownership and control, “The
American business corporation had become a person but had lost its soul?”
The corp is a legal person for many many reasons, not just for convenience purposes. It has
become more than just a conglomerate of shareholders and managers, it is something on its own.
In Canada, it has freedom of speech for a corporation, protection for its real rights, it can sue in
defamation (in Texas you can, here too, in UK58). They don't have freedom of religion (Big M
Drug Mart).
SANTA CLARA?
The corporation is not distinct from its members (associational), but it's also fictional.  idea
in the end is the same as in Santa Clara, that is that in the end, you still have individuals.
Following Santa Clara, you get the corp as a thir party, as a whole, and what the author calls
director absolutism (given more and more power to manange the corpoariotna dn the role of
shareholders is decreasing rapidly). This was written before the "rise of the institutional
investors", so perhaps things have changed.
QUESTION D'EXM DE MI-SESSION DE L'AN PASSSÉ
Five characteristics: legal personality, limited liability, delegated management, share
transferability and investor ownership. Do all five need to be there? No [LL Amex], but they
usually are, well, some of them are (legal personality is necessary for corporate entity), delegated
management (non plus, but it goes in the sense of history); share transferability (yes); investor
ownership (yes).
Subquestion: is the division of power appropriate? What is appropriate? Legally enforcible?
Fair? cheap/economically efficient? Ethics of care or ethics of justice? Checks and balances
(Horwitz says the consolidation of power of the directors happens at the expenses of the
shareholders)?
4. LEGAL PERSONALITY IN QUEBEC
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58
Apparently the biggest takeover of the 80s, Barbarian at the Gates had taken all the equity in the world.
Dumbest lawyer, UK. Discovery McDo
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PRATTE, Caroline, “Essai sur le rapport entre la société actions et ses dirigeants dans le cadre du
Code civil du Québec” (1994) 39 McGill L.J. 1-26 [WebCT]
La société par action est une institution importante du droit québécoise, mais les principes n'en sont
pas clairement définis, notamment à cause de la dualité du droit commun fédéral et provincial, et de ce
que les régimes spécifiques laissent beaucoup au droit supplétif, notamment quant aux rapport entre la
spa et ses dirigeant.
En droit anglais, le rapport entre la corporation et ses dirigeants est très développé. Or, la relation
fiduciaire qui le caractérise est étrangère au droit civil, qui est aux prises avec l'envie d'importer ce
concept et celle de travailler avec l'idée de mandataire (ou de cumuler les deux). En l'absence de
qualification, il faut regarder les sources, qui sont très anglaises (et donc, non satisfaisantes, malgré nos
automatisme à s'y tourner).
I. Le cadre conceptuel de l'étude de la SPA est tellement pétri de droit anglais qu'on a tendance à
importer aveuglément le droit des corporations dès qu'il est question de personnalité morale (le problème
a toujours existé, dans le CcBC, on avait «Des corporations» ET «des sociétés»). La plus grosse
différence, c'est que l'État doit permettre la personnalité morale (pour, et ce depuis Rome, contrôler les
agissements des groupes). L'idée, qui a existé en Angleterre (prérogative royale par le Bubble Act) a
cependant été abolie en 1825 (l'incorporation était permise par l'enregistrement seul du deed of
settlement). Deux obligations, l'obligation fiduciaire et le devoir de gestion.
Comment cela a-t-il été appliqué au Québec? Difficilement et par emprunt. On a emprunté plusieurs
principes du droit anglais sous le couvert du mandat (ultra viresness, constructive notice, indoor
management, etc.)
Ça, c'était avant le CcQ qui a changé bien des choses. À COMPLÉTER [~20+]
Questions. Can you identify the point at which an opportunity was created for the transplant of
common law concepts of corporate law into the Québec legal system? Why did confusion exist as to the
source of supplemental law for corporations? Would you agree or disagree with the thesis that the civilian
concept of legal personality is more limited in comparison with the developments in U.S. common law
outlined by Horwitz above, particularly concerning the relationship between legal personality and
patrimony in civil law (e.g., to dedicate a portion of the patrimony to a specific use).
Can you identify the point at which an opportunity was created for the transplant of common law
concepts of corporate law into the Québec legal system? Why did confusion exist as to the source
of supplemental law for corporations?
Until 1994, there was no equivalent to "fiduciary duties" in civil law. But with the new code
came a new section called “corporations” (personnes morales in French, as les corporations, ce
sont les guildes que l'on connaît). This being said, clearly, the concept was used before. It was
just that the common law concepts were used in Quebec, instead of mandate, for instance. With
the Code, new words were created where before common law terminology was used (it was
talked about “fiduciary obligations” in Quebec law!). These changes are not only about purity,
there are also about coherence. If the terms are functional equivalent, let's make them fit with the
system in which they'll be used.
When the new Code was drafted, corporations had to be included. It could only fit under one
these three categories (as these categories make the whole Code, the concept had to fit;
otherwise, it would be unharmonised and uncivilian): persons, property and actions. Since it
obviously wasn't property or action, it has to be a person. Which made sense because it has a
patrimony.
Would you agree or disagree with the thesis that the civilian concept of legal personality is more
limited in comparison with the developments in U.S. common law outlined by Horwitz above,
particularly concerning the relationship between legal personality and patrimony in civil law
(e.g., to dedicate a portion of the patrimony to a specific use).
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Getting to be a person meant it had a legal personality. And not only corporations (as in
common law) but also all forms of associations (partnerships, for instance).
5. WHAT
IS THE LEGAL, ECONOMIC AND SOCIAL SIGNIFICANCE OF CORPORATE LEGAL
PERSONALITY?
5.1. Introduction.
What are the implications of treating the corporation as a legal person? Does it really matter
whether a corporation is placed in the same legal category as physical persons, that is to say, that
to the legal system a corporation appears as a legal person and thus a holder of rights and
obligations? In other words, is legal personality nothing more than a convenient form of business
organization, or do we take the notion of “personality” seriously in considering how the legal
system should allocate rights and responsibilities amongst the various parties involved? La
différence est immense: si les corporations doivent être acceptées par l'État (qui octroie une
charte, par exemple), ce sont des créations de l'État, donc des entités publiques. Si elles ont la
personnalité juridique, ce sont des personnes privées.
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Il se joue en common law un débat important sur la fiction juridique de la personne morale
(alors que c'est n'est pas un problème en droit civil: les personnes ont un patrimoine, la
compagnie/société par action a un patrimoine, complétez le syllogisme).
A bit of a different argument, not arguing between fiction vs. entity, but group enterprise as
opposed to entity operated for benefit of shareholders alone (note that other forms of business
associations can be enterprises as well). Four elements to an enterprise: Persons, patrimony,
organizational structure and common objective. Significant that patrimony belongs to the
enterprise and not to the investors; justifies that actions be taken in the interest of the corporation
and not solely the investors. Focus of corporate governance is on coordination of interests within
the enterprise, and not simply the isolated entity.
5.2. Ce que divers auteurs en penser.
Et qu'est-ce que ça change que ça soit une personne? C'est qu'au lieu de travailler avec un
groupe de gens, celui qui travaillerait avec une compagnie travaillerait avec une entité. De plus,
si c'est une personne morale, comme une personne morale, elle a des droits et des obligations. In
a sense, this section on legal personality is the bridge between theoretical considerations and
more pragmatic questions of institutional design. We have reviewed several theoretical
arguments that seek to explain the existence of the corporation as both a business association and
a legal status. La définition des droits et des obligations revient à ce que disait Romano qui
voyait corporate law as a legal product offered by States and intended to facilitate business
organization and transactions. Pour Coase, il y a aussi une réponse basée sur le marché: firms
exist because they are more efficient than markets at coordinating complex economic activity
among multiple actors. Il y a encore l'argument de Berle et Means, selon lequel la nature d'une
société par action change radicalement les droits de propriété sur le marché: à qui donner ces
droits de propriété, comment les gérer, d'autant que le contrôle et la propriété sont séparés (ce qui
est un changement radical et unique). Pour Horwitz, although legal personality has been in
existence for some time, the personification of the corporation is a recent development. Penser à
la personne morale comme une personne et non une fiction est nouveau, ce qui explique qu'on
pense à lui offrir certains droits constitutionnels. Corporations had been characterized more as
legal tools serving the public interest. Now, however, they are viewed not simply as legal tools
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Why did I switch to French? I don't know.
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serving a private interest, but as a legal person serving its own interest, however this interest may
be defined.
5.3. Ce que ça change.
La question est une question difficile parce que des générations d'auteurs universitaires ont
dit que les actionnaires étaient la société par action. Or, on verra que si c'est le cas, certains
gestes posés sont illogiques.
One’s perspective of the nature of the corporate form as either a simple legal status (manière
pratique de dire que plusieurs travaillent vers un objectif commun) or a complex legal and social
phenomenon will influence our perception of the implications of legal personalitu: cela signifie
que les droits et obligations seront celles de cette personne, et donc, qu'il faudra prendre compte
de ses besoins et intérêts.
At issue is the extent to which one views legal personality as a mere fiction, or as
representative of the corporation as an entity with an existence separate and distinct from that of
its members. Furthermore, if one does accept legal personality as the legal status of an entity as
opposed to a mere legal fiction, the question arises as to whether the implications of
personification are positive, negative or some combination of both.
5.4. Samuel & Miller
Samuels, Warren J., "The Idea of the Corporation as a Person: On the Normative Significance of
Judicial Language" Corporations and Society – Power and Responsibility, ed. by Warren J.
Samuels and Arthur S. Miller, 5 Greenwood Press, New York, Westport Connecticut, London, 113
What is the corporation as a person and what is its social role? How understanding of corporations
changed a lot the power and beliefs underlining the system (most specif. the economic structure). Surely,
law defines social reality and has a contingent, truth-functional propositional logic which shapes (in part)
the economic system. Conversly, the law is what it is (partly) because of corporations.
It might be a sociological reality, an institution (decision-making and value-choosing entity), which is
both a creature and a creator of the System. It can be seen both as public (instrument of gov) and private
(instrument of private parties). You can also see it as another individual actor or as a market function
(managerialistic vision). Choosing one over the other will change your vision of the law and your decisionmaking. In any case, the corporate person is a complex organizations and modes of collective action and
identity (irony of a “person” so complex?).
The economy is a normative artefact in the sense that it is a product of human action/decision-making
(whether conscious or non deliberative). “What is lacking in economic theory is a theory of power, in this
process of replacing the market with internal decision-making that partake more of power than the
impersonal market”
Rights are the “legal recognition of a support for an entitlement; both prescriptive and normative; the
vehicle through which both ordinary and legal language establish and express protected interests and
thereby correlative and conflicting unprotected and exposed interests.”
Conclusion. The corporation is an institution, a “collective action in control and in liberation of
individual actions”, creator and creature of the law, the economy, the power structure, the beliefs of
society and the System.
Pour Samuel & Miller, au moment où on affirme qu'il s'agit d'une personne morale, on lui
donne des droits (lui pense qu'elle ne devrait pas en avoir), on lui confère un statut privé qui fait
en sorte qu'on ne devrait plus interférer avec sa «vie». Wendy says: Mais il faut faire attention à
ne pas démoniser ces entreprises: Enron est poursuivie parce qu'elle a violé des lois, pas parce
qu'elle est «méchante» en elle-même. Résumons S&M60: Corporations are evil. Discuss. Plus
sérieusement, Samuels, for example, argues that legal personality leads us to think of the
60
Ouais, peut-être pas…
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corporation as an actual person, entitled to the same rights and legal treatment as other persons.
This personification obscures the extent to which the corporation is a collective entity that
controls a significant concentration of economic power. En bref, le problème est celui de la
concentration du pouvoir. Si dans certaines situations, la concentration des pouvoirs peut être
efficace et permettre de faire les choses rapidement (de façon plus expéditive), pour S&M, à
chaque fois qu'une compagnie fait pression sur ses fournisseurs pour qu'ils se plient à certains
standards, elles forcent d'autres standards, plus élevés que ceux de leur propre juridiction et de ce
fait, en viennent à créer un seuil dans les standards (JE COMPRENDS PAS CET ARGUMENT).
En moins court, la thèse de S&M va ainsi: all the corporate problems come from the fact that
the corporation is a legal person. Legal definitions not neutral descriptions of externally observed
phenomena; they are based in part on ideas about how society should be organized, how rights
and obligations should be distributed and it will affect these things. They are not passive
descriptions but active methods for influencing economic and social outcomes. It's making the
law. Nobody denies that law defines social and economic outcome (difference between
capitalism and communism; property and individual decision-making). Ostensibly narrow legal
definition, e.g., the corporation is a legal person, can have broad ramifications.
To support this argumentations, they say that the economy is a product of human decisionmaking and thus influenced by power structures and beliefs (it's a system, larger than it's
individual parts, you can't predict it, chaos theory61 To state that “the corporation is a legal
person” is as much a normative statement as it is a positive statement. And such legal rules affect
economic activity (think Aguilera). And note that capitalism is defined in large part by the
presence of private property rights).
This whole idea of legal personality has contributed to the predominance market-based
rationale to make public-policy decisions. The foundations of corporate law such as legal
personality, limited liability and the recognition of certain constitutional rights contributed to the
predominance of market-based rationales for policy decisions in the U.S. because they are a
reflection of a particular power structure and belief system. The corporation being a legal person
is a power structure, an ideology (first the power, then the legislation, then favours the people in
power, and círculo vicisio). But more than this mainmise, it hides the ugly truth from your, the
überness of these powers. Legal personality, by casting the corporation as a private individual,
minimizes the extent to which corporations represent concentrations of wealth and power that
should be subject to oversight. If you could see it, you'd freak out or want checks&balances62.
Legal personality permits such a concentration of economic power that corporations now have a
private governance function in the market, which is therefore no longer a “free market” (free as
in decisions are made by individuals seeking to satisfy preferences rather than centralized
decision-making, essential distinction between capitalism and communism).
Legal personality obscures power: that's a big condemnation. And for once, it's not lawyers
creating this, it's people at power shaping the corporation to hide themselves (you see a person
and not a concentration of powers acting in undemocratic ways).
Question: why are we going to the market instead of going to the State? Anwser: because the
state is no longer effective. It's too late.
The counter-argument is that another power could go against the abuses. Prof. doesn't think
his argument goes against the legal personality if you can see out of it. Now the law is evil
because it has facilitated this fiction.
61
62
Like the movie Pi.
Doesn't mean you become communist overnight, just that you want responsibility.
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5.5. Lizée
Lizée, Marcel, « Essai sur la nature de la société par actions », 39 (1994) McGill Law Journal, No. 3,
502
In order to recognize the juridical personality of companies, the law must recognized that they are
more than a mere legal fiction, that the corporation is real and it exists independently from its
constituents. Its role goes further than serving the shareholders (e.g. employees). Analogie des atomes
(can't see them but we know they exist). There are two types of fiction, the authentic/genuine/real
fiction (completely false and non-existent) and explanatory fiction (“fiction explicative”, something we
recognize but do not know how to explain scientifically). It's hard to conceptualized, but it's a system, as a
system can be «un et plusieurs tout à la fois» et que le tout vaut plus que la somme des parties.
Lizée takes a slightly more complicated approach. A corporation is an entity is that it is a
business enterprise, and all such enterprises (except perhaps the single-shareholder enterprise)
have an existence which is separate and distinct from that of its members. The existence of legal
personality for corporate entities is not in itself problematic. Des situations où l'on ne contracte
pas en son nom propre, bien qu'elles ne soient pas la norme ne sont pas rares (les compagnies, les
fiducies). De plus, il existe plusieurs entités intangibles auxquelles nous donnent des
implications: le mariage, le bébé non né, la société par action, diverses institutions (comme
l'Église), la Couronne, la propriété intellectuelle. Lizée parle de particules atomiques, mais le
droit a également des concepts du genre.
What is problematic is the degree to which corporate law recognizes some constituent
members, such as shareholders, but not others, such as employees.
Autrement dit, les deux acceptions du mot «fictions» sont allègrement mélangées: d'un côté,
qui existe la fiction «réelle» (la fiction «crée» quelque chose, p.ex. la personnalité juridique) et la
fiction «explicative» (dire des les société par actions qu'elles existent indépendamment de leurs
membres, parce que c'est une fiction n'est pas suffisant, on a donc dit que c'étaient des personnes
morales). Les droits qui en découlent ne sont pas tout à fait les mêmes. Dans un cas, «fiction» est
le nom qu'on lui assigne, ce n'est pas une personne. Dans le second cas, la fiction, c'est son
existence. C'est l'idée derrière Salomon: une corporation est une chose véritable, il n'y a pas de
fraude, votre litige est avec la corporation et non avec les gens qui la composent.
True or genuine fiction, to give legal existence to that which does not exist. Explanatory
fiction, to provide legal recognition of that which is known to exist, but the existence of which is
not susceptible of proof. Difficulty with conflating these two notions in regards to concept of
legal personality as a legal fiction since one recognizes the entity and one does not. Can lead to
judicial incoherence, example of penal sanctions. Also pointless to refer to fiction if intention is
to treat something as real, Justice Holmes. Explains the reasoning in Salomon; creditors cannot
see how a fiction can defeat their interests; judges do not see how existence of the corporation in
form of legal person can be ignored. Most succinct statement of principle, by Machen, “But
although corporate personality is a fiction, the entity which is personified is no fiction”.
Donc, pour Lizée, la personne morale est séparée de ses membres et le droit des compagnies
devrait inclure plus que le droit des actionnaires. L'un découle de l'autre pour lui. Mais est-ce
vraiment le cas? À l'appui de sa position, Lizée quitte le droit et vogue vers la sociologie. C'est
sûr que la compagnie dépasse ses membres, mais si on regarde les effets qu'elle produit, la cause
n'est pas liée à chacun des individus qui composent la compagnie mais bien au tout. C'est la
théorie du système (ou cette bonne vieille Gestatl) selon laquelle l'effet total ne peut être isolé et
ramené à ses composantes (comme c'est le cas pour le corps humain, p.ex.). Tous ceux qui
fonctionnent dans le système de la compagnie dépassent dans les effets ce que chacun d'entre eux
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aurait pu faire (on rejoint Coase est les actions jointes pour limiter les coûts de transaction). C'est
un argument très fort contre la théorie de la fiction «réelle».
Oui la compagnie est une entité distincte et elle fait parfois oublier ses membres. Mais
lorsqu'on doit penser à ceux qui la constituent, qui sont-ils? La compagnie est-elle limitée,
comme les «académiques» l'ont souvent écrit, aux actionnaires? La personnalité juridique n'estelle donnée qu'à certains aspects de cette compagnie? Autrement dit, lorsqu'il est dit qu'on doit
agir «dans le meilleur intérêt de la compagnie», dans le meilleur intérêt de qui faut-il agir? de
quels gens qui y sont? Contrairement au trust où l'intérêt est toujours clair: c'est celui des
bénéficiaires et de personne d'autre.
Pour Lizée, le droit canadien est dans l'erreur lorsqu'il inclut les créditeur mais les employés
(à son sens, c'est l'équivalent d'une loi sur le divorce qui ne parlerait que des intérêts de parents).
Car les employés participent au système institutionnel63 et à ce titre, pour être protégé par le
système (duty of care/loyalty), ils doivent en faire officiellement et juridiquement partie. De plus,
on ne peut plus considérer que les actionnaires sont le seul apport d'argent à la compagnie. Can
define as a social (and not merely legal) method for resolving conflicting interests and
coordinating activity between persons for the purposes of achieving a given objective. Many
social institutions require legal intervention to resolve conflicts and allocate rights and
responsibilities, e.g., family law. Difference between contractual theory of membership and
institutional theory is that membership includes all persons involved in the objectives of
corporation, not just shareholders. Can also argue a more communitarian vision as opposed to
pursuit of individual objectives in contractarian theory.
Corporate partners, not shareholder primacy. Corporate governance is about providing an
appropriate framework for joint economic activity, not shareholder wealth maximization. Recall
Coase, corporate form more efficient than price mechanism. Corporation not just a vehicle for
investment, although it includes this. Far more complex coordination mechanism involving more
than the relationship between shareholders and directors/officers. Argument that employees are
more involved as corporate partners than widely-disperesed (and diversified) shareholders.
Exemple. L'actionnaire majoritaire de Teck Corp a décidé de faire une OPA hostile sur Teck
Corp64. Le conseil d'administration et haute direction décident de doubler le nombre d'actions, ce
qui aura pour effet de diluer les actions de l'actionnaire majoritaire. Si ce n'était que cela, ç'aurait
évidemment été illégal (coup bas pour empêcher l'OPA), mais la compagnie a mis les actions en
trust pour les employés (elles ne pouvaient être vendues) et a plaidé qu'elle le faisait dans l'intérêt
de ses employés. La cour a jugé que c'était une manière d'aider les employées et que c'était de
bonne foi, jadis, on ne se souciait que des actionnaires, mais aujourd'hui, on peut penser aux
employés65. C'est devenu un intérêt légitime dans le sens où les années 80 avec leurs fusions et
acquisitions à gogo en étaient venues à utiliser une technique très dommageable pour les
employées: systématiquement, les compagnies acquises slashaient 25% des employés et
renvoyaient tous les membres du CA et de la haute direction. Les lois ont donc dit que le CA et
la HD pouvaient refuser une OPA au nom des intérêts de leurs employés 66. Il faut y penser pour
People.
63
Penser Bubble Act, mais je ne vois pas pourquoi.
Ce n'est pas rare. Plusieurs actionnaires majoritaires sont des gens qui trouvent une compagnie qui a, à leurs yeux,
du potentiel, mais qui est mal gérée. Ils achètent bas, «arrangent» et revendent haut.
65
Il aurait quand même pu parler d'opportunisme, pourquoi les mesures n'avaient-elles pas été prises l'année
d'avant? Le «capital humain» (quelle expression, franchement) plus important que le capital tout court?
64
66
Un parachute en or ou golden parachute est une clause contractuelle entre un dirigeant d'une société anonyme et l'entreprise qui l'emploi et qui
fixe les indemnités versées lors d'une éviction suite à un licenciement, une restructuration, une fusion avec une autre société ou même départ
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Legislation, code and caselaw supports this theory in terms of taking interest of employees
into account. Note preference of employees to prefer collateral legislation, e.g., labour law, to
corporate governance regime for coordinating their interests within the corporation; which is
better? «En pratique, le meilleur intérêt de l’entreprise conduit au meilleur intérêt de l’ensemble
des divers intervenants au processus de fonctionnement de l’entreprise.» Keep this in mind when
discussing duty of loyalty in Peoples.
5.6. Others (Dent, Frankel, Hart), not discussed
DENT, George W. Jr., "Toward Unifying Ownership and Control in the Public Corporation", (1989) Wisconsin
Law Review, 881
B&M's theory of separation of o'ship and control separated because of pattern of stock ownership in public
companies. Today's observer fear this is inefficient and mistreats the capital providers (the shareholders): “separation
of ownership and control stems from management’s domination of proxy voting (“Wall Street Rule”: vote with
management or sell + the proxy system comes from the gov, not the market). Although commentators recognize this,
most accept it as inevitable; shareholders are too numerous, scattered and indifferent to coordinate their voting. So
long as management controls proxies, corporate government reform efforts are doomed. An effective shareholder
franchise, however, would remedy the separation of ownership and control, and with it, most other corporate
governance problems”.
The neoclassicists reject the B&M theory, saying the executives are under pressure from interest groups, and
that they are punished as a whole for the mistake of some of them. Dent argues their interests are just no the same
as the shareholders' (growth rather than maximum share value).
The managerialist think the B&M separation is good. For them, the corporation is a social institution accountable
not only to shareholders but to many constituencies including creditors, consumers, etc.” Otherwise, oligarchy would
rule the market.
The reformers agree with the B&M theory but want some reforms. WHY? They propose that the largest
shareholders be given access the corporate treasury to drum up support for proxy votes (their lare stake will make
them perform). Stubborn independent it not the key. Of course, evil managers will fight this (as well as too many
fiduciary duties). On the other hand, shareholders are obsessed with short term profits (preferring them is not bad per
se, but any obsession is).
FRANKEL, Tamar, "Fiduciary Law" 71 (1983) California La Review, no. 3, 795
More and more fiduciary law arises, but it's not coherent.
Relationships can be seen as status (parents; feudal England), contracts (American Industrial revolution) or
fiduciary (a kind of hybrid: “fiduciary relations combine the bargaining freedom inherent in contract relations with a
limited form of the power and dependence of status relations”; today, common welfare).
Must strike the balance between the risk of an abuse of power (vulnerability) and powerlessness (uselessness).
Three factors shape the risk (1) purpose of duty/nature of power delegated; (2) extent of power delegated; (3)
availability of protection. You may be careful in choosing to whom you will entrust your power, reward their
faithfulness, impose controls and monitor them; create professional standards. And, of course, go to court, as any
fiduciary duty is under the court's jurisdiction (that's public order). Note that fiduciary law only applies to the fiduciary
(trustee), not the entrustor (settler).
Frankel says you must (1) provide incentives to both parties (2) be fair; (3) low the aggregate cost of the
relationship in five cost-shifting principles: (a) courts should bear some costs, (b) the extent of legal intervention
should fit the parties' arrangement, (c) the benefits of the relation should be preserved for the entrustor; (d) the overall
costs should be reduced as much as possible (e) the fiduciary should pay for what he's willing to pay or what benefits
him.
programmé de l'intéressé. Ces indemnités vont en complément des indemnités légales dont l'intéressé peut par ailleurs prétendre. A corporate
provision to combat hostile takeovers. When triggered, the poison pill allows shareholders to acquire additional shares at below market price,
thereby increasing the number of shares outstanding and making the takeover prohibitively expensive. Such plans are relatively new in corporate
Canada and are the subject of some controversy regarding whom they are designed to protect. A suicide pill is a poison pill with potentially
catastrophic implications for the company it is intended to protect. A macaroni defense is a tactic used by target firms of hostile takeovers; it is a
type of shark repellent. Typically established in company bylaws by a Board of Directors, the strategy issues a large quantity of bonds that are
redeemable above their face value in the event a company undergoes a merger. As a result, the acquisition price becomes prohibitively expensive
and may seem economically unattractive. The Pac-Man Strategy is a defense against a hostile takeover. It is when a takeover target company
launches a tender offer for the company that was trying to acquire it. If successful, the target company ends up taking over the company that tried
to buy it out. A gray knight is an acquiring company that enters a bid for a hostile takeover in addition to the target firm and first bidder. The gray
knight is more favorable than the black knight (unfriendly bidder), but less favorable than the white knight (friendly bidder); it will usually take
advantage of any problems between the target firm and other bidders.
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Conclusion: “As members in our society become increasingly interdependent fiduciary relations become
predominant and fiduciary law increasingly important. To develop the law in a rational fashion the courts should
examine fiduciary relations separately from the legal contexts in which they arise and design the rules not by
analogies to prototypical relations but by evaluating the fiduciary power and its potential abuse. Fiduciary law should
reduce the costs of preventing this abuse, leaving the parties free to allocate the costs between themselves. The law
will thus encourage members of society to enter into the relation, seek each other’s services, exercise power
responsibly, and act for each other’s benefit.” (273)
HART, Oliver, "An Economist’s View of Fiduciary Duty", (1993) 43 University of Toronto Law Journal, 299
What is the role of the stakeholder in corporate decision-making? When do fiduciary duties kick in? Economists
used no to care about fiduciary duty because it didn't fit the neoclassical theory (where the managers where selfless
and compliant). The principle-agent theory is a great step in making the theory more fit with today's reality, but it's not
enough because it's still contract-based, and there's more than contracts to the corporate world.
Fiduciary duties are good because they protect the shareholders who given their money but have little
involvement. However, loyalty is limited (because it is shared among shareholders, creditors and employees) and if it
were too large, it wouldn't amount to anything. Specificity is easier.
On the other hand, some argue that a broader interpretation would (1) reduce shareholder-creditor conflicts if
they were both protected by the fiduciary duty; (2) help sustain implicit contracts; (3) reduce conflicts between
different cohorts of shareholders (classes of claimants) and (4) encourage an altruistic behaviour (going beyond the
corporation and into the community).
Hart thinks it's better to have it narrow because a rule too strict might make the company slower and have an
impact on the economy.
IV. Agency, Fiduciary Relations and the Corporation: The Duty of Loyalty
THE DEPLOYMENT, ORGANIZATION, AND REINFORCEMENT OF TRUST
0. LEGISLATION
0.1. Recall QCA Art. 123.83, CCQ Art. 321, 322, 2138,
In Quebec civil law, we begin first with the QCA, Art. 123.83, which provides that directors
and officers are mandataries of the company. The content of this standard is supplemented by
CCQ Art. 321, which also refer to directors as mandataries of the corporation, with the additional
limitation that a director shall not exceed the powers conferred on him (Note that the exercise of
a power, while present in common law, is more evident in civil law, particularly the concept of
misappropriating a power for one’s own use as opposed to its specified uses). We also refer to
Art. 322, where directors are instructed to act with honesty and loyalty in the interest of the
corporation. Although no mention is made of directors in either of these articles, we can refer to
Art. 2138, where a mandatary is instructed to act honestly and faithfully in the best interests of
the mandatory. (Note that Art. 2138 refers to the best interests of the corporation, while Art. 322
refers only to the interests of the corporation. Note as well that while the QCA refers to both
directors and officers as mandataries, and thus presumably Art. 2138 should apply to both
directors and officers, CCQ Art. 321 indicates that a director is merely “considered to be” the
mandatary of the corporation (compare «considéré comme mandataire» with «sont des
mandataires»)).
0.2. CBCA s. 122(1)(a)
For the CBCA, we refer to s. 122(1)(a), which instructs directors and officers to act honestly
and in good faith with a view to the best interests of the corporation. We have seen in Peoples
that the SCC refers to this duty as the statutory fiduciary duty, to distinguish it from the common
law fiduciary duty. In class, we refer to the more transsystemic concept of a duty of loyalty. The
statutory fiduciary duty in the CBCA may indeed owe its origins to English company law and the
frequent use of the trust deed following the collapse of the South Sea Company and the passage
of the Bubble Act of 1720, as Pratte has argued. Had this historical contingency not taken place,
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however, common law corporate law would have found another mechanism through which to
impose the obligation that directors and officers, in managing assets contributed by others, will
act appropriately in the interests of the corporation and not to further their own interests.
1. WHAT IS THE ROLE OF FIDUCIARY RELATIONSHIPS WITHIN THE CORPORATION?
Fiduciary duties dominate the legal landscape of the corporation. Much corporate law doctrine
has to do with the duties of directors, managers and controlling shareholders and with the rights
of shareholders, especially minority shareholders. These readings address why this is so,
especially from an economic perspective.
1.1. Whose Duties?
Fiduciary duties are everywhere: to your family, trustees, to the Crown, from the Crown, etc.
Common law and the medias has put much more attention on the directors than they have on
officers. Only 30 years ago, only the directors had fiduciary duties! The reason was probably that
shareholders elect directors (and it was not considered that director then delegated their power to
officers, only to supervise them). C(onstitutional c)orporate law is concerned with the division of
powers between the members of the corporation: on a legal basis (de jure), the directors then
delegate daily responsibility for this task to officers, but retain responsibility for supervising the
conduct of the officers and the performance of the corporation. But this doesn't tell us how power
is actually held and exercised; only business practices do. De facto, the officers are more likely
to select members of the board of directors than to be delegated to by them, and proxy-éloignés
shareholders have little to say about this.
Fortunately, the legal model has evolved to recognise this de facto structure by holding the
directors liable like the officers. QCA: mandatory.
Has any law reform changed law practises? Also, the legislation is not always clear, with
regard to the different between the d and o. In theory it says, but in practice, how big does the
decision have to be to know who makes it. The answers are not in corporate law. Can the board
ever be independent from management?
1.2.What duties?
As a matter of general law, whenever someone is working on someone else's behalf, there
needs to be some sort of obligation, of accountability. In a context where the right to vote is not
very meaningful (since it's yes or abstain), duties of care and of loyalty have a lot of importance
–they are to be shaped in such a way that they will be a weapon against "bad" d/o but won't
hinder the dealings of the "good" d/o (of course, some people think the market will sooner or
later punish them67).
 No controversy about the duty of care: it's a due diligence68 issue: did you make a
reasonable business decision (not necessarily a good one).
 The duty of loyalty69 is more controversial because it's broader and also because it's
owned to a corporation, i.e. something you know exists but can't see70. First and
67
Like the corp is underperforming, so it won't attract capital
“Due dilly” for short (well, I assumed it was written dilly because of the uncertainty of “dilly-dally” and students
a month out of law school who are sent to due-dilly stuff and say what they think is wrong everything seems odd!).
69
Law as your jealous girlfriend.
70
Strange example of prof who hates students. Student doesn't know and asks for a recommendation. Being loyal,
the prof has to put the student's interests before his own and say: "I wouldn't write it, if I do, it'll suck, you still want
it?".
68
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foremost, it's about not putting your interests in from of the others (thus the prohibition
on self-dealing71 and the corporate opportunity doctrine72).
Of course, these duties could arise by contract, but then, you could contract out of them. So
they are in the public order.
1.3. Duties to Whom?
As we said a little earlier, it can be hard to determine the best interests73 of the corporation, as
it's not tangible74. One cannot get away from thinking about the groups that take part in the
corporation in order to define the best interests of the corp. You need somebody behind the
corporation, even if it's an idealised norm (agency theory).
Corporate governance literature continues to refer to the duty as owed to the shareholders, in
accordance with shareholder primacy model/shareholder wealth maximization model of
corporate governance.
Another debate going on is the whole shareholder/stakeholder issue, where it will often be
argued that the responsibility should be narrow because:
 a duty to all is a duty to none75.
 all other groups (i.e. not shareholders) can protect themselves in some other way (creditor
have loan agreement, employers, union agreements and employment contract, suppliers,
supply contracts, ). Only the shareholders don't have a contract (“I want you to work as
hard as you can to make as much money as you can” is iffy).
Our very helpful SCC said the corporation was not equated to just the shareholders (esp.
since there are many types of shareholders76) or the creditors, but it didn't say to whom it was
equated (except, the oh-so-helpful “corporation”). Also, it's almost impossible to hold a duty to
both in a crisis situation: one of them will have to lose (see Peoples), the Board has the power to
chose which (duty to chose). But in order to chose, the Board can always pretend it was taking
some other group's interest into account –very practical, as they mustn't but if they do, they can't
be sued (see Teck Corp p. X). Of course, other countries have decided to include stakeholders in
the institution (Germany with its two-tier board).
2. HOW DOES THE LAW PROTECT CORPORATE FIDUCIARY OBLIGATIONS?
2.1. Peoples.
COPY PPT
2.1.1. My summary
Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] 3 S.C.R. 461 [WebCT]
Facts. Marks & Spencer sold Peoples to Wise under terms that made the merger impossible until the full amount
was paid. Consequently, the directors created a joint inventory procurement system so both inventories would be
separate. This idea, this didn't work out so well in practice (the economical context was rough), so Wise decided to
buy in America and Peoples in Europe and buy back from each other accordingly (some sort of trade credits/open
account agreement). They both went bankrupt. The trustee of Peoples claimed Wise was favouring its interests over
71
You can't buy from your own company because you might "offer a good deal" and in fact give a bad service. Lien
trust (mais en plus flexible, so more litigation), you can if it's truly the best price. This puzzles me.
72
As an officer, of course, not as Willy the mail boy.
73
CcQ: d/o must act in the interest of the company, but CBCA says best interest. Does that make a difference? It's
pleadable.
74
The entity – Lizée and genuine/actual and explanatory fiction
75
So uncivilian!
76
The large institution shareholders might make decisions that are bad for small investors. Should majority
shareholders be accountable to minority shareholders? Engages on a discussion on why. Lien plus haut.
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People's creditors's and sued the directors for breach of fiduciary duty (on behalf of the unsecured creditors). The
trial judge found the directors liable, the CA set the judgement aside (and the SCC dismissed the appeal).
Issue. 1. Was there a breach of fiduciary duty for lack of good faith and care (s. 122 CBCA)? 2. Were the Wise
brothers (directors) parties to the transactions with Peoples (i.e. in conflict of interests, s. 100 CBCA)? 3. Do the
directors hold the shareholders a duty?
Holding. No. Thrice.
Relevant provision. S. 122 CBCA. (1) Every director and officer of a corporation in exercising their powers and
discharging their duties shall ¶ (a) act honestly and in good faith with a view to the best interests of the corporation;
and ¶ (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable
circumstances. ¶ (2) Every director and officer of a corporation shall comply with this Act, the regulations, articles,
by-laws and any unanimous shareholder agreement.
Judicial History. SC. In an iffy situation, the SC said the d/o had to take care and think about the creditors. This
created a uproar: you were trying to save the company and it didn't go well, you tried to act in the best interest of the
company, and that's no good because you didn't think about the creditors? However, the case law the trial judge used
always had a fraudulent director. CA. It overturned the SC decision: no judge-made law, the CBCA was amended in
the mid-seventies as to what would create liability, putting boundaries and it was clear the CBCA was changed in
such a way that made Ginsberg J.'s decision ultra vires.
Reasoning. 1. The Wise brothers tried as they could to solve the Peoples/Wise procurement problem. They didn't try
to defraud anyone or to make profit for themselves (there is no proof to that effect and the trial judge didn't make
such findings), tried to make the best work out, so it cannot be said they breached their s. 122(1)a) CBCA obligation.
They did try to stop the company from going bankrupt. Being on the verge of bankruptcy doesn't change the
fiduciary obligations: it's the company they have to think of first, then the creditors and the shareholders. The
creditors can sue under 122(1)b) CBCA and abuse (241(2)c) CBCA). About 122(1)b) CBCA, the directors and
officers were prudent, given the info they had. The diligence norm (towards the creditors) is an objective one and
their business decisions were overall reasonable. Business-judgment rule. The bankruptcy had other sources and the
new procurement policy. 2. The facts don't support an allegation tot he effect that Wise paid less than the market
price for what Peoples has purchased (it did, but 6% is not significant, esp. as there were other considerations). The
“interest” of the Wise brothers is therefore irrelevant.
Ratio. 1. Directors and officers will not be held to be in breach of the duty of care under s.122(1)(b) of the CBCA if
they act prudently and on a reasonably informed basis. This is an objective standard. 2. This is irrelevant. 3. The
fiduciary duty under s.122(1)a) CBCA requires directors and officers to act in good faith and honestly towards the
corporation, which is distinct from its shareholders and, a fortiori, creditors (any stakeholder, really).
Comments. How was the argument run? It’s relevant from a trans-systemic perspective. The interests of creditors
align with the interest of corp when corp is ‘in vicinity of bkrtcy’. Civil law serves as a supplementary source of law
to the federal legislation: art. 300 CCQ and s. 8.1 of the Interpretation Act. “Since CBCA doesn’t entitle creditors to
sue directors directly for breach of their duties, it is appropriate to have recourse to CcQ to determine how rights
grounded in a federal statute should be addressed in Quebec”. CcQ makes visible idea that if you’re in breach of
duty and cause harm, you can sue. This is a statutory duty but is one that can trigger the broader civil obligations of
CcQ.
2.1.2. Ian Rose from Lavery, de Billy's Points
Issue: 122(1) CBCA fiduciary duty and duty of care. [para. 32]. Maybe using Lac Minerals
was not the best idea (it's common law fiduciary duty, not statutory).
In Canadian law, d/o have a duty towards the corporation, that's it. Stock options in se
are not bad.
[para. 40]
Esp. since the CBCA is unique and a specially powerful tool.
COPIER PPT
1457 CcQ duty of care
Business-judgement rule
Good-faith reliance defence
Has the standard of care been redefined [skipped]
Professional standard.
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Question de Wendy: what will happen when the corporations will give money for the longterm and lose a lot of opportunities in the short-term. The shareholders will get less. [Obbiche:
TRUST!]
So: if you want to go after the d/o, you can try
duty of care – reasonableness + remoteness (in Qc)
duty of loyalty – everything goes back to the corporation.
derivative action – def. ; and
oppression remedy – rare that creditors can access it, the test is “unfairly prejudicial” (s. 241
CBCA), as opposed to "simply" having your interests disregarded.
Who gets to complain and why? The corporate law keeps advancing even if the model hasn't
really changed in ph so many years (foundational concepts).
The problem is that the courts don't change everything overall, they just xtended whatever
the d had to do to the o.
If it's about the best interest of the corp, why do we theorize aobut the best interests of the
shareholders, why the disconnect? You need a baseline, and it might end up that in most
legialtions, you only end up talking about the d/o's not working in their own interest. It's hard to
define.
2.1.3. Wendy Adams's Overview: What is the relationship between corporate fiduciary
obligations and corporate governance?
The legislation is clear: at all times, directors and officers have a duty to act in the interests of
the corporation. If you haven't gathered that by now, you are really screwed. Of course, the
interpretation of the duty of loyalty is somewhat more difficult. Two options: either you
determine what is the interest of the corporation and any activity that falls within this definition
doesn't attract liability or you determine what is not in the interest of the corporation and any
activity which falls outside the definition does not attract liability. An approach will be taken
over another depending on the way it was pleaded.
Peoples solved only one (important) question: about the zone of insolvency. Insolvency: if
you can't pay your on-going bills, then you can petition for bankruptcy. In this situation, while
the creditors will want to get paid, the shareholders will want the corporation to take a big risk,
just in case it pays off (whatever if it doesn't because there's limited liability).
The question in Peoples was: who should the directors favour, as they can't favour both?
Australia, England and Delaware says: generally, take into account the interests of the
shareholders, and in case of insolvency, the creditors.
The SCC said: directors and officers owe no duty to the creditors to look after the interests of
creditors in these circumstances. The answer is also clear that the directors and officers owe no
duty to shareholders to look after their interests in these circumstances (!). At all times, the
directors and officers must act in the interests of the corporation. “The interests of the
corporation are not to be confused with the interests of the creditors of those or any other
stakeholders”. Surrounding this clear statement of law, however, are many statements which are
less clear, particularly when taken together: Insofar as the statutory duty is concerned, it is clear
that the phrase “best interests of the corporation” should be read not simply as the “best interests
of the shareholders”. Don't we just love negative definition, as is “The interests of the
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corporation are not to be confused with the interest of the shareholders or any other
stakeholder”?
From an economic perspective, the “best interests of the corporation” means the
maximization of the value of the corporation. What is “value”? Is it “incapable of definition” and
lacking in “legal meaning” as much as the “zone of insolvency”? Is it long-term or short-term?
Does this make the duty of loyalty a duty to pursue maximum profit? Same debate, again.
We accept as an accurate statement of law that in determining whether they are acting with a
view to the best interests of the corporation it may be legitimate, given all the circumstances of
the case, for the board of directors to consider, inter alia, the interests of shareholders,
employees, supplies, creditors, consumers, governments and the environment (see Teck Corp p.
X).
M ACEY, Jonathan R. and Geoffrey P. MILLER, "Corporate Stakeholders: A Contractual Perspective",
(1993) 43 University of Toronto Law Journal 401 [R. XXXX]
This article is based on contractuariasm (corporations are not an entity at all but a set of contracts or
series of bargains [347]), that way, no one can say they “own” the company: Macey&Miller: the firm is a
nexus of contract, not a web of contracts (like Coase), i.e. everyone dealing with the firm has some sort of
contract, it would be too expensive to write it all down, so the firm itself is the default contract.
Fiduciary duties are a corporate asset that will be bargained for and auctioned off among various
groups of stakeholders: consequently, the more narrow the duty, the more exclusive and undivided, the
most powerful the asset for the person to whom it's due. This means that the recent trend of creating
“Other Constituency Statutes” (a.k.a. “stakeholder statutes”) that forces directors to expand the scope of
their fiduciary duties makes shareholders and other stakeholders less well off. And it's valued the most by
shareholders (highest-valued use77).
Three general criticisms of stakeholder statutes
(1) fiduciary duties should flow only to shareholders (residual claimants) because they have the
greatest incentive to maximize the value of a corporation, and therefore place the highest value on the
legal protection afforded by fiduciary duties. This explains why they should have access. Now, why the
exclusivity of the access? Because ultimately everyone benefits from a regime where the shareholders
are the only ones benefiting from the fiduciary duty. Basically, the shareholders' right should be exclusive
because: fiduciary duties are not public good, shareholders place the highest value on fiduciary duty and
it will benefit the others claimants too. And other stakeholders can always contract it (local communities,
for instance) –and this is good for wealth allocation.
(2) constituency statutes require corporate agents to serve too many masters (confusion,
misunderstanding and litigation). Esp. a problem where the duties have to be taken quickly. Under these
statutes, the directors have to justify everything on the grounds that it will benefit some constituency
(paying no regard to the deleterious effects it might have on other constituencies). Also, it seems to forget
that there is not always conflict between the shareholders and the other groups. Also, Crédit lyonnais
Bank Nederland NV v. Pathe Communications Corp showed us that close to bankruptcy make the
shareholders less relevant.
(3) Third parties could have (and have) contracted. And the environment is irrelevant because it didn't
contract and it will be taken care of by environmental legislation. In some US states, the d/o protected
themselves from hostile takeover poison pill (buy the company, then you'll choke on it), green nail, gray
knight, or huge promise for the union. Point is: even if the d/o's job is to give the shareholders the highest
value, they can say they are concerned about the employees.
Often, “other constituencies” don't have any meaningful stake in a particular decision, so it's useless
to extend fiduciary duties to them. Fiduciary duties should only be about protecting the shareholders'
interests. It should be exclusive which would give then “a level of judicial protection commensurate with
the nature of the firm’s contractual obligations to them.” [355]
COPY WEBCT"
77
Grossly simplified: who will pay the most for it?
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Lien: child's best interest in family law.
If the copr is really a fiction in the sense that it was created out of nothing, you used it to
seprate your patrimony and for contract easiness. And those jurisdictions that say that in the zone
of insolvency, the d/o have to try to preserve the assets.
Or, it's fiction int eh sense tat it's an entity that exists. So the legal instrument is a fiction.
Whose interest do you want to prefer AND IN CORP law (there are other types of law) only the
shareholders you'll protect.
Shareholders, stakeholders and private ordering
Creditors a simple case; can obtain protection in the same contract which sets out the
obligation, e.g., interest rate, ability to appoint a private receiver; the issue is price, not ability
Trade creditors the most vulnerable because they often have no negotiating power, but note
that this is an issue of secured transactions and bankruptcy and that vulnerability could have been
addressed by the existing legislation but wasn’t; an attempt to obtain through internal corporate
governance what does not exist in external legislation?
Same argument with employees; can obtain protection through employment contract or
collective agreement
Employees also vulnerable because they often have no real negotiating power; is this
addressed through external legislation? Is the argument for employees to be included in
corporate governance stronger than the argument for any other stakeholder such as creditors?
Local community has political influence; note the persistent theme of whether a duty owed to
multiple stakeholders transforms private enterprise into private governance
What is the decision rule for identifying breach of duty of loyalty to shareholders?
Presumably liable for actions taken that do not maximize shareholder wealth; does this lead to
the next logical problem, e.g., conflicts between shareholders, particularly majority and minority
shareholders (note that CBCA oppression remedy would respond to this problem)
A critique of the economic approach: too much personification?
Note the impossibility of finding a simple decision-rule for “what are the best interests of the
firm” in the absence of an understanding of the various theories as to what constitutes a
corporation apart from the recognition it receives as a legal personality
Need to first understand basic assumption of atomic individualism, which is that “Persons
exist as discrete beings who are captured independent of the relationships they have with others”
Are students really students without professors?
Are professors really professors without students?
Problem with much of the shareholder-stakeholder debate is that it accepts the assumptions
of atomic individualism
Atomic individualism applied to legal personification results in a theory of the firm that
rejects view that obligation of directors and officers is to find appropriate balance amongst all
stakeholders (and shareholders are but one stakeholder group among many)
Cannot respond by remaining within framework of atomic individualism and simply
changing the identify of the various stakeholders to whom the directors and officers should, for
some reason, be held to owe a duty of loyalty; why should they owe this duty of loyalty to any
particular group of stakeholders, including shareholders?
Need a relational theory of the firm, authors argue pragmatism; no self without others,
intersubjectivity; corporation cannot be viewed as isolated from its various stakeholder groups; it
is constituted by these relationships and does not exist without them
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Authors argue this approach does not lead to the “stakeholder paradox” whereby one either
has business without ethics (strategic manipulation of interests) or ethics without business
(cannot act because interests cannot be reconciled)
What is the decision rule for identifying breach of duty of loyalty to the stakeholders?
Presumably not making an ethical decision, e.g., “the situational nature of ethical decisionmaking as operative in specific contexts; would this have to be examined for procedure rather
than substance?
2.2. US Steel.
Does duty of loyalty overlap with duty of care conceptually? What does the reasoning in
Peoples’ tell us? Need to imagine a conflict to reveal that best interests of the corporation has no
fixed baseline for measurement (back to U.S. Steel, what are the various interests, does each
“membership” speak with a single voice, is the objective to determine the appropriate interest or
to reconcile all of the interests, issues of institutional competence).
The plant is going badly. The employees try to buy the plant. And their former employers
said: I don't want you as my competitor, so no. The employees said: the community is dead and
the managers said: yeah, but we're not giving out shareholders. And the judge said: you can't put
the creditors/employees's claim before the shareholders'. Esp. since the collective agreement had
a closing clause with three months of severance. The managers said that dealt witht eh
employees and taxes was enough for the community. And again the other types of law. We've
already seen this. Whose job is it to decide whose interest should be taken into account
(environment, NGOs, employees, etc.)? Taking negatives externalities into account? The
government? Wendy says consumers (a little naïve, no?). The point is that you must go through
all the alternatives. Because the legal system enforces in us a belief that it should be because it is.
You need a decision at some point (thus the SCC's role).
3. FOR
WHAT RANGE OF STAKEHOLDERS ARE CORPORATE FIDUCIARY OBLIGATIONS
RECOGNIZED AND PROTECTED?
Informed by public choice theory, Macey and Miller take a critical approach to the extension of
corporate liability to a broad range of "stakeholders" You should consider their views critically
and imagine what the counter-arguments are in support of expansive protection of stakeholders.
4. RELATION BETWEEN THE DUTY OF LOYALTY AND CORPORATE SOCIAL RESPONSIBILITY
4.1. What is corporate social responsibility?
Corporate social responsibility (CSR) is the idea that corporations will take into account the
effect of their decisions on a broader range of stakeholders, both locally and globally, as well as
the implications of corporate activity for the environment. This assumes that corporations (1)
impose negative externalities ;and (2) will act on a higher standard than the one imposed by law.
This can be seen as just another way of asking how to determine the best interests of the
corporation, and thus the scope of the duty of care.
4.2. Gunther says
4.2.1. Problem-based, not interest-based.
While Berle-Dodd agreed on separation of ownership and control, they disagreed on scope of
duty of loyalty. Teubner’s response is to focus not on reconciling demands of expanding number
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of interest groups, but on accountability imposed according to circumstances of a particular noneconomic function, e.g., environment: Problem-based, not interest-based.
This is an old debate, the corporate social responsibility, a new way of seeing corporate
managers as trustees. Much of the debate revolved around the question of the best interest of the
corporation (what is this “best interest” officers and directors have to act in?). The corporate
social responsibility is just another way to analyse that, what is good for the corporation.
Teubner thinks most writers got the question wrong: it's not about building consensus from
the different groups; rather, the focus should be on the different functions. All the disputes come
from the difference between the procedural and the substantive. In hindsight, whenever the
corporation has lost money, it was a bad decision, esp. since the d/o can do something bad
(breach of fiduciary duty) and make money. Because it's so difficult to decide, the court will
only look at the procedure (fully informed decision, etc.).
4.2.2. The process of the decision
Putting aside the scope problem slightly, if accountability is to be imposed, is it better to
implement as a function of procedure (representation on board) or substance (imposing a duty to
meet a given standard of behaviour).
So Teubner would totally disagree with Peoples. The SCC said Wise made a good business
decision (good-faith effort, this is a procedural question). And then, they went to a substantive
question: who were you thinking about when making that decision and was that in the interest of
the corporation (yes, but by default because it was not in the interest of the creditors and you
helped the corporation by trying to make it work for as long as you could; loyal or not?).
Judicial review is not about the finding of fact; this is for the trial judge to decide. But on the
fact, it's the process of decision (the substantive decision) that'll be reviewed. Same for duty of
care/loyalty78.
Loyalty cannot be proven but the process of being loyal can be analysed (the procedure they
go through). The procedures Tubner recommends is: (1) disclosure (public scrutiny); (2) audit 79.
In any case, it is possible to make people loyal? There's always the agency problem, the
accountability arises from the duty of loyalty. But how do you define loyalty (extreme Phipps!)
and how do you know? How do you find the means to be loyal: strong definition: you must never
never never profit from what belongs to the corporation. But what we saw from Peoples, is that
it's not that bad: stock-options! Strict: they won't be loyal to the company but to their own
interests80.
Substance
HOW to make the decision
1221(1)(a) CBCA
Procedure
WHO makes the decisions
German AG with it's two-tier board: supervisory board (instead of
having a piece of legislation on which the judge will judge loyalty to
some interests, the interests are put on the board – union-chosen
employees vs. officers chosen by shareholders) and the executive
board.
78
Note that if the judges say they can't rejduge the business decision, but the loyalty, there's no problem and there's
never been.
79
This was obviously written pre-Enron.
80
But they are the same.
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Dodge v. Ford81 probably
high-water
mark
of
shareholder
wealth
maximization model
Gradual recognition of
validity
of
corporate
voluntarism in two forms,
isolated from liability if a
direct benefit (cakes and ale)
or isolated even if only indirect
benefit (corporate image)
Permissive,
not
mandatory82.
Can
“good
citizen”
approach in A.P. Smith
Manufacturing (the Princeton
donation)83
really
be
characterized as an expansion
of the scope of fiduciary duty?
In Germany, stock-listed companies (AG) have a two-tier board
structure
German Stock Corporation Act (Aktiengesetz), two-tier board
system consisting of a Supervisory Board (Aufsichtsrat) and an
Executive Board (Vorstand), can’t belong to both at same time
Executive Board responsible for managing the business
Function of the Supervisory Board is to supervise the Executive
Board and to appoint and to remove the members of the Executive
Board
Supervisory Board does not make management decisions, but
approval required for certain types of transactions require its prior
consent, e.g. annual budget, significant financial and M&A
transactions.
Shareholders elect their representatives on the Supervisory Board,
while employee representatives on Supervisory Board are elected by
the workers of the corporation or appointed by the trade unions for a
term between four and five years
All board members under both a duty of care and duty of loyalty
Group representation equal to enforcement of duty to comply with
behavioural standards?
Slightly contradictory. But careful because a duty to all is the same as a duty to none (there's
always someone else's interest you can act it, so basically, you can do anything84). But it's not the
same as too many masters (because then you can't move, because you always make someone
happy). Bottom line: aside from “the corporation”, is there any clear answer85?
4.3. Teubner's proposals (see “solutions”)
TEUBNER, Gunther, "Corporate Fiduciary Duties and their Beneficiaries – A Functional Approach to
the Legal Institutionalization of Corporate Responsibility", 149
Berle, with his minimalist approach (management’s powers are not absolute) and Dodd (the law
should make managers hold powers in trust for stakeholders) were radically opposed. Either way, a
recognition noneconomic corporate social responsibility should follow, even if Berle-Dodd's focus on legal
trust is too narrow, even if their discussion is not functional enough and even if the doctrine of fiduciary
responsibility should shift its focus from substantive norms to procedural mechanisms*.
Let's be trans-systemic: fiduciary responsibility and “Unternehmensinteresse”. US case law on this is
well developed. At first, it was a lot of ultra viresness (as in Dodge v. Ford Motor Co. (1919), where Ford
announced that no further dividends would be paid and that the future of the business was to be devoted
to reducing prices in the interest of consumers and to create more jobs for workers, [where] the Michigan
Supreme Court compelled the declaration of additional dividends on the grounds that a business is
carried on for the profit of the shareholders). It was afterwards abandoned and it was all about
81
Ford v. Dodge: Ford was afraid Dodge would expand elsewhere. Ford said it acted from the company, Dodge
won because it was acting for the shareholders (being one itself, wanting dividends). You cannot use the company to
further social goals.
82
Peoples: permissive (if you want to take the employee's interest into account, you can and the shareholders can't
sue you) and mandatory (you have to take it into account; Peoples didn't make the stakeholder-checking mandatory).
83
APSmith gave a lot of money to Harvard. The shareholders said: give money the shareholders, not to Harvard.
And the court said you could, being a good citizen is acting in the interest of the corporation (better corporate
image).
84
That's a little easy. Probably the reason why the judges prefer a bright-line rule. And public interest is the judge's
role.
85
If you haven't understood this by now…
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shareholders vs. the rest. Then came the benefit rule (corporate activities is ok if the corp can get
something out of it –first direct benefit only, now also indirect). Then business judgement rule. The legal
recognition of social responsibility is limited to corporate voluntarism (and sometimes negative
externalities). Tort and internal duties overlap in fiduciary matters. Germany. There used to be a duty, but
it was toned down so much it's almost useless. Before, the common welfare of the people was necessary.
Today, managerial autonomy but obligation to care about the public interest. While fiduciary duties focus
on obligations of management, German development changes the legal construction into a coalition of
different social groups and focuses on constitution of the firm, membership, representation, and control.
They are functionally equivalent in the sense that they impose larger social duties but the mechanisms
are very different.
Solutions. Doctrinal consequences: proceduralization of fiduciary duties. Power abuse. Environment.
The role of law is to impose internal procedures which necessarily lead to self-reflective process of
economic self-restraint, focus on procedural norms. Substantive standards need to be replaced with
procedural standards. Fiduciary duties should be replaced by duties of disclosure (defined scope), audit
(with systematic presentation of data, in depth and open to the public eye), justification, consultation and
negotiation (limit to managerial authority, management must involve board and committees in decisionmaking) and organization of internal control processes (certain institutions should be created to control).
Conclusions. The US and Germany have taken different directions. But it is important to find the
problems and solve them (I can't believe I wrote that sentence), with a goal-oriented approach, many
control mechanisms should be included in the corporate.
Other article?? Atomic individualism. You assume the copr and the people in them exist
solely as individual, they acts are he sole product of their individualism/imagination. But: would
you be students if there were no professors, and vice-versa? So atomic individualism is the
wrong way to go: every group in the corp does what it does because the other groups do what
they do. They don't exist independently from each other.
Last difficulty: do nothing because you want to pelase everybody (ethics without business)
and business with ethics (pretend you're always acting in person x's interest), apparently this
article gives an answer, but how do you make your decision. You breach your duty of loyalty
when making an unethical decision, which is a decision that breached the duty of loyalty.
Slightly circular. Should the rule be procedural rather than substantive.
Mid-term Summary.
Three main concepts from which everything else seem to follow. Corporate law determines 86: (1)
The corporate form and function; (2) Internal allocation of power and responsibilities; (3)
Relationship between the corporation and external parties.
Map of concepts (see WebCT):
Relational theory of the firm: Tasty – Need to define firm as a relation, pragmatic philosophy
(a corporation couldn’t possibly exist in the absence without all its constituent groups,
intersubjectivity). Look at the interests of the parties involved, no employer without employee.
Being rich and famous without the money and the fame.
Enterprise theory: Lizée – business as a going concern involving employees, D/O, etc. Can take
form of partnership etc. depending on the way you want to structure your legal affairs.
86
From Jean-Philippe Dallaire's summary.
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Constitution of private market actors. How the power is divided, what can you do and what you
can’t do, etc.
Quelques définitions:
Equity (or o'ship equity, or risk capital, or liable capital): difference between a company's
assets and liabilities -- that is, the value that accrues to the owners (sole proprietor, partners, or
shareholders). the difference between the market value of a property and the claims held against
it; the ownership interest of shareholders in a corporation
Debt: debt may include some degree of control)
Debt vs equity: Debt = you give me money, I pay you back with interests. Equity = you give me
money, I give you rights. Two different ways to get money for the firm.
Voting equity:
Non-voting equity:
Voting and non-voting: not all shares are voting. You can sell the shares to the public and don’t
have to make money. You raise capital without giving up control.
Inside equity:
Outside equity:
Inside / outside equity: Inside equity = shares are held by d/o, outside equity = shares are held
by investors.
Securities: (defined extremely simply) are investments in the form of debt or equity offered
to the public; includes more than just shares; they are regulated provincially in Canada, federally
in the U.S; Loi sur les valeurs mobilières, L.R.Q., V-1.1; Securities Act, R.S.O. 1990, c. S.5
Securities: Shares is a particular kind of equity. They are all called securities. The reason
they call it the Securities Act is to protect the public. Very large consumer protection act. A
security and a share are not the same thing.
Agency: someone (the principal) delegating to someone else (the agent) the power to make
decisions in certain circumstances. If you want something right, do it yourself. The idea is that an
agent can never ever do something as good as the principal. But, the principal can’t do
everything… If you’re doing work for someone else, you won’t work as hard as for yourself. A
rational person won’t work beyond the firing lane. Also, if you are an agent, you’ll probably
steal from your principal if you can fly away with it. For example, stealing office supplies.
This all leads to costs. Usually, you monitor the situation, hire a supervisor. You can have
bonding costs: in order to get the principal to be bound to me, let’s make this attractive. I
promise to act in you interest, work as hard as I can, etc.
1.
The economic theory of agency costs
Dès qu'il y a un effort conjoint, il y a des coûts d'agence. On peut définit les relations
d'agence comme des contrats: le principal/le mandant délègue son pouvoir décisionnaire à
l'agent/au mandataire pour que ce dernier agisse en son nom. Il n'est pas possible de s'assurer que
l'agent prendre les décisions optimales pour le principal sans y mettre le prix. Ce sont là les coûts
d'agence, les coûts de surveillance, de caution et les pertes résiduaires (monitoring costs, bonding
costs, residual loss).
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V. Corporate Governance.
Economics, Management And Comparative Law Perspectives On The Legitimacy Of Power In
The Corporation
1. WHAT
IS THE RELATIONSHIP BETWEEN CORPORATE FIDUCIARY OBLIGATIONS AND
CORPORATE GOVERNANCE?
Jensen and Meckling discuss how firm ownership structure and firm governance should respond
to the problem of agency costs, which in turn is linked to fiduciary responsibility in the firm.
JENSEN, Michael C. and William H. MECKLING, "Theory of the Firm: Managerial Behaviour, Agency
Costs and Ownership Structure" in Posner [R. XXX]87
New theory of the ownership structure of the firm based on three ideas: (1) property rights (2) agency
and (3) finance.
Agency: if both the agent and the principal are utility maximizers, the agents will not always act in the
best interest of his principal and it will therefore be necessary to devotes sums (agency costs) to the
monitoring of agents, bounding expenditures and any residual losses (decrease in welfare due to
divergences). Coase has said when the costs of using market were greater than the costs of direct
authority, the firm structure should be used.
But Jensen & Meckling think it’s the contractual relations that make the firm and that the cost of
agency exists in all these contracts. The corporation is a nexus for contracting, thus creating an inside
and an outside the firm. As a nexus, and not a person, the social responsibility question is misleading and
useless.
Also, with the agency problems and fight, comes the relevance of limited liability, the irrelevance of
the capital structure (for bankruptcy and reorganization costs, debt structure is dependent on the structure
of the firm). Agency costs of debt are incurred in tax subsidy on interest payments and wherever the
marginal wealth increments from the new investments project is greater than the marginal agency costs of
debt, and these agency costs are in turn less than those caused by the sale of additional equity, then
debt’s the best way to go. The agency costs associated with debt are: (1) potential wealth loss because
the debt made the d/o take certain investment decisions for the firm; (2) monitoring and bonding
expenditures by he bondholders and the owner-manager; (3) bankruptcy and reorganization costs.
Bottom line: the firm is a legal fiction which serves as a nexus for contracting relationships (it's not a
person). It is also characterized by the existence of residual claims on the assets and cash flows of the
organization which can generally be sold without permission of the other contracting individuals.
Shareholder contracted for some kind of cash flow, some claim on residual claims on assets (not that
they do not touch voting power in CBCA s.103). There rights can be sold without the permission of
anybody else. It is the coming together of these bilateral ties which make a corporation. It is a legal fiction.
Why then would it be relevant to make the difference between the in and the outsiders? Major contrast
with Macey and Miller.
In both cases, the duty of loyalty is the best way to reduce costs (agency costs, as these are
everywhere and taking them into account is the most marker-efficient thing one can do). Another
good way to make sure the managers will act in the best interest of the shareholders is to make
sure their interests are the same (by giving them stock option, for instance).
Macey and Miller: a duty of loyalty should be owed to shareholders because they cannot be
protected otherwise.
Jensen: shareholders should be protected because they can't specify by contract what the
obligations of the d/o should be. Adds that duty of loyalty is an after-the-facts device for SH and
creditors. It gives them a second kick at the can, according to Jensen.
LES COÜTS DAGENCE ET LETUQIT
87
This summary of a summary makes no sense to me. But it's based on Danielle Moubarak's.
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Aucune théorie de la personnalité juridique n'offre à présent de réponse claire quant à la
question du devoir de loyauté en fait de gouvernance d'entreprise. Il est cependant clair qu'il
existe une approche économique qui rejette la théorie de l'entité pour y préférer la théorie du
nexus of contracts, que ces contrats soient des contrats exprès ou des arrangements implicites.
L'objectif de ce type d'analyse est de déterminer si le marché fournit assez de régulation
(enforcement en fait) de ces contrats pour que les attentes des parties soient satisfaites. Ce n'est
que lorsque ces forces du marché seront insuffisantes que d'autres outils juridiques deviendront
utiles, le devoir de loyauté, p.ex.
Cela ne signifie pas que les lois du marché et les lois tout courts soient complètement
indépendantes, non, notamment puisque le droit de propriété et des contrats doit être en placé
pour que fonctionne le marché. La question est plutôt celle des autres mécanismes juridiques qui
pourraient s'avérer nécessaires, s'ils s'avèrent nécessaire (ce qui n'est pas sûr, il est possible que
les structures d'investissements et d'organisation fournissent d'autres mécanismes suffisants pour
motiver/obliger l'administration à agir de façon efficace). Pour Macey&Miller, elle s'avère
nécessaire: le devoir juridique de loyauté oblige un certain standard comportemental, compris
implicitement dans les actions mais qu'il aurait été trop cher de mettre par écrit.
Jensen et Meckling, eux offrent une nouvelle théorie. La traditionnelle, rappelons-le, dit que
les principaux et les agents doivent aligner leurs intérêts pour que les agents aient la motivation
nécessaire à la maximisation du bien-être du principal. C'est à partir du propriétaire-entrepreneur
que J&M cherchent un arrangement entre l'administration et les actionnaires qui réduira les coûts
d'agence. Il y aura toujours des coûts d'agences à partir du moment où des ressources extérieures
sont utilisées, qu'il s'agisse de dette ou d'équité. Quoi qu'il en soit, il est dans l'intérêt de tous que
les coûts d'agence soient payés par la personne qui coûte le plus cher (least cost avoider of
agency costs), afin de maximiser la valeur de la compagnie.
Il existe cependant un problème connexe avec la personnalité juridique. Ils croient que la
personnification crée une erreur analytique: la compagnie n'est qu'un lien, elle n'a pas de fonction
objective et c'est les fonctions objectives qui sont en cause et en question ici, puisque les parties
contractantes cherchent à maximiser leurs propre utilité (pas nécessairement, quoique souvent,
leurs profits).
Les coûts d'agence et la structure de capital: le mélange optimal entre la dette et l'équité.
Nous pouvons commencer notre histoire avec le gérant-propriétaire qui possède 100% de son
entreprise. Afin de maximiser son utilité (les profits et les incitatifs88), il pourra vendre des
portions de l'entreprise, ce qui entraînera cependant des coûts d'agence parce que les gérantspropriétaires, qui ne portent qu'une fraction des coût des incitatifs tangibles (perks), sera moins
motivé à chercher le profit89.
Le problème augmente comme le propriétaire vend la firme (devenant ainsi de plus en plus
un gérant et de moins en moins un propriétaire). Dans une logique de marché parfait, cela
signifie aussi que le capital devient plus cher parce que les investisseurs tiennent comptent des
coûts d'agences, qui sont supportés par le seul propriétaire-gérant, qui est donc motivé à résoudre
le problème.
Il peut trouver une solution par la surveillance (de la part des investisseurs) –auditing, budget
restrictions, compensation systems– ou par un cautionnement (bonding) de la part du
propriétaire-administrateur (que s'il fraude, l'assurance paie; contractual guarantees). Peu importe
88
89
Note the reference to secretarial staff in an article published in 1976
C'est au moins la millième fois qu'on le dit.
55
56
qui porte initialement les coûts de surveillance, c'est le propriétaire-administrateur qui va devoir
supporter les pertes liées à l'agence parce qu'il devra soit les payer lui-même (bonding) soit voir
le prix des actions réduit pour tenir compte de la surveillance. De plus, même avec la
combinaison la plus optimale, les coûts d'agence ne pourront jamais être supprimés.
Mais si l'equity (actif-passif) implique nécessaire des coûts d'agence, comment expliquer le
succès de compagnies aux actions dispersées? De telles compagnies demandent plus de capital
que le propriétaire-administrateur ne peut en fournir: les sources de capital sont donc les actifs et
les dettes. Sources of capital are equity and debt, l'une et l'autre ont des coûts d'agences. Les
coûts d'agence de la dette ont pour facteur motivants (incentive) des hauts taux de prêt, de
surveillance et de faillite.
Personne ne prêtera d'argent à un petit investisseur, surtout s'il a une responsabilité limitée.
Can reduce incentive effects through monitoring costs, particularly in form of restrictions on
borrowing and particular types of activities, but difficult to draft and may mean less than optimal
decision-making. Also difficult to predict and draft for claims in event of bankruptcy, so this
contingency is also reflected in the interest rate.
All of these costs taken into account by bond holders and reflected in the interest rate;
doesn’t matter who pays the costs, the wealth reduction will be felt by the owner-manger who
thus has an incentive to seek the least cost alternative for reducing agency cost
Ce qui fait agir les propriétaires-administrateurs. Les coûts d'agence, on l'aura compris,
peuvent être réduits, mais jamais effacés. Ceux qui prêtent ou investissents sont motivés à le
faire parce qu'ils ne supportent pas les coûts d'agences.
Et le devoir de loyauté dans tout cela? Les coûts d'agence l'expliquent-ils? Nous aident-ils à
trouver le «meilleur intérêt d'une compagnie»?
2. WHAT ARE THE LEGAL CONTOURS OF THE PROBLEM OF CORPORATE GOVERNANCE?
Corporate governance has to do with how power is deployed and controlled in the firm. These
readings are designed to characterize the legal issues that are raised by the problem of
corporate governance and to begin placing these issues in comparative perspective.
What business people think of lawyers. Law doesn't tell the whole story, esp. with regard to
the shareholders (why are they so important?) and the BoD whereas all the management
literature is about the senior officers.
Away's article. Closely or publicly held corporation share both held on shares, but no
necessarily to the public in general. Shares are a way of raising capital. Closely held = few
known shareholders; other using stock exchanges. The difference will be on the distinction
between shareholders and d/o. In a closely held corp, they will be the same people (in fact, not in
law, because of Salomon). In a publicly held corp, it won't. Unanimous shareholder agreement
(USA), which is? You dispense with the BoD. – CBCA, 146(1). The USA almost turns the
corporation into a parternship with many different legal personalities. Mais il existe des limites,
comme on le voit à l'alinéa (1) in fine "that restricts…is valid". Cela dit, le devoir de loyauté
continue à aller à la compagnie et non aux actionnaires (et certainement pas à eux-mêmes!). Si le
devoir de loyauté devait être itnerprété comme le devoir des d/o à maximiser les profits (ce qui
56
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est le devoir des d/o aux États-Unis), mais le devoir des actionnaires ne peut être dû à euxmêmes. Euh…
Dans les faits, ce devoir existe toujours. Un actionnaire pourrait vouloir poursuivre les autres
parce qu'ils font quelque chose de mal pour la compagnie. De même, un agent de l'extérieur,
comme un créancier, pourrait poursuivre parce qu'on «a fait du mal» à la compagnie. Ce triangle
est donc très bien pensé: on peut l'utiliser pour de petites comme pour des grandes compagnies.
Idem par le QBA.
Wise: il n'y a pas une seule sutrcute coproative en fait de sturcute de l'administration,
nombres de directeurs, nombres d'employés, il n'y a pas un seul modèle. Son argument est
cependant à l'effet qu'il existe un principe de gouvernance commun à travers toutes les structures.
Et c'est l'idée qu'un devoir de loyauté est dû à la compagnie elle-même: toutes les autres idées se
subsument dans celle-là. QQCH.
Mais n'est-ce pas exactemetn la même question, simplement déplacées aux actionnaires à
propos de ce qu'est le meilleur intérêt de la compagnie? Si on dit que le meilleur intérêt de la
compagnie n'a pas à inclure tout le monde, mais si elle est celle des actionnaires, alors, c'est
recirculaire en la déplaçant de d/o à actionnaires.
Donc (1) administration, devoir à la compagnie. (2) ne peut être simplement celui des
actionnaires parce qu'ils ne peuvent se devoir un devoir à eux-même (3) mais cela ne répond pas
plus à la question du meilleur intérêt de la compagnie. Comment en décider? C'est encore une
illustration du besoin de l'argument ou de la théorie. Et même dire qu'elle est passé du côté des
directeurs à celui des actionnaires ne répond à rien: qu'est-ce qu'on fait des autres personnes
intéressées (créanciers, communauté, nature, etc.). Ne pas oublier que les créanciers peuvent
utiliser le oppression remedy.
Réalisme (vous avez une véritable entité sociale) et nominalisme (ce n'est qu'un terme, nexus
of contract, parce que c'est facile)90. Autre grande question: le droit des compagnies n'est-il
qu'une série de règles par défaut ou est-ce vraiment un mécanisme qui permet de carry on
business. L'approche réaliste est plus en accord avec l'idée de la communauté: si la compagnie
existe, il faut regarder les intérêts de tous ceux qui peuvent interagir avec elle. L'idée nominaliste
est beaucoup plus proche de la notion du bénéfice des seuls actionnaires puisqu'ils sont les seuls
au contrat (puisque ceux les actionnaires ne peuvent pas entièrement contracter, contrairement
aux créanciers et aux employés).
Toutes ces questions ont été utilisées pour répondre à la question du devoir de loyauté. Mais
évidemment, il fallait au préalable choisir une vision plutôt que l'autre. Article de Dewey dans
les années 30: toutes les théories permettaient à justifier une loi plutôt qu'une autre.
Berle&Means:
90
Nominalism
Nexus
contract
?
Realism
of Social entity
?
Shareholders
if separation of
o'ship
and
control,
it's
because there's a
problem and as
the owner, the
C'est la même chose que Lizée, non?
57
Stakeholders
58
shareholders
should be owe
the
duty
of
loyalty.
Lizée
Dent
Hart –pro&cons
of narrow/broad
duty
(firms
should
have
the
possibility
of
opting out of the
general duty of
loyalty)
Teubner
–
substantive
approach
procedural
examination
Macey&Miller – X
economic
approach
B&R
X
X
X proxy voting
X
Don't
worry broader duty
about them, just
think
about X
interests, but he
did talk about
X
X
Corporation can't
exist outside its
relationships
J&M – agency X
costs
X
(probablement
ici)
Donc, approche nominale: bonne chances que les actionnaires seules, si entité, avec
personnalité propre, stakeholders.
Donc, quelle est la différence entre le réalisme et le nominalisme? C'est la différence entre
une université et une équipe de luge. J'ai complètement laggé. Cross-shareholding to make
yourself impervious to takeovers.
Réalisme: dispersion des actionnaires, nominalisme, plus proche. Share structure. Beaucoup
d'études comparatives sur le shold capitalism (ÉU, nominlaisme, maximiation de la richesse des
actionnaires) et le corporate capitalism (Japan, réalisme, keep the corporation as a going
concern). Mais comment avoir deux réponses différences alors que la question est la même
(quels sont les meilleurs intérêts de la société?). Pourquoi? Question de proximité des
actionnaires?
Mais est-ce une justification normative ou descriptive? Et à ce titre, les avocats vont toujours
favoriser la structure qui engage le moins de responsabilité.
Ne pas rejeter la théorie du nexus of contract (social entity) mais dire qu'elle n'est pas aussi
convaincante de la théorie du nexus of firm-specific investment, c'est-à-dire sans la compagnie,
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59
l'investissement qui y a été fait ne vaut rien91 et c'est aux administrateurs de protéger ces
investissements. D'une part, il y a le shirking et s'il y a allocation des surplus (puisqu'en équipe
on en fait plus que seuls) avant le travail, il pourra y avoir shirking aussi, mais si on décide après,
c'est le problème du pâturage des communes (redseeking: se battre sur la grandeur de la portion
plutôt que de faire un plus gros gâteau, être vicieux plutôt que travailleur). D'où le mediating
hierarch, qui observe/surveille et décide. Latin phrase: social contract, pactum subjecti unis? Se
donner à autrui et alors il est possible de comprendre que le devoir de loyauté fonctionne par
rapport à la compagnie, qui doit continuer à exister (coûts d'opportunité?). Le médiateur demeure
contraint par le marché, mais il a quand même un bon rôle.
Friday: Sholders proposals.
3. WHAT LIGHT DOES THE MANAGEMENT LITERATURE SHED ON THE PROBLEM OF CORPORATE
GOVERNANCE?
These readings are drawn from two of the leading contemporary management theorists and are
designed to link the legal discussion of corporate governance with the perspective of firm
management.
3. 1. Deux approches différentes
3.1.1. Le rôle des actionnaires
Une différence significative entre la littérature juridique et celle du management se joue sur la
question du rôle des actionnaires dans la gouvernance d'entreprise. Alors que la première met
l'accent sur leur rôle, surtout en ce qui a trait au devoir de loyauté, la seconde ne voit pas la
gouvernance d'entreprise comme une question de régulations mais de leadership et d'idéologie.
C'est sans doute pourquoi une approche transdisciplinaire pourrait être utile. Mais c'est difficile.
3.1.1.1. Des propositions des actionnaires
3.1.1.1.1 LA LÉGISLATION
137 CBCA. (1) 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
(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.
(1.1) To be eligible to submit a proposal, a person
(a) must be, for at least the prescribed period, the registered holder or the beneficial owner of at
least the prescribed number of outstanding shares of the corporation; or
(b) must have the support of persons who, in the aggregate, and including or not including the
person that submits the proposal, have been, for at least the prescribed period, the registered
holders, or the beneficial owners of, at least the prescribed number of outstanding shares of the
corporation.
…
(2) A corporation that solicits proxies shall set out the proposal in the management proxy
circular required by section 150 or attach the proposal thereto.
(3) If so requested by the person who submits a proposal, the corporation shall include in the
management proxy circular or attach to it a statement in support of the proposal by the person and
the name and address of the person. The statement and the proposal must together not exceed the
prescribed maximum number of words.
91
Uh?
59
60
…
(5) A corporation is not required to comply with subsections (2) and (3) if
…
(b.1) it clearly appears that the proposal does not relate in a significant way to the business or
affairs of the corporation;
…
(e) the rights conferred by this section are being abused to secure publicity.
…
46 Canada Business Corporations Regulations, 2001. For the purpose of subsection 137(1.1)
and paragraph 261(1)(c.1) of the Act,
(a) the prescribed number of shares is the number of voting shares
(i) that is equal to 1% of the total number of the outstanding voting shares of the corporation, as
of the day on which the shareholder submits a proposal, or
(ii) whose fair market value, as determined at the close of business on the day before the
shareholder submits the proposal to the corporation, is at least $2,000; and
(b) the prescribed period is the six-month period immediately before the day on which the
shareholder submits the proposal.
48. For the purpose of subsection 137(3) of the Act, a proposal and a statement in support of it
shall together consist of not more than 500 words.
3. 1.1.1.2 QUELQUES EXEMPLES
Nombreux sont les groupes qui peuvent s'y lancer:
 des investisseurs institutionnels comme le Ethical Funds Company canadien:
http://www.ethicalfunds.com/Do_the_right_thing/sri/shareholder_action/shareholder_resolutions.asp;
http://www.socialinvestment.ca/News&Archives/news-903-IPSCO.htm

des coalitions comme la Ceres coalition of investor groups, environmental
organizations and investment funds (United States): http://www.ceres.org/investorprograms/
ou la Trillium Asset Management and Amnesty International (United States);
http://www.trilliuminvest.com/pages/social/social_advocacy.asp

par les syndicats comme l'AFL-CIO:
http://www.aflcio.org/corporatewatch/capital/shareholderproposals.cfm
Certains en font une profession de foi: Robert Monks COPIER NOTES.
http://www.thecorporatelibrary.com/special/ragm/. On peut aussi se «ressourcer» avec des
cartoons: http://www.thecorporatelibrary.com/Governance-Research/cartoons/archive.asp
3.1.1. 2. Les configurations organisationnelles
Team production theory: all participants in joint economic activity are considered to have
made firm-specific investments and to have ceded authority to a mediating hierarch. Following,
nature and extent of power exercised by the mediating hierarch depends upon organizational
configuration, which all have six basic parts: Strategic apex, middle line, operating core;
Technostructure, support staff and ideologyNote the combination of internal and external forces
in asserting control over distribution of power; ceding power to mediating hierarch by
participants to joint corporate activity does not appear to be a one-time activity. Note placement
of shareholders as outside the firm, in same position as union.
There are also coordinating mechanisms: Mutual adjustment; Direct supervision;
Standardization of work process; Standardization of outputs; Standardization of skills;
Standardization of norms; Design parameters.
To what extent does organizational design determine individual expectations? Job
specialization (range of tasks performed and autonomy over schedule); Behaviour formalization
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61
(do lawyers wear uniforms?); Training; Indoctrination (do law faculties indoctrinate? Do law
firms?); Unit grouping and unit size; Planning and control systems; Liaison devices (everyone’s
favourite…); Decentralization (is decision-making centralized or diffused?).
And situational factors: Not all organizational design proceeds from a blank slate, situational
factors operate as constraints: Age and size; Technical system (as distinguished from
technology); Environment; Power. Should board supervision acknowledge situational factors in
determining level of deference to give to management decisions?
Il existe diverses configurations:
 Entrepreneurial organization
 Machine organization
 Professional organization
 Diversified organization
 Innovative organization
 Missionary organization
 Political organization
3.1.2. Le CA
La composition du CA devrait-elle changer selon la configuration de l'entreprise? C'est-àdire, le CA d'une mission catholique devrait-il être composé de prosélytes (de gens de l'intérieur)
seulement? N'est-ce pas un droit des actionnaires que d'imposer un veto à certaines transactions
fondamentales?
Druckner et les vrais devoirs d'un directeur. Does management literature suggest ways in
which certain basic features of corporate law, such as the accountability of directors and officers
and the role of shareholders in corporate decision-making, should be amended to address any
discrepancy between business practice and corporate law? Les CA d'aujourd'hui ne sont plus
ceux de la révolution industrielle, pourtant le modèle juridique demeure le même. Le même et
très vague: les directeurs doivent «gérer ou superviser la gestion de la compagnie» (ce «ou» est
une décision d'affaires, pas juridique: il n'y a pas d'obligation de déléguer aux cadres, juste de
superviser s'il y a délégation). Au niveau du devoir, un directeur n'est pas protégé du fait de son
ignorance (ignorance, nonchalance ou indolence) des tractations de ses officiers. Sélectionner les
cadres attentivement et leur demander des indicateurs de performances dans les domaines-clés
(allocating capital, appointing senior positions, innovation, strategic planning, succession
planning) fait partie du rôle des directeurs. Il leur faut vérifier la stratégie du groupe au regard
des résultats, s'assurer qu'il y a des politiques de gestion des relations extérieurs, que les
ressources qui nous sont confiées sont bien gérées (surtout en fait de fonds de pension), les
résultats financiers, l'approbation des grandes décisions d'affaires.
Des talents en droit et en comptabilités sont des atouts, surtout pour staffer des comités. Des
directeurs de l'extérieur peuvent également être une bonne chose92. Et que penser de la séparation
des rôles de président et de directeur général?
VI. Takeovers
TAKEOVERS: THE NORMATIVE FRAMEWORK OF THE MARKET FOR CORPORATE
CONTROL
 Parallel VanDuzer Readings: Chapter 10 & Chapter 11 Part D
92
L'exogamie administrative…
61
62
How does the corporate governance regime structure the market for corporate control?
This reading links the problem of corporate governance to the market for corporate control
through takeovers, drawing in some measure upon game theory.
1. UN PEU DE VOCABULAIRE
Anglais
Français
Définition
poison pill Pastille
Stratégie employée pour empêcher une OPA hostile, il s'agit de
empoisonnée rendre les actions moins attirants pour l'acheteur. Deux types:
(parfois
 Le flip-in permet aux autres actionnaires d'acheter des
pilule),
actions à prix réduit, l'achat d'actions supplémentaires,
dragée
vient diluer les actions de l'acquéreur, ce qui rend l'OPA
toxique
plus difficile et plus onéreuse.
 Le flip-over qui permet aux actionnaires d'acheter les
actions de l'acquéreur à un prix réduit après la fusion (p.ex.
le droit d'acheter des actions de l'acquéreuse à deux pour
un)
93
Poison put
La même chose mais dans un cautionnement (bond). Il s'agit d'une
clause qui prévoit le remboursement de la dette plus une prime
advenant certains événements (comme une OPA).
Il ne s'agit pas une pastille empoisonnée parce qu'elle ne servent
pas à empêcher l'OPA, simplement à recover wealth that would
otherwise be transferred to shareholders when debt is assumed and
bonds are downgraded
Warrant
Bon
de Émis avec les actions, permettent à l'actionnaire de spécifier un
souscription montant de sûretés à un prix fixe, généralement supérieur à la
(d'action)
valeur marchande, au moment de l'émission, pour une période
d'une certaine durée, quelques années voire toujours.
Si le prix des sûretés devient supérieur à celui du bon,
l'investisseur peut acheter au prix de son bon et revendre, avec
profit. Sinon, elle n'est pas utilisée ou expire.
Option
Option
Droit d'acheter (call option, option d'achat) ou de vendre (put
option, option de vente) un nombre d'action spécifié à un prix
précis pendant un temps donné (ex.: au mois de mars 2008, tu
pourras acheter 100 action au prix de mars 2006).
Pour le détenteur de l'option, la perte potentielle est limitée au prix
payé pour acquérir l'option. Chaque option a un acheteur (holder,
porteur, détenteur) et un vendeur (writer, vendeur). Si l'option est
utilisée, le vendeur est responsable de la délivrance des actions à
l'acheteur.
Lorsqu'elle n'est pas exercée, elle expire.
Free cash Flux
de Il s'agit des encaisses (ce dont la compagnie peut disposer
flow (FCF) trésorerie
immédiatement) que la compagnie peut générer après l'argent
disponible
nécessaire pour maintenir ou augmenter ses actifs.
93
In Coffee's article (who fned prof. Black a note) 
62
63
Going
concern
value
Valeur
d'exploitation
Liquidation
value
Breakup/Bust up
value
Greenmail
Valeur
de
liquidation
Valeur à la
casse
Primary
market
Marché
primaire
Chantage à
l'OPA
Chantage au
dollar
C'est un bon indicateur de la performance financière parce que un
bon flux de trésorerie permet à une compagnie d'améliorer la
valeur des actions en développant de nouveaux produits, en faisant
des acquisitions, en réduisant sa dette, en payant des dividendes,
etc.
Valeur comptable de l'actif net d'une compagnie au «jour de
l'inventaire», fondée sur le postulat de la continuité de
l'exploitation.
La différence avec la valeur de liquidation, c'est que le valeur
d'exploitation comprend certains intangibles comme le fond de
commerce (goodwill) et la propriété intellectuelle.
Estimé du montant qu'on pourrait retirer d'un bien ou d'une
entreprise si elle devait être vendue rapidement (p.ex. pour faillite)
La valeur d'une compagnie si chacune de ses parties étaient des
entités indépendantes, publiques. C'est une évaluation qui est
souvent faite avant les OPA.
Prime payée à l'acquéreur pour qu'il cesse son OPA.
(OLF) An antitakeover maneuver in which the target firm
purchases the raider's stock at a price above that available to
other stockholders. The funds for the purchase are often
borrowed; other stockholders are ordinarily excluded from the
transaction.
The market for new securities issues; security is purchased directly
from the issuer
Marché ((sur lequel sont placées)) les obligations et les actions issues
d'une émission ((qui)) plus tard seront négociées sur le marché
secondaire.
Secondary
market
Marché
secondaire
A market in which an investor purchases a security from another
investor rather than the issuer, subsequent to the original issuance
in the primary market
Marché public sur lequel se négocient les titres déjà placés.
Initial
public
offering
(IPO)
Junk bond
Investmentgraded
bond
Leveraged
buy-out
(LBO)
(Premier)
Le fait, pour un émetteur, d'offrir pour la première fois ses titres au
appel public grand public.
à l'épargne
Obligation à
haut risque,
de pacotille,
spéculative
Émission
sans risque
Obligation comportant un degré particulièrement élevé de risque et
qui, pour cette raison, offre un taux d'intérêt très élevé. BB ou
moins.
Acquisition
par emprunt
Extension of credit (significant amount of borrowed money,
usually over 70%) so you can buy a huge company when you don't
have the money (this could be a reputation problem); debt to be
Le contraire. BBB ou plus
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Restrictive
(business)
covenant
repaid by asset stripping or using profits generated by increased
efficiency.
¡! A large LBO will downgrade your credit rating, you might not
be investment-graded stock anymore.
Example: see RJR-Nabisco
Clause contractuelle qui oblige ou interdite à une partie de faire
certains actes (p.ex. un prêteur peut refuser que l'emprunteur fasse
certains investissements qu'il juge trop risqués, ou refuser qu'une
autre dette soit contratée)
RJR-Nabisco
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Wikipedia: “RJR Nabisco, Inc., was an American conglomerate formed in 1985 by the
merger of Nabisco Brands and R.J. Reynolds Industries. RJR Nabisco was purchased in 1989 by
Kolberg Kravis Roberts in the largest leveraged buyout (LBO) in history.” An LBO94 financed
with $25 billion “The RJR Nabisco LBO was, at the time, widely considered to be the preemininent example of corporate and executive greed. Bryan Burrough and John Helyar published
Barbarians at the Gate: The Fall of RJR Nabisco, a successful book about the events which was
later turned into a television movie for HBO.” “In 1999 due to concerns about tobacco lawsuit
liabilities, the tobacco business was spun off into a separate company, and RJR Nabisco was
renamed Nabisco Group Holdings.”

This made MetLife unhappy because it had a significant holding in bonds issued by RJR
Nabisco, and the size of the LBO led to an unprecedented $25M reduction in the value of its
bonds, which in turn affects its share price, and its shareholders…

Basically an argument that the LBO transferred wealth from the bondholders to the
shareholders
2. L'OPA ET LE MARCHÉ EFFICACE COMME MESURES DISCIPLINAIRES DE L'ADMINISTRATION
2.1. La méthode «Wall Street»
Jusqu'à présent, nous avons, c'est l'approche juridique à la gouvernance d'entreprise que nous
avons prise, avec une attention particulière portée aux possibilités d'abus du pouvoir
discrétionnaire et aux possibilités «légales» comme le devoir de diligence (décisions attentives et
prudentes) et le devoir de loyauté (sans conflit d'intérêt).
Certains auteurs, comme Coffee, proposent cependant que ces solutions ne valent pas les
solutions de marché. L'absence de loi pour fustiger les comportements inadéquats rendrait-il les
actionnaires ou les autres gens intéressés sans défense? Que non, disent-il, le marché impose
certains standards de performance aux administrateurs, par le biais de la transferability des
actions (Hausmann et Kraakman). Si le marché est efficace et que toute l'information est
disponible pour les acteurs sur le marché, et que cette information reflète avec justesse le prix
des actions. Alors, si l'administration utilise l'argent de la compagnie à son profit, la valeur des
actions baissera.
Les actionnaires suivront la «méthode de Wall Street», c'est-à-dire au lieu de chercher à
réformer (apathie des actionnaires), ils se contenteront de vendre et d'aller voir ailleurs (du bête
échange de stock mais il faut dire que la compagnie va mal, sinon, c'est du insider trading).
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Book account of the LBO is listed on Amazon.com, perhaps as a wry social comment, with the helpful
“Customers interested in this title may also be interested in: Shield Credit of Canada: Helping Canadians lower their
payments by up to 50%; Debt Consolidation: Pay off all outstanding debt with one lower payment you can afford”
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Sinon, ils cherchent à prendre contrôle de la compagnie en y acheter une participation majoritaire
(recall here Iwai’s distinction between realist and nominalist corporations WHY?), ce qui lui
permet d'éviter tous les problèmes de la mollesses et de la dispersion des actionnaires pour
contrôler les AG comme il le désire et faire les changements qu'il estime nécessaire, ce qui se
reflétera dans la valeur de la compagnie (et donc, l'actionnaire majoritaire pourra revendre, avec
profit).
2.2. L'OPA.
Cette utilisation du mécanisme d'OPA pour discipliner les administrations qui performent
mal est souvent appelée «marché de la prise de contrôle » (the market for corporate control).
Cette prise de contrôle est un investissement, ce qui explique pourquoi les actionnaires ciblés
dans les OPA reçoivent souvent une offre pour un prix supérieur à celui de la bourse, jusqu'à
concurrence du dépassement du coût d'option d'un autre investissement. C'est la prime de prise
de contrôle (control premium). L'actionnaire accepte parce qu'il retrouve une part de
l'investissement qui a été dilapidé par les administrateurs incompétents et cela ne pénalise pas
celui qui fait l'offre parce qu'il récupérera les fonds détournés. Seuls les administrateurs y
perdent, peut-être leur poste, et certainement les surplus non gagnés produits par leurs
malversations.
2.3. Coffee and unstable coalitions
2.3.1. Le principe.
Les actionnaires, l'administration, les créanciers et les employés ont tous des intérêts
différents dans le flux de trésorerie. Les trois derniers ont des investissements très liés à
l'entreprise et c'est donc la viabilité à long terme qui les intéresse (rétention ou réinvestissement
du cash flow, croissance plutôt que profit, être solvables et garder beaucoup d'argent dans la
compagnie). Les actionnaires sont dans la position contraire: ils veulent des retours sur leurs
investissements (ce dont les directeurs se foutent relativement, sauf stock-options, mais leur
salaire vaut plus que les retours), des profits ou des dividendes, s'ils acceptent le
réinvestissement, ce sera à risque. Coffee parle également des coalitions instables, c'est-à-dire
que le jeu du contrôle d'entreprise ne se joue plus qu'à deux. Car aux actionnaires et aux
administrateurs s'ajoutent de plus en plus les stakeholders. Ce sera du deux contre un, mais
simplement le temps que les intérêts changent –et même, si les malversations de l'administration
sont une des causes de la sous-performance, l'est également les alliances entre l'administration et
les autres intérêts contre les actionnaires parce que cela crée des ententes implicites qui ne sont
pas prise en compte au moment de la formation du contrat avec les actionnaires (qui n'ont pas
l'information nécessaire).
2.3.2. L'administration et les actionnaires
OPA: on peut prendre en compte l'intérêt des employés et des créanciers et pas seulement de
la compagnie. On critique: ça permet juste aux administrateurs de garder leurs emplois en
utilisant les autres. Coffee n'est pas d'accord. Grosse chicane théorique en France: les
administrateurs ont-ils le droit d'utiliser des poisons pills? Beaucoup d'État européens opt out de
cette idée (Coffee est en désaccord, trouvant qu'on protège moins les employés). Évidemment, ça
fait une différence dans la façon dont la cour traitera la question: pour certains, c'est simplement
une façon de sortir du contrat.
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2.3.3. L'administration.
Comme c'est le cas pour les actions, les obligations ont un marché primaire et un marché
secondaire. Ces obligations perdent de leur valeur dans les marchés secondaire lors d'OPA
financées par emprunt parce que les agences de crédit déclassent l'obligation de «rendement
élevé» à «hautement spéculatif». Cette perte de valeur de l'obligation est une perte pour celui qui
la possède. Même en fixant le taux d'intérêt, il n'est pas possible de se protéger de toutes les
éventualités. La solution est plutôt du côté d'une entente implicite, en plus de l'instrument
d'emprunt. Le poison put est une autre solution: il s'agit d'une entente implicite entre
l'administrateur et l'obligataire à l'effet que l'OPA ne fera pas baisser la valeur des obligations,
par le biais d'un remboursement immédiat et d'une prime pour prendre en compte la valeur
présente du revenu attendu. Le résultat, c'est qu'il est nécessaire de retenir le flux de trésorerie
(pour payer ces primes), au bénéfice de l'obligataire et de l'administration, et, vraisemblablement,
sans que les actionnaires n'en souffrent si les primes reflètent les pertes du marchées provenant
de l'emprunt fait pendant l'OPA.
2.3.4. Les employés.
Pertes d'emploi, réduction des pensions et des salaries, voici ce qui peut attendre les
employés lors d'une OPA. Ils ont auront donc besoin de l'assurance de la part de l'administration
que l'argent qui leur est imparti n'ira pas plutôt aux actionnaires (soit par l'augmentation des prix
des actions, soit par des mises à pied). Les pastilles empoisonnées peuvent être implantées dans
les actions, mais également dans les conventions collectives. Ainsi, y promettre la sécurité
d'emploi en cas d'OPA (idée similaire à celle des obligataires) ou d'éviter toute restructuration
qui mènerait à un leverage élevé (coefficient du passif à l'avoir des actionnaires, rapport dette
équité) rend la compagnie moins intéressante. Une convention collective à renégocier n'est pas
jamais de bonne augure pour un acheteur (ex.: NWA pilots’ and machinists’ unions).
Il arrive même que les syndicats fassent des bids pour entrer en compétition avec l'acquéreur! Ils
agissent parfois à leur propre compte, parfois avec l'administration, parfois avec un autre
investisseur en action (equity investor) ou à l'aide d'un régime d'actionnariat des salariés (ESOP,
employee stock ownership plans). Dans la mesure où celui qui possède les capitaux peut faire
une offre d'achatt, pourquoi pas les employés?
Note that parent corporations seeking to sell subsidiaries may not be happy with previous
employees, with know-how that cannot be captured by parent corporation through contract, as
new competitors
2.4. Lorsque les cours s'en mêlent: défenses il/légitimes aux OPA
Contrairement aux pastilles empoisonnées, les ententes entre l'administration et les créditeurs
et/ou les employés sur l'allocation des pertes et des gains en cas d'OPA sont implicites. Il y a fort
à parier que les obligataires n'accepteront pas «à l'avance» de voir le classement de leur
obligation perdre beaucoup de valeur, préférant plutôt que le taux d'intérêt soit un reflet du
risque. Malheureusement, ça se contracte assez mal –d'où ce qu'existent les poison puts. De
l'autre côté, les employés ne veulent pas de mises à pieds, de réduction des pensions et des
salaires et préfèrent que leurs salaires reflètent le risque, ce qui ne peut non plus être contracté à
l'avant. La solution est donc de mettre en place des restrictive covenants dans le contrat d'emploi
(ou de devenir un acquéreur compétiteur).
Exemple.
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Case of MetLife, where KKR could have paid shareholders $105 instead of $109 for
shares trading at $55 before the takeover began, and used the $4 per share to fully
compensate bondholders such as MetLife
Court found no breach of bond agreement since takeovers had been anticipated
But was the effect of $25 billion, the largest LBO ever, in the middle of rapid legal and
financial developments in takeovers, actually anticipated
If not, this is a case of incomplete contracting and perhaps the implicit bargain should be
upheld
But what are the terms of the implicit bargain, exactly? Use game theory, tit-for-tat, to
predict arrangement between shareholders and stakeholders (an agent will initially
cooperate, then respond in kind to a previous opponent's action; if the opponent
previously was cooperative, the agent is cooperative; if not, the agent is not)
Since gains for shareholders exceed losses to stakeholders, and since neither can predict
what outcome will be, some degree of cooperation expected to share the discrepancy
More likely to develop with increase in investment by institutions, who will soon acquire
reputations as they become repeat players
2.5. Le régime de l'OPA.
L'objectif des règlements en matière d'OPA est de s'assurer que tous les actionnaires seront
bien traités. Le droit des sûretés et une part de la législation de gouvernance d'entreprise,
s'applique aux compagnies publiques; le reste de la législation de gouvernance d'entreprise
s'applique aux compagnies privées. Au Canada, on utilise le CBCA pour réguler les OPA privées
et publiques, ce qui mène parfois à certains conflits avec le droit des sûretés provinciales pour les
compagnies provinciales publiques.
On l'a dit, l'OPA ici, s'adresse directement aux actionnaires, with price paid in case, shares or
combination of both, on a take-it-or-leave-it basis. Elle peut aussi changer le contrôle par
l'amalgamation ou la vente de tout (ou presque tout) les actifs de la compagnie. L'OPA peut ne
toucher que certains types d'action.
Le but est de contrôler assez de votes d'actionnaire pour renverser l'apathie des
actionnaires/le problème de l'action collective, convoquer une AG et remplacer les directeurs, qui
remplaceront alors les cadres. L'OPA peut être amicale ou hostile: en réponse à aux documents
envoyés par l'acquéreur potentiel à tous les actionnaires ciblés, les directeurs ciblés vont émettre
une recommandation justifiée. L'offre demeure ouverte pendant un certain temps. Si l'acquéreur
acquiert un certain pourcentage des actions, il peut obliger les actionnaires restant à lui vendre
pour un bon prix (afin d'éviter des poches de résistances d'actionnaires qui ne veulent pas que la
compagnie devienne privée, ce qui arrivera si toutes les actions sont achetées) ou les actionnaires
dissidents forcer l'acquéreur à acheter d'autres actions (afin d'éviter que les actionnaires
minoritaires ne soient écraser lors du changement de contrôle).
Why would the new shareholder want to take a public corporation private?
Exemple: La saga HBC.
 Bid must remain open for acceptance for a specified period of time
 Hudson’s Bay Co. established in 1670 (a charter corporation) as a series of fur trading
posts; Now operates more than 550 stores under brand names of Bay, Zellers, Home
Outfitters and Fields; Declining sales for over 5 years, with increased competition WalMart Stores Inc., Costco Wholesale Canada Ltd. and specialty clothing chains such as
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Old Navy and American Eagle; Retail analysts predict continuing decline of department
stores, with HBC following Woodwards, T. Eaton Co. Ltd., and Sears Canada Inc.
Despite speculation, Zucker insists no breakup of the brands or sale of assets; Maple Leaf
Heritage Investments Acquisition Corp. (U.S. investor Jerry Zucker) owns 19% of
Common Shares of Hudson’s Bay Company
October 28, 2005, MLHI announces intention to make unsolicited takeover bid for HBC
November 10, 2005, MLHI makes takeover bid of $14.75 per share for all outstanding
Common Shares (MLHI values HNC at $1.5 billion), open for acceptance until
December 29
Represents a premium of 9% at time offer was announced; following announcement of
takeover bid HBC (TSX) rose by 2 cents to $15.22; represents a 38% premium at time
MLHI’s holdings in HBC were announced on December 9, 2003
Is the market responding to a potential change in ownership?
Bid conditional upon regulatory approval in Canada; Investment Canada Act reviewable
transaction on basis of foreign purchase of a domestic corporation
November 24, 2005, disappointing third quarter results announced
November 25, 2005, board recommends rejection of MLHI’s unsolicited bid; main
reason given is that the offer is not high enough, but also that the offer is conditional in
many areas
Zucker’s response: “We understand that the HBC Board wants to fulfill its fiduciary
responsibility, but the reality is that it has been over 15 months since we approached
HBC with a proposal and a full month since we publicly announced our intention to make
the offers. …In all that time, the HBC Board has failed to take effective steps to
maximize shareholder value.”
As to conditional nature of provisions, Zucker argues that HCB has not provided MLHI
with sufficient non-public information, the same information it is providing to other
potential purchasers; HBC agrees to provide MLHI with non-public information
December 20, 2005, MLHI delivers notice of extension and variation to the shareholders,
reducing conditionality of some terms but holding price constant, with new deadline of
January 31
January 26, 2006, HBC Board reaches agreement with MLHI, offer increased to $15.25
January 26, 2006, MLHI indicates intention to tender another offer with conditional
provisions reduced and $15.25 per share
February 10, 2006, MLHI delivers another notice of extension and variation, with share
price of $15.25 and deadline of February 24
February 10, 2006, HBC Board sends management circular to shareholders
recommending acceptance of MLHI’s offer
Feb 24, 2006, MLHI now holds 82% (19% to start, 63% takeup) of the common shares
and extends offer on same terms for remaining shares until March 9, at which time
corporation will be taken private by its (hopefully) single shareholder, MLHI (following
a compulsory acquisition if sufficient shares are taken up)
MLHI working with HBC to "effect an orderly transition of HBC's board of directors,
including the resignations of current directors and the appointment of individuals
nominated by Heritage."
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3. L'ALTERNATIVE À LA RÈGLE DE WALL STREET,
OPPRESSION (OPPRESSION REMEDY).
LE RECOURS EN CAS D'ABUS/POUR
241. (1) A complainant may apply to a court for an order
under this section.
(2) If, on an application under subsection (1), the court is
satisfied that in respect of a corporation or any of its affiliates
(a) any act or omission of the corporation or any of its
affiliates effects a result,
(b) the business or affairs of the corporation or any of its
affiliates are or have been carried on or conducted in a
manner, or
(c) 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, the court may make an order to rectify the matters
complained of.
3.1. Avantage sur la méthode Wall Street.
Vendre ses actions quand ça va mal n'est pas toujours une idée géniale parce que souvent si
la compagnie va mal, vous allez vendre à perte. D'où l'oppression remedy. Dans certaines
juridictions, ça fait partie des pouvoirs de supervisions de la cour, ailleurs, c'est juste bon pour
certaines cours (au Québec, c'est peut-être juste bon en procédure civile parce qu'il y a des cours
qui sont compétentes pour entendre les disputes de corporate governance).
CBCA s. 241: possible de faire application à la cour si les administrateur ont posé des gestion
“oppressive, unfairly prejudicial or [that] unfairly disregards your interest”. Les vôtres ou ceux
des créanciers, des détenteurs de sûretés ou des administrateurs. Or, on sait que les intérêts de ces
«fonctions» ne sont pas toujours bien alignés, voir simplement, compatibles.
Mais jusqu'où va ce principe d'équité? Il va jusqu'à l'effet de la transaction, sans égard à la
bonne foi, à l'intention ou au degré de prudence (qui peut être pris en compte, certes, mais qui
n'est pas déterminant).
C'est une alternative à la Wall-Street rule qui va chercher loin: le prix de vente et le remedy
vont bien équivaloir au prix que vous avez payé.
3.2. Le test
La dominante du test s'articule autour des attentes raisonnables des actionnaires (et, on peut
présumer, des créanciers et des administrateurs, bien qu'il soit possible que les attentes des uns
conditionnent celles des autres).
Une autre composante est la question de savoir si la transaction imposée l'a été pour un bon
motif (idée similaire à la notion d'abus de droit en droit civil)95.
Le test est intéressant parce que comme administrateur, vous pouvez être trouvé responsable
même si vous avez suivi les autres règles (devoir de loyauté ou de diligence), mais c'est une
obligation d'equity, alors…
3.3. Exemple
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Mais bon, savoir ce qu'est une «bonne» utilisation d'un pouvoir nous mène à la question des intérêts d'une
compagnie, et donc… Comme quoi la personnalité juridique se trouve partout.  Corporate law haiku. What is
Loyalty/Duty to All or One/Peoples tells us zip.
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Arrêt Imax. Divorce settlement, h got voting shares; w got non-voting. Before only the nonvoting got dividend. The h asks for it to be turned around. It worked. La compagie était privée et
la femme a tout perdu (elle ne puvait voter et n'avait pas de dividendes). L'avocat a utilisé le
remède d'oppression. L'autre a dit que c'était une vengeance pour le divorce (pas d'expectative
raisonnable: la seule raison pour laquelle elle a eu les actions c'est son mariage tax shelter: you
were a tax break honey). La cour a dit que son expectative en tant qu'actionnaire était d'avoir de
l'argent jusqu'à ce que ceux qui votaient changent l'idée mais aussi, comme actionnaire, qu'elle
ne serait pas pénalisée pour être son ex-femme.
4. WHAT
DOES ONE LEARN FROM A COMPARISON OF LEADING DOMESTIC CORPORATE
GOVERNANCE REGIMES?
The organization of corporate boards and the oversight of managers takes on a considerable
variety of forms in different firms and different jurisdictions. The Maher and Andersson paper
for the OECD presents a useful overview of various approaches. French, German, Japanese,
South African, U.K. and U.S. models of corporate governance are discussed in the subsequent
readings. While you should read these materials as a package, The first hour and a half will
focus on Anglo-American corporate governance models and the second hour and a half will
focus on their rivals.
1. TRANSITION
1.1. Conclusion.
In the last class we discussed takeovers as a market-based alternative to legal regulation of
the behaviour of directors and officers. When directors and officers engage in inappropriate
behaviour such as shirking and diverting corporate resources, the resulting decline in profitability
is reflected in the corporation’s share price and the corporation becomes a target for a takeover
bid. The new controlling shareholder will replace the existing directors and officers with its’ own
management team. Thus the market for corporate control provides an incentive for directors and
officers to make careful decisions and act in the best interests of the corporation, even if legal
rules enforcing these standards of behaviour did not exist.
Donc relativement peu de foi dans le système juridique pour discipliner les administrateurs
qui ne s'occupent pas au mieux de leur compagnie, on lui préfère le marché. Mais la question
d'aujourd'hui est la question inverse: comment la gouvernance d'entreprise touche-t-elle le
marché? S'il existe plusieurs capitalismes et plusieurs cultures, il doit nécessairement y avoir des
différences d'un système de marché à l'autre. C'est une question difficile, sur la justice des
solutions juridico-économiques: le droit est-elle économiquement efficace? Et aussi les principes
de la gouvernance d'entreprise, même avant Enron, parce que les marchés et les trades s'étaient
ouverts à la mondialisation: non seulement cela change-t-il votre donne, mais également la donne
du pays dans lequel vous êtes basé. Et si voter gouvernance d'entreprise est mauvaise, vous ne
parviendrez pas à attirer des investisseurs. Une autre question d'œuf ou de poule: qu'est-ce qui
vient en premier, l'influence du marché ou celle de la gouvernance d'entreprise?
1.2. Deux grandes questions.
1.2.1. Comment la gouvernance d'entreprise influence-t-elle les marchés?
D'abord, comment la gouvernance d'entreprise touche-t-elle les marchés? Sous-question, la
gouvernance d'entreprise affecte-t-elle les performances des firmes (et donc la croissances
économique?). Pour Maher&Anderson, trouver les bons liens entre les deux concepts n'est pas
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chose aisée, et il n'existe pas un unique «bon» modèle de la gouvernance d'enterprise. Pour eux,
l'efficacité de chaque modèle est plutôt influencé par les cadres juridiques, historiques et
culturels ainsi que la structure du marché de l'État. Rien ne peut être fait sinon identifier les
forces et faiblesses de divers systèmes et les conditions régulatoires qui créent ses forces et
faiblesses.
1.2.2. Les principes de gouvernance d'entreprise sont-ils universels?
L'autre question, c'est celle de l'universalité (disons, dans l'univers capitaliste) des principes
de «bonne» gouvernance d'entreprise. Le sont-ils? Ou, autre contraire, est-ce une question du
niveau de développement économique de l'État. Pour Jesover&Kirkpatrick, les Principes de
gouvernance d'entreprise de l'OCDÉ sont mondialement acceptés parce qu'ils reflètent la vision
des membres et non-membres de l'OCDÉ, notamment parce que les principes tiennent en compte
«l'expérience» des non-membres.
2. COMMENT LA GOUVERNANCE D'ENTREPRISE INFLUENCE-T-ELLE LES MARCHÉS?
2.1. Quelques postulats:
2.1.1. La théorie de l'agence
Que dans le gap de l'agence et la séparation de la propriété et du pouvoir, il faut comprendre
que les actionnaires ne sont pas nécessairement des propriétaires (c'est-à-dire qu'ils ont du
contôle), parfois seulement des investisseurs. L'idée des actionnaires, c'est pourquoi perdrai-je le
contrôle à partir du moment où il existe une activité économique conjointe? Problème de
l'agence. L'objective de certaines théories est de remplir le fossé et de rendre la propriété aux
actionnaires, du côté desquels se trouvent les liquidités. Il est nécessaire que l'administration soit
du côté des actionnaires dans leur travail. L'avantage du nombre d'actionnaire élevé, c'est que les
actions sont «liquides», c'est-à-dire faciles à transféré: c'est un gros avantage, c'est peut-être
même une caractéristique fondamentale (H&Kraakman), de l'argent peut être amassé rapidement.
Il n'est pas nécessaire d'être richissime pour participer à l'économie. Au contraire, si les
actionnaires sont concentrés, c'est que la majorité risque d'opprimer la minorité (Zucker HBC) et
qui veut d'actions sans pouvoirs (et donc, seuls les riches, ceux qui peuvent posséder la majorité
des actions, peuvent prendre part à l'économie)  pas de liquidités.
Donc, actionnaires dispersés, peu de contrôle mais beaucoup de liquidités; actionnaires
concentrés, beaucoup plus de contrôle (parce qu'on peut licencier l'administration), mais moins
de liquidité. Ce n'est pas toujours un problème, mais ce l'est souvent, d'où la présence généralisée
des oppression remedies.
Aussi, la gouvernance d'entreprise est toute entière faire à l'aune de l'imputabilité
(accountability). Une façon de bridger le gap, c'est de donner aux administrateurs une incentive
pour que mieux la compagnie aille, plus les administrateurs en retirent (c'est de la vente à
commission, mais dans la cour des grands). L'autre idée, c'est celle du «bâton» (action dérivées,
devoir de loyauté, de diligence, etc.). Et il y a l'option du marché, qui punit, avec la compagnie
en jeu. Le problème du modèle des actionnaires est le modèle de performance (et donc, des
administrateurs qui mentent: Enron, p.ex.).
Résumé: Berle&Means, separation de la ppté et du contrôle  problèmes d'agence.
Évidemment, si l'on trouve que c'est le problème de base, on va orienter notre gouvernance
d'entreprise autour: obliger les administrateurs à agir dans l'intérêt des actionnaires, p.ex., ce qui
se reflètera dans les structures de capital: surveillance et liquidité, concentration du
contrôle/système d'insider ou dispersion des actions/système ouvert?
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Le système fermé est plus commun en Europe et au Japon, ce qui règle le problème de l'agent
mais crée un problème entre les actionnaires majoritaires et minoritaires.
2.1.2. Entre l'actionnaire et l'autre partie prenante (stakeholder)
La prise en compte des intérêts des «autres personnes concernées» (stakeholders) est quand
même récente. Peoples n'as pas révolutionné leur prise en compte, mais a laissé la porte ouverte.
People a simplement dit qu'il n'était pas possible d'obliger les compagnies à faire quoi que ce soit
(ce qui ne serait plus du capitalisme).
La différence est principalement une question de degré. Le modèle basé sur les actionnaires a
pour but premier la maximisation de leur richesse. L'autre est plus basé sur le long-terme et la
stabilité (mais peut-être est-ce là une simplification grossière). Mais la critique est que leurs
intérêts est une échappatoire: on peut dire qu'on l'a pris en compte pour excuser une mauvaise
performance.
Shareholder model
Stakeholder model
 “Corporate governance is a question of
 “…[C]orporate governance should be
performance accountability”
regarded as the set of institutional
arrangement for governing the
 Malfeasance on part of directors and
relationships among all of the
officers leads to lower returns on
stakeholders that contribute firm
investment, with implications for
specific assets.”
economic growth
 If relationships not managed properly,
 Solution is to address agency problems
then potential stakeholders reluctant to
with accountability mechanisms
make firm-specific investments with
 Can align interests of directors and
implications for economic growth
officers with those of shareholders by
 Critique of the stakeholder model is
providing them with a significant
potential ability of directors and
equity stake in the corporation that is
officers to use stakeholder interests to
tied to performance
justify poor firm performance that
 Can strengthen shareholder rights
would otherwise be impugned as not
sufficiently to overcome rational
maximizing
shareholder
wealth
shareholder apathy and provide
(consider the example of poison puts in
incentives for monitoring
collective
bargaining
agreements
 Market for corporate control
during a hostile takeover bid)
 Critiques of the shareholder model

 Leads to exclusive focus on agency
problems of widely-held corporations,
while ignoring the prevalence of
closely-held corporations where the
problem is one of minority oppression
by majority shareholders
 Narrow focus on alignment between
directors and officers and shareholders
ignores the extent to which other
groups make investments in the firm
and the role of teamwork in corporate
performance

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En plus de cette dichotomie insider/outsider, il en existe une autre au niveau des
investisseurs: le système anglo-américain est dominé par les investisseurs institutionnels (qui
offrent un peu plus de protection, mais qui surveillera les surveillants96?) alors que les
investisseurs principaux sur le continent européen sont les banks, les holdings familiaux et les
cross-holdings.
2.2. Dedans ou dehors?
What's good for GM is good for the country and vice-versa. If firms do well, the country will
do well (layperson's appreciation of economic efficiency).
If corporate governance improves, it will improve economic performance. But is it the kind
of improvement we want. Mais les mesures devraient-elles être différentes?
L'auteur a mis l'accent sur deux choses (1) la concentration et (2) les controlling
shareholders. Oui, ces structures varient d'un pays à l'autre, mais elles se ressemblent aussi: il y a
manifestement un sous-modèle dominant, qui est nuancé selon les régions.
2.2.1. Réalisme et contrôle de l'administration
2.2.1.1. De l'importance des marchés secondaires
Dans un système outsider, l'accent est mis sur marché secondaire actif pour les actions de la
compagnie, avec un système de protection des actionnaires minoritaire. Si la croissance
économique dépend de l'activité des marchés financiers, alors ces systèmes sont les meilleurs
parce qu'ils encouragent la protection des investisseurs et l'«échangeabilité» des actions
(hypothèse d'un marché efficace). Le marché secondaire est également un marché pour la
vérification des comptes (corporate control). Par contre, la discrétion administrative pourrait être
un problème (contrairement au système insider puisqu'il n'y a que peu, voire pas, de séparation
entre l'investissement et le contrôle).
2.2.1.2. Qui peut assurer la surveillance?
On l'a dit, les investisseurs institutionnels offrent une forme de surveillance 97. Le CA
surveille, dans les faits, assez peu les cadres (puisqu'ils s'entrenomment). C'est pour cela que
certains croient qu'il serait nécessaire de faire intervenir des directeurs de l'extérieur, pour briser
ces habitudes. Cela dit, des directeurs de l'intérieur sont nécessaires également parce qu'ils
comprennent certains enjeux de la compagnie en tant que «membres». Ces temps-ci, on croit que
les directeurs devraient venir de l'extérieur, il y aura plus d'indépendance et plus d'impartialité.
Par contre, les gens de l'intérieur sont à temps plein investis dans la compagnie, savent ce qui s'y
passe. Les mécanismes de marché peuvent également être utiles mais l'effet anti-concurrence
peut troubler la donner (les OPA peuvent être une manipulation de l'environnement économique
(rent-seeking) plutôt qu'une promesse d'efficacité véritablement accrue).
2.2.1.3. Le problème de l'action à court terme.
Un marché actif permet une diversification des liquidités et du risque et donc, donne des
raisons d'investir. Cependant, ce genre de marché peut également mener à se concentrer
seulement sur le court terme et les performances trimestrielles. On mettra alors le long terme et
96
Les cinq étapes du capitalisme.
Modération de l'administration. California Public Employee Pension Plan State Employee blabla. Qui a un très
bon watchlist. Mais toujours le problème des gens qui doivent monitor the monitors.
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la R&D de côté, ce qui, à long terme, sera négatif. Il faut faire attention à ce que les cadres
n'aient pas que des incitatifs à agir à court terme.
Comportement à court terme et l'obsession des biotechnologies. Les idées de gouvernance
d'entreprise In the shold max model lead you to take decisions that make you think short-term
and not long-term (et donc, pas de R&D). Certes, les compagnies pharmaceutiques pensent à
long terme, mais pas toutes les autres. La solution a été des subventions gouvernementales.
2.2.2. Nominalisme et contrôle des actionnaires-propriétaires.
2.2.2.1. Collusion de la majorité et long terme
La concentration des actions contrecarre les problèmes d'agence et donc, en théorie,
augmente la performance de l'entreprise. Le problème est plutôt celui d'une potentielle collusion
avec l'administration pour obtenir des bénéfices supplémentaires. Ce serait le problème d'une
majorité forte, d'une administration et d'une minorité faible, ce qui mènerait à une décroissance
économique et une chute de performance, ce qui mènerait à des marchés moins actifs, moins
divers et donc, moins bien développés. Par contre, les relations à long terme avec les
fournisseurs, les employés et les actionnaires a le potentiel d'y être meilleur.
Ces compagnies font de plus gros profits que les comparses «réalistes» 98. Mais cela ne
signifie pas que leurs performances sont moins bonnes (parce qu'il y a plus que les actionnaires à
l'économie…). Challenge is to capture benefits of monitoring by majority shareholders and yet
still protect minority investments. Demonstrates the importance of minority protection devices
such as the oppression remedy, s. 241 CBCA
2.2.2.2. Le rôle des banques.
Les sécurités proviennent des banques plutôt que du marché, de ce fait, les banques jouent un
rôle de surveillance. Par contre, les plus petits joueurs ont plus de difficulté à entrer sur le
marché99, ce qui peut être négatif pour la croissance économique. Mais cet effet sur la
compétition s'atténue peut-être avec la meilleure «acceptabilité» des investissements à long
terme.
2.2.2.3. Relations à long terme et holding intragroupe.
Le système insider se préoccupe plus des relations à long terme avec les partenaires
d'affaires, ce qui mène souvent à des investissements plus importants et plus stables dans des
actifs particuliers à une compagnie. Évidemment, ce genre de holding se soustrait au market for
corporate control.
2.3. Quelques autres problèmes empiriques
2.3.1. Market for corporate control and firm performance
Les OPA servent-elles vraiment à améliorer les performances ou n'est-ce qu'une
manipulation économiques (rent-seeking), auquel cas les administrateurs sont tout à fait justifiés
d'utiliser des pastilles empoisonnées et auquel cas le market for corporate control ne parvient pas
vraiment à remplacer les standards juridiques comme les devoirs de loyauté et de diligence? La
recherche empirique ne semble pas vraiment montrer d'amélioration.
Cela dit, les manœuvres anti-OPA peuvent également faire baisser la valeur des actions.
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99
Mais c'est normal, c'est du risque.
Voir les vaches et le real-life capitalism.
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2.3.2. Managerial compensation and firm performance
Autre problème de la compensation des administrations que plusieurs propositions
d'actionnaires ont voulu réduire. Pour certains, pourtant, c'est la meilleure façon d'aligner les
intérêts des administrateurs avec ceux des administrateurs. Empiriquement, cependant, il semble
que la relation entre le salaire et la performance soit faible, ce qui pourrait exacerbe le courttermise.
3. LES PRINCIPES DE GOUVERNANCE D'ENTREPRISE SONT-ILS UNIVERSELS?
3.1. Qu'est-ce l'OCDÉ et quels sont ces principes de gouvernance?
L'organisation pour la coopération et le développement économique est un forum unique
où les gouvernements de trente démocraties de marché travaillent à l'élaboration de solution pour
divers défi de gouvernance globalisé et cherchent à exploiter des possibilités communes. «The
integrity of corporations, financial institutions and markets is particularly central to the health
of our economies and their stability.» Les principes originaux datent de mai 199 et une version
révisée a été émise au printemps 2004, après consultation avec des non-membres, notamment par
des tables rondes régionales sur le gouvernement d’entreprise (Asie, Eurasie, Amérique latine,
Russie, Europe du Sud-Est, etc.).
Cela dit, la théorie de l'OCDÉ n'est pas des plus limpides: le CA est responsable devant les
actionnaires, mais on parle aussi de responsabilité face à l'entreprise, ainsi que de la prise en
cmpte des intérêts des parties prenantes.
Sinon, ces tables rondes ont soulevé l'importance de la force exécutoire, l'exécution publique
par la législation, l'exécution privée par des actions d'actionnaires (et, au Canada, le remède
d'oppression), l'importance de la protection des actionnaires minoritaires, les problèmes de
privatisation partielle d'entreprise d'État, augmentation du rôle de surveillance des actionnaires,
réduction des barrières régulatoires (et donc des coûts) dans les communications
interactionnaires (souvenons-nous des proxy battles), gestion des conflits d'intérêts, related-party
transaction, conflits entre créanciers et actionnaires dans le zone de faillite, surveillance accrue
du CA, notamment duproblème du “rubber stamping”, etc.
So we know there are five features, but there are a lot of modalities. Recently, there was much
ado around an article called "the end of corp. law", the thesis of which was that there is no point
in thinking about different models, as it is settled. Following, there was a floury of rebuttals.
One of readings is about cultural differences influencing the allocation of powers, there is a
tendency to map it out on a spectrum liberal (freedom of market, shareholder wealth) to a more
social-democratic view (you don't only regulate failures, you also regulate for certain purposes,
stakeholder wealth). But with increasing globalisation, these cultures are menaced (not only the
third-word countries).
Cadbury Report (see WebCT). European corporate governance institute.
French firms are closer to Europe. Why does the UK always get considered in Europe for corp.
gov? A continental approach to corp. gov. is more on the side of the stakeholder. SA société
anonyme (limited liability). Board structure is the same. Difference, the CEO and the chairman
of the Board is usually the same person (the PDG). Problématique because the Board is supposed
to be supervisory (but it's not that bad, it happens in the US). What is difference in France is that
the Board often doesn't vote de confiance (because a vote that might overturn the chairman's
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decision is considered like a non-confidence motion). Optional two-tier board nobody uses (max.
2-3%). A lot of activities between parents and subsidiaries (risk-management, separate reports
for a company you just acquired100). Concentration of ownership, more families and State in
Europe (like Fiat). In Canada, Crown corporations (State-held) used to be (but are today dead).
Very Eastern European or when a necessary service is not profitable.
Managerial style (Vienno? Report). Power of social objectives. Almost everywhere in Canada,
we have a division of powers incorporation legislation (except BC and PEI). Different from
English common law, civil law, have a memorandum of association (closer to a contract, that
says how powers will be allocated). Practical difference; MoA: more standard k –what's not
specified is the shareholders, Legislation: residuary powers are the d/os. But otherwise, it makes
no difference.
France doesn't talk about the best interest of the corp. (shareholders or more?). One is the
common interest of the members + Commercial come: general interest (de la société). Aren't
they inevitably going to conflict with one another? At least, it's stated here: both have to be
contemplated (more flexibility than the analytical debates we have in Canada). Is it one or two
interests? In the zone of conflict, it's probably two.
La difference entre les deux systèmes is that the darafint tells you it's not just the shareholders.
At 1.1.3 it should read genral and not common. The idea that there is a common interest is
something you find as what the d/o get in trouble for (abusing the power to act in the best interest
of the corp.)
In France, it's not a question of degree, it's a question of kind (what is right for me vs. what is
right punto).
SAT: no training for 20 years for mentally challenged people. These people can't get a job.
Mais pour le reste, both systems have the five features.
Japan, UK, Germany. End of history? No denying that the US are on the surge, but is it because
if you have the currency everyone wants, you'll spend 5% more than would otherwise be able to,
is it because of the corporate gov., is it a deviant system?
What difference does it make? Because if our system is not as good as your neighbour,s you
aren'T making as much money. From the outside, if you want customers somewhere else, the
outcomes you are used to get you might not get (certainty as to outcome of decisions regarding
the system, the clients expectations, securities –and costs goes up).
Dorre: do you really want to tamper these variations? Some of the differences highlighted
between the USUK and JapanGermany is about the intrinsic (I love it)/extrinsic (it pays well)
motivation. Darwinism of fast-trackers or all the community must be good; ethics: self-regarding
(economic lit  if every one is good, then we're all better off) or other regarding.
COPY WEBCT
Influence of top X school on corporate governance because they all get the same education, the
same norms. Law also: ideology of economic efficiency (good decision rule to use).
Result: cultural difference, institutional economic factors, pressure to converge but cultural
imperative that refuse convergence. There has been little parts chipping away (changes in
securities law), but nothing else. In Germany, everything has resisted the taking away of the twotier (co-determination) board. But it's almost useless in France. Why? Path-dependency?
100
Raconte l'histoire des taxi-cab co.
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MULTINATIONALES ET DROIT DES ENTREPRISES INTERNATIONAL
VII. The Globalized Firm: Multinationals and Networked Firms
These readings canvass efforts to unify corporate governance regimes. Is this a worthwhile
project? Is it anomalous that transnational firms cannot yet be said to operate within a
transnational corporate governance regime?
1. TRANSITION: DOES CONTEMPORARY CORPORATE GOVERNANCE REFLECT INJUSTICE IN
CORPORATE LAW?
1.1. Quelques principes philosophiques avant de commencer et ce que ça change.
Justice corrective: il s'agit de répondre au dommage causé à une personne, y compris le tort
de «l'inégalité», par la fautes (actes ou omissions) d'autrui. Il s'agit de remettre la personne «en
état» (statu quo ante, restitutio in integrum).
Justice distributive: les principes normatifs cherchent à distribuer des biens en quantité
limitée (y compris des «biens» comme la liberté), selon la demande. Il existe plusieurs types de
justice distributive: selon le bien (revenu, richesses, possibilités, etc.), selon le récepteur
(personnes physiques, groupes, classes, etc.) et selon le critère de distribution (équité, égalité,
marché, etc.).
 Égalitarianisme strict: la même chose à chacun parce que chacun a droit au même
respect.

 Le principe de différence: Rawls, A Theory of Justice and Political Liberalism, and the
famous (or infamous) veil of ignorance. Premier principe: chacun a droit à un «packagedeal» de base en fait de droits et libertés, évaluées à leur juste valeur. Second principe (le
premier l'emportant en cas de conflit): les différences socio-économiques doivent
satisfaire à deux conditions: elles doivent être rattachés à des postes et des rôles ouverts à
tous et elles doivent l'être au plus grand bénéfice des moins avantagés dans le société.
o Est-ce que le modèle centré sur les actionnaires de Hansmann&Kraakman peut se
justifier sous le modèle de Rawl?
o
 Selon les ressources: chacun reçoit une part égale des ressources101. Le reste, c'est la
parabole des talents.
o Un devoir de loyauté pour les seuls actionnaires fait-il obstruction à la conception basée
sur les ressources? Si non, d'où le travail viendra-t-il puisque les incitatifs touchent
seulement le capital.

 Visant le bien-être: ce qui est de la prime importance morale, c'est le niveau de bien-être
(ou «utilité») des gens (le plus de bien-être ou le moins de «mal-être»). Toutes les
questions de distribution devraient se régler à la lumière de ce bien-être (lequel peut être
défini de plusieurs façons: utilité, plaisir, satisfaction, etc.)
o Est-ce que le modèle centré sur les actionnaires de Hansmann&Kraakman peut se
justifier sur une base égalitariste?
o Est-ce que l'égalitarisme dans les profits ôterait l'incitatif à l'investissement de capital?
Comment faire la différence dans ce système enter les investisseurs individuels,
corporatifs et institutionnels?
101
Revenu de citoyenneté!
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o

Au mérite: les actions posées par certains font qu'ils méritent plus. On peut choisir de
récompenser les contribution (la valeur de leur contribution au produit social) ou l'effort,
p.ex.
o Comment faire la différence entre les contributions de capital et de travail?
1.2. Quelques principes juridiques.
1.2.1. La responsabilité de l'entreprise et non de ses membres
La responsabilité pour les dettes de l'entreprise (contre les créanciers volontaires) et ses
fautes (wrongs, contre les créanciers involontaires). Pour les dettes, elle est limitée aux actifs de
la compagnie. En ce qui concerne la responsabilité extracontractuelle, si l'on part de l'idée que la
compagnie est une personne, elle devrait normalement être la seule responsable du tort qu'elle
cause aux créanciers involontaires. Cependant, dans la mesure où une compagnie ne peut pas
réellement agir, il s'agit surtout d'une mesure destinée à protéger les administrateurs et les
actionnaires102. Cela dit, il y a certainement des situations où les administrateurs seront
responsables des dettes: il arrive donc que des gens se mettrent à poursuivre non pas la
compagnie (surtout si elle est insolvable), mais les actionnaires ou plus exactement les
administrateurs. Mais quand le seront-ils, responsables?
1.2.2. La responsabilité des tiers.
Il s'agit de faire la différence entre la responsabilité primaire (la responsabilité classique) et la
secondaire (les tierces parties). N'oublions pas qu'en fait de responsabilité primaire, on n'est
responsable que pour ce qu'on a causé (il existe quelques exceptions de responsabilité
secondaires, les mandataires, les parents, les employeurs en sont des exemples et ces catégories
sont bien définies, pour des questions de politique publique). C'est la même règle en droit civil
(1457 CcQ) et en common law.Mais il reste la question de savoir si les administrateurs sont des
tierces parties ou des acteurs. La règle présente est à l'effet que les administrateurs ne sont tenus
responsables que s'ils agissent d'une manière qui fait que les fautes de la compagnie sont les
leurs.
On remarquera aussi généralement que lorsqu'on poursuit les actionnaires, c'est que ce sont
aussi les directeurs (alors que la ligne entre la personnalité de la compagnie et de ses membres
est moins claires), sinon, à quoi bon poursuivre des gens dispersés qui n'ont pas vraiment de
contrôle?
1.2.3. Percer le mur de la responsabilité limitée.
Lorsqu'il est possible de poursuivre, on «soulève le voile corporatif» (c'est une phrase de
Denning LJ). Le concept est tout simple: il s'agit de passer outre la personnalité juridique propre
de la compagnie afin de poursuivre directement un administrateur (ou un actionnaire agissant
comme tel), pour des actes posés au nom de la compagnie. Il est aussi possible de poursuivre et
la compagnie et ses directeurs.
Mais c'est un argument difficile à faire, possible mais flou. On peut aussi penser que les
actions en la matière seront moins nombreuses puisqu'il existe un remède contre l'oppression, qui
102
Comme les enfants qui disent «ce n'est pas moi qui le dit, c'est ma bouche».
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permet également de poursuivre les administrateurs. Au Québec, art. 317 CcQ (fraude, abus de
droit, contravention à l'ordre publique)103.
2. IS THERE AN EMERGING TRANSNATIONAL CORPORATE GOVERNANCE REGIME? RETOUR SUR
LE DROIT INTERNATIONAL PRIVÉ DE LA GOUVERNANCE D'ENTREPRISE.
2.1. Quel droit?
Retour sur le Real Seat Theory (par opposition à «statutory seat»). Pas besoin d'un droit
harmonisé, juste besoin d'une masse critique de firmes qui s'incorporent à un endroit particulier
et qui vont influencer le droit. Two alternatives are the place of incorporation (sometimes called
the statutory seat) and the real seat (the place where the actual administrative centre of the
company is located). Real seat theory arguably protects regulatory diversity, while place of
incorporation (or statutory seat) arguably characterizes corporate law as a legal product, given
the potential for regulatory arbitrage
2.2. Harmonisation ou globalisation?
Il existe une différence entre l'implantation d'une seule loi «globale» et l'harmonisation par
des standards universels. Cette dernière vise intentionnellement à réduire les disparités, soit par
des mécanismes informels (peut-être secrets, élitistes104, des rapports de «best practices» de
l'ODCÉ, p.ex.) soient par des accords bi/multilatéraux. Cela dit, c'est ce qui arrive parce que la
loi globale est difficile à créer, à gérer et à exécuter. De plus, dans l'éventualité hautement
improbable que tous s'entendent pour un seul régime, freakez-vous parce que vous perdez un
certain degré d'autonomie et de définition de vos propres besoins?
Le cas de l'UE (et les accords ADPIC). Qu'arrive-t-il en UE? Système binaire. Encore la
question: est-ce que les pastilles empoisonnées seront permises et toutes ces choses. Besoin d'un
système de vote pour la structure de capital, d'un autre pour le droit du travail? Ça commence à
être un peu compliqué (et un peu moins fort puisque les principes ne sont pas les mêmes de bord
en bord). Mais c'est sans tenir compte d'Inspire Art qui a dit que l'on ne pouvait pas avoir des
règles pour obliger les compagnies à adopter des règles qu'elles avaient évité en s'incorporant
ailleurs. L'effet droit public, ouais bon.
2.3. Transition la convergence
Y a-t-il une convergence (c'est-à-dire non pas une seule loi, mais une harmonisation des lois,
des lois similaires à travers diverses juridictions)? Il peut s'agir du choix (selon différents
critères, p.ex. promouvoir la performance économique –il est intéressant que noter que l'intérêt
choisi ne dit pas qu'il faut ne pas tenir compte de l'autre, c'est simplement une question de la
maximisation des intérêts et du moyen pour y parvenir) par les États d'un seul régime jugé
«meilleur» ou d'un mélange de modèles.
103
Why is the English version written in active voice when the French version is written in passive voice? Does
anything turn on this distinction?
La personnalité juridique d'une personne morale ne peut être invoquée à l'encontre d'une personne de bonne foi, dès
lors qu'on invoque cette personnalité pour masquer la fraude, l'abus de droit ou une contravention à une règle
intéressant l'ordre public.
In no case may a legal person set up juridical personality against a person in good faith if it is set up to dissemble
fraud, abuse of right or contravention of a rule of public order.
104
Pas nécessairement de façon volontaire, peut-être simplement si tous les grands banquiers sont passés par les
mêmes institutions.
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Pour l'instant, on parle de deux modèles, le modèle anglo-américaine et le modèle
continental.
Question des fonds de pensions dont les actionnaires sont des employés: donc, où est la
différence entre les actionnaires et les autres intérêts? [longue réponse de David sur les lectures
étroites et les intérêts à prendre à compte]105 Si le regulatory arbitrage est fait à une superéchelle, alors par effet réseau, il y a aura convergence vers un système (c'est-à-dire sa proposition
initiale). BLABLA SUR CALPERS.
3. C'EST BIEN BEAU DE PARLER DE TOUT ÇA, MAIS EST-CE QUE ÇA ARRIVE OU PAS?
3.1. Oui, il y a convergence et c'est correct: Hansmann&Kraakman
Ces deux-là n'ont pas vraiment le choix, eux qui ont dit que les compagnies avaient toutes
cinq caractéristiques: la personnalité juridique, la repsosnabilité limitée, la «propriété» des
investisseurs, contrôle et supervision et des actions transférables.
La différence se trouve surtout dans la composition du CA et le degré de délégation de la
gestion des actionnaires aux administrateurs. La «transférabilité» des actions ne change en rien
les structures de capital.
On se rappellera que selon le modèle standard, ce sont les actionnaires qui ont le contrôle
ultime et les administrateurs leur sont redevables, que les actionnaires minoritaires sont protégés
des majoritaires. Et que les autres groupes ont d'autres lois pour les protéger (travail,
environnement, taxes, conventions collectives, faillite, etc.).
Mais il y a une convergence idéologique parce que (1) les autres alternatives ont failli.
 Managerial firms can respond to some non-shareholder concerns more efficiently than
other options (presumably legislation) but the price paid in terms of decreased efficiency
of operation overall is too great
 Co-determination, as exists in Germany, is an historical artifact that has not been taken up
through the EU (recall the evidence on co-determination in France)
 The popularity of the state-oriented model has declined along with socialism and
communism
 The stakeholder model is a variant of the managerial model and subject to the same
problems, whether the model is implemented in the form of an expanded duty of loyalty
or through board representation
Et aussi parce que (2) il y a la pression du commerce mondialisé. Il est logique que les
actionnaires aient le contrôle parce que ce sont eux qui ont la plus grande motivation à
augmenter la valeur de la compagnie. La force de la concurrence comme règle de droit
international privé rend la théorie du lieu d'incorporation de plus en plus prisée (toujours cette
idée de la gouvernance d'entreprise comme un produit).
Et aussi (3) parce qu'il y a émergence d'une «classe» d'actionnaires. Si tout le monde est un
actionnaire, qu'arrive-t-il à la traditionnelle distinction entre le capital et le travail? Le travail
«vaut-il» plus que le capital étant donné les investisseurs institutionnels? Est-ce que ça change
quelque chose au traditionnel débat actionnaires/autres intérêts?
105
«Everybody needs a footnote». Pas poser de questions sur le contexte. Il est 16h12 et mon voisin et moi jouons
aux points.
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3.2. Cernat: non, ça n'arrive pas, ça n'arrivera pas et si ça arrive, ce sera hybride
C'est un texte européen et “the direction of corporate governance convergence in Europe is
still a matter of debate”. De nombreux efforts d'harmonisation ont été faits, sans trop de succès.
Surtout qu'il y a un fossé entre le modèle anglo-saxon et le modèle continental (d'où la notion
d'hybride). Et tout est une question de stratégie.
4. COMPAGNIE MONDIALISÉE ET FIRME GLOBALISÉE
4.1. Début de ce cours-ci replacé à la fin qui répète probablement ce qui suit.
Il n'y a pas de système juridique global, international. Par contre, on trouvera des compagnies
et des entreprises multinationales. Maison-mère dans un État et filiales dans des dizaines de pays,
mais chacune des structures est domestique, même si le marque, le nom, lui, est international
(McDo, p.ex.). Il peut même y avoir une sous-maison-mère dans un pays, avec des filiales dans
un pays, mais elle-même est soumise à la supra-maison-mère. Même si Internet est le modèle
d'affaires, il faut quelque part, un «pied-à-terre». Mais où ça devient intéressant, c'est qu'il
devient possible d'envoyer certaines «fonctions» de la compagnie dans des pays qui y sont plus
favorables (regulatory arbitrage): la production au Bengladesh, les centres d'appel en Inde, le
marketing au Japon, que sais-je!
March 22, Class 20: What are the legal implications of the multinational and transnational
firm, of transnational strategic alliances and of networked firms?
These readings identify legal issues associated with the multinational corporation. The issues
are by now familiar from your other readings, but simply take on a transnational dimension.
Thus, for example, where is the legal personality of the transnational firm and how do
overlapping corporate governance regimes interact? To this point we have considered the firm
as a discrete entity. Yet, the contemporary globalized firm is more often than not part of a web of
relationships among firms and thus itself involved in multi-party governance structures. Autunes
present a sophisticated understanding of the legal problems raised by the networked
corporation. Castells puts this phenomenon into historical context and Evans and Wurster
discuss the implications of the "new economy" for the corporate form. The Figure gives an
example of a complex alliance arrangement.
4.2. Qu'est-ce qu'une multinationale?
Il s'agit d'un sujet en plein développement, dont on parle beaucoup dans les médias, où il se
trouve certaines personnes pour estimer qu'elles ont trop de pouvoir et pas assez de
responsabilité. Avant de vérifier cela, il faut trouver la définition d'une multinationale. Et il se
trouve qu'il n'y a pas de définition, que ça n'existe pas, en ce sens qu'il n'est pas possible de
s'incorporer «à l'international», ce doit être national106. Ces compagnies dites multinationales
sont en faites des compagnies en réseau qui agissent comme une compagnie multinationale (en
substance, par nécessairement sur la forme). C'est d'abord une façon de faire des affaires plutôt
qu'un format juridique.
Le mieux qu'on puisse avoir, c'est qu'il s'agit d'une ou plusieurs entités géographiquement
dispersées liées par un élément de contrôle: très important ça, la question de contrôle: il faut que
ceux qui prennent les décisions existent quelque part. C'est plus qu'un export qui consiste à
envoyer la marchandise produite en pays A à des clients situés au pays B. Ou l'on peut faire faire
106
If there is no form, there is no such thing; au mieux, l'Europe essaie.
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une partie de la production là-bas: c'est une décision d'affaires (coûts de production, etc.). Le
droit sert à faciliter cela.
Alors dire que les multinationales ont trop de pouvoir, et qu'elles ne sont pas responsables,
c'est surtout dire que l'on ne sait pas quel droit leur appliquer (étant entendu que certains droits
sont plus «forts» que d'autres). Et ce n'est pas tout à fait le même argument.
C'est une question très droit international privé (c'est essentiel).
4.3. Comment créer une multinationale?
Différences formes juridiques impliquent des différences dans les investissements étrangers
directe et impliquent des transferts de technologie (auxquels sont associés des risques de vol). De
même, chaque structure juridique permet divers types de structure de gouvernance, centralisé ou
décentralisé, flexibilité, partenariat? Diverses formes.
4.3.1. Equity-based.
C'est la forme «classique», avec sa relation parent-filiales.
 Il y a d'abord le cas classique du holding, où la compagnie A possède 100% des
compagnies B et C (soit qu'elle en a pris contrôle, soit qu'elle les a créées de toutes
pièces). On entreprend une structure fortement pyramidale lorsque B et C adoptent à leur
tour des filiales.
 Les fusions transnationales. A et B s'entrappartiennent à 50-50% et possèdent leurs
propres filiales. L'élément de contrôle va dans un sens comme dans l'autre107.
4.3.2. Contract-based.
Le contrat stipule ce que chacun fera. Mais si le contrôle va à un seul individu qui décide
tout, à quoi bon parler de compagnie? Le contrat est ce qu'on fait pour les franchises. Dans le
domaine de la restauration (peu dans les manufactures), c'est très fréquent.
Avec le contrat, on peut faire de la distribution de la mère à la «fille» (je n'en sais pas assez à
propos de l'État où je compte faire affaire, appel d'offre pour savoir qui fera la distribution làbas) –et dans ce contrat, il y a un élément de contrôle (par le contrat). Il peut aussi y avoir un
contrat de production (il faut des installations pour atteindre la quantité/qualité voulue): oui, il y
a du cheap labor, mais il y sans doute moins de technologie (et le shipping de la technologie làbas pourrait faire l'objet d'un vol ou simplement la perdre d'un savoir-faire particulier et donc
d'un avantage compétitif).
Il existe également divers consortiums et/ou joint ventures108.
Quelle est la différence entre un contrat et un joint venture. Dans le JV, les compagnies sont
indépendantes et sont intéressées à continuer à l'être après le travail. Ça arrive souvent en
matières minières, pétrolières, parfois pharmaceutiques. AirBus est un JV qui se trouve
présentement devant l'organe de règlement des différents de l'OMC.
107
Règle de droit japonais après la guerre: le parent ne peut pas être qu'un holding (avoir les actions et les gérer), il
doit faire autre chose. Le but: éviter les pyramides de holding. Avec le résultat qu'au lieu d'avoir une pyramide, on a
fini avec un cercle. Pas vraiment mieux. Kereitsu. - Keiretsu, immediate parent company of one or more subsidiaries
must be engaged in business and not serving as only a holding company for other subsidiaries; characterized by
extensive cross-holdings.
108
La définition est très vague. "I know it when I see it" (sur l'obscénité).
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5. COMMENT
RÉGULER LES RÈGLES DE GOUVERNANCE D'ENTREPRISE DANS CES MATIÈRES
INTERNATIONALES?
5.1. Introduction
Étant entendu qu'il n'y a pas vraiment de droit international de la gouvernance d'entreprise, il
faut se rabattre sur le droit interne. Certes, les règles du droit international privé s'appliquent,
mais en l'absence de droit pertinent, c'est la loi du lieu d'incorporation qui domine. On en
retourne à la question du droit-produit, du Delaware et d'Inspire Art (voir NOTES).
Cela dit, la plupart des contrats sophistiqués auront une clause définissant les termes (ou plus
fréquemment renvoyant à des lois les définissant) et précisant le droit applicable (clause
d'élection de for), droit que les tribunaux appliqueront sauf s'il existe un raison de politique
publique à l'effet du contraire. Ainsi, c'est le droit public de l'État où ont lieu les activités qui
s'applique pour les standards en matière extracontractuelle109, en matière d'environnement, de
travail ou de droit de la concurrence. La seule exception est la portée extraterritoriale du droit
interne.
Le droit international public doit tout de même être intégré dans les systèmes juridiques
nationaux, soit directement soit par acceptation législative.
5.2. Les défis de la régulation.
5.2.1. Qui régule?
Pour sanctionner un pays, il faut savoir où sont ses actifs (afin d'être efficace). REPRENDRE
SON O?R$%?&*()&?% d'EXEMPLE SUR UNION CARBIDE (8) Morts les enfants de Bhopal
(8) Industrie occidentale (8) Partis dans les eaux du Gange (8) Les avocats s'arrangent (8) Morts
les enfants, Renaud. Blabla sur Cuba et la nationalisation des industries sucrières sans
compensation (parce qu'à l'époque, ce n'était pas une règle obligée en droit international public).
En ce qui concerne les décisions internationales: winning's easy, it's the collecting that's
hard. C'est aussi qu'en ces matières, tous les États sont égaux, en ce sens qu'ils sont tous
souverains sur leur propre territoire, sauf accord international ou droit international coutumier
(particulièrement les normes de jus cogens).
Le corollaire c'est qu'un État n'est nullement soumis à la juridiction d'un État étranger qui a
des actions sur son territoire.
Mais il existe quelques exceptions: quand un citoyen de l'État étranger est impliqué ou quand
les actions d'un État étranger a des implications directes sur les actions de l'autre État.
5.2.2. L'OMC.
Parenthèse hobbesienne: si l'on estime qu'il faut un chef au droit international, c'est
probablement l'OMC qui est l'entité suprême.
Cela dit, il y a sans doute un déficit démocratique à l'OMC. Elle a été fondée par accord,
signé par tous les États qui voulaient s'y soumettre110, mettant au point un secrétariat, différents
organes «législatifs» ou décisionnels, etc. Évidemment, un tel accord international n'a aucune
force tant qu'il n'est pas reçu dans le droit interne. (1) Les acteurs étatiques doivent signer
l'accord, (2) le ratifier, (3) le recevoir dans leur droit domestique, soit directement (aux ÉU,
accepté par une majorité 2/3 au Sénat) soit indirectement (au Canada, par acte législatif).
109
110
Pas de droit liechtensteinois si l'on écrase un Belge.
Ben oui, c'est généralement comme ça que ça fonctionne!
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84
Alors où est le déficit démocratique? Simplement, dans le fait que l'OMC pourrait opérer de
manière non démocratique (sauf que dans la mesure où l'implantation, elle, se fait de manière
démocratique, les États pallient et acceptent ce déficit). L'argument du déficit démocratique est
donc plutôt lancé contre l'État que contre l'implantation elle-même111. C'est peut-être valide, mais
ce n'est pas le même argument
C'est toute la différence entre le déficit démocratique comme une méthode d'établissement et
un mode d'opération.
5.2.3. Approches territoriales et extraterritoriales.
5.2.3.1. Et la souveraineté du voisin, alors?
Comment réguler les multinationales étant entendu que la filiale dans un pays donné peut être
contrôlée par une mère qui se trouve dans un autre. Comment étendre la responsabilité de l'une à
l'autre?
L'État A légifère pour son État, mais certaines ramifications toucheront l'État B (enforced
against corporations of State B). En droit public, la justification principale est la citoyenneté112:
faites ce que vous voulez dans l'État B, mais vous pourrez en subir les conséquences dans l'État
A à votre retour. Il existe également certaines considérations proprement transfrontalières
(notamment avec la pollution, les cours d'eau ou la concurrence) où, réellement, l'activité de
l'État A est hautement préjudiciable à l'État B. Les ÉU ont essayé de le faire avec les compagnies
liées à Cuba.
5.2.3.2. Geographically-complex fact-pattern.
Il y a des activités dans les États A et B. Dans l'État A, il y la compagnie-mère, qui a 100$
d'actifs et qui possèdent 100% des actions (contrôle) de la compagnie-fille, qui a 10$ d'actifs et
qui se trouve dans le pays B. ParentCo a un contrat de distribution avec SubCo (mais attention,
ce n'est pas parce qu'il y a un contrat, et donc, nécessairement, une forme de contrôle, qu'il y a
formation d'un compagnie, sinon, nous serions tous pieds et poings liés). Dans l'État A, la
responsabilité est restreinte à l'entité qui a causé le dommage, dans l'État B, elle se limite à
l'entreprise qui a causé le dommage. Acceptez-vous d'exécuter le jugement pour un dommage de
50$? Conflit de lois? D'où le besoin de courtoisie (comity). Évidemment, tout le monde veut
garder ses actifs.
C'est toute la tension entre la législation interne qui pourrait avoir des effets extraterritoriaux:
d'une part, cette loi peut être nécessaire à l'atteinte d'objectif interne, de l'autre, elle pourrait avoir
une portée extraterritoriale. Il existe deux axes pour décider de la réponse: normativement, c'est
la portée de l'extraterritorialité; positivement, c'est la taille du désaccord entre les parties.
L'équilibre est un mélange de courtoisie (l'État local accepte d'appliquer le droit étranger),
d'extraterritorialité (l''État local applique son droit hors de sa juridiction territoriale) et
d'harmonisation (les deux États tentent de réduire la diversité législative).
5.2.3.2. Exemples concrets.
A. BHOPAL.
Union Carbide (UCC) qui possédait
Note that while the author refers to the location of the
51% des actions de UCIL (Inde). UC assets as the motivation for bringing the claim in the U.S., but
111
112
Parallèle avec le «oui/abstenir» (une proposition est à l'effet que le vote devrait être majoritaire).
Exemple de la prostitution en Thaïlande.
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avait peur que le juge américain refuse,
par comity, de ne pas exécuter la
décision du juge indien (responsabilité
d el'entreprise). Alors, que faire: aller
aux ÉU et dire appliquer le droit
américain parce que une des parties est
américaines ou demander de faire
appliquer le droit indien (choix de la
lex fori). À la fin, les ÉU ont dit qu'ils
étaient forum non conveniens (tous les
témoins étaient en Inde). Coût de litige
était trop important pour que l'Inde
puisse poursuivre (pas vraiment de
possibilité de recours collectif, pas
assez de taxes).
UCC could have been made a party in India and any resulting
order enforced against the assets of UCC in United States; one
of the most significant concerns was the externalization of
litigation and adjudication costs this would impose on the
Indian court system, extremely underfunded in comparision
with the U.S. to take on the largest industrial disaster in
history. Enterprise approach; Indian plaintiffs could not
recover against bankrupt UCIL so sought to impose liability on
UCIL. Comity would mean that US court would hear case and
apply Indian law, but declined to do so on basis of forum non
conveniens, but ordered UCC to submit to jurisdiction of
Indian courts. Settled, but left to India to bear the costs of
structuring and administering the settlement.
Does this type of internalization improve monitoring or
deter beneficial levels of risk?
B. CHILD-LABOUR AND EXTRATERRITORIALITY.
ShoeCo possède 100% des
actions de SubCo, située dans
l'État B et qui emploie des
enfants de 10 à 14 ans. Le pays
de ShoeCo dit il est cirminel
de faire des affaires avec des
pays où le child-labour est
permis. ShoeCo doit se
départir de ces actions: soit
faire fermer l'usine, soit céder
les actions à bas prix. La
réalité du capital étant
évidemment qu'il n'y a pas
assez de capital dans l'État B.
Il y a un influence de la
législation de A sur B.
Légitime ou pas? Légitimité de
ses principes (et force de ces
principes)
ou
portée
extraterritoriale.
ShoeCo is incorporated in LocalState, and has a wholly-owned
subsidiary SubShoeCo in ForeignState. Both LocalState and
ForeignState have signed and ratified numerous conventions
prohibiting the worst forms of child labour, including full-time labour
without opportunity for education. Until a few years ago, ShoeCo did
all of its production locally, but then relocated production facilities in
its wholly-owned subsidiary in ForeignState, where the production
costs are significantly lower (the labour costs exceeding the capital
costs of producing shoes), particularly since the majority of its workers
are between the ages of 10 and 14 who work a 10-hour shift, 6 days a
week. LocalState passes legislation prohibiting corporations
incorporated in LocalState from owning shares of corporations
operating in ForeignState if those corporations hire employees under
14 years of age, the legal age for employment in LocalState. As a
rational economic actor, ShoeCo closes its subsidiary, and its 300
employees aged 10 to 14 are no longer employed. LocalState
celebrates its dedication to international human rights, ForeignState is
in a somewhat more conflicted position
Does this amount to LocalState regulating ShoeCo as an enterprise
by the extraterritorial application of its local laws
C. À CE SUJET, VOIR LES CONFLITS DE ARAMCO ET DE SUMIMOTO.
Sumimoto disait qu'elle n'était pas soumise aux règles antidiscriminations américaines. La
compagnie a dit qu'elle était intégrée aux États-Unis par un accord japo-américain et qu'elle
n'avait rien à cirer. Et la cour a dit: non, c'est aux ÉU, vous êtes américains, les lois s'appliquent.
Mais l'inverse est également vrai (Aramco): les lois américains anti-discrimination ne
s'appliquent pas à l'étranger pour protéger les travailleurs américains.
Should the employment rights of employees in multinational corporations depend on local
laws in circumstances where the foreign state does not raise an objection?
Mais cela signifie-t-il qu'on puisse «mal» travailler plus on est loin?
Le problème
«aspirationnels».
des
accords
internationaux,
85
c'est
qu'ils
sont
presque
toujours
86
6. LES NOUVELLES OBLIGATIONS EN DROIT INTERNATIONAL.
6.1. Une compagnie peut-être violer des droits humains?
Déjà que ce n'est que depuis Nuremberg que les États sont soumis au droit international des
personnes, d'autant que ces droits sont une limite au pouvoir de l'État (théorique parce que dans
les faits, l'exécution est assez faible, d'une part à cause de la règle des affaires internes, d'autre
part parce que la ligne est souvent floue113). De plus, c'est souvent une règle strictement verticale
(État-citoyen), bien que dans certains juridiction (comme au Québec avec la Charte), il existe des
lois protégeant les personnes des personnes.
Déjà difficile pour l'État, alors les acteurs privés ne sont clairement pas liés par les droits
humains internationaux. Au mieux, l'État est responsable de ses acteurs privés et donc
responsable de ses violations (au mieux, j'ai dit). Deux choix: les compagnies agissent comme
des États, alors ils sont sujets aux mêmes lois ou alors les États agissent comme des compagnies
(??).
VIII. Corporation Social Responsibility.
FROM LEGITIMATE GOVERNANCE TO RESPONSIBLE CITIZENSHIP
1. WHAT IS THE LEGAL FOUNDATION OF CORPORATE SOCIAL RESPONSIBILITY AND CORPORATE
CITIZENSHIP?
We have studied the corporate constitution in comparative and transnational perspective. The
corporation, originally a creature of the state, wields authority within the corporate governance
regime that has at times dramatic social and political implications To raise the question of the
social responsibility of the corporation is itself controversial. These readings do so, documenting
both the law’s function and the pattern of corporate practice.
1.1. Introduction par le général
Corporate social responsibility is perhaps best viewed as an issue addressed by internal
corporate governance rules, which regulates relationships within the corporate governance
structure that often has third-party effects, as well as external legislation, which is perhaps more
directly concerned with third party effects. The issue of corporate social responsibility thus
becomes not just a question of what to regulate but also where to regulate.
1.2. Introduction par le Code civil
In terms of internal corporate governance rules, the material dealing with corporate social
responsibility places many of the themes addressed in prior sections in a different context.
Consider the issue of corporate personality, particularly as defined in legal terms pursuant to the
Civil Code of Québec. We know from Art. 298 that «les personnes morales» are endowed with
juridical personality. Juridical personality provides corporations with the capacity to hold rights,
as is evident from Art. 301, which provides that corporations have full enjoyment of civil rights.
Legal traditions, however, generally operate on the basis of reciprocity between rights on the one
hand and duties or obligations on the other. Civilized society could not proceed if bearers of
rights were not also responsible for fulfilling duties and respecting obligations.
113
(la torture ne l'est pas, mais le travail des enfants?).
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87
In terms of corporate social responsibility, how do we define those obligations that are
consistent with the nature of legal persons? We can begin with the most obvious obligation, set
out in Arts. 298 and 300, that «les personnes morales» as a matter of private law are governed by
their constituent legislation. Even this requirement is not conceptually clear, however, given the
significant difference in perspective evident in the difference in the drafting. The official French
text provides that «[les personnes morales] sont de droit public ou de droit privé». What are we
to make then of the unofficial English text which provides that «les personnes morales» are
established “for a public interest or for a private interest”? As for substantive clarity, we have
already seen that corporations behave in ways initiated by their directors and officers, and that
the discretion of directors and officers to initiate action is limited by their function as
mandataries of the corporation and are required to act in the corporation’s interest (Arts. 321 and
322). But have we determined with certainty and precision the substantive content of this
obligation?
Again, as a matter of private law, we know from Art. 302 that «les personnes morales» have
not only patrimonial and extra-patrimonial rights, but also obligations consistent with their
nature as corporations. But what are we to take from this provision? Does this mean that
corporations are subject only to those obligations already placed upon physical persons that are
consistent with the nature of the corporation, or does this mean that corporations have
obligations placed upon them, consistent with their nature, that are not held by physical persons?
1.3. Introduction par le cours
C'est un drôle de sujet que celui de la responsabilité sociale des compagnies (RSC): il fait
couler beaucoup d'entre, mais il est entièrement volontaire (rien d'obligatoire) –évidemment, le
droit ne peut pas obliger qui que ce soit à être altruiste (sinon, d'ailleurs, il ne le serait plus, il se
contenterait d'être un citoyen respectueux des lois).
Bien qu'il puisse y avoir des aires de correspondance, ce n'est pas le même débat que celui des
actionnaires/parties prenantes, ni le même que celui de «à qui les administrateurs doivent-ils leur
loyauté»? Exempli gratia: que fait-on d'une compagnie pharmaceutique (marché très lucratif) qui
utilise par ailleurs certaines de ses ressources pour traiter des «maladies orphelines» (dont la
recherche n'est pas rentable) en Afrique? Il ne saurait être question de partie prenante (à moins
d'avoir une défintion trèèèès large du *concept*).
Questions en jeu: Les compagnies peuvent-elles le faire? Si elles le font, que doivent-elles faire?
Devraient-elles le faire?
2. DÉFINIR LA RSC
2.1. Des intérêts en jeu
Ce peut être séparé en deux groupes de règles. Le règles internes qui touchent
l'administration –jusqu'à quel point peuvent-ils faire des dons? Il y a également des règles
externes (environnement et communauté, p.ex.).
Généralement, on en parle à la fin de la RSC et la personnalité juridique au début. Si les deux
sont mises ensemble, on a une autre lecture de la question de la personnalité juridique: la
personnalité n'en devient plus uniquement liée à l'argent. Est-ce que ce qui est altruiste est
nécessairement mauvais économiquement (dans la mesure où, théoriquement, si la compagnie
fait le plus d'argent, chacune des personnes qui en reçoit en reçoit plus –sauf que dans les faits, la
«séparation de la tarte» ne se fait pas de manière juste, donc est-ce que c'est mieux de «faire du
bien» ailleurs)?
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Définir la RSC est difficile, et de même il est difficile de dire qui en est un bon apôtre. Google.
Recall Lord Wedderburn’s argument that if profit-maximization is no longer the only
objective, the law must provide clear guidance on the nature and extent of new obligations
No one accepted definition, but for the purpose of analysis, the Social Investments Forum
definition: “Integrating personal values and societal concerns with investment decisions is called
Socially Responsible Investing (SRI). SRI considers both the investor's financial needs and an
investment’s impact on society.”
2.2. Ces intérêts sont-ils vraiment opposés?
Mais y a-t-il vraiment une opposition entre faire de l'argent et la RSC? Ne peut-on pas dire
que la RSC se jauge à long terme et qu'elle apporte également ses bénéfices? Mais bon, on en
parle beaucoup dans la littérature comme si c'était deux données conflictuelles114.
Un standard d'éthique qui fait partie du processus de décision (on voit pourquoi c'est
nécessaire que ce soit volontaire, c'est comme la «loyauté» pré-Enron, les listes ne servent pas à
grand-chose).
2.3. Pourquoi la RSC?
Il y a plusieurs façons de le faire:
 la manière instrumentale
o l'idée selon laquelle les activités socialement responsables maximisent les profits.
o regardez à long terme, c'est bon pour la compagnie et voilà, pouf! plus de problème; ou
simplement parce que nos consommateurs répondent à ce genre d'action
o Cause marketing: pour chaque tasse de café vendue, nous donnerons deux cennes à tel
organisme, c'est une question politique, d'imputabilité dans une société libre et
démocratique.
o Brand management: American Apparel.
o C'est la manière instrumentale qui a le plus la cote, parce qu'on aime bien vendre l'idée.
o
 Idée que s'il y a un problème avec le marché, et seulement à cette condition, l'État doit
intervenir (néolibéralisme). Comme le droit anti-concurrence, mais difficile à exécuter
parce que l'État n'a pas nécessairement les incentives. L'idée ici est l'idée contraire:
lorsque l'État ne mène pas à bien sa «tâche sociale», c'est au marché de mettre la main à
la pâte.
o Corporate citizenship as the obligations incurred when state protection of citizens
diminishes as centre of power relocates, the inevitable result of inability of states to
legislate in the face of market imperatives; international guidelines an example of
increasing corporate responsibility for macroeconomic performance; integrative
reasons, because the modern corporation combines both an economic and a social
function in terms of the activities of the various constituents involved; idea of no
separation between society and market is to be taken seriously

114
Raisons éthiques, basées sur des considérations éthiques et téléologiques (à propos de ce
qui est «bien»).
o Pensez aux impératifs catégoriques de Kant
Différence entre le RCS et l'investissement responsable.
88
89
o Cela dit, l'approche téléologique est souvent très utilitariste (question de conséquences)
115
.
2.4. Responsible for what?
 Compliance with legal regulation only?
 Bearing some cost for socially desirable but not legally mandated action?
 Internalizing true costs of corporate activity, even if legally permitted?
 Parent corporations responsible for subsidiary corporations?
 One-size-fits-all, or more demanding standards for more critical products and services?
 Implications of outsourcing by state of public functions?
2.5. Permissive or mandatory?
 Permissive allows directors and officers to defend actions taken to further corporate
social responsibility from claims by shareholders that actions do not maximize profits of
shareholders and thus are not in the best interests of the corporation
 Mandatory requires directors to take considerations other than profit-maximization into
account
3. MÉCANISMES
3.1. What legal mechanisms?
 Assuming all could agree that corporations should be responsible for social interests, who
decides what those social interests are? What are the implications of leaving this decision
in the boardroom? What are the implications of leaving this decision to legislation?
 Internal corporate governance:
o Shareholder proposals; window dressing?
o Board representation of multiple constituents; Board Babylon?
o Scope of the duty of loyalty; does “no cakes and ale unless it benefits the company”
imply that we can have our cake and eat it too?
 External legislation:
o Carrots, e.g., tax incentives
o Sticks, e.g., environmental and labour standards
3.2. Les incitatifs à la RSC
Quels incitatifs donner pour augmenter le nombre d'actes de RCS? Faciliter les propositions
d'actionnaires, même si elles ne sont qu'«aspirationnelles»? Aller chercher des directeurs de
l'extérieur pour qu'il reflète plus la société qu'ils ne sortent du même moule? Incitatifs par les
taxes116?
On ne parle pas vraiment d'un nouveau régime législatif. On veut simplement savoir jusqu'à
quel point le droit doit se mêler aux sphères économiques pour la RSC. Jusqu'à quel point le
RSC peut-il être le produit de la gouvernance d'entreprise? Pour Wendy, assez peu parce que ce
n'est alors rien de plus que de la compliance aux normes.
Même les fonds mutuels ne sont pas les premiers investisseurs, ce sont vraiment les dix
premiers plans de pension (1 billion de dollars américains en actifs117). C'est la structure du fond
115
Lien principe de précaution?
La différence entre la charité et «l'investissement charitable» (pour fins de déductions d'impôts).
117
One trillion.
116
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qui fait en sorte que les investisseurs ont ou non leur mot à dire. Mais généralement, ils n'ont pas
vraiment leur mot à dire: leur employeur et l'État choisit pour eux.
Au Québec, il y a un fond de pension. Au Canada (compris comme le RoC) aussi. Au
Québec, la loi dit que le mandat du gestionnaire est de maximiser les profits et le retour sur le
capital (c'est moins nébuleux que «le meilleur intérêt de la compagnie») tout en contribuant au
développement économique de la province. Est-ce que ces deux objectifs vont aider à faire des
choix socialement responsables? Cela dit, le but c'est aussi d'avoir des retours.
3.3. Les gestionnaires de fond ont-ils les chiffres comme seul critère?
3.3.1. Les fonds éthiques
La RSC, c'est plus que suivre les lois, ce doit être désirable socialement, mais non obligatoire
(si ce n'est pas désirable socialement, pourquoi n'avons-nous pas déjà légiféré? –mais on ne peut
pas légiférer l'altruisme, d'autant que si une loi l'oblige, ce n'est plus vraiment de l'altruisme).
Est-ce que ce pourrait être quelque chose comme les compagnies devraient internaliser leurs
coûts, partager de l'info (surtout en fait de compagnies pharmaceutiques, dont les agences
gouvernementales dépendant beaucoup pour donner leur feu vert).
Pour ce qui est des investissements des gens, soit l'employeur peut prélever un montant sur le
fond de pension ou alors les RÉER, qui sont des plans privés. Il y a aussi toute la question des
fonds éthiques118 (www.socialfunds.com119). Et c'est gros120.
(1) Reporting does not always include cost of externalities that could have negative impact
on long-term performance
(2) Pressure to report financial gains short-term leads to bias towards underestimating future
risks and over-estimating future rewards in calculating share price as the discounted current
value of future cash flows
(3) Negative externalities function similar to tragedy of the commons in terms of risk to
entire economic system involved when all actors take part (return is captured in its entirety while
costs of risk are distributed)
3.3.2. The answer is not in the market: Minnows and mammoths
Corporate social responsibility movement makes same mistake as sustainable development
movement; cannot have it both ways, cannot meet needs of current generation without
compromising needs of future generations
For corporate social responsibility, cannot operate within current market framework to
achieve socially responsible outcomes in economic behaviour of firms because inherent
incompatibility between current market structure and social needs
Focus has been on risk management, not ethical management
Are incentives socially responsible, or are they addressed at business issues rather than social
and environmental issues? Can these two issues actually be combined?
Managing risk and reputation? Protecting human capital assets? Responding to consumer
demands? Avoiding regulation?
Does corporate social responsibility methodology, both “soft” and “hard” law, have any
relevance?
118
Voir plus haut.
Et qu'est-ce qu'on fait du Vice Fund?
120
Wendy: et dès que c'est gros, on peut se demander les intérêts de qui sont servis.
119
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Does voluntary reporting improve performance? What is a “material” impact, and why is the
adjective “material” used as a legal standard?
Do voluntary codes of conduct alter corporate behaviour?
What is the role of consumers, and are they socially responsible? Can they be?
What is the relevance and impact of socially responsible investment? Constructive
engagement and choice from a limited number of areas? The best of the bad?
What reform is required?
Institutional reform in terms of changing standard of “materiality”, tax incentives
Alter corporate patterns by altering patterns of investment, but can investors, as consumers,
be forced to make a particular choice, and if so, in accordance with whose standard?
Alter standards of behaviour for corporate directors and officers as well as fund managers to
release them from duty of loyalty that focuses, in the absence of stated criteria, to maximize
profits
4. DU CUMUL DES FONCTIONS PAR L'ENTREPRISE
Question (et réponse à une question posée au cours numéro deux): la compagnie a-t-elle à la
fois pour fonction de générer des profits et d'être socialement responsable? 121
Si oui (), marché ou État (législation soit «bâton» soit «carotte»)?
L'art. 122(1)a) et b) CBCA disent que les administrateurs ne doivent pas mêler leurs
considérations morales dans leurs décisions de compagnie.
Bon, les compagnies et les investisseurs institutionnels ont beaucoup de pouvoir, de ce fait,
ils sont obligés de prendre des décisions socialement responsables. Veut-on de Conrad Black ou
de Bill Gates pour déterminer la RSC? Ils ont déjà un fort pouvoir économique, est-ce une bonne
chose de leur donner du pouvoir social en plus? C'est un argument en faveur d'une intervention
législative ça. Mais attention, les lois ne doivent pas être trop étroites, sinon, elles seront un
obstacle à la RSC.
Notons aussi que le débat sur la RSC est très vieux, même si le terme «RSC» est plutôt
récent. Parle de «cakes and ale» [apparemment, c'est dans un article].
La RSC devient également un moyen de «coopter» les gens: achetez-vous, nous sommes
responsables!
Aussi, plutôt que de se battre pour savoir qui aura quoi (ce qui, à certains égards, est l'idée de
la RSC), cherchons à faire grossir la tarte et ensuite, séparons-la, chacun en aura plus.
5. L'ÉTAT PEUT-IL ÊTRE LE FONDEMENT DE LA RSC?
These readings discuss how corporations might be regulated to prod them toward social
responsibility. Note that these readings are now in various respects dated, which may reveal
emerging institutional incapacity of the state in the wake of globalized markets.
Corporate social responsibility: From legitimate governance to responsible citizenship
What is the legal foundation of corporate social responsibility and corporate citizenship?
Notes Wendy Adams
Class summary
Recall that corporate social responsibility
La définition de la RSC a toujours été
must be defined, at least at the outset, as an utilisée dans tous les sens. Pour WAd, il existe
issue involving more than mere regulatory deux étapes et trois positions.
compliance. Otherwise, the debate over the
D'abord, il faut décider si les compagnies
121
Peut-on dire que légalement, la compagnie serait plus responsable (imputable) que les individus?
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integration of economic and social functions
would not exist. Accordingly, the discussion
proceeds in two distinct stages to reach three
positions. At the first stage we must decide
whether corporate social responsibility
imposes valid moral, but not legal obligations
on corporations. Those against the integration
of social and economic functions will argue
that corporations do not hold moral obligations
of corporate social responsibility. This then is
the first position, and the debate does not
proceed past the first stage.
Those who support such integration will
argue in favour of moral obligations, and from
here the discussion moves to the second stage.
The issue then becomes whether corporate law
should adopt a permissive or mandatory
approach to corporate social responsibility.
The second position adopts a permissive
approach that merely requires the directors and
officers not be held liable for decisions that
integrate social and economic concerns. This
is self-evident, given that we can’t very well
ask directors and officers to engage in
decision-making that violates existing law.
The third position adopts a mandatory
approach that would impose standards of
social responsibility on corporations. Note that
at this point, corporate social responsibility is
implemented in legislation and thus becomes
an issue of regulatory compliance, not
voluntary moral standards, and may more
properly
be
called
corporate
legal
responsibility,
or
simply
corporate
responsibility, rather than corporate social
responsibility.
Is each position an equally valid response
to claims for greater corporate social
responsibility? Is your answer dictated in part
by limitations of institutional design, including
the institution known as society? Recall Lord
Wedderburn’s
argument
concerning
institutional competence in that courts are
incapable of balancing both public and private
122
123
peuvent avoir des obligations morales (qui
dépasseraient leurs obligations juridiques).
Si
non
(première
position)
le
questionnement s'arrête.
Advenant un oui, il faut saisir l'ampleur de
la relation entre le droit et la moralité: avonsnous une structure permissive (où les
administrateurs ne seront pas punis d'avoir pris
des décisions socialement responsables).
L'autre position est celle d'une culture
obligatoire, c'est-à-dire où les compagnies
doivent obéir à un certain standard de
responsabilité sociale (le problème est ici que
si c'est une obligation légiférée, elle est légale
et non morale, mais bon122).
Question: ces trois positions sont-elles
également défendables? Laquelle est la
meilleure? Quelles sont leurs implications?
Est-ce que la question de l'institution peut
causer un problème?
Sur la question de l'imprécision, oui, c'est
un problème, mais ce n'est peut-être un
problème que parce que ce n'est pas un
problème juridique (ça reste moral parce qu'il
n'y a pas de solution juridique efficace123).
Réponse: les corporations sont des
personnes ou pas?
À moins d'être un fan du droit naturel…
Sous-question de l'intuition dans le cadre normatif du droit.
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interests. Recall Milton Friedman’s more
adamant argument that directors and officers
as private individuals cannot possible
determine what is in the social interest,
particularly when social interest is increasingly
a global interest. And finally, recall
Hamilton’s description, still valid even today
in a neo-liberal state, of the vast interaction of
state and market; can it be the case that the
issue of corporate social responsibility is
actually a prelude to inevitable legal reform?
Corporate law provides discretionary
authority to directors and officers to manage
the corporation as they see fit, subject to
substantive and procedural mechanisms of
accountability. Substantively, directors and
officers are required to make careful decisions
(the duty of care) and to act in the interests of
the corporation (the duty of loyalty).
Procedurally, directors are elected to their
positions by the shareholders and can be
removed by them at will. This procedural
accountability is attenuated by the issue of
rational shareholder apathy, except in cases
where such apathy is not rational, i.e., in the
case of informed majority shareholders who
wish to see changes made in the management
of the corporation.
Thus we see that directors and officers
already have a legal obligation to act
responsibly, although responsible behavior is
measured against only two standards, one of
duty and one of loyalty. But is this really the
case? Recall that many legal systems also
provides a mechanism for shareholders, and in
some cases also directors, officers and even
creditors, to complain against actions that are
within the discretionary powers of the
directors and officers but nonetheless represent
an abuse of those powers. In the CBCA, this
Le remède contre l'oppression.
On sait que les administrateurs ont deux
devoirs, le devoir de loyauté et le devoir de
diligence. On sait également que leur
imputabilité se résume à peu près à un vote des
actionnaires (et l'on connaît les problèmes de
dispersion et d'apathie).
Le problème de toute autre obligation
morale qu'on voudrait leur imposer est le
problème de la sanction. Pas de sanction, pas
d'obligation.
Et c'est ici qu'arrive le très intéressant
oppression remedy de l'art. 241 CBCA124.
Donc, sous ce remedy, n'importe quel
claimant (a “proper person”) peut se plaindre
d'une conduite qui l'a affecté, en tant
qu'actionnaire ou que créancier.
Question: à qui y a-t-il eu manquement si
ce n'est pas l'obligation (juridique) de
loyauté/de diligence? Ça sonne équité, abus de
droit et bonne foi, mais ce n'est pas suffisant,
pour Wendy Adams, ça sonne obligation
morale.
Peut-on le décrire autrement que comme
une obligation morale125?
C'est extrêmement affolant pour les
avocats parce qu'il ne leur est plus possible de
124
Et on pourrait probablement appliquer un équivalent au Québec par l'art. 33 du Cpc, lequel dispose que «À
l'exception de la Cour d'appel, les tribunaux relevant de la compétence du Parlement du Québec, ainsi que les corps politiques, les personnes
morales de droit public ou de droit privé au Québec, sont soumis au droit de surveillance et de réforme de la Cour supérieure, en la manière et
dans la forme prescrites par la loi, sauf dans les matières que la loi déclare être du ressort exclusif de ces tribunaux, ou de l'un quelconque de
ceux-ci, et sauf dans les cas où la compétence découlant du présent article est exclue par quelque disposition d'une loi générale ou particulière.»
125
–Did I break a rule? –No. –Am I liable? –Yes.
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mechanism takes the form of the oppression
remedy. A claimant, defined as any person
who, in the court’s discretion, is a proper
person to make a complaint, may bring an
action against a director or officer on the basis
that the powers of a director or officer have
been exercised in a manner that is oppressive,
unfairly prejudicial or that unfairly disregards
the interests of the claimant. No such provision
exists in the QCA, but claimants have had
success with arguing for similar relief under
Art. 33 of the CCP, which places legal persons
under the superintending and reforming power
of the Superior Court.
Note, however, that in the CBCA the
claimant’s interests are limited to those held in
his or her capacity as a shareholder or creditor.
Thus a claimant, while theoretically any
person, is actually limited to a shareholder or
creditor. If the CBCA was amended to remove
this limitation, would the oppression remedy
provide a mechanism to bring complaints of
socially irresponsible behaviour on the part of
the directors and officers? What standards
could courts use to determine the standard of
responsibility? Note that it is no defence to say
that neither the duty of care nor the duty of
loyalty requires directors and officers to act in
a responsible fashion in terms of social
interests, as the oppression remedy was
designed to provide recourse in circumstances
where no legal duty has been breached.
William the Conqueror, Duke of Normandy
and King of England, would no doubt agree.
dire que le seul respect des deux obligations
classiques suffit, il y a une inconnue dans
l'équation (d'autre plus que si quelqu'un nous
accuse d'avoir passé outre ses intérêts, c'est
peut-être simplement qu'on ne les a pas vu, et
alors, comment penser pouvoir les prendre en
compte?).
Cela
dit,
cette
incertitude
est
contrebalancée par la doctrine des attentes
raisonnables.
As mentioned in the notes to this section,
readings from the 50s, 60s, 70s and even 80s
can appear quite dated in terms of the faith
placed in the ability and desirability of
corporations and the state to work together to
achieve greater corporate social responsibility.
Stated in more current terms, the ability of the
state to create meaningful change in a
neoliberal, global economy may be minimal at
best. But does this necessarily mean that the
suggestions canvassed by these authors have
Les textes sont un peu datés, pas
nécessairement sur leur analyse, mais dans un
ton farouchement anticommuniste doublé
d'une confiance presque aveugle dans le
pouvoir de l'État, notamment par rapport au
privé.
Ainsi, on croyait que certaines formes de
PPP pourraient fonctionner, comme des
«propriétés sociales» sous formes de joint
venture entre le publié et le privé, où les
investisseurs seraient les payeurs de taxes.
Autre question: quelle serait la portée de ce
remedy s'il n'était plus nécessaire d'être
actionnaire ou créancier? La nature du remedy
ne change en rien, mais sa portée, sa portée!
Réponse: oui, mais si c'est un remedy,
c'est un legal recourse, non? Et puis il y a
un standard, celui de la personne
raisonnable. Et c'est distinct de la
moralité.
Et puis, ça serait probablement void for
vagueness (vive l'art. 7 de la Charte!).
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no relevance? Consider Britain’s Labour
Party’s document Social Ownership, as
described by Graham. The concept of social
ownership includes a public holding company
to establish and control publicly-funded
corporations to work in joint ventures with the
private sector. Presumably social ownership
brings to these joint ventures the concerns and
interests of its investors, i.e., taxpayers.
Presumably private ownership brings to these
joint ventures the concerns and interests of its
investors, i.e., shareholders.
While this type of public/private
partnership may no longer be an option (a
question of subsidies rules in international
trading agreements certainly comes to mind,
witness Airbus), is it correct to say that as the
power of the state has decreased, the power of
the corporation has correspondingly increased,
or has this power been diffused to other
destinations capable of bringing social
concerns to corporate activities? Is Lord
Wedderbun correct in arguing that legal rules
reflect a form of shareholder democracy
against which social facts rebel? Or does Berle
have a better point when he argues that
absolute power in any organization is subject,
sooner or later, to countervailing forces? Does
corporate law have a “conscience of the
king?”
Instrumental reasoning can often be a
preferred solution to conflicts involving
ostensibly irreconcilable differences. So long
as the solution is consistent with the objectives
of all parties, what relevance are problems of
definition and process? Such is the case with
instrumental justifications of corporate social
responsibility such as the one presented by
Green. Corporations following a business
excellence model recognize Friedman’s
126
On croyait qu'il en résulterait une solution
«moralement correcte», les intérêts du privé et
du public étant pris en compte. Or, l'histoire a
plutôt tendu à démontrer que ce n'est pas
vraiment le cas, «scandale» Airbus, pour ne
donner qu'un exemple.
Réponse: sans tomber la théorie du
complot et de la dépendance que veulent
créer les compagnies, elles n'ont pas le
même rôle que l'État, clairement pas et ce
n'est pas leur rôle que de l'imiter. Leur
création
et
leur
philosophie
de
fonctionnement n'est pas la même et c'est
un peu subversif que de penser donner
tant de pouvoir aux compagnies (la RSC
en plus, ça commence à faire beaucoup).
Ceux qui ne sont pas le roi n'ont pas de
pouvoir? Le roi comprend-t-il les investisseurs
institutionnels?
Réponse: la «conscience du roi», c'est
également cette question de standard: il
n'y a qu'un roi, donc qu'un standard de ce
qui est bon ou bien. Or, les consciences
individuelles des compagnies varient.
Les profits sont-ils nécessairement opposés à
la RSC? Pour Green, ce n'est aucunement le
cas, en effet, afin de maximiser les profits, il
faut
prendre
la
RSC
en
compte.
[POURQUOI?] Ainsi, à ses yeux, le docteur
Vagelos qui traite des maladies parasitaires
canines et du même coup la cécité des rivières
(onchocercose) est un exemple d'excellence
corporative126.
N'y a-t-il cependant pas un problème de durée?
Ça sonne tellement biblique: si tu fais du bien, tu seras récompensé –Dieu te le rendra au centuple!
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imperative that directors and officers act to
maximize profits, but also recognize corporate
social responsibility as an essential part of
profit maximization, if not in every individual
decision then in the pattern of business activity
of the corporation in the aggregate. Apart from
the example of Dr. Vagelos and river
blindness, do you see this as a defensible
position? Would you describe Merck as an
ethical corporation? If Merck is not an ethical
corporation, who or what is responsible for the
failure of economic models to integrate both
social and profit-maximization functions?
Pour les retombées, notamment.
Réponse: oui, c'est peut-être bon quand
on s'appelle Ford, mais ça ne fonctionne
pas avec toutes les entreprises (les
pharmaceutiques?
les
manufactures
d'armes?).
Évidemment, toujours selon la théorie du complot,
on pourrait dire que ça crée de la frustration, donc
des problèmes, donc des réponses.
March 31, Class 23: Can corporate law be just?
Any inquiry into the law must be tied back to an inquiry into justice. The course concludes with
some reflections on justice in corporate law.
Class cancelled.
_____________
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