Business Associations Summary
Corporate Law- descriptive facilitative instrument for wealth generation
 It does not deal with the inequities in distribution of wealth
 Corporate law is not about wealth distribution- it is about maximizing wealth generation.
 One of the weaknesses of the system is that it attracts high expectations
What is a business?
 Income tax definition- carrying out commercial activity for the purpose of making a profit
 Narrow definition of stakeholder:
 In this context corporate law addresses the relationships between the owners and the managers
 Some would say the only stakeholders are the shareholders themselves
 Broad definition- broad stakeholders
 However, if you talk to a CEO- they do not spend as much time worrying about the shareholders- they focus on
other stakeholders like the public, politicians, etc. to ensure the success of the investments
 Basically goes to the long term sustainability of the corporation
Broad public policy considerations that run through corporate law
1. Corporate law is a facilitative law as opposed to normative
 80% of statute is really just a standard form contract
 Over a period of a century- people have figured out that this is the best way to organize
 It is done to produce flexibility, to reduce transaction costs
 This is done as a result of the state recognizing that wealth creation is a good thing
 Example of Delaware: choice of state for incorporation by the Fortune 500 companies
 The reason behind this is the state and court system
 Running a corporate law infrastructure is the way Delaware generates funds
 Similarly, Nova Scotia was designed to facilitate effective tax planning for acquisitions across the borders
 The Yukon territories – mining takeover- the company had been incorporated in Yukon- the reason behind
incorporating there is because Yukon was one of the first provinces to not require Canadian resident business
directors
2. Efficiency- consistency
 One concern is when the rules change in the middle of the game
 The other thing is that you do not have to reinvent the wheel
3. Fairness
 Protecting reasonable expectations- here is what the law is and this is what will happen in this type of situation
 Preventing unfair treatment
 Corporate law is normative as opposed to preventive
 Protecting shareholders and stakeholders- providing them with remedies
 Regulatory aspects of corporate law
4. Trying to enhance the economy
 Corporate law is an instrument of attracting corporate investments
 Balancing overly onerous rules as well- for decades investors have chose to list in the US- however, now we
see them listing their companies in London or Toronto because they do not want to be subject to onerous
regulations
Choice of Enterprise Structure
1. Sole Proprietorships
 A business owned by a single individual, without taking any other steps to adopt any other legal form
 1 owner- has the prerogative and responsibility of making all ultimate decisions concerning the business
 There is no separate legal entity- if you are a sole proprietor you cannot be an employee since you are the only
legal entity- ie. You cannot contract with yourself
 The proprietor is the one entitled to all the profits and will bear all the losses
 Liability is unlimited
 All of the contracts and torts are the personal responsibility of the sole proprietor
 A person can not only go after the business assets, but also after the personal assets of the sole proprietor
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Advantages
 Simplicity- simple to start or cease
 No governing statutes and relatively few formalities – with two exceptions:
 If the business is in a name other than yours then you should register
 There may be some sort of licensing requirements
Disadvantages
 Unlimited liability- it becomes quite a large disincentive as the business grows
 This can be offset by insurance
 You can move assets into someone else’s name
 Contracts- exclusion and limitation clauses
 Being the only owner, the only way to raise capital is by borrowing- there are limitations on how much you can loan
 Also difficult because you cannot share costs
 Hard to sell the business- because you are the only owner – the buyer would like to only purchase the assets – you
cannot transfer the liabilities
2. Partnerships ( two or more persons carrying on business with a view to profit)- not a separate legal entity
Historical Background
 Evolved as a matter of common law (cases where the sole proprietorships were getting large and people were
carrying businesses together- court defined the relationships and rules governing the operation of businesses as
third parties)
 1890- English Partnership Act- provides the basis for the Ontario Partnership Act- substantially the same
 Unlike sole proprietorships it makes sense to have a governing statute
o With the Partnership Act it took 30 years of case law before it was decided to be codified
o Standard set of rules to govern internal relations and external reliance in dealing with partners
o The internal rules- you can modify though a Partnership Agreement
o The external reliance are more strict
Partnership Act
 60 or 70% is facilitative and the other side is normative
 Sections 2-5- Nature of Partnership
 Sections 6-19- Relation of Partners to Persons dealing with them
 Sections 20-31 -Relationships between the partners
 Sections 32-45- Dissolutions of partnerships
 Sections 45-46- Miscellaneous
 Section 45- Act is not a complete code- this rule provides that the rules of equity and common law applicable to
partnerships continue in force except where they are inconsistent with express provisions of the Act
 The regulatory side are the elements that govern the relationships between partners and 3rd parties
Disadvantages
 Hard to raise capital
 Liability- same issue as with sole proprietorship- it does not matter what share of the business is owned by each
partner- each could be on the hook for 100% of the liabilities
o All assets, personal or business, subject to seizure and liquidation in order to cover the partnership’s debts
 Managing the risk
o Allocation of risk- every partner is an agent of the firm for the purpose of business and can bind the other
agents unless the partner so acting has no particular authority or the third party that the partner is dealing with
know that this partner has no binding authority
 Partnership is not a separate legal entity
 Agency- How to ensure that individual partners do not engage in conduct that other partners would not approve of?
 You can buy insurance
 You can manage the partnership- in a law firm context the more management you impose the more
bureaucracy
 Mitigate risk by contract
o You can structure your investment as a loan as opposed to a contribution
o You have to mindful to what the indicia are of the agreement being construed as a partnership
o You can put in safeguards- ie a second partner has to review an opinion
 How you hold your partnership interest
o If you are afraid that your relationship may be seen as a partnership then maybe you would want to
hold your interest in that partnership through a corporation
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Becoming a limited liability partner pursuant to provisions of one of the provincially limited partnerships
o Example: Partners in law firms – under the LLP Act
form a partnership between incorporate companies
Advantages
 You can divide up ownership- this is the first step to sharing ownership
 Greater access to capital than a Sole Proprietorship
 Ease of formation and dissolution-general lack of formalities with respect to both
 Great flexibility in designing the internal managerial structure of the business
3. Corporations - A creature of statute
 Earliest corporations were created by specific statutes: ie HBC-creature of the Charter given by the Queen
 The way to create a corporation under statute is to
o file articles in a registry system (for reasons of public record for 3rd parties),
o pay a registration fee,
o choose a statute ( you can incorporate either under provincial or federal statute)
 The members of the corporation (shareholders) can customize their relationship between them very similar to a
partnership- you can have a contract called a shareholder agreement
 You do not have to file under the Ontario Business Name Act- you do not have to come up with a name
o You can actually have a number assigned to your corporation- it will be the next number
 If you want to operate under a specific business name, you have to search to make sure the name is not
taken-and you would have to register under the Ontario Business Name Act
Advantages
 Separate legal entity- it can sue and it can be sued- it can be charged criminally
 Corporations are regularly convicted of criminal offences
 Corporation is different than its owners
 Easy to obtain capital
 Perpetual succession- legal person that lives forever- you can control its lifespan
 Limited liability for owners- legal liability applies to board of directors
 The liability is limited to shareholders to the value of the investment you put into the corporation- there is no
additional liability other than risk you took by making the investment
 This plays into shifting the risk for the owners to other stakeholders
 If there is not residual value or there is negative residual value then the equity holders are the actual
creditors as opposed to the shareholders Stakeholders & creditors have contractual and statutory rights
 A shareholder can and often is an employee or a creditor- this is possible because they are separate legal
entities from the corporation
Disadvantages
 Double taxation- however large corporation are using the alternative of income trusts
 Acting only through agents- As a separate legal entity and not a real person, it can only act through its agents
 Possible divergent interests- resulting form separation of management and ownership
 Complexity of operation
 Separating management from ownership- More formalities If you operate in different jurisdictions then you have to license yourself in each of these different jurisdictionsunless you incorporate under the CBCA
 Also have to file annual returns containing prescribed information
 Additional Expense
 Legal fees are often involved ($800-$1200) and the incorporation fee in Ontario is $300
 Corporations are required to hold meetings, to elect directors and to provide shareholders with information
Why don’t all people choose to incorporate?
 Various types of professionals are not allowed in many provinces to conduct their business in incorporate form
 The promoters may only envisage a short term business relationship and may not think it worthwhile to incorporate
 Partnerships are often formed between corporations which may feel that they are adequately protected already
 Unincorporated forms of business may offer tax advantages
 Many small-business persons may not realize how easy and inexpensive it is to incorporate
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4. Joint Ventures
 Based on contract- arrangements set up for a limited time and for specific purposes
 The courts are less inclined to impose a fiduciary duty on joint ventures
Partnerships – Agency Theory
 Partnerships by corporations are regulated federally- however, there is not Federal Partnership Act
 When dealing with partnerships
o Look at statute
o Then case law (except for Quebec where no case law because of civil law)
o The Partnership Agreement
 A partnership can get sued
How would you manage the risk of actively participating in a partnership?
 One of the key elements of a partnership is the fact that you can be bound through agency by other partners
Cox v. Hickman (pg. 6)- illustrating section 3(3)(e) of the Partnership Act
Facts: Business called Smith & Sons- it was insolvent- the way the creditors handled this is by transferring the
business to trustees who would run the business (receivership)- the deal was that the trustees would remain in control
of the business until the debt was repaid- while the business was being overseen the trustees the business became
indebted to Hickman- H sued the two trustees as if they were members of the partnership
Decision: HL found that they were not partners
Reasoning
 The previous rule was that “all persons who shared the profits of a business incurred the liabilities of partners
therein, although no partnership between themselves might have been contemplated (Waugh v. Carver)
 The real ground of the liability is that the trade has been carried on by persons acting on behalf of the person
carrying in such a claim
 Each partner is in effect agent of the partnership (section 6 of Partnership Act)
Notes: Bovill’s Act- the British Parliament sought to clarify the common law position by providing that “a receipt of the
share of the profits of a business by a creditor in the described circumstance was not sufficient to make him a partner
of the business”- this was incorporated in Sections 3(3)(a) and (d) and 4 of the Ontario Partnership Act
 Section 3 of the PA: The receipt by a person of the profits of a business is proof, in the absence of evidence to
the contrary, that the person is a partner in the business, but the receipt of such a share or payment,
contingent on or varying with the profits of a business, does not of itself make him or her a partner in the
business, and in particular
 (a) the receipt by a person of a debt or other liquidated amount by installments or otherwise out of the
accruing profits of a business does not of itself make him or her partner in the business or liable as such
Note: rebuttable presumptionA.E. LePage Ltd. v. Kamex Developments (pg. 11) – co-ownership case
Facts: case about a co-ownership of property
Issue: can this be considered a partnership for liability purposes
Decision: the courts considered it a co-ownership as opposed to a partnership
Ratio: a partnership requires a common intention of both parties to business in common for profit- a common intention
that each should be at liberty to deal with his undivided interest in land does not constitute a partnership
Reasoning:
 Relying on Porter & Sons Ltd. v. Armstrong
 They were each free to deal with their share in the asset separately, this resulted in a co-ownership as opposed to
a partnership
 If they had sold the assets in common and decided to share to profits equally between them then they would have
been a partnership
 Each party can enter into a listing agreement without binding the other- as such, not a partnership
Note: Waitzer: this is a borderline case
Thorne v. New Brunswick (1962, CA) (pg. 16)
Facts: partnership entered into by Thorne and Robichaud- oral agreement- one in charge of woods operation and the
other in charge of the sawmill business- as required by the WCB Act they duly notified the board of the new
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undertaking, filed with an estimate of wages for the current year, and paid to the board the provisional assessment
applicable to the estimated payroll- Thorne suffered personal injuries- he applied to the Board for compensation,
claiming he is a workman within the meaning of the Act
Issue: Is Thorne a workman employed by the said partnership, within the meaning of the WCA?
Decision: Thorne cannot be considered a workman under the Act
Ratio: For the purposes of the Act, a person cannot occupy the position of being both employer and employee
Reasoning:
 The argument revolves around whether or not Thorne can be a partner and an employee at the same time
 Court analyze recent case law and the wording of the act and decided that the partnership is not a separate legal
entityNote: Contrast this decision with the case below, which recognizes the legitimacy of an employer-employee
relationship between a corporation and its dominant shareholders
Notes: There are certain exceptions to the non-entity rule
 PA section 5 recognizes the firm’s designation- however, see Thorne decision where it was pointed out that use of
collective name is only a matter of convenience and has no substantive consequences
 Section 39 of the PA- upon dissolution partnership debts get priority
 Under the ITA- section 96- a partnership is treated as a separate person resident in Canada for the purpose of
computing the partner’s share of the partnership’s income for the taxation year
 Rule 8.01 of the Rules of Civil Procedure- a partnership can be sued and under rule 8.02 the defense will be
issued in the partnership’s name
 Rule 8.06- an order against a partnership using the firm name may be enforced against the property of the
partnership
Lee v. Lee’s Air Farming (pg. 75) – contrast to Thorne- director of corporation can be employee
Facts: husband formed respondent company for the purpose of carrying on the business of aerial top dressing- he
held all the issue shares of the company with the exception of one- he was appointed governing director of the
company for life, and chief pilot of the company- relationship of master and servant should exist between him and the
company- killed while piloting- wife claimed compensation under Workers Compensation Act
Issue: can a dominant shareholder of a corporation be an employee of a partnership?
Decision: yes
Ratio: it is well established that the mere fact that someone is a director of a company is not impediment to his
entering into a contract to serve the company As per Salomon one may function in dual capacities
Reasoning:
 Corporation, unlike a partnership, is comprised of separate legal entities (Salomon)
 Just as the company and the deceased were separate legal entities so as to permit of contractual relations being
established between them, so also were they separate legal entities so as to enable the company to give an order
to the deceased
 A partner cannot be an employee of a partnership
Conduct of the Business of the Partnership
Relationships of the Partners Inter Se
 Sections 20-31 of the Partnerships Act contain the statutory presumptive rules governing the partner’s
relationship towards one another
4 Underpinnings of a Partnership:Without specifying, the Partnerships Act imposes:
1. Equality: Section 24
 that all partners have an equal right to profit and losses every partner has an absolute right to participate in the
management of the business (S. 24.1)
 every partner has equal access to the books (S. 24.9)
 there is a duty to render to each other true accounts and full information of all things affecting the distribution of
power within a corporate structure (S. 28)
 where a person incurs liability while a partner, it is unconnected to that partner’s contribution to the business
 S. 24- Provisions for sharing information, litigation expenses and partnerships agreements
 What capital is required?
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Whether the capital is sufficient- if it is not sufficient then what do they do
The test would be: were the expenses incurred for the preservation of property or a benefit for the firm?
 This is the test that would be applied if there were not agreement in expenses in advance
Section 24.1-Capital contributions
24.2 – personal expenditures
24.3- you can decide how much capital can go into a firm
24.5- Managing a partnership All partners have the right to take part in the management of the partnership
 You can contract out of this
Section 44.2- tells you what your status is a partner advancing money to the partnerships
 In effect your advances get paid out before any residual money would get paid
Example: you contribute $100,000 of capital- one of the partners is better of and he puts $50,000 down as a loan
and takes interest- there is $150,000 in capital contribution- the partnership owes 50,000 to creditors. When the
partnership is dissolved there are $160,000 left over. Where does the money go and who gets paid first?
 Creditors get paid first- the loan gets paid back second and the original capital investment last
 It becomes obvious that you would not get back all of your capital
 And you cannot change the order
First pay off non-partners, then you pay back capital advances (loans), then the original investment
 Once everything is paid off then the rest of the money is distributed evenly among the partners in the
absence of an agreement that specifies what share each partner is entitle to
Section 21.1- Capital contributions and partnership property
 Property and rights that are originally brought in for the purposes of partnership business
2. Consensualism:
 S. 20- provides the mutual rights and duties of partners, whether ascertained by agreement or determined by the
Act, may be varied by the consent of all partners
 unanimity is, subject to contractual alteration, required regarding fundamental changes to the business s.
24(7)(8)(25) and s. 26(1) and s. 32
 it makes the partnership unstable and susceptible to being terminated but prevents partners from having personal
liability for things they disagree with
 one partner’s desire to leave the partnership can theoretically terminate the partnership (S. 26.1)
 no majority of partners can expel a partner unless the power to do so has been expressly conferred in the
partnership agreement (S. 25)
 Exception from the unanimity rule involves ordinary matters s. 24(8)- a majority opinion can prevail
Dissolution of a Partnership:
 S. 32- Subject to any agreement between the partners, a partnership is dissolved,
o (a)- if entered into for a fixed term
o (b) if entered into for a single adventure
o (c) by one partner giving notice to others
 S. 35- dissolution by court order –
o (a) if one of your partners is mentally incompetent or is incapable of performing certain duties
3. Utmost good faith: fiduciary obligation between partners
 Partnership is an extension of agency. Each partner is an agent for each other.
 Implied promise that nobody will do separate deals on their own behalf (though this is broken all the time)
 A fiduciary must account by putting the funds received back into the business and reporting.
 True information s. 28 – need of transparency
 Full accounting s. 29(1)- all earnings/benefits
 No competition s. 30
 Sections 6-19- constraints on ability to contract out of these provisions (agency principles etc.)
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Personal Character
S. 31-deals with the effect of assignment of a partner’s interest in the partnership
S. 33- partnership is automatically terminated on the death or insolvency of a partner
Observations have been made that a partnerships is an unstable relationship- however, this instability can be
offset by carefully drafted agreements between the partners including provisions with respect to the admission of
new partners and the retirement of old ones, the effect of death or bankruptcy, the distribution of responsibilities,
the provision of capital and the division of losses and profits.
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Liability towards 3rd Parties
5 types of liabilities
1. Pre-partnership liabilities
 Section 18.1 provides that a person who is admitted as a partner into an existing firm does not thereby become
liable to the creditors of the firm for anything done before he became a partner
 Section 18.2- retirement does not exonerate a partner from debts and other obligations incurred by the firm
before his retirement
2. Liabilities as a partner
 Section 10- a partner is liable jointly with the other partners for all debts and obligations of the firm incurred
while he is a partner
 It is not necessary that the partner whom it is sought to hold liable actually approved or authorized the
contract giving rise to the indebtedness
 Section 6- the firm will be liable, and therefore the partner will be liable, if his co-partner “does any act for
carrying on in the usual way of business of the kind carried on by the firm of which he is a member”
 Subject to valid defence: if they can show that 3rd party knew that the person with whom he was dealing
had no authority to bind the firm in the particular manner or did not know or believe him to be a partner
 There is no obligations on third parties to find out this information but if they know then the partnership
is not liable directly for the misrepresentation
 Liability of the firm, and therefore of partners for wrongful acts or omissions is dealt with in ss. 11-13
 Note that while a partner only incurs joint liability with his fellow partners under section 10, her liability
under section 13 is joint and several
3. Holding out liability
 RULE: A person may be held liable as a partner even if she never was a partner, if the holding out principle of
section 15 applies to her
 Every person who by words spoken or written or by conduct represent himself or who knowingly suffers
himself to be represented as a partner in a particular firm, is liable as a partner to any person who has on
the faith of any such representation given credit to the firm, whether the representation has or has not
been made or communicated to the persons so giving the credit by or with the knowledge of the apparent
partner making the representation or suffering it made
 See Tower Cabinet Co. v. Ingram (1949)
4. Liability of Apparent Partner
 Another aspect of the holding out principle determines the extent to which a person may continue to remain
liable as a partner even after he has retired from the partnership
 The relevant rules are discussed under section 36 of the PA and in Ingram
5. Registration Requirements
 The Partnerships Registration Act (PRA) adopted in Ontario in 1869
 This was replaced in Ontario with the Business Names Act in 1990
 Purpose: to enable 3rd parties to ascertain the membership of a partnership and to learn of any changes in the
composition of the firm by requiring the filing of these particulars in a public registry office – BNA ss. 2(3), 4-5
Fundamental differences between the PRA and the BNA(Business Name Act)
 BNA applies to single proprietorships, corporations and partnerships
 BNA does not apply to limited partnerships or to partners carrying on business or identifying themselves to the
public under a name that is composed of the names of the partners
 Different Civil Sanctions:
 Section 7.1- partnership is not capable of maintaining a proceeding in Ontario except with leave of court,
unless 3 conditions in s. 7.2 are met
 BNA contains no provisions estopping a person whose name appears as a partner in the BNA registration
from denying that he is a partner until his name is removed
 The absence of estoppel provisions in the BNA does not mean that they may have not been implied
 Common law rules on holding out and the provisions in ss. 15 and 36 of the PA, it seems safe to conclude
that a person who allows herself to be held out as a partner in a BNA registration when she is not, or fails
to have her name removed when she ceases to be a partner, will be estopped from denying her
partnership status to a third party who has relied on the registration
 Courts have been reluctant to apply constructive notice as sufficient unless the specific Act in the area
specifies that it is enough
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6. Procedural Aspects of Joint Liability
 Kendall v. Hamilton- if a joint creditor of a firm obtains a judgment in an action brought against one partner
only, he loses remedy against the other partners, although he did not know of the other partners when he
recovered judgment and the judgment remains unsatisfied
 This rule still appears to be in practice in Ontario- however its effect is mitigated by the Rules of Practice
 Rule 8.01- a proceeding by or against two or more persons as partners may be commenced using the firm name of
the partnership
 Rule 8.06(2)- a party who has obtained an order against the a partnership using the firm name may apply for leave
to enforce it against a person alleged to be a partner if the person has not previously been served with notice of the
proceedings
 Rule 139.01 of the CJA-abolishes the rule that judgment against, or release of, a person who is jointly liable
prevents judgment from being obtained against any other joint wrongdoer
Agency Relationships within a Partnership
o You need some sort of framework around agency and dealing with third parties
o Section 7- you execute things in the firm’s name- for law firms you execute opinions on a daily basis
o Actual authority- some kind of verbal or written contract
o Ostensible/ Apparent authority- by estoppel- it appears to a 3rd party that you had authority
o When you get into implied authority you have to look into the conduct of parties
o Cases that come up is where an agent exceeds their authority or misrepresents their authority
o When you can demonstrate that a representation was made with some sort of authority and that the
representation was relied upon then you may have a case
o Section 6 of the PA- the firm will be liable, and therefore the partner will be liable, if his co-partner “does any act for
carrying on in the usual way of business of the kind carried on by the firm of which he is a member”
What happens when a person exceeds their authority in a partnership context?
o If you exceed your authority, as long as it is within the range of your typical business authority then you are bound
o Section 15- if you hold yourself out as a partner, even if you are not a partner, you will be held liable as a partner
Liability for debt Section 10(1)-Partners are liable for any acts while they were a partner- this is even after you retire or die- they can
go after your estate
Liability for wrongs
 Section 13- you are held liable joint and severally for wrongs
Tower Cabinet Co. v. Ingram (1949) HL- pg 31
Facts: Ingram and Christmas established a partnership name Merry’s- letterhead with both their names was createdIngram left the partnership however no notice was provided to the London Gazette- Christmas ordered furniture from
Tower on the old letterhead- Tower trying to enforce the debt against Ingram as partner in Merry’s
Issue: Is Ingram liable as a partner by reason of the provision of the PA 1890, in regards with holding out or failure to
give notice when a man has ceased to be a partner, and credit has been given to the firm as if he was still a partner?
Decision: Ingram not liable- company did not know he was partner before date of dissolution
Ratio: If the person dealing with the firm did not know that the particular partner was a partner, and that partner retired,
then as from the date of the retirement, he ceases to be liable for further debts contracted by the firm to such person
Reasoning:
 Under s.14, before Tower can succeed, they have to satisfy the court that Ingram by words spoken or written, or by
conduct has represented himself as a partner
 The court does not buy this- no evidence of such representation- the burden is “knowingly suffers himself to be so
represented”- not being negligent or careless
 However, s. 36 of the PA- the law stands that if there had been a known partnership, but no notice had been given
of the dissolution thereof, the defendant would have been liable
 S.36 (3)- a partner who, not having been known to the person dealing with the firm to be a partner
 If the person dealing with the firm did not know that the particular partner was a partner, and that partner retired,
then as from the date of the retirement, he ceases to be liable for further debts contracted by the firm to such
person
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Short Summary- D’Arcy Nordick
Sole Proprietorship- Business owned and done by one individual
 One legal entity
 All the benefits are for you
 All the contracts are in your name
 You own all the assets you are entitled to all the profits No statute- no formalities required
 No need to register under the Business Name Act unless you want to operate under a different name
 Disadvantage Unlimited liability- both personal and business assets
 Tort Liability- You can minimize risks by transferring assets
 When you die it goes with you
 Harder to sell the business
 Biggest problem- raising capital is tough- You can probably get a bank loan-but if you want to get someone
else involved it is a lot tougher
Partnerships
 Definition- two individuals working together for the purpose of profits
 Created by common law- some of it has been codified
 Governed by the Partnership Act- everything is in there- suggestion- read the Act
 The PA can be changed through certain partnership agreements
 Example: partnerships used to be such that when a partner dies the partnership is dissolved- however that
can be rearranged
 Disadvantages- Still unlimited liability- also agency binding the rest of the partners
 Thorne- Ratio- a partner cannot be an employee- you cannot wear different hats
 If you are a partner you cannot claim that you are an employee of the partnerships
 Contrast with Lee v. Lee’s Air Farm (corporation
 Ratio: in the corporate context you can wear a bunch of different hats
Partnerships- 3 principles
 Consent
 Equality
 Fiduciary Relationship- applies in the partnership context because one partner can bind the rest
 Unless the contract says otherwise, one partner dies, the partnership dies
Partnership and Relationship with 3rd Parties- Section 6-19- define and restrict this relationship
Agency
 When business carry out activities someone has to be doing- there is an agent of the firm
 The problem with agents is that when you are starting to bind other people, you have to ask yourself if that agent
has the authority to bind
 Section 6 of the PA- talks about agency
 You can bind other members provided that you are carrying on in the usual way of business of that firm
 You will bind unless the agents was acting outside his authority or 3rd party does not believe him to be agent
 Agency can be created by an agreement or by estoppel (apparent authority)
Notice- To the extent that a 3rd party has notice, you cannot really lie
Hybrids of Partnerships
Limited Partnerships
Historical Background
 Originally introduced in the US in 1822 as the Limited Partnership Act –adopted in Ontario as the LPA in 1980
o Ontario act based primarily on the Alberta Act
Changes in liability for certain professions- accountants and lawyers took advantage of this
 You are not liable for the negligent acts of others, however, you are still negligent for your own acts or the acts of
those you supervise
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If you are negligent, the firm can be sued, you can be sued, but other people do not have to worry about it unless
they were acting under your direct supervision
When you’re suing a law firm, you are going after the insuranceo Law firms pool their insurance
Important features of the Ontario Limited Partnership Act
General Features
 Definition: s. 2(2)-a limited partnership is a partnership consisting of at least one general partner and one limited
partner, and it is formed simply by filing a declaration under s. 3 of the LPA
 S. 3(2)- the declaration need only set out the name and address of the firm and the names of the GP and LPs, the
general nature of the business and the contributions made by each partner
o this declaration expires after 5 years, but the limited partnership is not dissolved by such expiry
o it only has to pay an extra fee- section 3(4)
 A limited partner is only liable to the extent of his contributions to the firm (s. 9), but his protection is lost if “he takes
part in the control of the business (section 13(1))
o Under s12. 2(a)- control is defined as that which explicitly permits a limited partner to advise “as to the firm’s
management
Transferability
 Section 18- gives an LP the right to assign his interest, but the assignee only has limited rights unless either all of
the other partners consent in writing to the assignment or the partnership agreement gives the assignor that power
Withdrawal
 An LP has a right to receive the return of his contribution from the firm in 4 situations, as per section 15.
o (1) on dissolution
o (2) if the partnership agreement provides for it
o (3) if no other procedure is specified in the partnership agreement, then after he has given 6 months notice
to all other partners
o (4) if all the partners consent to a return
Dissolution
 An LP is dissolved upon the death, retirement or mental incompetence of a general partner or dissolution of a
corporate general partner
o However, pursuant to 21 (a) and (b), the remaining GPs can continue the business
 Section 23(1)(b)- dissolution also occurs when all of the limited partners have withdrawn from the partnership
 Section 15(4)- an LP can have the partnership dissolved if, although he is entitled to the return of his contribution, it
is not forthcoming on his demand, or if the partnership assets are insufficient under section 14.2 and he would
otherwise be entitled to be repaid his contribution
Legal Personality
 No final answer as to whether an LP has a separate legal personality
Limited Partnerships and Taxation
 Recent popularity justified by a combination of limited liability and partnership tax treatment
Avoidance of Double Taxation
 Under the ITA, individual partners take their share of partnership income or loss into account when computing their
personal income for tax purposes
o This is a direct flow through of income as opposed to a corporate investment situation
o Income flow directly to the person and the LP avoids double taxation
o Furthermore, income for tax purposes can be reduced still further by claiming personal deductions
Special Incentives
 in an effort to implement specific economic policies through the taxation system, the federal gov’t introduced
certain tax incentives
 a partnership can flow those incentives through directly to the partners
o this treatment avoids any loss because of he time value of money, and ensure that the losses are actually
used up rather than being eventually lost because of limitations on their storage time ( corporation store
these incentives if they have not current income to offset)
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Income Trusts
 Limited partnership basically runs the business- they have a General Partner
 As the profits come in- no tax is paid by the LP- the profits flow into the trusts
 From the trusts- the profits flow to the individual unit holders without having been taxed
 The problem until recently is that trusts did not have limited liability
 Institutional investors were scared of touching income trusts- liability would flow right through
 the law has changed- now there is limited liability attached to income trusts
Proper Law of Limited Partnerships
 an LP formed under the laws of another jurisdiction will be recognized in Ontario subject to compliance with
statutory provisions
 under Section 25 (1-4) of the LPA- need to file an appropriate declaration or otherwise face penalties
 However, liability is set up under the jurisdiction in which the LP was originally organized
 Section 27(2)- laws of the jurisdiction where LP set up govern the liability of the LP
 Just because it operates in Ontario does not mean that Ontario liability rules would apply
 This results in forum shopping- there is no common law against this
Investor Protection
 Ss. 9-10 of the LPA provide some basic protection for LPs
 The LPA does not provide sufficient protection to investors in publicly traded LP interests
 As a result, the Ontario Securities Commission considers a limited partnership unit to be a security
 The OSC considers an LP unit to be a security (under s. 1(1) of the Securities Act)
 Section 9 of the LPA- Liability of the Limited Partner
 A limited partner is not liable for the obligations of the limited partnership except in respect of the value of
money and other property the limited partner contributes or agrees to contribute to the limited partnership, as
stated in the record of limited partners
 Section 10 of the LPA- Rights of Limited Partner
 A limited partner has the same rights as a general partner
 (a) to be allowed to inspect books
 (b) to be provided true and full information concerning all matters affecting the LP
 (c) to obtain a dissolution of the LP by court order
How to mitigate liability under an LP?
o Limitation of liability is done through a corporation
o Most of the administrative obligations and capital obligations are handled through a company
o In order to mitigate liability you use income trusts
o You set up the general partner to be a corporation
o Liability for legal work for example cannot be mitigated
o Section 44.2- Dealing with limited liability enables you to limit the liability for individual partners for the actions
of other individual partners, unless the original partner was supervising the actions of the other partners
Haughton Graphic Ltd. v. Zivot (1986) (ONT H.C.) pg. 45- LP’s liability as a GP when LP controls GP
Facts: Zivot wants to start up a magazine- sets up LP Printcast- he incorporated Life Style Inc. as a general partner
and himself as the limited partner in Printcast- Lifestyle controlled by Zivot- he represented himself as the controlling
hand of Printcast- he introduced himself as a the president- he enters into a contract with Haughton for printing of the
magazine- - the person at the other end of the contract claimed he did not know he was dealing with a limited partnerZ appeared to be the man at the top with complete and ultimate responsibility- before printing however, a credit check
was done which revealed that Zivot was a limited partner- however, no additional info about the structure of the LP was
provided- Printcast goes bankrupt- H goes after Z personally as a general partner
Ratio: if a limited partner takes part in the control of the business, he becomes liable under the statute as a general
partner (i.e. unlimited liability to the extent of his assets)
Reasoning:
 S. 63 of the Alberta LPA- “ a limited partner does not become liable as a general partner unless, in addition to
exercising his rights and powers as a limited partner, he takes part in the control of the business”
 Section 63 does not require any element of reliance- contrasting with the “specific reliance test” set out in
Frigidaire Sales Corp v. Union Properties (US) where it was held that “liability for a partnership’s obligation to a
creditor should not be imposed upon a limited partner who take part in the control of the business unless, as a
result of the limited partner’s conduct, the creditor believed that the limited partner was a general partner
 Furthermore, mere knowledge that the a magazine was being promoted and published by an LP does not change
the situation
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Section 63 applies only if two conditions are met:
 (1) the person be a limited partner
 (2) he take part in the control of the business of the limited partnership
The section does not apply to someone whose sole role in, and connection with, the limited partnership is that of
an officer, director, or other controlling mind of the general partner
Nordile Holdings Ltd. v. Breckenridge( 1992) (BCCA)- pg. 51- contrast to Zivot
Facts: the GP of the LO was incorporated and the defendants occupied dual positions as LPs and as shareholders
and officers of the GPDecision: no unlimited liability of the LPs
Ratio: acting solely in one capacity necessarily negates acting in another capacity
Reasoning:
 Court accepted the defendants’ claim that they acted in the management of the LP solely in their capacities as
directors and officers of the GP
 Narrow interpretation of the statute, plus there was a exclusionary provision in a statutory disclosure statement
supplied to the P before the transaction
 Court worried that imposing liability on persons in the defendant’s position would “destroy the Salomon principle
Limited Liability Partnerships
 In Canada, LLP legislation was first enacted in Ontario in 1998 in the form of amendments to the PA
 The Ontario provisions only benefit the members of qualifying professions
 So far only accountants and lawyers meet these requirements
 Section 10(1) of the Ontario PA- every partner in a firm is liable jointly with the other partners for all debts and
obligations of the firm incurred while the person is a partner
 Section 10(2) - Limited liability partnerships- Subject to subsection (3), a partner in a limited liability partnership is
not liable for debts, obligations and liabilities of the partnership or any partner arising from negligent acts or
omissions that another partner commits in the course of the partnership business while the partnership is a limited
liability partnership
 Section 10(3)- Subsection (2) does not affect the liability of a partner in a LLP for the partner’s own negligence or
the negligence of a person under the partner’s direct supervision or control
 It seems therefore that members of an Ontario LLP continue to have joint and several liability arising out of a
partner’s fraudulent conduct or breach of trust or fiduciary obligations, and for strict liabilities under the law
 Alberta exculpatory clause
 Section 11.1 protects the non-culpable partners from debts, obligations or liabilities of the partnership or
another partner arising from “negligence, wrongful acts or omissions, malpractice or misconduct” of another
partner, employee or agent of the partnership
 LLP’s formed in Alberta can be recognize in Ontario under section 44(4) of the Ontario Act provided that they
register their name under the BNA
 The rules that would govern that LLP are the rules of the province where the LLP was formed
Requirements for obtaining the status of an Ontario LLP (sections 44.1-44.3)
1. there must be a written agreement between 2 or more persons designating their partnership as an LLP to be
governed by the OPA
2. the partnership is formed to carry on a profession governed by an act that permits practice of the profession by an
LLP, and the governing body of which profession requires its members to maintain a minimum amount of liability
insurance
3. the LLP’s name is registered under the OBNA
4. the LLP’s name must include the words LLP, L.L.P. or s.r.l.
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Corporate Personality- separate legal personality
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Who can incorporate- CBCA Section 5:
Section 5(1) – Incorporators- One or more individuals not one of whom
(a) is less than eighteen years of age,
(b) is of unsound mind and has been so found by a court in Canada or elsewhere, or
(c) has the status of bankrupt,
may incorporate a corporation by signing articles of incorporation and complying with section 7.
Section 45- sets out the basic principle that the shareholders of a corporation are not, as shareholders, liable for
any liability, act or default of the corporation except under subsection 38(4), 118(4) or (5), 146(5) or 226(4) or (5).
Introduction
Obviously based on the ease with which legislators allow corporations to be created, the doctrine of Salomon can be
easily abused and corporate personality can be used as a veil to shield conduct that is prejudicial to the company’s
creditors & others.
Salomon v. Salomon & Co (seminal case)
Facts:
Mr. Salomon had carried on business for many years as a sole proprietor and he wished to incorporate his company
with himself and his family as shareholders. As payment Salomon received “Purchase Price” (paper purchase) - 39,000
pounds consisting of 20K in shares, 10K for 100 debentures (promissory notes/debt), 8K in cash (liabilities paid down) and
he took out “fun money 1k. Salomon was both vendor and purchaser
 Price was considered high since balance sheet was inflated
 Shares issued. A month later on security of the debentures, Salomon got a loan from Broderip of 5,000 pounds.
Original securities were cancelled, and Broderip was issued new debentures to secure the repayment of the loan
 CORP failed to make the payments on Broderip's debentures. He sought to bring the corporation into receivership
 Sale of the CORPs assets: netted 6,055 pounds received…5,000 pounds went to Broderip - Who gets the remaining
1,055?
 Mr. Salomon claimed this amount because he was the owner of remaining 5000 debentures (debts are secured
credits so he would be paid before a lender w/ no debentures – “scandalous” floating charges.)
 Liquidator claimed that he should not get it because Salomon had inflated the balance sheet, formation of the
CORP was a fraud on creditors, and CORP was merely an extension of Mr. Salomon
Issue: is the corporation separate form Salomon? Can the general trade creditors have Solomon’s secured claim
subordinated to theirs?
HELD: separate legal entities- Salomon not personally liable for debts of corporation (company properly incorporated)
and Salomon can act as secured creditor
Ratio: a corporation has a separate legal personality and its shareholders are not liable for its debts and obligations
Analysis: note both the lower court and Court of Appeal viewed the corporation as a sham
Court upholds corporate veil
1. Once a firm is legally incorporated, it must be treated like an individual, and the motives of the CORP upon
incorporation are irrelevant
 Note: court would consider it, but will be met with reluctance bc court don’t want to second guess, much less
rate business decisions (Business Judgment)
2. There was no fraud because creditors had full notice that the firm was being incorporated, and if they were
concerned about repayment they should have asked to see the balance sheet. The business was solvent the
minute after the transaction was completed and there was no attempt to strip the assets. The risk is always born
by the creditors unless there is fraud.
3. Lack of independence of the shareholders does not justify piercing the veil.
4. The fact that the dominant shareholder holds corporate debt and is principally influencing and controlling co - also
does not justify piercing the corporate veil.
The Salomon Hangover: “Something less than fraud” is needed
 If fraud is the only reason to pierce the veil and is hard to prove:
 Asset stripping will be hard to stop (i.e. take assets out of business)
 Undercapitalization will be hard to prevent
 If this is the case, Corp will lose commercial credibility
 Salomon made it clear that corporations are here to stay
 However, the effect may be counterproductive due to the possibility of abuse – corporations hence will then lose
their commercial credibility
 Court wants to see if that was the result of fraud
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Therefore, when a business has failed, question of whether undercapitalization took place
Legislators then created new basis for complaints for undercapitalization
Kosmopoulosv v. Constitution Insurance Co. (1983) Ont. CA – dealing with insurable interest
Facts: K and wife start leather good store- they do not speak English well- advised by lawyer A to incorporate- K was
the sole shareholder and director- lease of business premises was under his name- business carried on under the
name Spring Leather Goods- AR was the insurance agent- insurance is rendered in the personal capacity- assets are
gone- making claim for his insurance-insurance company trying to deny claim based on the fact that business was
carried out by Spring Leather Goods and that the policy was under K’s name
Ratio: Canadian courts have no real to and from on whether or not a corporation is a separate legal entity – they find
that a sole shareholder has a much higher stake than others and such should have an insurable interest
Analysis:
 Insurable interest- to be circumstanced with respect to assets of a company that the person had “benefit from its
existence, prejudice from its destruction”
 The shareholder has no insurable interest in the corporate assets
 Corporation loses its assets but the corporation is a separate legal entity and it is the corporation that lost the
assets- the man just signed the insurance but that was on behalf of the corporation
 However, the courts use equity and decide that the sole shareholder should in fact have an insurable interest
 Distinguishing between sole shareholder and one shareholder of multiple shareholders
 In Macaura- court found that a shareholder who was not the sole owner has no insurable interest in the assets of
the corporation
Policy
 General rule from Salomon is that a corporation is a legal entity distinct from its shareholders
 However, court may disregard the rule and “lift the corporate veil” when the “separate entities” principle would yield
a result” too fragrantly opposed to justice, convenience or the interest of the Revenue”
 As such, the court pierced the corporate veil in this case
Note: should there be a distinction made between sole shareholders and multiple shareholders?
Piercing the Corporate Veil:
The following cases explore the extent to which the courts have been willing to pierce the corporate veil even without
the aid of specific statutory authority to do so. Though there is no single coherent principle to explain the judicial
response, the following factors are helpful in distinguishing types of cases:
1. Cases involving allegations of fraudulent conduct on the part of the company’s principals
2. Cases where the company was clearly undercapitalized to meet its foreseeable financial needs
3. Cases involving tort claims against the company
4. Cases where the company was not incorporated for bona fide business reasons (to take advantage of loopholes)
5. Non-arm’s length transactions between parent and subsidiary companies
(1) Fraudulent Transactions
Clarkson v. Zhelka (1967) Ont. H.C: Personal Debts of Controlling Individual behind CORP
Facts: Selkirk (S) promotes, incorporates and controlled several companies one of which purchased land with cash
advanced by 2 of S’s other companies. 1yr later the land was conveyed to S’s sister Ms. Zhelka (Z) for promissory
notes. Ultimately S personally went bankrupt and the trustee in bankruptcy wants the land. The trustee is claiming that
the S’s asset is merely kept via an agent / alter ego which is directed by S to prejudice & Confuse the Creditors.
Issue: Can personal creditor of a debtor seek assets from CORP which the debtor owns and controls?
Held: There was no fraud against the personal creditors of S and hence no reason to lift the veil
RATIO: There is nothing unlawful against the personal creditors of S in the monies transferring between companies
controlled by S. The companies are separate from the individual, as are the assets. If there were some illegal transfers
made, the injured parties would be the shareholders & creditors of the CORPS.
Analysis:
 The transaction with Z was without consideration and for the purpose of protecting against creditors.
 Thus a resulting trust in the CORP as it was never intended for Z to take any beneficial interest in the property
conveyed –however, the resulting trust would only be open to creditors of the corporation, not creditors of S
 Incorporation followed regular procedure
 It takes a co to be formed for the express purpose of doing a wrongful or harmful act
 if the corporation acting as a mere agent, may say that the co is a “sham, cloak, or alter ego”, but otherwise it
should not be so termed. All these things are questions of fact.
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Note: Though S in his dealings, had shown disregard for the separateness of his various corporations, the court did
not treat the debts of the CORP as shared by all of S’s interrelated CORPS since this would not be fair to the different
creditors of each individual CORPS.
Big Bend Hotel Ltd – fraud allows the court to pierce corporate veil
Facts: Big Ben Hotel Ltd. burnt down. Made claim against insurance co. Insurance co said, hey, the guy who
incorporated the co previously torched a hotel. And when he applied for this insurance K, he was asked if he had ever
torched a hotel. He said, no, Big Ben Hotel Ltd. never torched a hotel. Insurance co never would have insured the co
if knew that the principal had torched a hotel.
HELD: had the insurer known about the prior fire loss, they would have declined to accept the risk. This was a case of
the individual behind the corporation clearly omitting to disclose a fact which he knew was material to the insurers.
Gilfrod Motor Company v. Holmes (1933)- sham or cloak- reason to pierce veil
Facts: H (defendant) was G’s (the plaintiff) managing director. G included a clause in H’s employment contract to
prevent him from competing within three miles and for five years after leaving the company. H incorporated a company
and set up a competing business [disguised bc it is not in his name]
Issue: Is the corporation a mere sham?
Held: Injunction granted against H and the corporation from continuing the business. Yes, just to avoid contractual
obligations he signed.
Rule: person could not incorporate a company as a cloak or sham to enable him to breach the terms of his individual
agreement
Analysis
 Court looked through the corporation to the substance of the transaction. A key factor was that H as a sole share
holder in his corporation.
Note: If H was one of many SHs, court may have been more reluctant to pierce the corporate veil to find the
corporation illegitimate. But, even if court pierced the veil and granted an injunction in that situation, the injunction
would be against H and not the other SHs.
Rockwell Developments v. Newtonbrook (1972) OCA: Personal liability of directing mind for business K of CORP
Facts: Here the solicitor involved in real estate development incorporated a limited company for each separate real
estate development deal he entered into. At issue is that two corporations have entered into a contract for the
sale/purchase of Newtonbrook plaza. Parsham (P) controls NB CORP, Kelner (K) controls RW. They disagree over
terms, NB wins and gets costs awarded against RW. But RW thinly capitalized, so NB argues:
 This shows RW is to shield Kelner, so wants to go after Kelner, arguing K is the real party, he was really the
contracting party, RW is the agent for this.
 Kelner signs on behalf of RW. Corporate papers are thin in RW; funds advanced not thru RW but by Kelner
directly, all litigation done by Kelner personally
Held: In the absence of fraud allegations, Kelner was not the actual contracting party (though undoubtedly
individually Kelner was going to benefit from the contract) as the contract was made with the company alone.
Both
K and P were pursuing the same course of action & were quite content to enter into contracts made by the CORPS
which they respectively controlled.
RATIO: Individuals behind CORPS cannot sue upon the contracts made through the company nor can they be sued
personally based on such contracts. To hold the CORP as a nominee holding title, would imply CORP merely a trustee
which goes against the principles of company law
Analysis:
 Lower court held that K was the actual contracting party and the person who set this process in action with RW
being only a nominee holding title
 Undoubtedly the handling of the corporate records, both as to the minute book & the books of account was
slipshod but no one in connection with RW was in position to complain but K (or RW’s shareholders).
 Not in this case the court was not impacted by RW being thinly capitalized … court makes the point that NB knew it
was dealing with a limited liability company
 some countries require minimum capitalization to incorporate, not here …-some industries, Banks, Investment
Dealers, etc, require this, but there is no general minimum asset requirement
o this puts onus on creditors to obtain security, to be more on alert
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(2) Undercapitalized corporations
Iron City Sand & Gravel Div v. West Fork Towing Group (1969)
Facts: P brought action against D CORP & its principal shareholder for the value of 2 of P’s barges which sank due to
the D CORP’s negligence while the bailee of the barges.
HELD: no evidence of negligence & dismissed claim, but also held that had it been necessary to do so, the court would
have accepted the P’s contention that D CORP was merely the alter ego of the principal shareholder. Though
ownership of all or almost all shares in a CORP (by one individual) does not afford sufficient grounds for disregarding
the corporate entity, inadequate capitalization would give the court justification to find the CORP as mere alter
ego. If an undercapitalized CORP is to be attributed a separate legal entity, it would be attributed a status which its
principal never attributed to it!
Note: Ontario Rule 56.01(d) of Rules Civil Procedure holds: The court may (on a motion in a proceeding) make such
order for security for costs as is just where it appears there is good reason to believe that P or applicant has insufficient
assets in Ontario to pay the costs of the D or respondent
Walkowsky v. Carlton (1966)(pg. 138)- thinly capitalized corporation may survive as long as no fraud
 Court is well aware that this is a thinly capitalized capital which potentially could have a lot of exposure
 Majority agrees that as long as the person did all the proper things to incorporate, they should not go so far as to pierce
the corporate veil- the law permits incorporation for the very purpose of avoiding liability, as long as no fraud
 Exception (as we saw in Iron City)when person uses corporation to further his owns purposes rather than
those of the corporation – barring this- Salomon is good law
 Minority- dissents- takes issue with the fact that the corporation is undercapitalized
 It is inequitable that the shareholder should set up such a flimsy organization to escape liability
 This is an abuse of the separate entity and will be ineffectual to avoid liability
 Thinly capitalized results in piercing the corporate veil for Keating J
Fliesher (2001)- contrasting Rockwell
HELD: Corp veil can be pierced if when incorporated, “those in control expressly direct a wrongful thing to be done”.
Analysis
 In this case the company was not held liable for the undertaking but
 if they had been, then the controlling shareholders could have been made personally liable if they knew at time of
getting undertaking that the CORP was too thinly capitalized to cover the amount.
Conclusion- Thinly capitalized corporations- what you must do:
 Can it satisfy all of its liabilities and financial needs- is it actually thinly capitalized
 Look at the purpose- is it a business purpose or is it for alternate personal purpose
 The final answer is that an argument can clearly be made that the veil should be pierced (Minority Walkowsky
and court in Iron City) and STILL an argument can clearly be made that the veil should be upheld in Majority of
Walkowsky
(3) Transactions involving affiliated corporations
Theory is against traditional model (separate entity), look at the companies as a group, where there is a high degree of
managerial synergy and integration. The most common, simple example is wholly-owned subsidiary, but it is not
necessarily the case. The term sub is loosely used to define company that the parent has a significant stake, but
legally often refers to degree of control.
Concept of Control
 Section 2(3)- body corporate is controlled by a person or by two or more bodies corporate if
 (a) person or bodies corporate control more than 50% of shares
 (b) the votes attached to those securities are sufficient to elect a majority of the directors of the body corporate.
 Section 2(5) A body corporate is a subsidiary of another body corporate if
 (a) it is controlled by (i) that other corp, (ii) a subsidiary of corp (iii) two or more corps each of which is
controlled by corp
 (b) it is a subsidiary of a body corporate that is a subsidiary of that other body corporate.

Controls refers to owning at least 50% of voting shares, thus giving a majority to assign directors of the company
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subs often under control, influence, or direction of the parent
the fact that a parent controls a sub doesn’t mean that the court will pierce the veil, it will only be used where
the entity theory does not reflect the social and economic, political realities of the group of companies
excess interference over the sub, unnatural control
Factors considered by court when deciding whether to pierce corporate veil:
 Levels of economic integration, volume of inter-company transactions
 Nature of sub’s contracts
 Financial dependence, such as cash infusions for asset purchase
 Employment structure: by sub or employed by parent and ‘lent’ to sub
 Common group trademarks/identity
DeSalaberry Realities Ltd v. MNR (CB 123) improper use of Corporate Structuring for transactions
Facts: This is an appeal from income tax assessments from 1963-65 pertaining to the profit realized by the appellant
in selling land alleged to be purchased only for shopping centre purposes. Evidence disclosed indicated creation of
multiple CORPs for tax purposes (where each company sells one or a few parcels of land whereas the group sells
many). The 2 families behind the corporate structures claim these are purely investments, while tax authorities saying
that these are really income sources & the multiple CORPs that fact.
Issue: whether the proceeds are income or capital gains?
RATIO: the rule in Salomon cannot be used to refrain the court from passing judgment on the course of conduct of
group of sister & parent companies, where the thin capitalization are the birth of a sham or of a docile instrument (here
for tax purposes);
Held: Though the Subs are doing business (and a separate legal entity), the companies approached are those under
direct influence of Grand Parent companies and thus an instrument in purchasing and selling land. The Subs were not
really capitalized to do deals which they did; rather they were intermittedly funded by the Grand Parent Companies.
Analysis:
 Given the Pyramid structure with general policy and decision making coming from top, the court need not restrict its
scrutiny to one appellant which is only an instrument in the hands of the group.
 Criteria to indicate subsidiary company carrying on the business of the parent come from Smith Stone & Knight:
 Was the profit going to Parent?
 Were the persons appointed to run business appointed by Parent?
 Was the Parent the brain & head of trading venture?
 Did the Parent decide on which ventures to peruse?
 Did the Parent make the profits by its skill & direction?
 Was Parent in Effectual and Constant Control?
 Note: it comes to tax, the courts, for the sake of getting revenue, will find a way to pierce the corp veil and will look
to the entire group within which the co operates
Situations where corporations are being used to circumvent statutory requirements
Corporate veil is more likely to be lifted when attempt is being made to avoid statutory or regulatory duties or where
legislative rationale would be frustrated.
Jodery Estate v. Nova Scotia (1980) SCC: improper use of Corporate Structuring for estate matters
Facts: The issue in this case was whether 12 grandchildren, the beneficiaries under the will of Roy Jodrey were liable
to pay succession duties under the Nova Scotia Succession Duties Act. Prior to his death the deceased had sought to
avoid the impact of the Act by incorporating 3 companies:
 The parent company JBH had issued each of the grandchildren 100 shares (at $1 per share).
 The subsidiary company JCG had issued 100 common shares all of which were beneficially owned by JBH;
 Third company WRI was not related to first two, it issued 2 common shares both of which were owned by the
deceased;
The deceased had transferred to WRI his shares in a Nova Scotia investment company in exchange for a promissory
note for $3.7Mii. He also added a codicil to his will revoking an earlier bequest to his grandchildren & substituted a
bequest JCG including the note for WRI.
HELD: The Grandchildren were beneficially entitled to the deceased’s estate and therefore subject to succession
duties. Here the subsidiary was a mere conduit linking the parent company to the estate.
RATIO: Where the parent & subsidiary are bound together and the subsidiary is under control of the parent and
neither company (sharing the same directors) has engaged in business nor have any creditors, the court must examine
the realities.
DISSENT: The fundamental soundness of the Salomon principle is that a company as a body corporate is in
contemplation of law an entity separate and distinct from shareholders who compose it.
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Mere ownership of shares in a company does not equate to ownership of, or having beneficial interest in, the
assets of the company and the situation is unaffected by the fact that one or more of the shareholders may have
voting control.
Stubart Investment (1984) SCC:
ISSUE: The question before the court was whether a corporate affiliate, established solely for tax planning purposes,
should be ignored on the ground that the new corporate structure served no bona fide purpose.
HELD: Refused to apply the ‘business purpose’ test on the grounds that a taxpayer’s right to organize its affairs is
deeply entrenched in CDN law and implicitly recognized by the Income Tax Act, and the adoption of such a test would
create too much business uncertainty.
Note: Notion of tax avoidance in the Income Tax Act: A transaction is not considered to be an avoidance transaction if
the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes
other than to obtain a tax benefit.
The Deep Rock Doctrine: In many cases the creditors or other security holders of an insolvent COPR (which is being
liquidated or reorganized in receivership or bankruptcy proceedings) instead of attempting to hold the sole or
controlling shareholder personally liable for the subsidiary’s debts, seek merely to have the court deny such
shareholder the right to enforce a claim as a creditor or secured creditor of the insolvent corporation.
 The claim of the controlling shareholder may be subordinated to other claims, including the claims of preferred
shareholders, due to improper management and thin capitalization (Taylor v. Standard Gas)
Situations where Representations (as to unlimited liability) have been made & relied upon
 Section 10(1)- The word or expression "Limited", "Limitée", "Incorporated", "Incorporée", "Corporation" or "Société
or the corresponding abbreviation "Ltd.", "Ltée", "Inc.", "Corp." or "S.A.R.F." shall be part of name of corp
 Rationale: To let 3rd parties know who they are dealing with corp.
 Courts are generally more likely to pierce where representations have been made as to unlimited liability.
 Thus if one were to misrepresent then they should not be allowed to take advantage of the limited liability.
Wolfe v. Moir (1969)
Facts: P suffered injuries while skating on a roller skating rink owned by Chinook Ltd - Moir and his wife were the
company’s shareholders & officers, and Moir also acted as the manger of the skating rink. The Skating rink was
advertised in the name of Moir’s Sportsland and not the CORP. Moir had previously served as a recreation director for
the city and his name was well known in the community.
Held: Moir personally liable for using his name for the rink as opposed to corporate name
Ratio: if a person chooses to advertise & hold himself out without identifying the name of the company with which he is
associated, he runs the risk of being held personally liable.
Analysis
 There was nothing to indicate that the usual corporate formalities were gone through
 for a person to rely successfully upon what is the extraordinary protection from personal liability granter by the
Companies Act, it is incumbent upon him to establish that at least the formalities prescribed by the statute have
been complied with
(5) Tort creditors
 PRINCIPLE: Courts are more likely to pierce the co. veil in relations to non-consensual creditors (tort victims).
 Two step test:
 Corporation can be vicariously liable for the acts of their employees
 directors and officers of the corporations are not employees simply by being in that position
 they not only have to be employees but they have to have been operating in the course of their employment
when the tort occurred
Walkovsky v. Carlton (N.Y.C.A., 1966)
Facts: The plaintiff was severely injured when he was hit by a taxicab owned by a corporation. The corporation (and its
sister corporations) were thinly capitalized: the CORP owns 2 taxicabs and retains only the minimum liability insurance
of $10,000. The D is the sole shareholder of the corporation (and its sister corporations). The P attempts to add the
sister corporations and the shareholder as defendants claiming it is one organization. Plaintiff’s lawyer, instead of
arguing they are so closely connected, is saying there are no companies at all and that defendant is personally liable
(reach through corp and get at person in charge ~ tough case to prove).
Issue: Whether the court will pierce the corporate veil for the sister corporations or for the shareholder?
Held:
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Majority agrees that as long as the person did all the proper things to incorporate, they should not go so far as to pierce
the corporate veil- the law permits incorporation for the very purpose of avoiding liability, as long as no fraud
 Exception (as we saw in Iron City)when person uses corporation to further his owns purposes rather than
those of the corporation – barring this- Salomon is good law
 Minority- dissents- takes issue with the fact that the corporation is undercapitalized
 It is inequitable that the shareholder should set up such a flimsy organization to escape liability
 This is an abuse of the separate entity and will be ineffectual to avoid liability
 Thinly capitalized results in piercing the corporate veil for Keating J
NB: Had P gone after the CORP using connectedness doctrine, he would have been successful. Instead, he went
after the individual and had to prove fraud, which was difficult since D met the statutory sanctions.
Corporate Criminal Liability:
1) Why should corporations be held criminally responsible?
 Starting with the premise “no soul to damn: no body to kick” it was long supposed that mens rea offences could
not be attributed to CORPs and equally the traditional goals of criminal punishment (deterrence, incapacitation,
rehab, retribution) only deterrence made any sense … and even that has been questioned on the grounds that
deterrence can just as effectively be attained via civil and administrative law remedies.
2) Under what circumstances criminal responsibility should be ascribed to corporations, particularly in the case of mens
rea offences?
 Large corporations are real persons and not legal fictions and exert enormous influence over the economic, and
frequently social, welfare of the communities in which they are located.
 CORPs commit real crimes (anti-trust violations, racketeering, drug money laundering, financial frauds and
industrial pollution)- it is argued that civil sanctions are not sufficient and the stigma of a criminal conviction is as
telling for a corporation as it is for an individual accused.
Canadian Dredge & Dock Co. Ltd. v. The Queen (1985) SCC:
Facts: A number of CORPs were charged with conspiracy to defraud a contract under the Criminal Code. The
circumstances were such that during a contract bidding, all bidders agreed that the lowest price be inflated and the
loosing bids would receive payments from the winning bid. In some cases the Senior Officers who orchestrated the
fraud scheme kept for themselves the side payments which under the agreement they were to have paid off to their
CORPs. 4 CORP Ds appealed their convictions on 2 grounds:
 1) Challenging the doctrine that corporations could be convicted for mens rea offences under the identification
theory of corporate criminal liability;
 2) CORPs are not criminally liable for directing mind that was acting:
o In fraud of the CORP
o On their own personal behalf
o Contrary to the instructions of their allowable duties
HELD: (Estey J) Ds not able to sustain a defense since they received benefits & payouts from contracts and were
acting partly for the benefit of the CORPs and thus it cannot be said that the CORPs were defrauded even though
some of the benefits of the illicit scheme were diverted to individuals
 Absolute Liability offences - where mens rea is not statutorily a prerequisite, CORPs & individuals are treated the
same - CORP will be held vicariously liable for acts of the employees;
 Strict Liability - where guilt predicated upon the establishment of the actus reus, subject to the due diligence
defense - CORP & natural persons are in the same position with both cases liability is not vicarious but primary
 it comes back down to the directing mind type of language
 the human actor who committed the crime- the acting mind- this nexus has to be there
 the difficulty with this kind of analysis is that the corporation can be held liable for acts of agents even if the
acts were not authorized
 By issuing company policy against criminal activity, CORP have a defense in strict liability cases only.
 Under the Traditional Criminal Offences… Identification theory: criminal conduct including the state of the mind of
employees & agents of the CORP is attributed to the CORP so long as the conduct of the directing mind is within
his, (the vital organ of the body corporate), authority (similar to tort vicarious liability and principles of agency)
 CORPs have more than 1 directing mind and given the scale of business tasks of directing minds are delegated to
others including regional offices - thus identification doctrine only operates where the Crown demonstrates that the
action taken by the directing mind:
 I. Within the field of operation assigned
 II. Not totally in fraud of the CORP
 III. By design or result partly for the benefit of the company
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Casebook Notes:
 The burden falls upon the Crown to prove that the conduct was not totally in fraud of the corporation and by design
or result for the benefit of the CORP
 Estey J: “Totally in Fraud” is executing a scheme to deprive their respective employer CORP of any or all of its
businesses or benefits
 Bill C-45 replaced the directing mind test with the rule that all those employees, agents, who play an important role
in the organization … deemed to be acting for the corporation and can incur criminal liability on behalf of the
corporation
The Impact of Charter on CORP:
To what extent are corporations as legal persons entitled to Charter protection? When do they have the ability and
standing to invoke the Charter?
 Words such as ‘everyone’ ‘any person’ and ‘anyone’ synonymous while ‘every citizen’ not!
 there are some sections that are clear
 minority language rights- simply through the drafting of the charter- they apply to citizens- corporations may be
persons but they are not citizens
 life, liberty and security of the person- tough to argue from the perspective of the corporation
 rights against arbitrary search and seizure would be a right that could apply equally to individuals and
corporations
Conclusion on Piercing the Corporate Veil
 Courts do not like to pierce the corporate veil
 Fraud situation is a slam dunk
 Tax situation is arguable
 Tort claim- falls under this category
 Thinly capitalized companies are also arguable
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Pre-Incorporation Contracts:
The fact that CDN law does not recognize the existence of a CORP until a certificate of incorporation has been issued
or other prescribed conditions have been met creates significant legal and practical difficulties where a promoter
purports to conclude a contract on behalf of a proposed CORP.
The promoter often wants to avoid personal liability on the contract and mistakenly believe they can secure immunity
by signing the K in a representative capacity. Frequently the promoter has the mistaken impression that the CORP
has already been incorporated or that compliance with statutory incorporation requirements is only a minor
inconsequential formality.
There are 3 distinguishing situations to bear in mind:
1. both parties to the K know that the company has not been incorporated (Kelner);
2. the promoter knows that company has not … but the contracting party does not (Shatski/ Newborne);
3. neither party to the K knows [where promoter mistakenly believes it and contracting party relies upon the
mistaken representation] (Black);
NOTE: additional consideration is whether the company after incorporating purports to ratify or adopt pre-incorporation
contracts … or does not ratify or adopt the pre-INC Ks.
Statutory Reform
 Due to uncertainty of the Common Law, as seen in cases bellow, there was statutory reform
 Section 14- deals w/ personal liability, allowing the court to allocate / proportion risk to agents unless they
expressly exclude themselves via K. (where risk gets transferred to 3 rd parties)}
 POLICY: the 3rd party cannot mitigate the risk while the agent can via K or through the CORP shell-The Statute
thus declaring those who are in best position to manage the risk should bear the risk (i.e. agents & CORP)
 Section 14 (1)- Personal Liability- a person who enters into, or purports to enter into, a written contract in the
name of or on behalf of a corporation before it comes into existence is personally bound by the contract and is
entitled to its benefits.
 Note: this section is predicated on the fact that the corporation will actually come into existence
 What happens when a corporation never gets incorporated or K is oral?

Waitzer- presumably the common law applies
 Also if an oral K CL applies, though OBCA does take oral K into account!!
 Section 14(2)- Pre-Incorporation Contracts- a corp may within a reasonable time after it comes into existence,
adopt a written contract made before it came into existence on its behalf, and on such adoption
 (a) the corporation is bound by the contract and is entitled to the befits as if corp was in existence at time of K
 (b) the promoter who entered into the pre-inc K ceases to be bound or be entitled to benefits under K
 Section 14(3- Application to Court- whether or not written K made before the coming into existence of corp is
adopted by the corp, a party to a K may apply for a court order respecting the nature, obligations and liability under
the K- the court may make any order it deems fit
 Note: this is an exception to 14(3)- the court may make order making promoter liable
 this is a residual power of the court to apportion liability
 Section 14(4)- Exemption from Personal Liability- a person who purported to act in the name or on behalf of a
corp before it came into existence can contract out of liability through exculpatory clause in K
Conclusion
 Thus under CBCA, promoters of Pre-INC Ks will incur personal liability unless they specifically K out or the CORP
later adopts the K and relives them personally
 By making clear in writing that the CORP not yet in existence, promoter has created a defence against liability
Common Law Position
Kelner v. Baxter (1866, UK) Common law Pre-INC K (before s.14 of CBCA enacted) where both parties know
company not exist
Facts: K entered contract with B and 2 other Ds for the purchase by a yet un-INC company of stock and premises
owned by K. K proceeded to sell by written contract, as an individual, to the proposed company, which was acted for
by a number of Ds (the promoters). The company was incorporated and ratified the contract but the company later
failed. The plaintiff (K) sought to enforce the contract against the agents (B) personally, who signed on behalf of the
corporation.
Issue: Can a corp later assume liability for contracts made on behalf of the corporation before it came into existence?
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Held: The agent is personally liable (NOW Under sec. 14(2) this would only be true if the firm does not ratify the
contract.) Had the company existed at the time of the contract, the persons who had signed would have signed as
agents. But since there was no company at the time, the whole agreement would be inoperative unless it was binding
on the Ds personally.
Ratio: where a contract is signed by one who professes to be signing as “agent,” but who has no principal existing at
the time, and the contract would be altogether inoperative unless binding upon the person who signed it, he is
bound thereby: and a stranger (CORP) cannot by a subsequent ratification relieve him from that responsibility.
Analysis:
 Erle C.J.: From principles of contract: doctrine of privity- When the Company came into existence it was a totally
new creature, having rights & obligations from that time, but no rights or obligations by reasons of anything which
might have been done before.
 Willes J.: The Company could only become liable upon a new contract, as it would require the assent of the
plaintiff to discharge the defendant. Ratification can only be by a person ascertained at the time of the act done by
a person in existence either actually or in contemplation of law.
 We must assume that the parties contemplated that the persons signing would be personally liable
Waitzer  arguably not a very fair result, 3rd party believed they were dealing with a corporation
Casebook Notes:
 It was established at Common Law that the ‘non-ratification’ rule cannot be avoided by recourse to such devices
as ‘adopting’ the contract. What is required at common law is a fresh contract, a requirement which in the
absence of new written document presents considerable difficulties… the later cases indicate contemporary CDN
courts’ willingness to relax the strict common law requirements.
 Since the decision in Kelner was based on the assumed intention of the parties, it is of course open to promoter
to show he had expressly excluded his personal liability. In the 1959 CDN case of Dairy Supplies v. Fuchs
parties making purchases made it clear to the vendor that he should look to the company and not them for
payment. The company did not pay and court HELD: claims against the promoters personally unsuccessful.
Black v. Smallwood (1996, Australia) – both parties mistakenly believed the firm was incorporated
Facts: 2 promoters contracted on behalf of a company that they honestly believed existed at the time of contract. The
plaintiffs seek to enforce the contract against the promoters personally.
Issue: does the fact that the contractors didn’t intend to enter a contract on behalf of a non-existent company alter their
personal liability?
Held: The 2 agents were not held liable since the K was a nullity. The fundamental question in every case must be
what the parties intended or fairly to be understood to have intended. There is no fraud because the agents honestly
believed there was a corporation. There is no reliance because the other party didn’t rely on the agents as they
themselves believed the corporation existed.
Ratio: Kelner did not set out a rule that owners would always be personally liable. Rather it depends on the intentions
of the parties & the terms of the K. Where the parties have no intention of K personally, (here based on mistaken
fact), they are not liable.
Analysis:
 INTENTIONS were important here…the court would use the intentions “test” to see if the owners were liable or not
liable.- We can look at underlying equities…In this case we don’t have issues of unjust enrichment.
 The only possible remedy, based on the facts, was for the P to bring forth a cause of action in the nature of a
breach of warranty (facts were that there was an implied warranty on part of Ds who were directors of an existing
company with power to make contracts)
Note: The Statute of Frauds restriction in s.14 (1) of the CBCA should be noted. Because of it the pre-CBCA law may
survive for oral pre-incorporation agreements, unless s.14 is found by judges to be an exclusive statement of the law.

NB EXAM: if faced with Kelner fact patter, DN necessarily mean ratio in Kelner is determinative i.e., may still want
to look at intention of the parties!!!
Newborne v. Sensolid (1953 UK) Ability of 2nd Party to repudiate K on grounds CORP not exist at time of K
Facts: N entered into a contract to sell ham to S. S was unaware of the fact that the corporation had not yet been
incorporated - however, when the price of ham fell, S tried to get out of the contract by claiming that the corporation had not
been in existence when the contract was made.
Issue: Can the 2nd party (not the promoter) to the K repudiate it (for ulterior purposes) on grounds CORP was not in
existence?
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Held: since contract had been made with a corporation that was not yet in existence it could not be upheld - the contract
was a total nullity
Implications   You can rely on a corporation’s non-existence at the time of the contract to avoid contractual
obligations. However, if a contract refers to a “company to be incorporated” there may be a different result.
 Whether promoter liability will be presumed when both parties know that the firm has not been incorporated is a
question of judicial gap-filling – promoter was found personally liable in Kelner
POLICY TENSION – We want to encourage the formation of corporations, but we do not want promoters to be able to bind
non-existent corporations since they have no fiduciary obligations at that point (i.e. no accountability). Solutions: CBCA s.
14 (ratification by corporation) or include a clause in the pre-incorporation contracts denying all personal liability.
Wickberg v. Shatsky (1969) B.C. promoter knows that the corp does not exist but the third parties do not know
Facts: A Corporation existed and with the addition of new directors, investment of capital and business expansion, it was
decided to incorporate a new company under a different name, which it did not due, but carried on business in the new
name (stationary was prepared and the sign over the new premises bore the new name). The P was hired as a new
manager and the employment contract was signed under the new name. The business was not successful and P gave
notice of terminating services and brings forth action (for non-performance of K terms) against the 2 new directors.
ISSUE: 1) Can the parties to a K be personally liable as agents of a non-existing principal? 2) Can such parties be liable for
breach of warranty of authority to sign K under the name of non-existing principle? 3) The D along with his brother are
liable because at the time of the K they were operating a partnership
Held:
1) The Ds are not liable for K on basis of being agents based on principle in Black.
2) However, Ds are liable for breach of warranty (and if proven liable for fraud). Nominal damages awarded only
because the D was not held personally liable on the K and the P’s loss is more result of business failure than the
breach of warranty.
3) Court is silent on this ground. – LOOK at Section 3 of the Partnership Act- rebuttable presumption when no
common intention is shown
RATIO: Where parties did not have the same view as to the facts when K entered into, court still looks to the intentions of
the parties to see whether the promoter intended to be personally liable. If not then K is nullity.
Note:
 Interesting line of argument by P to say that in the alternative if D not personally liable since Pre-INC K a nullity based on
lack of intentions…. then one still push to hold D liable as in they were a Partnership & nevertheless still liable for K >>
should be explored as alternative line of attack.
 In Delta Construction (1979) court followed the reasoning in Shatsky by not finding D personally liable but willing to
look at breach of warranty. Here the Court noted that the project for which the P extended Credit had foundered & if P
is to be successful in this suit, it would be in a better position than it would have been if the company had been in
existence as the parties believed … thus the non-existence of Co should not produce a windfall for the P.
 The formalisms: i.e. the words "on behalf of" after a signature signifies that the signatory is an agent; "per/" signifies no
personal liability as the signatory is a company.
Waitzer  fuzzy stuff- hard to see where a case would go and arguably an unfair result given the knowledge of the
promoters
NOTE: OBCA - Contract prior to corporate existence
 Section 21(1) A person who enters into an oral or written contract in the name of or on behalf of a corporation
before it comes into existence is personally bound by the contract and is entitled to the benefits thereof.
 Section 21(2)- 21(4) of the OBCA- same as 14(2)- 14(4) of the CBCA
Westcom Radio Group Ltd v. MacIsaac (1989) Ont. Div. Ct.: Personal Liability for mistake in Pre-INC K –
application of Common Law in conflict with OBCA / CBCA intent
Facts: D was sued on an advertising K that she had signed on behalf of her employer… but unknown to both D & P
the business had never been incorporated.
HELD: No liability for the promoter b/c parties intended to K only with the corporation. Promoter not held liable under
OBCA equivalent of s.14 (1) when both promoter and 3P believed corporation to be in existence and thought contract
was with it.
Ratio: starting point must be to determine whether the P intended to K with the non-existent company exclusively. If
so then the purported K is a nullity.
Waitzer  shifted risk back to 3rd party, defeating the s.14 purpose & inconsistent with the statutory intent
Note: Here we see the court brining back an intentions analysis …Looking at the state of mind of the parties
 Court said this case resembles Black and the K is a nullity.
 We see here that intent of parties renders statute meaningless when trying to determine promoter’s liab.
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


Maurice J. states legis didn’t use right words in the provisions to reflect how they should be interpreted, so he
reverts to common law
CRITICISIM OF DECISION … Professor Ziegel argues that it is abundantly clear that the legislature used the word
contract in its colloquial style and the they fully appreciated that there was no binding contract with the corporation
… thus the result of Westcom ruling to make nonsense of the whole subsection and to deprive it of all meaning…
which is to hold the individual liable
In Szecket v. Huang (1998) the Ontario Court of appeal sided with Professor Ziegel. Although the court declined
to overrule Westcom, it characterized the ruling as unnecessarily complex and that decision represented the
problems arising from the common law of pre-INC Ks which the legislature intended to remedy with s.21 of OBCA
& s.14(1) of CBCA … i.e. overrule common law.
Landmark Inns of Canada v. Horeak (1982) Sask. Q.B: True application of s.14 of CBCA
Facts: Promoters intentionally breached the K. 4 individuals who decide set up an Optical/Contact Lens business and
before co. incorp’d, they entered into agreement to lease space from Landmark. The in the agreement was shown as
South Albert Co Ltd, and H signs as chair of the co. Landlord renovates to meet requirements of promoters and their
co to be formed. The 4 promoters decide they’d rather locate in diff shopping centre, and they advise Landmark first
in writing, and then verbally that they don’t intend proceed with lease. Landmark gets new tenant but only to rent
premises 6 months later than original lease. Of note, when the CORP came into existence, it adopted the contract
ISSUE: Can P bring forth a cause of action against the promoters personally? Does the adoption of the K by the CORP
release the promoters of liability?
HELD: The K was repudiated by the promoter before the CORP came into existence, and thus the subsequent
adoption is immaterial given that there was no K remaining (otherwise promoter would have ceased to be personally
liable s.14(2)(b)).
Ratio: s.14 is quite clear… it applies when the K is signed on behalf of the INC by an agent and since there was no
express disclaimer in the lease, as required by s.14(4) the promoter was held personally liable
NOTE in this case the court does not deal with the parties intentions since s.14(1) replaces the common law principle
which began the analysis of pre-INC Ks with the intentions of the parties. Under the statutory regime, all written
contracts are subject to s. 14 of CBCA & equivalent provincial laws (s.21 OBCA) … where the parties’ intentions are no
longer relevant.
Creation of a Corporation
 In terms of incorporation, provinces and feds have co-existing power to govern corporate law.
 Under BNA in s. 92 provs have power to govern corps ltd to provincial business…But under residual power in s.
91, courts read in fed power to govern trans-provincially operating businesses.
 If incorporated under CBCA, s. 15(2), company have right to carry on business in CDA.
 A provincial company can only operate in the province they incorporated in, but can also operate outside of
province if the other jurisdiction allows it  this done thru registry
 Choice of CBCA or a provincial statute often relates to the lawyer’s preference.
 If u expect to carry on business in several provinces, then fed incorporation is better.
 In terms of rights and obliges associated w/ Corporate law, they’re governed by their incorporating statute:
 If a co. incorp’d under the OBCA but operates in BC and Alta as well as Ontario, when facing allegations of breach
of fiduciary duty, OBCA provisions will be operative…
 BUT, if that company has plants or offices in BC or Alta, then they are subject to BC and ALTA legislation
dealing with environmental law, or employment standards, etc
 Contrast this to the jurisdictional reach of Securities Laws:
 Under security laws, a provincial securities commission can take jurisdiction if residents of a province are
significantly affected even if the company doesn’t have offices or doesn’t operate in that province…if it’s
investors are residents of Ont, then Ont securities commission can take jurisdiction.
 E.g. Cdn investors in US co’s can be subject to, for e.g., New York securities law.
Re Place of Incorporation:
 Aside from the choice of federal or provincial registrations, companies essentially have a choice of 13 laws since
none of the Corporations Acts require the incorporations to be resident in the province or territory of incorporation
(some of the Acts impose CDN nationality or residency requirements for directors … CBCA s.105(3) or OBCA
s.118(3))
 If the CORP see an advantage in doing so, they may even incorporate offshore (choice usually dictated by tax
reasons) since the normal conflict of laws rule is that the validity of the incorporation, the status of the corporation
and its general personal law will be governed by the laws of its incorporation.
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

This rule is served with the caution that certain jurisdictions will not apply the local laws of incorporation where
some other set of rules have a more significant relationship to the occurrence and the parties.
Shopping for favourable corporation laws has never been a prominent feature in CDA nor have the provinces &
federal government actively competed for incorporation… with the CDN tradition being the opposite of the US
“Delaware Phenomenon” … with many arguing that the provincial and federal administrators are more interested in
promoting greater uniformity than widening the gap between them … thus the practice is for CORPS to INC in
provinces where they are to carryout majority of their business (if no significant extra-provincial operations
envisaged) otherwise to INC under the CBCA
Re Extra-Provincial Licensing & Filing Requirements:
 Under the Ontario Extra-Provincial Corporations Act (EPCA), CROPS INC in other CDN provinces or under the
CBCA do not require to obtain a license under the Act to carry on business in Ontario
 However, CORPS INC outside CDN jurisdiction are subject to the full force of the provincial requirements
applicable to extra-provincial corporations.
 If extra-provincial licensing is required:
 It is an offence to carry on business without a license (though prosecutions are rare)
 Such CORPs usually are not capable to maintain action or other proceedings before a Provincial court in
respect of a contract made by it (however the defect can be cured retroactively by acquiring a license
 In common with domestic corporations, extra-provincial CORPs must usually make annual filings of pertinent
information
 “Carrying on business” as a definition has bee subject to much litigation. Section 1(2) of the EPCA defines it as
a business that has “resident agent, representative, warehouse, office or place where it carries on its business in
Ontario”… but s.1(3) hold such acts as placing orders for or buys or sells goods, ware or merchandise, and offers
to sell by use of travellers or via advertising as not carrying on business.
Re Continuance Under the Law of Another Jurisdiction:
 An important feature of the CBCA & its provincial counterparts is the ability of CORPs to continue its corporate
existence under the laws of another jurisdiction (CBCA s.187-188)
 A CORP may wish to do so for a number of reasons (tax advantages, has shifted business operations to new
jurisdiction, desire to amalgamate with a CORP in another jurisdiction or because the corporate climate is more
hospitable in 2nd jurisdiction)
2 step procedure for continuance:
 (1)Emigrating CORP must obtain the consent of the authorities in the jurisdiction of its incorporation (export step)
 (2) it must meet the requirements of the federal or provincial Act under which it seeks to be continued (import step)
In the case of Mergers & Amalgamations (within the same jurisdiction):
 Continuance under the law of another jurisdiction does not affect the migrating corporation’s prior obligations,
property rights and involvement in all prior civil, criminal and administrative proceedings pending before the
continuance (CBCA s.187(7))
Mechanics of Incorporation under CBCA:
 Section 5- individuals have to be over 18 and of sound mind and not bankrupt can incorporate;
Requirement for Articles of Incorporation to be filed
 set out the fundamental characteristics of a corporation in accordance with the Act
 want to keep these as brief as possible (to allow for growth and to avoid having them become to cumbersome
 Section 6- Articles of Incorporation- basic requirements:
 The name of CORP
 The province where CORP is to be registered
 The capital- the classes of shares that are to be issued- number- minimum and maximum:
 If there are 2 or more classes of share, the rights, privileges, restrictions & conditions attaching to each
class of shares, and
 if a class of shares may be issued in series, the authority given to the directors to fix the number of shares
in, and to determine the designation of, and the rights, privileges, restrictions and conditions attaching to,
the shares of each series;
 if the issue, transfer or ownership of shares of the corporation is to be restricted, a statement to that effect and
a statement as to the nature of such restrictions
 the number of directors, or subject to s.107(a), the minimum and maximum # of directors of the CORP
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Section 6(2) The articles may set out any provisions permitted by this Act or by law to be set out in the by-laws of
the corporation
Section 6(3) Subject to subsection (4), if the articles or a unanimous shareholder agreement require a greater
number of votes of directors or shareholders than that required by this Act to effect any action, the provisions of the
articles or of the unanimous shareholder agreement prevail;
Section 6(4) The articles may not require a greater number of votes of shareholders to remove a director than the
number required by section 109;
NEXT STEP- In order to incorporate, you deliver those articles of incorporations to the Director of Incorporations
Branch (a filing branch)
Section 8- the Director of Inc Branch will issue a receipt of articles of incorporation subject to s.262 – they
basically stamp the articles
 Note the Director does have the authority under s. 19 & 106 to refuse to issue certificate if the CORP came
into existence would not be in compliance with the CBCA
Section 9- the corporation comes into an existence when the certificate if incorporation is issued- that is
basically the stamp on the articles that is placed by the Director of the Incorporation Branch
Section 10 – name of corporation (to appear in English, French or both) The word or expression "Limited",
"Limitée", "Incorporated", shall be part of the name
Section 11 - The Director may, on request, reserve for 90 days a name for an intended corporation or for a
corporation about to change its name
Section 12 – Prohibited names – a corp shall not be incorporated or continued as a corp under this Act with a
name that is as prescribed prohibited or deceptively misdescriptive or that is being reserved by another CORP
Section 13 - Certificate of amendment- When a corporation has had its name revoked and a name assigned to
it under subsection 12(5), the Director shall issue a certificate of amendment showing the new name of the
corporation and shall give notice of the change of name as soon as practicable in a publication generally available
to the public
Section 173 (1) Amendments of Articles Subject to sections 176 and 177, the articles of a corporation may by
special resolution be amended to:
 (a) change its name; (b) change province
 (c) add, change or remove any restriction on the business or businesses that the corporation may carry on;
 (d) and (e) change any maximum number of shares to be issue and create new classes of shares
 (f) reduce or increase its stated capital, if its stated capital is set out in the articles;
 (g) change designation of shares- modify rights and privileges of shares
 (h) and (i) changes to shares of one class
 (j) division of shares into classes
 (k) changing the rights, privileges, restrictions and conditions attached to unissued shares of any series;
 (l) revoke, diminish or enlarge any authority conferred under paragraphs (j) and (k);
 (m) increase or decrease the number of directors
 (n) add, change or remove restrictions on the issue, transfer or ownership of shares; or
 (o) add, change or remove any other provision that is permitted by this Act to be set out in the articles.
Section 173 (2) Termination- The directors of a corp may, if authorized by the shareholders in the special
resolution effecting an amendment under this section, revoke the resolution before it is acted on without further
approval of the shareholders
Section 173(3) Amendment of number name Notwithstanding subsection (1), where a corporation has a
designating number as a name, the directors may amend its articles to change that name to a verbal name
Section 49(8) – Restrictions on Shares - Any restrictions on (share transfers, charges in favour of CORP,
Unanimous shareholder agreements) ownership of share clearly must also be indicated on the shares themselves
Section 28- Pre-emptive Rights , if the articles so provide, before company can issue additional shares to
anyone else, existing share owners have right to purchase to those shares… at issue is the dilution of the shares &
control in the company
Section 32- the ability of restrict transfer in order to restrict level of foreign shares … e.g. if you buy more than
allowed as a foreigners, the excess shares are automatically deemed held by a trustee or they become non-voting
shares
 Note: certain areas of business and pieces of legislation restrict the level of foreign ownership to 10%
Restrictions on the manner in which the business is supposed to be carried out
 S.6(3) – Special resolution requirements- can include in the Articles matters in respect of which a special
majority (2/3) is required;- you can make the special resolution requirement higher
 Section 45 provisions enabling company to impose a lien on shares for shareholders who owes $$ to company
 Section 114(1)- Meeting of Directors - Unless the articles or by-laws otherwise provide, the directors may meet
at any place and on such notice as the by-laws require.
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Section 114(2) Quorum Subject to the articles or by-laws, a majority of the number of directors or minimum
number of directors required by the articles constitutes a quorum at any meeting of directors, and, notwithstanding
any vacancy among the directors, a quorum of directors may exercise all the powers of the directors.
Section 106- notice of initial directors to be included at time of submitting Articles of INC for Certification
o Section 105 (3) of the CBCA (qualifications of Director, residency requirement)- at least 25% of the directors
have to be Canadian residents
o This is to contrast with the OBCA where it is a majority of the Directors have to be Canadian residents
Bylaws- typically tend to deal with housekeeping matters- examples of rules that you can override in bylaws
 Section 114 - Meeting of Directors
 Section 132- Location of shareholders meetings
 Section 139 –General rule of Quorum
 Section 141 – Manner of voting at shareholder meetings
Other things that can be included in the bylaws
 Indemnification
 Designation and duties of officers- if you want to have a president, VP, treasurer- describe their duties
 Procedures for paying out dividends
 Provisions for authorized payment of officers
When do bylaws become effective?
 Bylaws become effective when they are passed by the Directors at the initial meeting
 However, this bylaw remains effective only if ratified at the next meeting by shareholders (section 103)
Director’s resolution
 Terminating Officer
 Essentially all of the important decisions made by the directors
Shareholder Agreement
 Basically customizes the way the corporation is governed (in a typically closely held CORP)
 At the initial the first shareholder meeting:
 Compensation & indemnification of directors
 Designation & duties of Officers
 Procedures for payments of dividends
 When the financial yr begins
 Provisions for authorized signing officers
 Directors resolve such things as banking arrangements etc
Powers & Responsibilities of the Corporation
Scope of the Corporate Contract:
In the cases that have followed in this context the question which arises is how constituencies other than mangers and
investors interact with the corporation. Should private choices by managers & investors (on how to initially structure
the corporation) prevail over the interests of other parties that come into important contact with the corporation? Thus
the analysis will look at how parties entering into explicit Ks with the CORPs are affected by the internal corporate
rules.
Note on Ultra Vires Doctrine:
 Modern corporate law structure assumes CORP (unless their powers are expressly restricted) has same powers
as a natural person.
 Section15- Capacity of a Corporation- a corporation has the capacity and subject to this Act the rights and
powers & privileges of a natural person
 Section 16- Powers of a Corporation- it is not necessary for a by-law to be passed in order to confer any
particular power on the CORP or its directors.
 16(2) a CORP shall not carry on any business or exercise any power that is restricted by its articles from
carrying on or exercising … nor shall CORP exercise any of its powers in a manner contrary to its articles
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16(3) No act of a corporation, including any transfer of property to or by a CORP is invalid by reason only that
the act or transfer is contrary to its articles or this Act!!
Conclusion: corporation acting outside of its jurisdiction is liable, but will not be held liable if the Act is outside of
its jurisdiction but is a specific right of a by-law
Agency Doctrines and the Corporation:
 Since a CORP is only an artificial entity, it must act through natural persons. A natural person is liable for the acts
of an agent if the agent had actual, usual, or apparent or ostensible authority to commit the acts from the principal
 “usual” authority means  authority ascribed to the agent by common or trade understanding by virtue of the a
particular office held by him
 “Apparent or ostensible” authority  authority with which the agent had been clothed as a result of the
principal’s express or implied representations. Such representations may be implied from the principal’s conduct
or acquiescence as well as from his spoken or written words.
3 basic Agency Rules are complicated by a number of factors:
 (1) many corporations have complex organizations (there are many agents and many principals) and it may not be
easy to determine which superior manager / officer in the chain of command is entitled to make representations
with respect to the apparent authority of the inferior agent;
 (2) Courts superimposed special corporate rules on the normal agency rules:
 The most important of these was the constructive notice rule that outsiders are deemed to be familiar with the
contents of those of the CORP’s constitutional and related documents that are filed in a public office.
 Consequently if these documents impose restrictions on agent’s authority the outsiders will be bound even
though the agent was acting within his usual authority or was clothed with apparent authority. The outsiders
will not be allowed to plead ignorance of the restrictions.
 (3) English courts introduced an important qualification to the constructive notice rule referred to as “indoor
management” rule:
 Confining constructive notice rule to actual restrictions on corporate agent’s authority…
 INDOOR MANAGEMENT RULE: Outsiders only need to know the restrictions but not required to satisfy
themselves that the internal regulations of the corporation had actually been complied with!
 In CBCA this rule is found under Section 17  No person is affected by or is deemed to have notice or
knowledge of the contents of a document concerning a corporation by reason only that the document has been
filed by the Director or is available for inspection at an office of the corporation
 POLICY: The courts sought to balance the corporation’s interests not to have its assets dissipated by
unauthorized acts of its agents with the interest of outsiders to be able to conduct business with the CORP’s
agents without undue restrictions.
Cases where 3rd party was unsuccessful in enforcing the representation include:
 Cases where the 3rd party sought to enforce a K on a person who was not in the position which the 3 rd party knew
normally be not authorized & thus the reliance was not based on representation
 In such cases if the 3rd party wants to use the Articles (which allow for delegation of power) as evidence of their
reliance
 Court has HELD: the 3rd party must first establish that:
 (1) they knew of the contents of the Articles and
 (2) the conduct of the CORP’s board in light of that knowledge of the Articles, would be understood by a
reasonable person as a representation that the agent had authority;
Freeman & Lockyer v. Buckhurst Park (1964, UK)
Facts: Partnership formed to purchase property. One partner entered into contract on behalf of the business with 3 rd
party. The other partners denied that he was authorized expressly or impliedly to enter into contracts on behalf of the
business. However, based on evidence, it was found that with the knowledge of the board, Kapoor (K) acted in a
manner consistent with a managing director (but without the express authority).
Issue: Where directors are not appointed but representation by one who has power to appoint has been made, can
such agent bind his principle?
Held: Kappor did not have express authority, nor did K have actual implied authority bc did not hold office which
carried with it authority to enter such a contract. However, did have ostensible authority – since he had acted
throughout as the managing director to the knowledge of the board of directors.
Rules:
1. If the agent has actual authority (legal relationship between principal and agent) he can bind the principal: agent
has either explicit or implicit authority from his principal and enters contracts within the scope of his authority.
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2. If the agent has apparent authority (legal relationship between principal and 3rd party via the agent who is actually
a stranger to the relationship… in law the making of such representation is itself an act of management of
company’s business … prima facie falling under the actual authority of the board that allowed for the agent to make
such representations) he can bind the principal;
4 Conditions that must be fulfilled for 3rd party to enforce against a company K entered into with Agent:
i. Representation: the agent represented (irrelevant whether agent has actual authority) that he had authority to enter
into (bind) a contract for the company. (Agents are now presumed to have so represented themselves [which
operates as an Estoppel for the 3rd party that relies upon the representation] when they enter agreements with 3rd
parties)—Yonge v. Toynbee [UK, 1910].
ii. Agent had Actual or Implied Authority to manage the business of the company either generally or in respect of
those matters to which the contract relates
iii. Reliance: the contractor relied upon the representations and entered the contract.
 Reliance constitutes a belief you are binding the principal through the agent and not the agent personally.
 Reasonable Expectation: (NEW, not from Freeman), “what is the reasonable expectation of the 3rd party
concerning the agent’s authority. IE. the gas attendant is an agent of the principle and should reasonably be
given the money for the gas, but cannot enter into contracts on behalf of Esso, this is beyond reasonable
expectations.
iv. Articles of Incorporation: Under the articles of incorporation the company was not deprived of the ability to enter
into a contract of that type or to delegate authority to enter into a contract of that kind by its agent.
NOTE: The court in Freeman took noted to the following 3 rulings:
 In British Thomson-Houston Co … where a guarantee was executed by a single director, it was contented that
the provisions in the articles required guarantees to be executed by 2 directors which deprived the company of the
capacity to delegate to a single director authority (condition iv). HELD: other provisions in the articles empowered
the board to delegate the power of executing guarantees to one of their members… Thus this defence failed.
 In Mahony v. East Holyford Mining … no board of directors or secretary had in fact been appointed and it was
the conduct of those who, under the constitution of the company were entitled to appoint them which was relied
upon as a representation that certain persons were directors and secretary. HELD: Since they had actual authority
to appoint these officers it was reasonable to rely on their authority to make representations.
 In Biggerstaff … Ratio: by permitting a director to manage affairs, the Board had represented that he had the
authority to enter into Ks.
 Section18 - lists 6 grounds a corporation can’t use as a defence against being bound by an agent’s actions unless
the individual had or ought to have had knowledge to the contrary, specifically,
 (a) the articles, by-laws and any unanimous shareholder agreement have not been complied with;
 (b) the persons named in the most recent notice sent to the Director under section 106 or 113 are not the
directors of the corporation;
 (c) the place named in the most recent notice sent to the Director under section 19 is not the registered office
of the corporation;
 (d) a person held out by a corporation as a director, an officer or an agent of the corporation has not
been duly appointed or has no authority to exercise the powers and perform the duties that are
customary in the business of the corporation or usual for a director, officer or agent;
 (e) a document issued by any director, officer or agent of a corporation with actual or usual authority to issue
the document is not valid or not genuine; or
 (f) a sale, lease or exchange of property referred to in subsection 189(3) was not authorized.
 S.18(d) of the CBCA states that a corporation cannot use as a defence that a person held out by the
corporation as a director, officer or agent has no authority… EXCEPT where the person has or ought to have
by virtue of his position with or relationship to the corporation knowledge to the contrary.
 Section 18(2)- Exception- Subsection (1) does not apply in respect of a person who has, or ought to have,
knowledge of a situation described in that subsection by virtue of their relationship to the corporation.
Sherwood Design Services Inc. (1998) OCA:
Facts: Appeal by the plaintiffs from a decision denying their claim for breach of contract. The individual defendants
signed an agreement in trust for a corporation to be incorporated. The agreement was for purchase of assets of one of
the plaintiff companies. The price was $300,000. The individual defendants also signed a promissory note for $45,000
payable on demand in case the transaction did not close. The note did not refer to a company to be incorporated. After
the agreement was entered into, the defendant numbered company was incorporated. That company was identified by
the purchasers' solicitor, in a letter sent shortly before closing, as the corporation that would complete the asset
purchase. The transaction did not close.
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ISSUE: The purchasers argued that when the letter was sent, the necessary documents had not yet been completed to
give the personal defendants actual ownership of the corporate defendant. In the absence of formal evidence of
ownership, the purchasers could not be said to have had control of the company when the letter was sent, so there
was no intention on the part of the individual defendants that a company they controlled would complete the
agreement.
At Trial Level:
Judge found that the corporate defendant was not bound by the individual defendants' agreement to purchase the
assets and so held that there was no corporate liability for breach of contract. The individual defendants were held
personally responsible for the promissory note.
HELD:
Appeal allowed; judgment for plaintiffs against the corporate defendant for breach of contract. The defendants'
argument was more sophistry than analysis. The letter signified the company's intention to be bound by and
accordingly to adopt, the contract.
RATIO: There were no statutory requirements and no principled basis for imposing the necessity of formal
documentation to extract such an intention. The letter was sent by someone with the authority to send it. It was
irrelevant that the company at the time had not yet been transferred to the individual purchasers.
Dissent-the company had never adopted the transaction- the drafts were unsigned- the fact the documents were not
signed should have been enough to put the lawyers on notice that the transaction was not complete
Waitzer This case could have gone either way. Part of the reason why the court might lean to enforce thisprofessional ethics… It is important to be able to rely on lawyer’s representations and undertakings on behalf of the
client those essentially become personal undertakings…If it had not been a lawyer who sent out the draft documents it
is likely that the case would have been decided differently
Capitalization of the Corporation
How a corporation is financed (two choices):
 Equity … shares of the corporation
 Shareholders = part owner of the business (not necessarily managing it)
 Advantages … no repayment obligations in short run & no interest payments,
 Disadvantages … you give up the value & profit making stake in the company
 Debt … shareholder loan/ bank financing/ public offering of notes (promissory notes), bonds …
 advantages are tax deductible (offset the interest against revenues) & limited share of profit if business doing
well… you do not dilute the firm by issuing additional shares
 disadvantages aside from paying interest … positive & negative covenants, financial ratios (debt to equity ratio)
Shares
 Share represents an ownership interest (all the bundle of rights) in a company; it is not an interest in the intangible
aspects of the Company, but rather a set of intangible rights the owner has in relation to the CORP.
 Share certificate is evidence of the ownership, possession not necessary to establish yourself as SH
 The kind of rights depends on the particular share as Section 6 notes that the articles must state all the different
classes of shares of the corporation (up to the directors and officers in determining the kind and quantity of shares
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Section 24(1)- Shares- Shares of a corp shall be in registered form and shall be without nominal or par value.
 Par value is the price at which directors intended to provide the shares
 This section eradicated the concept of par value
 The reason behind this is that it became confusing- non-sophisticated investors believed the par value
attached to the share was actually the value when in fact that value was nominal and the share value is
dictated by the market
Section 24(3)- Rights Attached to Shares- where a corporation has only one class of shares, the rights of holders
are equal in all respect and include rights
 (a) to vote at any meeting of shareholders of the corporation;
 (b) to receive any dividend declared by the corporation; and
 (c) to receive the remaining property of the corporation on dissolution.
Section 24(4)- Rights to Classes of Shares- The articles may provide for more than one class of shares and, if
they so provide,
 (a) the rights, privileges, restrictions and conditions on shares of each class shall be set out therein; and
 (b) each right listed in (3) shall be attached to at least one class of shares (not required to be attach all to one
class)
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Key Features of Shares
(1) Dividend Rights  rights to receive the profits earned by the Corporation; they are discretionary in that they are
declared by the BOD; dividends can be cash per share (i.e for every stock you own, you will get $0.05 per share)
or they can be declared as stock (for every share you own you can get 0.25 of a share).
 Section 42: solvency test:- A corp shall not pay a dividend if there are reasonable grounds for believing that:
(a) The corporation is or would become insolvent after paying out the dividend
(b) Liquidating its assets would not satisfy its liabilities
 Dividend rights have to be declared by directors (Section 155(3)(d))- except where there is a unanimous
shareholder agreement where you pre-empt the director’s powers.
(2) Voting Rights  relates to the right to voice your opinion and to have a voice in decision about the company and
the business; key voting right is the right to elect Board. Often, preferred shares do not have voting rights.
(3) Rights SH have on Dissolution of Corp  to share in assets of the corp upon dissolution-- this right only comes
into effect upon insolvency.
Share Certificates: shareholders may have the right to share certificates- but not many get them because the
corporation is required to keep a Securities Registrar
 Section 49(1) right to security certificate proving the ownerships or non-transferable written acknowledgment of
their right to obtain such a security certificate from a corp in respect of the securities of that corp held by them
o 49(13) the certificate has to be legibly stating all the restrictions & rights attached to it- while in reality most
things are electronic with statement from stockbroker
How many classes of shares can be issued?
Section 6(1)(c). If two or more classes created, one is ‘common shares’ and the other is ‘preferred shares’
Common Shares (CS) Generally free of all preferences or conditions.
 voting shares (if have enough, you control the corporation)  vote to elect the Board Of Directors (BOD) and the
BOD manage the corporation
 Common SH is entitled to dividends only if there is profit left over after dividends have been paid to Preferred
Shareholders
 On a dissolution, the creditors and preferred share get paid first and then common
 CS are the riskiest, but they also have the most upside potential
 They are entitled to all the residual profits and residual growth of the company
Preferred Shares (PS) Bear special rights and restrictions with respect to such matters as voting rights, dividends
and distributions on liquidation
 Preferred shares have special rights. Such preferences may include a right to be paid dividends before the
common shares (percentage right)
 PS may or may not be voting, but typically they don't have as much voting power as CS
 Preferred shares may also be made redeemable by the corporation, which can require SH to surrender them back
to the corporation for a particular price.
 The preferred shares may also be made retractable, in which the decision to return them to the corporation for
cash is made by the SH.
 Could also be convertible to CS-- would want to convert if common dividends are more than preferred
 Preferred shares do not always put their holders in a preferred position. Thus non-voting shares may be referred to
as preferred shares since they are subject to special conditions, unlike common shares.
 The rights attached to PREFERRED SHARES must be stated in the ARTICLES (CBCA s.6 (1) (c) (i).)
 If the directors wish thereafter to issue a class of shares not provided for in the articles, they must cause the
articles to be amended. When directors fix the special rights and issue the shares, articles of amendment must be
prepared under CBCA s. 27(4).
 Note: Section 27(3)- prohibits the issue of any such series of shares with rights to a payment of dividends or a
return of capital that are prior to the rights of any other outstanding shares of the same class.
Structure Options for Preferred Shares
 If you call them PS at 10% in your articles of incorporation and say nothing more, what are the default rules that
apply to these preferred shares?
(1) voting  PS right to vote could be restricted (s.140(1) states that unless the articles provide otherwise, each
share of a Corp entitled the holder to one vote at a SH meeting)
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(2) cumulative v. non-cumulative dividends  if not mentioned, then dividends are going to be cumulative (if
dividends not paid out on PS, they are cumulative and become arrears to be paid out in future years before
any other dividends are paid out (ahead of CS dividends)
(3) non-participation re: dividends  default rule is unless something to the contrary is put in the articles of incorp
or is agreed to, PSH once they receive their share % cap, do not participate in any dividends declared to other
classes of shares
Preferred Shares
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Section 27(1)(b)-Shares in Series: use of the “golden share” allows directors to come out with shares when needed
in tight spot >>Practical tip… whenever complicated transactions, you’ll have to amend articles … do it when you
have only one shareholder … keep things simple
Issuing Shares
 Section 25(1)- Issue of Shares- subject to the articles, bylaws or s. 28, the directors are deemed to have the
power to issue shares when, to whom, and in consideration for what they sees fit
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Consideration for shares must be in $ or property, or past services of an equivalent value
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(Note: services must have already been performed – see s.25(3))
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“for such consideration as the directors may determine” ~ tried to take into consideration the future
goodwill and the potential for what the company was trying to achieve
 Section 25(2)- Shares Non-Assessable- Shares issued by a corporation are non-assessable and the holders are
not liable to the corporation or to its creditors in respect thereof.
 Note: SH not liable for any additional debt- the corporation cannot ask for any more money than it has already
paid for shares
Consideration for Shares
 Section 25(3): a share shall not be issued until fair consideration is fully received in money, property, or past
services of a similar value
 Section 25(4): where the consideration is property or past services, the directors may discount the value of the
consideration if there are grounds to do so
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Consideration does not have to be paid solely in money form; it can be paid in the form of property (which does
not include the promise to pay)
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Therefore shares may be issued for: (1) money; (2) past services; or (3)property
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Shares may not be issued for: (1)promise to pay; (2)future services; or (3) in return for non-property assets
 Section 25(5): “property” does not include a promissory note or a promise to pay the person to whom the shares
are issued or a person who does not deal at arm’s length with that person
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Reinforces full consideration is required
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Bonus stock or shares issued for no consideration is not expressly prohibited but these provisions have been
interpreted to require consideration
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Cannot have a partly paid share-- to get around this can have installments that can be made to a trustee who
transfers shares to beneficiary when the shares have been completely paid
Liability of Directors in relation to consideration
 Section 118(1): the directors are personally liable for the difference between the FMV of the shares that were
issued and the FMV of the consideration (other than money) received in exchange, unless (s. 118(6)) he could not
reasonably have known the difference or (s. 123(4)) he reasonably relied on a professional’s opinion {Due
Diligence Defence}
 Note: Ooregum, court won’t penalize bad judgment
Acquisition and Transfer of Shares
The general presumption is that shares can be transferred freely, subject to anything contrary in the articles of
incorporation
Two ways to acquire shares:
1. From the treasury of corporation  creates shares and sells (CBCA and Articles establish when C can issue
new shares of a class from another shareholder).
2. from an existing SH  TSE if public co
Issuance of Shares/Further Shares (Not IPO):
1. Who decides when a corporation will issue new shares?
32

 (1) Do the Articles of INC permit the issuance of new shares?
 (2) Look to Act
 (3) Review any Unanimous SH Agreement that has been made to see what they say about a new offering
 (4) If after all that, nothing is said on the issue, then it is up to the directors' discretion to issue new shares
Section 25(1): subject to the articles, bylaws and USA and to section 28, shares may be issued at the discretion of
the Directors; thus directors do not have open-ended authority as still must look to the articles of incorp

If max issuable is not reached; if articles of incorp say there are 3 classes of shares and a class has not
reached the max issuable, directors can issue at their discretion until the cap is reached.

If max is reached, BOD has to have the articles amended and this they would need its SH' approval
2. How is the price determined for the issuance of new shares?

Will depend on how much capital want to raise and what price the market will accept

Up to directors (s.25)
3. What is a “series”? How is it different from a “class”?
 A series is a subset of a class of shares
 Terms of each series are determined by directors

Section 27(1)- Shares in Series - you can subdivide classes of shares further into series and

(a) fix the number of shares in, and determine the designation, rights, privileges, restrictions, and
conditions attaching the shares of each series, or

(b) authorize the directors to fix the number of shares and the qualities of each series

Comment: The articles can authorize the issue of any class of shares in any one series

The series can modify voting rights- meaning that some series in the same class may have voting
rights but other series may not

This is subject to the limitation is Section 27(3)

Section 27(3)- Restrictions on Series- all shares within a class, have to rank the same with respect to
dividends and return on capital
 Terms must not be inconsistent with terms attached to the class as a whole (as set out in the Articles)
 No series within a class can have priority over another series with regards to dividends and the return of
capital, therefore, whatever changes are made cannot affect the priority of a series within a class.
Example: if have a non-cumulative series, if create a new series, it also has to be non-cumulative bc
otherwise it would rank first in priority.
3. Is it possible to incorporate a company with no voting shares?

If company issues shares, is bound by s.24(4)(b) ~ at least one class has voting rights

Voting is mandatory for a CBCA corporation
4. If a corporation has more than one class of shares, which class has the prior right to capital on dissolution?

Turn to Articles
 If Articles don’t state that preferred get priority, then both preferred and common rank equally
5. What records are companies required to maintain with respect to share capital?
 Section 26(1): a corporation shall maintain a separate stated capital account for each class and series of
shares it issues. Stated capital account is important for tax purposes it shows the amount of money that can be
returned to shareholders without having to pay income tax.
 Section 26(2): a corporation shall add to the appropriate stated capital account the full amount of any
consideration it receives for any shares it issues.
6. Does a corporation have power to borrow money at any time?

Borrowing seems to have less restrictions than issuing shares
 Section 189: Directors seem to have broad powers but can be constrained by Articles or USA.
Oregum Gold Mining v. Roper (C.A., 1892): so long as the company honestly regards the property offered as
consideration as fairly representing the cash value of the shares issued, a court will not intervene and question the
business decision..
Re Hess Mfg. Co. (S.C.C., 1894): the decision to issue shares is actionable only if they were issued for no
consideration.
Re Mcgill Chair (1912): where a corporation issues shares for fictitious consideration, the issue is void.
33
Repurchasing Shares
 Companies can repurchase their shares
 The test for repurchasing shares is the same as issuing dividends or reducing stated capital
 Insolvency test- section 34(2)(a)- you cannot buy back shares if it will make you insolvent Section 118(2)- director liability for approving such a buy back when company becomes insolvent
 There is a lower threshold when you get to purchasing back shares in terms of remedies
 The shareholder has a right to be paid fair market value
 In that case the company is not restricted by the insolvency test
Stated Capital
 Stated Capital Account & Paid up Capital Account –
 When you issue a share “in consideration received shall be added to the stated capital account”
 S.26(3) restrictions to adjusting stated capital
 S.38(3) you cannot reduce the stated capital if you do not meet the solvency test
 Section 26(1)- Stated Capital - A corporation shall maintain a separate stated capital account for each class and
series of shares it issues.
 Comment: Stated capital is the aggregate amount paid for those shares
 For any class or series, you would have a record for how much the shares were issued for (S. 26(2))
 Stated capital is simply dividing the number of shares by their value
 Completely inaccurate picture because it looks at historical value
 Section 26(4)- Restrictions- cannot add to the stated capital more than the consideration received
 Section 26(5)- Constraint on Addition of Stated Capital- Where a corporation proposes to add any amount to a
stated capital account it maintains in respect of a class or series of shares, if
 (a) the amount to be added was not received by the corporation as consideration for the issue of shares, and
 (b) the corporation has issued any outstanding shares of more than one class or series,
the addition to the stated capital account must be approved by special resolution unless all the issued and
outstanding shares are shares of not more than two classes of convertible shares referred to in subsection 39(5).
For our purposes, the only relevance for stated capital is the capital impairment test in section 38(3)
 Section 38(3) A corporation shall not reduce its stated capital for any purpose other than the purpose mentioned in
paragraph (1)(c) if there are reasonable grounds for believing that
 (a) the corporation is, or would after the reduction be, unable to pay its liabilities as they become due; or
 (b) liquidating its assets would not be enough to pay off debts and liabilities
 Even this test is not too onerous because you can adjust stated capital
 Section 38(1)- Reduction of Stated Capital- a corporation may by special resolution reduce its stated capital for
any purpose including, without limiting the generality of the foregoing, for the purpose of
 (a) extinguishing or reducing a liability in respect of an amount unpaid on any share;
 (b) distributing to the holder of an issued share of any class or series of shares an amount not exceeding the
stated capital of the class or series; and
 (c) declaring its stated capital to be reduced by an amount that is not represented by realizable assets
 The other reason you may want to reduce stated capital
 Is that so you can pay capital dividends- subject to dividend solvency test- section 42
 If you are returning capital, you have to reduce stated capital
 This is tax free- reduces for tax purpose the cost base of your shares
Continuum of Capital
o Continuum of how business raise money…One of the constraints of the sole proprietorship is raising capital.
However, in the corporate environment
Types of capital
o Love Capital- family/friends that believe in you
o Banks and other lenders
o Angel investors- people who are prepared to take higher risks in return for very high returns
o Venture Capital Market- formal market
o Highly developed- relatively illiquid
o People who invest in a company on the venture market would basically be the company going public
o Public Equity Market- Stock market- there is more liquidity there
o Private Equity Market
34
o
o
o
KKR
Professional investors who look at the public equity market and think they can optimize the debt
Private Equity and Venture Capital Markets are getting deeper and are squeezing out the public equity
market
Dividend Rights
Dividend Rights  rights to receive the profits earned by the Corporation; they are discretionary in that they are
declared by the BOD; dividends can be cash per share (i.e for every stock you own, you will get $0.05 per share) or
they can be declared as stock (for every share you own you can get 0.25 of a share).
 Section 42: solvency test:- A corp shall not pay a dividend if there are reasonable grounds for believing that:
(a) The corporation is or would become insolvent after paying out the dividend
(b) Liquidating its assets would not satisfy its liabilities
 Dividend rights have to be declared by directors (Section 155(3)(d))- except where there is a unanimous
shareholder agreement where you pre-empt the director’s powers.
How are dividends decided?
 On preferred shares, there is often a fixed dividend
 However, on normal shares, it is dependant on historical trends
Ferguson- cumulative dividends
 If the directors do not pay out non-cumulative dividends (because it does not pass the insolvency tests in section
42) then the dividend is gone the next year
 However, if they are cumulative, then you do not miss them
 Rule: you cannot pay out junior ranking shares before you pay the unpaid cumulative dividend
Webb v. Earle (1875): if it is not clearly provided for, the dividends paid by preferred shares are presumed to be
cumulative.
Will v. United Lankat Plantations (H.L., 1914): if it is not clearly provided for, preferred shares are presumed to be
non-participating.
Westfair Foods v. Watt (Alta C.A, 1991.): preferred shareholders are entitled to receive a dividend in lean years when
common shareholders receive nothing. The cost of this privilege is that they are not entitled to receive anything more
than what they were promised in more profitable years.
Re Northern Ontario Power (Ont., 1954): when a dividend is declared, the corporation becomes the shareholder’s
debtor for the amount of the dividend.
Bond v. Barrow Haematite Steel (Ch., 1902): shareholders normally have no rights to a dividend before they are
declared.
Burland v. Earle (P.C., 1902): “the Court has no jurisdiction to control or review [management’s] decision [to declare
or not to declare a dividend], or to say what is a ‘fair’ or ‘reasonable’ sum to retain”
Evling v. Israel & Oppenheimer (Ch., 1918): where the articles expressly require the directors to declare a dividend
when sufficient returns are earned, the shareholders may impeach the directors decision not to pay a dividend.
Ebrahimi v. Westbourne Galleries (H.L., 1973): shareholders may seek relief when the decision not to declare a
dividend is tainted by a conflict of interest
Berwald v. Mission Development (Del. S.C., 1962): in order to obtain the extreme relief of receivership against a
solvent business, there must be evidence of an imminent and great loss resulting from fraud or mismanagement. The
court found for the defendant notwithstanding the plaintiff’s claim that there was an inherent conflict of interest between
the controlling shareholder, who wished to delay the payment of dividends for tax reasons, and the minority
shareholders.
Winram v. M.N.R. (Fed. Ct., 1972): subject to the articles or bylaws of incorporation, the directors are permitted to
declare a dividend for one class of shares regardless of whether they declare a dividend for other classes of shares
(tax case: one class of shares were valued as if dividends will not be paid to the other class).
International Power v. McMaster University (S.C.C., 1946): in the absence of provisions to the contrary, the rights of
shareholders are equal.
35
Ranking upon Dissolution
(1) Secured Creditors [(a) charge over specific asset, then (b) general charge]
(2) Bondholders
(3) General Lenders (Unsecured)
(4) Preferred Shares
(5) Common Shares
Rights of Parties in relations to CORP:

Board of Directors  (Subject to any USA) have the authority to mange affairs of CORP (Section 102)

SH  may have the right to vote and receive dividends, but in relation to dividends there is no legal obligation that
they will be received; do not have a claim to have their debt repaid upon an insolvency-- whereas creditors have a
legally enforceable claim to have their debt repaid

Creditor  have a legally enforceable claim to have their debt repaid; their claims rank ahead of SH so upon
dissolution, the holder of creditors or debt securities are paid out first and then SH are paid out if there are any
remaining assets
Subsidiaries and parent companies

General Rule: A subsidiary cannot hold its own shares of the shares of its parent company

Exception- banks- Example: if I own shares in the Bank of NS
Exchangeable Share Structure – Situation where Company A wants to Purchase Company B
 One way to do this is by cash
 The other way is by offering shares in another corporation- share trade
 The advantage of this was is that there is no direct taxation
 It is way to defer tax
 one problem with this is that this did not work when a foreign company was bidding on a domestic company
 the other problem- there were certain restrictions on how much foreign assets you could hold
 Thus if there was foreign company, it would set up a CDN subsidiary which would in turn offer exchangeable
shares (mirroring the foreign shares) which would be held in a trustee & through which voting rights for
instance would be exercised on the foreign company
 RRSP Restrictions- you can only invest 10% in foreign assets- to get around it- US Co incorporates subsidiary
Can Sub in Canada- you invest in Can Co- Can Co exchanges shares at a certain ratio with Can Sub- which in fact
gives you access to US Co- US Co holds the shares in a trust
36
Management & Control of CORP
Legal Model has Underlying Themes:
Shareholder Democracy
 Presumption that SH conflicts decided by majority vote. This principle is subject to many
qualifications to
protect minority SH, which we’ll discuss, but generally the balancing of majoritarian demo with interest to min.
SH gives rise to difficult issues
Management Autonomy
 Once elected by SH, Directors entitled to manage corp w/o interference
 Rationale: business efficiency, the need for directors to make decisions based on corp interest not just SH (greater
good of corp), accountability to SH maintained through their power to elect and remove directors.
 Qualifications: SH has say in fundamental changes to corp In relation to this theme, issues around conflicts with
mgmt and SH interests. The legal model does not necessarily reflect the social reality of the corporate world. Extralegal factors are significant
In Practice:
 It is all about how you allocate power and control
 You try to separate ownership, control, and management
 You need some kind of accountability mechanism
 Basically, you make it so that accountability goes back to the owners
 In simplest terms- General construct
 The owners in theory elect directors- this does not happen when there are many shareholders where the no
one owns a big share- in that case the management elects the directors
 This is offset by a shareholders who hold voting rights
 Directors supervise the management of the company
 They have the responsibility to appoint officers who are accountable to the board
 Shareholders have the residual rights- they also have the power to vote
 It is a form of democracy- however, it is not to be confused with political democracy
 Here it is not 1 citizen – 1 vote always
 In fact, this is almost never the case unless every shareholder happens to own the exact same number of
shares of the exact same type of shares
Election of Directors:
 Section 102(2)- Number of Directors - A corporation shall have one or more directors but a public company shall
have not fewer than three directors, at least two of whom are not officers or employees of the corp or its affiliates
 Section 6- Number of directors should be named in the articles
Rationale: outside directors are there to protect interest of public SHs who own few shares in the corporation and do
not have time to monitor the corporation; to ensure that self-interested directors who actually work for the corporation
will take all SH interests into account.
BUT
Reality: Board members are drawn from a close pool of directors from the same social networks from the CEO so it
may be harder for them to exercise the independent judgment we require from them. Directors can be corporation’s
retired executives, outside counsel and other retained advisors such as investment bankers.
Recommended: that the reinventing of the outside director as a full-time professional director who would have the
requisite expertise and would serve on the Boards of perhaps six corporations.
 As full-time directors of a limited number of corporations they would have a focused mandate and the time to
familiarize themselves with the corporations on which they serve as BOARD MEMBERS. These professional
directors would be chosen by INSTITUTIONAL INVESTORS who might organize a separate clearinghouse to
coordinate action among institutional investors for the selection of directors.
Qualifications of Directors
 Section 102(2)- public companies min 3 and 2/3 have to be outside directors
 Section 105(1)- (a) age of majority, (b) sound mind, (c) not a corp, (d) not bankrupt
 Section 105(2)- NO requirement for directors to hold shares in the corporation, but some have made the case that
they should have shares to force them to think like SH
37

Section 105(3): Residency – at least 25% of directors of corporation must be resident Canadians. However, if a
corporation has less than four directors, at lest one must be a resident Canadian

‘resident Canadians,’ which includes citizens of Canada ordinarily resident in Canada, landed immigrants
except those eligible for Canadian citizenship who have chosen not to apply for it, and certain citizens of
Canada ordinarily resident abroad. [CBCA s.2(1)].
 Principle: appears to be that Canadian citizens will be more responsive to Canadian national interests in the
operation of a corporation’s affairs than non-citizens would be and ensure better value for Canada. BUT,
promotion of Cdn national interest is not made a statutory duty of directors, who presumably are to manage the
C for the purpose of maximizing SH wealth w the dictates of the law
Subsidiary companies of Foreign Corporations
 Parent company could appoint a majority of Canadian directors to the board of subsidiary- they can strip the board
of all powers via a Unanimous Shareholder Agreement (Section 146(2))
Method of Election and Appointment
 Section 106(1): Notice of Directors – at the time of sending articles of incorporation, the incorporators shall send
to the Director a notice of directors in the form that the Director fixes, and the Director shall file the notice.
 Section 106(2): Term of Office – each director named in the notice holds office from the issue of the certificate of
incorporation until the first shareholder meeting [which pursuant to s.133 (a) must be held within 18 months of
incorporation].
 Section106(3): Method of Election – SHs of a corporation shall, by ordinary resolution at the first meeting of SHs
and at each succeeding annual meeting at which an election of directors is required, elect directors to hold office
for a term not longer than 3 years (may be re-elected after the term is over).

Section 145: Application to the court- A corporation, SH or director may apply to court to resolve any
controversy with respect to an election or appointment of a director, and the court may make ‘any order it
thinks fit,’ including one restraining the person whose election or appointment is disputed from serving and
ordering a new election under JUDICIAL SUPERVISION.

Section 133(a): Max term of office is not later than the close of the 3rd annual meeting of SH (as provided
in the articles) could be greater than 3 years since annual meetings don't have to be held every year but
w/in 15 mos of preceding meeting and 18 mos after incorporation
 Comment: Requirement of SH election of directors apparently may not be waived, not even where the
authority of board members has been sterilized in a unanimous SHs agreement under CBCA s.146 (2).
 Election of directors - most important matter on which SHs VOTE. Directors manage the corporation, the
election of directors significant manner in which SHs can exercise control over the way the corporation is
managed even for small SHs … gives management an incentive to ACT in the interest of SHs.
 Section 106(4): Staggered board -- when all of the directors are not up for re-election at the same time or have
different terms. This is done to avert a possible hostile takeover bid.
 Section 106(5): No stated terms – if the length of a director’s term is not specified in the resolution, it is presumed
to be one year
 Section 107: Cumulative Voting – where articles provide for cumulative voting, the articles shall require a fixed
number of directors (not a range); FORMULA= # of shares held by SH multiplied by # of directors to be elected
(may cast them all in favor of one candidate or distribute them among candidates)
 Instead of voting for all directors, you are able to vote one director in if they own 10% of the shares
 Whereas, if you have 50% of the shares then you effectively control the entire board
 Example: 100 shares outstanding and we need to elect 10 directors to the board
 If there is one shareholder with 51% of shares, with non-cumulative votes, this shareholder controls all
 However, with cumulative voting, they each get 10 votes, this shareholder can only elect 5 of the 10
directors the rest are up to the other shareholders
 Section 108(1): Ceasing to Hold Office – a director of a corporation ceases to hold office when s/he (a) dies or
resigns, (b) is removed in accordance with s. 109 (resolution of SHs), or (c) becomes disqualified under s. 105(1).
 Section 6(4)- principled constraints…Articles cannot require a greater number of votes than what is already
required in section 109
Removal of Directors
 Section 109 (1) - by ordinary resolution of SH’s at a special meeting of shareholders, so a distinction made
between general meeting and the special one…Issue: can articles alter effect of this provision, so instead of
ordinary resolution 50% of vote, can we have more majority to remove, and s6 (4) says no. b/c don’t want it so
hard to remove directors so that they are entrenched forever``
38




Section 109(4): Resignation (or Removal) – if all of the directors have resigned or been removed w/o
replacement, a person who manages or supervises the management of the business and affairs of the corporation
is deemed to be a director for the purposes of this Act (substance over form).
 Section 109(5): Exception to 109(4) – section 109(4) does not apply to (a) officers of the corporation who are
being controlled by SHs or other persons, (b) lawyers and other professionals who participate in the
management of the corporation only for the purpose of providing legal services, and (c) trustees, receivers or
secured creditors who exercise control only for purpose of realization of security or the administration of a
bankrupt’s estate
Section 111(1): Filling Vacancy – if a director resigns prematurely, a quorum (the minimum number required to
vote) of directors may fill the vacancy. But see exceptions.
Section 112: Number of Directors – the shareholders of a corporation may amend the articles to increase or,
subject to s. 107(h), decrease the number of directors, or the minimum or maximum number of directors, but no
decrease shall shorten the term of an incumbent director
Section 113(1): Notice of Change of Director or Director’s Address – within 15 days after (a) a change is made
among its directors or (b) it receives a change of address from a director, a corporation shall send to the Director
notice in setting out the change, and the Director shall file the notice.
Bushnell v. Faith (1970) - Despite concerns, this is valid law in Canada
Facts: Closely held Family Corporation issued 300 shares of which 100 go to each of 2 sisters and 100 to the
brother; One of sisters and the brother are the sole directors. Articles allow shares to be issued with any rights and
restrictions as determined by the company. Each share carries one vote generally, (but under Article 9) obtains triple
voting rights in certain circumstances, including where an attempt is being made to remove a director. Both sisters
attempt to remove the brother, requisitioned a meeting of SHs for the purpose of removing him. Plaintiff claims that the
resolution had passed 200 votes to 100 votes. Defendant agues that the resolution had been defeated 300 votes to
200 votes. Sisters apply to court for declaration that article 9 is void because it frustrates the purpose of the UK
Company Act.
Issue: Is Article 9 void? Ie) do the shares maintain triple-voting rights?
Held: appeal dismissed - brother can exercise his super voting rights,
The corporation complied with these restrictions of CBCA. Majority decision is concerned that if we begin interfering
with structure, where does that end (slippery slope)? Where do we stop interfering with freedom of private persons’
contracts
Ratio: The CBCA (section 109) simply precludes an explicit requirement for more than 1/2 to remove, but it does not
prevent a corporation from giving super-voting rights either generally or for specific purposes.
Dissent: concerned Directors become irremovable… employed a purposive interpretation and argued that the
majority’s decision effectively renders the directors irremovable, which defeats the purpose of the statute.
?POLICY: CBCA is reluctant to hamper freedom for parties to enter into K even if bad business decisions are made;
NB: Act was aimed at bigger corp not small ones that no one really cares about. It also reflects judicial deference to
governance issue. This case also comments on the difficulty of legislating on matters that have always been left to
incorporators to decide.
 What if SH inherited shares from Parents? This decision misses substantive effects of these voting rights.
 Dissent highlights the policy result of this decision, making director irremovable and against intent of the Act.
Dissent says special voting rights triggered only for certain shares, which violates principles of equality of shares
(s24 of CBCA)
NB:
Specific voting provision that doesn't change management structure, but one of the most important rights of SH
is to be able to vote on management. Distinguish Bowater and step down provision as all SH in this case have equal
rights in the same position (ie. if happened to sister she would get those rights too).
NB:
The result is that the brother remained in office, but at the next annual general meeting, when he is up for reelection, the sisters do not have to vote for him and when the directors are up for re-election, the votes do not carry
triple voting rights. So it is not that the directors can never be removed, it's just that they cannot be removed from
office mid-way.
39
Powers of Directors and Officers
 Section 102 (1): Duty to Manage or Supervise Management - subject to any unanimous shareholders
agreement, the directors shall manage, or supervise the management of, the business and affairs of a corporation.
 Section 103(1): By-Laws – unless the articles, bylaws or Unanimous Shareholder Agreements (USA) otherwise
provide, the directors may, by resolution, make, amend, or repeal any bylaws
 Comment: Sets out the process for enacting bylaws. Bylaws passed by Directors are effective immediately,
but these bylaws are also subject to approval by SH at their next meeting
 Section 103(2): Shareholder Approval - at the next shareholder meeting, shareholders are entitled, by ordinary
resolution, to confirm, reject, or amend a bylaw, amendment, or repeal.
 If SH confirm or amend bylaw by ordinary resolution, amended bylaw or the bylaw continues in effect 103(3);
 If SH reject the bylaw, the bylaw ceases to have effect on the date of the rejection (at AGM date, but up until
that point remains effective) 103(4);
 If a bylaw is either not submitted for approval or is rejected by the SH at a SH meeting, Directors cannot make
any other bylaw w substantially the same purpose or effect w/out getting SH approval first.
 This same process for creation of bylaws by Ds approval of bylaws and then approval for SH also applies if Ds
amend or approve bylaws 103(4)
Kelly v. Electric Construction Co (1907) power to enact bylaws
Facts: At the annual meeting of Electric Co 4 absent shareholders who were represented by proxy were not allowed to
vote. The evidence showed that the directors had adopted a by-law in 1897 stating that “all instruments appointing
proxies shall be deposited at the head office of the company at least one day before date at which they are to be
used”. This by-law was not confirmed at the next annual SH meeting but was confirmed at a SH meeting in 1905.
Issue: Is the by-law not ratified at next SH meeting in effect and if not can it be ratified by SH?
HELD: The Director’s bylaw was not confirmed at the next annual meeting and thus it ceased to have any force and in
relations to the 1905 SH meeting, since shareholders do not have the authority to initiate new bylaws, the attempt to
introduce the same bylaw as new bylaw by the SH also fails.
RATIO: Shareholders cannot initiate the creation of a by-law, only have the power to ratify, reject or amend bylaws
made by board of directors.
Automatic Self-Cleansing Filter Syndicate v. Cuninghame (1906) power to reject SH resolutions
Facts: P wished the assets of the company to be sold, and he arranged a contract for that purpose with a purchaser. A
resolution to sell the assets on terms of the proposed contract was passed by the SH by simple majority. The directors
were of the opinion that the proposed contract was not in the company’s best interest, and they refused to carry out the
resolution. The action brought by P to compel the directors to carry out the resolution. Trial: held for the defendant,
plaintiff appealed.
Issue: Are the directors bound to carry into effect a resolution passed at a meeting of the SH?
Held: Directors are not bound by the shareholders wishes nor resolutions since Ds manage the company. Statute
gives directors the power to run the corp and a simple majority of SH cannot alter the mandate of the Ds (who are not
agents of the shareholders but rather of the corporation). To alter the mandate of the directors, you need a unanimous
SH agreement before the fact.
Rule: Once the power to manage the company has vested w the Ds, SH are not entitled to usurp that power except
where the statute says they can or where the corporate constitution (articles of incorporation, USA, or bylaws suggest
otherwise). Therefore, Ds can act in complete opposition of majority of SHs
Analysis:
 SH are not fiduciaries and are not bound to Best Interest of Company (BIC) and do not control company
 BUT Directors are Agents of corp and as such have a fiduciary relationship with the corp and must act in BIC.
 As non-fiduciaries, SH cannot impose their will on Ds as Ds have a responsibility to a number of interested parties
including SH, creditors and corp.
 Hence, directors are entitled to act independently of views of majority of shareholders.
Note: principle is codified in Section 102(1). BOD can act independently of the views of the majority of SH or the
controlling SH. BUT a practical result of this is that when directors are up for re-election, they may not be re-elected if
majority or controlling SH in total disagreement w what the directors have done.
NB: What rights to SH have? Only concern SH should have is growth in equity and dividends. If SH want to control
corp, then should have the duties and liabilities that go along with it. There is a misunderstanding that company exists
for its SH. Theme that guides management is very straightforward  increase profits to increase SH value.
40
Director Remuneration
 Section 125- subject to Articles, Bylaws and USA, directors set their own compensation and the compensation of
the officers and employees
ISSUE How do you set your own compensation? Conflict of interest? The CBCA specifically permits it.
 Section 120 (1)-Disclosure of Interest-- if the director had a conflict of interest they are supposed to notifying the
company and then refrain on voting on anything they have a conflict of interest on
 S.120(5)(a) --Voting—director required to make disclosures under 120(1) shall not vote on any resolution to
approve a contract or transaction relating primarily to his remuneration as director/officer/employee/agent
Director Indemnification
DIRECTORS have tons of liability… for breaches of duties, conflicts of interests… in contested takeovers the courts
are one of the forums for resolving such corporate moves… so directors must ask themselves whether they have
protection:
 Section 124(1)- Indemnification  CORP may indemnify a director or officer, a former director or officer or
another individual who acts or acted at the CORP’s request as a director or officer (or an individual acting in
similar capacity) against all costs, charges, and expenses (including amount paid to settle actions) that are
reasonably incurred by the individual in respect of any civil, criminal, administrative, investigative or other
proceedings … where the individual is involved because of association with CORP.
 Section 124(6)- Insurance- a corporation may purchase insurance & maintain it for the benefit of its
 scope of insurance is even broader than indemnity to include even breach of fiduciary & theory being that up to
insurance co. to decide what prepare to insure, although a line is drawn at director knowing that he was
engaging in unlawful conduct
 Note: Section 124- tries to set a balance between allowing the directors to serve & denying directors the
benefit of CORP indemnity when they engage in bad public conduct: the section defines 3 types of
circumstances where indemnification given…
 Mandatory indemnification s.124(5)… when action results in director/officer found not guilty or has fulfilled the
conditions set out in s.124(3)
 Discretionary Indemnification (even when at fault so long as complied with fiduciary duties & reasonably
believed their conduct was lawful),
 Derivative Actions which are brought by shareholders against the directors/company
R v. Bata Industries Ltd (1992) On Prov Division
This is a case of criminal prosecution against certain officers of Bata shoe Co. who were convicted under the Ontario
Water Resources Act for unlawful discharges.
Provincial Court Judge: convicted & ordered the individuals to pay personally & for the company not to indemnify them
(even though the Co. had provided indemnification)
The Court of Appeal: Went the other way by saying the Provincial Court Judge had no authority to override the
statutory scheme, which actually allows for indemnification of officers (as shown in the facts of this case) who were not
knowingly breaking the law & therefore eligible for indemnification.
Meeting of Directors
 Section 104(1): Organization Meeting - after the certificate of incorporation is issued, a meeting of the directors
shall be held where they may (a) make bylaws, (b) adopt forms of security agreements and corporate records, (c)
authorize the issue of securities, (d) appoint officers, (e) appoint an auditor to hold office until the first annual
meeting of shareholders, (f) make banking arrangements, and (g) transact other business.
 Section 114(1): Meeting of Directors –Subject to articles or bylaws providing for the contrary, the directors may
meet at any place and on such notice as the bylaws require.
 Section 114 (2): Quorum - The mechanics of calling and holding Board meetings are usually specified in the
corporation’s by-laws. Subject to the articles or by-laws, the quorum of directors (i.e., a majority of the number of
Ds required under the articles, unless article or bylaws provide for the contrary) may exercise all of the powers of
the directors.
 Section 117(1): Resolution in lieu of Meeting - a resolution in writing, signed by all of the directors entitled to vote
on the particular issue at hand, is valid as if it had been passed at a meeting of directors or committee of directors.
 Section 155: Annual Financial Statements - the directors of a corporation shall place before the shareholders at
every annual meeting (a) comparative financial statements, (b) the report of the auditor, if any, (c) any additional
pertinent financial information as well as information that must be disclosed pursuant to articles, bylaws, or
unanimous shareholder agreements. Not less than 21 days before a meeting: s. 159
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Delegation of Duties
 Section 115 (1): Delegation - the directors of a corporation may appoint a director who is a Canadian resident the
managing director or a committee of directors and delegate any of the powers of the directors.
 Section 115(3): Matters which CANNOT be Delegated - non-delegation of some matters, including (a) matters
requiring approval of the shareholders, (b) filling a vacancy among the directors or in the office of the auditor, or
appointing an additional director, (c) issue securities except as authorized by statute, (c.1) issue shares of a series
under s. 27 except as authorized as directors, (d) declare dividends, (e) purchase, redeem or otherwise acquire
shares issued by the corporation, … or (j) adopt, amend, or repeal bylaws. (Directors cannot delegate all of their
duties and liabilities, but rather may only delegate powers to carry out ordinary business transactions).
 See also, Hayes v. Canada-Atlantic & Plant S.S.: the power to manage a corporation must ultimately rest
with the directors.
POLICY:
Directors have power to manage under section 102(1), but it is impossible for Ds to manage every aspect of the C, so
Ds have the power to appoint managing directors/officers and delegate some of those powers. BUT
 Effectiveness of replacing directors as a control device would be HAMPERED if the directors had DELEGATED
ALL THEIR POWERS… THEREFORE s.115 (3) provides that directors are restricted from delegating if it is any
matter which must be submitted for SH approval.
 Limits are expressed in both the CBCA as well as the common law: a wholesale delegation of power to
subordinates will be rejected as invalid by the courts.
 The idea is that the board can only delegate powers to carry out ordinary business transaction, not powers which
deal w fundamental changes discussed in 115(3) where the entire BOD must decide
Constraints on independent authority of Directors (designed to align interests of Directors with that of SH):
(1) CBCA provisions;
(2) Articles of INC;
(3) Statutory obligations; can be removed by SH through ordinary resolution;
(4) Special resolutions required for certain transactions; and
(6) Unanimous SH agreement
Inside Delegation
Hayes v. Canada-Atlantic (1910)
Facts: Directors appointed an Executive Committee to exercise full power of the board when the board not in session
(as per the articles). 2 members of the 3 member executive committee have a meeting and alter several aspects of
management structure to benefit themselves, such as increased their pay, one can call a special meeting, only need
two, etc
Held: These acts are not within legitimate power of the executive committee. Even though the terms that referred to
the exec committee discussed full power… that should be only for ordinary functions, otherwise these two directors
would be able to absorb all powers of the company.
Ratio: you cannot fully delegate to an executive committee… The board has residual responsibility both with respect
with the things enumerated in 115(3) and to the overall
Note: this case suggests the court will read down Executive Powers to reserve ultimate control to the directors
Outside Delegation
 A prudent management decision in some cases may be to contract for the management services of 3 rd parties who
possess particular skills.
 A company can delegate some of its management duties (Not specifically addressed in the CBCA- the
presumption is that as long as the board retains the residual responsibility to supervise the management, it can
delegate- there is no restriction on delegating) but not its entire power of the board for an indefinite period.
 Directors have to exercise control over corporate affairs in good faith, and cannot just divest themselves of this
duty. Directors can’t transfer substantially all of their management powers to third parties. They have to retain
residual power to set corporate policy and make decisions about the company.
 There are issues about:
 (1) control,
 (2) residual power retained by board,
 (3) length of time the K is for, long term delegation has more of a damaging effect in terms of corporate policy
42
Sherman v. Ellis (1930) Outside Delegation for 20yrs… periodic reporting
Facts: The D insurance company granted its management to the P insurance company for a period of 20 years.
HELD: There are duties the performance of which may not be indefinitely delegated to outsiders. The delegation is
void since the board did not retain residual discretion & responsibility of supervision.
Ratio: In deciding whether the board had retained that residual responsibility, the duration of the delegation and the
extent of remaining duties not delegated are relevant.
Analysis: In Jones v. Williams the newspaper company had delegated the position of editor and manger to an
outsider for 5yrs. That period was fixed & a large part of the board’s official duties were un-delegated. Here the
delegation was for 20yrs and nothing of importance was left to the board of directors.
Kennerson v. Burbank (1953) outside delegation … sole asset of company
Facts: The board delegated the control of the one company assets, a theatre, to Kennerson, subject to the only
requirement that K report back periodically.
HELD: the board’s power to manage had completely sterilized & therefore struck down the delegation
RATIO: The board cannot delegate/ transfer to 3rd party the management of the sole asset of Co, where by no
control is exercised with respect to the direction of the company and the ability of the 3 rd party to assign their new
duties. This amounts to transfer of control which is prohibited.
Analysis: By this contract the board has attempted to confer upon him the practical control and management of
substantially all corporate powers (control over bookings, personnel, admissions prices, salaries, contracts, expenses)
Appointment and Removal of Officers
 note officers have fiduciary duties to whom directors delegate duties
 Section 121: subject to article, bylaws or unanimous shareholder agreements to the contrary (a) the directors may
appoint officers, (b) a director may be appointed to any office of the corporation, and (c) two or more officers or the
corporation may be held by the same person.
 Section 125- Compensation of Officers- subject to the article, bylaws, or any unanimous shareholder
agreements, the directors fix remuneration of officers and employees as well as their own remuneration.
 Section 115- directors are able to appoint a director or a committee of directors and delegate to them directory
responsibilities and powers…Most corporations would have a finance committee, a human resource committee,
and a governance committee( they would have the power to appoint)
Removal of Officers
 Officers get power from delegation by statute, but overlay of rights b/c they also have an employment contract
 CBCA doesn’t expressly address this issue, but judicial sentiment is that where articles don’t speak to the issue,
directors can remove officer with/without cause, but the removal of the officer is without prejudice to any
contractual rights that she may have against the corporation.
 Under corporate law the directors can fire the CEO, but he has an employment contract that says his employment
is for 5 years, so if they fire after 1 year, there is a breach of contract. Thus directors authority limited by the
employment contract, and he would be entitled to collect on the contract.
Southern Foundries v. Shirlaw (1926) termination of director/officer & employment K consequences
Facts: Shirlaw was appointed managing director of SF for a period of 10years. The Articles of SF provided for the
appointment of a managing director & also provided that he be subject to same removal provisions as the other
directors but “subject to the provisions of any contract between him and the company”. The articles also had the
provision that “if a managing director ceases to be a director, ipso facto ceases to be a managing director”. When FF
Co acquired control over SF, it adopted a new set of Articles and pursuant to which it removed Shirlaw as a director
who then ceased to be managing director.
ISSUE: Can the company escape liability under the terms of employment K based on their authority to alter the Articles
which cause the dismissal?
HELD: Co in breach of Employment K.
RATIO: A Co cannot be precluded from altering its articles, nor can an injunction be granted to prevent the adoption of
the new articles. But so to act may nevertheless be a breach of an employment contract. Employment rights are not
contingent upon corporate law.
Analysis:
 The court discusses the fact that although the articles were changed, the trigger for firing of Shirlaw was actually
put in place by first company and thus both were instrumental in the removal
 Ed Waitzer  one of the differences between Officers and Employees is the fact that Officers can be removed at
the pleasure of the board (which is statutorily provided for) but note that even in such circumstances the Officers
have employment Ks with the Co and thus such Ks are not overridden … Officers do retain the contractual
remedy of ‘dismissal without cause’
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Issuing Debt
 Section 189(1): unless there is a provision to the contrary, the directors of a corporation may, without the
authorization of the shareholders (a) borrow money on the credit of the corporation, (b) issue, reissue, sell,
pledge, or hypothecate debt obligations of the corporation, (c) give a guarantee on behalf of the corporation to
secure performance of an obligation of any person, and (d) create a security interest in any and all of the
corporation’s property to secure any obligation for the corporation
 Section 189(2): notwithstanding s. 115(3) and para. 121(a), the directors may delegate the power of issuing debt to
a director, committee of directors, or an officer, subject to the articles, bylaws, or unanimous shareholder
agreements
Cumulative Voting and Class Voting for Directors
Cumulative Voting (s.107)
Purpose: A system of proportional representation. It is designed to guarantee that minority shareholders will be able
to obtain representation on the board of directors.
Example:

Suppose have two shareholders, X has 6 shares. Y has 4 shares: if three directors must be elected. If no
cumulative voting then X puts forth a slate of directors or votes for each one by one and wins all.

If, however, you have cumulative voting then you take the number of shares and multiply them by number of
directors to be elected (X gets 18 votes, Y gets 12 votes). Y can put all votes for one and get representation.

Cumulative voting is only required where the articles of incorporation provides for it.
s. 107(a): there must be a fixed number of directors provided in the Articles (not a range)
s. 107(b): number of votes typically attached to a share is multiplied by the number of directors to be elected, and
shareholders are permitted to cast all of their votes for one candidate or distribute them an any manner among
candidates
s. 107(c): a separate vote shall be taken with respect to each candidate, unless an agreement is passed unanimously
providing for two or more persons to be elected by a single resolution.
s. 107(e): if there are more directors running than positions, the candidates who received the least votes shall be
eliminated.
s. 107(f): each director ceases to hold office at the close of the first annual meeting for shareholders following the
director’s election.
Class Voting for Directors (section 109(2))
 Section 109(2): where a particular class of shareholders hold the exclusive right to elect one or more directors, only
this particular class of shareholders may vote to remove these same directors
Controlling Corporate Managers
Effective Governance (article on extranet by Ed on What Directors what supposed to do & what the actually do:
 There is an ongoing debate about corporate governance; issue is the ability of directors to actually manage what is
happening bellow them
 Academic literature states directors are friends of shareholders, of the same class, senior business people & not a
place where it is good to go against the grain, they tend not to challenge senior executives etc
 What has happened during past decade is to efforts to reform corporate governance … e.g. push for independent
directors which can be an illusive concept (independent from dominant shareholders as their main source of
revenue is not the company or its executives)
 but such directors still have to be elected & paid by majority shareholders- Some new initiatives:
 Also separate the Chair from the CEO … so CEO not setting the agenda
 Another is setting up nominating committees … composed of independent directors
 Compensation committees … hiring the consulting firms to do market value which means the price still goes up
… therefore still question of how independent this process is
 Also push for more diversity on the boar (age, gender, ethnic)
Burly & Means
 Problem is that as corporations have grown there has been a separation of ownership & control…
 as the company attracts more & more outside capital this separation occurs, to the point that in case of fortune 500
companies, 90% of companies where single share holder has more than 1%...
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therefore by default management (who may have no equity at stake although they have their career but not their
own $$ invested) is controlling
ISSUE: how to maintain accountability of management where SH does not have the power of checks & balance …
Reply to which is provided by THE LAW & ECO view is what is wrong with this
it is a chain of contractual relationships which can be held accountable by market forces & As for those real issues
of conflict of interests [management interest not in line with the shareholders’] …? There are set of legal & market
controls to deal with it:
 Legal Controls… shareholders vote … but such votes do not mean very much if not the controlling
shareholders… & also do not mean much because every shareholder owns a fraction of % which makes them
hard to organize & whom ultimately is chosen by the directors
 Market Controls … if the company is being mismanaged or agents are taking advantage of owners, it will
reflect in the price of stock which will be a strong signal to the owners which can go into market & get new
managers … but such is highly imperfect controls, if the company is of a large size, it is very hard to pinpoint
market signals to a particular actions & market really cares less about highly contentious issues such as
remuneration terms of CEOs
Legal Relationship between Managers & Shareholders
Once the power to manage the co. has been vested in the Directors, Shareholders are not entitled to usurp that power
except when expressly provided by CBCA or corporate constitution (s.102 (1))
 Section 102 (1): Duty to Manage or Supervise Management - subject to any unanimous shareholders
agreement, the directors shall manage, or supervise the management of, the business and affairs of a corporation
 Section 103(1)- unless articles, by-laws, or USA provide otherwise, directors have powers to make, amend or
repeal bylaws that regulate the business or affairs of the corporation
 Section 103(2)- by-laws are subject to shareholder approval
 Section 103(4)- if a by-law is not approved or not submitted to approval by Directors, then it ceases to be
effective and the directors are barred from making, amending or repealing a by-law that serves substantially
the same purpose or effect until this action it is confirmed or amended by the SH
 Section 103(5)- Shareholder Proposal - shareholders with right to vote may make proposal to make, amend or
repeal by-law
Unanimous Shareholder Agreements
 Section 146(1)- USA- lawful agreement among SH of corp that restricts, in whole or part, the powers of Directors
 Section 146(2)- Declaration by a single holder- if person who is beneficial owner of all the issued shares make a
written declaration that restricts the duties of directors, the declaration is deemed to be a USA
 Section 146(3)- Constructive Party- purchaser or transferee of shares subject to USA is deemed to party to USA
 Section 146(4)- When not notice given- if notice if the USA not given in accordance to 49(8), the purchaser can
rescind the transaction within 30 days of becoming aware of the existence of the USA
 Section 146(5)- Rights of Shareholders- if powers of directors are restricted by USA, the parties who gain the
power are deemed to have all the power, duties and liabilities of a director (they also have the right to the same
defenses)
Note the following 2 Cases mentioned previously which are applicable here:
o Kelly v. Electric Construction Ratio: shareholders cannot initiate the creation or ratification of a bylaw- such are
the powers of the directors.
o Automatic Self-Cleansing Syndicate Ratio: shareholders cannot bury the mandate of the directors by ordinary
resolution- they can do it by unanimous shareholder agreements, or by amending the articles, but not at the annual
meetings ( thus Directors do not have to follow the resolutions of SH)
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Voting Rights:
Objectives:
 give SH a voice
 protect minority SH from minority
 to give non-voting SH a voice
Objectives are achieved through various mechanisms:
 by requiring approval of changes by a majority
 by requiring approval by a series of acts
 conferring special voting rights on non-voting shares
 Access to the appraisal remedy
Problems with SH voting rights
 In widely held companies, only SH with large holdings and thus influence exercise their vote
 Small SH don’t exercise voting rights b/c cost of voting greater…called SH rational apathy
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Section 2(1): “ordinary resolution” requires ½ voting approval; “special resolution” requires 2/3 voting approval
Section 24(3): Rights Attached to Shares: where a corporation has only 1 class of shares, the rights of the
shares are deemed to be equal in all respects, including (a) voting, (b) dividends, and, upon dissolution, (c) claims
to the firm’s assets.
Section 24(4): Rights to Classes of Shares: if the articles provide for more than one class of shares, (a) the
rights, privileges, restrictions, and conditions attaching to the shares of each class shall be set out in the articles,
and (b) at least one class of shares will possess voting rights, dividend rights, and the right to claim the firm’s
assets upon dissolution.
Section 140(1): Right to Vote: each share is presumed to carry one vote unless Articles provide otherwise
Policy: Why do we have this rule that w/in the same class, shares are deemed to have the same rights?
 (1) Formal equality rationale
 (2) Rights attach to a share and not a SH
 (3) Idea is that directors are unable to give preferential treatment to certain individual SH and are not allowed to
distinguish b/w SH-- so if one share has particular rights, all those shares have the same rights
 (4) There is also a disclosure concern that SH should know the terms of the K when they are buying shares
Special Resolution:

Special resolution is required when fundamental changes are being initiated
 Amendment of articles
 Including prejudice to certain classes and series of shares
 Amalgamations
 Continuance
 Sale/Lease of all or substantially all assets
 Dissolution
Amendment of Articles- Section 173
Section 173(1): Amendment of articles or fundamental changes: a special resolution is required in order to (a)
change the corporate name, (b) change the province of residence, (c) modify the business restrictions, (d) change the
cap of the maximum number of shares, (e) create a new class of shares, (f) modify its stated capital (if set out in
articles), (g) modify the qualities of any class of shares, (h) – (l) modify existent shares, (m) alter number of directors or
minimum/maximum number of directors, (n) modify transfer of ownership restrictions, (o) modify any other provision
that is permitted to be placed in the articles. (Subject to s. 176)
 Section 176 – Class Votes- if the amendment to articles will effect different classes of shares differently, then
those different classes get a separate class vote (again 2/3 vote)
 Applies to all classes, regardless of whether the class otherwise has a right to vote.

** makes voting rights mandatory even where shares might otherwise be non-voting.
 Prevents co from issuing preferred, non-voting shares and then removing dividend rights when receive cash
from the shares… in such circumstances s.176 would be triggered and they would have the right to vote if
there was an amendment on the table
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Section 174(1): Constraints on Shares: a public company may by special resolution amend its articles in
accordance with the regulations to constrain the issue, transfer or ownerships of the shares
Section176(1): Class Vote: a class vote is required by shares of the same class where there is proposal to:
 Note- Rights in (a), (b) & (e) can be contracted out of in articles since not fundamental).
 (a) increase or decrease any maximum number of authorized shares of such class,
 (b) effect an exchange, reclassification or cancellation of all or part of the shares of such class;
 (c) add, change or remove the rights, privileges, restrictions or conditions attached to the shares of such class
 (d) increase the rights or privileges of any class of shares having rights or privileges equal or superior to the
shares of such class;
 (e) create a new class of shares equal or superior to the shares of such class;
 (f) make any class of shares having rights or privileges inferior to the shares of such class equal or superior to
the shares of such class;
 (g) effect an exchange or create a right of exchange of all or part of the shares of another class into the shares
of such class; or
 (h) constrain the issue, transfer or ownership of the shares of such class or change or remove such constraint.
Section 176(4): Limitation: if different series in the same class are affected by an amendment differently than the
other shares in the same class, then the series is entitled to a class vote of their own.
Section 176(5): Right to Vote: s. 176(1) applies to all classes, regardless of whether the class otherwise has a
right to vote. ** makes voting rights mandatory even where shares might otherwise be non-voting.

Prevents co from issuing preferred, non-voting shares and then removing dividend rights when receive
cash from the shares. Section would be triggered and they would have the right to vote if there was an
amendment on the table

This is subject to the golden share
Section 177(1): Delivery of Articles: amendments to the articles shall be sent to the Director
Section 179(1): Effect of Certificate: an amendment becomes effective on the date shown in the certificate
amendment and the articles are amended accordingly.
Section 179(2): Rights Preserved: an amendment will not alter liability of persons retroactively; liabilities are not
extinguished
Amalgamations (s181-185)
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Amalgamations also require SH approval by SPECIAL RESOLUTION…Where terms of amalgamation directly or
indirectly affect SH rights, classes vote separately
All shares that are normally non vote, have mandatory voting rights
Where have Short Form Amalgamation, idea is that SHs don’t care about the structure as long as both entities
remain (so rules are different than for Long Form Amalgamation)
when 2 or more companies merge into one amalgamated company
-the rights of creditors are preserved against new amalgamated company
-however, the rights of SH in old company are exchanged for shares, cash, or debt in the new amalco.
Section 183(3)- Right to Vote- Each share of an amalgamating corporation carries the right to vote in respect of
an amalgamation agreement whether or not it otherwise carries the right to vote
Section 183(5) – Shareholder Approval- An amalgamation agreement is adopted when the shareholders of each
amalgamating corporation have approved of the amalgamation by special resolutions.

Continuance under Laws of Another Jurisdiction (s.188)
 If corp wants to leave CBCA in favour of another statute, must do so by special resolution
 Also, mandatory voting rights even for those not voting, but no separate class or seating rights
 Allows corporations to engage in forum shopping, to seek out a statute more favourable to them,
 The Director of the CBCA (in Ottawa, doesn’t do a lot) has to approve this transaction, the continuance of laws into
another jurisdiction.
 The Director considers whether continuance will adversely affect the interests of creditors
 Section 188(4): Right to Vote: no share is denied the right to vote, including non-voting shares
 Section 188(5): Shareholder Approval: require approval by means of a special resolution
Sale, Lease or Exchange of All or Substantially All Assets
 Section 189 (3) -other than in ordinary course requires SH approval by special resolution
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Section 189 (6): mandatory voting, if that class or series affected in a manner that is different than others, class
voting may be required as well
 Qualitative and qualitative factors that determine what “all or substantially all assets is”
 Qualitative: nature of the asset and its importance to business operations

Section 189(9) deals with other aspects of sale all/substantially all says --- directors can terminate exchange if in
resolution put to SH they are authorized to terminate transaction even if SH approve it. This provision is in place
in part b/c in the context of the sale, SH have certain rights to dissent, to the appraisal remedy. If there are
enough SH wanting the transaction that the Directors change their mind about, they have recourse under s190
appraisal remedy anyways
Dissolution - Voluntary Dissolution


Section 210(1): a corporation that has not issued any shares may be dissolved at any time by resolution of all the
directors. The CORP ceases to exist on date of dissolution certificate: s. 210(5).
Section 211(1): the directors, or a shareholder who is entitled to vote, may propose the voluntary liquidation and
dissolution of a corporation. Requires special resolution of each class of shares: s. 211(3). Liquidation procedure:
s. 211(7).
Dissent and Appraisal


Purpose: protection of minority SHs.
s.190 has strict procedural requirements: Fundamental change  SH objects all along  Votes in the Negative
 Resolution approved  Minority SHs meets procedural requirements  Appraisal Remedy granted  FMV (if
cannot agree on FMV, crts decide)
 Section 190(1): Types of Fundamental Changes that will allow access to remedy:

if corporation is subject to an order pursuant permitting a SH to dissent (s. 192(4)(d)) that affects the holder or
to certain fundamental changes, including
(a) modify any provisions restricting the issue, transfer, or ownership of shares (ss. 173, 174),
(b) modify business restrictions (s. 173),
(c) amalgamate otherwise than under s. 184,
(d) be continued under s. 188,
(e) sell all or substantially all property (s. 183(3)), or
(f) carryout a going-private transaction or a squeeze-out transaction.
 Section 190(2): Further Right: a holder of shares of a class entitled to a class vote pursuant to s. 176 may dissent
 Section 190(3): Remedy: a dissenting shareholder is entitled to demand the corporation purchase its shares for
“fair value,” (i.e., the closing price of the stock) before the objectionable business decision was known and if SH did
not vote for it.
 S12 requires Directors to come up with a fair value and rationalize it.
 s15: if can’t agree on FMV, apply to court to affix the value.
o Court would look at a comparison b/w FMV before and after the announcement for a public company,
for a private company will look at other valuation methods
o Not many cases out there on this, b/c it is more of a deterrent to Directors to engage in a transaction
where there is serious dissent.
 Section190 (5): Objection requirement: a dissenting shareholder must object to the change at or before any
shareholders meeting and vote against it.
Pre-Emptive Right
 Right of existing SH to receive first offer to take up any new shares to be issued by the corp’n, in proportion to their
holding
 Rationale: To protect shareholders from the discretion of the directors to issue new shares and prevent the dilution
of shareholder voting power. BUT ABSOLUTE PRE-EMPTIVE RIGHTS may be costly to a firm: Suppose that
CORP has found a new investor willing to provide needed capital for a particular percentage of firm equity. PreEmptive rights may frustrate the transaction by introducing a risk that the new investor will not obtain the
percentage of shares he requires. Problem: new SH may not want to buy into co, b/c they will not have as much
control as SH w pre-emptive rights
 Note: Not a default right in CBCA. Only available if provided for in the Articles, signifying they have been agreed
upon by the Directors and SHs (s.28(1). Applies only to shares of the class being issued
48
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
Section 28(1): Pre-Emptive Right: subject to exceptions listed in s. 28(2), the articles may provide that no shares
of a class shall be issued unless first offered to the shareholders holding shares of that class, and those
shareholders have a pre-emptive right to purchase the offered shares in proportion to their ownership of shares
Section 28(2): Exception: SH have no pre-emptive right in respect of shares to be issued (a) for consideration
other than money (e.g., in exchange for legal services), (b) as a share dividend, or (c) on the basis of conversion
privileges, options, or rights previously granted by the corporation
Example:
 Company has CS and PS; pre-emptive rights attached to both classes (in Articles, pursuant to s.28(1)). Board
decides to issue another 100 CS to SH 4 because of pre-emptive rights; SH1 and SH 2 must be offered the
shares FIRST in proportion to their current holdings.
SH 1
SH 2
SH 3
Common
Preferred
60
50
40
10
Therefore,
 SH 1 can purchase 60 additional shares (60% of new issuance)
 SH 2 can purchase 40 additional shares (40% of new issuance)
 SH 3 is not entitled to issuance of new CS. Only has pre-emptive right wrt class s/he is already in.
Equality of Shares within Classes
 Common law principle: ALL shareholders within a class are deemed to have equal rights with respect to all
matters. Rationales: directors are not permitted to give preferential treatment to certain shareholders; disclosure
concern that SH should know the terms of the K when they are buying shares.
 Formula equality rationale: rights attach to shares, not SH, and thus directors are not entitled to give preferrential
treatment to certain SH
Jacobsen v. United Canso Oil & Gas Ltd Capping Votes via amendment to bylaws prohibited
Facts: the directors passed a by-law that said no shareholder could vote more than 1000 shares no matter how many
shares they actually held. This was done to reduce the likelihood of a hostile takeover. Change wasn’t actually put into
by-laws until 10 years later, the corporation was continued under the CBCA in 1979.
Issue: Validity of the restriction of cap voting rights under CBCA
Held: Not permissible b/c contravened CBCA. All shares must confer equal rights, if voting rights are to vary then
separate classes must exist so the different voting rights can attach to the shares
themselves and not the
holder of the shares.
Ratio: It is only when a company divides its share capital into different classes with different rights attached to them
that the prima facia presumption of equality of shares may be displaced. ALL SHARES CONFER EQUAL RIGHTS
AND IMPOSE EQUAL LIABILITY.
ANALYSIS:
Unless stated otherwise, one vote per share.
(1) When stating voting restrictions or rights attaching to shares must be in articles and not in bylaws to have
any authority (s. 6(1) states that articles must set out a restriction on shares and the rights attaching to them)
(2) Unless the articles state otherwise as per section 6(1), the default rule is that each share carries one
vote (s. 134(1)). Different things and restrictions can only apply to shares in different classes; thus, cannot
differentiate based on the identity of the SH w/in the same class.
(3) If there is only one class of shares, the rights of those shares in the same class must be treated
equally in terms of voting, dividends and distribution of assets (s. 24(3)); based on this, crt says that
Parliament clearly specified that different rights and restriction can attach only to shares when you have more
than one class of shares and crt says that this rule is absolute as you need different classes of shares in order
to create different rights amongst SH).
(4) Within the capped voting right, the identity of the particular SH affected his position (so if SH held 10,000
shares, would only be entitled to 1000 votes, but if SH held 500 shares would be entitled to 500 votes; point is
that differential voting rights treatment based on the number of shares he/she holds is impermissible).
NB: Having provision of 1000 votes only is shark repellant b/c could never vote out management (ie. this type of
provision puts hurdle so high that management doesn’t have to worry). But provision sets up a problem since corp is
discriminating b/w 2 SH. Thus, case says that you can differentiate b/w shares but have to do it by class and
through a structured, predictable approach.
49
NB: How do we reconcile Bushnell (super voting rights were triggered when a D was potentially being removed) and
Jacobsen (voting rights cannot be capped)

Bushnel was a closely held corporation (can make argument that all shareholders consented to the provision) and
Jacobsen was a publicly held corporation (can argue that not all SHs in a position to make informed consent). If
you are dealing with a public company, the principle of liquidity is the norm. s. 49(9): in general, a public
corporation may not restrict the issue, transfer, or ownership of its shares of any class or series, subject to s. 174
(e.g., Canadian ownership).

In Jacobsen it could have been done if they made different classes of shares.

Bushell the super voting rights were adopted when the co was incorporated, whereas in Jacobsen the capped
voting rights were adopted through an amendment at a later point after incorporation.

Also in Bushnell, all had access to these specific resolutions if that specific situation came up

Way to reduce/prevent hostile bidders, so to the extent of other companies wanting to take over, it would be
difficult….thus this is more offensive than Bushnell’s defensive tool
Are there other corporate management ways the CORP can achieve this goal?
 non-voting right share class
 Section 49(9) as a public company must allow SH to trade freely
 limited circumstances where allowed to restrict under s174, restriction such as being a resident Canadian, if the
restriction is to comply with another piece of legislation
 another option is poison pills aka SH rights plans
 Ex. any SH can obtain 10% of all shares, all other SH instantaneously obtain right to purchase often at discounted
price directly from the company. By triggering it, it makes it more difficult for the hostile bidder to take control
 Comment- These plans openly discriminate against a hostile bidder, expressly exclude them, and the courts
have yet to address this issue head on.
 Part of the problem is divided jurisdiction, so securities regulators also get involved, but the securities
regulators haven’t really addressed this in the light of SH equality either.
Re Bowater Canada v. R.L. Crain (Ont. C.A., 1987) step-down provision breaches s.24 principle
Facts: Articles provided that a class of special common shares carried 10 votes each if held by the original
shareholder; if transferred, each share would carry one vote. Bowater wanted to reduce the right to claim 10 votes for
all special common shares to one vote so he challenges validity of Articles. Note: he is attempting to indirectly take
control by having the special voting shares brought down to one vote each.
Issue: Is the article that created the special condition valid?
Held: “step-down provision” in the voting rights invalid because it offends the principle of equality of shares
within classes. BUT, the court severed the step-down provision. In so doing, the special common shares were
deemed to carry 10 votes each permanently, regardless of who owned them. This was consistent with the intention of
the parties (that Crayshak would remain in control and Bowater would get a minority interest)
Rule: Propositions - rights of a given class of shares must be equal in all respects (subject to the separate rights that
may be assigned to series within a class of shares); all SHs of a class of shares must be treated equally
In terms of the remedy, they drop the condition of ‘original SH’ and leave it that for that class, all shares of that class
keep 10 votes regardless of holder, thus attaching right to share, not the holder.
Waitzer: The court was also swayed by the fact that these terms were not new & not created in attempt to respond to
takeover attempts… these votes had existed as part of the Articles in this company which had a 30yr history…in other
cases you might have different results if there was some deception, misrepresentation in terms of SH who purchase
into a company w different voting rights
NB: Distinction b/w Bowater and Bushell: Bowater was a step down provision whose purpose was to maintain
effective control in event of TOB (possibly a widely held corporation) where as Bushell had share certificate that said
who is being removed gets 3 votes for every one share for purpose of making it difficult to remove D (closely held
corporation).
50
Other rights shareholders have
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Directors are obliged to hold regular meetings on a yearly basis (annual meetings)
Mandatory things that should occur in these meetings
Electing directors and appointing auditors
In the case of a public company- the right to appoint auditors is not very meaningful – they are usually appointed
by the directors
For private companies- more important
Shareholders are entitled to receive the annual financial statements
Holding Meetings
 Section 133- directors obliged to hold annual meetings
 the Articles can provide how directors are elected, at the meetings:
 There are non-mandatory things that can be placed on the agenda
 Section 133(2)- calling special meetings
 Directors have right to call a “special meeting” e.g. selling substantial amount of assets or restructure the
company in a time sensitive way … they need shareholder approval … e.g. removing directors
 Section 134- fixing the record date- The directors may, within the prescribed period, fix in advance a date as the
record date for the purpose of determining shareholders
 (a) entitled to receive payment of a dividend;
 (b) entitled to participate in a liquidation distribution;
 (c) entitled to receive notice of a meeting of shareholders;
 (d) entitled to vote at a meeting of shareholders; or
 (e) for any other purpose.
 Section 135- the requirement to give shareholders notice of the meeting and what the meeting is about
The test of notice
 you have to give shareholders sufficient details about what the meeting is about to allow them to make a
reasonable judgment (Section 135(6))
 This gets argued a lot in takeover bid decisions
 Section 138- entitlement to notice- corporation has to put together an alphabetical list- only the shareholders on
that list are entitled to vote, based on the number of shares appearing beside their name on the list
 Section 139- quorum provision
 Unless the by-laws provide otherwise, a quorum of shareholders is present at a meeting of shareholders,
irrespective of the number of persons actually present at the meeting
 If you do not have the quorum, you can adjourn the meeting
 The details of what happens next are in the by-laws – could be that the meeting will be adjourned within 1 hour
and the quorum would be whomever is there at that time
 Section 143- shareholders calling a meeting
 Shareholders of not less than five percent of the issued shares of a corporation that carry the right to vote at a
meeting sought to be held may requisition to call a meeting of a shareholder for the purposes stated in the
requisition
 Basically you have to get 5% of the voting shareholders to get together and requisition the board to call a
meeting- the board has 21 days to do so (section 143(3))
 Exceptions
 The board has already called a meeting
 The subject matter of the meeting is improper
 If the board ignores the requisition- section 144- the Act gives the shareholders the ability to apply to court and
the court can order the board to hold a meeting
Airline Industry Revitalization Co. v. Air Canada - pg. 790- hostile takeover- requisition SH meeting
Facts: American Airlines decided to take a run at AC and merge it with Canadian Airlines- they found a Canadian
buyer (this is because the Air Canada Act restricts foreign owners to 10% of the shares) – they found Onyx owned by
Jerry Schwartz (AIRCO) - it was hostile takeover- requisitioned a shareholders meeting-there were provisions under
the Air Carriers Transportation Act which gave a window of time when the transaction could happen without violation of
the regulations- AC declined to call the meeting- AC wanted to avoid the meeting to not allow Onyx to use these
provisions- while American & Onyx wanted to push through with the requisition
ISSUE: Whether AC’s BOD is required by s.143 (3) to hold a special meeting? If not, whether applicant nonetheless
has a right to call under s.143 (4)? If no, should the court exercise its discretion under s.144 to order the meeting?
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Decision: the court ordered the meeting… the AIRCO requisition is a valid requisition pursuant to s.143 since it was
signed by at least 5% of the requisite voting shares & the business to be transacted (as stated on the form) is business
which may properly be put before a requisitioned meeting of SH. Furthermore, the fact that the BOD had established a
date for a SH meeting later on the calendar, has no application on the facts of the case… the BOD was obliged to call
a meeting of the SH to transact the business stated in the requisition
 Comment: Re s.144 Court’s discretion  a broad discretion to order SH meetings, which should be exercised with
caution … however CORP not run by plebiscite and the SH do not have a general power to call a meeting anytime
they feel like… s.143&144 are exceptions to the primary role of the directors in this regard
Note: This forced AC go into restructuring because it was a bad investment
Appointing a proxy
 Section 147 – recognizing that it may be impractical for shareholders to physically attend meetings
 They can designate someone else to go to the meeting on their behalf or call in by other means
 Section 148- appointing someone else to go to the meeting
 For example: you get a proxy circular that informs you of what will be dealt with at a meeting- if you simply sign
it then you basically give the vote by default to the management
 You can modify it-I want to vote this way on this and this way on that
 Section 149- form of the proxy
 Section 150- defines the concept of solicitation- basically anyone who is out trying to get your proxy
 you cannot solicit proxies – you cannot influence how people vote without providing prescribed disclosure
 [in case of management = of sufficient information to make informed voting decision] or [if not management,
a dissident group providing a circular- their prescribed form is different by the kind of information made
available- but still to provide sufficient info for shareholders to vote on an informed basis]
 Theory- voting should be fully informed
 Exception- Section 150(1.1)- solicitation to fifteen or fewer shareholders
 Increasingly large amount of shares being held by pension funds
 To what extent can they talk amongst themselves in an effort to encourage corporate governance
 Public benefit for shareholders to talk amongst themselves without the cost of having to send a proxy
circular to all of the company
 If you are only talking to 15 or fewer you can talk away all you like without having to do a proxy solicitation
Ability to make shareholders proposal
 Section 137(1)(a)- any shareholder who is entitled to vote at the annual shareholder meeting is entitled to
announce the directors of what they intend to raise at the meeting
 Unlike s.143 this section has no minimum % of share required
 s.137 has become a favourite of social activist shareholders
 Section 137 (1)(b)- shareholders can discuss at the meeting any matter in respect of which the person would have
been entitled to submit a proposal
Matters that shareholders may raise

s. 137(4): nomination of a director (if own 5% shares entitled to vote)

s. 137(5): make, amend or repeal a bylaw

s. 175(2): amend the articles

matters of social responsibility

business policies such as debt equity ration

auditors

compensation
Verdun v. TD Bank (1996) (pg. 777)- only registered owners can bring proposal
Facts: Bob Verdun wanted to bring a proposal at an annual meeting of TD Bank- TD Bank said that they do not need
to take this proposal from him under the Bank ActIssue: is someone who is a beneficial owner as opposed to a registered owner entitled to bring a proposal?
Decision: In order to bring a proposal at annual meeting you have to be a registered owner, not a beneficial owner.
Reasoning:
 Beneficial Shareholder
 When you go to a broker to buy the shares on your behalf, the shares will stay in the name of the broker
 The shares stay immobilized in the repository- every couple of hours, these share trades get netted out
 Registered Shareholder
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Only time you have registered shares, is when the shareholder requests the shares registered in their name
There are cost savings when the shares stay in the street name and also anonymity is preferred sometimes
In fact, beneficial owners are entitled to the same information as registered owners
Most people are beneficial owner, not registered owners
Verdun was a beneficial owner
Note: the CBCA was amended afterwards via sections 137 (1.1) to include both registered and beneficial owners
Micheaud v. Banque Nationale du CDA (pg 776-7)- token shareholders have same rights- overridden by statute
Facts: activist shareholder- he owned one share in some financial institutions such as RBC- At the time there was no
minimum share hold by statute- Bank not wanting to listen given that he had token shares & Bank did not want to bear
the cost of having to go through this
Issue: does a token shareholder have the same rights as the others?
Decision: the court held this was enough- he was meeting all the requirements under the CBCA- no statutory min.
Reasoning
 Bank argued that that he only owned a token share and is not a real shareholder
 Court held there is not statutory minimum
Note: proposals costs money to the corporation because they have to be printed and sent to everyone
Note: shareholders cannot tell directors what to do
a. If they have enough voting power they can replace the directors
b. However, while the directors are in power they cannot tell them what to do
Note: The regulations were amended afterwards -CB Regulation- Section 46:
 for purposes of s.137(1.1) & 261(1)(c.1) of CBCA the prescribed number of shares is the number of voting shares:
a. equal to 1% of total outstanding voting shares as of the day proposal submitted; or
b. FMV of the share on the close of the business day before the proposal is submitted is at least $2000
 Section 46 (b) - the prescribed period is 6 months immediately before the day on which the shareholder submits
the proposal
Shareholder Proposal Restrictions
Section 137(5) - shareholder proposal restrictions:
 (a) has to be submitted prescribed # of days (Regulation s.46)
 (b) the company can reject a proposal if it looks like a personal claim (theory is that there are other remedies for
personal claims without exposing costs for the shareholder meeting)
 (b.1) if clearly the proposal does not relate in a significant way to business or affairs of the corporation
 Comment: This is the most litigated
 Old Rule: proposal was for promoting general economic, political, racial, religious, social or similar causes are
grounds for restriction of such proposals
 New Rule: Test has been relaxed, because over time a number of successful activist shareholders argued that
such political, social, religious can have significant impact on business affairs of the company
 now the test is whether it significantly impacts the business affairs
Note: shareholders cannot by virtue of a passed proposal require the directors to act in accordance
 shareholders can only recommend, because the board has the power to make decisions
 this is the division of authority between shareholders & the board of directors
Greenpeace Foundation v. Inco -pg 776- Applying the old test
Facts: - submitted a proposal to INCO regarding pollution measures -Inco relied on 137(5) (b.1) to refuse;
Held: Upheld the refusal
Reasoning: proposal was related to an environmental cause, & under the old test (eco, pol, soc) not applicable
 (1) Greenpeace was not a shareholder at the material time—90 days before anniversary: s. 137(5)(a).
 (2) the proposal was substantially same as last year’s proposal: s. 135(5)(d), even if the target was much lower.
 (3) Third, the proposal is related to an “environmental” cause: s. 137(5)(b) and so had nothing to do with
business/affairs of corporation (this issue not discussed, just concluded).
Varsity Corp. v. Jesuit Fathers of Upper CDA pg 772
Facts: Proposal was to limit investment in S. Africa
Held: not required to accept the proposal
Reasoning:
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given that the general purpose not what the test held but rather an attempt to argue it via collateral basis & not
directly relating to business
The purpose of the proposal was actually described in the preamble as the peaceful elimination of a partite in S.
Africa & they also though the economic investments as too risky
Given the old test, did not have to include the proposal as it was primarily a political/social
Right to refuse to follow proposal
 CBCA governs the right of management to refuse to listen to proposals
 If mgmt rejects inclusion of a sh proposal, the sh have to go to court for determination
 Expensive avenue thru the court
 In Canada mgmt has greater incentive to reject proposal as compared to US.
 Management response to proposals is based on common law as well as strategy
 MGMT still might include a proposal, even if it’s legally dubious, just so they look like they encourage sh
democracy (especially if mgmt is confident the proposal will succeed)
 Mgmt might be concerned about negative publicity attracted by rejection of proposal,
 It might negotiate to act on certain parts of proposal in exchange for withdrawal of the proposal.
Note: Also Section.137 (5) includes:
 if you made a proposal at a previous meeting & did not show up to present it - cannot make the same proposal
 if a substantially similar proposal was made at previous meeting & did not achieve the requisite level of support
then it may be considered abuse to secure publicity
 rights conferred by this section are clearly being abused
Conduct of Meetings- the Limited Rights of Discussion
 Section 137(1)(b) of the CBCA and Section 99(1) of the OBCA provide for a shareholder right of discussion

Entitled to limited right of discussion on proper subject matter
 One of the issues that arises in contested meetings is how to cut off someone
 The consequence of cutting off prematurely is the possible court challenges of the validity of the meeting
Right to discussion
 Courts no fixed rules in this context
 Courts have recognized some right on part of SH’s to give opinions provided they’re not reasonable, and subject to
broad discretion of chair of the discussion when she sees fit (this chair usually a sr. officer or director of the co.).
 Courts are deferential to discretionary power of the chair.
 The only duty of the co. is to listen to reasonable arguments for a reasonable time.
 The chair has authority to terminate the debate at some point even if some sh’s feel they haven’t had a full hearing.
 A court will be more likely to intervene if mgmt is using its power at the meeting to obstruct the wishes of a majority
of the members- If a chair adjourns a meeting of majority that displeased w/ mgmt and asks for an investigation
National Dwellings Society v. Sykes (1894)- Pg 758
Facts: SH’s dissatisfied with co. mgmt- Proposed at a meeting a committee to investigate affairs of the co - Chairman
of meeting, Sykes, rejected the proposal and put resolution for sh’s to accept financial accts for the year- The SH’s
voted down the resolution by a majority, and so Sykes refused to carry on with any other business- the other business
was election of directors, etc…instead he ordered the meeting dissolved and he walked out- The SH’s unanimously
elected a new chair, proceeding on their own, and appointed an investigative committee.
ISSUE: were the SH’s entitled to resume the meeting once Sykes left?
Ratio: The chair has to maintain order – however chair not allowed to stop the meeting whenever wants to serve own
interest. Chair’s powers to conduct meeting are such that they must be exercised in orderly manner and in fair and
reasonable manner
Wall v. London and Northern Assets Corp- Pg755 –
Facts: Dealing with the ability of chair to bring closure to a meeting
Ratio: Court looks at this based on reasonableness
 minority cannot be given a weapon to drag on meetings
 the majority should have the means for bringing meetings to an end (passing resolutions & putting them into effect)
54
Note: Recent cases have affirmed the right of sh’s to be heard at a meeting, and the duty of the chair to be neutral and
hear both side

Bomac- The chair failed in his duty to act quasi-judicially, since it is a fundamental error by presiding officer to fail
to hear both sides of an argument before coming to conclusion. He failed in duty in leaving a meeting with a
quorum present
Blair v. Enfield - Pg 763- Dealing with the duties of the chair
Facts: Blair, who had been CEO knew he was about to be deposed because others had acquired a majority- he
conducted the meeting- he retained outside counsel to assist him as chair of the meeting- in the course of the meeting
he sought advice as to the validity of proxies- he made rulings opposed to shareholders that ultimately made a
proposal
Ratio: chair has a duty to preserve the integrity of the voting process
Held: even though he was voted out at the meeting he was entitled to rely on his indemnity because he acted on good
faith & legal advice
Note: Courts are reluctant to interfere with the conduct of shareholder meetings
Access to Company Records- SS.19-21 of CBCA:
 Section 19: Registered office - (1) a corporation shall at all times have a registered office in the province in
Canada specified in its articles. (2) Notice of Registered Office - notice of the registered office along with any
amendments to relevant articles shall be sent to the Director. (3) Change of Address - the directors may change
the address of the registered office within the registered province, provided (4) Notice of change of address notice is forwarded to the Director within 15 days
 Section 20- Corporate Records- the company is required to maintain at its registered office records containing
the bylaws, articles, any unanimous shareholder agreements, minutes, notices required under Section 106 (terms
& appointments of directors), Section 113 (changes of address of directors) &securities register, record of director’s
meetings, accounting records
 Section 20(2)- records that have to be maintained that are available to the directors
 Financial records and copies of minutes of meetings or resolutions of the board of directors or any committees
 Those have to be kept at the registered office
 Section 20(5)- accounting records do not have to be kept in Canada, however:
 if accounting records are held outside of Canada, then certain accounting records have to be kept at the
registered office or other place in Canada designated by the directors these accounting records have to be adequate to enable the directors to ascertain the financial position of the
corporation with reasonable accuracy
 Section 21 –Access to Records- SH & creditors of corporations or their reps can examine anything in 20(1)
 Entitled to examine during business hours & entitled to take extracts of it
Arguments for and against broad disclosure of such docs to public:
Arguments for broad disclosure

Mkt efficiency- You can’t expect investors make good decisions w/out anything less than full info about the co
 Mkt works best when everyone acts to maximize their own returns thru use of this info
 Principle of sh democracy
 Power to hold mgmt accountable thru corp governance structures.
 Empty if SH’s didn’t have info on which to evaluate mgmt’s performance
 Public Interest: co’s affect everyone, and as such should be required to disclose harms and info related to their
business activity.
 Globalization of securities markets. If other juris'n’s increasing disclosure stds, we at leas teed to keep up and
harmonize our disclosure rules (for fear of losing appeal to business community)
 Concept of equal opportunity:
 Insiders of the corp have access to lots info and details of the co.
 This info should be made available to all so that all investing on equal playing field.
Against broad disclosure
 Interpretation of things can be difficult with so much info being provided
 Could be competition issues and need for Corps to keep things secret in order to get returns on them. Forced
disclosure might hinder this.
 The cost can be quite large; smaller Corps make this point that cost can be quite significant
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Fundamental Changes
 Significance of fundamental changes is that they are matters so fundamental that all shareholders get a vote
 This is so even if they were not entitled to a vote before
 Vote is by special resolution-They require 2/3 majority vote to pass
 Most popular types of fundamental changes
 Amendments to the articles –Section 273(1)
 Amalgamations- Section 183(3)
 Sale or lease of all of the assets of the corporations -Section 189(6)
 Continuance of the corporation under a different jurisdiction- Section 188(4)
 Dissolution of a company or winding up of a company (section 211(3))
Note: Section 176- if it is a fundamental change, and one particular class of shares may be prejudicially affected in
comparison to others, that class of shares gets a separate vote (in addition to the fact that all classes get to vote)
 in effect it gives certain affected classes a separate veto classes
Shareholder Agreements- Section 146
Types of shareholder agreements:
 Unanimous shareholder agreements has the effect of displacing the duties and responsibilities of the board of directors
 Other Agreements-Any shareholders can get together and make agreements
 Agreements by 2 or more shareholders to vote together
 Agreements restricting share transfers
 In private companies you would have shareholder agreements restricting share transfers
 This is especially so in smaller companies
 You would want to make sure you know who your partners are- you may want the right of first refusal or
may make an agreement that the other shareholder have to approve the transfer of share
 You could put anything you want into a shareholder’s agreement
 Anything that is decided in the shareholder agreements has to be on share certificates
Unanimous Shareholder Agreements
Ringuet v. Bergeron-SCC- (1960)- pg. 839- overridden by Section 146 of the CBCA
Facts: shareholders enter into an agreement saying: this is how we are going to direct the directors to act- they wanted
to require the directors to vote a certain way- CCAAIssue: can you by agreement override the duties of directors?
Held: No, you cannot override the duties of directors via agreements
Note: In 2001, section 146 of the CBCA was introduced to override Bergeron
 You can enter into a unanimous shareholder agreement, and in doing so, you can in effect substitute a
shareholders agreement for director’s discretion and assume director’s liability
 If the shareholders get together and decide that they are going to substitute the shareholder agreement for
director’s discretion as supplied by the Act, section 146 says this is valid subject to certain requirements
 To the extent that you do, you are also relieving the directors of their liabilities and their fiduciary duties and
you take them over as shareholders
Note: Questions that the statute does not address
 Section 146- relieves directors of liabilities under the CBCA in the case of shareholder agreements
 However, it does not relieve directors under other statutes- 30 statutes that may impose liability on directors
 unanimous shareholder agreements that relieve director of their liabilities are never used in public companies and
seldom used in private companies because of this uncertainty
Notice of unanimous shareholder agreements
 Section 146(3)- Constructive Party- purchaser or transferee of shares subject to USA is deemed to party to USA
 Section 146(4)- When not notice given- if notice if the USA not given in accordance to 49(8), the purchaser can
rescind the transaction within 30 days of becoming aware of the existence of the USA
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Section 146(5)- Rights of Shareholders- if powers of directors are restricted by USA, the parties who gain the
power are deemed to have all the power, duties and liabilities of a director (they also have the right to the same
defenses)
Section 49(8)- putting a legend on the share certificate itself
 Notice on a certificate works better in a private company environment- because the only way share transfers
occur is by physical transfer of the certificate
 For the public companies- the legend is there
 Sometimes the restrictions are registered on the computer
 It is also the duty of the broker to advise you on this and inform you of restrictions
Restrictions of Share Transfers
 Section 49(8)- Transfer restrictions require notice to transferee
 Share transfer restrictions (Other than section 174 which deals with regulated industries- limited restrictions)
 If the shareholder owes money to the company and has pledged the shares as security for a debt, a
unanimous shareholder agreement or an endorsement under 190(10)( if the shareholder dissents to a
resolution and the motion passes, they are entitled to FMV for their shares- if the company is insolvent, you
become an unsecured creditor)
 Notice of this situation is required if you try to sell your shares to someone else
 Section 51(1)- dealings with the registered holder- a company is entitled to deal with the registered owner in
terms of sending notices or dividends- a company does not have to figure out who the beneficial owners
 Under Securities Laws, it becomes the duty of the registered owner to pass on those benefits to the beneficial
shareholder- (basically the brokers would be contacted by the corporation and they would be passing on the
info or the dividends to the beneficial owners)
 Section 60(1)- Delivery of a security- the purchase receives what the seller had in that share certificate, unless
the purchaser has incurred some sort of fraud, or has notice of some adverse claim with respect to that security
 Section 60(2)- a bona fide purchaser of that security, who does not have notice of adverse claims, acquires that
security without incurring the adverse claim
 Section 65(3)-Endorsement- how transfers take place- requirement for signature on the security or on a separate
document, requirement of an assignment or transfer, or just a signature on the back of the security
 Note: On the back of the share certificate there will be a provision for transfer and the registered owner, or
someone authorized to act on their behalf will sign off to transfer
 This means that the security then is transferred even though the seller’s name is still on the certificate
 Section 76(1)-duty on the part of the company to register a transfer
 Where a security in registered form is presented for transfer, the issuer shall register the transfer if
 (a) the security is endorsed by the appropriate person as defined by section 65
 (b) reasonable assurance is given that endorsement is genuine and effective
 (c) the issuer has not duty to inquire into adverse claims or has discharged that duty
 (d) any applicable law relating to the collection of taxes has been complied with
 (e) the transfer is rightful or is to a bona fide purchaser
 (f) any fee referred to in subsection 49(2) has been paid
 The transfer agent is obliged to register the transfer
 Section 78(1)- protection for the company- the issuer
 There is a limited duty on the issuer to inquire into adverse claims
 If an issuer is presented with a security to be transferred and registered and has some notice of adverse claims
 Onus is shifted back to the security holder to resolve that adverse claim
Smith & Fawcett (1942) – restrictions on share transfers
Facts: someone who held 4001 shares- the directors told him that they will only register a transfer if the guy sold 2000
shares to one of them at a certain price- the articles provided that the directors in their absolute and uncontrolled
discretion may refuse to register any transfer of shares
Held: Cannot do this- absolute and uncontrolled discretion is still subject to fiduciary duties to act in the best interest
of the company and not for any collateral purpose…must exercise their discretion bona fide in what they consider
(not what the court may consider) to be in the interests of the company
Analysis
 Must have regard to those considerations only which the articles upon their true construction permit them to take
into consideration. One of the rights of a shareholder is to deal freely with his property & to transfer it to
whomsoever he pleases (SH has a prima facie right)
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Another consideration when examining construction of Articles is they type of company…
where private companies, though still separate legal entities just as public Co, but from business & personal
standpoint they are much more analogous to partnerships than to public CORP …
accordingly it is to be expected that the Articles of such Co the control of Directors over membership may be very
strict (as there are very good business reasons)
Edmonton Country Club v. Case (1975) SCC- ability of directors to turn down a share transfer
Facts: 20yrs after inception, the Articles of the Co were altered to impose a minimum annual fee and to give a right of
forfeiture or forced sale of shares in the event of default… the changes included the notion that if the annual fee is not
paid and or did not pay for playing fees of the club, the CS or PS of the SH would become subject to a lien or charge in
favour of the Co enforceable by sale of shares … articles were also amended to allow Directors to set the amount of
transfer fees for registration of share transfers… NOTE split of the court is RE the right to refuse the registration of
transfers existed from the birth of the Co!
ISSUE: the validity of the article clause giving directors the right to refuse to register any transfer
Held: directors can restrict transfers
Analysis
Majority- Before the court moves to strike down such power as unreasonable, there must be some factual support for
such a conclusion, there is no evidence before the court nor alleged, that the Directors have at anytime during the 30yr
history of the Co acted in bad faith, arbitrarily or otherwise abused the power. More relaxed the Smith
Dissent in part- Reasonableness test- closer to Smith

What the share transfers were really about were about admitting new members

We should not be imposing corporate fiduciary duties on the discretions of directors to allow members in…

the article in question should be struck out
 such power is on its face arbitrary which is not related to any standard for the exercise of an unfettered discretion
 this power has turned the Co into a private club despite its INC as a public Co …If a company is not willing to
establish criteria upon which to enable a measure of reasonable exercise of discretion to be considered in
advance, it ought not be permitted to have the cover of INC as a public Co
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Defences against director liability


Section 123(4)-Defence- reasonable diligence
 A director is not liable under section 118 or 119, and has complied with his or her duties under subsection
122(2) if the director has exercised the care, diligence and skill that reasonably prudent person would have
exercised in comparable circumstances, including the reliance in good faith on
 (a) financial statements of the corporation represented to the director by an auditor of the corporation or in
a written report of the auditor of the corporation fairly to reflect the financial condition of the corporation
 (b) a report of a person whose profession lends credibility to a statement made by the professional person
Section 123(5)- Defence good faith
 A director has complied with his or her duties under subsection 122(1) if the director relied in good faith
 (a) financial statements of the corporation represented to the director by an officer of the corporation or in a
written report of the auditor of the corporation fairly to reflect the financial condition of the corporation
 (b) a report of a person whose profession lends credibility to a statement made by the professional person
Part XIV- Financial Disclosure
 Section 155- directors have to present to shareholders at annual meetings financial statements
 Section 155(2)- exceptions- financial statements may be omitted if the reason for the omission is set out in the
financial statements, or in a note thereto, to be placed before the shareholders at an annual meeting
 Section 156- Provides for exemptions for omitting certain info from the financial statements if the directors believe
that including that info in the financial statements would be detrimental to the corporation
 Section 157- need to maintain financial statements and that those statements are available for inspection by the
shareholders or their personal representatives
 Section 158- the requirement that the directors approve the financial statements and that they should not be issued
until they are approved
Role of Professional Advisors- Auditors
 Is every co required to have one?
 Section 163 of CBCA says a co that’s not public can resolve not to appoint an auditor if there’s a unanimous
consent of all the sh’s, but this resolution is only valid for one year- so all the sh’s the following year will have to
agree that they won’t have the co’s financial stmts audited.
 What is the auditors job?
 Review and report on financial statements prepped by mgmt…
 Section 169 of CBCA highlights the auditors review and report to be preparedd in accordance with rules set out
by CICA (Cdn Inst of Chartered Accountants).
 Problem with auditing function:
 Great deal of discretion in accounting matters
 Lack of independence of auditors from mgmt.
Number of provisions in CBCA deal with qualifications, election and appt, removal, etc. of the auditor and oversight of
the auditor by regulatory bodies.
 Section 161- qualification of auditors- subject to subsection (5), a person is disqualified from being an auditor of
a corporation if the person is not independent of the corporation, any of its affiliates, or the directors of any such
corporation or its affiliates
 (2) independence- definition of independence
 Section 162-provides that auditors are appointed by shareholders by ordinary resolution and can be removed the
same way
 In theory shareholders fix their compensation in the same way directors do
 In a private company this would true
 Section 163- private companies do not require auditors- Although they can decide they want an auditor
 In a public company- this is a little farfetched – management usually proposes through a resolution who the
auditor should be and they set their remuneration for one year
 Section 165- Removal of Auditors- can be removed by ordinary resolution at any time (rare)
 Section 168(5) and (5.1) - if a resolution to remove auditor is to be before a meeting, auditor to get chance to
respond in writing, and must be forwarded to SH with notice of the meeting
 Section 168(7): replacement auditor needs written statement as to why old auditor is getting removed
 Section 170: auditors entitlement to information
 Section 171- public companies have to and others may have an audit committee
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Prescription of independence and the duties of the audit committee- at least 3 people, a subcommittee of the
other, majority being o/s directors, but this rule is possibly being changed that the audit committee must
entirely be o/s directors, securities law already has this requirement
 Meetings, auditor can attend and review the f/s by sr. fin officers and interact to get certification prior to certified
f/s are issued to board for final approval
All of these requirements in corporate law have been substantially enhanced under Securities Laws
 A lot of new regulations post Enron and Worldcom
 Biggest problem that accounting firms deal with today is liability
Do these protections work in protecting from management being too involved?
 difficult for auditor to complain of the actg methods used, b/c would result in being removed
 larger concern for reputation, don’t want to have rep for ‘causing trouble’ with management
 some courts say auditor should be watchdog not a bloodhound
 other judges say that role of auditor is increasingly important and so this is a dated concept
Auditor Liability
Hercules Management Ltd. V. Ernst & Young (pg. 903)
Facts: E & Y were auditing Hercules- things went wrong
Issue: do auditors owe a duty of care to the shareholders?
Held: no liability for auditors for unspecified shareholders
Analysis:
 it was not reasonable to assume that shareholder used auditor financial statements to make their investment
decisions- There was no reliance
 Auditor could not be held liable to unspecified shareholders
 You have to prove actual reliance on the auditor statements- in this case this could not be proved
Note: this is why auditors in Canada do not have to insulate themselves too much
Note: discussion on auditor liability
 Narrowing of auditor liability brought about by Hercules was closely followed by an amendment to the CBCA from
joint and several liability of defendants to proportionate liability in situations where there is a financial loss that
arises out of an error, omission or misstatement in financial information (section 237.3(1))
 Under the old scheme, if the auditor was responsible for only 5% of the liability, and the rest of the liability was
on the company and others, the auditor could still be on the hook to pay 100% of the liability (joint & several)
 Under the new scheme, with some exceptions, the auditors would be liable only to the extent that they were
responsible for the losses
 There is nothing in the statute about lawyer liability
 Common law- due diligence defence
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Corporate Stakeholder and Social Responsibility
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Whole focus of corporate law is facilitative- focus on maximizing shareholder wealth
Fiduciary duty - Directors should be acting in the best interest of the owners and shareholders
One of the difficulties of saying that the directors owe duties to a broader range of shareholders
 If accountability goes to shareholders, employees, customers- how do we balance these duties and how do we
determine if they have discharged of their duties
Dodge v. Ford Motor Company (pg. 263)(1919)- US Case
Facts: Henry Ford, decided that instead of paying out dividends, he would use the funds to reduce the price of cars- 2
shareholders took him to court to try to convince the court to compel Ford to pay out dividends
Held: court agreed with the Dodge brothers
Ratio: corporation should be organized to carry on primarily for the profit of shareholders
Analysis
 You can do what you like with your own money in terms of social interests
 When you are running the company, the business organization should be organized to carry on primarily for the
profit of shareholders
Parke v. Daily News Ltd.(pg. 269)- English Case
Facts: the newspaper was not profitable- they decided to wind it up and sell off the assets- once they sold of the
assets and paid off the liabilities, there was still surplus- the board of directors decided to use the surplus to pay
employees severance compensation (this is compensation they had not legal entitlement to)- the shareholders did not
receive anything- they sued
Held: consistent with the Dodge Case- the directors breached their duties by disregarding their fiduciary duties to the
company’s shareholders in favour of the employees
Analysis
 Statute says that the directors should act in the best in interest of the corporation
 The best interest of the corporation is the best interest of the shareholders
Teck Corporation Limited v. Miller (pg. 277) (BCSC)– shifted ground in Canada-expanding the net
Facts: case that dealt with the duties of directors in a takeover situationHeld: directors may observe a decent respect for interests beyond those of shareholders- there may be other
stakeholders whose interest directors would have to consider
Analysis:
 considering the duties of directors - under Securities Laws there are exclusive policies that say the duties of
directors is to maximize the wealth of shareholders
 the court decided there are other stakeholders that need to be considered
Note: activist judge-advocate for aboriginal rights- many cases have followed this decision
Theodora Holdings Corp v. Henderson (1969) pg. 278- challenging charitable donations
Facts: the ability of a company to make charitable donations was challenged
Ratio: in order for corporate charitable or educational gifts to be valid they must be within reasonable limits both as to
amount and as to purpose
Analysis
 theory behind this type of challenge is that the corporation is spending the shareholder’s money
 the corporation should pay out the dividend and it should be up to the shareholder to decide whether or not
they wish to donate
 court looked at statute and case law in the US and decided that the corporation is within its rights to make
charitable donations
 the test to be applied is one of reasonableness of the gift
 the court looked at the impact on each individual shareholder- it was something like $0.15 per contribution
 moreover, the court saw that the reserve for unrealized capital gains taxes was reduced by $130,000,
effectively increasing the balance sheet net worth of the shareholders
 benefit outweighs the loss to the individual shareholders
 court upholding policy of philanthropic value of donations
Comment
 Waitzer- donations has a marketing purpose and a social purpose, however, sometimes donations may have other
purposes, like reducing taxes or furthering the well being of a board member (ie: political contributions)
 One solution- Disclosure of charitable donation may impose some sort of discipline
 Here is where we made our donations- here is how much
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Through this disclosure would come some level of scrutiny from shareholders
However, this type of disclosure is very rare
CNR Run Through Report
 Question that Commission asked of the courts: whether there was any basis in law, absent a specific regulatory
requirement, to impose in CNR Railroad duties of corporate responsibility to communities
 Held: there was no basis to impose corporate social responsibility to communities
Theory- Continuum
 Chicago School approach- Business of business is business directors should be focused on maximizing the profits of the company
 The interest of other stakeholders are protected by other areas of the law
 They can be protected by contract, specific regulations or statutes
 Social benefits to maximizing wealth creation
 If you think that the corporation is good mechanism for maximizing wealth-then maximizing the profits of
the corporation would make sense
 Corporation should engage in some socially responsible activities
 Theory that fulfilling social responsibility and maximizing corporate profits are not mutually exclusive
 This is supported by case law such as Theodora- ok to give money to charities as long as it is reasonable
 Corporate managers should be following the spirit of the law in addition to technical compliance
 Even if non-compliance with the spirit of the law might increase value in the short term they should look at the
spirit of the law
 Corporation should be directly responding to non–shareholder interest, by
 Expanding the purposes of the corporation to include non-shareholder groups
 Meaning direct representation of non-shareholder groups in the decision making of the corporation
Ethics
 Article on the website about Philanthropy and Prosperity
 1st level of argument- Part of ethical conduct is just good business
 People deal with you because they feel they could trust you
 It is about how you are perceived
 2nd level of argument- we have a market place that is focused on short term performance
 Everything from the performance of the company to the bonuses of the CEO are measure on short term results
 As such it becomes very hard to reconcile maximization of profits with corporate social responsibility
 This ignores that some of the best business opportunities have a great social benefit
 Example of instant coffee process implementation by Nestle to save Brazil from its insolvent status
 It had a great positive impact on Brazil and on their business
 The questions that CEO’s are faced with, is why invest in people or other things when you are focusing on
short term profit goals and you are likely not going to be around for the benefits of that
 However, Waitzer believes that the better corporations out there focus on the long term
 3rd level of argument
 Articulated by the McKinsey partner in the article on the website
 On the one hand the business of business is business
 On the other hand, it is important for a corporation to mitigate any negative impact of the corporation
 CEO’s spend very little time focusing on the shareholders and more time dealing with the community and the
clients- it is important to be able to identify needs in the market and figure out business solutions
 These are some thought that try to desimplify the polarity of the debate between those who think corporations are
evil and should be regulated and those who think that the corporations should focus on short term profits
Shareholder Statutes
 In the US, there are a few statutes that allow directors to think about other stakeholder, such as non-shareholders
 Pennsylvania- Adopted statutes that specifically allows directors to consider other stakeholder outside of the
shareholders when making their decisions
 This provides an additional defence for the directors
Proposal
 Hutchinson, would like to have non-shareholders on the board
 Waitzer unsure about this proposal from the perspective that they do not necessarily understand what is going on
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Duties to Creditors
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There is a legal question about whether director and officers owe duties to creditors?
As a company approaches insolvency, shareholders do not really have a stake- they are at the end of the chain
As such, creditors are the ones that are going to play an important role
People’s Department Store Ltd. (1992) Inc. Re (pg. 296)
Facts: Wise brothers acquired People’s Department Stores, which had been acquired by Marks and Spencers- M&S
decided that People’s is not fully profitable- Wise bros wanted Peoples in order to expand in Canada as well- it was a
growth strategy- however, People’s wanted to be fully paid for all of the stores prior to the amalgamation taking place
with the Wise Brothers- they had to run the stores as separate business, because if People’s does not get paid then it
would harder to take back their stores - the way they handled it is that the Wise brothers would handle domestic
purchasing for the whole group- People’s would handle offshore purchasing for the whole group- joint purchasing
scheme- they would do transactions to even it out- both business went under- the trustee for People’s claimed against
the Wise brothers that there had been a fraudulent preference- that the Wise brothers had taken advantage of People’s
in terms of People’s ability to buy inventory or extend credit- and this contributed to People’s going under- this was
going against the Wise brothers personally
Held: in an impending insolvency, directors do not owe a duty of care to any one type of stakeholders, including
creditors.
Analysis
 The trustee argues that: compelled to assume the duties imposed on them under Section 122(1) of the CBCA, the
brothers did not act in the best interest of the creditors of People’s Inc. which is tantamount to not acting in the best
interest of People’s Inc
SCC dealt with the issue as a fiduciary duty issue
1. Directors didn’t owe a fiduciary duty to the creditors even when it was clear that People’s were close to insolvency
 Fiduciary duties are fiduciary duties- they do not change
 Remedies that creditors have are duties of care
2. Acting in the best interest of the corporation according to the SCC means not favouring any particular group of
stakeholders
 Para 47- in using your skills for the benefit of the corporations when it is in troubled waters, the directors must
be careful to attempt in the best interest of the corporation by attempting to create a better corporation and not
favour any one group of stakeholder
 Waitzer- he advises that you should consider the interest of creditors
 Creating a better corporation has been taken to have expanded the fiduciary duties to a whole range of
other stakeholders
 Waitzer- does not believe this is true- it is just activists that argue it this way
3. When it comes to the due diligence defence, you need to consult professional groups listed in Section 123 of the
CBCA in order to take advantage of this defence
 One of the defences that the Wise bros put up, is that when they started running into inventory management
problems, they went to the VP of finance for advice and he cooked up the scheme for inventory management
 Their argument was that they received professional advice and they relied on it
 The court dealt with that quite severely- although the CFO had a lot of experience he was not meeting the
requirement of a professional- he was not an accountant or lawyer- he also did not carry insurance
 They ended up not finding the directors liable for breach of fiduciary duty anyway
Note; this decision has created a lot of uncertainty
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Duties of Directors and Officers

Two types:
 Duty of care- relates to standards of confidence and diligence
 Duty of loyalty and good faith
 They are fiduciary duties in conflicts of interest
Legislation
 Section 122(1)(a)- FIDUCIARY DUTY- every director and officer of a corporation in exercising their powers and
discharging their duties shall act honestly and in good faith with a view to the best interest of the corporation
 Section 122- (1)(b)- DUTY OF CARE- every director and officer of a corporation in exercising their powers and
discharging their duties shall exercise the care , diligence and skill that a reasonable prudent person would
exercise in comparable circumstances
 Section 122(2)- Duty to Comply- every director and officer of a corporation shall comply with this Act, the
regulations, articles , by-laws and any unanimous shareholder agreement
 Comment: you cannot contract out of these- they are mandatory
 Section 122(3)- NO EXCULPATION- subject to subsection 146(5), no provision in a contract, the articles, the bylaws or a resolution relives a director or officer from the duty to act in accordance with this Act or the regulations or
relives them from liability for a breach thereof
 Section 146(5)- unanimous shareholders section- if the shareholders have signed up a declaration taking
away power from directors, then it is hard to hold directors liable
 Section 123(1)- Dissent-a director who is present at a meeting of directors or committee of directors is deemed to
have consented to any resolution passed or action taken at the meeting unless
 (a)- director requests a dissent to be entered into the minutes
 (b) – directors sends written dissent to the secretary of the meeting before the meeting is adjourned
 (c)- director sends a dissent by registered mail or delivers it to the registered office of the corporation
immediately after the meeting is adjourned
 Section 123 (2)- Loss of Dissent- a director who votes for or consents to resolution is not entitled to dissent
 Section 123(3)- Dissent of absent director- if director not present at the meeting, he is deemed to have consented
unless within 7 days after becoming aware of the resolution, the director
 (a) – causes a dissent to be placed with the minutes of the meeting
 (b)- sends a dissent by registered mail or delivers it to the registered office of the corporation
DEFENCES- See above section on defences
 Section 123(4)-Defence- reasonable diligence
 A director is not liable under section 118 or 119, and has complied with his or her duties under subsection
122(2) if the director has exercised the care, diligence and skill that reasonably prudent person would have
exercised in comparable circumstances, including the reliance in good faith on
 (a) financial statements of the corporation represented to the director by an auditor of the corporation or in
a written report of the auditor of the corporation fairly to reflect the financial condition of the corporation
 (b) report of a person whose profession lends credibility to a statement made by the professional
 Section 123(5)- Defence good faith
 A director has complied with his or her duties under subsection 122(1) if the director relied in good faith
 (a) financial statements of the corporation represented to the director by an officer of the corporation or in a
written report of the auditor of the corporation fairly to reflect the financial condition of the corporation
 (b) a report of a person whose profession lends credibility to a statement made by the professional person
Note: Most common question asked of lawyers- In a takeover bid scenario, what is my duty of care and what do I
have to do?
Note: see Stikeman’s website for a summary of this stuff
Common Law Cases
Re Brazilian Rubber Plantations and Estates Ltd. (1911) (pg. 305)- test for director liability- subjective
Facts: a promoter was running this company and ended up persuading someone to buy into a rubber plantation
based on hype- the report was misleading- not even close to the reality- the plantation failed- the stock ran out- turned
out it was not a good investment
Issue: whether outside directors liable?
Held: No- cannot hold directors liable for errors of judgment- can’t set aside a higher standard
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Ratio: director’s duty is to act with such care as is expected of him, having regards to his knowledge and experience.The director need not bring any special qualifications to the job
Analysis
 Composition of the board of directors- One director was absolutely clueless about the business, the other director
was 75 years old, the next guy was a rubber broker (he was advised that all he had to do was give an opinion as to
the value of the rubber when it arrived), fourth guy joined because the other 3 were there and he though they were
quite reputable
 Court held that exaggeration happens- gave them the benefit of the doubt
Note: once again the standard was set quite low
Note: the director is judged on his facts and circumstances- e.g. banker is judged on the facts of a reasonable banker
 Therefore, the standard on which directors are measure is subjective
City Equitable Fire Insurance Co. Ltd. (1925) – pg. 301- liability of directors- low threshold- follow Brazilian Rubber
Facts: fraud by a managing director- winding up of a profitable business because the directors failed- bad investments
and fraud are behind the reason
Issue: whether the other directors were negligent in not monitoring the managing director’s conduct
Held: duty of care is a reasonable person test- Director need not exhibit in the performance of his duties a greater
degree of skill than may be reasonable expected from a person of his skill and knowledge
 Objective test not a subjective test
Analysis
 Being a director is not a full time job- they cannot be continuously expected to manage what is going on
 Director is not a trustee- should not be held to that standard
 Duties of a director differ depending on the context- depending on the business
 Recognizing that your duty as a director of a large corporation is different than that of a small corporation
 Director of large corporation carries more burden and given the size has to delegate and relies
 This case follows Brazilian Rubber- however, it goes further
 Not liable for errors in judgment
 Not bound to give continuous attention to the business
 You can rely on delegation to other parties
Note: this case sets the bar pretty low
Waitzer- Principles on the duty of directors
 Directors are not trustees- there is not an absolute fiduciary duty
 The standard of care is context driven
 The standard of care is much higher when you are for example thinking of selling company shares to the
insider as opposed to purchasing a plant
 If you exercise care and diligence, the courts will be deferential in area of the merits of the decisions
 The courts will not substitute their business judgment for your business judgment
 AKA – business judgment rule
 Directors are not required to have specialized skills or knowledge about a company’s business
 Part of your duty of care, however, is to make sure that those with specialized knowledge are aware and have
reviewed the decisions
 Directors are not required to attend full time to the company’s affairs
 However, part time job does not mean that you forget what is going on from a meeting to the next
 You have to be aware of important current issues
 Directors are entitled to trust and rely on the officers of the company
 Part of exercising the standard of care is to ask tough questions
 This includes questions about conflicts of interests, alternative scenarios
Note: hearing a 20 min presentation and not having professional advice does not cut it
Duty of care- D’Arcy’s Statement of Principles
1. Directors cannot be compared to trustees (City Equitable)
2. The standard of care depends on contexts
a. The context of the business
b. The context of the traits of the directors that they bring to the table (City Equitable)
3. Business decisions should not necessarily be subject to scrutiny from a business perspective (Brazilian Rubber)
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4.
5.
6.
7.
Directors are not required to have special skills or knowledge of the business (Brazilian Rubber)
Directors are not required to attend full time at the company affairs (City Equitable)
Directors are entitled to trust and rely on officers and others (City Equitable)
The standard can be summed up as being objective subjective (Peoples)
Peoples (pg. 323)- standard of care in the ITA –same as in the CBCA
Held: the standard of care set out in section 227.1(3) is not purely objective or purely subjective- standard can be
properly described as “objective subjective”
 It is not enough for a director to say he or she did his or her best, for that is an invocation of the purely subjective
standard- honesty is not enough
 However, the standard is not a professional one nor is it the negligence law that governs
 Rather the Act contains both objective elements- embodied in the reasonable person language- and subjective
elements- inherent in individual considerations like “skill” and the idea of “comparable circumstances”
 Accordingly the standard can be properly described as “objective subjective”
Business Judgment Rule
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It is not a rule- it is a presumption- comes from Delaware
US- not applicable in Canada- if you can show evidence to a court who is looking at a business judgment by the
board, that there is fraud, illegality, or conflict of interest, you can shift the onus to the directors – it becomes their
responsibility to demonstrate they acted in good faith
 US Rule: Absent fraud, illegality or conflict of interest, directors are presumed to be acting in good faith
Canada, there is no onus switching- plaintiff has the onus to prove the directors did not act in good faith
It is a presumption that in making a business decision the directors acted in an informed basis, in good faith and
with the honest belief that the action taken was in the best interest of the corporation
 Rebuttable presumption if you can show evidence otherwise
 If you cannot show otherwise, courts, in looking at the validity of the business decisions, courts will show
deference to the board of directors
Note: get the idea that directors certainly have a right to be wrong
Smith v. Van Gorkom (pg. 344)- case on tax credits
Facts: V is the chair of Trans Union- the board starts talking about selling Trans Union- V cuts a deal with a banker to
sell the company- the company was publicly trading at $37.25 and the deal was cut for $55- looks like a good deal on
the surface- he takes it to management- only 2 people supported it- V calls a board meeting- he gives a 20 min
presentation on a conference call- he gives no explanation as to how $55 is arrived at- they have no copies of the
merger agreement available-the CFO is saying is a fair price- the lawyer is saying that they may be sued if they do not
take the deal- the board has 10 members- five inside directors (management) and 5 outside directors (people who are
in other businesses who you bring in because you think they add something to the dynamic)- after a 1 hour discussion,
with no independent review or third parties, the board adjourned because they had to go to the opera- clear conflicts of
interest on the part of management
Held: court found that the management of Trans Union were not allowed to rely on the business judgment rule
because they had not exercised the care that a reasonably prudent person would in comparable circumstances---therefore directors liable – settled for 23.5 million
Analysis
 Chancellor Marble- of the court of Chancellery of Delaware- held that the directors acted on an informed decision
and therefore should be able to take advantage of the business judgment rule
Majority Decision
 Justice Horsley- overturned him- the board should have known that something was fishy The directors should have thought to ask questions about V’s push to sell – they should have also inquired as to
the intrinsic value of the corporation
 But did not have an investor come in
 Held that they were grossly negligent for approving this sale based on a 20 min presentation
 The report from the CFO is not enough- requires relevance on the decision being made and you should rely on
it in good faith, not blindly
 the Board argued- that they relied on the profit, they were all experienced and they were told they would be sued
 the Court holds that they should have gotten a fairness opinion
 “fairness opinion”- you have a Bank coming in to give a fairness opinion- this should say that the transaction is
fair from a financial point of view to the shareholders
 While there is no legal obligation for this, it is good idea in order to protect yourself
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Minority Decision
 this board has a lot of experience- they are not the kind of people that are going to get duped
 the directors knew that this sale was going to happen for some time-they had been thinking about it for some time
 in her mind these people were fully informed- they were not taken advantage of
 they should be given advantage of the business judgment rule
Note: this decision led to proceduralization of the process of making a decisions
 the process seems to take precedence over the actual decision
 emphasis on having an independent committeeNote
 when you know your client has to sell their business, what you should advise your client is to strike a independent
committee on this decision- should be outside directors that have not interest in this and therefore can render an
independent decision- they go out and inform themselves and then render advice to the board
Brant Investments Ltd. V, KeepRite Inc (1991) (pg. 358)- Canada adopting the business judgment rule
 perfect example where the board struck an independent committee
Facts: a parent corporation, ICM, had a number of subsidiaries- one of these, Keeprite, was 65% owned by a
subsidiary of the parent- Keeprite was a publicly held corporation, and the balance of the shares were in the hands of
public shareholders- ICM decided to use its powers of control to merge Keeprite with two of its wholly-owned
subsidiaries- it struck an independent committee of the board of directors to review the proposed terms of the
transactions and to determine whether the transaction was fair to the public shareholders of Keeprite- committee would
not endorse merger unless price paid to shareholders was increased- the increase was approved and the merger was
approved- a group of minority shareholders sued, claiming that the transaction was oppressive to the interests of
minority shareholders
Held: the court ought not to usurp the decision of the board- should defer to the board
Ratio: court adopts business judgment rule- the extent to which directors should inquire as to the alternatives is a
business decision, which, if made honestly in the best interest of the corporation, should not be interfered with
Analysis
 the court looked at whether the board looked at all of the options
 court decided that to suggest that directors are required, when entering into a transaction on behalf of the
corporation, to consider every available alternative transaction is unrealistic
 the extent to which directors should inquire as to the alternatives is a business decision, which, if made honestly in
the best interest of the corporation, should not be interfered with
 court saw that reasonable efforts were taken, through the appointment of a committee and reliance on a
consultant’s report
 Courts should not be substituting their decisions for those of the board
 Decisions are made at different times, different place and different mindset- it is tough to sit in a court room and
say that this was a bad business decision
Pente Investment Management Ltd. V. Schneider Corp. (1998) pg. 367
Facts: Maple Leaf made a takeover bid for the Schneider Corp. which the directors of Schneider thwarted by entering
into a lock-up arrangement with another bidder (with the express approval of the company’s shareholders)- the
court looked at the onus of proof
Issue: when it comes to business decisions, who bears the burden of rebutting the presumption?
Held: if the directors took reasonable steps to avoid a conflict of interest, then burden on the plaintiff shareholders
Ratio: If a board of directors has acted on the advice of a committee composed of persons not having a conflict of
interest, and that committee has acted independently, in good faith, and made informed recommendations as to the
best available transaction for the shareholders in the circumstances, the business judgment rule applies
Analysis
 The law on duty of directors when dealing with a bid that will change control of a company is not uniform
 In KeepRite, the issue whether the burden of proof is on the directors to justify their actions as being in the best
interest of the company, or on the shareholders challenging the actions, was raised but not decided
 The burden of proof may not always rest on the same party when a change of control transaction is challenged
 The real question is whether the directors of the target company successfully took steps to avoid a conflict of
interest- if so, the rationale for shifting the burden of proof on the directors does not exist
 If a board of directors has acted on the advice of a committee composed of persons not having a conflict of
interest, and that committee has acted independently, in good faith, and made informed recommendations as to
the best available transaction for the shareholders in the circumstances, the business judgment rule applies
 The burden of proof is not an issue in such circumstances
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Disney- posted online- talks about the business judgment rule in the US
Facts: the termination of Michael Obetz- there may have been a settlement of 140 million
Analysis
 quote from Peoples on business judgment rule
 duty of care of directors will be measured on a subjective objective standard that is what you will be judged against
 as long as you are informed- go through some questions- etc. you will be fine
 it appears in Canada, the courts will not just sit back, based on the Schneider and People’s
 the courts may be willing to look at whether the business decision was reasonable
 somewhat different approach from the US- in the US, the court does not consider the reasonableness of the
business decision
2 different thresholds
 Revlon duty- where a board adopts defensive measures in response to an alleged takeover threat, where a board
approves a transaction, they may have to meet a higher standard and have enhanced scrutiny in terms of the
business decision
 Unocal duty- Proportionality Test
 What you do in terms for defensive tactics is considered in relation to the behaviour of the bidder
 Defensive actions have to be proportional to bidder behaviour
Other liabilities of directors
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Section 118(1)- Director’s liability- directors of a corporation who vote for or consent to a resolution authorizing
the issue of a share under section 25 for a consideration other than money are jointly and severally, or solidarily,
liable to the corporation to make good any amount by which the consideration received is less than the fair
equivalent of the money that the corporation would have received if the share had been issued for money on the
date of the resolution
Section 118(2)- Further Director’s Liabilities- directors of a corporation who vote for or consent to a resolution
authorizing any of the following are jointly and severally, or solidarily, liable to restore to the corporation any
amounts so distributed or paid and not otherwise recovered by the corporation
 (a)- a purchase, redemption or other acquisition of shares contrary to section 34, 35, 36
 (b)- a commission contrary to section 41
 (c)- a payment of a dividend contrary to section 42
 (d)- a payment of an indemnity contrary to section 124
 (e)- a payment of a shareholder contrary to section 190 or 241
 Comment- all of these sections deal with the old insolvency test- do not think that you can run through these
tests and you can get away with it
Section 119(1) -Liability of directors for wages- directors for a corporation are jointly and severally, or solidarily,
liable to employees of the corporation for all debts not exceeding 6 months wages payable to each such employee
for services performed for the corporation while they are such directors respectively
Section 119(2)- Conditions Precedent to Liability-a director is not liable under subsection (1) unless
 (a)- the corporation has been sued for the debt within 6 months after it has become due and execution has
been returned unsatisfied in whole or in part
 (b)- the corporation has commenced liquidation and dissolution proceedings or has been dissolved and a claim
for the debt has been proved within 6 months after the earlier of the date of commencement of the liquidation
and dissolution proceedings and the date of dissolution
 (c)- the corporation has made an assignment or a bankruptcy order has been made against under the BIA and
a claim for debt has been proved within 6 months after the date of the assignment or bankruptcy order
Section 119(3)- Limitation- a director, unless sued for referred to in subsection (1) while a director or within 2
years after ceasing to be a director, is not liable under this section
Comment: if you are liable as a director for those times when you are a director for unpaid employee wages, you
want to make sure that you pay the employee wages
 If you think employees are not going to get paid- then you should resign
Liabilities under other Acts
 ITA- Liable for source deductions
 Employment Law- Wages
 Pension Law- shortfall of pension fund contribution
 Health Insurance- Potential liability for not paying health insurance benefits
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Environmental Law
Environmental Liabilities
R v. Bata Industries Ltd. (pg. 324)- directors liability with respect to the environment
Facts: manufacturing in Batawa- they have a lot of chemicals around the manufacturing site- the Ministry of Env’t
charges the company and 3 directors with failing to take proper care- things were not going very well- a new manager
was brought in- he had to turn things profitable- he had to cut middle management- this resulted in increased duties for
others- he gave responsibilities to Mr. De Bruyn—he held a lot of positions- even though he was busy, the corporate
head office should have been aware of this- they actually had a memo with environmental policy and compliance- they
want to get the chemicals removed- it would have cost $56,000- they get another quote- $28,000- when the person
starts removing the sludge, they do not actually honour the contract- it does not get done
Issue: what is appropriate delegation? What do you have to do to meet the due diligence defence?
Held: in order to be able to invoke the defence of due diligence when delegating, you need to follow up and ensure the
what you have delegated is completed- you are responsible for the actions of the person to whom you delegatedHeld:
Decision
 Claim brought against Bata, Marchand (the president), and Weston (general manager)
 Mr. Bata gets off- he says he was not aware- he never went to Batawa – not guilty
 Marchand- went to Batawa- knew about the problem and did not do anything about it- guilty
 He tried to raise the defence that he delegated the issue
 However, the court held that he had a responsibility to follow through and make sure his delegates followed
through as well
 Weston- on site manager- he should have seen it and smelled it Did nothing to investigate why the second quote was smaller than the first
 He accepted the second quote without making sure that the second company could finish
 The court held that he was wilfully blind
 The court held that he needed to follow up to make sure
Article by Ron Daniels: “Directors Face Grab-Bag of Liabilities”
Comment- how do you get directors to take this job?
 Insurance only gets so far- hard to claim as well
Review of Duty of Care- Waitzer
 Two branches of director and officer liability
 Duty of care- standards of diligence and confidence
 Fiduciary duties- duties of loyalty and good faith
 Legislation
 122(1)(b)- Duty of Care
 122(1)(a)- Fiduciary Duty
 Common Law
 Sets a very low standard
 Smith v. Van Gorkom- court assumes (duty of care creates a presumption) that when making a business
decision directors are acting in the best interest of the corporation and in good faith
 Whether a business judgment is informed or not depends on whether or not the directors have taken the
time to inform themselves of information that should be reasonably available to them
 This was a classic case of not coming to an informed decisions- clear example of the directors not
reviewing all relevant information
 Summary of principles
 Duty of care of directors is different than that of trustees
 Standard of care depends on context
 Courts tend not to second guess business decisions
 Tendency of judges is to say that they are not business people
 This is referred to as the business judgment rule
 Directors do not have to bring any special knowledge
 Directors are not expected to spend their entire time on the companies’ affairs
 Directors are entitled to trust and rely on officers, experts and professional advice
 This is unless the directors knew or should have know that they cannot rely on the officers
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Only when there a reasonable basis for directors to know this
Policy Issues
 Is procedural review sufficient and necessary to ensure the standard is met?
 If the board knows everything, do they really need to go through the expense and the time that it takes to have
experts review the decision?
 Lesson that comes out of Van Gorkom and securities laws- Anytime that a company wants to do a related party
transaction that is above a certain size- there is a whole process that is set out
 Need independent committee
 Need evaluation by experts
 The transaction has to be put to the shareholders- not only to the majority but to be approved by the majority of
the minority shareholders
 Do we really need all this?
 It does impose a high cost- however, directors want to make sure they protect themselves
 Waitzer- it poses such an emphasis on procedure that people look track of the substantive issues
 US- the court embarks on substantive analysis
 Court is prepared to second guess the decision- they actually look at the business decision, not only process
 Reason: How independent can directors be, when significant shareholders are the very same people that elect
the directors and control how much these directors are compensated?
 Canada- the court focuses mostly on process as opposed to the substance- looses track of substantive decision
Other specific statutory liabilities
 Section 119(1)- personal liability of directors for wages for 6 months
 Section 118- imposes personal liability on the issuing of dividends, or inadequate non-monetary compensation
 Other statutes- ITA, Environmental Legislation
 Section 127 of the Securities Act- gives the Securities Commission extraordinary power to hold directors liable,
where in a commission’s view the director has not acted in the best interest of the public interest
Duties to creditors
 People’s- directors do not owe a fiduciary duty to creditors even in impending insolvencies, and the creditors have
access to oppression remedies and can try to establish a breach of duty of care
Indemnification and Insurance
 Section 124- Indemnification
 Statute tries to achieve a balance in order to encourage directors to serve by giving directors protection, while at
the same time leaving in place some deterrent effect against directors engaging in bad faith behaviour
 Section 124(5)- directors and officers are entitled to an indemnity if they are determined not to have been at fault
and to have satisfied their fiduciary duties, provided they have complied with some requirements set out in 124(3)
 Section 124(3)- Limitations- a corporation may not indemnify an individual under subsection (1) unless
 (a) the individual acted honestly and in good faith with a view to the best interest of the corporation, or, as the
case may be, to the best interest of the other entity for which the individual acted as a director or officer or in a
similar capacity at the corporation’s request
 (b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, the
individual has reasonable grounds for believing that the individual’s conduct was lawful
 Section 124(1)- a corporation may indemnify a director or officer of the corporation, a former director or officer of
the corporation or another individual who acts or acted at the corporation’s request as a director or an officer, or an
individual acting in a similar capacity, of another entity, against all costs, charges and expenses, including an
amount paid to settle an action or satisfy a judgment, reasonably incurred by the individual in respect of any civil,
criminal, administrative, investigative or other proceeding in which the individual is involved because of that
association with the corporation or entity
Bata- judges cannot restrict corporations from indemnifying their directors even when directors found liable
Facts: environmental liability
Held: at trial, the judge held that the company cannot indemnify the directors; the CA held that the judge does not have
the discretion to bar the company from indemnifying the directors, because the CBCA permitted indemnifications in
especially these circumstances
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Fiduciary Duties of Directors
Legislation
 Section 122(1)(a)- FIDUCIARY DUTY- every director and officer of a corporation in exercising their powers and
discharging their duties shall act honestly and in good faith with a view to the best interest of the corporation
 Comment: directors and officers cannot put their best interest ahead of that of the corporation
 Section 122(3)- NO EXCULPATION- subject to subsection 146(5), no provision in a contract, the articles, the bylaws or a resolution relives a director or officer from the duty to act in accordance with this Act or the regulations or
relives them from liability for a breach thereof
 Comment: can’t contract out of fiduciary duties The only way you can avoid the strict liability that the common law enforces is Section 120
Common Law
 Most case law seems to turn around the directors profiting at the expense of the corporation
 Remedies- most common remedy in this area is a trust remedy
Self-Dealing Cases
Aberdeen Railway Co. v. Blaikie Bros- pg. 377- self dealing caseFacts: one of the directors of the railway negotiated a contract to buy shares from Blaikie brothers partnership, where
this director was negotiating with himself, since he was a partner in the partnership as well
Held: the court held that the company was entitled to avoid the contract- court voided the contract
Ratio: Director cannot put himself in a position where his interests conflict with his duties to the corporation. Where this
occurs, the corporation can void the contract.
Analysis
 Director cannot put himself in a position where his or her interests conflict with his or her duties to the corporation
 Here we had a duty to the corporation and to himself- clear conflict
 The rule was breached not because it was not a clear contract, but simply because it was a possibility of a conflict
of interest
 This is a strict rule in favour of the corporation
 “so strictly is this principle adhered to that not question is allowed to be raised as to the fairness or unfairness of a
contract so entered into”
Remedy: the corporation can void the contract and walk away
 If the company likes the deal they can keep it- if not they can walk away
 There is not need for an inquiry as to whether the contract was good or bad
Legislative Exceptions to the common law rule
 Section 120- permits related party transactions but requires compliance with
 (a)procedural standards and
 (b) substantive fairness
Procedural Standards Required
 Section 120(1)- Disclosure of Interest- a director or an officer of a corporation shall disclose to the corporation the
nature and extent of any interest that he has in a material contract or material transactions, if the director or officer:
 (a)- is a party to the contract or transaction
 (b)- is a director or an officer, or an individual acting in a similar capacity, of a party to the contract or
transaction
 (c)- has a material interest in a party to the contract or transaction
 Section 120(5)- Voting- a conflicted director/officer has to abstain from voting in anything that they have a conflict
 Comment: Curiously enough, you do not have to refrain from voting on your remuneration or your indemnity or
your insurance
 Section 120(6)- Continuing Disclosure- you need to disclose on a ongoing basis so that the rest of the directors
are aware of your conflicts at all times
Substantive Standards
 Section 120(7)- Substantive Test- AVOIDANCE STANDARDS- a contract or transaction is not voidable if you
have complied with all the procedural things and the board approved the contract and
 (c) the contract or transaction was reasonable and fair to the corporation when it was approved
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Comment: this really relieves some of the rigidity of the common law scheme
Section 120(7.1)- the other way you can save a contract- CONFIRMATION BY SHAREHOLDER even if you do
not meet the test in 120(7), if the director or officer was acting honestly and in good faith a contact can be saved if
 (a)- the contract or transaction is approved or confirmed by special resolution at a meeting of the shareholders
 (b)- disclosure of the interest was made to the shareholders in a manner sufficient to indicate its nature before
the contract or transaction was approved or confirmed
 (c) – the contract or transaction was reasonable and fair to the corporation when it was approved
Securities Regulations
 Procedural tests- National Instrument 61-501- test there tend to heighten disclosure requirements
 Disclose what is in it for the related parties
 Requirement of an independent committee approval- they would go and obtain independent financial advice
 Then it is put to the shareholders for minority approval- this is in additional to the requirements of the CBCA for
the majority shareholders
Corporate Opportunities
 Directors forced to make decisions on corporation’s investments- a project will be recommended if it is profitable
 What happens when directors invest themselves into a project that could have been acquired by the corporation?
 This may be problematic because valuable opportunities may be diverted from the corporation to directors or
officers acting in a personal capacity
 One way to control- impose fiduciary duties upon directors and officers that limit their ability to take opportunities
belonging to the corporation
 Problem- no clear agreement on the criteria that determine when a transaction belongs to a corporation
 The issue remains to determine whether the director or manager has usurped the authority granted to her by the
shareholders of the corporation in order to acquire some “unbargained for” personal benefit
Regal (Hastings) Ltd. v. Gulliver- pg. 392
Facts: Regal owned 1 movie theatre- trying to lease 2 others- they were trying to lease them through a subsidiary for
limited liability purposes- because of this, the landlord requested either $5,000 invested in the subsidiary to have
capital there, or have the directors guarantee the lease personally- basically the landlord was looking for some
protection- Regal was not in a position to meet the landlords first requirement (did not have the capital to invest)- the
directors decided that they were not prepared to sign personal guarantees- directors decided that Regal would put
2,000 in the subsidiary and the directors contributed 3,000 to meet the 5,000 requirement- they did not get the
shareholder approval- at the same time, they decided to sell the business- they sold the business at $3.16/share, at a
profit of $2.16/share- subsequent purchaser sued the outgoing directors for breach of their fiduciary duties on the
grounds that they profited at the company’s expenseHeld: directors liable to pay back to the company the profit they made
Ratio: Two step test used to determine whether directors should be liable to pay back personal benefit to the corp:
1. Did the opportunity arise out of their relationship to the corporation (i.e. because they were directors)?
2. Were they acting as directors in implementing the financing arrangement from which they ultimately benefited?
Analysis
 The standard was a strict liability one- directors cannot make a profit from their relationship with the corporation
 The purchaser did not want to void the agreement because he now owned the company
 The remedy would be to account to the company for the profits- the directors would have to return that 2.16/share
profit- basically, the new purchaser would be getting a windfall- he would get 2/3 of his paying price back
Court applied a 2 step test
1. Did the opportunity arise out of their relationship to the corporation (i.e. because they were directors)?
 Court answered YES
2. Were they acting as directors in implementing the financing arrangement from which they ultimately benefited?
 Court found that the directors standing in a fiduciary relationship to the corporation in regard to the exercise of
their powers as directors, and having obtained these shares by reason and only by reason of the fact that they
were directors of Regal and in the course of execution of that office, are accountable for the profits which they
have made out of them
 The standard is strict- the court does not care if the decision made perfect sense from a business perspective
 It was simply a matter of the directors benefiting from the transaction personally
Note: scope of this test gets narrowed in Peso Silver Mines- see below
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Peso Silver Mines Ltd. v. Cropper (1996)- pg. 410
Facts: board of Peso rejected the offer presented to them by some unproven mining company to take over that group
of silver mining claims- the board based this rejection on professional advice, constraints of financial situation of Peso
and legitimate business reasons- Cropper was a director of Peso- sat on the board when this decision was madesometime later, he decided to take the offer personally
Issue: can Cropper be allowed to retain a profit from an engagement where his personal interest conflicts or may
conflict with those of the principal to whom the duties are owed?
Held: Cropper not in breach of fiduciary duty
Ratio: an out-and-out bona fide rejection by the company would be the best evidence that any later dealings with the
property by one of its directors would not be against its interests
Test: (1) had to have access to the opportunity in the course of your role as director and (2) had to exploit the
opportunity in the course of acting in your fiduciary role
Analysis
 Unlike in Regal- the board here said no breach of fiduciary duty
 How did the court distinguished from Regal?
 The court said- Peso ceased to have an interest in this opportunity
 As such, it was no longer a corporate opportunity because it was an express rejection of the opportunity
 The court also rejected the idea that merely because Cropper learned about the opportunity as a director of Peso,
he is in breach of his fiduciary duties Did not meet the second requirement of exploiting the opportunity in his role as a director
 Cropper was not acting as a director of the corporation when he purchased the claims personally
Comment: the reason why Regal and Peso were treated differently, is because in Regal there was a contract for the
sale of business at the same time, and the profit was big for the directors- the way the deal was done was fishy in the
court’s view and the directors should have found a different way to do the transaction
Canadian Aero Services Ltd. v. O’Malley-pg. 419- SCC striking down Peso
Facts: O’Malley(president) and Zarzycki (executive VP)- both officers of Aero- assigned to negotiate a new deal for
doing a topographic mapping in Guyana- they resigned and set up a new topographic business- they put in their own
bid and won- they were sued for breach of fiduciary duty by Canaero
Held: court agreed that they breached their fiduciary duties- remedy was accounting of their profits to the corporation
Test: much broader than Peso----- see below
Analysis- Laskin J
1. fiduciary duties extend beyond directors- go towards senior officers especially when management is involved in
negotiating duties
2. not relevant that the project was not exactly the same project that the two officers were negotiating at Canaero
 here the terms of the tender had changed- but the court found this irrelevant
3. it was not necessary to show that Canaero would have certainly obtained the contract had these officers not
resigned – it may have been that Canaero would not have gotten the contract, but we will never know since the
officers resigned before
TEST: scope and the duration of how long fiduciary duties survive must be determined on a case by case basis
 Categories to look at when making this determination:
1. Whether the opportunity belongs to the company? How closely is the opportunity connected to the company?
 How significant is the opportunity to the company?
 The specificity of the opportunity
 Was the opportunity a private or public opportunity?
 Was the opportunity rejected in good faith by the board?
 How long has it been since the opportunity was rejected
2. What is the relationship of the fiduciary to the company
 Does the fiduciary only know about it because of their role, or was it advertised otherwise?
 The extent to which they use their fiduciary position to take advantage of this opportunity
 Time elapsed
 Different from the Regal test -there is a breach only when the fiduciary received profits only because of his role as
a director and in the course of being directors
 Conclusion: the inquiry is very fact specific- different than using a roadmap such as in Peso
Note: How can you avoid this situation?
 Resigning as a fiduciary and obtaining informed consent from the company- however this is not a perfect defence
 Waitzer- There is not such thing as getting 100% protection when you are dealing with fiduciary obligations
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Other types of fiduciary conflict categories
1. Multiple directorships
 You are a director of more than one companies
 How do you make sure that opportunities that come through in one role do not affect the others?
 Example: anyone who is a director for Pepsi & Coke would be in an obvious conflict of interest
2. Compensation
 Section 125- Remuneration- subject to the articles, the by-laws or any unanimous shareholder agreement, the
directors of a corporation may fix the remuneration of the directors, officers and employees of the corporation
 Section 120(5)- Voting- a director required to make a disclosure under subsection(1) shall not vote on any
resolution to approve the contract or transaction unless the contact or transaction
 (a)- relates primarily to his or her remuneration as a director, officer, employee, or agent of the corporation
or an affiliate
3. Takeover Bids
 Transaction where someone is bidding for control
 Directors may be self-interested because they are trying to protect the interest and their jobs
 Legal Issue: How do you make sure that the directors are acting in the best interest of the corporation as
opposed to their own interest?
Shareholder Remedies
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If the rights given to shareholders, whether by statute or contract, are to be worthwhile, correspondingly effective
remedies must also be available to cure their breach
Broad distinction between rights and remedies
 Remedies are means for ensuring that shareholders are given the rights to which they are entitled
 If the company denies their right, then some means might exist to protect the right
Remedies and obligations usually start in the common law and later get codified
However, this does not mean that the common law is no longer valid
Wall Street Rule- in the case of public companies, if you do not like what is going on, you can sell your shares
 This is not a legal rule- but it makes sense
 Sometimes other remedies are not worth your time and money
Legal Remedies
1. Derivative Actions- derivative because most of the duties that are owed by directors and officers are duties that are
owed to the company, as opposed to duties owed to individual shareholders
2. Personal Remedies
3. Statutory Remedies
4. Oppression Remedy
Derivative Actions
 Where a corporation has been injured by some wrongdoing, a shareholder of the corporation arguably has been
injured through the diminution in value of his or her shares that is traceable to the corporate injury
 Courts followed by the legislature developed a derivative action whereby a shareholder was permitted to bring an
action to rectify a wrong committed against the corporation of which management did not seek redress
 This would be the case where one of the mangers is the wrongdoer
 Under the derivative action, a shareholder on behalf of the corporation bring an action which derives from the
company’s cause of action
 This contrasts with the personal or direct action, whereby a shareholder enforces his own rights
 The advantage of derivative actions-----Can ensure management accountability
 Disadvantage- nuisance of strike suit actions- litigation having little merit that seeks to extract gains from the
nuisance value of claims for higher damages
Rule in Foss v. Harbottle- pg. 862- 865- overridden by Statute- Section 239
Facts: 2 shareholders went to court complaining about a sale by the director of the company of his own property to the
company, at what they though was an inflated price
Held: they cannot bring this claim
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Rule:
 Part I- only a corporation can bring a derivative action; a claim that intends to redress a wrong done to the
corporation cannot be brought by shareholder, only by the corporation itself
 Part II- a wrong done to the corporation can be ratified by a simple majority vote of shareholders
 Exceptions to what can be ratified:
 (1) fraud on the minority- if management of the board was giving away assets to themselves, then
ratification cannot work because the majority should not be able to ratify their own fraud
 (2) cannot ratify ultra vires acts – cannot ratify acts that exceeded the authority of the corporation
 (3) if there was a defect in the ratification process, then the ratification is not valid
 (4) personal claims- not a real exception because it is not a derivative claim
Analysis
 Fiduciary duty of directors is owed to the corporation, not to shareholders directly- harm was done to the company
not to the shareholders
 Comment: Artificial rule- shareholders bear the costs to the harm of the corporation anyway
Conclusion- therefore, after F v. H- you have no standing as a shareholder- moreover, the majority shareholders can
ratify the wrong and legitimize it
 Mozley- as long as the majority says it is ok, the courts will not intervene
 MacDonald- when the matter is an internal dispute, it is for the majority to decide
Legislation
 Section 122(3)- NO EXCULPATION- subject to subsection 146(5), no provision in a contract, the articles, the bylaws or a resolution relives a director or officer from the duty to act in accordance with this Act or the regulations or
relives them from liability for a breach thereof
 Section 238- Who can bring a claim:
 (a) a registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security of a
corporation or any of its affiliates
 (b) a director or an officer or a formed director or officer of a corporation or any of its affiliates
 (c)- the Director
 (d)- any other person who, in the discretion of the court, is a proper person to make application under this part
 Who could fall under Section 238(d)?
 Shareholders or officers of subsidiary or parent corporation
 Creditors- a big category- they may be able to be fit under Section 238(d)- proper person- question to ask is
would a creditor be a person who could reasonably be entrusted with the responsibility of advancing the
interests of the corporation by seeking a remedy to right a wrong allegedly done to the corporation?  They should be allowed- see First Edmonton Place
 Waitzer- to his knowledge they have never been allowed
 Important who brings the claim- it dictates the nature of the remedy
 Employees- maybe a stretch here- more applicable in oppression remedy
 Section 239- Replaces the Rule in Foss v. Harbottle
 (1)- Commencing derivative action- subject to subsection (2) a complainant may apply to a court for leave to
bring an action in the name and on behalf of a corporation for the purpose of prosecuting, defending or
discontinuing the action on behalf of body corporate
 (2)- Conditions Precedent- no action may be brought and no intervention in an action may be made under
subsection (1) unless the court is satisfied that:
 (a)- the complainant has given notice to the directors of the corporation of their intention to apply to the
court under subsection (1) not less than 14 days before bringing the application, or as otherwise ordered
by the court if the directors do not bring, diligently prosecute or defend or discontinue the action
 (b)- the complainant is acting in good faith and
 (c)- it appears the interests of the corporation or its subsidiary that the action be brought, prosecuted,
defended or discontinued
Comment: first step, need to apply for leave of court
 Noteworthy that the threshold for leave of court to be obtained is low
 What are the policy reasons behind this?
 To weed out frivolous suits- in the US they are looking for a quick settlement even if no cause of action- usually
because of jurisdiction and costs it will result in a nuisance settlement
 Section 242(1)- Evidence of shareholder approval not decisive- an action may not be stayed simply because
the majority ratified it, but evidence of approval by the shareholders may be taken into account by the court in
making an order under section 214, 240, 241
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 Eliminates once again the rule in Foss v. Harbottle
 On Exam talk about requirements for proceeding with derivative action claim
Section 242(2)- Court approval to discontinue- once a derivative action is commenced the court is in chargeyou need court approval to stay the action, to discontinue the action, to settle the action and dismiss the action
 Comment: extension of that gatekeeper role- to discourage frivolous suits and discourage greenmail
 “greenmail” – a company paying someone to go away- it arises in hostile takeover bids
 Either direct pay off of a shareholder with a potential claim or buying their shares at a significant premium
Section 242(3)- No Security for Costs- a complainant is not required to give security for costs in any application
made or action brought or intervened in under this Part
 Comment: typically, a complainant would have to satisfy the court it has enough funds to pay the costs of the
other party if it loses- this is not the case here
Section 242(4)- Interim Costs- the court can award interim costs to the applicant, including legal fees and
disbursements, but the complainant may be held accountable for such interim costs on final disposition on final
disposition of the application or action
 Comment: the corporation should be funding this
Case Law on the “Best Interest of the Corporation” (Section 239(2)(c))
Re Northwest Forest Products Ltd. (1975)- pg. 867- derivative action case
Facts: Northwest owned 51% of Fraser Valley- the assets of Fraser Valley were sold to Green River for $200,000- the
same day Green River obtained a $290,000 loan from a bank using the assets as security- the bank was at arm’s
length- this is indicative of the bank thinking the assets are worth more than buying price- 2 of the directors of
Northwest are directors of Green River- a majority of the shareholders of Fraser Valley ratified the sale of assets- a
minority shareholder applied for leave to commence derivative action
Issue: whether bringing the application was prima facie in the best interest of the corporation?
Held: Yes, it is in the best interest of the corporation- approved the application
Ratio: in order for the application to be approved, the plaintiff has to forward sufficient evidence which prima facie
discloses a cause of action. In the absence of further evidence from the other side, the prima facie proof becomes
conclusive and the party giving discharges its onus
Analysis
 The court basically says is that if you can produce a certain amount of evidence that prima facie shows that a
cause of action may exist, this is enough
 The court looked at the fact that the directors did not go to other valuators for a second opinion
 Moreover, the shareholder approval was not decisive- looking at section 242(1)
 The judge held that he cannot take into account shareholder ratification without also considering whether the
majority vote included votes from the conflicted directors
Note: the application decides nothing more than whether the applicant has adduced sufficient evidence which on the
face of that evidence discloses that it is, so far as it can be judged from the first disclosure, in the interests of the
company to pursue the action
Conclusion
 Less onerous test then you would face in civil litigation where it would be a balance of probabilities or in order to
bring an application you would have to demonstrate a prima facie case
 Policy: The reason why it is less onerous:
 You do not want to discourage a case
 A minority shareholder will not be in a position at the beginning of the case to bring all the necessary evidence
 It is different than a majority shareholder who has access to all of the information and who is informed
 A minority shareholder may not have even known about the bank loan- this type of information comes out
later in the trial
Exam Question
 You need to go through the pre-application requirements listed in section 239(2)
 You also need to establish that there is prima facie proof that there is a case to be tried
Re Marc-Jay Investments Inc. and Levy- pg. 871- Ontario case- lower threshold than the statute
Facts: a company called Levy bought a company called Premium from another company called Seeway- Seeway and
Levy had the exact same board of directors- the claim is that there was not sufficient disclosure- the transaction should
have gone to shareholders for approval- the minority shareholders were claiming that they did not get sufficient
disclosure
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Ratio: the standard that was used for the court to determine if leave should be given is “whether the action brought by
the complainant is not frivolous, vexatious or without merit”
Analysis
 This was an OBCA case- however, it is clear that beneficial holders have status
 The court decided that in order for him to give leave, all he needs to decide is that the action was not frivolous or
vexatious or without merit
 This is once again a lower threshold than the CBCA
Comment: as we know, statute overrides the Harbottle rule that a ratification of the act gets you out of the woods
 Before bringing claim, minority shareholders have to give notice to the corporation- they company has reasonable
opportunity to decide whether they want to take action themselves
 An independent litigation review committee should be appointed to make a recommendation on this
Armstrong v. Gardner- sometimes you have to rely on 3rd parties in order to get relief
Held: application for leave can be granted based on information and belief of others since first-hand evidence would
not usually be available- Rationale: directors do not usually talk about what goes on in the board room (as such 3rd
persons and experts have to be brought in and provide their expert advice based on whatever information is available
Conclusion: all you need to prove is that it is not frivolous or vexatious and you will probably get leave of the court
Business Judgment of Litigation Committee
2 schools of thoughts
 The court should defer to the business judgment of the independent committee
 They are independent and perform an independent, adequate inquiry They also have firsthand knowledge of the affairs of the corporations
 Why should the court second guess their judgment- they have more at stake
 There are cases where the courts will simply refuse to overturn a litigation committee that is disinterested and
performed a through investigation
 The court should not second-guess business judgment, but in looking at that business judgment, the court should
also look at the reasonableness of the decisions (not just the procedural aspects of the decision)
 This is a more substantive inquiry
 Cases where the court will consider the decision of the independent litigation committee- however, the court
reserves the right to come to its own decisions
Re Bellman and Western Approaches Ltd.- pg. 873- have to make sure the committee is independent
Facts: dispute between 2 shareholder groups- they both had representation on the board- the dispute was about a
loan agreement with a bank that the controlling group had entered into to enable them to buy the minority shares- part
of some of the conditions in the loan agreement extended not only to the controlling group but also to the rest of the
corporation- this included a provision that the corporation should be providing to the bank an account of confidential
information of the company- the minority shareholders were claiming that the controlling shareholders are in effect
giving away/misusing corporate assets (i.e. confidential information which would allow the bank to determine the value
of the shares)- In considering the request to have the corporation bring this claim, the controlling shareholders set up a
litigation review committee
Issue: whether the litigation review committee was independent enough to relieve the board from liability
Ratio: a determining factor in whether the court will rely on the recommendation of the committee is their
independence- board members should not be on the committee because of their close connection to the
shareholders who appointed- this voids their independent status and prevents the court from placing any value to
their recommendation.
Analysis
 The court said that the litigation committee was not independent
 The members of the committee had been appointed to the board by the controlling shareholders
 Because of this, the court said that they had contracted out their independence
 Because the controlling shareholders appointed the directors, who were also members of the committee, they are
not independent and as such the court will not rely on their decision
Note: pg. 876-878- a bunch of interesting notes about US cases- Can you buy your way into a derivative action?
 The statute says that a claimant can include past or present shareholders?
 Can you then buy shares in order to profit from the claim?
 There are cases that say no, you cannot do this- however, area is still a bit gray
 This is why there is a good faith requirement set out in the legislation for a complainant
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Onus of showing good faith rests on the complainant- it may be assumed that the complainant is applying in
good faith if it seems he has a good claim
 The result is that the fate of the good faith requirement may depend upon whether the action is in the best
interests of the corporation
Moreover, as per Royal Trust Corp. of Canada v. Hordo “persons who acquire shares after the facts, which
were the subject of the complaint, were known should not be treated as a complainant”
However, this area was greyed by Richardson Greenshields of Canada Ltd. v. Kalmacoff where the SCC
held that “acquisition of securities after the wrongdoing did not bar the person from being a proper
complainant”
Conclusion- EXAM ADVICE
 When you get notice of derivative action being brought by one of the SH, strike a litigation committee
 Given the litigation committee freedom and make sure they are independent
 Abide by their decision- all you are doing is building your defence- assuming the litigation committee agrees with
the original action which will mean the minority shareholders will continue to seek leave and bring you to court
Personal Actions
 Beck, “The Shareholders’ Derivative Action”(pg. 885)- the ownership of stock in a corporation carries with it a
number of personal rights
 A partial list of the most common are:
 The right to receive timely and informative notice of company meetings
 The right to vote at such meetings
 The right to have a property executed proxy accepted and
 The right to inspect certain of the corporation’s records
 Some of these rights arise out of the companies Acts (i.e. the right to inspect books), some out of articles or bylaws
(the notice period for the meeting) and some out of judicial legislation
 Difficult to make out the line between wrongs to the corporation and those to the individual sometimes
 The rights listed above tend to not give rise to claims- they are mechanical rights- claims tend to come out of
breach of fiduciary duties
Goldex Mines Ltd. v Revill (pg. 897)
Facts: claim by shareholders that the information that was sent out to the shareholders was misleading and deficient
Issue: where do you draw the line between personal and derivative claims?
Ratio: A claim is personal occurs when a shareholder suffers a personal wrong as opposed to the corporationmisleading information gives rise to a personal claim
Analysis
 A claim is personal occurs when a shareholder suffers a personal wrong as opposed to the corporation
 In this case, the court held that misleading information gives rise to a personal claim
 In this particular case the pleadings were deficient because they did not distinguish between personal and
derivative claims
 No clear mention of personal claim in the pleadings by the complainant
 As such, the court came to the conclusion that there would have been a personal case but the claimant blew it
Hercules Management Ltd. v. Ernst & Young- pg. 903
Facts: liability of professional advisors (auditors)- shareholders were suing E and Y saying that they relied on financial
statements prepared by them- Hercules ended up going into receivership
Held: the court said no- financial reports by the auditor did not give rise to personal claims on the part of the
shareholders
Ratio: The interest of the shareholders in the proper management of the company’s affairs is indistinguishable from
the interest of the company itself and any loss suffered by the shareholders… will be recouped by a claim against the
auditor in the name of the company, not by individual shareholders
Analysis
 This was a private company
 To the extent that shareholders relied on the management reports, the shareholders were relying on them in a
quasi-managerial role as opposed to in the role of shareholders
 Pg. 904- “the shareholders assume what may be seen to be a “managerial role” when , as a collectivity, they
oversee the activities of the directors and officers through resolutions adopted at shareholder meetings
 In this capacity they cannot properly be understood to be acting simply as individual holders of equity
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Any duty owed by auditors in respect of this aspect of the shareholder’s functions, then, would be owed not to
shareholders qua individuals, but rather to all shareholders as a group, acting in the interest of the corporation
 And if the decisions taken by the collectivity of shareholders are in respect of the corporation’s affairs, then the
shareholders’ reliance on negligently prepared audit reports in taking such decisions will not result in a wrong
to the corporation for which the shareholders cannot, as individuals, recover”
The court made a point to state that nothing in Hercules detracts from the Goldex proposition that where a
shareholder has been directly and individually harmed, that shareholder may have a personal cause of action even
though the corporation may also have a separate and distinct cause of action
This case simply finds that claims arising in respect of losses stemming from an alleged inability to oversee or
supervise management are really derivative and not personal in nature
 Shareholders cannot raise individual claims in respect of a wrong done to the corporation
Note: Waitzer completely disagrees with this decision
Duties of majority to minority shareholders
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In addition to the fiduciary duties of directors, is there a duty owed by majority shareholders to minority
shareholders?
Brant Investments Ltd. v. KeepRite Inc. (1991) – pg. 561- current law
Facts: family of companies- ICG was the parent company at the top of the pyramid- it decided to cause KeepRite to
buy assets from ICM and Energy Products- the board decided that assets should be shuffled around- KeepRite
was buying assets from 2 related companies- KeepRite set up a committee of independent directors (directors who
were not officers)- the committee negotiated it for a better price- 4 million dollars lower than originally intended- on
that basis the committee recommended that the deal be approved as fair-board approved- minority shareholder
brought an oppression claim on the grounds that the majority holder was doing something for their own benefit at
the detriment of minority shareholders
Issue: is there a fiduciary duty by majority shareholders to minority shareholders?
Ratio: there is no absolute fiduciary duty by the majority shareholders to minority shareholders
Analysis
 The courts were satisfied that the decision was made following a fair process
 Held that there is no absolute fiduciary duty by the majority shareholders to minority shareholders
Note: this decision became important
Comment- process important in order not to owe a duty
 (1) set-up a special independent committee made up of non-interested directors
 (2) get the opinion of a valuator
 (3) get consent from minority shareholders
Policy- it is easy for the court to step into these types of corporations because the relationship was personal- the
shareholders knew each other and the court is offended by the egregious behaviour of the majority shareholders
 In a public company there is more deference to the board
 Part of the reason behind this deference is the process itself- the independent committee and the other approval
requirements set out in the Securities Act make it more fair and difficult to harm the minority shareholders
 It would take some pretty egregious behaviour on behalf of a public company for the court to step in
Pente Investment Management Ltd. v. Schneider Corp.- pg. 587
Facts: Schneider was a meat packing company- Maple Leaf Foods wanted to acquire it- the Schneider family held the
voting shares, and the public held non-voting shares- the family had 70% of the votes even though they only held
about 7-8% of the ownership- they were therefore able to exercise their will in terms of voting- Schneider said that they
were not interested in Maple Leaf Foods because they do not like them (not the kind of people that they would want to
work with)- however, they did say they are prepared to accept other bids- set up a special committee to find other
buyers- they found others- they ended up recommending a bid put forward by Smithfield- partly why they
recommended this deal is because the Schneider family said they endorse the deal- they in fact signed a lockup
agreement – they agreed that if Smithfield made the bid and the board recommended the bid they will tender to it- the
minority shareholders sued for breach of fiduciary duty because once you initiate the selling process you have a duty to
find the best bidder- without having consulted Maple Leafs, how do you know you have found the best bid
Ratio: majority shareholders do not owe a fiduciary duty to minority shareholders- they can act in their own interestthe duty of the board was discharged of properly by finding a bidder that satisfied the interest of the majority
shareholder
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Analysis
 The CA said that the board has discharged its duty- did not have to go back to try and get a better offer
 It discharged its duty when it recommended the bid and facilitated the lockup agreement
 WHY? – because the majority shareholder does not owe a fiduciary duty to a minority shareholder
 The only way the board could get sued is if the court found that the family had an obligation to the minority to
tender to the highest bidder
 The court found that the family does not have to tender to any bid
 Control is one of their family rights and they can decide what they want to do with it
 They have the right act in their own best interest
Note: “coat tails”- voluntary contractual rights- if someone bids for a higher voting share, and the controlling
shareholders accept that bid, then the lower voting shares convert into a higher voting shares
 In effect, all the shares should get the same price
 Note that some companies are grandfathered and do not have coat tail regulations
 It is also easy to get around them
Public Interest Power of the Securities Commission – pg. 594
 Securities commission has a very wide power if it is in the interest of the public- section 127
 Classic case where this power is invoked is Canadian Tire- pg. 596
Canadian Tire (pg. 594)
Facts: various siblings controlled the company by voting shares- public held non- voting shares- the public included a
lot of the Canadian Tire dealers- the dealers wanted to acquire control- some of the siblings did not agree to the
transaction- the dealers came to the siblings prepared to pay them a huge premium – 6-700% of the current valuethe reason they did this is because the coat-tail provision would not kick in unless more than 50% was acquiredthey were therefore making a partial bid for less than 50% at $160/share – 49% of the shares would have given
them effective control but not absolute- the 2 brothers agreed but the sister did not- they owned about 61% of the
shares- a group of the institutional shareholders took the claim to the Securities commission
Ratio: Securities Commission held that there is a duty to minority shareholders- using power under section 127 of the
Securities Act
Analysis
 Securities Commission invoked their power under Section 127
 While they are not supposed to pass judgment on the fiduciary duties of majority to minority shareholders, the
Securities Commission found that there is a duty there to minority shareholders
 Took issue with the egregious way in which the transaction was to occur in order to avoid triggering the coat-tail
provision
Comment: Canadian Tire would have been differently decided if there were not coat-tail provision
 In Canadian Tire, the court thought the way this transaction was drafted resulted in avoidance
Discussion on whether controlling shareholders are good or bad for the market
 Because the US capital markets are the deepest and the broadest, US law tends to trump
 Post 9/11 American attitude of “our way or the highway”
 US and UK- only 2 markets where market is predominantly governed by public companies where there is no
controlling shareholder- each shareholder holds a small percentage of the shares
 In markets like Canada, Europe and Japan, the markets are characterized by controlled corporations
 This is because the controlled companies tend to outperform
 Where the CEO reports to many shareholders, his performance is based on short term results In a controlling shareholder environment, the controlling shareholders care about long-term effects and as such
they can guide the CEO to focus on long term effects-
Remedy of Restraining or Compliance Order
 Section 247- the ability to get a compliance order or a restraining order- if a corporation or any director,
officer, employee, agent, auditor, trustee, receiver-manager or liquidator of a corporation do not comply with this
Act, the regulations, articles, by-laws, or a unanimous shareholder agreement, a complainant or a creditor of the
corporation may, in addition to any other right they have, apply to the court for an order directing any such person
to comply with, or restraining any such person from acting in breach of, any provision thereof, and on such
application the court may so order and make any further order it thinks fit
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Comment: these applications are not uncommon- sometimes this is the better alternative as opposed to suing in
contract
Section 248- Summary application to court- where this Act states that a person may apply to a court, the
application may be made in a summary manner by petition, originating notice of motion, or otherwise as the rules
of the court provide, and subject to any order respecting notice to interested parties or costs, or any other order the
court thinks fit
Remedy of Rectification
 Section 243(1)- Application to Court to Rectify Records- If the name of a person is alleged to be or to have
been wrongly entered or retained in, or wrongly deleted or omitted from, the registers or other records of a
corporation, the corporation, a security holder of the corporation or any aggrieved person may apply to a court for
an order that the registers or records be rectified.
 Section 243(2)-Notice to Directors- An applicant under this section shall give the Director notice of the application
and the Director is entitled to appear and be heard in person or by counsel.
 Section 243(3)- Powers of Court- In connection with an application under this section, the court may make any
order it thinks fit including, without limiting the generality of the foregoing
 (a) an order requiring the registers or other records of the corporation to be rectified;
 (b) an order restraining the corporation from calling or holding a meeting of shareholders or paying a dividend
before such rectification;
 (c) an order determining the right of a party to the proceedings to have their name entered or retained in, or
deleted or omitted from, the registers or records of the corporation, whether the issue arises between two or
more security holders or alleged security holders, or between the corporation and any security holders or
alleged security holders; and
 (d) an order compensating a party who has incurred a loss
Investigation Order
 Sections 229-236- Part XIX- deal with the power of the court to order an investigation
 Section 229(1)- Investigation- A security holder or the Director may apply, ex parte or on such notice as the court
may require, to a court having jurisdiction in the place where the corporation has its registered office for an order
directing an investigation to be made of the corporation and any of its affiliated corporations.
 Section 229(2)- Grounds- Court may order an investigation of the corporation if it appears that:
 (a) the business of the corporation or its affiliates is or has been carried on with intent to defraud any person,
 (b) the business of the corporation or its affiliates have been conducted in a manner that is oppressive or
unfairly prejudicial to or that unfairly disregards the interests of a security holder,
 (c) the corporation or any of its affiliates was formed for a fraudulent or unlawful purpose or is to be dissolved
for a fraudulent or unlawful purpose, or
 (d) persons concerned with the formation, business or affairs of the corporation or any of its affiliates have in
connection therewith acted fraudulently or dishonestly,
 Section 230- Powers of the court- In connection with an investigation under this Part, the court may make any
order it thinks fit including, without limiting the generality of the foregoing,
 (a) an order to investigate;
 (b) an order appointing an inspector, who may be the Director, fixing the remuneration of an inspector, and
replacing an inspector;
 Comment: the rest of the subsections of this provision deal with the courts power to order an investigation if it
is satisfied that the grounds above are met, requiring the production of evidence and enabling the appointment
of an inspector(the inspector would have the authority to conduct that investigations
 Note: the rest of provisions in Part XIX- deal with the procedure for the investigation
 Note: the court has the same authority to exercise in a much broader ground when it comes to an oppression
application
Example of Investigation Order granted by the Court
Hollinger Inc.
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the minority shareholders of Hollinger brought an application saying that they think Conrad Black is
misappropriating funds court appointed an inspector- inspector spent 15-20 million dollars trying to figure out if any money was
expropriated example broad power by the court
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Inspector does not have the same powers as the Securities Commission but it does have the same powers as the
court does and can compel the production of documents
Dissent Remedies of Shareholders
 Section 190(1)- Right to Dissent- on fundamental changes, if you vote against the shareholders you are entitled
to go to court and be paid fair value for the shares (Section 190(3)), essentially becoming an unsecured creditor of
the corporation
 Section 190(12)- Offer to Pay- A corporation shall, within 7 days of receiving notice, make
 (a) a written offer to pay dissenting shareholders the fair value of the shares, accompanied by a statement
showing how the fair value was determined; or
 (b) a notification that it is unable lawfully to pay dissenting shareholders for their shares.
 Comment: presumption that market value will be offered for the shares
Common Law Tests for determining fair value of shares
 Market Value Test
 Underlying Asset Value Test
 Public companies often trade at a discount
 Example: Real Estate Company- if you liquidated all of its assets and distributed out all the cash- the
underlying value would be greater than the share value
 Earnings Value
 A valuator will typically value a ongoing business by looking at earnings and applying a multiple to that
 The multiple would vary based on the type of business
 Essentially saying that if the company is making $100 dollars of revenue it is actually worth 8x that revenue
 Combination of tests- MOST COMMON
 Most typically used by the courts- look at all tests and taking all factors in consideration
 Comment: the value is determined as of the date the event took place- not future value
Winding-Up Remedy
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Remedy that you would only invoke in a private company
A couple of shareholders- business not going well anymore
Section 213(1)- Grounds for Dissolution0 The Director or any interested person may apply to a court for an order
dissolving a corporation if the corporation has
 (a) failed for two or more consecutive years to comply with the requirements of this Act with respect to the
holding of annual meetings of shareholders;
 (b) contravened subsection 16(2) or section 21, 157 or 159; or
 (c) procured any certificate under this Act by misrepresentation.
 Section 214(1)- court may order the liquidation and dissolution of a corporation or any of its affiliated corporations
on the application of a shareholder,
 (a) if the court is satisfied that in respect of a corporation or any of its affiliates, the acts of the corporation or its
directors or officers give a result that is oppressive or unfairly prejudicial to or that unfairly disregards the
interests of any security holder, creditor, director or officer; or
 (b) if the court is satisfied that
 (i) a unanimous shareholder agreement entitles a complaining shareholder to demand dissolution of the
corporation after the occurrence of a specified event and that event has occurred, or
 (ii) it is just and equitable that the corporation should be liquidated and dissolved.
Case Law
 The cases where this remedy is used tend to be cases where there are irreconcilable differences between the
shareholders of a private corporation
 i.e. one shareholder wants the corporation to go in one direction, and the others do not want to agree
 another issue is serious misbehaviour on the part of one of the shareholders
 other serious disagreements- since there is no shareholder agreement in private companies there are no set
standards of rules
 Note: this is truly a last resort remedy- this is because if the company has any value it would not make sense to
wind it up unless differences are so irreconcilable
 even if that was the case, the best course of action would be for one shareholder to purchase the share of the
one causing the irreconcilable differences
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Ebrahimi v. Westbourne Galleries Ltd.- pg. 565- brought under the British provision equivalent of 214(1)(b)
Facts: 50/50 partnership between 2 parties- somewhere along the line Nazar brought his son into the businessstarted out as Nazar having 500 shares and Ebrahimi having 500 shares- they each sold 100 shares to Nazar’s sonsomewhere along the line, Nazar’s son decided they wanted to get rid of Ebrahimi- since he and his dad had 600
shares, and Ebrahimi only had 400, they had the majority of votes in general meeting- they first expelled Ebrahimi
from the board as a director- Ebrahimi then brought the motion to wind-up
Issue: should the corporation be wound up? Was it just and equitable for Nazar to remove Ebrahimi?
Held: the respondents were not entitled, in justice and equity, to make use of their legal powers of expulsion – the only
equitable and just course was to dissolve the association
Analysis
 the phrase “just and equitable” at the heart of this remedy
 Equitable consideration of this remedy is based on the presence of the following elements
 (1)- an association formed or continued on the basis of a personal relationship, involving a mutual confidence
(this element is often found where a pre-existing partnership has been converted into a limited company)
 (2) an agreement that all, or some of the shareholders shall participate in the conduct of the business
 (3) restriction on the transfer of the member’s interest in the company- so that if confidence is lost, or one
member is removed from management, he cannot take out his stake and go elsewhere
 the law of companies recognizes the right to remove a director from the board
 However, the removed director can used argue inequity if:
 he undertakes the burden of proving fraud or mala fides
 he can also try to prove some special underlying obligation of his fellow members in good faith, or confidence,
that so long as the business continues he shall be entitled to management participation- if this obligation is
broken then the conclusion is that the association must be dissolved
 the court found that while Nazar and his son had the right to remove Ebrahimi, this was an abuse of power and a
breach of good faith which partners owe to each other
 part of the reason is that the removal meant that Ebrahimi lost his rights to share in the profits through director
remuneration, being at the mercy of Nazar as to what he should receive out of the profits
Oppression Remedy
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the broadest most comprehensive remedy in corporate law
it is a remedy that arose out of all the other remedies- there is some overlap
introduced in the CBCA in 1975- it got picked up by most provinces later- Ontario introduced it in 1982
serves as an antidote to the general purpose that majority rules
 the majority generally controls what goes on in the corporation
 the oppression remedy along with fiduciary duties are constraints on what majority shareholders can do
 in some ways, the oppression remedy broadens fiduciary duties
this remedy displaces derivative actions- so much more simplicity in bringing an oppression remedy claim
 Section 242(4)- the court can award interim costs on an oppression application
Legislature
 Section 238- “complainant” means
 (a) a registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security of a
corporation or any of its affiliates,
 (b) a director or an officer or a former director or officer of a corporation or any of its affiliates,
 (c) the Director, or
 (d) any other person who, in the discretion of a court, is a proper person to make an application under this Part.
Issue: whether creditors can bring oppression remedy claims?
First Edmonton Place Ltd. v. 315888 Alberta Ltd. – Test for creditors fitting under Section 238(d)
Facts: landlord brought an oppression application
Held: landlord was not a proper complainant- does not fit under 238(a) or (d)
Analysis
 Court looked at whether the a landlord can fall under the definition of complainant under Section 238(a)
 In order to be a security holder under Section 238(a) you presumably need to have certificates which are
entered into a register
 A security issued by the company is a debt- a mortgage is a security that can be registered- however, this
should not be extended to lessors
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 First Edmonton is not a security holder capable of exercising an oppression remedy claim
 As a landlord they have other remedies
 Court looked at whether the landlord can fall under section 238(d)
 A creditor could be found to be a “proper person” if they would be able to show that in the circumstances of
the case, justice and equity require him to be given an opportunity to bring a claim, because there was some
evidence that of oppression or unfair prejudice or unfair disregard for the interests of the creditor
 There are 2 circumstances in which justice and equity would entitle a creditor to be regarded as “proper person
 (1) if the act or conduct of the directors or management of the corporation, constituted using the
corporation as a vehicle for committing fraud upon the applicant
 In this case there is not evidence of this
 (2) if the act or conduct of the directors or management of the corporation constituted a breach of the
underlying expectation of the applicant arising from the circumstances in which the applicant’s relationship
with the corporation arose
 Example: where the applicant is a creditor of the corporation, did the circumstances, which gave rise to
the granting of the credit, include some element which prevented the creditor from taking adequate
steps when he or it entered into the agreement, to protect his or its interests against the occurrence of
which he or it now complains?
 The court found no evidence that the second requirement should apply because it was not a creditor at the
time of the act or conduct complained of
Note: creditors have been successful in brining claims under Section 238(d)
Note: A lot of the oppression were cases where the government was seeking the status of complainant as a creditor
 The company was paying out dividends which frustrated the amount the government could collect
Procedural Advantages of the Oppression Remedy
1. like the derivative remedy, you commence it by application
 no pleadings and no discovery necessary
 once the court is satisfied that you have a claim, you can get in front of a court very quickly, when there are no
factual disputes
2. you can bring an oppression remedy ex parte- not so for derivative remedy
 basically you do not have to notify the other side that you are bringing a claim
3. the remedial authority is broader
 the goal of derivative remedy is to right the wrong done to the corporation
 the remedial application of an oppression remedy is much broader:
 you can order a director accused of taking money out of the corporation to put it back in
 the court has an ability to order compensation to an aggrieved party
 technically, any remedy that you could get by a derivative claim or any other civil claim, you can get
through the oppression remedy
Grounds for bringing an Oppression Remedy Claim
 Section 241(2)- Grounds for bringing an Oppression Remedy Claim- 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.
Note: a creditor is clearly contemplated under Section 241(2)
Ferguson v. Imax System Corp.- pg, 922- introducing the reasonable expectation principle to oppression
Facts: more extensively discussed at pg. 572- Imax was set up by several couples that were all in the film businessone of those couples was the Fergusons- they held a quarter of the shares going- there was another couple that held a
quarter of the shares- the company was becoming viable and started making profit- the Fergusons split up in 1972Graham Ferguson was trying to force out his wife in partnership with other shareholders- all the wives had non-voting,
type B shares- however, they were to receive equal dividends- upon forcing her out, the company sought to convert all
class B dividends to non-voting, limited-dividend sharesHeld: behaviour of the company was unfairly prejudicial and oppressive- oppression claim allowed
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Ratio: applying indirectly the “reasonable expectation” principle of Ebrahimi- actions which come in direct conflict with
the reasonable expectations of one of the founding shareholders are considered unfairly prejudicial and oppressive. IIN
deciding whether to award an oppression remedy, the courts will look at
 (1) what is the effect of the decision – Section 241(a)
 (2) the process itself – Section 241(b) and (c)
Analysis
 A review of the common law in the area of oppression remedies shows that each case turns on its own facts
 What is oppressive or unfairly prejudicial in one case may not necessarily be so in another
 The court held that the conduct of the other families in attempting to force out Mrs. Ferguson was unfairly
prejudicial, was contrary to her legitimate expectations
 It was denying her any participation in the growth of the company
 “the resolution authorizing the change in the capital of the company is the culminating event in the lengthy course
of oppressive and unfairly prejudicial conduct to the appellant”
 The court held that the company has not acted bona fide in exercising its powers to amend
 In essence, it was not just Ferguson acting in an oppressive manner, it was him in combination with the other
members of the company that were acting in a prejudicial manner
Note: Ferguson does not refer to Ebrahimi, however it is similar because it talks about reasonable expectations
 Canadian courts have ignored Lord Wilbeforce’s attempt in Ebrahimi to limit the scope of “equitable rights”
 There are now many cases applying the concept of equitable rights in the context of suits arising under the
oppression remedy
 Ebrahimi indicates that shareholder expectations may be a source of rights as well
 this greatly broadens the grounds upon which a disgruntled minority may challenge the actions of a majority or
controlling shareholders
Diligenti v. RWMD Operations Kelowna Ltd. – following IMAX and Ebrahimi- reasonable expectation principle
Facts: 4 equal partners in a franchise- they acquired multiple franchises- 3 of the partners decided to remove a 4th one
who had been a manager and director- they did so and formed their own management company to run the businessHeld: the court said this was oppressive- applying once again the principle of reasonable expectation
Ratio: the courts are willing to look at the actual expectations of the aggrieved parties- an action that goes against
these reasonable expectations could potentially be oppresssive
Analysis
 followed the Ebrahimi reasoning- this was a breach of reasonable expectations
 the court held that by squeezing this partner out, he was being disentitled to an economic interest which was within
his reasonable expectation
 The court found that:
 (1) in circumstances such as exist here there are “rights, expectations and obligations” which are not
submerged in the company structure, and these rights are enjoyed by a member as part of his status as a
shareholder in the company which has been formed to carry on the enterprise
 Among these rights are the rights to continue to participate in the direction of the company’s affairs
 (2) although his fellow members may be entitled as a matter of strict law to remove him as a director, for them
to do so is unjust and inequitable, and is a breach of equitable rights which he in fact possesses as a member
 (3) although such a breach may not oppress him in respect of his proprietary rights as a shareholder, such
unjust and inequitable denial of his rights and expectations is undoubtedly “unfairly prejudicial” to him in is
status as a member
Note: this was so even though there was no explicit agreement for all the shareholders to participate in the
management and there was no longstanding partnership between shareholders as in Ebrahimi
Comment: this case is illustrative of how the oppression remedy is a very broad remedy
 Waitzer- the court has extremely broad discretion since this remedy is very fact specific
Westfair Foods Ltd. v. Watt – pg. 927- picks up from Diligenti- reasonable expectations raised
Facts: 2 classes of shares- 1 class of shares was entitled to a priority 2 dollars on dividends- before you could pay a
dividend to the B shares, you had to pay $2 to the A shares- once that is satisfied, both classes shared equally in
dividends- there was a policy in the company as to how much earnings was distributed during the year- the company
would basically retain most of its earnings in the business- at some point the board decided to change that policy and
essentially distribute out all earnings as dividends- the A shareholders, who had the priority, argued that this is
oppressive because it is in effect doing away with their dividend priority- as such brought a oppression application
Held: court awarded relief- ordered the company to repurchase the shares
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Ratio: applying indirectly the “reasonable expectation” principle of Ebrahimi- actions which come in direct conflict with
the reasonable expectations of one of the founding shareholders are considered unfairly prejudicial and oppressive
Analysis:
 A shareholders were claiming the policy change removed their priority- by paying everything out, there was nothing
left to divvy come year 2- previously there was a higher certainty that they would always get at least $2 every year
because the company was retaining a lot of its earnings In effect, it was argued that this diminishes the value of the A shares and unfairly prejudices the interests of the A
shareholders who purchased the shares with the expectation that they would share in the business success or
failure of the corporation
 Ebrahimi is once again quoted- the decision is about reasonable expectations Court found that the company’s policy change unfairly prejudiced the reasonable expectations of the A
shareholders
 The court reaffirmed that the test is always case specific in these types of cases
Waitzer- guesses that representations were made to the A shareholders that gave rise to reasonable expectations
Does the Oppression Remedy Require a Showing of Bad Faith?
 Professor MacIntosh argues that the origins and construction of the oppression provision suggest that it was never
intended that bad faith be a necessary part of the cause of action
 He argues that the question of unfair result be at the centre of the inquiry
 This reasoning was adopted by the court in Brant Investments v. Keeprite
 “in considering whether any act it unfairly prejudicial to, or unfairly disregards the interests of one of the
protected persons or groups, I am of the view that a requirement of a lack of bona fides would unnecessarily
complicate the application of section 234”
 The difficult question is whether or not the rights of shareholders have been prejudiced or their interests
disregarded unfairly
 In testing the facts in a given case against the word unfairly, evidence of bad faith as to motive could be
relevant, but there may be other cases where the particular acts effect an unfair result, but where there has
been no bad faith whatsoever on the part of the actors
Scottish Co-operative Wholesale Society Ltd. v. Meyer (pg. 942) (1959)-inactions just as oppressive as action
Facts: Scottish Co-op set up a subsidiary- they hired Meyer, a person with know-how in the rayon business to help
them get launched in that field of business- he was given share ownership in the subsidiary-however, Scottish Co-op
retained 51% of shares and therefore control- the Co-op provided funding and the market- at the end of a 5 year
employment contract they took the rayon business back in-house and allowed the subsidiary to decline- they did not
renew Meyer’s contract and moved the business into the parent company- Meyer brought an application asking that
the shares be purchased at a fair price
Held: oppression found- remedy to buy back Meyer’s shares at Fair Market Value
Ratio: the affairs of a company can be conducted oppressively by the directors doing nothing to defend the interests of
the company when they ought to do something- just as they can conduct its affairs oppressively by doing something
injurious to its interests when they ought not to do it
Analysis
 The court saw a lack of equity and fair dealing
 While Meyer was the managing director, there were three other directors who were nominated by the parent
company and who supported the parent company
 They thought that as nominees of the co-operative society their first duty was to the co-operative society
 The court found that by subordinating the interests of the subsidiary to those of the parent company, they
conducted the affairs of the subsidiary company in a manner oppressive to the other shareholders
 While they were a minority, and their protest may have result in nothing, they should have still protested the to
manner in which the parent company has decided to let the subsidiary decline
 Ordered the shares to be purchased back at a fair price
Note: the English CA has also applied the oppression remedy quite explicitly to the conduct of shareholders as
evidenced by the following passage in Re Jermyn Street Turkish Baths(1971):
 “oppression occurs when shareholders having dominant power in the company, either
 (1) exercise that power to ensure that something is done or not done in the conduct of the company’s affairs, or
 (2) procure by an express or implicit threat of an exercise of that power that something is not done in the
conduct of the company’s affairs
Note 2: in many cases it is not necessary to characterize the acts of shareholders as oppressive, unfairly prejudicial,
etc. in order to bring oneself within the oppression remedy
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For example, if an oppressive shareholder resolution is passed and the company acts on the resolution, then it can
be said that the corporation has committed the act of oppression
Having found oppression, it is clear that the court may then make orders that have affect or are directed against
shareholders
It is common for the court to order that a majority of controlling shareholders buy the shares of the complainant
minority shareholder( Wind Ridge Farms v. Quandra Group Investments)
Does the oppression remedy extend to non-affiliated shareholders?
 Affiliate- company that controls, or that is controlled by the company
 There have been cases where oppression claims against non-affiliated shareholders have failed
 However, the court has broad discretion under Section 241- unlimited flexibility
 Section 241(3)- Powers of Court- In connection with an application under this section, the court may make any
interim or final order it thinks fit including, without limiting the generality of the foregoing,
 (a) an order restraining the conduct complained of;
 (b) an order appointing a receiver or receiver-manager;
 (c) an order to regulate a corporation’s affairs by amending the articles or by-laws or creating or amending a
unanimous shareholder agreement;
 (d) an order directing an issue or exchange of securities;
 (e) an order appointing directors in place of or in addition to all or any of the directors then in office;
 (f) an order directing a corporation, subject to subsection (6), or any other person, to purchase securities of a
security holder;
 (g) an order directing a corporation, subject to subsection (6), or any other person, to pay a security holder any
part of the monies that the security holder paid for securities;
 (h) an order varying or setting aside a transaction or contract to which a corporation is a party and
compensating the corporation or any other party to the transaction or contract;
 (i) an order requiring a corporation, within a time specified by the court, to produce to the court or an interested
person financial statements in the form required by section 155 or an accounting in such other form as the
court may determine;
 (j) an order compensating an aggrieved person;
 (k) an order directing rectification of the registers or other records of a corporation under section 243;
 (l) an order liquidating and dissolving the corporation;
 (m) an order directing an investigation under Part XIX to be made; and
 (n) an order requiring the trial of any issue.
McLaughlin Case (1982)- case on powers of the court
Facts: Bruce McLaughlin paying himself a lot of money- misappropriating funds- he had been partners with the
Rothman family- they wanted out- they forced him to buy their shares in order to maintain the control of the companyhe had to borrow money- he had to increase his salary to pay back the loan- it was 5% of the revenue of the companythat was not enough so he started buying assets from the company at discounted prices or selling assets to the
company at inflated prices- minority shareholders were not comfortable with this- however, the oppression remedy was
not available at that time- as soon as the oppression remedy became available they brought a claim
Held: the court gave a remedy on the spot- expelled the whole board – appointed a new board- appointed an inspector
to investigate the transactions- imposed a restriction on the company on entering into non-arm’s length transactionsthey basically took away all of his powers as a controlling shareholder
Note: hard to imagine a more comprehensive set of measures enforced by the court
Note: as a consequence Bruce tried to petition the company into voluntary bankruptcy- eventually he was forced to sell
the company
Conclusion: this case stands for the fact that oppressed shareholders were able to bring an oppression claim without
notice and effectively in one day change the ownership of the company- broad powers of the court
Naneff v Con-Crete Holdings Ltd.
Facts: family real-estate business- father had brought in 2 sons- at some point decided that he did not like the way one
of his sons was carrying out his life and kicked him out of the house- also removed him as an officer and removed him
as a manager, basically cutting off his income- the son, Alex, brought an oppression application
Held: contrary to reasonable expectations- oppressive- remedy is to share buyback
Analysis
 The trial judge held this was oppression- it was going to be a liquidation remedy
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The CA held back a little bit- they agreed with the trial judge that reasonable expectations of the son had been
frustrated
the conduct of the rest of the family in ostracizing the son from the business, especially removing his main source
of income was inequitable and unfairly prejudicial and contrary to the son’s reasonable expectations
 However, as for the remedy, they requested the company to buy back Alex’s shares as opposed to liquidation
Greenlight Case- Summary of Oppression Remedy- pg. 8-15
 the purpose of the statutory remedy for oppression is to rectify, or provide compensation to the complainant for ,
conduct found to be oppressive to, or fairly prejudicial to, or that unfairly disregards the interests of, the
complainant
 in order to determine whether the actions of the Respondents constitute oppressive conduct, the court must have
regard to the reasonable expectations of the complainant, objectively determined at the time of the conduct
complained of (820099 Ontario Inc. v. Harold E. Ballard (1991))
 The court must determine whether such reasonable expectations have been thwarted
 The burden of proof in an oppression application is on the applicant and the Respondents are not required to prove
that they did not act oppressively (Brant Investments v. Keeprite Inc)
 The authorities establish that there is a two-step process that must be followed when dealing with reasonable
expectations of shareholders as part of an oppression claim:
a. the subjective expectations of the shareholders must be established
i. This is accomplished through a detailed analysis of any representations and/or public statements
made by the company and the company’s conduct
b. An objective analysis of the individual shareholder’s expectations must be conducted to determine if that
expectation was reasonable
 The pursuit of an agenda to promote the interest of a controlling shareholder without an analysis of whether it is in
the best interest of the corporation is per se unfairly prejudicial to shareholders (Deluce Holdings Inc. v. Air
Canada)
 The conduct of directors, committees and officers of the corporation may be scrutinized to determine whether they
have acted fairly in approving a particular transaction. While the court should not second a Board’s decision, the
court can scrutinize the process undertaken to reach that decision (Kymmene Corp. v. UPM)
 In examining the conduct of the directors, committees and officers, the court will consider whether they received
independent legal advice (CW Shareholdings v. WIC)
 It is not necessary to establish bad faith on the part of the directors, committees or management in applying
section 234; it is sufficient if the foreseeable result of their actions would be oppressive to the complainant (Brant
Investments v. Keeprite)
 In applying the business judgment rule, the court only requires that the directors make a decision which is within a
range of reasonableness and the courts will not interfere with the selection by the directors of one of several
reasonable alternatives (Maple Leafs Foods Inc. v. Schneider)
 A complainant in an oppression action cannot rely on reasonable expectations, however honestly and subjectively
held, which are contrary to public disclosure statements or public statements made by a corporation (Shaw v.
BCE)
 Among the reasonable expectations of shareholders is an expectation that the directors, committee and officers
will act in accordance with their statutory duties under section 134 of the OBCA to (a) act honestly and in good faith
with a view to the best interests of the corporation and (b) exercise their reasonable business judgment with the
care, diligence and skill of a reasonably prudent person in comparable circumstances (Gazit Inc v. Centrefund
Realty Corp)
 the directors duty to act in good faith requires that the director’s decisions be disinterested and impartial
 they must avoid actual or perceived conflicts of interest
 the creation of a special committee of independent directors has been accepted by the courts as a mechanism
to minimize actual or perceived conflicts of interest in considering the transactions that are not at arm’s length
 shareholders may reasonably expect that the corporation would establish such a special committee
Conclusion on Oppression Remedy
 (1) Look at who is a proper person
 (2) Grounds- effects of actions of the corporation, process, manner in which the business of the corporation was
carried out
 (3) Expectations of the shareholder- were they treated unfairly?
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Apportionment of Liability
 Part XIX of the CBCA- starts with section 237
 It deals with degrees with responsibility
 These sections deal with financial loss that result from errors or omission or misstatement in financial
information concerning a corporation
 Section 237.3(1)- Degree of Responsibility- every defendant or third party who has been found responsible for a
financial loss is liable to the P only for the portion of the damages that corresponds to their degree of responsibility
for the loss
 Financial Loss- means a financial loss arising out of an error, omission or misstatement in financial
information concerning a corporation that is required under this Act or the regulators
 Section 237.3(2)- Uncollectable Amounts- If any part of the damages is uncollectable, the court may, on the
application of the plaintiff, reallocate that amount to the other responsible defendants or third parties, if the
application is made within one year after the date that the judgment was made enforceable.
 Section 237.3(3)-Reallocation- The amount that may be reallocated = the uncollectable amount x a percentage d
degree of responsibility of that party
 Section 237.3(4)- Maximum Amount- The maximum amount may not be more than 50% of the amount originally
awarded against that responsible defendant or third party.
Exceptions
 Section 237.4(1)- Fraud is an exception- The plaintiff may recover the whole amount of the damages awarded by
the court from any defendant or third party who has been held responsible for a financial loss if it was established
that the defendant or third party acted fraudulently or dishonestly.
 Section 237.4(2)- Contribution- The defendant or third party referred to in subsection (1) is entitled to claim
contribution from any other defendant or third party who is held responsible for the loss.
Joint and Several Liability
 Section 237.5(1)- defendants and third parties referred to in section 237.2(1) are jointly and severally, or solidarity,
liable for the damages awarded to a plaintiff who is an individual or a personal body corporate and who
 (a) had a financial interest in a corporation on the day that an error, omission or misstatement in financial
information concerning the corporation occurred, or acquired a financial interest in the period between the day
that the error, omission or misstatement occurred and the day, as determined by the court, that it was generally
disclosed; and
 (b) has established that the value of the plaintiff’s total financial interest in the corporation was not more than
the prescribed amount at the close of business on the day that the error, omission or misstatement occurred or
at the close of business on any day that the plaintiff acquired a financial interest in the period referred to in
paragraph ( a).
Comment:
 You are only able to claim the prescribed amount
 When you are dealing with the term prescribed, you have to look at the regulations
 See part XI- for the purposes of these individuals or body corporate claiming that there was a loss resulting
from an error or omission, the amount of the value of the total financial interest is capped at $20,000
 Section 237.6 - equitable grounds- if the value of the plaintiff’s total financial interest referred to in subsection
237.5(1) is greater than the prescribed amount, a court may nevertheless determine that the defendants and third
parties are jointly and severally, or solidarily, liable if the court considers that it is just and reasonable to do so
 Comment: if you had more invested and you feel that it was an egregious situation, always go to a court and
they may determined that the defendants are liable for more than the cap
Sample Exam Questions
 Error or omissions on financial situation by a mutual fund- what section can I sue under? What claims can I make?
 What I am an individual and the value of my stake is $22,000- What can I sue for to get that entire amount- what
actions do I have to take and what sections apply?
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Controlled Transactions- Mergers and Acquisitions
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Merger is a Delaware concept- Canadian term is amalgamations
Amalgamations- two corporations join- they both die and combine into a new one
Merger is one corporation joining another one- more like tributary river joining the main river
Public Companies
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issue shares to the public companies listed on the public markets- this is not a mandatory requirement
 subject to the Securities Act
Private Companies
 a few parties involved negotiated agreements and transactions
 example of Private MNA- Heinz acquiring Rene’s Dressing
Mergers
 What are the different ways you can purchase a business?
1. Share and asset transactions
2. Amalgamations
3. Arrangements
 Mechanics of shares and Asset Transactions
 Mechanics- share transactions Private- negotiated share purchase transactions
 Public- takeover bids
 Requirements for public transactions- part XX of the Securities Act
 Mechanics - asset transactions
 Often in private context and very seldom in public context
Statutory Amalgamations
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Section 181- Definition of Amalgamation- two or more corporations, including holding corporations and
subsidiary corporations, may amalgamate and continue as one corporation
Section 182(1)- Amalgamation Agreement- each corporation proposing to amalgamate shall enter into an
agreement setting out the terms and means of effecting the amalgamation and in particular setting out
 (a) the provisions that are required to be included in the articles
 (b) name and address of directors of the amalgamated corp
 (c) the manner of conversion of shares
 (d) what happens to shares that are not to be converted
 (e) manner of payment of money instead of the issue of fractional shares
 (f) whether the by-laws of the amalgamated corporation are to be those of one of the amalgamating corps- if
not the proposed by-laws
 (g) details of any arrangements necessary to finish the amalgamation
Requirements for Amalgamation
1. Amalgamations Require Shareholder Approval
 Section 183(1)- Shareholder Approval- directors of each amalgamating corporation have to submit the
amalgamation agreement for approval by each of the shareholders of their respective corporations
 Section 183(2)- Notice of Meeting- has to be provided
 Section 183(3)- Right to Vote- each share receives a right to vote on this, regardless of status before
 Section 183(4)- Class Vote- each class of shares gets to vote separately
 Section 183(5)- Shareholder Approval- Requirement of amalgamation to be approved by special resolution
 Special resolution- 66% and 2/3 of the shareholders have to agree
 Requirement to inform people of their dissent rights in accordance with Section 190
 Note: there is a risk in a public context of doing this- this is why you see this more in a private context
2. Corporations have to be governed by the same jurisdiction
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Section 188- Continuance – other jurisdictions- subject to subsection (10), a corporation may apply to the
appropriate official or public body of another jurisdiction requesting that the corporation be continued as if it had
been incorporated under the laws of that other jurisdiction if the corporation
 (a) is authorized by the shareholders in accordance with this section to make the application
 (b) establishes to the satisfaction of the Director that its proposed continuance in the other jurisdiction will not
adversely affect creditors or shareholders of the corporation
Comment: the corporations have to be governed by the same Act
 if you want to amalgamate in another province, you have to continue that in the CBCA jurisdiction
 if you are on OBCA corporation and want to merge with a CBCA corporation, then one has to choose the
other’s statute
3. Procedural Requirements for Continuance under a different Act
 Section 188(3)- Notice of Meeting- need shareholder meeting and notice has to be provided
 Section 188(4)- Right to Vote- each share receives a right to vote on this, regardless of status before
 Section 188(5)- Shareholder Approval By Special Resolution- an application for continuance becomes
authorized when the shareholders voting thereon have approved the continuance by a special resolution
 Special resolution- 66% and 2/3 of the shareholders have to agree if you take a CBCA corporation and moving
it into the OBCA jurisdiction, or viceversa
Other Requirements:
 Just like any other shareholder meeting
 You need a circular
 You have to provide them with particulars on what they are voting on (i.e. the resolution itself)
 You have to meet the timelines under the Act
 You have to meet the timelines under the Securities Act if it is a public corporation
Short-form Amalgamations
 Part II of the definition of an amalgamation refers to multiple corporations including subsidiaries and holding corp.
 Sometimes you have multiple corporations for tax purposes
 All of the sudden you buy the company and you can just combine all of the corporations
 Section 184(1)- Vertical Short-Form Amalgamation- a holding corporation and one or more of its subsidiaries
may amalgamate and continue as one corporation without comply with sections 182 and 183 if
 (a) the amalgamation is approved by a resolution of the directors of each amalgamating corporation
 Section 184(2)- Horizontal Short-Form Amalgamation- 2 or more sister companies may amalgamate and
continue as one corporation without complying with section 182 and 183
 (a) the amalgamation is approved by a resolution of the directors of each amalgamating corporation
Benefits of Statutory Amalgamations
 Asset sales require a certain degree of consent- if you think that consent will be withheld, then you may want to
consider amalgamations
 On a statutory amalgamation there is a view taken that no assets are being transferred
 As such, it can be argued that there is no need to seek consent
Arrangements
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Section 192 (1)- definition of arrangement includes
 (a) an amendment of the articles of a corporation
 (b) an amalgamation of two or more corporations
 (c) an amalgamation of a body corporate with a corporation that results in an amalgamated corporation
subject to this Act
 This your continuance
 (d) a division of the business carried on by a corporation
 (e) a transfer of all or substantially all the property of a corporation to another body corporate in exchange for
property, money or securities of the body corporate;
 (f) an exchange of securities of a corporation for property, money or other securities of the corporation or
property, money or securities of another body corporate;
 (f.1) a going-private transaction or a squeeze-out transaction in relation to a corporation;
 (g) a liquidation and dissolution of a corporation; and
 (h) any combination of the foregoing.
Arrangements- Used to
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 Restructure corporations
 Conversion into income trusts
If it is complicated and it cannot be done under any other provisions of the Act, then you look at an arrangement
 You basically have the court overlook the process- you make it legit
 Extremely flexible, allow for multi-step transactions- everything can be done with one seal from the court
 Arrangements are used in cross-border MNA deals because of their flexibility
Section 192(3)- application to court for approval of an arrangement- where it is not practicable for a
corporation that is not insolvent to effect a fundamental change in the nature of an arrangement under any other
provision of this Act, the corporation may apply to a court for an arrangement
Section 192(2)- where a corporation insolvent- for the purposes of this section, a corporation is insolvent
 (a) where it is unable to pay its liabilities as they become due
 (b) where the realizable value of the assets of the corporation are less than the aggregate of its liabilities and
stated capital of all classes
15.1- Policy of the Director concerning Arrangements Under Section 192 of the CBCA (pg. 433)
Policy Section
 What used to be done is that the applicant had to be solvent
 Now, it does not matter if you are insolvent when you apply to the court- it is important to come out of the
rearrangement being solvent
Process for Arrangements
 Go to court – the court looks at ensuring that:
 Make sure that all of the classes of shareholder have a vote
 What are the thresholds you are putting down (i.e. 2/3 and 66%)
 If those are met then the court looks at the form of the circular
 Court has to Approve all of the elements of the meeting Company has to be solvent
 Once the circular has been stamped by the court it is sent out
 You have the meeting
 Assuming meet all of the requirements of the meeting you go back to the judge
 You have to swear affidavits in front of the judge that the meeting took place and all the requirements for a fair
meeting were met
 Judge approves it again
 The process could take a long time
 However, the advantage of the process is that it is flexible
Takeover Bids
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You are basically making an acquisition of shares- Regulated by provincial Securities legislation
Acquisition of control
 Acquiring 20% or more- once you make a bid for more than 20% then you are into takeover territory
Hostile takeover
 It is hostile because the directors do not approve of your takeover
 Then you go to the shareholders with a circular- and explain what you are offering (i.e. securities, cash)
 Cash is a straightforward circular
 If offering securities, need a prospectus-like disclosure in your circular
 Have to advertise in the newspaper
 Follow it up with a circular
 You give people 35 days to deposit
 The directors have 15 days to say Yay or Nay and follow it up with their own circular
 Same offer has to be made to all shareholders
 You have to offer the same consideration that is at least equal to the highest consideration paid by the offeror for
shares of the same class in private transaction during the 90 days preceding the bid
 If you do not get 100% of the company then you leave the bid open in a public context
 If you get 90% you can squeeze out the rest by offering them FMV (this rarely happens)
 The shareholders can go to court to determine what FMV is
 You want to make sure that you get 66% and 2/3 of the votes
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This is the amount required to make sure you can amalgamate
You want to find a way to get all of the shares
A big corporation creates another corporation that is Acquire Co
Send Acquire Co to bid on a company- it gets all of the A shares – the voting shares
It also gets 66% and 2/3 of the B shares
 However they still want to get rid of the remaining B shares which are not voting
 The remaining B shares get bought out- second step transaction
 You issue new preferred shares to the remaining shareholders - redeemable at the company’s optionthe company buys them back and the shareholders gets the bid value of the shares
Asset Sales
 Section 189(3)- a sale, lease or exchange of all or substantially all the property of a corporation other than in the
ordinary course of business of the corporation requires the approval of the shareholders in accordance with
subsection 4 to 8
 Section 189(4) to Section 189(8)- need to have meeting, notice has to be provided, each share gets a vote, each
class gets their own separate vote, and it has to be passed by special resolution (2/3 and 66%)
Why do an asset deal
 Sometimes you just do not want the whole thing
 Sometimes you just want to buy a divisions- i.e. the auto parts division
 it is difficult to do an asset sale in a public context
 typically ask company to roll assets into another company
 shares can be assets- they are assets to the company that holds the shares
Things that are applicable to every deal
Regulatory issues
 Things that you should think about in all types of deals (private deal, asset deal, amalgamation)
 Competition Act
 Investment Canada Act
 Messing up a deal comes from tax issues or competition (anti-trust law)
 Competition Act
 you may have to let the Competition Bureau know in advance that you are planning to buy this company you may also ask them if you think there is a competition issue
 Advanced Ruling Certificates (ARC- sets out what you are buying and when you are proposing to buy it)
 The Competition Bureau gets back to you with all the issues, if there are any
 If you give them a notification since you know there are competition issues- they have timelines, depending on
whether it is a short-form or long-form during which it is illegal for you to close the deal
 Short-form – 14 days, long-form-42 days- statutory waiting periods
 Once these periods expire, it is up to you
 Commissioner of Competition can ask the Competition Tribunal to extend the statutory period
 The Cost of an ARC is 50,000
 See the website for what the tests are to determine whether or not it is a transaction requiring notification
 Bureau can be a big problem- that is why you run tests in advance
 Deal with the competition issues upfront- you are talking about large parties- exceeding $400 million in assets
 Size of parties test
 Size of transaction test
 If you are buying all of the corporation
 Investment Canada Act
 review by the government of the transaction to make sure that there is a net benefit to Canada
 Certain transactions are exempt
 The policy reason- we do not want to deal with temporary stuff
 Investment Act – requires every foreign investor to file an Application with the Minister prior to the acquisition of
control – 5 million or more
 For WTO members- both direct or indirect acquisitions- the threshold is raised to 250 million
 Assuming you meet threes thresholds, the test is that you have to show on balance that this will bring some
benefit to Canada
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Private Transactions
Step 1: client wants to sell their business
 Client wants to sell their business- depending in the sophistication level of the client, they may not know all of the
implications
 Important to know your client- when they do not understand, you have to be able to explain it to them
 At the same time, you do not want to go into too much detail if they are a sophisticated client
 They may want to sell their business but they do not have a buyer
 Are they going to auction their business or do they need to auction their business
 There are financial corporations that help clients sell their business
 They look for business who want to sell and they look at finding them a buyer or arranging an auction
 In an auction, they are trying to get the best deal for the seller
Controlled auctions
 An appeaser goes out advertising the business being sold- it may have a confidential memorandum including
some company information and who its customers are
 Asks for non-binding bids on what you think it is worth
 Once the bids are sent in along with the confidentiality agreement, 4 or 5 are chosen
 These 4 or 5 are allowed the opportunity for due diligence- they are also provided a draft of the sale purchase
agreement
 If the buyer has any changes to the purchase agreement then they have to send it back with the changes
 The negotiations are going on with more than 1 company
 Once an agreement is reached where either side is comfortable signing the purchase agreement of the other
side then an agreement is reached
 When the seller puts out a bidding request through the appeaser, they make the bidders acknowledge that the
seller retains the right to choose whomever they chose and they also can withdraw from the negotiation at any
time- important to give yourself as much leeway as possible
Step 2: is it going to be a purchase of shares or purchase of assets
 Amalgamations are rare in this scenario
 Share sale- why choose this?
1. Easier- the conveyancing (transfer of shares) is simple
a. You hand over your shares and you hand over the share transfer form
b. The share purchase agreement may be more complicated
2. Share sale typically require fewer third party consent
a. Unless contracts contemplate a change of control requiring consent, you do not need consent
b. Rarely is there a contract that does not require consent to assignment
i. However assignment only comes up in an asset sale
ii. An asset of the corporation is the contract
iii. If you were going to assign a contract then the consent requirement is triggered
c. Getting consent is tough- as such, the lesser consent you have to get the better off you are
d. However, if you do not get consent, and it was required, you give the buyer a walking right
3. Shares sales are simple when it comes to employment matters
a. You buy the business you get the employees
b. Employment contracts they are personal service contracts- on an asset sale they cannot simply be
assigned- therefore, on an asset sale you are forced to enter into new employment contracts with all of
the employees
c. The reality is that most employees show up the day after the sale- you put a clause in the share
purchase agreement recognizing that the employees will receive the same benefits and will have the
same contract as before
d. Bulk Sales Act (Ontario and Newfoundland)- Act says that you are going to have to sale of assets
outside the regular course of your business then you have a very strict set of procedures
i. Designed to protect the creditors
ii. When representing suppliers- make sure they have quick payment terms- they should get their
invoices paid within 15 days- you should be worried when it goes to 30 days (suggest to them
they give a bonus to companies that are there to pay early
iii. For asset sale transactions- have an indemnity- the vendor gives an indemnity to the extent
that there are claims by a third party for non-compliance with the Bulk Sales Act
1. non-compliance with the Act gives the 3rd party the right to unwind the transaction
iv. Protecting yourself
1. you put notice in the newspaper
2. you can go to court and get approval that you have provided notice
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3. what you could as well as get from the vendor of the outstanding creditors
a. on the closing day you could in fact pay the vendor less and use the difference
to pay the creditors off in order to avoid any Bulk Sales Act issues
4. Share sales give you capital gains
a. As such, you are only going to be taxed on 50% of this
b. Asset sales may not always result in capital gains
c. Sellers prefer for tax purposes to sell shares, buyers prefer for tax reasons purchase of assets
i. Buyers prefer asset transactions because they get to “write-off assets”- what a buyer wants to
do is to allocate the purchase the price of assets based on the ITA- they want to negotiate so
that as much of the purchase price gets allocated as inventory
ii. Buyers also want to allocate purchase price to depreciable capital property (i.e. machinery and
equipment)- however, this will not allow you to write-off the entire expense – it is spread over
the life of the depreciable capital property
iii. Buyers want to allocate as little as possible to non-depreciable property, such as land
d. Seller prefer share transfers
i. They do not want the buyer allocating money to depreciable property because of recapture
ii. Example: widget maker- machinery- you wrote it down at 25% every year for 4 years- the
machine had been purchased for $400 but now is worth $100- the buyer wants to allocate
$200 to the purchase price in this area- when it is declared for ITA purposes, the CRA will
want to bring 100 back and ask you to pay tax on the 100 because you wrote it off too quickly
5. GST and Sales Tax are applicable to assets sales
a. Sales tax is paid on tangibles property
b. If your buyer is outside of Canada, you have to consider if there are any withholding tax issues
applicable to them, and are there section 116 certificate requirements
i. If they are a foreign buyer, section 116 certificates allow you to receive the entire selling price
Step 3: as a buyer, negotiate a Letter of Intent
 As a purchaser, you have to do a couple of things
 Need to talk to the seller in order to nail down the buyer’s right to take a look at the business
 May be a binding and non-binding agreement
 What to include in a letter of intent?
 To the extent you have not already entered into it, a confidentiality agreement (binding)- needs to contain:
 (1) Buyer will keep confidential anything about the seller’s business
 (2) The seller keeps confidential anything that it learns from the buyer
 (3) Keep confidential the fact that they are even talking
 A covenant from the vendor to allow you access for due diligence
 If the seller only grants you access to certain information, a condition of the purchase agreement should be
that before the transaction can be completed, the seller provide access to the rest of the info
 Who is responsible for the expenses (binding)
 You are going to bring in an auditor
 Any rules you want to abide by for public announcement
 Most importantly, exclusivity provisions (binding)
 If we are going to talk about you selling to me, you are not going to talk to anyone else about selling
 Non-binding provisions
 Price
 What are the material conditions for closing
 If the conditions are not met, the agreement can be terminated- they are up for negotiation
Step 4: Purchase Agreement
 This is what you are ultimately trying to get to- once this is signed you ultimately lock people up
 Prior to this, either part is not bound and can walk away
Elements of the agreement
 Most important thing is the purchase price- section 2 or earlier
 Easiest thing to put into a document but is the hardest thing to make sure is right
 First thing you typically have is an adjustment
 When you enter into an agreement on March 1 and you close on April 1- all of the working capital changes
between this time
 As such, you adjust the purchase price based on the changes in the working capital
 The second thing is an ernote ( I don’t know if this the correct spelling)
 You do not know how the business will do in the future
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As a buyer, you might want to say, depending on how the company does in the future, I will give you a
percentage of how the business does in a future defined period
 If the business does well, the buyer will pay more, if not they will not have to pay so much on a losing
business- this benefits the seller as well since if the buyer does well, they will receive a higher
purchase price
 Comprehensive representations and warranties
 As a buyer, if you are looking for a green, convertible VW you want to make sure you obtain that
 The biggest thing that gets negotiated
 Example: a simple rep and warranty- “facility has been operated in compliance with all environmental laws”- a
lawyer would say “facility has been operated, to the best of my knowledge, in compliance with all
environmental laws”
 A few things that you never want qualified in any way, shape or form (you do not want to see “to my
knowledge” when these representations are made)
 That the corporation has been incorporated and is in existence
 In the case of an asset sale, you want to know that the vendor is incorporated
 Corporate authorizations- you want to know that everything that had to be done by the board of directors
has been completed
 Title- you want to know from the outset that the vendor has title to the shares
 Anything that takes away title is a problem
 You want to make sure there are no liens on title – if liens are present you want to make sure they are
gone before the closing
 You will have in your representations and warranties basic corporate matters
 Corporation authorization
 No conflicts
 Business carried on in the ordinary course
 Compliance with regulations and laws
 Compliance with GAAP
 Employees- are they involved in unions
 Company is fully insured or not
 What outstanding litigation they have- when you buy the shares you buy the litigation
 Representations and warranties with respect to privacy legislation
 That they are not selling employee information
 That they are not running certain illegal websites, etc.
 The biggest thing you can do- take your clients through those steps early
 if your client can give the representation then it is better- the less negotiation the better
 Pre-closing covenants
 You want promises made that the consents are obtained if they are necessary
 You also want to make sure the seller operates the business as they had before- for any changes in the
operation of the business the buyer should be consulted
 If the due diligence is not completed then the buyer should be allowed to continue it
 Deal with any regulatory issues
 Key Term – “efforts” – did you use your best efforts to obtain consent
 Or was it commercially reasonable efforts- this may not include the obligation to incur additional costs in
order to obtain consent
 You have to be careful which one you use
 Pre-closing conditions
 All requirements for the closing have been met
 All covenants have been met
 All regulatory requirements have been met
 Including obtaining consent and delivering the shares
 Any other things that you want to make sure are done
 Specific Indemnity Provisions
Step 5: Interim Period
Step 6: Closing
 This when the business actually transfers
 This is quite simple- because everything has already been done- just a matter of incorporating the documents you
have worked on
Step 7: Post-closing
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What happens if one of the representations or warranties are breached?
If you can prove that the vendor represented something that is false then you have a claim
Survival period- you want to make sure certain representations survive forever
 Vendor was incorporated
 Corporate authorization
 Title
Other things that usually last a long time
 Environmental issues
 Tax issues
The rule of thumb for representations is that you want it to run for one audit period- the auditors will go in once you
close and hopefully they will find something
The minimum periods that are usually represented is 18 months
If there is a breach of a representation – what is the maximum remedy threshold?
 Usually it goes up to the purchase price
When are you allowed to make a claim?
 Whenever you entered into a purchase agreement, odds are there will be some misrepresentation
 Are you allowed to sue for every claim, or is there a minimum amount for every claim?
 There are negotiations about aggregate thresholds
Post-closing covenants
 Certain tax filings have to be made
 Confidentiality will be continued
 Do not compete covenants
 Boiler plate
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Public Transactions
Economic Rationale for Acquisitions
1. Replacing inefficient management
2. Allows for diversification of a company’s business
3. Economies of scale
4. Tax planning
5. Lack of tax neutrality- it makes sense for management to retain money rather than distribute it via dividends
a. As such, management would want to do something with it6. Academics claim that MNAs are driven by egos
a. CEOs driven by competition and compensation increases with an increase of assets
Takeover Bid Regulation
 The statutes define a takeover bid either at 10 or 20%- once a bidder buys either more than 10 or 20% of a
corporation’s assets, they are making a takeover bid and therefore have to comply with the rules
 Having control of the company is different than just simply owing the shares
 Controlling shareholders decide who the directors are, decide when the dividends are distributed, decide
compensation for everyone, hire yourself and decide how much you will pay yourself, control assets
 Because of this power, there is a premium on the value of control
 Who is entitled to that premium when there is a change in control?
 The premium will be shared with all the shareholders rather than just the controlling shareholder
Principle 1: Equal Treatment
 Rule: when you make a takeover bid, and you offer a premium or 15% or more, you have to offer the premium to
everyone, not just selectively
 Rule: you cannot pay a higher price to a shareholder in a private transaction Rule: you cannot pay collateral benefits
 These rules are set up to make sure that control premiums are shared equitably
 However, some contest this position- controlling shareholders think the control premium is their property and
therefore the premium should not be shared
 Conclusion: when there is a controlled transaction you have to treat everyone equally
Principle 2: Disclosure
 By definition, you cannot equalize information A bidder in a friendly transaction will always have more disclosure
 However, in theory there should be some sort of equalization in disclosure between friendly and hostile bids
 Takeover rules state that when you make a bid you have to made a takeover bid circular
 Securities Law describes what you have to disclose in the circular
 Plans for the business
 Benefits that insiders are gaining
 Valuations and audits
 There are also prescribed timeframes
 Example: Four Seasons
 2 minority shareholders offered a 30% premium to gain control and take the company private
 This helped the market price increase by at least 10%
Principle 3: Responsibility of the Board to represent shareholders and maximize value in a bid
 The board has an obligation to respond to the circular with a director’s circular
 It is advised to inform shareholders what the board thinks about the bid- either suggest accept or decline
 Sometimes the board stays neutral- however, if they choose to stay neutral, they have to provide reasons
 The board can go to try to find other bidders- if not has to at least find someone who can valuate the business
 What is the business worth and what the business is worth to the shareholder
 this is done in an effort to increase the value of the bid
Comment: there is a whole gloss in Canada in relation to takeover rules because the companies are controlled
 as such there are Securities Regulations in relation to transaction initiated by insiders, by the company itself and by
other related parties- REQUIREMENTS:
 heightened disclosure requirement
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valuation requirement
in considering a related party transaction, or going private transaction, the board has to constitute a committee
constituted of independent directors
 in addition to whatever thresholds are required by corporate law to approve certain deals, when you go to a
shareholders vote (if needed), you also need to get a majority of the minority (under Security Rules)
Policy: all four of the requirements are designed to ensure fairness
Transactions where the bidder wants to take the company private
1. under the CBCA, if you acquire 90% you can statutorily squeeze out the minority shareholders- section 194
2. if you get over 2/3 you can do a squeeze via an amalgamation- section 181
What is the role of directors of target company in a takeover?
 Their role is to achieve the highest price for the shareholders
 However, there may be certain conflicts that arise
 Can they resist the bid to save their own jobs? (not supported by law)
 Can they resist increasing premium to shareholders? (might in good faith think it is a bad bid)
 Can they resist because they are concerned about the welfare of other stakeholders? (may be aware of
information that will not go over well)
Note: resistance may be permitted insofar as the interests of non-shareholding stakeholders are being addressed:
Teck
Defensive Tactics
Options
1. keep the price of shares high- companies are attractive when others think they are undervalued- difficulty with
this is that it involves short-term behaviour by the directors
2. make company less attractive by creating new liabilities (different from poison pills)
 enter into certain contracts that create a liability
3. white knight: offer a friendly third party to acquire you as opposed to a hostile takeover
4. pacman defense- somebody bids for you and you turn around and bid for them
5. divest of the Crown Jewels: make the company less valuable by selling asset the bidder may be interested in,
which makes the target less attractive to offeror,
6. poison pill (i.e., rights plan): create a liability for the offeror contend with that is realized when the offeror
attempts a TOB, for instance, each share will be granted conditional rights to purchase more shares at a
ridiculously low price that is active upon the happening of an event, typically when any one shareholder acquires a
certain % of shares; the result is a take-over bid is virtually impossible to achieve and impractical,
 the threat of it usually is effective – the bidder has to wait for board approval or has to the Securities
Commission to request a cease of trading
7. special dividend payment: if the offeror is eyeing the target’s surplus cash, the target could simply declare
dividends,
8. greenmail (issuer bid): the target purchases its own shares at a higher price,
Teck v. Millar CB 466
Facts: Teck made a hostile TOB for Afton. The directors of Afton did not think that Teck was the right bidder- they
approached Placer Dome and ended up doing a deal with Placer Dome- Teck protested and was even prepared to offer a
higher price- Afton’s board issued shares to Canex(subsidiary of Placer Dome- $3/share resulting in a dilution and thereby
defeated Teck’s attempt. Teck argues the directors did not act in good faith or in the best interest of the corporation.
Canex’s offer not as lucrative as Teck’s was, but the board of Afton said Canex’s history and expertise was superior,
despite being less. Teck 30% SH, files derivative suit saying not in best interest of corporation.
Hogg Test: primary purpose of share issuance to retain control
Held: The court rejected the primary purpose test set out in Hogg and adds even if that test is valid, it does not apply in this
case because the primary purpose here was to make the best possible deal for the shareholders. Says the test is too
limiting on directors. Directors are allowed to consider who is behind the TOB and why. If they reasonably believe
substantial damage to the company will ensue if the corporation is taken over, they are allowed to use their powers to
defeat the TOB.
Test (two parts):
1. subjective component: the directors must act in good faith,
2. objective component: there must be reasonable grounds for directors’ belief the conduct was in the corporation’s
interest.
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Analysis
 Afton’s board was wary of Teck’s financial capacity, technical expertise, managerial strength, and marketing
experience. These considerations were significant, even though Teck made an offer twice as large as any other
offer. Since directors were honestly pursuing what they thought was best interests of corporation and had
reasonable grounds for their belief
Note; this gives the board a very broad discretion in takeover bids and
US Case Law
Unocal Corp v. Mesa Petroleum – US Case
Facts: 2 tier offer- a bidder makes a bid for 60% of the shares offering a premium for control- they disclose when they
make the bid that if they reach that 60% they will proceed to squeeze out the rest of the shareholders at a lower pricethis provides an incentive for shareholders to participate in the initial bid- Unocal launched a sort of poison pill- they
said the price is too low- Unocal bid to all of the shareholders except Mesa to buy back their stock (this cannot be done
in Canada because the rules say you have to make the same offer to everybody)- they were offering a higher premium
than Mesa was- this made Unocal have to borrow money and it became less economically attractive
Issue: is this a legitimate defense?
Held: this is a good defence- the Mesa offer was coercive and Mesa’s prior activities showed that what Mesa was
really trying to do was to be paid off- therefore, the decision of the board was correct
Waitzer-this kind of transaction is inherently coercive
 These kinds of transaction would not work in Canada
 We have a rule that if you offer a price to anybody to anybody you cannot offer a lower price for 90 days
 The court could get involved if this rule is broken However, in the US these rules did not exist and this structure was quite popular
Note: the Mesa decision gave rise to the proportionality test
Proportionality Test
 What you do in terms for defensive tactics is considered in relation to the behaviour of the bidder
 Defensive actions have to be proportional to bidder behaviour
Revlon Inc. v. MacAndrews & Forbes Holdings Inc,- Delaware Case
Fact: one of the first leverage buyouts – Revlon resisting to takeover bid by someone- they did not overtly resistedthey canvassed other offers- they granted an asset option lock-up
Held: Revlon directors breached their duty of loyalty by preferring one bidder over trying to maximize profits
Ratio: invoking the proportionality test- once you decided that sale of the company is inevitable, the duty of the board
changes from canvassing alternatives to the bid (by poison pill, sale of Crown Jewels etc.) to basically making sure that
the transaction goes down properly and that shareholders are getting the best price
Analysis
 once they cross the threshold and it is pretty clear that someone will be buying the company then the duties of the
board change
 the initial defensive tactics worked to the benefit of the shareholders and thus the board was able to sustain its
Unocal burdens in justifying those measures
 using the asset option lock-up meant that the company was acknowledging that the company will be taken over
 at that point their duties should have shifted – should have focused on the maximization of profits and not
preferring one bidder over the others
 No such defensive measures can be sustained when it represents a breach of the directors’ fundamental duty of
care
Paramount Decision 1- takeover of Time Warner.- another Delaware case
Facts: Paramount wanted to acquire Time Warner- the board said no- they did not want to support this bid or any other
bid because they have a long-term plan for running Time Warner and they do not see a benefit to the shareholders to
be taken over for a short-term gain
Held: court bought that- directors are not obliged to abandon plans (long-term strategies) unless there is clearly no
basis for that strategy to be supported
Note: one of the defense strategies by directors in order to make sure they are not liable in a hostile takeover
environment, is to have a valid long-term plan that is updated constantly- they can argue that the bid and the
abandonment of the plan is not beneficial to the shareholders
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Paramount Communications Inc. v. QVC Network Inc. (pg. 491)- Delaware
Ratio: there is a heightened level of judicial scrutiny in a change of control of transaction both with respect to the
process that the board adopts in deciding that they want more bidders, and the reasonableness of their actions in that
processHeld: There are 2 situations which give rise to Revlon duties:
1. the company initiates a change of control (this is the target initiating the change of control)
2. the target abandons whatever long-term strategy it has, assuming it has one
Canadian Case Law
Pente Investment Management Ltd. v. Schneider
Facts: Maple Leafs Foods made a bid for Schneider- S was a family company who held 70% of the shares- the family
rejected the Maple Leafs bid- they did not reject any other bid, just the Maple Leaf bid- S told the board that they would
be prepared to sell to a rival bid – Smithfield was a potential- they favored it because they thought they would be a
better steward of the family business – Maple Leaf foods brought an oppression action against the board alleging that
the board breached their duty in electing to choose the lower bid by Smithfield
Issue: what can directors do in this context, where controlling shareholders may be forcing them to violate their duties?
Was the process appropriate and was there a Revlon duty imposed here?
Held: no Revlon duty here- the court will look at the process (i.e. setting up independent committee to reach a
decisions)- if this is done properly then no liability for directors and business judgment rule is applied
Analysis
 Court still employs a derivative analysis.
 The corporation established an independent committee to review the various bids and considered which bid had
the most to offer in terms of financial adequacy, and a concern for employees, customers, and suppliers.
 Committee provided that the directors have acted honestly (subjective—the committee must be independent) and
reasonably (objective—the committee should retain the advice of outside parties), the court ought not to substitute
its own business judgment for that of the board of directors.
 The court looked at process and applied business judgment rule
 the court found no oppression- The corporation established an independent committee and the members of the
committee acted in good faith in the sense they acted honestly.
 final issue is that there was a bid? What about the ‘affirmative duty” of going to auction?
 US case law says have to go to auction and go to highest bidder (Revlon)
 Court says Ontario law doesn’t require going to auction every time, the point of an auction is that it is just one
way of addressing the conflicts of interest issue in the context of a takeover
Note: one of the mechanics to make sure that all the shareholders are treated equally is to insert a coat-tail provision
in the subordinate shares that said if the controlling shares were sold, all the shares immediately had the same the
rights- the bidder had to buy all shares- in this case, the Schneider family had provided a coat-tail in 1988Canadian Framework- Stock Exchange Rule and TSE Regulations
 Stock Exchange Rules have the ability to require shareholder approval when the company is issuing shares from
treasury in a sufficient quantity to take control of the company
 This came up in Goldcorp
 Goldcorp was going to be issuing a huge amount of shares to private shareholders- the single biggest
shareholders went to the stock exchange and then to the court- the way this transaction was structured, only
other shareholders had approval rights
Torstar Corp Re (pg. 510)
Facts: rumors that someone was about to launch a bid for Southam Inc.- Southam decided that as a pre-emptive
defense it would issue stock to friendly hands- Southam family was not a controlling shareholder, just a significant
shareholder- they approached Torstar to have them purchase some shares- Torstar purchased 20% of the shares- and
Torstar did the same back to Southam- no approval was obtained from the Toronto Stock Exchange- an appeal was
brought to the Stock ExchangeHeld: the Stock Exchange did not want to unwind the transactions- just made some prohibitions on trading as slap on
the wrist
Canada Malting (pg. 510)
Facts: rumor that someone was about to launch a takeover- two major shareholders were Molson and Labatt- they
accounted for a huge percentage of CM- 80% of domestic sales – in the face of rumors about a takeover, CM issued a
bunch of stock that took them from about 30% to about 40%- putting 40% in private hands makes it impossible to take
the company private- CM asked for approval from TSE
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Held: TSE allowed the transaction – it was a non arm’s length transaction that made business sense. Appeal to
Securities Commission. SC held that just as courts defer to business judgment rule, so will they
Takeover Bids and Control Premiums
 The courts have decided that control premiums should be shared among all shareholders
 Difficulties- How do you enforce this?
 This is especially with companies where there are voting shares and non-voting shares
 The fix was the requirement for coat-tails for companies who want to list on the TSE
 Coat-tails- the theory of the coat-tail is that if somebody bids for control, all shares become equal- therefore,
the bidder if they want to acquire control has to bid for all shares
 Companies that listed on the TSE before this requirement was implemented were grandfathered- they still have
differential rights and no coat-tails- an example of this is Magna
Securities Regulations
 When someone makes a bid the primary objective of the board is to protect the interest of the shareholders- get
them the best price
 The consequence of this is that when targets invoke defensive tactics there will usually be a hearing taken to the
Securities Commission on whether the defensive tactics are reasonable
 What has emerged over the last 15 years is a defined period of 35 days where defensive tactics can be employed
in order to find other bidders by the target company
 This period of time may be extended upon application by the target company- usually when there are multiple
bidders and there is a chance that holding out a little longer will results in a better price to the shareholders
 However, this time extension is capped to 75-90 days
Jordex- authority for stating that the maximum time allowed for defensive tactics in takeover bids is 75-90 days
Note: the combination of all the duties and regulations results in defence takeovers being very difficult to employ in
Canada- there is now discussion that there is too much reliance on the Securities Commission
Chapters Inc. Re
Facts: hostile bid for Chapters Issue: what is the time when the “pill has to go”? (When the defensive tactics have to end)
Held: decided the time to be 54 and this was commonly accepted for a while- however, today it has been increased to
75-90 days due to the increasing complexity of bids
Analysis
 Factors that the court might consider in determining when a poison pill should stay or go:
 Whether shareholder approval of the rights plan was obtained
 When the plan was adopted
 Whether there is broad shareholder support for the continued operation of the plan
 The size and complexity of the target company
 The other defensive tactics, if any, implemented
 The number of potential viable offerors
 Steps taken by the target company to find an alternative bid or transaction that would be better for the
shareholders
 The likelihood that, given further time, the target company will be able to find a better bid or transaction
 The nature of the bid, including whether it is coercive or unfair to the shareholders of target
 The length of time since the bid was announced
 The likelihood that the bid will not be extended if the rights plan is not terminated
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Fundamental Changes

How to do amendments to articles, continuances, amalgamations, arrangements, sale of all or substantially all of
the company’s assets and dissolution (voluntary and involuntary)
Amendment of Articles
 Section 173. (1) Subject to sections 176 and 177, the articles of a corporation may by special resolution be
amended to
 (a) change its name; (b) change province
 (c) add, change or remove any restriction on the business or businesses that the corporation may carry on;
 (d) and (e) change any maximum number of shares to be issue and create new classes of shares
 (f) reduce or increase its stated capital, if its stated capital is set out in the articles;
 (g) change designation of shares- modify rights and privileges of shares
 (h) and (i) changes to shares of one class
 (j) division of shares into classes
 (k) changing the rights, privileges, restrictions and conditions attached to unissued shares of any series;
 (l) revoke, diminish or enlarge any authority conferred under paragraphs (j) and (k);
 (m) increase or decrease the number of directors
 (n) add, change or remove restrictions on the issue, transfer or ownership of shares; or
 (o) add, change or remove any other provision that is permitted by this Act to be set out in the articles.
Requirements
 Special Resolution by the shareholders is required to amend articles- the threshold for Special Resolution is 2/3 or
it can be higher than 2/3 if the Articles specify it
 Example; private company- 1 shareholder has 2/3 and the other has 1/3- in this case, in order to protect the
smaller shareholder they may want to set in the article that Special Resolution is required at 3/4
Section 176- Class Votes- talks about when a separate class vote is required- essentially the answer is whenever the
amendment would affect the right of one class of shares differently than other classes of shares
 (a) increase or decrease any maximum number of authorized shares of such class, or increase any maximum
number of authorized shares of a class having rights or privileges equal or superior to the shares of such class;
 (b) effect an exchange, reclassification or cancellation of all or part of the shares of such class;
 (c) add, change or remove the rights, privileges, restrictions or conditions attached to the shares of such class and,
without limiting the generality of the foregoing,
 (i) remove or change prejudicially rights to accrued dividends or rights to cumulative dividends,
 (ii) add, remove or change prejudicially redemption rights,
 (iii) reduce or remove a dividend preference or a liquidation preference, or
 (iv) add, remove or change prejudicially conversion privileges, options, voting, transfer or pre-emptive rights, or
rights to acquire securities of a corporation, or sinking fund provisions;
 (d) increase the rights or privileges of any class of shares having rights or privileges equal or superior to the shares
of such class;
 (e) create a new class of shares equal or superior to the shares of such class;
 (f) make any class of shares having rights or privileges inferior to the shares of such class equal or superior to the
shares of such class;
 (g) effect an exchange or create a right of exchange of all or part of the shares of another class into the shares of
such class; or
 (h) constrain the issue, transfer or ownership of the shares of such class or change or remove such constraint
Note: on any amendment that requires a class vote, the fact that it requires a class votes also triggers dissenting rights
(the right of a shareholder that dissents against the resolution to be paid out at FMV)- Section 190(2)
Exceptions to the Requirement for Special Resolution
 Section 173(2)- exception relating to the name- in order to change the name from a numbered company to a
normal name, you do not need special resolution
 Section 27(1)- allows the articles to authorize directors to fix the attributes of series of shares within a class and the
issuance of those shares
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Continuance
 When you are taking a company into and out of a jurisdiction (i.e. changing a CBCA to a different jurisdiction)
 This is known as importing or exporting
 What is the reason for initiating a continuance?
 Having better remedies and features- some statutes have better provisions, better features
 Amalgamations require that the corporations are incorporated under the same statute
Mechanics (Importing)
 Section 187(1)- Continuance (Import)- A corporation has to apply to the Director for a certificate of continuance
 Essentially this is a permission from the jurisdiction in which you are incorporated
 Section 187(2)- Amendments in articles of continuation- A continuation requires shareholder approval- because
it requires an amendment to the articles- (it may be Special Resolution but could be different depending on the
statute under which the incorporation)
 Once you have met these 2 requirements you go to the Director of the CBCA, you file articles of continuance- there
is a certificate that you file stating that you received shareholder approval and that is a valid change- the Director
(under section 187(6)) checks all this in the jurisdiction under which you were incorporated
Mechanics (Exporting)
 Note: the mechanics are the same for exporting except in reverse
 Section 188(1)- Continuance to Other Jurisdicitons- a CBCA company may apply to another jurisdiction to be
continued
 in order to do so it has to be authorized by the shareholders
 Section 188(5)- requires Special Resolution approval
 Section 188(10)- Prohibitions- The director under the CBCA has to be satisfied that the continuance into another
jurisdiction is not going to adversely affect the shareholders of a corporations
 There is a prohibition on continuing under the laws of a jurisdiction unless that jurisdiction preserves the
fundamental rights and obligations that attach to the corporation:
 (a) the property of the corporation continues to be the property of the body corporate;
 (b) the body corporate continues to be liable for the obligations of the corporation;
 (c) an existing cause of action, claim or liability to prosecution is unaffected;
Amalgamations – (Sections 181-186)
 Section 181- Definition of Amalgamation- two or more corporations, including holding corporations and
subsidiary corporations, may amalgamate and continue as one corporation
 Reasons behind amalgamations
 Takeover bids are done by amalgamations Tax motivations- you have a group of companies that are highly profitable and there are others with losses that
they cannot use, then the profitable companies want to combine to take advantage of the losses
Mechanics of Amalgamations
 Statute provides that if you acquire more than 90% of the shares you can statutorily squeeze out the 10%
 Even if you do not get the 90% you are still able to squeeze out the rest of the shareholders
 Section 182(1)- Amalgamation Agreement- each corporation proposing to amalgamate shall enter into an
agreement setting out the terms and means of effecting the amalgamation and in particular setting out
 (a) the provisions that are required to be included in the articles
 (b) name and address of directors of the amalgamated corp
 (c) the manner of conversion of shares
 (d) what happens to shares that are not to be converted
 (e) manner of payment of money instead of the issue of fractional shares
 (f) whether the by-laws of the amalgamated corporation are to be those of one of the amalgamating corps- if
not the proposed by-laws
 (g) details of any arrangements necessary to finish the amalgamation
 IN addition to what is in 182(1), there would be contractual provisions and representations and warranties in
relation to the assets, liabilities, nature of the business
 The representations and warranties come from the shareholders
 Section 183(1)- the boards of each of the companies that are amalgamating have to approve the amalgamation
agreement and then they have to submit for shareholder approval
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Special Resolution is required- 2/3 or higher depending on what each company had required (remember that
by now all of the amalgamating corporations have to be CBCA corporations)
The shareholders get a proxy circular which has to include a summary of the amalgamation
Section 183(2)- dissenting rights- your remedy if you are dissenting is to be entitled to a buyout at FMV
Section 183(4)- gives shareholders a class vote only to the extent they would have a class vote otherwise (i.e. their
rights are being affected differently from others by an amendment of articles)
Section 183(3)- shareholders get to vote on an amalgamation proposal regardless of whether they had a right to
vote or not- because they get the right to vote they are entitled to dissent rights
Note: this entire process described above refers to a long-form amalgamation- this usually applies when the
shareholders of the amalgamating companies are different
Short-Form Amalgamation
 Applicable when the shareholders of the amalgamating companies are the same- it is really the directors who do
the amalgamation at this
 Vertical Short-Form Amalgamation
 parent and subsidiary situation- parent owns 100% of subsidiary- parent is trying to eliminate a subsidiary
 Section 184(1)- A holding corporation and one or more of its subsidiary corporations may amalgamate and
continue as one corporation without complying with sections 182 and 183 if
 (a) the amalgamation is approved by a resolution of the directors of each amalgamating corporation;
 (b) the resolutions provide that
 (i) the shares of each amalgamating subsidiary corporation shall be cancelled without any repayment
of capital in respect thereof,
 (ii) except as may be prescribed, the articles of amalgamation shall be the same as the articles of the
amalgamating holding corporation, and
 (iii) no securities shall be issued by the amalgamated corporation in connection with the amalgamation
and the stated capital of the amalgamated corporation shall be the same as the stated capital of the
amalgamating holding corporation.
 Horizontal Short-Form
 Applicable when there are multiple sister companies under the same parent- you want to combine them
 Section 184(2) Two or more wholly-owned subsidiary corporations of the same holding body corporate may
amalgamate and continue as one corporation without complying with sections 182 and 183 if
 (a) the amalgamation is approved by a resolution of the directors of each amalgamating corporation; and
 (b) the resolutions provide that
 (i) the shares of all but one of the amalgamating subsidiary corporations shall be cancelled without any
repayment of capital in respect thereof,
 (ii) except as may be prescribed, the articles of amalgamation shall be the same as the articles of the
amalgamating subsidiary corporation whose shares are not cancelled, and
 (iii) the stated capital of the amalgamating subsidiary corporations whose shares are cancelled shall be
added to the stated capital of the amalgamating subsidiary corporation whose shares are not
cancelled.
 Note: in both cases the articles have to be the same- they do not change
 Note: in the case of subsidiaries, they do not have to get approval from the parent- however, this never happens
without the approval of the partner
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Section 185- deals with what happens once directors approve the amalgamation –
Section 185(2) - The articles of amalgamation shall have attached thereto a statutory declaration of a director or an
officer of each amalgamating corporation that establishes to the satisfaction of the Director that
 (a) there are reasonable grounds for believing that
 (i) each amalgamating corporation is and the amalgamated corporation will be able to pay its liabilities as
they become due, and
 (ii) the realizable value of the amalgamated corporation’s assets will not be less than the aggregate of its
liabilities and stated capital of all classes; and
 (b) there are reasonable grounds for believing that
 (i) no creditor will be prejudiced by the amalgamation, or
 (ii) adequate notice has been given to all known creditors of the amalgamating corporations and no
creditor objects to the amalgamation otherwise than on grounds that are frivolous or vexatious.
Section 185(3)- discusses what is adequate notice
Section 185(4)- once all the requirements are met then the Director shall issue a certificate of amalgamation in
accordance with section 262.
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Arrangements
 Used to allow you to do any fundamental changes that you could not do practically in an ordinary way
 Section 192- talks about the kinds of things you can do under arrangement
 Section 193(3) –Application for the approval of arrangement - Where it is not practicable for a corporation that
is not insolvent to effect a fundamental change in the nature of an arrangement under any other provision of this
Act, the corporation may apply to a court for an order approving an arrangement proposed by the corporation.
 Comment: where it is not practical to proceed with an amalgamation then arrangement may be the right way
 the court ultimately has to decide what process will be followed and the court will have to decide whether it is
fair to the shareholders
 if you are not sure that what you are doing is fair, and you want to insulate yourself from liability ( which is
often the case in a public company) then arrangement should be the way to go
 this would help insulate you from an oppression remedy
 essentially this is a customized amalgamations
 there are things you can do by arrangement which you cannot do by amalgamation
 the courts used to be harsher when companies were seeking an arrangement went they could have used the
amalgamation process
Mechanics
 Court issues and interim order- discussing the requirements of and what needs to be done by the directors
 Shareholder meeting
 Voting and approval
 Explain who are the dissenting shareholder and how many
 There is a public hearing where the dissenting shareholders can voice their concerns
 There will be second public hearing when all this is completed and the court has to give approval
Meaning of “not practical”
 the standard that has been developed is being able to the demonstrate to the court that doing it directly by
amalgamation is for some legitimate reason inconvenient or less advantageous than an arrangement
 usually if you can show that the transaction is too complicated for it to be completed by amalgamation
 but also making sure that what you are doing is fair to the shareholders (insulation from liability)

Section 192(2)- cannot do an arrangement when the company is insolvent
 However, there have been cases where the courts have approved an arrangement when one of the companies
was insolvent
Sale of All or Substantially All Assets
 Section 189(3)- A sale, lease or exchange of all or substantially all the property of a corporation other than in the
ordinary course of business of the corporation requires the approval of the shareholders in accordance with
subsections (4) to (8).
 The reason this is a fundamental change, is because you are modifying all of the assets of the company
 Section 189(5)- This requires Special Resolution – 2/3 majority and shareholders entitled to dissent rights
 Section 189(4)- Requirement of circular explaining the change, tell the shareholders they have dissent rights
 Section 189(6)- non-voting shares have a right to vote
When is the threshold crossed?
 If you have a business and you are selling 35% of the assets does that qualify as all or substantially all?
 No hard and fast rules- case specific case law determination
 There have been cases where 30% of assets was enough because of the nature of the assets
Going Private Transactions
 Section 193- Going Private Transactions- A corporation may carry out a going-private transaction. However, if
there are any applicable provincial securities laws, a corporation may not carry out a going-private transaction
unless the corporation complies with those laws.
 Securities Law Require:
 Heightened disclosure requirements
 Set up an independent committee to evaluate the transaction
 Shareholders have to approve both by special resolution and majority of the board
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Squeeze-outs
 There are different ways to do squeeze outs other than through amalgamations:
 Consolidation of shares- the biggest minority shareholder had less than 1000 shares-resolution can be passed
by controlling shareholders to consolidate 1000 shares into one share- this means that all minority
shareholders with less than 1,000 shares would have their shares consolidated in a fractional share- then you
could have a provision stating that all fractional shares should be redeemable for cash
 Section 194. A corporation may not carry out a squeeze-out transaction unless, in addition to any approval by
holders of shares required by or under this Act or the articles of the corporation, the transaction is approved by
ordinary resolution of the holders of each class of shares that are affected by the transaction, voting separately,
whether or not the shares otherwise carry the right to vote. However, the following do not have the right to vote on
the resolution:
 (a) affiliates of the corporation; and
 (b) holders of shares that would, following the squeeze-out transaction, be entitled to consideration of greater
value or to superior rights or privileges than those available to other holders of shares of the same class.
Wind-up of a company
Voluntary Dissolution- Section 210
 Section 210(1)- you can wind-up a company before it starts doing business
 Section 210(2)- if the company has already started doing business then the business can be wound-up by the
shareholders through a special resolution
 Section 210(3)- wind-up by liquidation- you can wind-up a corporation by special resolution if the assets
have been distributed or disposed of and the liabilities have been discharged
 Section 211- requirement of notice to shareholders and creditors prior to winding up a corporation
 Once you have gone through all the dissolution requirements then you can go to the Director to have a
certificate of dissolution and the company ceases to exist
 Section 211(a)- court supervised dissolution
 The court in effect becomes ceased of the dissolution and it can make any order it wants to make
 Section 215-217- provides the range of authority that a court can exercise when it comes to dissolution
 Once you have a court supervised dissolution the court will appoint a monitor to make sure everyone is being
treated fairly
Involuntary Dissolution
 You can bring an oppression application in order to wind-up a company
 This may occur when the shareholders of the company are deadlocked
 The court supervises the way in which the dissolution will take place
Dissolution by the Director
 The Director has the power to order the dissolution of a corporation- this will occur in cases where the company
falls behind in filing its annual accounts The Director will send notices about the filing being overdue- if those are ignored long enough then a notice will be
sent that the company will be wound-up
 The Director will simply issue a certificate of dissolution (Section 212(3))
 Section 212- (1) Subject to subsections (2) and (3), the Director may
 (a) dissolve a corporation by issuing a certificate of dissolution under this section if the corporation
 (i) has not commenced business within three years after the date shown in its certificate of incorporation,
 (ii) has not carried on its business for three consecutive years,
 (iii) is in default for 1 year in sending to the Director any fee, notice or document required by this Act, or
 (iv) does not have any directors or is in the situation described in subsection 109(4); or
 (b) apply to a court for an order dissolving the corporation, in which case section 217 applies.
 Section 212(2)- Notice requirement- 120 days notice and publication of the notice
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