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1. Introduction ................................................................................................................................. 6
Types of Business Associations ................................................................................................................ 6
(a) Sole Proprietorships .......................................................................................................................................... 6
(b) Partnerships ...................................................................................................................................................... 6
History ................................................................................................................................................................ 7
Definition of Partnership .................................................................................................................................... 8
Conduct of the Business of the Partnership ....................................................................................................... 8
(c) Joint Ventures .................................................................................................................................................... 8
(d) Limited Partnership ........................................................................................................................................... 9
(e) Limited Liability Partnership .............................................................................................................................10
(f) Corporations .....................................................................................................................................................11
Differences b/w partnerships & corporations: ..................................................................................................11
2. Canadian Business Corporations ............................................................................................. 13
History ..................................................................................................................................................... 13
Four Incentives for Incorporation ......................................................................................................................13
Constitutional Basis for Incorporation ................................................................................................. 13
Incorporation and its Consequences ..................................................................................................... 14
BCBCA s.3, 10, 13, 17, 18, 30, 87 .......................................................................................................................14
3. The Corporate Entity ................................................................................................................. 15
(a) Introduction....................................................................................................................................... 15
Salomon v. Salomon & Co. [1897] A.C. 22 (H.L.) ...............................................................................................15
BCA ss.19, 17(2), 64, 121, 136 ...........................................................................................................................15
Lee v. Lee’s Air Farming (1961 J.C.) ...................................................................................................................16
Kosmopolous v. Const. Ins. Co. (1983) Ont CA (REEXAMINE)............................................................................16
Categories of Companies in Canada ..................................................................................................................17
(b) Lifting the Corporate Veil ............................................................................................................... 17
BCBCA, ss. 422 and 423: Dissolutions and cancellations of registration by registrar ......................................17
Clarkson Co. Ltd. v. Zhelka 64 D.L.R. 2d 457 (H.C.) ............................................................................................18
De Salaberry Realties Ltd. v. M.N.R. (1974) 46 D.L.R. (3d) 100 ........................................................................18
Guilford Motors v. Holmes ................................................................................................................................18
Walkowsky v. Carlton [p.138] (1966) 223 N.E. (2d) 6 (N.Y.C.A.)........................................................................19
4. Procedures of Incorporation ..................................................................................................... 20
(a) Place of incorporation ...................................................................................................................... 20
(b) Extra-provincial Licensing .............................................................................................................. 20
BCA ss.1, 374-399 ..............................................................................................................................................20
(c) Continuance ....................................................................................................................................... 22
(d) Widely Held and Closely Held Corporations ................................................................................. 22
Rothstein Purina case ....................................................................................................................................23
(e) Different Classification of Corporations (terminology unique to Canada) ................................. 23
(1) Special Act Corporation / Company [s.1 definition, s.4(1)] ..........................................................................23
(2) One-person Corporation [s.172(3), 140(4)] .................................................................................................23
(3) Constrained Corporation - Constrained by a combination of legislation and self-regulation (to meet
legislation) .........................................................................................................................................................24
(f) Incorporation Techniques................................................................................................................. 24
Two sources of incorporation in Canada: ..........................................................................................................24
(1) “Registration jurisdictions” i.e. BC, AB, Maritimes ...................................................................................24
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(2) “Letters Patent jurisdictions” - Incl’s CBCA, OntBCA, QueBCA .................................................................25
(g) Registrar’s Discretion over Corporate Names [ss. 21-29] ............................................................. 25
5. The Nature of the Corporate Constitution ............................................................................... 26
(a) Generally ........................................................................................................................................... 26
BCA, ss. 10-19 See s.1 definition “articles” ........................................................................................................26
(b) The Concept of Restrictions/Alteration of Corporate Constitution ............................................. 26
Common Law .........................................................................................................................................................26
BCA, ss. 30-33, 154(1)(a), 228(3)(c), 259, 260, 378(2)/(4) .....................................................................................26
Remedies for Restricted Acts ................................................................................................................................27
Altering the Corporate Constitution ......................................................................................................................27
6. Pre-Incorporation Contracts ..................................................................................................... 28
(a) Common Law .................................................................................................................................... 28
Kelner v. Baxter (1866) ......................................................................................................................................28
Black v. Smallwood (1966) (H.C.A.) ...................................................................................................................28
*Heinhuis v. Blacksheep Charter Ltd. (1988) 46 D.L.R. (4th) 67, (B.C.C.A.) ........................................................29
(b) Statutory Reform – [s.20]................................................................................................................. 29
Problems with s. 20: ..............................................................................................................................................29
Landmark Inns of Canada Ltd. v. Horeak 1982 Sask QB ....................................................................................30
7. Management and Control of the Corporation .......................................................................... 31
(a) Introduction....................................................................................................................................... 31
Berle and Means (Managerial Model of Corporate Governance) .........................................................................31
Enter the Contractarians .......................................................................................................................................31
Mechanisms used by Owners for Controlling Agency Costs .................................................................................31
SH Voting, used in 2 ways: .................................................................................................................................31
SH Influences and Markets: ...............................................................................................................................31
Role of Corporate Law in Contractarian Model (Enabling) ....................................................................................32
Criticism of Contractarian Model ..........................................................................................................................32
B.C.C.A., ss. 1(3), 124, 135, 136 and 138 ...........................................................................................................32
(s.136) Vesting of Power in Board as a Whole.......................................................................................................33
Vesting subject to (s.301), (s.136) .....................................................................................................................33
Distinguish BC from Ont/Fed .............................................................................................................................33
Automatic Self-Cleansing Filter Syndicate v. Cunninghame (1906) ...................................................................33
Deadlock Theory / Residual Powers Theory ......................................................................................................34
Barron & Potter (p.176) IN CLASS EXAMPLE .....................................................................................................34
Two Ways in which Vesting of BOD Powers are Compromised in BC ...................................................................34
(b) Delegation .......................................................................................................................................... 34
(s.136): Director’s power to delegate ................................................................................................................35
(s.137): Power of Directors May Be Transferred ...............................................................................................35
(s.141): Officers May Be Appointed...................................................................................................................35
Montreal v. Champagne (1916) 33 DLR .............................................................................................................35
Hayes v. Canada-Atlantic Plant SS Co (1910) ....................................................................................................35
(c) Sale of Undertaking .......................................................................................................................... 36
BCA, s.301 – Power to Dispose of Undertaking .................................................................................................36
(d) Audit Committee (ss.223-226) ......................................................................................................... 36
8. Enforcement of Duties Owed by Directors and Officers to the Corporation (“Derivative
Action”) .......................................................................................................................................... 37
(a) Introduction – The Rule in “Foss v. Harbottle”............................................................................. 37
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(s.142): Fiduciary Duties of directors are owed to the corporation, not to the shareholders. .........................37
Common Law: The Rule in Foss v. Harbottle .....................................................................................................37
Exceptions to the Foss v. Harbottle Rule (outlined in Edwards v. Halliwell) .........................................................38
Four Procedural Elements (from Foss and Harbottle and Statute, s.233) .............................................................38
Problems with the Common Law ..........................................................................................................................38
(b) The Statutory Derivative Action ..................................................................................................... 38
CBCA s.239 .........................................................................................................................................................38
BC BCA (s. 232) – Standing for Derivative Actions .............................................................................................39
BC BCA (s.233) Four Criteria for getting leave ...................................................................................................39
BC BCA (s.233(6)) Ratification............................................................................................................................39
Differences between CL and statute .................................................................................................................39
Re Northwest Forest Products 1975 BCSC ........................................................................................................40
Re Bellman and Western Approaches 1981 BCCA.............................................................................................40
Other Points re: Derivative Actions [AFTER LEAVE GRANTED] ..........................................................................41
(c) Costs (s.233(3)(b)) ............................................................................................................................. 41
9. Duties of Directors and Officers ............................................................................................... 42
(a) Care and Skill (Negligence) .............................................................................................................. 42
(i) Common Law .....................................................................................................................................................42
Re City Equitable Fire Insurance Co. Ltd. (1925)................................................................................................42
A Changing Standard? .......................................................................................................................................43
(ii) Statutory Reform ..............................................................................................................................................43
BCA s.142: Duties of Directors and Officers – declaratory of the CL .................................................................43
BCA s.154: Director’s liability [personal] ...........................................................................................................43
BCA s.157: Limitations on Liability/Reliance [Defences]....................................................................................44
BCA s.228: Compliance or restraining orders ....................................................................................................44
People’s Dept Stores 2003 Que.CA....................................................................................................................44
Brandt investment v. Keep Rite 1991 OntCA .....................................................................................................44
(iii) Business judgment rule in Canada ..................................................................................................................45
(b) Fiduciary Duties................................................................................................................................ 45
BCA s.142(1)(a), (2), (3) .........................................................................................................................................45
(i) Introduction ......................................................................................................................................................45
(ii) Self-dealing / Contracting with the Corporation ..............................................................................................45
(a) Common Law ................................................................................................................................................46
Aberdeen Railway Co. v. Blaikie Bros. 1843-60 UKHL........................................................................................46
Gray v. New Augarita Porcupine Mines Ltd. 1952 UKPC ...................................................................................46
Northwest Transportation v. Beatty (p.528) .....................................................................................................47
NB: Common law was vague about what kind of contract ...........................................................................47
(B) Legislative Response ....................................................................................................................................47
BCA, ss.147 to 153 .........................................................................................................................................47
Differences b/w CL and statutory provisions: ...............................................................................................48
(iii) Corporate Opportunities .................................................................................................................................48
Cook & Deeks 1916 Ont.PC................................................................................................................................49
Regal (Hastings) v. Gulliver 1942 UKHL .............................................................................................................49
Peso Silver Mines Ltd. v. Cropper 1966 BCCA aff’d 1966 SCC ...........................................................................50
CURRENT COMMON LAW TEST .........................................................................................................................50
Canaero v. O’Malley 1973 SCC ..........................................................................................................................50
Approach in American jurisdictions ...................................................................................................................51
(iv) Competition .....................................................................................................................................................51
BCA, s.153: Disclosure of conflict of office or property .....................................................................................51
(v) Compensation ..................................................................................................................................................52
(vi) Hostile Takeover Bids and Defensive Management Tactics ............................................................................52
(A) Introduction .................................................................................................................................................52
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(B) Common Law ...............................................................................................................................................53
Bonisteel v. Collis Leather Co.............................................................................................................................53
Hog v. Cramphorn Ltd [1967] Eng (mentioned in Teck v. Millar) ......................................................................53
***Teck Corp Ltd. v. Millar [1973] BCSC............................................................................................................53
On US Law ..........................................................................................................................................................54
(c) Relief From Liability for Breach of Fiduciary Duty ...................................................................... 54
(i) Ratification {s.233(6)} ........................................................................................................................................55
Northwest Transportation Company v. Beatty (1887) JCPC ..............................................................................55
(ii) Statute ..............................................................................................................................................................55
BCA, s.142(3): Waiver [virtually impossible]......................................................................................................55
BCA, ss.157, 234: Excuse – Breach of duty has occurred, but D is asking court not to hold them liable ..........55
(iii) Indemnification and Insurance (s.159-165):....................................................................................................56
10. Shareholders’ Rights ............................................................................................................... 57
(a) Introduction....................................................................................................................................... 57
Rights come from 4 sources: .............................................................................................................................57
(b) Voting Rights {s.173, 174} ................................................................................................................ 57
BCA, ss. 173-174: Voting, Shareholder Meetings ..............................................................................................57
(c) Shareholders’ Meetings {ss.166-186}............................................................................................... 57
1. Annual General Meeting (AGM), s.182 ..........................................................................................................58
2. Extraordinary/special general meeting, s.181 ...............................................................................................58
3. Court-ordered Meeting, s.186 .......................................................................................................................58
(i) Requisitioned Meetings and Shareholder Proposals (ss.167, 168, 187-191) ....................................................58
Requisitioned Meetings (ss. 167, 168)...............................................................................................................59
SH proposals (ss. 187-191) ................................................................................................................................59
Dow Chemical case (p.771) ...............................................................................................................................60
Jesuit Fathers case (p.772) ................................................................................................................................60
Greenpeace case (p.776) ...................................................................................................................................60
Air Industry Revitalization Co. v. Air Canada (1999) Ont.SCJ .............................................................................60
(ii) Removal of Directors, s.128(3) & (4), 131(a) ....................................................................................................60
11. Shareholders’ Remedies ......................................................................................................... 61
(a) Shareholder Agreements .................................................................................................................. 61
BCA, s. 175: Pooling Agreements.......................................................................................................................61
Voting Agreements (p.836) ...............................................................................................................................61
(i) Voting Trusts .............................................................................................................................................61
(ii) Buy/Sell Agreements ................................................................................................................................61
Dissent proceedings: s.237-246 (Appraisal Remedy) see below .......................................................................61
Unanimous Shareholder Agreement: (Ont. and Fed. only) LP jurisdictions ......................................................61
Two other ways to derogate from D’s powers: Delegation & Transfer of Powers ............................................62
Ringuet v. Bergeron 1960 SCC ...........................................................................................................................62
(b) The Personal Action: Standing to Sue (i.e. s.227, s.19).................................................................. 62
Farnham v. Fingold OCA ....................................................................................................................................62
Perlman v. Feldman (note on p. 897) ................................................................................................................63
Jones v. H.F Ahmanson (1969 CalSC) (p.906) ....................................................................................................63
GoldEx Mines Ltd. V.Revill (1975 OCA) ..............................................................................................................63
Bottom line (Farnam & GoldEx): ........................................................................................................................63
Beck, “The Shareholders’ Derivative Action” (p.885) ............................................................................................64
(c) The Statutory Oppression Remedy, s.227 (Complaints by SH) .................................................... 65
History ...................................................................................................................................................................65
Standing: s.227(1) ..................................................................................................................................................65
First Edmonton Place Ltd. v. 315888 Alberta Ltd (1988 AltaQB) .......................................................................65
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Grounds for relief: s.227(2) ...................................................................................................................................66
Appropriate relief: .................................................................................................................................................66
Ferguson v. Imax Systems Corp. 1983 Ont.CA ..................................................................................................66
**Scottish Co-op Wholesale Soc. Ltd. v. Meyer 1959 UKHL ..............................................................................66
Ebrahimi v. Westbourne Galleries Ltd (p. 924) (1972) HL .................................................................................67
Diligenti v. RWMD Operations Kelowna (1976 BCSC) (p. 924) ..........................................................................67
Forms of relief & Orders: s.227(3) .........................................................................................................................68
Jackman case 1977 BCSC ...................................................................................................................................68
Relationship b/w Oppression Remedy and Derivative Action, p.940 ....................................................................68
(d) Other Statutory Remedies ............................................................................................................... 69
(i) Compliance and Restraining Orders and Rectification: ss.19(3), 228, and 229 ................................................69
Goldhar v. Quebec Manitou Mines Ltd. (1977 ON Div Ct) .................................................................................69
(ii) Dissent Proceedings (The Appraisal Remedy): ss.237-246 ...............................................................................69
Domglas v. Jarislowsky (1982 QCCA) (p.977).....................................................................................................70
Smeenk v. Dexleigh Corp. (1990 ON HC affirmed at CA 1993) ..........................................................................70
(iii) Winding-Up: s.324 ...........................................................................................................................................71
Ebrahimi v. Westbourne Galleries Ltd (1972 HL) ...............................................................................................72
In Re German Date Coffee Company (CA 1882) (p.989) ....................................................................................72
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1. Introduction
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Securities regulators are amoral – enabling people to incorporate and setting up the rules that govern.
Theoretically, you can incorporate anywhere (i.e. incorporate Vancouver corner grocery in PEI). Most likely
BC Business Corporations Act is the primary statute.
The alternative is to incorporate federally. The Federal Business Corporations Act; it is seen by some as
being more modern than the BC statute – also might be useful if you have a national presence.
BCA is difficult to navigate. There may be some provisions of FedBCA that don’t yet exist in the BC Act. BC
Act tends to be standalone…even recent amendments having perpetuated this ‘West Coast approach’.
Contrast to jursid’s like Australia and USA which have uniform (federal) governing statutes/bodies.
Types of Business Associations
(a) Sole Proprietorships
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Sole proprietor: single person (of sufficient age to contract) doing business with no associates and without
being involved or accountable to any other person. (They can employ people, of course.)
One owner makes all decisions
Oldest & simplest form; Significant factor in CDN economy
No specific rules governing SP’s. There are rules that may apply depending on what kind of business the SP
is engaging in (i.e. Law Society Rules if SP lawyer, Competition Act rules, IP rules) – this is true throughout
the common law countries, but may not be so in civil law countries.
One of the main concerns is protecting the name of the business. Most prov’s but not BC have business
names protection statutes that enable SPs to register their biz name w/ the province and therefore gain
propriety over the name. May also be protected by CL tort of passing off.
Very common to use “& Associates” or such terms to give impression of bigger deal; however BC requires
such SPs using names that imply plurality that isn’t there to register the name. This gives the same/similar
protection as biz name registration schemes.
Easy to commence & dissolve (barring special munic., prov., or fed., licensing)
Enjoys none of the advantages of business corporations
Owner cannot separate business and personal life/finances; owner liable personally for all business
liabilities
(b) Partnerships
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Two or more people carrying on business in common with a view to profit.
o ‘carrying on business’ connotes commercial but also connotes continuity…the wording of s.2
suggests that temporary endeavors (i.e. buying property to flip it) but the Act says that
Partnerships can be for a specific term. The law on this is unclear.
o ‘in common’ – does not mean (CL) that everyone is an active participant in the business. Although
most do, partnerships do not necessarily include all partners as active participants. (‘Active
partners’ and ‘passive partners’). Passive partners choose not to be involved in the day-to-day
running of the business.
Partners as agents –
o (a) They are agents of one another.
o (b) They are also fiduciaries of one another (BCBCA, s.22(1)). This protects (innocent) partners by
way of a claim of fiduciary duty. It also acts as an insurance policy against partners acting in such
a way that puts the other partners at risk.
o Having passive partners complicates things for a partnership b/c partnership contracts are agency
contracts. Every partner is an agent of another partner (every other partner) when that partner is
acting on behalf of the business. There is no such thing as the partnership as a legal person – only
the partners themselves are the legal persons.
 NB: corporations as partners
o When suing a partnership, under BC Supreme Court Rules, you would style the cause as ‘Y v. X
carrying on as a firm’. ‘firm’ is a euphemism for partnership and ensures that all partners
(including those that may be unknown at the time) will be jointly and severally liable should the
lawsuit succeed.
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Commercial profit motivation – this excludes clubs/societies/any form of un/incorporated non-profit
organization.
S.27 of the Partnership Act has default provisions for the sharing of profits (partners may vary by contract).
It can arise by the way people behave in relation to one another for a business purpose – no need for a
formal statement of partnership (contract).
Primarily arose b/c of disputes between partners or between partnerships and outsiders.
Great flexibility in designing internal management structure
Unlimited liability for partners jointly or jointly & severally
Legal personality for partnerships: although partnership is a legally recognized business entity, it is not a
separate legal person. The partnership is the people (incl. corporations) that make up the partnership.
o Merely being a partner does not make you an employee, however a partner can argue separately
that he/she is an employee.
Majority Rule: (under PA, s.27) If a majority of the partners agree on something, that is binding on the
minority partners; however the Act provides that there are certain fundamental matters that cannot be
dictated by majority rule. For example: changing the partnership agreement.
o However: the partnership agreement can vary this provision. Additionally, the Act provides that a
partnership
No dichotomy of ownership and control. If you are a partner, you have the same power and capacity
(subject to the partnership agreement) as the other partners.
o Some entitlement to profits from the business.
o Ongoing right to assert your power to manage the partnership.
o (Contrast to Corporation): dichotomy b/w ownership and control – Shareholders and directors
respectively. So shareholders have no agency toward the corporation, but they have claims to the
assets of the corporation based on percentage ownership. By contrast, the directors have to be
appointed/elected and have the powers to contract (powers of agency) on behalf of the
corporation.
Management of a partnership is a fairly specialized set of relationships. Same is true for a corporation, it is
just governed by a different set of rules.
o Is partner bound to perform managerial role? Statute says nothing, but Crane & Bromberg:
entitles other partner to seek dissolution where one partner is inherently incapable of performing
his part.
The End of a partnership:
o Section 33 - Partnerships dissolve whenever a partner dies or leaves the partnership. Most
partnership agreements therefore contain provisions for the partnership to immediately reform
as between the remaining partners.
o A corporation can only cease to be when a bureaucrat strikes its name from the registry.
o Great flexibility to commence & dissolve (only comply w/ Business Names Act and notify creditors
if one partner leaves)
Ways to avoid liability in partnership:
(a) Limited Partnership: A partner can limit his/her liability by becoming a Limited Partner, but must then
‘scrupulously avoid playing any part in the direction of the business.’ This has the requirement of statutory
registration (unlike regular partnership).
(b) Limited Liability Partnership: Partners avoid personal liability for negligence or other described wrongful
acts of a partner.
(c) Liability may also be avoided by creating partnership between business corporations. Technically, general
partner which is corporation is still liable, but if it has few assets then the result is limited liability.
History
1890 – British Parliament passed Partnership Act which became foundation for CDN partnership law.
 Acts divided into:
o Nature of Partnership
o Relation of Partners to Persons dealing with them
o Relation of Partners to One Another
o Dissolution of Partnerships
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o Miscellaneous
Act is not a complete code – equity & common law rules applicable to partnerships continue in force
except insofar as they are inconsistent with the Act.
Definition of Partnership
Conduct of the Business of the Partnership
(i)
(ii)
(iii)
(iv)
Equality
 Share equally in profit/loss, in managing the business.
 Equal access to partnership books and in duty to render to each other true accounts and full
information of all things affecting the partnership. NB: contrast to distribution of power within
corporation (esp. right to participate in management)
Consensualism
 Mutual rights & duties of partners may be varied by the consent of all the partners. Rule of
unanimity also governs admission of new partners and any changes in the fundamental character
of the partnership business.
 One exception is that majority rules in ‘ordinary matters’. (maybe b/c unanimity would be
paralyzing? Efficiency!)
Fiduciary Character
 Partners owe each other a fiduciary duty. Section 22(1) of BC Act: “A partner must act with the
utmost fairness and good faith towards the other members of the firm in the business of the
firm.”
 Courts won’t budge or lower standard. Ever.
Personal Character of Partnership Contract
 The statute (s.33) states that partnerships are automatically dissolved on death or insolvency of a
partner.
 Although overall statutes make partnerships ‘unstable relationships’, a good partnership
agreement can ensure they are not.
(c) Joint Ventures
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This may have legal meaning under certain statutory schemes (as do some other terms like conglomerate,
etc.) In Canada, debatable whether JVs are recognized.
Usually concerned with a single undertaking that doesn’t require continuous attention of every
participant. Ie: building/construction work – need pooled equipment/skill/expertise.
A JV is an association created by co-owners of a business undertaking, differing from partnership (if at all)
in having a more limited scope. In all important respects, the JV is treated as a partnership.
Never been unequivocally recognized in Canadian law. The reason there is a debate is because of
recognition in some US states: under American law (in some states) ‘if corporations could be involved in a
JV, their shareholders would be bound by the decisions of the BoD of the JV’. Some concern that the
shareholders should not be bound by directors who are not agents of the corporation.
US got around this by recognizing JVs as separate biz entity: (1) contribution by founders of
money/property/skill to the enterprise (2) some kind of sharing of the business (3) a right to mutually
control management (4) expectation of profit (5) objects of the venture are limited to a single undertaking.
(#1-4 are identical to that required of partnerships. In Canada, though, you can get a partnership that is of
limited duration.)
CANADA: Takeaway: no unequivocal recognition of JV as distinct biz enterprise by CDN courts – most
arrangements of this kind would constitute partnerships and therefore be governed by partnership law.
How do you decide which partnership law is applicable?
o Depends on the law that governs the contract of partnership
o Conflict of law rules apply “Proper Law of Contract” rule to say which jurisdiction is this
contract most connected with? This can be avoided by putting a choice of jurisdiction clause into
the contract (i.e. this contract is governed by the laws of NY)
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Non-profits/Clubs: Non-business associations (used to be called ‘clubs’) are now also governed by many of
the same principles as corporations.
o In the common law, club members paid a membership fee and were only liable for the debts of
the club to the extent of their membership fee. At the same time, members were not entitled to
anything from the club. This parallels ownership in a corporation.
o In Canada most non-profit organizations are primarily concerned about their tax situation. So
almost universally in Canada, non-commercial organizations incorporate under the Society Act of
BC (is mirror image of BC BCA). This clarifies their non-commercial status (prima facie). Federal
Incorporation: if you do so you incorporate under provisions of Canada Corporations Act which
has been repealed (and replace by XX XX) except the parts which apply to non-profits.
(d) Limited Partnership
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Introduced in CDN law around 1973 for capital-raising reasons
Definition: [s.50(2)] - a partnership that consists of one or more general partners and one or more limited
partners.
Limited Liability: The LP only enjoys this statutory privilege if they comply with Partnership Act. Liability is
limited to the moneys or property that they have already contributed or agreed to contribute [s.57]. They
are in the very same position as a shareholder in a CDN company. LP can lose its limited liability in certain
situations [ie. S.13(1) – lost if he takes part in the “control” of business]
Any partner who is not a limited partner is a general partner.
LPs are a way for entrepreneurs to gain investment by high-worth individuals who don’t have the
time/interest in running the company.
Advantages:
o Tax treatment can be attractive – profits of a LP can be subject to certain tax credits & deductions.
When a corporation earns a profit it is taxed directly (b/c corporation is separate legal
personality). The profits cannot be attached to the income of the shareholders. B/c LPs are not
legal persons, the profits (and losses) of a partnership are ascribed directly to the partners. The
rules are not quite as attractive as they once were, but there can still be advantages to a
partnership.
o Limited partner not expected (even prohibited) from taking part in management – this suits the
limited partner fine.
o Vendor avoids having to comply with the Securities Act. LPs usually don’t involve very many
people. Usually raising reasonable amount of money. If number of people is small enough (no
magic number) then LP doesn’t have to comply with the provincial Securities Act. If they are
forced to comply w/ Securities Act then they need to meet add’l requirements including
prospectus. Practical reasoning appears to be that ‘the rich can look after themselves’. If people
are wealthy enough to be investing in an LP, they likely have the financial resources to manage
their own risk.
o Transferability. A partnership is akin to a marriage: there is ‘emotional’ involvement on the
business side (who are they, how they behave, trust, etc.). However, a limited partnership doesn’t
impose these same concerns/restrictions on the limited partner. (i.e. if ltd partner decides to sell
LP rights it shouldn’t affect the GP(s) b/c LP can’t be involved in management. S. 18 gives a LP the
right to ASSIGN his interest, but assignee only has limited rights unless (a) all other partners
consent in writing to this assignment, or (b) the partnership agreement gives the assignor the
power. Act facilitates in s.51 and following.
Three formal requirements to establish a ltd partnership:
o (1) File Certificate: Fill out certificate (s.51) and file it with Registrar of Companies (in Victoria),
signed by all partners (general and limited). Announces certain characteristics (name of ptshp,
term of partnership, type of business, names & addresses of partners, their contributions
(including promised future contributions), entitlement to share of profits.
o (2) Name: must announce to the world that it’s a LP. End its name with “Limited Partnership” or
LP. If you fail to do this, the LPs can lose the protection of limited liability. If don’t comply, lose
privilege of limited liability (s.53).
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o
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(3) Not Managing: a LP is not liable as general partner unless he or she takes part in the
management/control of the business. [s.64].
 More substantive, less formal requirement. This is sort of an estoppel theory – by acting
contrary to the partnership contract the LP loses protection of being a LP.
 (1) Why should the statute mandate this? Look at 3rd party’s expectation: If LP is out
trying to sell things and acted as if they had role in management, can contractually bind
the P? If so, then LP may have participation in management. Management roles will
ordinarily involve in expectation on the outside that they are dealing with a GENERAL
partner (with unlimited liability). Since management involves hands-on involvement, LP
should have less opportunity to impose liability on the GPs.
 (2) What is management? Test: What does T (outsider) reasonably think? If T thinks that
they are a partner is behaving towards them indicates that they are a general partner,
then that means that person is engaging in “management” so that partner loses their
“limited” liability. That person is estopped from shying away from liability.
 Can you have a LP if a general partner is actually a LLcorp? Can individuals designate
themselves as LP and then incorporate themselves separately, then come back and be
the sole general partner?
 See Notebook Sept 12 e.g. #1 – some courts have dealt with this by ‘lifting the veil of
incorporation’ while others have allowed this ‘device’ to remain. Paterson: best solution
is that if the arrangement appears to have been set up purely for the purpose of avoiding
liability (i.e. corporation has consistently had no assets and paid all profits through to
shareholders A&B) then the veil of incorporation should be lifted. *NB: this is likely to be
a problem mainly for smaller, unsecured creditors – they will not have spent the
time/money to investigate.
Advantages:
o Can combine advantage of LL with benefits of partnership tax treatment to avoid double taxation
(can be tax benefits)
o Not responsible for day-to-day management of business
o Not subject to Securities Act
 Security: form of property right(s) in exchange for them giving money to someone else.
(See also ‘Securities Act’ for def’n.) Includes shares, partnership interest,
 Securities Act is all about regulating businesses/businesspeople as they seek money from
unsophisticated investors.
o Transferability – can sell interest w/o permission of other partners [s.51-66]
Extraterritorial Scenarios: Where an LP/corp from another province comes and does business here: do
provinces have jurisdiction over ‘foreign’ LP?
o The BCA (corps) and Partnership Act (part dealing w/ LPs) [s.80] reporting requirements – if
“carrying on business,” the LP/corp must register with the registrar in Victoria. Why? Not to make
them submit themselves to BC regulations per se, but for the purposes of identifying themselves
to 3rd parties so we know who to serve process on (to sue them).
o BCSC has set out basis for its jurisdiction in the Court Rules.
o CL test for jurisdiction: presence. But LP/corp don’t have that physical ‘presence.’ So test if agents
for enterprise are carrying on business in BC, must register!
(e) Limited Liability Partnership
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See summary of law in Canada pp.51-53. Did not exist in BC until January 2004.
American invention now present in most if not all CDN jurisdictions. Introduced in CDN law b/c lawyers &
accountants didn’t want to be liable for their crazy partnerships.
They address the problem of the liability of partners for the liabilities and debts of other partners:
o Esp. law firms, which were traditionally partnerships and where all partners wanted to be involved
in the management of the business.
o In respect of the liability of general partners as between one another, a single partner might incur
liability to a client. If that liability was upheld by courts (or agreed to) the client could turn to the
other partners for the amount.
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LLPs create the opportunity for professionals to limit their liability to a portion of the amount that the
partner is held to be liable for.
Main provisions (not examinable): Section 94 - 113
o Partner not liable for ‘partnership obligation’ beyond their own debts and negligence liability.
o Definition of what they’re liable for varies with each statute across Canada.
o An attempt to prevent 3rd parties being able to hold OTHER partners beside A to share in certain
liabilities (debt and negligence).
BC: Amendment introduced (Part VI of Partnership Act) to work in conjunction with Legal Professions Act.
Possible for individual partnerships to incorporate. Most of them will register as LLP, even if they’ve
individually incorporated, to take advantage of limited liability.
(f) Corporations
Advantages
 Corp has its own legal personality, separate from SH/D/O
 Corp has perpetual succession and isn’t affected by any changes in, or deaths/retirements of its members.
Disadvantages
 Incorporation must be sought from gov’t agency and requires filing of documents + adoption of a
corporate constitution.
 Corp wishing to do business in more than one province will either have to incorporate federally or obtain
an extra-provincial license.
 Corps are requires to hold meetings, elect directors, and provide SH with information.
Why wouldn’t a business incorporate?
 Some professionals aren’t allowed to conduct business in an incorporated form (i.e. lawyers)
 The promoters may only envisage a short-term business relationship (i.e. joint venture)
 Partnerships are often formed between corporations
 Unincorporated forms of business may offer tax advantages
Differences b/w partnerships & corporations:
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(1) Corp is separate legal entity (unlike P) which are fictional (only exist through agents, employees that act
on the Cs behalf.)
o Partnership has no existence in law apart from its members (partners) and ceases to exist as a
partnership in law when one P leaves (unilateral breach of K).
o Lots of theories about corporate personality. A corps remains despite SH/D come and go, because
it’s fictional and can only act through human intermediaries (agents: directors, employees).
(2) Corp has formal steps for formation and dissolution; Partnerships can form by operation of law and
dissolve when a partner dies, retires, etc.
(3) Putting aside LPs, in all other partnerships, all partners can take part in the management of the
business.
o Partners have not only property rights but also right to act as partner and thereby bind your
partners (s.27). Even if they’re “passive investors” (only contribute capital and don’t take active
day-to-day role), they CAN, if called upon.
o In corporation there is an invitation for specialization. Must also have:
 Shareholder(s) – ownership: owning something (property rights), also have right to vote
at shareholder meetings
 Director(s) - [term of art] power: have the power to manage the company. (s 136) –
vesting of power, to the exclusion of SH.
o NB: In private/closely-held corps, has very few SH, and they’re likely all D. So separation between
ownership/control doesn’t really apply. This distinction more applicable to public/widely-held
corps, where have thousands of SH (investment in shares).
(3)Because partnership is contract, Privity is important – must be unanimity in any change of the business
of the partnership.
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o
o
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In a corporation, the directors make the decisions (s.136), not the shareholders.
2 restrictions to D’s power: (1) Company’s constitution can limit them and the type of business the
company is engaged in; amended via “special resolution” (vote). (2) If D tries to make a
“fundamental change in business,” triggers SH’s right to appraisal remedy (right to sell their
shares and exit the enterprise).
(4) Transferability of Ownership
o A Partner can’t transfer partnership interest without unanimous agreement between all Ps
(modification to terms of K); but in a Corp the shares are prima facie transferable.
o Public Corp – fellow SH don’t care who you transfer shares to, b/c can’t be involved in
management. Private Corp – care, so usually have “SH’s agreement” (think pre-nuptial). In private
corp, shares are “unattractive” because no independent market as for public corp, so difficult to
transfer. Why would they want to buy your shares if you want to get rid of them?
o CH companies actually want it to be difficult to transfer share ownership – the intimacy of a
closely held corporation is a key feature of them. So, most CH constitutions will have a clause
limiting the transfer – usually a preemptive right (first right of refusal).
(5) Publication of Trading Capital [value of assets contributing to enterprise when first est.]
o Whether public/private, when you incorporate, must publish its capital = statement of its
ownership in terms of a # of shares. [fractual ownership in terms of shares]
 This is filed with the registrar. (i.e. ‘the capital of this company consists of 100 shares’.) It
is important to lawyers b/c it tells an outsider how many shares the company was
allowed to issue. Once the full number of shares has been issued, corporations can’t
issue more shares without amending their constitution.
o By contrast, partnerships do not have to say anything about their ownership to the outside world.
(6) Number of Members [no max # for both P/corp]
o Partnership requires at least 2 members. Could have more, but realistically difficult if too many (all
want to manage); generally only a few.
o Corps: can be ONE person, but can reach multinationals with millions of SHs. As # of SH increases
in a corp, the likelihood that it will be regulated by regimes outside the BCA also increases
[securities regulators].
How to become a shareholder (these apply to both private/public companies):
1. Subscription: Acquire shares upon the company’s incorporation. Ds have the power to issue those shares
upon the incorporation of the company.
2. Allotment: Issuing (unissued) shares after the company has already been incorporated (at some future
time). Sometimes Ds may not issue all the shares possible (under the company’s constitution) right away –
Ds may have power to issue additional shares at a future time.
3. Transfer: this is really just an ordinary sale of goods [stock exchange].
4. Transmission: person [executor of will, usually] becomes a shareholder on death of another, via operation
of law.
Shareholder v. member
 SH is anyone who has acquired legal title to share(s).
 Member – registered on member list; are SH who has right to vote at meetings.
NB: two types of shares in Canada:
 Par-value – shares are described or defined in terms of a monetary amount. i.e. ‘authorized capital consists
of 100 shares of $1 each.’ Par value doesn’t represent value, but rather ownership/entitlement to
dividends, return of capital on winding up, etc.
 No-par-value – shares include no monetary amount. i.e. ‘authrorized capital consists of 100 shares.’ This is
the favored approach because they don’t suggest the real value of the shares to anyone. So if you own 50
of shares in 100 share company, you own 50% of the value of the corporation. Contrast to Par-value where
$value doesn’t really tell you anything, although they seem to imply that they are worth x, though they
aren’t.
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2. Canadian Business Corporations
History
Four Incentives for Incorporation
(1) Limited Liability
a. Privilege granted by state to SH of registered corps – s.87. Limit set by amount agreed to pay for
shares at subscription; not liable for anything beyond that.
b. Corps themselves don’t enjoy LL; they are fully liable to their creditors (secured/unsecured).
c. LL beneficial for SH of WH corps, because despite whatever craziness management undertakes,
they are only liable for the amount of the share (originally).
d. LL not beneficial for SH of CH corps. Creditors will find other means to secure the debts. It’s the
unsophisticated unsecure creditors who are at risk. In loans, will want signatures of all SHs too,
not just company.
e. There may be situations where limited liability is lost.
(2) Perpetual succession
a. Results because of the legal fiction of the corporation.
b. Huge advantage for WH corps, but not for CH corps, where there is a greater risk of all SH/D die at
same time. Then there’s no possibility for the SH to elect new D.
c. Personal representatives of deceased have all the rights of deceased members. So they may elect
replacements (s.115).
i. Who wants to become an owner in that situation? CH Corps would often have assets that
are unsaleable. What are the shares worth (in an open-market sense)?
ii. When advising CH corps, numerous measures can be taken to protect against this.
(3) Transferability
a. Shares can be bought/sold, but Ds are maintained, until voted in or out of office at AGM.
b. Not applicable to private companies – don’t really transfer shares much, and don’t want to, and
may go to lengths to prevent shares being acquired by outsiders.
c. But too much transfer? Questionable value of company, but generally go up and down.
d. But recently Cdn companies have been able to buy their own shares – part of a recent “going
private” phenomena, for investment purposes.
(4) Distinction between ownership + control
a. (1) SH (owners) attend AGMs vs. (2) BOD (management)
b. [s.136]– “The directors of a company must, subject to this act, regulations, and company
constitution…, manage or supervise and manage the affairs…” This means (through cases) that
management can do almost anything, including: issue shares, buy shares, distribute dividends (or
not), take the company into new endeavors.
c. Bad for CH Corps?
i. These two overlap. Most of SH will often be the Ds too.
ii. Also, minority SH: if each of 3 people own 1/3 of the shares, any one of them is at risk of
being outvoted at any time. A minority shareholder in a corporation is often in a risky
place b/c they are always potentially on the losing end of the votes. They also have no (or
a very difficult) parachute-out option because where will they sell their shares?
Constitutional Basis for Incorporation
[See pp.62-63]
Parallel authority to incorporate both federally or provincially:
 (1) s.92(11) – provinces have power in relation to companies with “provincial objects.”
o Bonanza Creek – “provincial objects” not limited to those heads listed under s.92. No limits based on
subject matter or even geography as to what a provincially-incorporated company can do. So a BC
corps can carry on business throughout Canada and other countries, and can carry on lines of business
that are within s.91, if extra-provincial jurisdiction will allow it.
o So “provincial objects” language largely neutralized by the SCC.
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(2) s.91 POGG
o Parsons/Multiple Access – not just residual power (if not “provincial object”); Feds can incorporate
business to carry on business anywhere.
So what’s the difference? You either like the prov/fed Act better. Although some differences still exist in Acts,
practically no effects.
So WHERE do corps incorporate? Federal? Provincial – which province?
o (1) Custom-made  facilitate what you want to do better in Fed over Prov, for example.
o (2) Status  Federally if you want that “national presence” or connotes “nation-wide,” which doesn’t
mean that they are, but just gives that impression.
o (3) More name protection for a federal company
o (4) The major difference constitutionally is:
 Federally there are articles of incorporation + bylaws
 Provincially there are notice of articles + articles
o (5) Geographical convenience  if Fed-regulated, would probably need more lawyers in Ottawa to
deal with the fed regulations.
 Jurisdiction
o To what extent are fed corps subject to prov regulation?
 Depends on characterization of the prov legislation. If it’s just corporate character,
ineffectual, but if double character (legislation affecting property, civil rights) it is valid so
long as it doesn’t conflict w/federal legislation – must have conflict to trigger
paramouncy, not just overlap/duplication (Multiple Access Ltd. v. McCutcheon (1982)
[SCC])
o What about when prov legislation (when legitimately exercising prov power under s. 92(13) of CA)
“sterilizes” business activity of a fed corp?
 John Deere Plow and Great West Saddlery (PC): business activities of fed corps have no
immunity from prov control/restrictions. However applied a test of whether prov. leg.
“impairs” or “sterilizes” essential capacities of federal corp.
 Can. Indemnity Co. v. A.G. B.C. [1977](SCC): As long as provincial legislation is
constitutionally valid, “it may completely paralyze all activities” of a fed. corp.


Incorporation and its Consequences
BCBCA s.3, 10, 13, 17, 18, 30, 87
s.3
s.10
s.13(1)
s.17
s.18
s.30
s.87
A company is recognized under the Act when the incorporation, conversion, amalgamation, or
continuation occurs.
(1) One or more persons may form a company by (a) entering into an incorp agreement, or (b) filing an
incorporation application.
(2) Each incorporator must sign agreement + set out # of shares of each class for that incorporator.
A company is incorporated (a) at date + time application filed w/ registrar, or (b) at a later specified time.
Effect of incorporation – SH are capable of exercising the functions of an incorporated company with the
powers + with the liability on the part of the SHs provided in this Act.
Whether or not the requirements precedent + incidental to incorporation have been complied with, a
notation in the corporate register that a Co has been incorporated is conclusive evidence that the Co
has been duly incorporated.
A company has the capacity and the rights, powers and privileges of an individual of full capacity.
(1) No SH of a Co is personally liable for the debts/obligations/defaults/acts of Co.
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3. The Corporate Entity
(a) Introduction
Prior to this case, there was a pervasive view that the legal consequences of incorporation were fairly limited…that
the same principles courts had applied to rights & liabilities of partners would still apply to shareholders of
corporations…
Salomon v. Salomon & Co.
[1897] A.C. 22 (H.L.)
Facts: Salomon was sole propietor (leather goods). Assets became the assets of the company (Salomon was then
known as a ‘promoter’). S got in return (i) cash (ii) shares {equity interest} and (iii) debenture over the company’s
assets {debt interest – defined in Act; also, an acknowledgement of debt, usually in writing. It can be registered at
the Business/Incorporation Registrar. It is granting a security for that debt over its assets. If the jurisdiction has the
capacity for that security to be registered, then you have a debenture}. When company was wound-up later, if the
amount realized from company assets was applied to debenture (to Salomon), the creditors would have been
screwed.
I/A:
Trial and Appeal held against Salomon: the company was Salomon’s agent and there was no separation b/w
Salomon and Salomon Ltd. However, on the facts there was no way to say that Salomon had abused the process
that allowed him to incorporate.
HofL said Salomon had not abused the statute; the statute invited him to do what he did. **If the HL had decided
this case differently, it would have seriously undermined the corporate form as we know it today.**
One of the allegations against S was that he had overvalued the business {over-rewarded himself for his business}.
However the court said it would not interfere – the business was good consideration; whether it was adequate is for
the market to decide. This approach to pricing is still good law – companies decide the price of the shares they are
offering and the market decides whether that is an adequate price. (Securities regulators do limit what companies
can get for their shares; add’ly the company may not be able to sell the shares.)
First instance of the Business judgment rule: legal principle that manifests the policy behind this approach: directors
are businesspeople, and courts, who are not businesspeople, should not second-guess directors’ decisions. This
avoids a huge amount of litigation over ‘bad decisions’.
Salomon brought in family members as directors. This was very common in Canada until the 1970s.
RATIO: (see p.85 – good description)
1. Corporation has separate legal existence apart from the personalities of its shareholders
2. There is no requirement that shareholders must hold their shares beneficially and  no objection to de facto
one-person corporations.
Seminal case in establishing the corporate form as we know it today: corporation is a separate legal person.
NB: IMPORTANT - There may be situations where corporations may be agents of their shareholders, which lead to
“lifting the corporate veil.”
BCA ss.19, 17(2), 64, 121, 136
s.19 (Company Constitution) - Historical relic: tries to state incorporation and the relationship b/w the corporation
and its owners. In BC, known as “notice of articles” and “articles” OR “memorandum” and “bylaws.” See 19
September 2006 NB.
s.17(2) (BC Interpretation Act) If a company didn’t have directors, s.17(2) says: a majority of the members of a
corporation may bind the company – fallback provision that gives SH the ability to perform acts on behalf of the
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company if there are no Ds. This is important because it indicates that the Ds are agents of the corporation. If Ds
are unable to act, a majority of the SH can act on the company’s behalf and bind it. See s.136 BCA
s.64
Directors have the power to issue shares (at time & price to be decided by them)
s.121
(Company Act) – the names of the first director(s) must be included on incorporation of the company. If a
company is WH (public) there must be at least 3 shareholders (s.120)
s.136
Widely-enough worded that it allows for Ds to be uninvolved in the day-to-day running of the business.
NB: ‘Promoter’ a person actively involved in the formation of a company. They have fiduciary-like duties; has been
problematic in BC.
NB: Priority on a winding up: Preferred creditors, secured creditors, unsecured creditors, shareholders.
Lee v. Lee’s Air Farming (1961 J.C.)
One spouse owned all but one share; he had appointed himself director for life; he was also the sole FT employee.
He was killed at work (plane into hillside). Wife tried to claim on his worker’s compensation but failed at trial and
subsequent appeals. Appealed to Privy Council who said that corporation is separate legal person and is capable of
contracting with someone through its agent. Also confirmed that you can be both a shareholder and an
employee.
What if this had been a partnership (b/w two spouses)? Paterson sees a partner as being able to be an employee of
his own partnership. (Check?)
Kosmopolous v. Const. Ins. Co. (1983) Ont CA (REEXAMINE)
Significant chunk of this is insurance law:
 Insurable interest – in order to take out a K with an insurer, you must have an insurable interest in what
you’re seeking to insure. i.e. you can’t take out insurance on other people’s lives. However, this is mainly
relevant to real/personal property interests.
 Subrogation – is what happens when an insurer pays an insured the proceeds of an insurance claim. i.e. ICBC
pays you for damage to your car (to have work done on car). Once pay out happens, ICBC can bring a claim in
your name against the other person. (Policy: this is to not bias juries by involving an insurance company in the
suit)
Facts: Classic sole proprietorship that decides to incorporate (under new CDN statutory regimes that allow sole
person-corporations). He transfers his business assets to the newly incorporated company but retains an insurance
policy that is in his own name in respect of the business’ premises. Insurance co says sorry, no insurable interest in
the building since it’s the company’s asset, not his.
Courts responded in two ways:
(a) No difference (esp. when sole shareholder) between you and corporation.
(b) No, you and corporation are separate legal persons; but a person who owns shares in corporation which
has insurable interest, that person should be regarded as having an insurable interest. (What threshold of
holding is required?)
Court gets into law of insurable interests. Says that if Kosmopoulus had taken debenture over property then he
would have had insurable interest and no problem.
However, since he was the sole shareholder…but ONCA uses benefit/detriment test and says Kosmopoulos does
have insurable interest b/c he is sole shareholder. Ziegel (critique) responds that this is wrong in law: (a)
undermines Salomon by modifying the corporate legal person, and (b) what about a company where there is
another shareholder that has a tiny other share? What’s the threshold? Canadian law has never articulated a
definite test of when the courts can modify the rule in Salomon’s case.
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Ratio:
Case goes on to SCC which upholds on different grounds: MacIntyre SCJ wants to apply the ONCA reasoning and
rationale for one-person corporations. Majority supports Kosmo by reasoning on insurable interest: the idea that
you must have insurable interest to have insurance coverage is not determinative; instead they apply a moral
certainty / benefits/detriments test from Macina. So as an individual, had an insurable interest in the Co’s assets,
allowing him to take out an insurance policy so can now get benefits.
Important is “SCC not prepared to create any exceptions to the Salomon principle, even in the case of single-person
corporations.” This line of argument may be more susceptible to criticism, but we may not need to worry too much
about it (esp. as regards insurance law)
Categories of Companies in Canada
Two well known types: Widely held (aka. reporting companies; public companies) / closely held (aka. private
companies).
Two other variables exist:
 One-person company – whether this is literal (Kosmopoulos) or in fact (i.e. Lee, Salomon). CDN courts don’t
treat them differently. The practical problem w/ 1-person corps is with meetings: CL rule that you cannot
meet with yourself (must be two or more people). Act therefore had to validate and define req’ts for oneperson meetings.
 Holding/Subsidiary situation: many large (and some small) corporations own shares in other corporations
(and even in themselves). When is it appropriate to describe a corporation as being a subsidiary of its holding
company.
o {s.2(3)}: when the holding company has control of the subsidiary.
 (i) de jure
Holding co owns more than 50% of shares in subsidiary, so can control
outcome of resolution at AGM; can guarantee who is elected to BoD or
 (ii) de facto
Whether or not, in fact, the holding co can elect a majority of the BoD even
if you don’t have a clear majority. This is very important w/ WH companies
where it is unlikely to own 50%, but by owning 10-15% (ie) you may well be
able to get self or appointees elected and have de facto control}.
(b) Lifting the Corporate Veil
Lifting the Corporate Veil: Judge is willing, on facts of case, to modify the strict application of Salomon principle.
Importantly, in none of these cases are judges denying that there isn’t a separate legal person; instead they are
saying for the purpose of the issues before the court, we will modify some of the consequences of being a separate
legal entity. Also, despite attempts to categorize/theorize when courts may lift the corporate veil, there seems to be
none. Examples below show situations when courts may be flexible (but there are no hard and fast rules).
BCBCA, ss. 422 and 423: Dissolutions and cancellations of registration by registrar
s.422(1): The Registrar may dissolve a company or cancel registration if the company:
(a) Fails to file an annual report for 2 straight years
(c – g) Fails to follow orders of the registrar or follow certain sections of the Act
s.423: Lieutenant Governor in Council may cancel the incorporation of a company + declare it to be dissolved.
Three situations when courts more willing to lift the corporate veil:
(1) Agency: Where they think the corporation is an agent of its principle SH.[Clarkson]
(2) Avoidance: Where they think the activities of the company are a mechanism to avoid regulatory legislation
(particularly tax liability) [De Salaberry]
(3) Fraud: Where they are convinced on the facts that the purpose for which the corporation is engaged is
fraudulent.[Gilford Motor, p. 117]
Text also mentions:
 Where company clearly undercapitalized to meet foreseeable financial needs
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Cases involving tort claims against the company
Non-arm’s length transactions b/w parent and subsidiary companies
Clarkson Co. Ltd. v. Zhelka
64 D.L.R. 2d 457 (H.C.)
Lifting the veil: Narrow reading of Salomon
Selkirk holds four companies. Industrial Limited Co buys property using cash advance from St. George and Langstaff
Co’s. When Selkirk is in financial difficulty, he facilitates transfer from IL to his sister Zhelka who mortgages it.
Selkirk becomes bankrupt. Trustee in bankruptcy seeks declaration that sister holds land in trust and that IL was
mere agent for Selkirk (objective being that asset is available for Selkirk’s creditors).
Held: Sister holds land in trust for IL (b/c no consideration). However, court not prepared to hold that IL was
Selkirk’s agent. They conceded that he controlled it etc., but didn’t think (despite his motives) it was part of a
preconceived intention to avoid his personal obligations to creditors. Corporation was not part of scheme to avoid
financial problems; if it had been structured this way after his bankruptcy the veil would likely have been lifted.
NB: in USA the ‘instrumentality theory’ makes courts seemingly more willing to characterize corporations as agents
of their shareholders.
Ratio:
Upholding a narrow reading of exceptions to the Salomon principle only where applying the logic of Salomon would
be “flagrantly opposed to justice”.
De Salaberry Realties Ltd. v. M.N.R.
(1974) 46 D.L.R. (3d) 100
Lifting the veil: agency & avoidance
What was the purpose that certain of these parties held these corporations? Family argued that corporate structure
set up for legitimate business purposes (buying ppy for investment purposes) and arguing that these were capital
gains/losses and should not be taxed for income. Court says NO.
 Although valid, none of the corporations had enough assets to carry on business in any real way
 There were no dealings b/w the subsidiaries with one another – it was all up to the parent co.
 All of the directors were nominee shareholders; not an independent BOD.
 The subsid’s were only used as vehicles for specific transactions; not self-sufficient or didn’t have their own
ongoing business.
Courts said this is an example of a group enterprise and therefore the court could ignore the strict roles of separate
persons and could instead look at the enterprise as a whole to determine the true purpose of the enterprise.
TEST: for determining if a subsidiary is really just a puppet (and therefore corporate veil should be lifted). Factors
to consider:
 Were the profits treated as profits of the company?
 Were the persons conducting the business appointed by the parent company?
 Was the company the head + brain of the trading venture?
 Did the company govern the venture, decide what should be done and what capital should be embarked
on the venture?
 Did the company make the profits by its skill + direction?
 Was the company in effectual and constant control?
Guilford Motors v. Holmes
Lifting the veil: Fraudulent purpose
Former employee who signed a restrictive agreement not to compete when he left GM. He incorporates Co then
conducts trade in competition. Court declined to allow the Co to violate his personal contract and says the Co was
established to avoid this pre-existing contractual legal obligation.
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What about K obligations NOT yet in existence? Usually potential tortuous liabilities:
 Eg: Incorporating to distance own assets from liability in the future (taxis, pool installers, etc.)
 Generally courts allow Co to do this.
Walkowsky v. Carlton [p.138]
(1966) 223 N.E. (2d) 6 (N.Y.C.A.)
P is injured by taxi cab which was owned by company that carried the bare minimum required insurance. When
suing the cab co, the company’s ability to meet his claim is limited by the level of insurance. P's lawyer argues that
the strategy of having each cab owned by a separate corporation is part of a scheme to avoid/minimize liability.
Says that for purposes of determining liability, the companies should be treated as one whole.
Court found in favor of cab co. There was no preexisting liability toward the pedestrian. This is the main distinction
b/w Wochalski and Guilford – in Guilford there was a preexisting liability which the corporate structure was used to
attempt to avoid.
However the dissent is more in line with how American courts have approached other cases like this – more willing
to lift the veil where there is no preexisting liability but there is a likelihood of future liability.
NB: In Canada, courts have sometimes distinguished between actions of the corporation and actions of the
individuals themselves who are involved in running the company.
SUMMARY: Salomon is preeminent! (via Kosmopolous).
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4. Procedures of Incorporation
(a) Place of incorporation
pp.164-66 + citations to literature.
 CDA having no province-to-province incorporation competition, however there may have been a recent trend
towards federal incorporation (Paterson thinks that it may have been partly a backlash against the new
BCBCA)
 Canadian law pretty uniform, so forum shopping not common. Generally, will incorporate provincially if extraprovincial operations not envisaged; if so, then incorporate federally.
 We have these choices b/c none of the Corporations Acts require the incorporators to be resident in
province/territory of incorporation (although some Acts impose residency requirements for D.)
 If advantageous, might even incorporate offshore (usually for tax reasons) since the normal conflicts rule is
that a corp will be governed by the law of its incorporation. (But be careful, some American courts refuse to
apply this rule if there isn’t a significant link b/t jurisdiction of incorporation, the place of business and the
SH’s residence.)
(b) Extra-provincial Licensing
BCA ss.1, 374-399
(s.1) Definitions
 Company: a corporation recognized as a company under this act.
 Corporation: a company, a body corporate, a body politic and corporate, an incorporated association or a
society, however and wherever incorporated, but does not include a municipality or a corporation sole; more
general usage.
 Extra-provincial companies: means a foreign entity, registered under section 377 as an extra-provincial
company or under section 379 as an amalgamated extra-provincial company, and includes a pre-existing
extra-provincial company;
 Foreign corporations: a corporation that (a) is not a company, (b) has issued shares, (c) is not required under
the Cooperative Association Act to be registered under that Act, and (d) was
(i)
incorporated otherwise than by or under an Act,
(ii)
continued under section 308 or otherwise transferred by a similar process into a jurisdiction other
than British Columbia, or
(iii)
the result of an amalgamation under Division 4 of Part 9 or a similar process, or of an amalgamation
or similar process in a jurisdiction other than British Columbia, and includes an extraprovincial
corporation within the meaning of the Financial Institutions Act;
 Limited liability company: a business entity that (a) was organized in a jurisdiction outside BC, (b) is
recognized as a legal entity in its organizing jurisdiction, (c) is NOT a corporation, and (d) is not a
partnership including LP/LLP.
Basic Features of Provincial requirements for EP licensing:
 It’s an offence to carry on business in province w/o a license, although prosecutions are rare.
 An unlicensed CP corp is usually not capable of maintaining an action before a provincial court/tribunal in
respect of a K made by it (this can be ‘cured’ retroactively by getting license).
 Granting of license is discretionary with the official (although refusals are rare).
 EP Corps are usually required to make annual filings of pertinent info, in common with domestic
corporations.
(ss.374-399) (Part 11).
A foreign entity must register as an EP company under the BC Act 2 months after beginning to ‘carry on business’
in BC (trigger) [s.375(1) BCBCA]
 Ongoing presence is required: Vendor relationship doesn’t necessarily mean that the principal/agent on the
other side of the deal is carrying on business in the province
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
Lots of case law interpreting “carrying on business.” E.g. Weight Watchers: Court held that the existence of
a franchise/licensing K in Ont didn’t mean that company was carrying on business in Ont and wasn’t
enough of a “presence.” Main point: CONTINUITY; must have ongoing presence.
 CoB is also the test for jurisdiction over corporations.
A foreign entity is ‘deemed to carry on business’ if [s.375(2)]:
 Its name in a BC phone director which gives BC phone # or address
 Its name is in an ad in which BC phone #/address is given
 It has a resident agent or warehouse or office or place of business, or
 It otherwise carries on business in BC
Others:
Detailed code dealing with registration of foreign Corps in BC. If you’re COB and didn’t register, could be fined
$50/day for not registering.
 Exemptions include banks, business only constructing and operating railways, and entities serving merely
as limited partners in a BC partnership [s. 375(3)].
 Shipping companies exempt as long as they have no warehouse, office, etc. in BC, though ss. 27(1), 384,
385 all apply as if they were extra-provincial companies [s. 375(4) & (6)].
 S. 376: Outlines the requirements for Registration Application
 S. 377: Registration – May file a registration statement and register a company as an extra-provincial
company. Must issue a certificate of registration and give a copy to company.
 Ss. 378-383: Effect of Registration, Amalgamation, Annual report requirements, Name Changes or
Cancellations of extra-provincial companies
 S. 384: Liability if name not displayed
o (1) A director or officer who knowingly permits an extra-provincial company to contravene s.
27 (sets out requirements as to name display) is personally liable to any of the following who
suffer as a result of that contravention:
 purchasers, suppliers, or persons holding security in the company
 S. 385: Enforcement of duty to file records
 S. 386: One or more attorneys must be appointed by an EP Company
 Ss. 387-396 – Regulations for attorneys of EP Companies
 May appoint attorney to accept service on behalf of foreign entity [s. 388]
 Ss. 397-399 – Provisions for cancellation of registration of EP Companies.
 Ss. 426, 428 – lays out consequences and reverse onus for claiming to not be carrying on business; makes it
difficult for foreign corps to NOT register!
 Additionally, if you’re a non-registered company, you can’t sue, but your contractual obligations are deemed
to be valid.
SCENARIO: P wants to sue D.
 First question: Does court have jurisdiction over the claim? Forum conveniens plays into this – court can
say that it doesn’t make sense for them to take jurisdiction over the matter.
 Usually not a problem when dealing with sole proprietor or partnerships, because that person(s) are
amenable to jurisdiction of courts where they are physically located.
 Are the D physically in the jurisdiction? Problem for corporations, because don’t have that “physical
presence.”
 Test: The “Carrying on of business” test: Does that entity perform commercial activities in our jurisdiction?
o Must separate out indirect/temporary presence from a more permanent/continuing form of
presence.
o This COB test makes sense of the rule that corps that aren’t formed under BC Act must register
under BC as an “EP corp” which then forms a kind of presence. [But main motivation was to know
who/where to serve process on, so you can sue.]
 Conflict of laws: Even if foreign corp can be sued here, which law governs? Place of incorp!
o Cdn courts will usually defer to foreign law in regard to questions of statuts (whether you’re a
corp), but local law will govern with questions of powers (limits what corps can do).
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(c) Continuance
Two kinds of takeovers:
(1) Friendly
 2 firms in agreement about combining. Needs approval of SH of both companies via separate meetings and
vote. Proposal is highly complex and usually involves cancellation of shares.
 All Corp Acts have provisions/rules for mergers/amalgamations.
 Statutes secure rights for dissenting SH. (B/c may lose status as SH.) Given rights to go to court to
determine whether deal is fishy or not.
 Problem: What if the 2 Corps are in different jurisdictions? (i.e. AB vs. BC). Can’t use BC Act to carry out
merger, b/c don’t have jurisdiction over AB Corps.
o One solution is to achieve “continuation”: movement of one of these corporations into the other
jurisdiction. “Immigrate” the AB Co into BC, if % of SH votes in favour, and then can be deemed as
a BC-incorporated Corp.
o Then merger can occur, because can now be governed under BC Act.
 Problem: What if both companies want to merge in another jurisdiction they’re both not a part of? NOT
POSSIBLE. Can’t achieve continuation in a jurisdiction that neither was a part of in the first place.
(2) Un-friendly – covered later
NOTES:
 A company incorporated in 1 jurisdiction can apply to ‘continue’ its incorporation in another jurisdiction,
provided it obtains the consent of both jurisdictions: two-step process
o (1) The emigrating company must obtain the consent of the authorities in the jurisdiction of its
incorporation (the “export” step)
o (2) The emigrating company must meet the requirements of the fed/prov Act under which it seeks
to be continued (the “import” step)
 Reasons for continuance include: tax advantages, amalgamation w/ another Corp, shift of business
operations, better corporate climate in 2 nd jurisdiction.
 Continuance under the law of another jurisdiction doesn’t affect the migrating corp’s prior obligations,
property rights and involvement in all prior civil/crim/admin proceedings. [s.187(7) of CBCA]
{s.302-311} – ‘immigrating a company’; applications for continuance in BC
 Designed to simplify a corporation’s ‘immigration’ from one jurisdiction to another. It is always possible to
dissolve and reincorporate in another jurisdiction. Similarly they could sell all their assets to a BC registered
corporation, wind up the AB corporation and take shares in the BC company.
 However, especially when companies want to merge, they must get 2/3 to 3/4 (depends) SH approval and
then judge rubber-stamp (Part 9). But it can’t apply if one company isn’t covered by the BC BCA. Continuance
facilitates a merger in these situations: must have matching provisions in both statutes. One company must
become company of other jurisdiction. Continuation provisions are expedited process for doing so. Allows
them to ‘move’ from (i.e. AB to BC).
(d) Widely Held and Closely Held Corporations
See BCA, s. 1 def. of “public company”, “reporting issuer” and “reporting issuer equivalent”.
*See Securities Act, S.B.C. 1997, c. 418, s. 1, definition of “reporting issuer”.
A widely-held company is a publicly trading reporting issuer
 Reporting issuer: a company that has its securities registered under Securities & Exchange Act (US market)
and/or has any of its securities traded through a stock exchange and has any of its securities reported
through a … reporting system. R.I. is the term used in the BC Securities Act, which regulates issuers of
securities to the public.
 Public: has been interpreted by USSC in a way (Rolstein Purina case) based on whether it was useful or not
that the Act apply. Where there are offerees that actually have a need for the information in order to make
an informed investment decision, then you have an offering to the public. “Need to know test”: does the
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public need to know information in order to make an informed investment decision? This is also good law
in Canada.
Closed system/ Continuous disclosure: if you are required to disclose to the public, then you are required
to do so on an ongoing basis (unless the company takes itself private again)/
A closely-held company is a private company – req’s 3 things
1. Limits in constitution re: transfer of shares
2. Less than 50 SHs
3. Cannot sell any shares to the general public.
This definition isn’t super important (public company under BCBCA) – however, there are sections in the BCA that
apply or don’t apply depending on whether the company is a public company.
 S.192: Liability of insiders (relates to insider trading); only applies to private companies
 S. 197: Financial statement requirements; diff and more onerous requirements for public Corps
 S. 120: A private comp can have 1 director; a public comp must have a min of 3 directors
 S. 210: Change of auditor by a public company; stringent requirements
 S. 223: Audit Committee requirements; only applies to public.
Note: BCBCA is about BC Corps. However, the BC Securities Act doesn’t distinguish based on nationality or origin.
Any corporate issuer that issues shares to public in BC is subject to BCSA and so must follow disclosure
requirements. Any conduct regulated by BCSA that happens in BC gives BCSA jurisdiction. [i.e. insider trading in
foreign company that happens in BC.]
“shares” vs. “securities”
securities – generic term that encompasses primarily shares or secured corporate debts (debentures, bonds).
However in BCSecAct also covers “investment contracts”. The issuer doesn’t have to be a corporation – however it
does have to be ‘to the public’.
Rothstein Purina case
Co issued shares but only to directors, management, and employees. SC said that it made sense for
directors/management. Where there are offerees that actually have a need for the information in order to make an
informed investment decision, then you have an offering to the public. ‘need to know test’. This is also good law in
Canada.
(e) Different Classification of Corporations (terminology unique to Canada)
(1) Special Act Corporation / Company [s.1 definition, s.4(1)]



A business corp that owes its separate legal personality to a separate Act.
Arises through the political process; usually a Crown Corp: ICBC, Museum of Civilization, BC Ferries, Export
Development Corporation, etc.
Legislation is attuned to particular requirements of the enterprise; Custom-made corporations for special
purposes, but there are a lot of routine matters that these corporations need, so most say: except where
inconsistent with this [enabling] Act, the provisions of the BCBCA will apply to the Act [s.4.2]
(2) One-person Corporation [s.172(3), 140(4)]




Relatively recent (since 1970s there had to be more than one shareholder) [see p.170]
Some technical problems in relation to meetings, so Act had to adapt to allow a one-person meeting:
o s.172(3) – Directors Meetings
o s.140(4) – Shareholders Meetings
What about fiduciary duties?
Can you be charged with theft from the business?
o Creditors suffer so they might insist that.
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(3) Constrained Corporation - Constrained by a combination of legislation and self-regulation (to meet
legislation)




CL rule about transferring the shares: shares are prima facie transferable;
So the bylaws of most CH Corps contain clauses restricting the transferability of shares (sometimes known as
preemptive rights provisions).
However, sometimes these restrictions are more extensive – arrived as result of historical ownership increase
of CDN corp’s by US co’s (in late 60s). More recently (in 80s) there was a move to open up.
The remnants of this chain of events are the Investment Canada Act (for very large corporations) and sector
regulations that regulate foreign ownership in specific areas of the economy: i.e. transportation, media &
communications, banking. They have the 25/10 rule: foreign investors may not own more than 25% of a
chartered bank, and no one shareholder can own more than 10% of a chartered bank.
(f) Incorporation Techniques
Two sources of incorporation in Canada:
(1) “Registration jurisdictions” i.e. BC, AB, Maritimes
 Incorporation is seen as something that citizen(s) have as a right; easy to get!
o Registrar [incorporating officer] has no real discretion to deny registration (except name) if Act has
been complied with, otherwise mandamus would lie to compel him to do so.
o No questions about capital, expertise, etc.
 see pp.57-58
 Old act: two documents (both public)
o Memorandum (parallel to Article of incorporation)
o Articles (parallel to by-laws)
o People were deemed to have knowledge of contents (constructive knowledge)
 New Act: has adopted completely new language. Incorporation effected in BC by delivery to the Registrar of
Companies of two documents:
o (a) Notice of Articles [s.11] (formerly “memorandum”; public, must be filed in Victoria)
 Contains company’s name (preapproved), names & addresses of directors (who may or may
not be shareholders, tell registrar the address of the corporation (including registered office
[law firm-where you serve documents] and records office), and authorized capital of the
corporation.
 Form 1 in Schedules to Act.
o (b) Articles [s.12] (needn’t be filed/public, though must be available to the SH).
 Essentially the constitution. Contains rule for conduct, restrictions to business or powers of
directors, share restrictions, etc.
 If company doesn’t set out their Articles, Table 1 provides a model/template/default version
[s.16(b)].
 S.12 is statutory template of matter the Articles must contain/address.
o Once application filed, the certificate of incorporation is issued (birth certificate).
o [s.19]: Legal effect of (a) & (b) is to create contracts b/w each SH and the corp and b/w each SH. The
documents are part of the company’s legal system, its constitution. So SH can sue the corporation if it
violates its own constitution.
o [s.421] No longer any constructive notice of what’s in a company’s articles. So a person no longer
deemed to know its contents merely b/c it’s filed with registrar.
o Formation of Company [s.10]: Incorporation also requires incorporation agreement : an agreement
filed w/ registrar that outlines how shares will be divided amongst SH and sets out the names of who
initially is taking ownership in the company.
 Paterson thinks this does not form part of the company constitution. There is some
confusion – s.19 + fact that IA doesn’t contain anything significant in terms of company
constitution.
 NB: cannot include beneficial interest information on incorporation agreement.
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Pp.175-179: most of this will be discussed in more detail later on. In a registration jurisdiction you used
to define what the corporation could/couldn’t do.
(2) “Letters Patent jurisdictions” - Incl’s CBCA, OntBCA, QueBCA
 Residual carryover from days when only Crown could incorporate companies. Sovereign issued letter’s patent
to corporations.
 Idea that state has a privilege that it can withhold; however, reality is that this never happens nowadays and
have right of appeal if it does.
 Two constitutional/constating documents:
o Articles of incorporation – public documents
o By-laws – needn’t be public
(g) Registrar’s Discretion over Corporate Names [ss. 21-29]


Incorporation = grant of monopoly (over business name). Want to prevent confusion b/w names!
Three remedies:
o Passing off – intention & damages to π
o Intentional infringement of copyright/TM
o Statutory/admin remedy – [s.406] – broad right of appeal for ppl who have been “affected by ruling of
the Registrar” to have name changed.
General Rules:
 S.25 – can’t use foreign name
 S.26 – foreign company can use either English or French translation of their name.
 S.27 – display requirement @ place of business.
 Must include Incorp/Corp/Ltd/Limited, etc.
 Can’t use public figure name or associate with government (BC).
 Number names must contain “BC Ltd.”
 One-word names must be a registered trademark.
 Changing names:
o Registrar may order change [s.28,20] if name violates any requirements of Act
o Changing names – s.263 – involves change to notice of articles. Because this is a constitutional change,
the level of shareholder agreement is higher: usually a “special resolution”. In BC - 2/3 vote (by
statute) unless the bar has been set higher by the company constitution.
 Factors considered in determining whether the proposed name will be confusing:
o Nature of business
o Class of persons likely affected
o Visual/auditory impact of the 2 names
o Use of descriptive and generic terms
o Time + mode of use of a name which may have stamped it with a particular identity
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5. The Nature of the Corporate Constitution
(a) Generally
BCA, ss. 10-19 See s.1 definition “articles”




See Incorporation Techniques, above for “Notice of Articles” and “Articles”
The differences b/t the Memorandum and Letters Patent (now CBCA) jurisdictions go beyond the methods of
incorporation to some important conceptual distinctions.
(1) Pre-CBCA distinctions
o LP corp
 Had capacity/power of a natural person
 Directors get power from Act, not constitution [CBCA s.102(1)]
 SH couldn’t modify unless unanimous
 D could pass bylaws (which SH would later approve) but Cdn courts would decide if D acted
reasonably. This supervisory role now applies to M corps too (Edmonton Country Club v Case)
 Unclear what residual authority SH had, but Foss v Harbottle held to apply
o M corp
 Was subject to UV doctrine (Riche v. Ashbury Ry.): Corps only had the power their constitution
conferred on them (conferring power on themselves)!
 Articles were public docs, and public deemed to have constructive notice.
 Memorandum + articles were Ks that the SH could sue the Corp on [s.19(3)].
 Powers b/t D and SH determined by constitution [BCBCA, s.136(1)] and residual authority lay with
SH to break a D deadlock, to ratify UV acts of D (Foss v Harbottle) and to sue.
(2) Current Position
o Significant changes in the diff b/t M and LP jurisdiction:
 UV doctrine (as it affects 3rd parties) and constructive notice (public docs) ABOLISHED [s.30]
 SH confirmed to have power to ratify a voidable K in which a D/O has material interest
 See page 177
o Important remaining differences are regarding:
 Allocation of powers b/t D and SH
 Scope of SH’s residual power
 Permissible scope of bylaws + articles
(b) The Concept of Restrictions/Alteration of Corporate Constitution
Common Law




UV act was seen as illegal act (or contrary to public policy), so seen as breach of fiduciary duty as well as breach
of K.
Most breaches of FD are unactionable by SH, b/c FD is owed to Corp, not SH. Although SH may be severely
affected, only Corp has standing to sue.
In LP jurisdictions (BC), Corporation has all powers/responsibilities of a natural person.
In registration system, Corp only has powers that were given to them (build up in memorandum). So if
something left out, that act was UV. Also, since memorandum was a public document, everyone deemed to
have constructive notice. E.g. If you lent money to corp and then sued to get it back, corp could say that lender
had constructive notice that the corp was not allowed to borrow money. Upheld by HL in Ashbury v. Ritch.
BCA, ss. 30-33, 154(1)(a), 228(3)(c), 259, 260, 378(2)/(4)
Since 1973, the CL doctrine (above) has been eliminated by statute. See ss. 30 & 33.
 Now, corps start with full powers, then constitution can restrict those powers
o Section 30: Full capacity/broad grant of power (rights + privileges of a natural person)
o Section 31: A comp can hold property rights in same manner as individuals
o Section 32: Unless restricted by Act/constitution, a BC corp can do business outside of BC.
o Section 33: Can restrict the exercise of any power (s.30) via constitution (self-imposed).
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

(2): No Act of company is invalid because it violates a restriction. So even if a Corp DOES have
restrictions in their constitution and they violate it, the resultant actions aren’t invalid. This
protects 3rd parties/creditors
o Section 421: Abolishes constructive notice, BUT active notice still works against a person
o Section 259: SH can amend/delete/introduce restrictions in constitution @ any time with special
resolution. Amendments are a ‘fundamental change’ so gives rise to ‘appraisal remedy.’
o Section 237-246: Appraisal remedy for dissent SH, which forces corp to acquire SH’s shares in the
company.
o Section 260: SH may dissent to resolution for alteration of articles; required for appraisal remedy.
Extra-provincial Companies: (some places where UV doctrine still in effect)
o Section 378(2): EP companies should obey limits of their constitution
o Section 378(4): Equivalent of 33(2), contravening constitution doesn’t make act invalid.
There are still situations in BC where companies are restricted from doing something in their constitutions. Can a
creditor do anything? Historically a UV act was not only UV but was considered to be a breach of fiduciary duty. But
a creditor had no standing to bring action against the company. Today, there is no specific provision regarding
personal liability for actions contrary to the company’s constitution.
Remedies for Restricted Acts
With the new statute, we do have remedies provided for in the act, but are they the only remedies for a restricted
act? Not in part of act dealing with restricted acts, so messy.
 Section 228: Compliance or Restraining Orders
o A “complainant” (SH or appropriate person) can bring an action to stop company from doing
anything its constitution/statute says it shouldn’t.
o (2) – any violation of this statute (includes restricted act under s.33)
o (3) – injunction, or compensation (for s.33 violations) = personal remedy
o Example: A SH gets an order setting aside the deal under s.228, but courts (b/c of equity) orders
compensation to be paid to a 3rd party under s.228(3)(c), but then makes a further order that the
D personally pay compensation under s.154.
 Section 154: Personal Liability on directors for various infractions
o Don’t know who the parties might be, what forms of relief might be granted.
o See defences to PL in s.157
Altering the Corporate Constitution
Three procedural requirements to effect alteration of Corp’s constitution:
1. A special resolution, in form of a SH resolution of more than mere majority (2/3)
2. If rights are attached to the shares of a particular group or class of SH (i.e. preferred shares), that are in
some sense unique, provision is generally made for the SHs holding those shares to give their consent
SEPARATELY to any alteration of those rights.
3. Minority/dissent SH are generally entitled to have their shares bought from them at valuation (appraisal
remedy).
Substantive Limitations (what you can’t change):
1. SH cannot, without his consent, be required to take/subscribe for more shares or have his liability
contribute to assets of the company increased (doctrine of limited liability prohibits this).
2. The majority can’t use powers in fraud or to oppress the minority – limitation on power to alter.
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6. Pre-Incorporation Contracts
A enters binding K relationship(s) with T, then realizes that (1) corporation did not yet exist OR (2) corporation exists
but not clear whether A was acting in personal capacity or as agent of corporation.
Note: There is an argument that this is a matter of property + civil rights, and so the fed government doesn’t have
the power to include these provisions in the CBCA.
Problem: Cdn law doesn’t recognize existence of Corp until certificate of incorporation has been issued. So T has no
legal action Corp for K entered into before incorporation and cannot enforce agreement; Corp could avoid K.
Three distinguishable situations in which this could occur:
1. Both parties to the K know that the K is not incorporated yet. (Kelner)
2. The promoter knows but the contracting party doesn’t
3. Neither party knows or promoter mistakenly believes that the corp. is incorporated and contracting party relies
on this representation. (Black)
(a) Common Law
Kelner v. Baxter
(1866)
Individual can be personally bound if clear from facts that they intended to be personally bound
Facts: Promoter (A) of hotel orders beer from Supplier (T) in preparation for opening. Both knew that company was
not yet in existence and that he was acting in behalf of it. A signed name on behalf of proposed company (evidence
as to his state of mind). Company collapsed and T sued A in personal capacity for payment for the product supplied
to the hotel.
Issue: Is A personally liable, or is the corporation liable? YES
Reasoning:
 Broad ratio: when a K is entered into on behalf of corp that doesn’t yet exist, the person signing that K will
always be personally liable under the terms of that K
 Narrow ratio: in a situation like this, A can be personally bound if clear on facts that they intended to be
personally bound (both parties intention)
o In this case, both believed company did not yet exist so presumption that must have intended that A
would be personally bound (to rebut this, need evidence of intention in K itself)
o Problem: difficult to figure out evidence of intention
 For Corp to be liable, there must be a new K formed between the Corp and 3 rd party
Class Notes:
 Law of Agency: Principle of the Non-Existent Principal:
o Principal, who is not in existence at the time an agent purports to act on their behalf, can’t ratify the
actions of that person (someone who couldn’t be an agent on corporation behalf b/c it didn’t exist then)
 BC courts adopted this approach that company is NOT capable of ratifying; must enter new K.
Black v. Smallwood
(1966) (H.C.A.)
Clarified Kelner
Facts: Both sides mistakenly believed that the company had been formed. A not personally liable.
 Reject broad ratio in Kelner; Kelner stands for the proposition that you must look to the INTENTIONS of the
parties to be bound. If both parties thought the Corp existed, there is NO presumption to be personally
bound.
 In combination with the POTNEP (above), this made the whole arrangement a nullity.
 Obiter: P can’t get specific performance but may be able to sue for breach of warranty of authority (implied
warranty that they were directors of an existing company which had the power to make a K to purchase
land).
(followed in Newborn, and there’s a CDN case [GMAC & Weisman])
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*Heinhuis v. Blacksheep Charter Ltd.
(1988) 46 D.L.R. (4th) 67, (B.C.C.A.)
(Most important BC Case until recent changes to BCBCA)
Brief: Company, after incorporation, dealing with other party as though bound by pre-incorporation contract —
Company bound!
Facts: Corp took title to a yacht following a PIC in a chattel mortgage. Title to vessel transferred to company. Court
said that in the way the parties had acted, it was clear that the Corp had adopted the responsibilities.
Ratio: A PIC is binding upon the new Corp if the conduct of the parties, such as part performance, shows an
intention to be bound.
 Changes in K Law: Mutuality is now enough to form a contract. A/Corp acted as if they were bound,
assumed responsibilities, and now are essentially estopped from saying they are not bound.
 A powerful signal that in Canada the courts were going to try to hold up these pre-incorporation Ks
whenever possible.
Remedies at common law = Breach of warranty of authority [largely usurped by s.20]. T can sue A alleging that
they have wrongfully and intentionally misrepresented an authority that didn’t exist.
3 elements: (1) A misrepresented an authority that didn’t exist; (2) Must have believed Corp existed (reliance); (3)
Must be actual damages flowing from false warranty.
(b) Statutory Reform – [s.20]








If Corp NEVER formed, s.20 wouldn’t apply, so use CL rules, or courts will rely on equity.
NO PIC is binding upon a Corp, no matter how or by whom the K was made.
For Corp to be bound, a new K must be made b/t newly-incorp Corp and T.
A(facilitator) deemed to warrant that Corp will come into existence and will adopt the K. A personally liable
for breach of that warranty.
Upon adoption of PIC by newly-incorporated Corp, novation occurs [similar K arises with new parties and
relieves old parties], so A no longer personally liable (his warranty lapses).
Adoption, which must occur within a reasonable time, can be express or implied, including by inaction,
which signifies intention to be bound by K.
(8): what about sham Corps that are intentionally unable to meet its commercial obligations? Don’t know.
Courts might be able to ignore the existence of a separate company if they find A had set up company
deliberately to avoid liability. But if bona fide company and is insolvent, then A not liable and T out of luck.
Remedies (ss. 20(5) to 20(7))
o (5) If Corp doesn’t adopt PIC within reasonable time, then it’s required to give back for the
benefits it received = restitution/quantum meruit.
o (6): More difficult remedy. Can ask court for an “appropriate remedy” whether PIC is adopted or
not. Only makes sense in an action by T. Court can rearrange entitlement/relationships between
A/T/P – unforeseen liability!
o (7) Court can do anything under (6) = anything goes!
Problems with s. 20:
(1) Ambiguity of meaning
(2) Relationship with other remedies, other issues that it doesn’t address [5 & 6 are personal remedies-impt
to distinguish this from remedies that belong to the corporation]
(3) What is the relationship b/w the old cases and the new panacea that s.20 is supposed to represent?
When they start to apply the provisions they should consider what was wrong with the common law.
(4) What about issues that s.20 doesn’t address, like repudiation, default on the obligation itself? Paterson
thinks s.20 is exhaustive insofar as situations that it provides coverage for, otherwise, can still look to CL.
Black v Smallwood could still apply.
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Landmark Inns of Canada Ltd. v. Horeak
1982 Sask QB
Similar provisions to s.20 in Saskatchewan, but A deemed personally liable (no warranty)
Facts: A was tenant, T was landlord, A entering into lease with T in the name of the corporation prior to it being in
existence. The new Sask provision (their version of s.20) deemed A to be personally liable. Argued that the lease had
been adopted by the corporation after it came into existence. However, on the facts, A had repudiated earlier on to
get another lease (better deal). A was not allowed to then argue that the corporation could have adopted the first
contract if it was repudiated.
R: To relieve a person of personal liability, K must have an express provision that a person who enters into a written
K in name of a company before incorporation is not personally bound by K – not enough to just refer to section of
the Act.
NB: Saskatchewan provides that PIC (providing later incorporation occurs) is personally binding on A. It only
becomes binding on Corp if it adopts. So as far as T is concerned, T always has a binding contract with someone.
NB: What’s the difference b/w this and our warranty? What is the practical difference b/w BC and Sask? [Maybe it
has to do with enforceability if the corporation doesn’t come into existence…in Sask there’s still a binding K, in BC
it’s less clear that s.20 applies]
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7. Management and Control of the Corporation
(a) Introduction


Problem of ensuring accountability of managers to the goals of the corporation
There is a natural propensity for corporate actors to deviate from these goals in an effort to maximize their
own welfare
Berle and Means (Managerial Model of Corporate Governance)





Concern over opportunism by corporate managers ever since their book, The Modern Corporation
The power/control in a corporation lies with the board of directors, not the shareholders. However, to find
the real power/control, look at how the BOD are elected (which is by shareholders.)
About how managers enjoyed so much discretion b/c of the separation of ownership and control in US
corporations
Dispersion of share ownership meant that no particular SH had any incentive to assume the responsibility for
controlling the affairs of the corporation; SH’s transformed into passive principals of the company they owned
Control held by BOD (managers) w/ only minor ownership interests in the capital of the corporation; thus mgmt
not motivated to act in welfare of Corp b/c no personal stake
Enter the Contractarians




Economic theory: corporation as nexus of Ks between SH, creditors, mgmt, employees, suppliers
Allowed for delegation from principal to agents who became specialists and enhanced overall efficiency
Concern was that all power given to BOD (agents) and what was to prevent them from keeping/hiding all
benefit for themselves? The main reason that managers didn’t do this were economic (mkt) forces (the legal
rules were unpredictable/weak)
Main Agency Conflict: the delegation of authority from SH to managers in the corporation
o When ownership and control are fused (i.e. one person) the prospect of this agency conflict is less
b/c costs of opportunistic behaviour are reflected back onto the same party
o The sep of ownership and control gives rise to agency conflict. But, it is possible for SH to anticipate
and control agency conflict
o Always incentive for a corporation to choose sensible governance.
o i.e. Directors are more likely to sell shares in a Corp in the first place if they adopt restrictive rules
vs. permissive rules for management.
o Legal and market mechanisms to discipline managers [i.e. imposing ex post costs/penalties on
managers engaging in such activities]
Mechanisms used by Owners for Controlling Agency Costs
SH Voting, used in 2 ways:


(1) Determine the membership of BOD of Corp
o By simple majority vote (50%)
o Usually BOD doesn’t manage Corp (power defined in s.136), but appoints and supervises managers who
do
o So by making management accountable to SH, SH indirectly controls management.
(2) SH voting on fundamental corporate changes
o Usually subject to “special resolution” (>50%, usually 2/3) votes
o This limits capacity of various major SH to adopt changes that would benefit themselves.
SH Influences and Markets:

INDIRECT:
o (1) Capital market – if stocks rise in value as expected, SH happy and corp likely well managed. If stocks
drop or underperform expectations, SH may find managerial incompetence and vote off managers.
o (2) Product market (the market in which the corporation’s goods are bought/sold)
 Poor market performance sends a signal to investors about managerial performance,
particularly if a Corp is performing poorly while its industry peers are thriving.
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 Direct sanctions on managers for bad performance i.e. bankruptcy and replacement
DIRECT: The following markets impose direct penalties on managers for engaging in opportunistic behavior.
The effectiveness of these markets is not contingent upon the ability of SH to overcome collective action
problems.
o (3) Managerial Market  the market where services of corporate managers are traded.
 Salaries often determined by share price/performance; thus incentive to increase salary will
offset incentive for opportunism. Link performance (share price) to pay is incentive for
diligence.
 Problem: The effectiveness of this mechanism turns on ability of market to evaluate the
performance of manager in isolation from his/her team.
o (4) Market for Corporate Control  transfers control of mismanaged to corps
 The organization of a company is, in itself, a form of self-policing form
 A mismanaged company is more likely to be victim to a “hostile takeover”.
 If run by dishonest parties, or negligent directors, other parties will come along and "take over"
the undervalued company by buying 51% of its shares, vote off the management and turn it
around.
Role of Corporate Law in Contractarian Model (Enabling)


Markets only exist and function b/c of the law
Corporate law reduces transaction costs by providing the standard form K
Criticism of Contractarian Model


Above markets are unable to effectively control agency costs
o i.e. Leaving corporate law to private parties→ Enron disaster
o Product + managerial markets often suffer from structural imperfections
o Legal rules may be incorrectly articulated and applied
That control remains w/ those who selected BOD is only true at a simplified level
o Mace Article: criticisms of BOD
NB: Eisenberg Theory. Said it wasn’t really BOD so much that was in control as it was the senior management (plus
inside directors). They are the most knowledgeable and expert, involved and informed. When BOD is thinking about
who the next nominees to the board might be, they actually ask senior management. If the nominees are then
elected, they tend to regard themselves as loyal to the people who got them the job (senior management). The iron
paradox: only people fully involved can be qualified to run a business (have sufficient expertise to do the job), but
only people who are not so involved can be trusted to oversee the management.
Response: Adopt the EU model and implement Management (inside D) and Supervisory (outside D) Boards. Takes
away some of inside D’s power; SB given defined tasks involving checks + balances on management. Also, auditing
committees to check financial statements (make sure they’re arm-lengths away by appointing a committee to liaise
between auditors and BOD).
B.C.C.A., ss. 1(3), 124, 135, 136 and 138



S. 124 – disqualification of directors; applies to officers too (s.141(3)).
S. 135 (1) If there are no directors in office:
 (a) an individual may be empowered by the SH’s or incorporators to call a meeting of SH’s,
etc. to elect and appoint directors or appoint interim directors (see (2)) OR
 (b) there may be appointed, no more than the number permitted by the constitution to be
elected at an annual general meeting. (See (3))
o (2) An individual may be empowered under (1)(a) by an instrument in writing, signed by more than 1/2
of SH’s (or subscribers in a pre-existing corp).
o (3) An appointment under (1)(b) may be effected by a unanimous resolution by the SH’s (or
subscribers in the case of a pre-existing corp)
S. 138 – Act applies to non-directors if performing director functions, but with list of exclusions.
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(s.136) Vesting of Power in Board as a Whole



(1) The directors of a company must, subject to this Act, the regulations and the memorandum and articles of
the company, manage or supervise the management of the business and affairs of the company.
(2) Without limiting s.146, a limitation or restriction on the powers or functions of the directors is not effective
against a person who does not have knowledge of the limitation or restriction.
This vesting of management powers is subject to the act (s.301) and the company’s constitution.
Vesting of power not in an individual director but in the board as a whole. D1 cannot purport to do something
in furtherance of s.136 without the authority of the D’s or a majority of them.
SH cannot exercise any managerial functions!
Vesting subject to (s.301), (s.136)

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(s. 301)→ have to give SH to veto when selling off assets
(s. 136)→ can be subject to memorandum of articles where power under statute can be varied
BUT no memorandum for company incorporated under the new Act. So pretend it only says “articles”
Unlikely that there would be significant restraints in the company’s constitution in a public company; but likely
that restraints would appear in a closely held company b/c SH are concerned w/ broad grant of power to
directors
Distinguish BC from Ont/Fed



Section 102 is fed equivalent of BC s.136.
In LP jurisdiction, company’s constitution can’t limit D’s powers. The only place where there can be restrictions
is through unanimous SH agreement (USH).
o Not possible for WH Corps, because we want fluidity of membership and transferrable shares.
o So s.136 grant of power is EXHAUSTIVE in these jurisdictions.
o So how to protect SH interest? Via CL fiduciary duties, or through restrictions (s.33).
Another distinction b/w Ont/Fed and BC – bylaws (instead of articles): Ont/Fed – directors themselves can pass
bylaws. Board has power not only to manage the affairs of the company but to add bylaws at its discretion. At
next SH meeting the SH can affirm or veto the decision.
Automatic Self-Cleansing Filter Syndicate v. Cunninghame (1906) (p. 235)
*Seminal decision – still good law in BC
*At time there was no provision in the Act regarding removal of directors; it was in company’s article: that
management and control of the company were vested in the directors, subject to such regulations as passed by
extraordinary resolution.
Facts: Articles of company provided that mgmt and control was vested in company (broad grant of power), subject
to regulations that could be made by extraordinary resolution (vote of ¾ of SH). General meeting called @ request
of major SH who had arranged for sale of company’s assets. Resolution approving sale was passed by simple
majority and directors instructed to carry out transaction. BOD refused to do so b/c sale was not for benefit of the
company.
Issue: Are the directors bound to carry out the resolution passed? NO!
Reasoning:
 Once BOD vested with management powers, SH can’t on an interim basis interject and usurp power to
manage the company. SH have given up their rights to tell BOD what to do. If you want to alter BOD’s powers,
that must be done by extraordinary resolution (not simple).
Ratio:
 Until the directors are voted out, they are the only one who can exercise the powers of directors
 A majority of SHs cannot alter the mandate originally given to the directors by the articles of association
except in accordance with procedures laid out in the memorandum/articles.
 SH could have either (a) amended the constitution under s.259, or (b) voted the directors out [pre-emptory
dismissal before term expires] under s.128(3); BOTH REQUIRE SPECIAL RESOLUTION.
NB: Fits Berle and Means analysis b/c it is BOD that has the day-to-day powers (powerful!!!)
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D no longer just agents of the Corp. But AGM has ultimate control b/c of power to amend articles and change
directors, but until then, D can do what they want. Even kicking D out @ AGM can be tough, so clearly D are
more than mere agents, and have lots of power.
Deadlock Theory / Residual Powers Theory
However, there is some thinking out there that the SH are the ‘primary organ’ of the corporation since they “own”
the Corp and vest power in the BOD. Evident in the CL is in relation to the ‘deadlock theory’ (‘residual powers
theory’). Deadlock theory is that if for some reason the board could not function (i.e. a tie, death of all directors,
etc.) the power that is vested in the board reverts to the shareholders. The difficulty with the theory is that no one
is quite sure what needs to occur for this to happen.
Barron & Potter (p.176) IN CLASS EXAMPLE
Court relied on deadlock theory to say that powers of management revert to SH in general meeting.
Facts: Deadlock most often arises when ownership is closely divided. 2 individuals had equal # of shares. One had
casting vote in SH meeting, and the other in BOD meeting. The 2 were in total conflict and both controlled their
respective meetings. DEADLOCK; dysfunctional!
Reasoning:
 When there is a deadlock so that company can’t function, the powers that the BOD has reverts to SH in a
general meeting (b/c they’re the source of these powers). So P could control outcome of SH meeting.
Notes:
 Problem: this case is fact specific; do you need to have this level of absurdity; not clear if this is applicable in
letters patent jurisdiction.
 If you have to choose who is the primary organ, it is probably the SH at the GM
 The fiduciary duties of BOD are owed to the Corp (not SH) – since the powers to start litigation vest in BOD,
how does litigation on behalf of SH against BOD start? This may be one situation where deadlock/residual
powers occur.
Two Ways in which Vesting of BOD Powers are Compromised in BC
(1) Provisions in Act
a. Undertaking, s.301
i. ‘Undertaking’ – legal term that refers to all of the Comp’s property (tangible/intangible).
ii. Gives SH a veto power over BOD’s decisions to sell comp’s undertaking. So SH can’t mandate a
sale, but can stop BOD from selling.
b. Audit Committee Provision
i. Fairly important idea that there should be procedural controls on BOD’s power.
ii. If PUBLIC and at least 3 Ds, must appoint an audit committee to review financial statements with
BOD.
iii. Very modest form of Supervisory Board function (in EU)
(2) Company’s Constitution (notice of Articles)
a. Attempt to limit pre-existing power BOD has from s.136.
b. Section 102 – no limits on BOD’s power in WH Corps, b/c not possible. So only way is through USH.
(b) Delegation



CL: BOD had NO authority to delegate powers w/o special authority from statute/bylaws.
CBCA, s.115: Directors can appoint a committee of directors and delegate powers, restricted to “ordinary
course of business”, and excludes stuff like issuing securities and adopting bylaws.
BCBCA, s.137: allows transfer of power, no restriction on delegation.
o S. 136: The words ‘manage or supervise the management” indicate that the board may delegate its
power(s) to the ‘delegate’. Non potest delegano: (admin) the person in whom powers are vested
cannot truly delegate (i.e. escape) control. This is in the proper interest of the BOD as fiduciaries that
they can revoke delegation of power.
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(s.136): Director’s power to delegate
Board may delegate its power(s) to the ‘delegate.’ Non potest delegano: (admin) the person in whom powers are
vested cannot truly delegate (i.e. escape) control. This is in the proper interest of the BOD as fiduciaries that they
can revoke delegation of power. See Hayes.
Delegation may also be to committee of the board, President, CEO, Managing Director (these are terms that don’t
necessarily have a precise legal meaning). And any time a single director purports to exercise powers under 136,
they must be doing so as either a delegate or an agent.
(s.137): Power of Directors May Be Transferred
(1) Articles of company can transfer powers of the directors to another person(s).
(2) Directors are relieved of that power and the person(s) take on the responsibilities & liabilities as a director.
NOTE: this is a new provision; the implications of it are not clear because it has not yet been subject to judicial
interpretation. See Montreal.
(s.141): Officers May Be Appointed
Officers may be appointed by directors & have specified duties.
(2) Subject to corporate constitution, anyone may be appointed: Unless the constitution provides
otherwise, anyone may be appointed to the office of a company and may serve 2 or more offices at
the same time.
(3) Exception: Anyone not qualified to be a director under s. 124, is not qualified to be an officer.
NB: Officer is not defined in act, but “senior officer” is in s.1. CL meaning is “senior management.” And there’s a
definition in the Securities Act.
Montreal v. Champagne
(1916) 33 DLR
Corporation agrees to let respondent exercise all management and control over corp subject to such direction &
control as board has a duty to exercise. Civil law case, so argued that it is contrary to public policy. Court said it is
fine b/c the agreement did provide for residual power with the board. The BOD reserved some power so preserved
the integrity of the power.
POLICY: does s.137 change that?
s.137 – Paterson thinks that it is better to think of 137 not as a new method of delegating, but rather of providing
for a transfer of the powers itself. CONTRAST THIS to common law (which matches CBCA).
Hayes v. Canada-Atlantic Plant SS Co
(1910)
CL rules of delegation: non-potest…board collectively can delegate certain amounts of its powers but it can’t amount
to complete/whole delegation.
Facts: Bylaws of the corp allowed the directors to form an executive committee which would have “full powers” of
the BOD when the BOD was not in session. After being appointed to the executive committee Hayes and Gale
divested the directors of almost all their functions, then changed the by-laws of the company.
Issue: Should the words “full powers” allow the appointees unlimited powers?
Held/Ratio: Court rejected this, saying that bylaw-making power of the board cannot be delegated. Officers can
only be delegated the powers limited to the ordinary course of business.
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(c) Sale of Undertaking
BCA, s.301 – Power to Dispose of Undertaking
SUMMARY: To sell an undertaking (all or substantially all of Co’s assets), it is necessary that the Co go to the SH and
ask them to vote via special resolution. If they don’t pass the resolution, sale can’t go through (i.e. veto power).
And even if it does pass, directors don’t have to sell.
 Note: In voting for/against sale of undertaking, non-voting shares are enfranchised
 (1): SH have veto power over Board’s decision to sell via a special resolution.
o “All or substantially all” = a sale NOT in the ordinary course of business
o Quantitative test: If >50%, presumption that it’s not ordinary.
o Qualitative test: Looking @ circumstances, what type of business, what type of assets, etc. Is it out of
line of company’s normal business activities?
 (2): Contravention of (1) gives SH, D, creditors standing to apply to court for personal remedy to:
o Enjoin/stop, set aside the disposition, or make any other ‘appropriate’ court order.
o Note: NOT the same as personal liability of D, a list of which can be found in s.154.
 (3): 3rd party protection
 (4): D doesn’t have to go through sale, even if special resolution passes.
 (5): Any SH may send notice of dissent. Dissenting SH entitled to appraisal remedy under s.238(1)
 (6): Circumstances where SR not needed; includes: giving security interest, lease with a term less than 3 years
to a subsidiary (exceptions to what constitutes a sale of undertaking).
(d) Audit Committee (ss.223-226)


With WH companies, BOD required to produce publicly available financial statements. The financial statements
must be audited by accountants who are in a statutory relationship with the corporation – if they fail to find a
financial impropriety, they may be sued for breach of K. However, CDN courts have only recently held auditors
to owe a duty of care to SH of a company. This is the closest we get in CDN law to the European arrangement of
supervisory/management board separation.
Purpose of the AC = an ‘independent’ committee to review financial statements before signed by directors and
presented to SH; to minimize fraud. Auditor gets right to appear before AC and may be required to appear
where it is requested, and has right to call a meeting.
s.223 – AC only required for public companies (as defined in Securities Act [a reporting issuer]
s.224 – Appointment and procedures of AC
 (2) Audit committees must be made up of 3 or more directors, elected by the BOD, and a majority of its
members must not be employees or officers of the company or an affiliate of the company. So all public
companies must have at least 2 outside directors.
 (5) The auditor of a company must be given reasonable notice and must have a right to appear before the
audit committee. They are also mandated to attend a meeting of the board.
s.225 – Duties of AC
 AC must report to the directors on the financial statements of the company
 Intention is to get management to consider report, chance for auditor to explain what the financial
statements mean. But there can still be a lack of independence. Many of the directors may also be
‘financial illiterates’. Auditor may also be compromised by relationship with the company.
Problems: Auditors are often friends with the directors (independence??); Outside directors do not necessarily
understand the business; Auditor may not have to appear @ AC meetings.
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8. Enforcement of Duties Owed by Directors and Officers to the Corporation
(“Derivative Action”)
(a) Introduction – The Rule in “Foss v. Harbottle”
(s.142): Fiduciary Duties of directors are owed to the corporation, not to the shareholders.




[From Solomon]= B/c the fiduciary is owed to the company, only the company has standing to prosecute an
alleged breach of them.
But the people who can bring about lawsuits via the company are the directors! What if they say no?
(Obviously, b/c they breached their FD)
Solution: Derivative action = Court gives leave for other people to sue in the name of the company.
SH can commence a (1) personal action, (2) a derivative action, or (3) an oppression action to protect
their rights
1. A derivative action (CL + statutory) may be commenced by SHs where they all are affected equally
by the impugned conduct (breach of FD causing reduced value in shares, for e.g.) on behalf of “the
corporation.” If leave granted, SH gets the same rights as the corporation has to sue (can’t pursue
any greater rights than the company has). Any remedy given will normally be given in favour of
Corp, not SH.
2. A personal action may be commenced where SH(s) have some grievance affecting themselves
individually; not share equally among all SHs. Remedy issued would favour the SH(s).
3. The oppression remedy augments the substantive rights of SH by expanding upon the range of
matters actionable at CL for breach of FD.
 This remedy may be beneficial if it protects SH against actions that are little more than
redistribution of wealth in favour of managers or a constituency of SH
 But also potentially costly b/c might encourage meritless SH claims (only purpose to extort
money from Corp); and creates uncertainty about legal rights which leads to greater
amount of litigation.
 But good in that it will increase the likelihood that wronged SH will sue (instead of being
scared and wait).
Common Law: The Rule in Foss v. Harbottle
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Facts: 2 SHs alleged a sale by the D’s of their own property at inflated values to the company. Wrong alleged
was a wrong to the company so Ps had no standing.
Transaction itself (which was voidable, for conflict of interest?) + bringing suit for damages were matters to be
decided by the Corp (SHs) in its general meeting. Since Ps didn’t represent the majority, had no standing to sue
in Corp’s name.
Power of the Majority was extended further in
o Mozley v. Alston: two SHs brought personal action for declaration that BOD’s holding office illegally and
contrary to Co’s constitution. Court held the F&H rule applied: wrong was to the company and so
company was the only proper complainant. Refused to consider that the Ps asserted personal right to
have D’s act in accordance w/ internal gov’t rules of company (terms of incorporation).
o MacDonald v. Gardiner: articles allowed taking of a poll upon the demand of five members. When poll
demanded on motion to adjourn, Chair ruled there could be no such poll. CA said this was internal dispute
for majority to decide. Court did not consider section in UK Co’s Act that memorandum and articles are a
contract b/w company and members and so Ps could be considered as suing for personal right.
o North-West Transportation v. Beatty – D purchased his own ppy for Corp and submitted K to general
meeting for approval, which was granted b/c D was also a SH and votes his way (if not, K would’ve been
denied). SCC said that an interested D can’t use his SH votes to confirm his own K, but PC said that a D is
entitled to do so: A SH is entitled to exercise his vote from motives or promptings of what he considers his
own individual interest.
An action could be rendered moot if the majority of the SHs could decide to ratify and excuse the breach.
SH’s cannot usually bring action in name of the corporation unless representing a majority, where the breach
was a wrong done to the company.
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Exceptions to the Foss v. Harbottle Rule (outlined in Edwards v. Halliwell)
*Paterson describes these exceptions as things that a simple majority of SH should be able to exonerate.
(1) Ultra Vires Act
o An individual SH can sue because the act complained of is ultra viresthe Corp, so there is no question of
the transaction being ratified by any majority.
(2) Fraud on the Minority
o If the majority of SHs are acting in an oppressive way towards the minority so as to cause injustice. Idea
here is that some things are so wrong that no majority could ratify it, concerns abuse of power (e.g.
misappropriation of corporate assets). Included in this exception are negligent acts of directors where
they received economic benefit.
(3) Special Majority
o FH rule doesn’t apply to actions requiring a special resolution for ratification, so individual member can
sue.
(4) Personal rights of action
o If personal and individual rights have been invaded, then you already have a personal right to bring an
action (e.g. contractual obligation to pay preferred rate of dividends to SH).
o SHs cannot ratify a wrong done to an individual SH, so rule doesn’t apply.
o The most important right for SH in Canada is the Oppression Remedy in s.227/8.
Four Procedural Elements (from Foss and Harbottle and Statute, s.233)
1.
2.
3.
4.
Complainant must show that they have made reasonable efforts to get the Corp to sue. I.e. could ask BOD
and got denied, or the action might be against the Board itself which they obviously won’t agree to.
Prevents multiplicity of proceedings.
Must give formal notice to Company (SH) that you are asking for leave. Last minute opportunity for
Company to bring the action themselves.
Complainant must be acting in “good faith”
Must show that getting leave would be in the best interest of the company. Merit aspect.
Problems with the Common Law
(1)
(2)
(3)
(4)
Costs for litigation. Directors have access to Corp bank accounts, whereas minority SH don’t.
Vague meaning of “fraud on the minority.” Usually basic theft, negligence counts.
Access to evidence. Insiders have edge over outsiders (the SHs usually who want leave).
Unclear distinction b/t personal and corporate rights of action. Minority SHs need to figure out what
remedies are available and must categorize the conduct of BOD to bring the appropriate action.
(b) The Statutory Derivative Action
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See pp. 865-866 for derivative action provisions of CBCA
Sections 232-3 are considered complete provisions, so can’t rely on CL.
Section 142 (breach of fiduciary duty) matters are often pursued in a derivative manner.
The derivative action may be brought by individual member, where the claim is structured as minority SH
v. BOD, with corp joined as a defendant. This is an exception to Foss v. Harbottle.
The rule in Foss precludes SH-initiated litigation whenever the alleged wrong was ratifiable (actual
ratification irrelevant) by the SHs. If SHs could ratify the Corp’s action by a simple majority taken @ a
general meeting, then no action could be taken against the company.
CBCA s.239
(1) SH may bring action on behalf of a corporation
(2) In order to bring an action, (a) directors must be given notice, (b) complainant must be acting in good faith,
AND (c) action must appear to be in the interest of the corporation.
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BC BCA (s. 232) – Standing for Derivative Actions
(1) “complainant” a SH or director of the company; “shareholder” has same meaning as 1(1) and includes a
beneficial owner of a share of the company and any other person whom the court considers to be an
appropriate person to make an application under this section.
 Note: SH and directors have standing as of right.
 “Appropriate person” may be creditors/liquidators, employees, customers (discretion of court)
(2) A complainant may, with leave of the court, bring an action on behalf of a company, as long as the company
would be permitted to bring such an action.
(4) A complainant may likewise defend on behalf of a corp
BC BCA (s.233) Four Criteria for getting leave
Powers of court in relation to derivative actions
(1) Outlines the criteria for leave to commence a derivative action, including:
(a) Reasonable efforts by complainant to cause directors to commence the action,
(b) Notice: Have to tell the company that you are seeking leave to sue derivatively
(c) Good faith: Must be acting in good faith
(d) Action must appear to the court to be in the best interest of the corp. [Does the application have
merit?]
BC BCA (s.233(6)) Ratification
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No application made [chambers app] or legal proceeding [trial] prosecuted or defended under s.232 or this
section may be stayed/dismissed merely because it is shown that an alleged breach of a right/duty/obligation
owed to the company has been or might be approved by the SH (via ratification).
SO ratification is NOT conclusive, but may be taken into account by the court in making an order under s.232/3.
Paterson says this is a complicated area – he doesn’t know himself what the conclusion is here
o Good news is that it is not conclusive, but then still have to look at common law which is complex.
o Not entirely clear whether the ratification is applicable at the leave stage or if it can affect a trial on its
merits.
NOTE: Does not specifically allow courts to order damages to be paid to SHs rather than the company as in CBCA
s.240(c), though this order could be made under s. 233(4) which allows the court to make any order it deems
appropriate.
Differences between CL and statute

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The statute sections do not address actions by the company itself
o If the company has authorized someone to sue on the company’s behalf, then it is not a derivative action
since the company is doing the suing
Courts are given more discretion over the execution of a derivative action than they once had
o Discretion over costs, i.e. control of legal fees being paid to SH
Do the provisions means that the proceeds from a successful claim could bypass the company and go to the
individual SH bringing the action?
o Controversial question – depends on the wording of the section
o Federal statute S.240 seems to allow for it, but no cases on this though
Old law and new law. Because you have to get leave to sue derivatively statements of claim are often major
exercises since you may want to list various causes of action in order to get leave to sue.
o Have to make sure to put the corporate ones on one side and personal ones on the other since you have to
get leave first to sue for the corporate claims.
o I.e. it may be tempting to sue for oppression since it is a personal right and is simpler to sue. The
complexity of suing by getting leave is more difficult, especially for smaller investors.
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Re Northwest Forest Products
1975 BCSC
Application of Statutory Derivative Action application
Facts: NWFP was 51% SH of Fraser Valley Pulp & Timber Co. Assets of FVPT sold at what appeared to be very low
valuation. SHs of NWFP petitioned D’s to vote NW’s shares to set aside the sale but they didn’t respond.
Complainant SHs sought leave to commence derivative action. Allegation of negligence against Ds (unusual claim,
b/c hard to get). Substantive allegation was breach of s.142. Had to get in under ss.232/3. First Ps asked
management if it would sue on their behalf. Then tried to convene a meeting of SHs (s.167).
Held: Court said applicants had acted reasonably. (Ds argued they had not been specific enough about the matter
they were alleging. Court rejected, saying there was no particular level of specificity. See pp.869 re: prima facie
language, court rejected.
Ratio:
When bringing a derivative action, the court will consider:
 Whether the minority SH first asked the D’s to take the action which s/he now brings the derivative action
for.
 Whether the allegations, if true, would make it in the company’s best interests to allow the claim by the
derivative person
 Whether the allegedly guilty D’s voted in favour to defeat a motion to sue for the conduct (but this will
likely not be taken seriously by the court).
 Court has residual discretion to grant leave or not depending on clear extraneous circumstances.
Held: In this case, there were very strong facts that suggested a successful prima facie case. Ps not required to
show the whole merit of the case (s.233(1)(d)). Court did not refer to good faith requirement, but did talk about
what is now 233(6).
Court’s discussion of 233(6)
 At CL, ratification destroys an action even though you can mount a prima facie case against a D for breach
of duty. Negligence and breaches of FD (that hadn’t caused actual harm) were ratifiable, but heinous acts
(like appropriation of property) are not.
 233(6) says that ratification no longer conclusive. Can be disregarded on leave application or at trial itself.
 Problem with ratification is credibility issue. CL says the impugned director could vote own shares to ratify
the motion. Now, highly questionable! If this happened, would be a trigger to use discretion allowed in
233(6).
Re Bellman and Western Approaches
1981 BCCA
Facts: D & B were both shareholders in W. Takeover bid for Westman by D [majority SH] (opposed by B [minority
SH]). Alleged wrongdoing was breach of s.195. Complainants (B) sent letter to company alleging wrongdoing and
requesting Corp to seek relief. Following American practice in Canada for the first time, BOD said it would establish
litigation committee who would report back to BOD as to whether the company should sue the D. Report came
back negative and board decided not to sue. B said that they would sue as SHs.
Held: B meets test under s.233(1), so B wins leave.
Analysis:
3 of the conditions precedent to seeking derivative action:
1. Notice: D must be given reasonable notice of B’s intention to apply for DA. Notice letter that had been sent
had omitted one ground that the leave application had – breach of statutory duty. But court says “Failure to
specify each and every cause of action in a notice does not…invalidate the notice as a whole.”
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2.
Good Faith. Technical argument by applicants: b/c B was suing for oppression remedy in their personal
capacity, as well as the other as SHs, that was vexatious. Court said that relief sought was not the same and so
having simultaneous suits was not vexatious.
3. Merit / Interests of the Corporation: [equivalent: 231(1)(d)]
 Court said you must have a prima facie case, but don’t have to be able to prove it at the time. The test
for granting leave is not whether a claim can be proven or not. It’s whether a claim, if it could be
proved, would be in the best interests of the corporation to allow the suit.
 Court said that litigation committee procedure was flawed and so wouldn’t consider its
recommendations binding on the court’s decision regarding leave:
(1) One of the directors against whom allegations of impropriety were lodged was on the
litigation committee.
(2) The committee had not investigated all the allegations that B had made.
Ratios:
 Failure to specify each and every cause of action in a notice does not…invalidate the notice as a whole.
 The test for granting leave is not whether a claim can be proven or not. It’s whether a claim, if it could be
proved, would be in the best interests of the corporation to allow the suit.
 A litigation committee should not include a person who is in conflict of interest with the purpose of the
committee, and it must investigate all allegations made.
POLICY Q: If the Litigation Committee had not been flawed, is the report binding or just persuasive?
The issue has not been fully resolved in Canada, but in US where the c’ttee procedure was ok, the courts have gone
in two directions. US jurisprudence says, alternatively:
(1) Shouldn’t be overturned due to business judgment rule. (Auerbach v. Bennett)
(2) That making the litigation c’ttee binding would be usurping the court’s jurisdiction [Zapata]. If the court is
precluded by the recommendation of the c’ttee, then it is having its discretion exercised by the c’ttee and
not by itself.
Other Points re: Derivative Actions [AFTER LEAVE GRANTED]
1.
2.
3.
4.
Proceeds: if DA successful, the proceeds go to the corporation, not the SHs.
Rights claimed no greater: in DA the rights claimed can be no greater than those that the company would
otherwise be entitled to.
Lead Shareholder (s.233(4)): Court can appoint a lead shareholder to control the action.
Settlement (s.233(5)): Normally settlement of civil action is b/w two parties directly. But here, settlement
requires approval of the court. Why? American experience w/ this type of action: “strike suits”:
troublesome shareholders waiting to see a misstep by management that they can seek a derivative claim
for remedy. They don’t do this to actually sue, but rather to hold management to ransom. If settlements
must pass through the court, court can ‘weed out’ the ransoming situation.
(c) Costs (s.233(3)(b))
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Derivative actions are particularly expensive, especially for SH who don’t have the company resources of
management. This can be a big disadvantage to the SH. How do we fix this problem?
o CBCA s.242(4) and BCBCA s.233(4) - One way is to allow recovery of costs by P from all those who
stand to benefit from the favourable judgment (i.e. where the award is derivative in character, and the
award is made in favour of the Corp, get the Corp to pay costs of litigation).
o This solves free-rider problem but unfortunately creates another – where the Corp automatically pays
all the costs of the action, SHs may be encouraged to commence nuisance or strike suits lacking any
merit (excessive litigation).
o One solution may be to require the Corp to pay, but NOT if it can be shown that P was not acting in
good faith and only if the action has a reasonable possibility of success.
There can be an interim award of costs under s.233(3)(b).
Downside is that court may order recovery of costs against SHs if they lost under 4(b) and(c).
Court can order security given by Corp against the award to the defendant (s.236).
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9. Duties of Directors and Officers
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Two types of duties: (1) Fiduciary; (2) CL duty of care (negligence). ONE duty or separate?
Powers are vested collectively (s.136), but duties are owed INDIVIDUALLY. Duties are owed to the company. If
company unwilling to sue – use derivative action to enforce this duty.
Who is a Director/Officer? Don’t know. Members of BOD for sure, but categories of fiduciaries are never
closed: Courts decide, based on the responsibilities and skills of a person.
Inherent Difficulty – Fiduciary duty comes from law of trusts, in which trustee is not engaged in risky
endeavours. However, directors of supposed to take risks to make profits. Paradox is that FD is based on
analogy of trustee: inherently contradictory of imposing trustee role on someone who is required to take risks.
Court says it’s impossible to impose strict fiduciary standards to directors of businesses.
Seeking Relief for a Breach – if a SH believes that a breach of either has occurred., 2 practical ways of seeking
relief:
o (a) Oppression remedy – describe pattern of conduct and ask court to grant relief. SHs have standing
as of right to seek this remedy.
o (b) Pursue claim of breach of duty of care [damages] or breach of FD [equitable remedies].
(a) Care and Skill (Negligence)
Two branches:
1. Breach of fiduciary duty
2. Breach of duty of care
Two main roots:
1. Statutory regimes
2. CL duty of care (DOC)
(i) Common Law
Re City Equitable Fire Insurance Co. Ltd.
(1925)
Setting up “gross negligence” standard - Low and flexible standard for directors
Facts: Insurance company is profitable, but missing 1.2M due to fraud committed by managing director. Order
made for winding-up. Liquidator brought action against the directors and auditors [under specific section] alleging
negligence and breach of duty.
Held: Directors & auditors were off the hook. However, provision under which they were relieved of liability would
now be invalidated by current statute. Role of directors varies with the nature of the company on whose board
they serve.
Contains elements of the CL claim (p.303):
1. Director’s SOC is not a professional standard, but rather that of a reasonable person with the same
knowledge and experience = subjective standard.
a. So higher standard on inside directors than outside directors.
b. Look at (a) the particular skills of the person, (b) the way in which the director carries out his
responsibilities/role of director, and (c) the way in which a particular board functions (more
formal, higher expectations placed on individual).
2. Directors are only expected to perform supervisory functions; not expected to give continuous attention
in day-to-day affairs [s.136].
a. Periodic supervision enough; doesn’t have to attend all meetings.
3. Directors are entitled to rely on management to run the company; can take opinion at face value and act
accordingly (in absence of grounds for suspicion).
a. Why? Business judgment rule – courts can’t be 2nd-guessing business decisions.
b. In respect of all duties which may properly be left to some other official, a director is, in the
absence of grounds for suspicion, justified in trusting that other official.
c. Due diligence requires pro-activity only when the director is alerted to an irregularity.
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Harder to prove breach of DOC because of evidentiary problems (SH has no access to internal documents);
easier to prove breach of FD.
Breach of FD better than getting oppression remedy, especially if it’s a SH challenging a WH Corp.
Must sue derivatively since the directors won’t sue themselves for negligence.
A Changing Standard?
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But there are signs that things could be changing: What if the director is a genius? Standard of care
required of auditors is established by their profession: directors do not – there is no profession of company
directors.
“Ludicrous” for the courts not to distinguish b/w closely & widely held co’s – they can (and may have)
ratchet up the standard in City Equitable depending on how the company conducts itself…i.e. if the
company has engaged in spot checks previously. If they define the standard of care for themselves maybe
they should be held to that higher standard.
Do different sized companies implicate fundamentally different roles in the nature of director supervision
or only in the intensity of supervision?
Gower suggests that a valuable reform would be to make ALL directors jointly and severally liable for board
decisions, leaving it to courts to provide individual relief where justified, since director liability for breach
of DOC is predicated on personal negligence.
(ii) Statutory Reform
BCA s.142: Duties of Directors and Officers – declaratory of the CL

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Section 142(1): A director/officer must
o (a) Act honestly and in good faith with a view to the best interests of the company (FD)
o (b) Exercise care, diligence + skill that a reasonably prudent individual would exercise in
comparable circumstances (DOC)
Section 142(2): This section is in addition to rule of law and equity and don’t subtract from CL.
Section 142(3): Director cannot contract out of FD or CL DOC. (This may modify CL somewhat.)
The duties in s.142 are owed by individual directors & officers to the company, not owed collectively.
BCA s.154: Director’s liability [personal]
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Personal liability of directors (not officers) who are involved in commission of prohibited acts
Only refers to liability on part of directors for infractions of the statute, not s.142 which would be violation of
CL or equitable.
This section applies to:
o (s.33): commission of restricted act – there is no remedy provision in ss.30-33, but s.228 allows a SH
to go to court to prevent commission of a restricted act.
o (s.67): sale of shares at a discount: CL rule - when board decide the price at which shares will be
issued, they must collect the decided-on amount from purchasers. Can’t set discount pricing – based
on protecting shareholders and creditors.
o (s.70): paying dividends when co is insolvent. Insolvency defined. Directors have complete control
of dividends; shouldn’t do that when they can’t pay creditors.
o (s.78/9): redeeming shares. Redeemable shares are combo of share and debt. After some time, get
money back, and Co is obliged to repurchase shares at a certain date.
o (s.163): Board indemnifies itself. Redemption of shares – redeemable shares are required to be
repurchased by the company at some future time.
(5): If D present at a meeting, deemed to have consented to any resolution passed at that meeting, unless that
D’s dissent is recorded at the meeting, or given promptly after meeting.
o Draws distinction between directors who do/don’t attend meetings (stricter than CL).
(7/8): If D not at meeting, then deemed to have consented to resolution passed unless you file notice of dissent
within 7 days of becoming aware of the resolution.
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BCA s.157: Limitations on Liability/Reliance [Defences]

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Defences apply to ss. 154 and 142 (negligence or breach of FD)
(1): A director not for breach of duty if the director RELIED on, in good faith:
o (a) Financial statement or statement of fact represented by another D/O.
o (b) Written report of an expert (lawyer, etc.) whose profession lends credibility
o (c) A statement of fact represented to the D by an O to be correct
o (d) Any record, whether forged/fraudulent that the court considers to provide a reasonable reliance by
the director.
o BP thinks this must be read as subject to the director being put on notice or inquiry.
(2): Did not know /could reasonable have known it was contrary to the Act
These don’t really change CL, but are more invitations for arguments to be made by defence counsel.
Applies to directors. Interpreting the new provision is unclear – Paterson would apply to both D/O.
BCA s.228: Compliance or restraining orders

Allows a shareholder to go to court and prevent the commission of a restricted act. Court can order
compensation be paid.
People’s Dept Stores
2003 Que.CA
Applies gross negligence standard – evidence that nothing changed from Re City Equitable Insurance
Facts: Arrangement by which 2 co’s purchased inventory jointly. Creditors of Peoples argued that they were
compromised by having to compete with creditors of other party to arrangement. Typical case where company
suing b/c now in bankruptcy. Trustee in bankruptcy was prosecuting the cause of action against its former directors
who were instrumental in the original business arrangement. Involved allegations of both negligence and breach of
fiduciary duty.
Analysis:
 P. 321: reiterates & applies gross negligence standard (City Equitable) but notes the rather limited liability for
directors – only personally responsible for company’s action if they commit a gross fault.
 No evidence of negligence – it was reasonable for Ds to rely on reports from experts (VP, auditors) [s.157 ]
 Only provision addressing expertise of directors is s.124, which only sets minimum standards (over 18, not
undischarged bankrupt)
 Problem with claiming negligence is that you’re alleging negligent OMISSION, not positive act, which is hard to
prove, b/c no common standard for D’s DOC.
Ratio:
 FD refers to the personal conduct of the directors, not the quality of their management. Law imposes duty
which is related more to the motivation of directors than to the consequences of their actions. “Integrity and
good faith are gauged according to the reasons that motivate, not the concrete results of, the directors’
actions.”
 DOC is determined by reference to the quality of the director’s decisions.
 Section 142(1)(b) imposes an “objective subjective” standard; NOT a professional standard.
Brandt investment v. Keep Rite
1991 OntCA
Modern CDN example of business judgment rule being applied to complex corporate situation.
Facts: Majority SH decided to merge w/ other companies. Committee of Board of KR charged with evaluating
fairness. Some recommendations approved. Minority SHs sued and sought oppression remedy.
Issues: Should burden of proof shift to Ds to show that what they did was not unfair?
Analysis
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Court says no basis for allegation of special treatment so no shift of burden of proof.
Court said that committee procedure had exonerated D’s from liability. Unlike Bellman, found committee to be
independent (no inside D’s), no proof that committee had omitted to consider certain evidence, had solicited
outside expert advice.
Ps then argued that this kind of judicial deference is an ousting of the court’s jurisdiction. Court finesses the
argument: “no finding by us of breach of duty in any case. On the facts, what happened does not establish a
breach of duty; even if the onus of proof had been reversed.”
s.157 suggests, if anything, that as long as there is no absence of good faith and form of reliance is one of
four specified, then it is not an ousting of court’s jurisdiction by allowing Ds to exonerate themselves by
relying on expert outside advice.
(iii) Business judgment rule in Canada
In USA, this is the foundation for gross negligence standard that applies to D/O: courts won’t deconstruct actions of
D/O’s; treat as being prima facie proper (in relation to negligence liability) b/c: no profession of directors.
Concept is explained in two ways:
1. Courts shouldn’t second guess business decision-making: certain matters depend on discretionary evaluation
of business factors that the court should never interfere with (w/ benefit of hindsight). Commercial decisionmaking trumps judicial reexamination. Note that this is similar treatment to that of experts (i.e. standard of
care req’d of surgeons, etc.). Main justification is that the court lacks competence to second-guess.
2. Presumption of reasonableness in absence of evidence to the contrary: In USA, more specific rule of evidence:
unless there’s evidence of fraud, illegality or conflict of interest, there is a presumption that the directors have
acted reasonably (not been negligent). No liability will arise unless π can adduce add’l facts which show basis
for finding negligence or any other breach of duty. Practically, courts in CDN do much the same thing: if no
evidence of negligence/breach, evidentiary burden remains w/ π.
(b) Fiduciary Duties
BCA s.142(1)(a), (2), (3)
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Powers vested in Board collectively under s.136, but owed individually to Co under s.142.
FD applies to both D/O.
(1)(a): outlines FD – honestly & in good faith with a view to the best interests of Co.
(2): These provisions in addition to any rules of law or equity.
(3): Can’t contract out of this duty. Prohibits getting out of duty in advance.
(i) Introduction
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
FDs are legal norms imposed on D/O in relation to their conduct with the Corp and SH.
Fiduciary in terms of (1) corporate property, and (2) of their own powers (s.136). If SH wants to allege breach
of FD, it can be in relation to company’s property, or in relation to exercise of powers (i.e. issuing shares to
get friends on board).
FD requires: utmost good faith, act in best interests of company, NO conflict of interest, NO secret profit from
their office.
Certain breaches of FD can be waived; others cannot.
FD are equitable, not CL. Equitable remedies historically aimed at supplementing rigid CL principles [Foss v
Harbottle said that directors owe their duty to Corp, not SH].
FD of directors is different than that of trustees because directors are obligated to take risks, whereas trustees
were not. So courts have great difficulty: even though directors are entitled to act in riskier ways, when do the
activities amount to a breach of FD and when do they not?
o E.g. Making business decisions that benefit company AND director. Case law says that risk that it wasn’t the
best deal (and consequently you made decision to benefit yourself) makes the K voidable at company’s
discretion (but can still ratify).
(ii) Self-dealing / Contracting with the Corporation
Liability of D’s when D has interest in K that co. is party to
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Self-dealing transactions involve K between D/O (either directly or through their interest in another entity),
and the Corp itself.
Dangers: Whenever an insider Ks with the Corp, the risk of diversion of corporate wealth is clear.
o Insiders K-ing with Corp operate under strong incentive to cause the Corp to enter into
transactions on terms that favour the insider.
o Merely requiring D to hold a stake in Corp won’t eradicate it, b/c loss sustained by D in investment
in Corp will generally be offset by gains realized in D’s personal capacity.
E.g. Sale of an asset to Corp by D/O at a overvalued price OR purchase of asset from Corp by D/O at
undervalued price.
The cost occasioned by self-dealing Ks constitute a form of agency cost.
(a) Common Law
Aberdeen Railway Co. v. Blaikie Bros.
1843-60 UKHL
Facts: Company entered K to purchase chairs from a partnership. D was instrumental in getting Corp to enter K w/
the partnership in which he was a partner.
Issue: D owes fiduciary duties to corporation: is he in breach by causing Corp to enter K?
Analysis/Ratio:
 Where D is an agent who owes FD to the Corp, these duties preclude him from entering into K in which he
might have a personal interest conflicting with the interest of the Corp (who he’s bound to protect).

If a conflict with his FD arises, company in this case has automatic right to rescind (voidable) and damages
once conflict of interest is shown to exist.
 This theory is based on the potential risk that director’s being on both sides of deal gives to the Corp getting
less than the best deal. P was the corporation (unique in this case). Most times the D would be able to convince
others in BOD not to sue, in which case a minority SH would have to seek leave to sue derivatively.
 The inability to K depends not on the subject-matter of the K, but on fiduciary character of K-ing party.
Notes:
 The trustee standard of FD imposed in this case is perhaps excessively high in view of the realities of business
life. But perhaps tempered in practice by the preclusive effect given to ratifiability by the rule in Foss v
Harbottle (standing).
 Main difference b/t CL DOC and equitable breach of FD is that in the former, both breach + damages must b
shown, whereas in the latter all that must be shown is the breach. To succeed on breach of FD mere
possibility that damage could’ve arisen is sufficient.
 Replaced by statute, which is considered exhaustive. CL rules apply to O, but stat rules apply to D and senior
officers. (But “senior officer” defined quite broadly.)
 K in self-dealing case can be ratified by a SH simple majority, but SH must have FULL disclosure. Director
involved in the conflict of interest can vote as a SH (Northwest Transportation) in favour of what is a prima facie
breach of their duty. Shocking, b/c tortfeasor can somehow exonerate themselves.
Gray v. New Augarita Porcupine Mines Ltd.
1952 UKPC
Facts: Director appropriates certain opportunities to seek personal benefit; tries to have board ratify act.
Ratio:
 “No ratification will be effective if the people doing the ratifying are not fully informed about what has
happened that they are being asked to ratify.”
 Where a D is involved in self-dealing, he must not vote in meeting of BOD regarding adopting the K. But see
NW Transport: BM/SH can vote shares in general meeting.
 Where D is involved in self-dealing, he must disclose the nature of interest such that his colleagues become
“fully informed of the real state of things”.
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Surprisingly CL courts said the company founders could put provision in their articles saying the fact that
one of their D had that kind of interest was not to give rise to a right of rescission. The statutory provisions
in BCBCA reflect this. [Can’t contract out of duty!]
The amount of detail required must depend on each case upon the nature of K or arrangement proposed
and the context in which it arises – look to the company articles for guidance, but must always meet the
statutory requirements.
Court says Board can’t ratify breaches of FD.
Northwest Transportation v. Beatty (p.528)
**Court allowed ratification by the board.
Key is what it says about Ratification:
 Assuming that an interest in a K (giving rise to voidability) is always ratifiable;
 However in this case it was argued the director against whom the breach was alleged shouldn’t be allowed to
use his shares in the majority ratification vote.
 PC says no, the alleged D can vote, do as he likes. Says that shareholding directors are 2 different people –
shareholder & director. Shares are your private property.
 At this point, there’s no suggestion that directors meeting could ratify the actions (until the new provisions in
the Act).
 So interest in K by director gives rise to voidable K, however it can be ratified by a simple majority vote of the
shareholders.
NB: Common law was vague about what kind of contract
Any kind of legal/beneficial interest on the other side of the deal would give rise to the voidability rule.
(B) Legislative Response
BCA, ss.147 to 153
 BP thinks these are a complete code (other than interest in K + insider trading, there’s nothing more specific
about FD in the Act).
 Applies only to directors/senior officers NOT officers (so CL applies to them).
 Section 153(1): Positive obligation on D/senior officers to make disclosure of the nature and extent of the
conflict.
o CL did not require D to positively disclose that he had an interest in a K, but if he didn’t, the Corp might
be able to avoid the deal.
o Must disclose to BOD (not SH)
o Doesn’t provide for sanctions for non-disclosure; problems with enforcement
o BP thinks these should be viewed as exhaustive of duty to disclose – standalone
 Section 148(4): General statement in writing provided to Corp is sufficient disclosure


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DISCLOSURE/EXCLUSIONS
o Section 147(1): Defines what is disclosable: a K that is material (includes proposed Ks) where a
D/senior officer has a material interest in the K.
 Changes from CL – doesn’t have to be a strict K (transaction ok) & materiality test.
 What about negotiations? Is that a “proposed” transaction?
o Section 147(2): List of things NOT disclosable
 (a) – largely ignored
 (b) – (e): situations where companies are affiliated, so disclosure not needed
o Section 147(4): More non-disclosable situations
 Matters concerning remuneration, indemnity/insurance, loans/guarantees
ACCOUNTABILITY:
o Section 148(1): If disclosable conflict of interest, you are accountable for profits made.
o Section 148(2): When there’s no liability.
APPROVAL: Section 149: To avoid accountability, have to follow one of the following forms of approval.
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o
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(1) Director resolution or special resolution (SH) – go to board, disclose, and have vote.
 (2) Director with disclosable interest cannot vote.
 (3) If all directors have an interest, they can vote in director’s resolution. Court will probably
require a special resolution (SH) in this case, but silly if the directors make up most of the SH
anyways.
 (1) and (3) suggest that Ds can affirm their own profits, look at s.148(2).
o Section 150: Via court order
 (1)(a): Can apply to court to order they allowed to keep their profit if fair and reasonable.
 (2): Injunctive relief – if applicant becomes aware of this profit-taking and the K is in the
negotiation stages, then it can be enjoined.
THIRD PARTY PROTECTION: Section 151: The K is valid despite the conflict of interest.
o Allow for enjoinment to prevent commission of restricted act, but upholds validity of K nevertheless,
and even if D/senior officer didn’t make disclosure.
o Remedies from s.150 still available.
REMEDIES:
o Section 150(1): Court may order that D/SO not liable, or any order that the court considers
appropriate.
o Section 150(2): Court may order (a) an injunction; (b) account for profits; (c) what’s appro.
o Personal remedy: gives standing to people: Corp, D, SO, SH, beneficial SH.
o Complete code, so SH probably can’t argue that interest in K is actionable derivatively.
Differences b/w CL and statutory provisions:
(1) POSITIVE OBLIGATION TO DISCLOSE – s.153. At CL, you may be liable if you didn’t disclose, or Corp can avoid
the deal, but you weren’t required to disclose pre-emptively.
(2) A new type of ratification system set up by s.149: approval by fellow board members (in addition to SH
ratification) – can be problematic!
(3) 142(3) prohibits provisions in companies constitution / articles that would exonerate liability for the conflict of
interest, whereas UK courts have tolerated excusatory provisions in articles.
(4) New provisions that essentially make the derivative action sections irrelevant. SH are given standing as a right
to seek relief under s.150(1), so makes ss. 232 and 233 moot.
(5) 148(5): SH’s must, without charge, have the right to inspect minutes of D meetings where consents were voted
on.
(6) s.150: additional persons besides SH can seek remedy
(7) D/SH have standing to ask courts to set aside such agreements. Courts have wider power to order relief.
Paterson thinks s.151 mainly used by SH to set aside K or by Director who worries s/he won’t get SH / BM
approval.
Summary Questions:
1. Is there a disclosable interest?
2. Are they within the exemptions?
3. How can D/SO keep their interest?
(iii) Corporate Opportunities
Corporate opportunity: D/Os come across information in capacity as board members that instead of exploiting on
behalf of the company they exploit for their own benefit.
2 things to remember when reading these cases:
1. Courts are nervous about articulating too-rigid rules which would allow D/O’s to devise ways to work
around them (analogous to tax law).
2. Tension b/t preventative aspects of equitable doctrine versus the need for commercial reality where
people are making business decisions that the court shouldn’t/can’t reopen. @ CL in Canada, there are no
preordained categories of fiduciaries – doesn’t matter what you call yourself (Canaero).
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Cook & Deeks
1916 Ont.PC
BOD hatched scheme to usurp Co’s opportunities to benefit themselves personally; attempted to ratify their
actions. D’s FIRST interest should be to protect the Co; any attempt to exclude the Co from a K for personal benefit
amounts to a breach of trust, and Ds must account to Co for all profits received from K.
P.390: re: ratification - “distinguishes where ratification is effective and not:
1. Where there is a conflict of interest (self-dealing), where there is potential harm but no real harm, ratification
(by simple majority of SHs at SH meeting) can give rise to remedy (voidable K) because there is not necessarily any
real harm to the company. No appropriation of anything belonging to Co.
2. Where co has equitable title in property that legally belongs to fiduciary by virtue of that person’s being a
fiduciary, ratification is ineffective; this would amount to giving away company property and getting nothing in
return. Any attempt to ratify would be ineffective b/c it would be ratification of something that could never be a
benefit to the company. [Where there is an outright taking, you can’t argue that that could ever benefit the
company].
 FD doesn’t depend on state of mind (i.e. irrelevant that director thought he was actually acting in the best
interests of the company
Regal (Hastings) v. Gulliver
1942 UKHL
More recent application of Cook & Deeks principles
Facts: Co was movie operator (after WWII). Found cinema they thought would be profitable. Set up subsidiary that
held title to premises. Co didn’t have enough money itself to buy the property, so issued shares in subsidiary to ppl
including the directors (who purchased shares at par). Property rose in value, shares then sold to new company.
New BOD then (successfully) sued the former BOD for profit they made on sale of shares; request accounting of
profits; claimed breach of FD. Got discount on purchase price.
Note:
 There was no tort for breach of confidence at the time of this case
 Everyone acted perfectly (no lack of good faith).
 Only difference between this case and Cook is the fact the directors here were acting in good faith (but
director’s intent is not supposed to be relevant).
Court says:
 If a director uses his position to make a personal profit there is a conflict of interest and he cannot keep his
profit. But judgment has a few shocking elements:
o Company wouldn’t have been able to buy premises if D’s hadn’t contributed their own money.
o No bad faith - Ds not hiding fact that they were directors and were buying in their personal capacity.
o No actual harm to the company. But note that strict reading of fid.duty does not require harm.
o Some other people (SH) were not deemed to be in fiduciary duty, so weren’t accountable.
o HL said if, before you had sold you had convened meeting of SHs to ratify the D’s purchase of the shares,
then there would have been no actionable breach of FD. NB: which of the two Cook & Deeks situations
does this belong to? Seems that where court says ratifiable, then it is #1, but the facts of the company
seem to indicate that the facts are very parallel and in fact involved the appropriation of company
property (opportunity to buy shares).
 CONFLICT RULE: ‘I am of the opinion of the directors that the directors standing in a fiduciary relationship to
Regal 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 D’s of Regal and in the course of the execution of that office, are
accountable for the profits which they have made out of them.”
o This has been interpreted in later cases as basically meaning that if at the time you made the profit you
were no longer in a situation where your personal interest and your duty to the company to obtain
that profit were no longer in conflict, then your personal profit will not have to be given to the
company. [Remoteness?]
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[Obiter]: And, if directors decide bona fide not to exploit an opportunity and then directors take advantage
for their personal gain, they would not then be liable to the company for their profits. D can take it b/c then
too remote. This is NOT ratification – issue of whether there is a breach of FD in the first place.
**Contrast PROFIT RULE: P must only show that fiduciary made money out of opportunity that was result of FD
and company activities.
Peso Silver Mines Ltd. v. Cropper
1966 BCCA aff’d 1966 SCC
Facts: Cropper (et al) were Peso’s directors. Issued shares to public. Peso was offered various other mining claims
and its directors decline to buy the claims, but decide to exploit them privately. Change in control of company, who
then brings an action against Cropper et al. Affirmed by SCC.
Analysis:
 Distinguished from Regal Hastings b/c in this case the Co simply abandoned the opportunity; in RH the Co was
not willing to exploit the opportunity except with the assistance of the involvement of its directors.
 Applied conflict rule – although there was a potential conflict when the opportunity to buy the claims was first
being considered, the conflict disappears once a bona fide decision that it is in the best interests of the
company NOT to purchase is made.
 If Co ceases to have an interest, the law can’t prohibit D from taking an opportunity merely b/c he learned of it
in his capacity as a director. But this rule limited to situations where fiduciary is still with the Co.
 Links profit-taking to interests of company. Paterson thinks this puts too high a premium on the impartiality of
directors.
 This decision was criticized b/c it allows the director to contrive to have an opportunity rejected by the board,
so that he may take it.
 Note: this is NOT ratification, which is only involved where there is a breach of FD and the SH affirms it.
[After Canaero, would Peso have been decided the same way? * BP thinks at minimum they might shift the onus of
proof.]
CURRENT COMMON LAW TEST
Paterson thinks that this changes Canadian law toward American approach. It is the most recent decision in Canada
on corporate opportunity.
Canaero v. O’Malley
1973 SCC
Facts: D’s were senior officers of company sent to Guyana to negotiate topographical mapping Ks. Decided this was
profitable, resigned from company and formed own venture to compete with Canaero. Canaero said that
resignation was part & parcel of the breach of fiduciary duty. SCC holds that D’s are liable for the profit.

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Neither Profit/Conflict rule are determinative as to whether breach of FD has occurred; depends on facts of
case. This is clearly a concern that if particular rules exist, as business changes new situations will arise that
make it difficult for the rules to apply. Laskin prefers an open approach.
Non-exhaustive factors in Situation-based test:
o Position of office held – if more senior, more duties
o Nature of corporate opportunity (how specific, how ready/ripe for exploitation, rejected )
o Director’s relationship to opportunity – scope of knowledge and how it was obtained (PB thinks
public/private divide may still be relevant here)
o If alleged breach occurs after termination of D’s relationship with Co – how long after, and how it
was terminated (retirement, resignation or discharge)
After they resigned, the director employees continued to be under a FD in respect to the project. D’s can be
liable for breach of fiduciary duty even where the information involved is public (not privileged or private).
Oddly, Laskin doesn’t mention: the conflict rule/disclosure/approval by the board.
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Approach in American jurisdictions
Three main approaches, somewhat consistent with Laskin (broader approach)
1. Fairness test (p. 425): Look at interests of Corp on one hand in receiving the benefits and compare with the
fairness of an individual director personally profiting. Consistent w/ basic idea that directors shouldn’t profit in
situations where actual harm occurs.
2. Interest or expectancy test: Like a proximity test and is most common approach. Was the corporation seeking
& in need of the opportunity? If not, no liability.
3. Line of business test: Associates business opportunities with what the Corp normally does. Common sense
approach – relevance of opportunity to the company of which you’re an officer.
**US courts also keen on shifting the onus of proof onto Ds that they didn’t misuse the opportunity, once SH
proves director is a fiduciary and has profited from taking the opportunity.
Open questions for Canada:
 What if you do something that is a breach of fiduciary duty but don’t make any money at it? Court will
grant injunctive relief (Nova Scotia case)
 What if person really not acting as a director when gaining the profit? P thinks good chance of no liability
(based on Laskin’s factors).
SUMMARY & Suggestions from BP about Canadian approach:
 Don’t get tied up with categories  go back to language of s.142
 SCC has rejected having ONE single test – have to consider circumstances of each case.
 Start with the conflict test: if at the time you made the profit you were no longer in a situation where your
personal interest + your duty to the company to obtain that profit were in conflict then your personal
profit won’t have to be given to the Corp.
 Because of Canaero, onus probably shifts to DIRECTORS to show that they did NOT profit.
(iv) Competition


Can be conflicts when directors sit on boards of vertically or horizontally related companies that compete with
one another. Law is strict on directors who breach FD by taking corporate opportunity, but more lenient on
directors who sit on boards of competing Corps.
In a way, competition is the lowest sense of FD. Can’t establish breach of FD merely b/c D holds multiple
directorships, which is possible in Canada. Exception: Under Bank Act, can’t be D of multiple financial
institutions simultaneously.
BCA, s.153: Disclosure of conflict of office or property
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A director that holds any office/property that conflicts (or could conflict) directly/indirectly with his duty or
interest as a director of the company MUST disclose promptly after he gains his office.
So competition, either directly by engaging in a competing enterprise, or indirectly by being interested in such
an enterprise represents another potential cause of conflict of interest and breach of FD. So multiple
directorships is a potential conflict that must be disclosed under s.153.
Only applicable to directors and senior officers.
Just because you disclose under s.153 doesn’t mean you get to keep profits.
NB: No CL duty of disclosure.
Relief? Possibly the oppression remedy (s.228). Tough to make out a breach of FD (and hence derivative
action)
Fettering of Discretion: Fiduciaries commit an ipso facto breach of FD if agree in advance that they’ll vote a certain
way. Possible in situations where you hold more than one directorship. How do you know it’ll always be in the best
interest of the Corp?
Crown Corporations: Procedural problems: Only have 1 SH, so how do we sue them? Can’t sue derivatively for
breach of FD, because only the Crown is a SH. Could argue that as the public, you’re a “proper person,” but unsure if
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that’ll work. Usually if a breach of FD is alleged, the Attorney-General can sue as the Crown’s rep in the province,
and as rep to the public. But obviously AG will only bring action for political rather than commercial reasons. Also,
what is the fiduciary duty of the Crown? How do we define it?
(v) Compensation

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Directors’ entitlement to compensation is NOT via K of employment (b/c they’re elected fiduciaries). In light of
the business judgment rule, they are essentially able to pay themselves anything. Their fees are more like a
property right. Conflict between BJR and FD.
However, the equitable concept of waste might allow a court to rule than amount of compensation is too
much, as being an unjustifiable expenditure of corporate resources (Rogers v. Hill).
o Basis of judgment: Fiduciaries must spend company money in a way that is rationally connected to the
services being received. (Arises out of s.136.)
o CBCA s.125 says Board (of a Fed Corp) has the authority to fix remuneration for themselves.
Has normally been viewed as a market decision: if they’re being paid too much they’ll be replaced.
Some things D can’t do regarding compensation:
o UK case where D agreed to receive amount of money in consideration for voluntary retirement from the
board. Court said this was like selling something that didn’t belong to him – sale of office – and was
breach of fiduciary duty.
Common for boards to insulate themselves from liability (re: their compensation) by setting up a compensation
committee that reviews the compensation directors are to receive. Committee provides some rationalization
for the payment that’s voted.
(vi) Hostile Takeover Bids and Defensive Management Tactics
(A) Introduction


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HTBs generally occur as a result of gains that can be made by replacing opportunistic management.
Directors will often adopt drastic measures to prevent the bid from being successful in their personal interest
(don’t want to lose their jobs) even if acquisition would be in best interest of Corp (breaching FD).
Difficult, because SHs determine whether to take the bid or not, and don’t know who to trust.
In Canada, three kinds of takeover bids:
o 1. Circular bid - Takes place outside stock exchange by offeror making direct contact w/ SHs.
o 2. Stock Exchange bid: takes place through the facilities of a stock exchange (only).
o 3. Issuer bid: company(majority SH) is making takeover bid for itself (going private/non-reporting); get
rid of the minority SHs; directors must pass a resolution to do so.
HTBs regulated under our Securities Act, b/c they involve <20% bids. Takeover Corp = “offeror” and target Corp
= “offeree.”
o This regulation in Canada reflects the Proper purpose doctrine:
o (1) Disclosure of information by offeror (>20% bid = de facto control) to offeree (SH):
 Takeover bid circular – identify who they are, what financial resources they have, what existing
shares they already own. Basically any info to assist the target SH evaluate whether they want
to accept the offer or not.
 Director’s circular – if target Corp/BOD want to make a recommendation about the bid to give
the target SH a more balanced perspective on the bid being made.
 *Documents designed to provide some reliable information to this involved in the bid.
o (2) Substantive measures that seek to ensure equality of treatment of bids
 Takeover bids must be accepted on a pro rata basis – if more than the offeror’s desired of SHs
want to sell shares, the offeror must buy proportionately from each of those SHs.
 If offeror increases the bid price to get more SHs to sell, he must retroactively apply the
increased price to SHs who have already sold /top up. (I.e. If you buy some shares for $10, $12,
then later you want to pick up more at $15, must pay all sellers $15.)
Many WH Corps in Canada are owned by few SHs. This is not so in the US. So in US takeover bids tend to work
better; in Canada there tends to be more sympathy for existing management.
Defensive Tactics:
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Note: Fiduciary duty – it may be that management truly believes that them staying in control would be
in the best interests of the company.
Defensive tactics are subject to regulation by Securities regulators rather than the courts (p.517).
US courts have said that where there is a takeover bid, onus shifts to the offeree’s BMs to prove that any
tactics they enact to avoid being taken over are justifiable and in the best interests of the offeree
company.
(a) Poison pill – pre-emptive constitutional tactic put in place by BMs that will defeat takeover bid in
respect of those shares = Whenever one person acquires 25%, the votes of the shares that are not
attached to that person will double.
(b) Issue additional shares – to dilute and defeat the takeover bid. Gives rise to proper purpose
doctrine – If it can be proven that issuance of shares is being done to defeat a takeover bid (instead of
the proper purpose of getting money), then it’s not for a proper purpose.
(B) Common Law
Bonisteel v. Collis Leather Co
Facts: Ds of CH Corp faced takeover bid. Response was to make uneven issuance of shares to defeat the bid. Court
agreed that Ds breached FD when they used their power to issue shares to defeat rather than to raise money.
D’s argued that their actions were in the best interests of the company. Court held that issuing shares to defeat a
takeover bid can never be in the best interest of the company = breach of FD.
This case raises issues of:
 How do you know what the proper purpose for a power is?
 How do you really know what the Ds purpose was?
 Are the Ds bona fide intention ever relevant?
 Conflict b/w court & business judgment rule
Hog v. Cramphorn Ltd [1967] Eng (mentioned in Teck v. Millar)
*Confirmation (application) of doctrine of proper purpose
Facts: Directors of Cramphorn established a trust for the benefit of the Co’s employees and allotted shares to the
trust, nominating themselves as trustees to enable them to purchase the shares.
 Court found that directors’ purpose (in good faith) was to ensure that Baxter, who was seeking to acquire
control of the company, could not achieve a majority.
 Directors have no right to exercise their power to issue shares, in order to defeat an attempt to secure
control of the company, even if they consider that in doing so they are acting in the company’s best interests
 Case was criticized on social policy grounds that it gave too little protection to employees of target Corps;
however, the employees could never get leave to sue derivatively.
***Teck Corp Ltd. v. Millar
[1973] BCSC
**Leading case on Proper Purpose doctrine
Facts: ∆ Millar was director of Afton Mines and also President. Afton needed capital and its drilling results were
starting to improve. Placer, through a corp intermediary Canex, signed a financing deal which would give Afton
money to enable its drilling. Part of that K was that Placer (thru Canex) would become the controlling SH of Afton.
Meanwhile, Teck was buying Afton shares in the market and offered a higher share price than Canex. Teck bought a
controlling interest in the company. To prevent Teck gaining real control, Millar made a revised deal w/ Placer that
would increase their share holding so they would end up owning more shares than Teck - so incumbent board used
power to issue shares to outsider to defeat Teck’s attempt for control. Teck brings action for breach of FD based
on share issue.
Issue: Was there a breach of FD; did D act w/ proper purpose? Held: NO breach (acted w/ proper purpose)
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Reasoning:
 Disagrees with Cramphorn that it can never be in the company’s best interests to defeat a takeover bid.
 Basic rule (done whenever you want to change the law!): As long as the court thinks it’s in the company’s best
interests that the bid be defeated, then the ’s will not have committed a breach of FD.
 Looks to Primary Purpose test (Mills v. Mills JCPC): What is the primary purpose that motivated Millar et. al. in
doing a deal with Placer and defeating the bid of Teck? = Not to defeat Teck, but to get a good financing deal
for Afton.
 Qualifies the approach by saying that D’s must (i) act in good faith (throwaway line) and (ii) have reasonable
grounds upon which to base their belief that X was in the best interests of the company. Otherwise, lack of
reasonable grounds will justify a finding that Ds were actuated by improper purpose.
o Test: Directors entitled to consider the reputation, experience and policies of anyone seeking to take
over control. If they decide on reasonable grounds a takeover will cause substantial damage to the
company’s interest, they are entitled to use their powers to protect the company.
o To prove improper purpose, it must be shown that the directors acted for collateral purpose.
 Whole case turns on Millar’s motivation/purpose.
o Objective was to obtain the best agreement they could (w/ Placer) while still in control
o Not to defeat Teck’s attempt to gain control, but to foreclose Teck’s opp of obtaining for itself the
ultimate deal  Not an improper purpose
o Was acting in company’s best interests and had reasonable grounds for belief
 Directors are not bound to accede to the directions of the majority of SH
 Purpose did not become improper after Teck acquired large shareholdings
 Summary: BP thinks the best way to handle these cases is to have an onus shift. As soon as it is established that
the issuance of shares was to defeat a takeover bid, the onus shifts to the defendants to prove that it as in the
best interests of the company. This follows the US approach.
Policy:
 Unanswered issue: What if Millar had construed the primary purpose of his acts differently – could the action
still be sustained in Millar’s favour (assuming there were reasonable grounds to believe it was in the best
interests of the company?)
 Criticisms of this approach:
o Very subjective: Opening up to counsel to argue either way
o Maybe more respectful of business judgment rule but still has some impact on it.
 Paterson likes:
o Idea that court can examine the reasonableness;
o Compromise of the business judgment rule. This makes sense because it involves not so much D’s
personal interest and those of the company, but rather the D’s personal interest versus the interests of
the SHs.
On US Law


In Unicol case (p.480) court addresses relationship b/t fairness approach and the business judgment rule,
develops onus-shifting approach:
o When facts reveal an inherent conflict b/t Ds speaking on behalf of SHs and Ds speaking on behalf of
themselves, the Ds have to adduce evidence that they had reasonable grounds for that belief and that
what they did was reasonable.
o Using a committee system to evaluate the bid(s) and recommend to the board
o Proportionality test - response to threat can only be by taking proportional measures (did they
overreact?). If there is no great likelihood that a bid would succeed, the directors would not be
justified in taking an extreme tactic.
If at the stage where the takeover bid is 90% sure going to go through, any retaliatory measures taken then is
probably going to be construed as an improper purpose.
(c) Relief From Liability for Breach of Fiduciary Duty
Four main ways how directors can avoid liability:
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(i) Ratification {s.233(6)}
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[Reminder: Section 154 sets out statutory liability for committing a restricted act; Section 157 sets out a
defence for ordinary breach of FD that allows Ds to say they relied on experts, so no liability.]
2 types of actions for breach of FD: (1) Brought by Corp in its own name (s.136) OR (2) Derivative action (s.232).
=No derivative action may be dismissed simply b/c a breach of duty was ratified by the SHs, though evidence
of this may be taken into account by the court. Alternatively, ratification of a director’s breach of FD can only
be taken into account as against derivative claims.
Generally, SH in general meeting can’t sue in company’s name (only Board, s.136), unless the board is
deadlocked: Baron v. Potter. But even if SHs did have the power and they passed a resolution instructing Ds to
do something, a director who didn’t agree might be able to pursue an action via s.232 (which includes a
director as a person who can seek leave to sue derivatively).
Directors can vote their shares at a meeting for ratification – this would probably affect the court’s
discretion/decision under 233(6), though.
Northwest Transportation Company v. Beatty
(1887) JCPC
**This principle may have been changed by s.233(6)**
Facts: NWFP was 51% SH of Fraser Co. Assets of Fraser sold @ very low value. SHs of NWFP petitioned Ds to vote
against the sale, but ignored. Complainant SHs sought leave for derivative action under ss.232/3. Allegation of
negligence against Ds; breach of s.142. Ps first asked management (BOD) if it would sue on their behalf. Then tried
to convene a meeting of SHs (s.167).
Key is what it says about Ratification:
 Assumes that an interest in a K (giving rise to voidability) is always ratifiable;
 Here, it was argued the director against whom the breach was alleged shouldn’t be allowed to use his shares in
the majority ratification vote.
 PC says NO, the alleged breachor can vote. Says that shareholding directors are 2 different people –
shareholder & director. Shares are your private property.
 However, at this time (1887), there’s no suggestion that a director’s meeting could ratify the actions (until the
new provisions in the Act).
Ratio:
 So interest in K by director gives rise to voidable K, however it can be ratified by a simple majority vote of the
shareholders.
 As a shareholder, a director may vote to ratify any K involving a breach of duty, even if it was his own.
(ii) Statute
BCA, s.142(3): Waiver [virtually impossible]
Redundant – Directors can’t K out of being a fiduciary, duty of care/negligence, or the Act’s provisions.
 Waiver is an attempt to have something inserted into the bylaws to excuse them from liability.
 Possible exception: where a FD arises out of the facts of a particular relationship (i.e. insider trading prior to
the provisions of the Act/a contractual relationship). Here, there could be contracting out (i.e.
“notwithstanding D/SH relationship, you’ll never sue me), although may be held unconscionable.
 Allen v Hyatt – where D approaches SH and takes him into his confidence and asks to buy his shares
without revealing special information. Due to inequality of bargaining power, not good. In this situation,
can you K out and say: “You can’t sue me”? Paterson not sure that s.142 excludes this possibility.
BCA, ss.157, 234: Excuse – Breach of duty has occurred, but D is asking court not to hold them liable
s.157: Directors relieved from personal liability under s.154 (litmus test for liability) if:
(1) the director relied on, in good faith, documents that should’ve been reasonably relied on
(2) the director didn’t/couldn’t have reasonably known that the act he did or authorized was contrary to
the Act (reasonable mistake of fact defence).
 Two key points:
o (1) Extends to director’s acts under s.154
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o

(2) Is a defence to s.142(1) liability. Can argue (as D) not liable if you relied on the four sources
mentioned (company officer, auditors, lawyers, etc.).
BP thinks this might be like ratification. Most likely only useful to outside directors (who don’t really know
what’s going on in the day-to-day aspects).
s.234: Fairness test. Older provision than s.157 (which is a specialized version of s.234)
 Court may relieve person of liability if, having regard to all circumstances, the person has acted honestly and
reasonably and ought to be ‘fairly excused’.
 Why is this provision useful?
o Included in provincial Trust Acts to protect lay-trustees (b/c don’t know what they’re doing).
o Can give partial exoneration of some responsibilities and not others.
o Most useful for outside directors, or if it was a “technical breach.”
o Lawyers throw this defence in (why not?) - Gives courts very wide discretion and look at facts.
 Problems - UK courts say: You should’ve gotten legal advice before proceeding! Don’t be careless and then seek
to rely on this provision. Doesn’t exist in US statutes.
Ratification assumes there has been a breach – majority of the SHs can neutralize the presumed breach by a simple
majority. In respect of derivative claims this has been modified: something they will take into account but not
determinative. Waiver: basically doesn’t exist. Excuse: two statutory provisions that allow D/O’s to ask the court to
forgive them: 157 or 234
(iii) Indemnification and Insurance (s.159-165):
Liability has been determined. D/O seeking reimbursement from the principal (Corp).
Three themes:
1. Legitimize a company to agree to indemnify its D/Os, with some limitations [s.160/2]
2. D/O has legal right (independent of what Co may grant voluntarily) for certain breaches [s.161]
3. D/O wants to apply to court to make an order that they be indemnified [s.164].
s.159
s.160
s.161
s.162
s.163
s.164
s.165
Definitions; defines what a party is eligible to be indemnified against
What a Corp can do to indemnify against certain liabilities. If Corp agrees, possibly anything the D/O is liable
for. Subject to s.163.
D/O has absolute entitlement for indemnification if the result of proceedings is in D/O’s favor
Preliminary payments allowed
Expenses for which there can be NO indemnification:
(a/b) when prohibited by company’s constitution
(c/2) if eligible party didn’t act honestly and in good faith. Suggests no reimbursement for remedy granted
for breach of FD.
(c) applies to non-corporation, whereas (2) does
(d) quasi-criminal + admin proceedings where strict liability might arise
Remedy if Corp unwilling to indemnify D. D can apply to court and ask for an order for (a) liability (b)
expenses. Probably doesn’t operate where there is a pre-existing agreement. Also probably operates in
conjunction with s.161 [overrides s.163 and could still order indemnification; it’s just that the company
itself can’t indemnify where s.163 applies)
Insurance against liability: (1) Personal coverage for D/O for liabilities they can’t/won’t be indemnified for;
(2) Coverage for amts that Company lawfully pays or is ordered to pay for indemnification.
- Expensive! 30-50K premium/year with 25-50K deductibles.
- ON/Fed provision has “good faith” concept
- Subrogation? Where there is indemnification, can the insurance Co step into shoes of the D/O under
s.164 and seek recovery? BP thinks NO.
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10. Shareholders’ Rights
(a) Introduction
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
Rights that automatically attach to someone because they have SH status:
o Right to vote at SH meetings.
o Right to receive any dividends, paid out of profits. Distribution of a share of company’s profits on a pro
rata basis [depends on how many shares you own]. Preferred SH get paid before ordinary SH.
o Right to return of company capital (assets) only on winding up of the company [ordinary SH]. This right
for preferred shares occurs if/when they time out @ a certain point, then preferred SH get this right.
 Shareholding is a “chose in action” – indefinable proprietary right
 SHs not actual “owners” of Corp, best seen as ownership of “bundle of rights”
Dividends:
o Cannot be paid if Company goes insolvent
o Cannot be paid out of company capital
o Within discretion of directors
o CH Corps – directors want this money for themselves
o WH Corps – directors think that company should keep the money
Rights come from 4 sources:
1.
Company’s constitution/Charter
o Describe voting rights attached to shares, when a SH has right to return of capital, (redeemable shares
– according to predefined time period, shares repurchased from SH)
o Under BC Act – “notice of articles” and “articles”
o LP jurisdictions – “bylaws” and “memoranda”
2. Common law
o Gives rights including that D’s not exercise power in way that breaches FD
3. Governing Statute
o Includes many SH remedies (see below)
o Most important is oppression remedy (s.227)
o Appraisal remedy (ss.237>>) – gives right to an order in your favour that the company buy your shares.
Connected to ‘fundamental changes’ in corporate directions.
4. Separate Agreement (b/w SH’s and company) – Shareholders Agreement
o N/a for widely held corporations
o BP thinks they should be used more often, especially for small companies.
o ‘Pre-nuptial for corporations’ – clarifies what each party’s rights are.
(b) Voting Rights {s.173, 174}
BCA, ss. 173-174: Voting, Shareholder Meetings
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One vote/share unless the constitution states otherwise; so non-voting shares possible.
Non-voting shares used to manipulate control from going to other groups.
Share vote may be exercised by proxy (i.e. power of attorney).
Sometimes the Act enfranchises shares (shares deemed to have a vote) for a certain purpose (i.e. sale of
undertaking, s.301 – enfranchising allows SHs to veto BOD’s decision to sell off company’s assets)
 Are votes worth anything to a SH? (Usually not worth much in a CH corp)
o 3 situations when votes associated with shares are significant:
o (1) If you’re a significant investor
o (2) During a takeover bid, because someone else wants your votes/shares
o (3) If a new nominee is seeking election to the BOD
(c) Shareholders’ Meetings {ss.166-186}
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Types of Shareholder Meetings:
1. Annual General Meeting – minimum requirement, obligatory (s.182)
2. Special/Extraordinary Meeting – any SH meeting called outside AGM (s.181)
3. Court Ordered Meeting – SH asks court to order that the directors hold a general meeting (s.186)
4. Requisitioned Meeting – 5% of SHs ask that directors convene a meeting (w/o a court order) (s.167-8)
5. Shareholder Proposal Provisions (s.187-191)
1. Annual General Meeting (AGM), s.182
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

What happens in meetings:
o Election/Re-election of Directors - most important!
 Company’s articles usually set up the procedures for doing this.
o Auditors Appointed:
 Big difference b/w auditors of widely and closely held companies.
 Elected, but auditors are supposed to be in arms length with company. Can’t be agent of directors,
so SH must appoint!
 I.e. if all SHs unanimously vote to agree that the accounts of the company will not be audited, they
will not be. [s.203(2)] This is not feasible in terms of a widely held company.
o Financial Reports/Statements, and auditor’s reports received
s.182(2) there can be a unanimous shareholders resolution waiving the requirements that there actually be an
AGM. [This is likely only applicable to closely held corporations.]
s.176-85: formalities of AGMs, including quorum (s.172), election of chair (s.178), minutes (s.179)
2. Extraordinary/special general meeting, s.181
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Rules applicable to General Meetings apply to all other meetings.
No limits to how often these can be called, etc.
Essentially any meeting of SH other than the AGM.
3. Court-ordered Meeting, s.186
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Court, on application of the company/director/voting SH, may order that a meeting be held on terms
determined by the court.
May be useful as alternative to full civil suit; gives SH opportunity to address the issue directly with the D’s
Mainly used in 2 types of cases:
o (1) Usually minority SH has issue with management and is not getting it resolved and wants to use
meeting as a way to get the issue out. This usually viewed reluctantly by Court – i.e. why don’t you use
oppression remedy instead?
o (2) Where there are practical problems about how the company is running = crisis situation?
Difference b/t COM and requisitioned meeting? Not sure what judges think yet.
o Need >5% of SH to force requisitioned meeting on Board. Difference with court-ordered meeting is
unclear.
o RM – don’t need court order? S.187. And if you have less than 5%, then court-ordered meeting is
better.
Mostly used for private companies.
(i) Requisitioned Meetings and Shareholder Proposals (ss.167, 168, 187-191)
RM and SP both emerged out of US initiatives (not found in Europe). Purpose  to give powerless SHs an
opportunity to address management and shareholders about issues they’re concerned about. Also to redress the
imbalance of power between SH (owners) and Directors (management), who seem to have real control.
 However these provisions are usually used by takeover bidders to get themselves elected.
 These provisions say that company must pay for costs of meetings. Otherwise would be onerous and object of
RM would be undermined if SH had to pay.
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Requisitioned Meetings (ss. 167, 168)
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Section 167(2): RM triggered by vote of 5% or more of shareholders.
Section 167(3): Applicant must state purpose, identity of SHs, and must notify directors.
Section 167(5): Once receive info, Ds must call meeting within 4 months
Section 168: SHs don’t pay for costs of the meeting, the company does!
Section 167(7): Exceptions so directors don’t have to call RM
o (b) Same business already considered (res judicata)
o (c) Where subject matter doesn’t relate substantially to business of company (vague, problematic)
o (d) Primary purpose is to gain publicity, address personal grievance against company
o (e) Business stated in requisition has been substantially implemented
o Directors have onus of proof
o BP thinks court should be careful not to give generous interpretation here, otherwise undermine purpose
 Section 167(8): If director’s don’t respond within 21 days, then with 2.5% of SH support, can hold meeting
themselves, and none of the exceptions above apply, and SHs would have to pay costs of meeting
 SHs can only vote on matters within their jurisdiction (appointing auditors, electing directors, amending articles,
etc.)
o If they pass a proposal that relates to BOD’s power, can’t be binding.
o To be binding, SHs would have to pass a special resolution (2/3)
o So easier then to just remove Ds/amend articles via special resolution and bring in own directors
 2 Downsides if RM goes ahead:
o (1) Getting enough support – a vote @ this meeting in support of resolution has to be AT LEAST a
simple majority, and maybe higher (if for amendment of articles). Problem becomes political. Directors
can state rebuttals.
o (2) If resolution is specific and it falls squarely in director’s powers, they can easily just say NO.
SH/BOD’s powers are mutually exclusively.
SH proposals (ss. 187-191)
Have been used mainly by SHs with social justice issue of some kind; i.e. used against Greyhound to fight segregated
seating, stop Dow from making napalm, stop companies from trading w/ South Africa under apartheid. But, they
don’t change the allocation of powers between the D’s and SH’s. So if the majority of the powers to run the
company are vested in the board, then SHs can blow their horn all they want, but they can’t order them to stop. Ds
not bound by resolutions of SHs in terms of their powers to manage the corporation.
Four categories of SH Proposals:
1. Proposal to amend articles
2. Propose that a by-law be made, amended or repealed
3. SHs holding at least 5% of shares or 5% of voting shares may nominate directors
4. Residual category - proposals that are “not relating to the business or affairs of the corporation”
 These provisions concerned with ability of SHs to put certain issues before meetings. Unlike RMs, the SH
proposal provisions only apply to public companies, s.187(3)
 Binding management – same problem with RM; even if it is voted and approved, if the matter is within the
power of BOD, it isn’t binding on them. [Note that s.136 is subject to articles. So in theory SHs could change
the articles by special resolution and thereby bind management, but this has practical difficulties.]
 Standing – must be a SH for 2 years, and amount to ≥1% of the voting shares, s.187(1), s.188(1)(a)(b)
 Formalities – must get proposal to directors 3 months before the meeting (s.189) so can get put on the AGM.
Must make declarations set out in s.188(d)
 Management – must communicate this to other SHs (must be in proxy materials), s.189
o NB: When WH Corps send out proxies, must also include information circular (required under
Securities Act) which forces management to give useful info and allow proponent appear and speak at
the meeting. But subject to s.189(5) exceptions, with onus on Board.
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Dow Chemical case (p.771)
Facts: Dow refused to include proposal in proxy material. Proposal was to stop Dow from selling napalm, which was
being manufactured to help the war effort. Dow relied on exception that if the proposal related to ‘general political
and moral concerns’ it was outside the scope of the section.
Analysis: Court was sympathetic to proposal, says Dow made napalm b/c it was committed to warfare not b/c of
business reasons, so the proposal applies to the ‘business of the company’.
Ratio: A company cannot bar a proposal based on moral/political motivations. But resolution not effective against
management b/c not within SH powers to tell them what not to produce!
Jesuit Fathers case (p.772)
Corporation sold its products in SA during apartheid; JF of Upper Canada sought resolution to stop that practice.
Company relies on exception that is like (c) & (d) above. Resolution sought is contrary to excepted grounds.
Greenpeace case (p.776)
Re: sulfur emission by Inco; matter had been already raised and dealt with. Applicants have not typically had an
easy time of it.
Air Industry Revitalization Co. v. Air Canada
(1999) Ont.SCJ
*Example of requisition meeting.
Facts: Attempt to hold a RM under CBCA s.167 by takeover bidder (AirCo). Air Canada’s directors argued that the
requisition was subject to exceptions - that a RM can’t deal with an amendment to the company’s articles.
Held: That AirCo requisition is valid and AC D’s were obliged to call SH meeting. That since AC didn’t, AirCo had
statutory right to call meeting itself, so court should not exercise its discretion to call the meeting itself.
Analysis:

AC argued RM is subject to exceptions: argued that management had already given notice of meeting of the
company, so why requisition meeting on top of that? (equivalent of our 167(7)(a). Court said not valid b/c the
existence of a SH meeting and assuming that the matter will be discussed/considered at the meeting are not
the same: since it’s not clear that this would happen, the exception shouldn’t apply.

That RM cannot deal with amendment to articles: [why was this argument even brought?] Nothing in the act
differentiates what can be dealt with at the different meetings. Anything that can be done at one meeting can
be dealt with at another.

Court-ordered meetings: court says that the relationship b/w its power to order meetings at request of SH and
its power & responsibilities in respect of calling meetings. Says [see p.797…]
Ratio:
Validates and applies statutory provisions re: SH requisitioned meetings. No provision in Act that prevents amending
articles in a requisitioned meeting.
(ii) Removal of Directors, s.128(3) & (4), 131(a)
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Section 128(3): Basically, irrespective of what company’s constitution says about election of its board
members, a director can be dismissed @ any time during his/her term by (a) special resolution, or (b) as
provided for in memo or articles (so in CH Corps, best to insert provision!).
Section 128(4): If only a certain class of SHs have authority, then by (a) SR, or (b) subject to Co’s constitution.
But it’s the same threshold vote that’s required to amend the company’s articles. That could achieve the same
objective (dismissal). So it’s very much a “right” that’s very limited, but can be technically very important.
Section 131(a): D vacancy can be filled by SHs @ the SH meeting (when D kicked out, or later time).
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11. Shareholders’ Remedies
These all are inherent personally in shareholders – don’t require leave (i.e. derivative action)
3 sources for SH relief:
1. Shareholder agreements – private K negotiating certain rights with the Corp
2. CL – personal action
3. Statutory – oppression remedy, s.227
(a) Shareholder Agreements

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
Only in private/CH corp (i.e. small # of SHs who want to be elected to the board).
Useful in protecting SH interests, especially minorities.
o In the past, greater focus on the co’s constitution as the repository of SH rights, but then it could
be amended by a special resolution. (Constitution is a K b/t SHs that can be altered by the
majority.) So minority SH require the SH agreement – it’s a regular K and requires unanimity to
amend.
BOD powers (in articles) can only be modified via special resolution, which obviously won’t happen b/c
people on board won’t vote on restriction of their own pers. That’s why SH agreements are important –
way to negotiate right of SHs at inception of company = prenuptial concept
Very little case law on SH agreements, b/c they’re confidential Ks in CH companies, so difficult to study.
BCA, s. 175: Pooling Agreements
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
Two or more SHs may agree that when exercising their voting rights they’ll vote in a certain way.
Compare with directors, who can’t do this, as it would be a fettering of their discretion, and might
compromise their acting in the best interest of the company in the future.
No dissent remedy for SHs under s.237
Practically don’t work for WH Corp, so most likely only CH Corps.
Voting Agreements (p.836)
(i) Voting Trusts
 Voting agreement where a SH transfers their shares to a trustee who act on their behalf (like a proxy
agreement); but SH remains beneficiary (dividends, etc.).
 Voting agreements prevent a SH from being able to dissent (s.237)
 Voting trusts are often used to implement SH agreements.
 Structure of the agreement gives the trustee a role in certain things: acting as arbitrator
(ii) Buy/Sell Agreements
 Issue in private company, where there’s no market for the shares.
 These agreements give a pre-emptive right to company and SHs to buy shares from anyone who wants to
sell (arbitrator can be used to determine price).
Dissent proceedings: s.237-246 (Appraisal Remedy) see below
Where voting SH is in minority on vote, company required to buy back your shares. But does this statutory provision
override a Shareholder agreement?
Unanimous Shareholder Agreement: (Ont. and Fed. only) LP jurisdictions
This is the only way (Ont. and Fed only) that the power of the BOD can be compromised, but only for CH Corps.
CBCA s.146 – powers vested in the directors subject to the provisions of any unanimous SH agreement.
BCA s.136 – subject to Act and constitution, directors have ALL powers regarding supervision of companies.
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Two other ways to derogate from D’s powers: Delegation & Transfer of Powers
Delegation: must remain in control of the delegation process and be able to revoke.
Transfer of Powers (s.137): elected D can transfer powers to other persons (including a corporation)
Ringuet v. Bergeron
1960 SCC
**Leading Cdn case on Shareholder Agreements
Facts: Company had 7 SHs w/ equal votes. 3 wanted to acquire majority control by buying shares of #4. Entered
agreement saying (1) each would support election of one another for election to the board; (2) they would vote in
unison @ “company meetings”, and (3) if they didn’t comply their shares would be forfeited to the company. One
SH sued to have the shares of another forfeit b/c they weren’t voting as they were supposed to and elect him to the
board. Their defence was to argue the agreement was invalid for breach of FD.
Issue: Does provision apply to Directors meetings as well as Shareholders meetings?
Held: Court says although provision ambiguous, it didn’t apply to Directors’ meetings and was  not illegal.
Ratio: Supports that while SHs can agree to how they will vote their shares, Directors cannot because it would be
a fettering of their discretion.
Note: Clark v. Dodge - What if all shareholders agree that the Directors should vote in a certain way; would that
‘anesthetize’ the risk of breach of FD. Can SHs waive the D’s fiduciary duty? US recognizes an exception to the
fettering rule. This has never been applied in Canada, and the difficulty in BC would be s.142(3) which says you can’t
contract out of FD.
(b) The Personal Action: Standing to Sue (i.e. s.227, s.19)




When a SH has standing to sue for their own benefit. Ratification not an issue b/c SH cannot be prejudiced by
the actions of other SHs.
No reference in statute, but in terms of classifying civil remedies that SHs may enjoy, distinguish b/t 2:
o Corporate rights of action can sometimes be very useful – i.e. (s.142) duties are owed to the Corp and
the Company is the proper plaintiff, but SHs can only enforce by derivative action.
o Personal rights of action belong to SH personally and have standing inherently.
 Statutory remedy (i.e. s.227 oppression remedy)
 Based on constitution or SH Agreement (s.19) – where a breach affects one SH uniquely
 CL/equitable remedy (i.e. exception to rule that Ds don’t owe FD to SHs)
Analysis in text suggests that PA’s should be available (and indeed have been available) when the company
does certain acts (via D’s) which are primarily of an internal nature and which primarily affect the SHs, because
the directors assume a fiduciary obligation toward the company as a whole, that is to the SHs as a general
body, to act with an even hand and in good faith.
Procedure: no procedural complexity: show that they are a SH and that the remedy is available.
Farnham v. Fingold
OCA
NB: represent situation in Ontario which is no longer true
Facts: π SH was trying to argue whether minority SHs had the right to share in the control premium that was
available to a majority SH when he/she sold shares. (i.e. 60% SH has something that is worth more than just 60% of
the total value of the outstanding shares, because the buyer would be buying control as well. The market will
therefore attach a premium).
US Jurisprudence:
 Perlman v. Feldman: when a SH sells control position for a premium, have to share premium with the
remaining (minority) SHs; i.e. control belongs to Corp not any SHs in particular.
 Other cases had suggested differently, however.
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Held/Analysis:
 Court says that P was really arguing breach of duty to company, b/c premium belongs to company, so P
was seeking to enforce a corporate action and had not sought leave (for a derivative action).
 Class actions are not available anymore as an alternative to derivative actions as per Foss v. Harbottle.
Ratio:
 This was followed in Shield v. Western Mines (BC). It’s  clear that in Canada the statutory provisions must be
followed. Thus any action of a derivative nature must be brought via statutory provisions (BCBCA).
Also, examined the scope for personal actions regarding breaches of the security act. π argued that the new
disclosure legislation was for the benefit of small investors in WH Corps. If they could point to misstatement or
error, they should have personal standing to seek relief in respect of that misstatement or error. Court said this
might be able to work.
Perlman v. Feldman (note on p. 897)
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Where a minority SH brings an action alleging that the majority has appropriated a control premium on the sale
of its shares that the action is derivative rather than personal
Court gave a personal remedy (ordered that the premium be held in trust for those who were SH at the time
the company was sold.
S. 233 of the BCA does not allow such a personal remedy in a derivative action; but the Ont/Fed Act do.
Jones v. H.F Ahmanson (1969 CalSC) (p.906)
Facts: Successful credit union in Cali; small SH based w/ very high worth shares (so low marketability). Majority SH
ganged up on woman SH, redefined shares to lower market value/share but didn’t extend same scheme to minority
SHs. P brought action – abuse of majority rights against minority SHs.
 Court says YES, majority have FD to minority not to act in unjust manner. Remedy granted.
 Other US states adopted this, but Canada has NO STATED DUTY ON MAJORITY TO MINORITY.
GoldEx Mines Ltd. V.Revill (1975 OCA)
Facts: Goldex was SH of Probe Ltd. Dispute among Probe’s directors over proposed purchase of mines from a Co
controlled by former Probe director. Goldex alleged breach of duties, but to Probe or its SHs?
 Disclosure by public companies, need for personal action by SHs to seek remedy for failure to comply with
disclosure requirements.
 Where statute requires things that have to be fairly and accurately done to benefit the persons/SH in target
company, those people have standing to sue for non-compliance if they are not complied with.
 Suggestion that can’t get damages, but can get non-pecuniary relief (injunctions, declarations)
 Court suggested that the majority owe a FD to the minority (this was a new idea for Canada); have to exercise
powers in a way that respects minority shareholders; have some kind of good faith obligation, but not sure if it
as strict as a FD.
 Also went on to say (more controversially) that if the majority of SHs are acting ‘poorly’, the minority ought to
have a remedy against them.
 GoldEx was test case for Ontario as to whether similar cause of action existed in Canada. Some UK case law
suggests that when majority passes special resolution to change articles and the effect is to cause clear
prejudice to minority, there may be a remedy.
Bottom line (Farnam & GoldEx):
Decided before Ontario had oppression remedy. ON Courts trying to ‘invent’ a CL remedy. The need for these kinds
of arguments has reduced due to the existence of the oppression remedy.
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Beck, “The Shareholders’ Derivative Action” (p.885)
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Ownership of stock carries with it a number of personal rights. Some rights come out of companies Acts (e.g.
right to inspect books), some out of articles or by-laws (e.g. # of days before a meeting by which notice must be
given) and some out of case law (e.g. when judges make the requirements of the statute or K meaningful, like
requiring “truly informative” notice). Other rights are the right to vote and the right to have a properly
completed proxy accepted.
If many SH all suffer the same wrong, they can form a single action that will look representative, but is actually
still a personal action.
Reason for confusion and for limiting personal actions comes from idea that all wrongs committed by corporate
directors and officers, and all duties owed by them, are suffered exclusively by the corporation and not its SH’s.
So on this argument all wrongs (say not paying a dividend) are only ever done to the corporation and the
private SH would never have a private action.
Also the idea that all acts of directors are acts of the corporation, so it is always the corporation that would be
harming the SH, not the director personally that is harming the SH.
But the above two points lead to the conclusion that it is always the corporation harming itself.
BUT a director acts in a variety of capacities – as an agent of the company, as the company itself and as an
appointed officer with formal functions. Should not mechanistically say that all acts of the directors are acts of
the corporation, but should do a functional analysis of directors’ actions in order to accord more w/ reality and
widen ambit of SHs’ personal action.
Ask “who in reality is the aggrieved party?”, b/c in many cases the corporation would only suffer harm
theoretically, not in reality.
If directors inflict harm on SHs, then SHs should be able to sue (is US position and seen in some UK/Can.
cases – but remember, in US, directors owe FD to SHs and no case in Anglo-Can. law says that is so (explicitly)
hence, maybe, the confusion.
So if corporation issues shares improperly, should allow the SHs to personally sue the corporation and or the
directors.
Condec Corporation v. Lunkenheimer (Del.): Directors of D company caused it to enter into a merger
agreement with a third company that involved the issuance of a large block of D’s shares to it. The share issue
was large enough to prevent P from exerting the voting control that it had just acquired through a cash tender
offer. The court declared the issue void b/c this was a case of a SH with a contractual right to have certain
voting power associated with his shares being deprived of such control by a breach of FD by directors against
SH. Court said that the directors owed a FD to the SHs, not just the corporation.
Text says that in Canada we do not have to say that the directors owe a FD to the SHs in order to allow
personal actions.
In line of cases in UK law from Percy v. Mills and Punt v. Symons dealing with invalid issuance of shares it is not
clear whether the actions were considered personal or derivative actions, but what is occurring in these cases is
interference by the company with the rights of certain of the SHs, and this is the same type of conduct as in
other cases where the right of SH to take personal action is firmly established. These other cases are ones in
which the SHs rights are abrogated, altering corporate structure in a way that is a fraud on the minority,
depriving SHs of the right to vote.
Discussion of whether UK cases are allowing personal actions when directors misbehave and author thinks that
judicial reasoning (although not clearly expressed as such) says that in causing company to do certain things
that are primarily of an internal nature and primarily affect the SHs (issue shares, make calls, refuse transfers,
solicit proxies), the directors assume a fiduciary obligation toward the company as a whole, that is to the SHs as
a general body, to act w/ an even hand and in good faith (and so if they don’t a personal action should be
available).
So basically saying, many cases have allowed personal actions when the directors have not acted even
handedly, and none of them ever said that there is a FD to the SH’s individually, so we can now go ahead and
allow personal action by a SH when directors behave badly, and we do not have to say that there is a FD to
the SH’s individually [although seems to me that that is the implication].
Australian courts have treated improper allotment of shares as giving rise to personal action to have the
improper allotment set aside (Ngurli v. McCann, Aust. HC).
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May be that in threatened ultra vires or illegal acts, there is both a personal and corporate (derivative) right
of action. But the fact that the derivative action option is available, does not mean that you should not allow
a personal action.
In collateral purpose cases SHs are most concerned and injured
Securities legislation gives clearest example of both personal and corporate rights of action arising from the
same wrongful act: both Ont. Securities Act and OBCA provide for individual and corporate recovery when an
insider trades in a company’s securities with knowledge of material, confidential information. Need statutory
provision to allow the personal action b/c of holding in Percival v. Wright, but even if statute didn’t say
anything regarding the corporate action, author thinks that a right to it would exist in addition to personal
action b/c of Regal (Hastings) Ltd. v. Gulliver and Canaero. So would not matter if the statute only specified the
personal action, the derivative corporate action would still exist.
US courts have recognized, especially in the context of securities legislation, that the same allegations of fact
can support both a derivative and a personal action (leading case is J.I. Case Co. v. Borak, USSC).
Breaches of proxy solicitation legislation (I think that is when you tell the SH’s that they should hand their proxy
votes in now) in Canada give rise to a personal action. There is an analogy to notice cases (where the courts are
very strict if notice is not given) b/c proxy solicitation rules are really about giving SH truly informative notice.
Therefore, if statutory provisions for proxy solicitation are not complied with, or material provided with the
proxy solicitation is inadequate and misleading, the SH has a personal right to sue for a declaration that the
meeting and all the acts done at it are void.
Breach of the proxy solicitation requirements may also give rise to a derivative action (Charlebois v. Bienvenu,
1967 Canada).
(c) The Statutory Oppression Remedy, s.227 (Complaints by SH)
History
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Oppression remedies introduced in 1948 UK Companies Act as a response to the inadequacies of the law in
that derivative actions weren’t adequate to respond to breaches of FD – too difficult + expensive.
OR facilitates remedy of minority SHs in CH Corps in Canada; focuses on misconduct/hardship of SH.
It’s a personal remedy – no problem of standing (unless you’re not a SH, then must convince court you’re
qualified as an “appropriate person”) and can’t be deprived of that capacity by any vote (no question of
ratification).
NOT a codification of CL or trying to say that majority owes the minority a FD.
Standing: s.227(1)
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Standing given AS A RIGHT to SHs, beneficial SHs, and any other “appropriate persons” (might include
creditors, former SHs, employees, customers). NOT DIRECTORS (who have standing for derivative action).
o First Edmonton Place Ltd v. 315888 Alberta Ltd: Creditors are “appropriate persons,” but they have to
convince court of that.
o Other persons (also have to convince court): widow of deceased SH, trustee in bankruptcy of Corp,
employees (only if at risk in same way as SHs are at risk).
A wrongfully dismissed employee-SH can get OR if loss of employment is intrinsically linked to status as SH:
Krynen v. Bugg (2003 OntSCJ)
Ie: Showing that you’re at the same risk as a SH.
The section doesn’t limit itself to CH companies; but it’s more likely to fit a CH situation because of the
element of interrelatedness that’s more typical of CH companies. In WH co, hard to show a D’s act affects you.
First Edmonton Place Ltd. v. 315888 Alberta Ltd (1988 AltaQB)
Facts: Action by a landlord against tenant claiming oppression; lessor was claiming standing in capacity as creditor –
is the landlord an “proper person” under s.227(1)? NO, not a creditor at the time.
Analysis:
- **Pg. 917 - Reference to just & equitable test – whether creditor would be regarded as a “proper person”: (1)
Situations of fraud; (2) Situations of legitimate expectations (from underlying relationship).
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Here, #1 didn’t arise on facts, and #2 doesn’t work b/c at the time, the tenant didn’t owe rent, so technically
the landlord wasn’t a creditor.
See page reference – BP thinks this test is weird – sounds a lot like derivative action? (But here we shouldn’t
care about the corporation?)
Ratio: Creditors can be appropriate persons. Other persons have been held as also appropriate persons, but this
is fact specific judgment by the court in each particular case.
- NB: Prior to 2002, law required you to be SH or appropriate person, and you had to have that status at the time of
the conduct you are complaining about. Now, you can now complain about conduct that precedes your status as SH.
Grounds for relief: s.227(2)
(a) Oppression - affairs of the company or powers of directors being exercised in ways that are oppressive
(b) Unfair prejudice - some act of the company has been done/threatened, or that some SH resolution
passed/proposed, is unfairly prejudicial to one or more of the SH’s. Wider scope in that it focuses on the effect
of the actions
Notes:
 Oppression is perceived as a higher threshold than unfair prejudice.
 Oppression looks at the nature of the conduct itself. Unfair prejudice looks at its effect.
 Modifications to the wording of this section means that no pattern of misdeed is required; an isolated act is
sufficient to show oppression.
 Ratification is irrelevant b/c oppression is a personal remedy.
Appropriate relief:
Ferguson v. Imax Systems Corp.
1983 Ont.CA
Facts: Imax incorporated. Founding SH were appellant (who was involved in work at the corp), her husband and 2
other couples; wives received non-voting shares. They divorced, company tried to squeeze her out; was discharged
and company refused to declare dividends. Also wanted to cancel and convert all her shares to non-voting, limited
dividend. She sought relief under s. 234 of CBCA alleging the company and directors acting in an oppressive,
unfairly prejudicial manner that unfairly disregarded her interests as a security holder.
Issue: Is app entitled to relief? Held: Yes; actions were oppressive!
Reasoning:
 Majority must act fairly and honestly; if not, then equitable jurisdiction of court can be invoked (Goldex Mines)
 Interpret section broadly; court can consider relationship b/t SHs not simply legal rights as such
 Court focused on relationship b/w shareholders and management; was satisfied that the SH had been unfairly
treated by the other SHs in an effort to force her out. [This is common way of majority SHs manipulating
minority – withholding dividends; this has never happened in Canada except by way of oppression remedy.]
Ratio: Only required to show that the acts of the D’s showed a lack of bona fides and that they caused oppression.
Oppression remedy should be interpreted broadly to protect minority SHs; focus is on fairness.
Notes:
 Problem – directors can argue business judgment rule.
**Scottish Co-op Wholesale Soc. Ltd. v. Meyer
1959 UKHL
*Leading case for oppression; starting point for meaning of oppression remedy
Oppression entails some lack of good faith or impropriety (“impropriety with a hint of mens rea”)
Facts: Scottish Co-op is the parent company and created a holding subsidiary company and same directors in both.
Meyer was managing director of subsidiary and one of its substantial SH, but SC retained 51% of shares and control
of BOD. Meyer no longer needed after 5 yrs and the parent established a department to perform subsidiary’s tasks
to force him out. Parent’s nominees on the BOD passively supported the parent by allowing subsidiary’s traditional
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activities to decline. [Other SH in subsidiary complained that the affairs of the subsidiary – the directors were
treating the subsidiary as if it was the same company as the parent; not paying attention to the distinct needs.]
Issue: Was the inaction of the nominated Ds oppressive? YES. Ordered oppressors to buy shares at a fair price
Reasoning: Denning
 Parent was seeking to promote its own interests the whole time
 Meyer et al offered to sell shares to parent but refused; parent wanted to wait until liquidation happened or
share prices would be depressed as a result of their own competing dept
o Plain that they could not perform their duties to both companies (i.e. getting best share price for the coop vs. acting in good faith towards subsidiary and promoting its business)
o Put their duty to the co-op above and this was oppressive to subsidiary
o Doing nothing to defend its interests when they ought to do something can be oppressive conduct
 Lord Simmonds:
o Parent behaved in an oppressive manner to the minority SH: Oppression is burdensome, harsh and
wrongful; not as serious as fraud/dishonesty
 Seems possible to bring SH conduct w/in the oppression remedy s/out using interlocking directorships
 OR applied clearly to SH conduct in Re Jermyn Street Turkish Baths Ltd [1971] English CA: Oppression occurs
when a SH having a dominant power in a company either:
o 1) exercises that power to procure something that is done/not done in the conduct of the
company’s affairs OR
o 2) procures by an express/implicit threat of an exercise of that power that something is not done
in the conduct of the company’s affairs
RATIO:
- Oppression as “burdensome, harsh and wrongful” – connotes element of bad faith, concerned about the
conduct of the character more so than how the conduct affected you.
- As it is a personal remedy, the OR will not be available where P cannot show any loss other than to share
value and this loss is suffered by other SHs
- The oppression remedy may be applied to the conduct of SHs.
- Where directors subordinate the interests of a Corp in favour of the interests of another Corp, including those
of a parent corporation, the conduct may amount to oppression.
Ebrahimi v. Westbourne Galleries Ltd (p. 924)
(1972) HL
Facts: Art gallery as partnership. One of the partners had son and got on board. Other guy said that they ganged
up on him; applied for winding up on the ground that it is “just and equitable” to do so.
 Cdn courts ignored the attempt to confine scope of equitable rights in this case
 Did not confine minority interests to the rights they had explicitly contracted for; indicates that SH
expectations may be a source of rights as well
 Broadens grounds upon which a minority can challenge actions of majority via oppression remedy.
 s.324: SHs have personal standing to go into court and argue that given the situation within the company, it is
appropriate that the company be wound up. This is bringing the company to an end, so is “radical surgery”.
 Impt because: (1) meaning of oppression; (2) shows operation of winding up petition (J&E remedy, 324), (3)
understanding “unfair prejudice”
Diligenti v. RWMD Operations Kelowna (1976 BCSC) (p. 924)
*One of first cases where Cdn judge called on “equitable rights” (from Ebrahimi) to resolve oppression claim
*Demonstration of possible separation between Oppression Remedy and Unfair Prejudice
Facts: Applicant SH had been fired from BOD under equivalent of s.128(3) [allows special resolution to remove
director from office at any time]. Applicant was still SH, and in that capacity he sought relief. At time it was heard,
‘unfair prejudice’ ground had just been added.
 Additional possible causes of action: Could have brought action in s.324.; Some cases suggest that majority
have quasi-fiduciary duty to exercise majority power in way that is not discriminatory against minority. Some
limits on ability to vote in favor of something that ends up being discriminatory. See Allen & Goldgreaves
[p.922]; OR breach of articles [s.19] – this requires suing in capacity as SH rather than as Director.
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
Applicant was seeking appraisal but argued it through oppression remedy. Diligenti claimed standing as a
shareholder, but was complaining about conduct that affected him as a director [this was prior to the
‘appropriate persons’ addition].
 Court referred to Meyer (burdensome), and said that what had happened was unfortunate, but not at high
enough level to constitute oppression.
 Court also emphasized that oppression looks to the nature of the conduct itself, rather than its effect.
 Intention of introducing the ‘unfair prejudice’ was to open the limits of ‘oppression’; then said that same
problem still arose: status as SH while complaining about treatment that affected him as D.
 Court turned to Ebrahimi which had dealt with the same problem – HL said that in a CH corporation, there was
an ongoing expectation that you would always be both a Director and SH; if not that would mean you wouldn’t
have any influence on direction of company;  your removal as member of board actually prejudices you as SH
because the two roles are interwoven in most closely held companies. So this changes the focus of unfair
prejudice from the conduct of the directors to the effect on the party.
 Now, Diligenti would probably ask for status as appropriate person. That way it wouldn’t matter whether the
conduct had only affected you in your status as a SH.
 In some jurisdictions there is a third ground: “unfair disregard” of the interests of SH or appropriate person.
Seemingly lower threshold than unfair prejudice!
Ratio:
- “Unfairly prejudicial” is broader in meaning than “oppressive.” “Oppressive” conduct only includes
interferences w/ strict LEGAL RIGHTS, but “unfairly prejudicial” allows court to consider whether his EQUITABLE
RIGHTS have been violated.
- Court says prejudiced as a member by being removed as director in this situation where reasonable
expectation is that he’ll always be both director and SH.
- The denial of SHs’ rights to continue to participate in the direction of a company’s affairs may be unfairly
prejudicial.
- Only really applies in CH context (never have that expectation in WH context).
Forms of relief & Orders: s.227(3)
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Examples of relief are just that and Courts may come up with others.
Clear distinction in cases is between SHs who see themselves as inevitably involved in management and
persons who do not see themselves as D’s/Managers. Or where SH dies or transfers shares to someone else.
Jackman case 1977 BCSC
Facts: Applicant was widow of employee SH; her evidence was that there were no meetings of SHs, so she never got
to go, no financial statements provided to her, company ran up debts, made loans to other companies owned by
the SHs. Court agreed w/ applicant, but said re: appraisal remedy, this is only appropriate where SH/D role overlap
(no other option); instead, the court ordered that the company hold general meetings, provide financial
statements, personally secure loans, etc.
“Clean hands” – technically this is not an equitable remedy, but courts have often considered whether the
applicant is complicit in his/her own circumstances – degree to which the person has contributed to their own
situation.
Relationship b/w Oppression Remedy and Derivative Action, p.940
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Any breach of FD is almost certain to be categorized as “oppression”
UK courts conservative in granting leave to SHs for derivative actions b/c worried about vexatious proceedings.
Oppression remedy may break down some limits put up by the derivative action, but if too broad, then BAD.
o (1) Substantive standard (fairness) is broader than either CL or statutory FD standard. E.g. Even if D’s act
is honest and in good faith, it might yield a RESULT that is unfair, and therefore oppressive.
o (2) OR gives courts wider remedial jurisdiction than available under CL/equitable principles.
But becoming a problem in Canada:
o Furry Creek (1992 BCSC) – Test as to whether a SH can bring an oppressive action is when what they
complain about is also a breach of FD. (I.e. whether the SH has been affected in a manner differently than
the harm to the company, OR they’ve suffered additional harm than that has affected company.)
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s.227 is available to all SH under the act, but it is less likely to be feasible incase of WH Corps with generally
diverse shareholding b/c the SH will have more difficulty to prove why he individually should get a remedy (NB:
oppression is for individual SH only, not class of SHs or the corporation.)
Oppression action by SH may be preferable to ordinary civil action for breach of FD because:
o More expedient, b/c may be commenced by way of application w/o pleadings or discovery
o Relief from court is broader and more flexible
o Uncertainty regarding law on FD means it’s safer to rely on OR
o Section 227 easier to get than s.233, especially in CH Corps.
(d) Other Statutory Remedies
(i) Compliance and Restraining Orders and Rectification: ss.19(3), 228, and 229
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Section 19(3): A company’s constitution is a binding K b/t the company and its SHs. So argued that each SH has
a general contractual right to have the Corp’s affairs managed in accordance with the terms of the
memorandum and articles. But no court has ever awarded damages under this section.
Section 228: Gives standing to SHs or appropriate persons (s.228(1)) to force directors to act or to stop noncompliance with this Act or company’s constitution (s.228(2)). Personal remedy for SH!
Section 228(3): Gives relief for complainant:
o Injunction to prevent contravention
o Order of compliance (positive injunction)
o Order preventing sale of property
o Compensation, only if company had committed ultra vires or restricted acts (s.33).
Section 229: Remedying corporate mistakes (retroactive). Court may make an order to correct an omission,
defect, error or irregularity in the company’s conduct that leads to breach of Act/articles, or renders ineffective
a SH/D meeting
o Test: Weigh the inconvenience to the company of re-holding a meeting versus the significance to a SH of
having an opportunity to have some kind of input.
Goldhar v. Quebec Manitou Mines Ltd. (1977 ON Div Ct)
Lawyer tried to use this section to get around leave application for derivative action: argued SH should be able to
use 228(3) to get relief against director for breach of FD. Court refused to accept argument for the reason that it
would undermine the framework for derivative actions [s.142]. Rationalized this by saying s.228 was intended for
‘housekeeping’: notice periods, timing; not intended to deal with something as fundamental as s.142.
(ii) Dissent Proceedings (The Appraisal Remedy): ss.237-246
Certain events concerned with the redefinition of the company’s nature give rise to a personal remedy allowing
(dissenting) shareholders to sell their shares back to the company; premised on the significance of the change.
- Only excuse for a Corp not buying the shares is if the Corp is insolvent.
- Section 238(1): Voting SH or non-voting SH entitled to dissent to the following (fundamental change):
o (a) Alteration of articles to alter restrictions on powers of the company/ its business (s.33).
o (b) – (d) Amalgamations and arrangements
o (e) Sale of undertaking (s.301) – SHs get right to veto sale; if they dissent, use this section
o (f) Continuation in another province (s.309 – right to dissent against continuation)
o (g) Any other situation that the court permits
- Section 239(1): SH may not waive a general right to dissent, but can for a particular corporate action.
- Most fundamental changes require special resolution and hinge on the SH dissenting to it.
- Section 242: Appraisal remedy available for SHs who dissent to a fundamental change in CH/WH corps.
- Rest of provisions outline procedure which SH must follow to get this remedy:
o Section 240: Notice of Resolution – all fundamental changes require a SH resolution, which requires
notice. This notice must include notice of the right to dissent, and given 21 days before meeting. All SHs
have a right to vote whether or not they have voting shares.
o Section 240(3): If management doesn’t comply w/ notice, SHs have right to trigger their dissent.
o Section 242(1)(a): Dissenter must send notice of dissent at least 2 days before resolution to be passed.
o Section 242(4): Must dissent with ALL our shares; not only half
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o
o
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Section 243: Notice of intent to proceed – SH appraisal rights crystallize
Section 246: SH loses right to dissent when, (a) Corp abandons resolution, (b) Resolution doesn’t pass, (g)
the SH votes in favour of the resolution.
o Section 245: What price for your shares (payout value)?
 Negotiate b/t company and SH; problematic for CH Corp, OR
 Apply to court to determine a payout value (see s.237): a fair value that the notice shares had
immediately before the resolution.
Share valuation presents 3 main possibilities (see p. 977):
o Market value approach – what a market says the shares are worth (if not erratic or minimal); only WH
o Assets value approach – value company’s undertaking and divide by shares; problem if companies aren’t
asset-rich; better one for CH-corp.
o Earnings/investment value approach – most popular method outside MVA: look at anticipated future
earnings and extrapolate, discount to present value. Experts calculate; appropriate if little fixed assets
o Court has discretion to select a valuation method to use, which depends on facts of each case, such as:
whether Corp is publicly traded, @ what volume, ease of asset value, likelihood of liquidation.
Domglas v. Jarislowsky (1982 QCCA) (p.977)
Raises issue of whether dissenting minority SH is entitled to the “squeeze-out” value of the shares – can they hold
the majority to ransom? “Getting rid of our dissent is worth something to the company as a whole.”
- There is no definite rule for determining “ fair value” but look at facts of case! Component elements to consider
include stock market price, investments value, and net asset value. The weight to be given to each factor
depends on the circumstances of the case.
- Outlines the 3 approaches above, and adds The Combined Approach – court + appraiser fix 3 different per
share values by applying the 3 approaches. Then the 3 values can be weighed, based on facts of case.
- Court says the majority should have to pay a premium for forcibly taking where there is a squeeze-out. Applied
an equitable test, resulted in adding 20% to price.
- Rejected by BC, ON and SCC courts. So … not sure!
Smeenk v. Dexleigh Corp. (1990 ON HC affirmed at CA 1993)
*Sets out principles for determining value of shares
Facts: Foodex was in restaurant business. H was investment Corp that owned Foodex shares. Corps amalgamated,
which was approved by special meeting of SHs @ both Corps = new Dexleigh Corp formed. Dissenters were SHs of
both F and H, and were offered price for shares. Applicants unhappy with price; want to have “fair value” of shares
determined by the court.
Held: F shares given market value; H shares has no value.
Analysis:
- Henry J. laid out the following principles for valuation:
o No onus on applicants to demonstrate the Corp’s offer is too low. But if you’re going to propose a value,
must prove it on a BOP.
o Not proper for court to adopt rigid formula; court must look @ facts + circumstances of each case; this
allows court to invoke equitable jurisdiction.
o Applicants not entitled to obtain benefits (or detriments) of amalgamation, b/c they dissented.
Other remedies that are personal in nature:
- Section 244(6): A dissenter who has complied with this section may not exercise any rights in respect of the
shares they have dissented with. So appraisal remedy appears to be an exclusive remedy.
o BP thinks you can’t argue appraisal + other remedies in the alternative, and the remedy is subject to
conditions. If you’ve begun AR, you are estopped from seeking another remedy.
o However, in McConnell v. Newcombe Financial, the section does restrict the ability of SH who has sought
the appraisal remedy to seek the oppression remedy.
 Downside: Limitation periods may force a decision pretty quickly, so no time to think things thu.
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BUT you can get the appraisal remedy through the oppression remedy too (can order company to buy
your shares), but OR is discretionary (Jackman). AR is automatic right; don’t have to prove impropriety.
Just having a fundamental change + taking appropriate steps = AR.
Iacobucci, Pilkington and Prichard, Canadian Business Corporation 1977 (975)
 Appraisal right is the rights of a SH to require the corporation to purchase her shares at an appraised price
if the corporation takes certain “triggering” actions from which she dissents.
 The right works as a device to reconcile the majority’s need to adjust to changing economic conditions with
the right of the members of the minority to refuse to participate in ventures beyond their initial
contemplation.
 Allows changes that require SH approval, where that approval is not forthcoming.
 It will only arise only in situations involving major structural changes, often described as “fundamental
changes”, and while the enterprise is continuing.
 The right can lead to minority relief, as well as to more diligent efforts by management and the controlling
SHs to represent the interests of all SHs.
 Criticism of the appraisal right is twofold:
(1) it ill-serves the SH who uses it since the it is laborious, slow, technical and expensive, and the benefits are
unpredictable;
(2) the corporation is ill-served by an appraisal right because it creates a drain on cash flow at a critical time (but if
the process is slow the critical time will be over by the time the order is made), it frightens creditors and suppliers,
and uncertainty is created by the unknown number of dissenters.
 It has been suggested that the right should be limited to the private corporation since there are alternative
means available for dissent on the public company i.e. sell your stock on the available market. This
argument is less compelling for a large SH if the stock is thinly traded. Also if the market agrees with the SH
that the change is bad for the corporation, the stock price may tank before the SH has a chance to sell.
 Strongest argument for keeping the appraisal right is that it serves as a check on management and ensure
that any company changes consider the interests of all SHs.
(iii) Winding-Up: s.324
Personal remedy akin to a divorce, which courts are cautious about, b/c bringing the corporation to an end.
- Section 324(1)(b): Court can liquidate and dissolve company, but need to look @ case law to determine
whether this remedy is appropriate (“just and equitable”), or whether applicant is an “appropriate person.”
- MOST drastic form of SH relief.
o Expectations that you will always be a director. If you are fired as a director in small private Corp (by
s.128(3)), then court may find that Comp should be wound-up for J&E reasons (Ebrahim).
o Could bring an action under oppression remedy for winding up under s.228(3)(o), but court likely won’t
exercise its discretion unless situation met the J&E test.
- This remedy N/A to WH companies, b/c SHs will be able to sell their shares.
- Criteria courts have looked at:
o If applicant is reasonable in assuming no confidence in management (pursuing agenda that doesn’t
accommodate their concerns/interests)
o Must show lack of fairness & good faith by the directors (somewhere b/t oppression and fraud)
o Encompasses the business judgment rule – just b/c things doesn’t go your way is not a good reason
- Four principal relevant categories for when Court will grant this equitable remedy:
o Loss of substratum – see German Date, below
o Justifiable lack of confidence
o Deadlock
o Partnership analogy
 Bondi Better Banana Ltd (1951 CA): In a company analogous to a partnership, a lack of trust +
cooperation b/t “partners” may incapacitate the Corp in the same sense that actual voting
deadlock could.
 Also see Ebrahimi, below.
- Is an equitable remedy, so there are defences available = laches, clean hands
- Liquidation/winding up can take place voluntarily by SH resolution or involuntarily by court order (ss.312-253)
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Section 324(3): Application for wind-up can be changed by court into one for oppression remedy (s.227)
Ebrahimi v. Westbourne Galleries Ltd (1972 HL)
Ebrahimi used to own ½ of company. Diluted to 1/3 of company (minority). A father + son used their shares to
dismiss Ebrahimi from the Board (by s.128(3)). He petitions for winding up b/c it’s just and equitable.
HL says that this kind of small private company was really just an incorporated partnership and that the same
approach to partnership cases (dissolution on J&E grounds) should apply
‘Reasonable expectations’ test – SH/D have reasonable expectation that they will enjoy the SH/D role forever.
- Bars to granting of this relief:
o Courts are inherently reluctant to grant this remedy; used as last resort.
o Court won’t use this just to provide economic relief from disappointment and anger.
o Lack of success in having your own view supported by fellow SH/D not enough.
- Success when:
o Court’s convinced of lack of probity & good faith on part of management. Kind of like oppression – not
fraud, but pattern establishes basis that BOD has lost your confidence and can’t be trusted.
In Re German Date Coffee Company (CA 1882) (p.989)
Facts: Corp formed for purpose of getting a German patent to manufacture coffee from dates; instead, got a
Swedish one. Corp established plant in Hamburg at a profit. 2SH filed petition for wind-up b/c there was a complete
failure of corporate objects. TJ found that whole substratum of Corp had disappeared + granted wind-up.
 If there is proof of the impossibility of carrying on the business contemplated by Corp @ its inception,
that is sufficient ground for winding up
 Here, real object = to manufacture date coffee under German patent; so granting of German patent was
basis of the corporation.
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