Law 230 Corporations I
Robert K. Paterson
Fall 2009
By
Ilia Von Korkh
Note: The materials here are not in the same order as in the syllabus, but are arranged in the way that makes sense to me.
I’m sure that you can work this out.
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230 Corporations I
Non-Corporate forms of Business Associations
7
Sole Proprietors
Partnerships
Limited Partnership (LP)
Limited Liability Partnership (LLP)
Corporations
9
Differences Between Corporations and Partnerships
Incorporation And Its Consequences
10
30 Capacity and powers of company
87 Liability of SHs
17 Corporate rights and powers
Nature of the Corporate Entity
Salomon v. Salomon & Co. [1897] HL
Corporations are separate legal persons apart from SHs and directors. A director or a SH can also be a creditor.
Kosmopolous v. Constitution Insurance Co. [1983] ONCA
Affirmed proposition in Salomon in Canada.
Types of Corporations
Lifting the Corporate Veil
Clarkson Co. Ltd. v. Zhelka [1967] HC
Only in the most flagrant cases of agency will the CO be seen as an agent of its owner or SH.
De Salaberry Realties Ltd. v. Minister of National Revenue [1974] FedTD
For the purposes of taxation, the courts are more flexible in lifting the veil of a group enterprise, even though the individual
COs remain individual persons in the eyes of the law.
Guilford Case
A CO which was made for a fraudulent purpose will have its veil shamefully lifted and its face exposed
422 Dissolutions and cancellations of registration by registrar
423 Lieutenant Governor in Council may cancel incorporation of company
The Process of Incorporation
15
The Place of Incorporation
Extra-Provincial Licencing
375 Foreign entities required to be registered
Mergers
Corporate Names
The Nature of the Corporate Constitution
Incorporation Technique
3 When a company is recognized
10 Formation of company
11 Notice of articles
12 Articles
13 Incorporation
14 Withdrawal of application for incorporation
16 Articles on incorporation
17 Effect of incorporation
18 Evidence of incorporation
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17
230 Corporations I
19 Effect of notice of articles and articles
Restriction on Powers and Practices of a Corporation
33 Restricted businesses and powers
Remedies for Breach of Constitution
Pre-Incorporation Contracts
20
Common Law
Kelner v. Baxter [1866] UK
A pre-incorporation K places the liability on the facilitator, if he knew that the CO does not exists and if it is clear that he
intended to be personally bound.
Black v. Smallwood [1966] HCAU
A pre-incorporation K is void if there is a mistaken belief on both sides that the CO does exist. In this case the facilitator is
not liable.
Statutory
20 Pre-incorporation contracts
Management And Control Of the Corporation
23
Introduction
Board of Directors
1 Definitions
135 If no directors in office
136 Powers and functions of directors
124 Persons disqualified as directors
128 When directors cease to hold office
137 Powers of directors may be transferred
138 Application of this Act to persons performing functions of a director
139 Revocation of resolutions
141 Officers
Automatic Self-Cleansing Filter v. Cuninghame [1906] UKCA
Once the board is vested with power by statute, they cannot be interfered with by SHs, save for a special resolution to amend
the Charter.
Audit Committee
223 Application
224 Appointment and procedures of audit committee
225 Duties of audit committee
226 Provision of financial statements to audit committee
Sale of Undertaking
26
301 Power to dispose of undertaking
C.B.C. Pension Plan v. BF Realty Holdings Ltd. [2000] ONCA
Whether assets owed by subsidiaries will count toward total undertaking has to be established on a case by case basis. But
most of the time they will.
Duties of Directors and Officers
28
142 Duties of directors and officers
Negligence
28
Common Law
Re City Equitable Fire Insurance Co. [1925] UK
Standard of care for directors and officers is that of gross negligence.
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230 Corporations I
Statutory Reform
142 Duties of directors and officers
154 Directors' liability
157 Limitations on liability
Peoples Department Stores Inc. v. Wise [2003] QBCA
Directors owe duty of care to their CO's creditors or any other stakeholder.
BCE Inc. v. 1976 Debentureholders [2008] SCC
Court will give deference to Business Judgements of directors as long as it is in the best interest of the CO and does not violate
legal rights of parties affected. Directors may consider the non-legal interests of the parties affected.
Fiduciary Duty
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Introduction
Self-Dealing
Aberdeen Railway Co. v. Blaikie Brothers [1843] HL
No one having fiduciary duties can enter into engagements that can lead to personal interest conflicts or which can conflict
with the interests of those whom he is bound to protect. Whether transaction is good or bad for corporation is irrelevant.
147 Disclosable interests
148 Obligation to account for profits
149 Approval of contracts and transactions
150 Powers of Court
151 Validity of contracts and transactions
152 Limitation of obligations of directors and senior officers
153 Disclosure of conflict of office or property
Corporate Opportunity
Cook v. Deeks [1916] ONPC
Directors breach their fiduciary duty when they use their position to actively promote their own interests at the expense of the
corporation.
Regal (Hastings) Ltd. v. Gulliver [1942] UK HL
Any situation where directors made a personal profit due to their position as a director is a breach of fiduciary duty even
where thre
Peso Silver Mines Ltd v. Cropper [1966] BCCA
Conflict Rule is the law in Canada. When the CO turns down an opportunity, it no longer has an interest, and the directors
are free to do as they will.
Canadian Aero Service Ltd. v. O’Malley [1974] SCC
No one test is the proper approach in considering corporate opportunities, but the findings should be concerned with the
special circumstances of each case.
Competition
153 Disclosure of conflict of office or property
Hostile Takeovers
Teck Corp v. Millar [1973] BCSC
If the directors reasonably consider that a takeover bid will cause substantive damage to the CO’s interest, they can rely on all
of their powers to prevent it.
Relief From Liability
41
Ratification of the Breach
North-West Transportation Co v. Beatty[1887] PC
Ratification by SHs is allowed, and directors with SH can to vote their shares in ratification at meeting.
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230 Corporations I
233 Powers of court in relation to derivative actions
Statutory Limitations on Liability
157 Limitations on liability
234 Relief in legal proceedings
Indemnification and Insurance
Rights Of Shareholders
45
Voting Rights and Shareholder Meetings
173 Voting
174 Participation at meetings of shareholders
Airline Industry Revitalization Co. v. Air Canada [1999] SCC
This case validates and clarifies statutory provisions regarding SH Requisitioned Meetings.
128 When directors cease to hold office
131 Vacancies among directors
Shareholders’ Remedies
Derivative Action
48
48
Rule in Foss v. Harbottle
Statutory Derivative Action
232 Derivative actions
233 Powers of court in relation to derivative actions
Re Northwest Forest Products Ltd. [1975] BCSC
Ratification of a breach is not an bar to derivative action claim, but it is an element to be considered
Bellman v. Western Approaches Ltd [1982] BCCA
The best interest of the company does not have to be proven, it is sufficient to show an arguable case
Costs
Other Shareholders’ Remedies
51
Shareholders Agreements
175 Pooling agreements
Ringuet v. Bergeron [1960] SCC
Directors cannot engage in shareholder agreements like SHs because restricting their votes would have the effect of fettering of
their discretion and decision making power.
Personal Action
Farnham v. Fingold [1973] ONCA
Derivative action is the exclusive basis to seek leave of the court to sue on the behalf of the CO
Statutory Oppression Remedy
227 Complaints by shareholder
First Edmonton Place v. 315888 Alberta Ltd [1988] ABCA
Creditors have a standing to sue, as long as they get leave of the court.
Ferguson v. Imax Systems Corp [1983] ONCA
Majority SHs exploiting power contrary to the expectations of minority SH creates a basis for oppression claim. The focus is
on fairness.
Scottish Co-op Wholesale v. Meyer [1958] UK
Oppression must be burdensome, harsh, and wrongful, and it connotes an element of bad faith.
Embrahimi v. Westbourne Galleries [1972] HL
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230 Corporations I
Defines unfair prejudice. Minority rights can arise out of their expectations, and are not limited to the rights specifically
contracted.
Diligenti v. RWMD Kelowna [1976] BCSC
Oppression will likely touch on legal rights, while unfair prejudice may touch on equitable rights such as expectations.
Oppression looks to the nature of conduct. Unfair prejudice looks to the effect on the party,
BCE Inc. v. 1976 Debentureholders [2008] SCC (BELL CASE)
This is the current state of law of oppression remedy.
Other Statutory Remedies
228 Compliance or restraining orders
229 Remedying corporate mistakes
Winding Up
324 Court may order company be liquidated and dissolved
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230.1 Introduction and Nature of Corporations
Non-Corporate forms of Business Associations
Sole Proprietors
Sole Proprietor: A single person carrying on business or pursuing a commercial activity on their own.
• There are no special rules that apply to sole proprietors.
• These are easy to commence and dissolve.
• But they do not enjoy the advantages of formal COs. That is the owner cannot separate business and personal life and
finances, and is personally liable for all business liabilities.
• These have to be compliant with provincial laws and local bylaws, all of which apply regardless of incorporation.
• There may be issues arising with naming and maintaining rights over the name of the sole proprietorship:
• Other than BC, most provinces have business names protection statutes, which allow SPs to register their business
name with provinces and gain propriety over name.
• Rights to a name may also be protected by the common law tort of passing off.
• “Name & Associates” is often used to give impression that the SP is bigger than it seems; however, BC requires SPs
using names that imply a false plurality to register the name.
Partnerships
Partnership: A business entity, where two or more people are carrying on business in common with a view to profit
(Partnership Act, s.2).
A partnership is a legally recognized business entity, but not a separate legal person.
This is seen as a type of contract of agency, which arises out of the workings of the Partnership Act [RSBC 1996].
Equity and common law rules are applicable to partnerships insofar as they are not inconsistent with the Partnership Act.
Partnership is the relation which subsists between persons carrying on business in common with a view of profit.
(Partnership Act, s.2).
• “Carrying on business” implies some kind of continuity, but it is unclear what continuity is required.
• “In common” does not mean that everyone is an active participant in the business. Passive partners can choose not to
be involved in day-to-day running of business, yet still be a part of the partnership.
• “View to profit” means that non-profit societies are not governed by these rules, and their members have no liabilities.
• Partners have a fiduciary duty to each other.
• Benefits of a partnership are:
• Flexibility to commence and dissolve
• Flexibility in designing internal management structure
• Drawbacks of a partnership are:
• Unlimited liability for partners jointly and severally.
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•
•
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Some characteristics of partnerships.
Deed of Partnership:
• These are partnership agreements that clarify contributions, rights, responsibilities, etc.
• Partnership Act s.27 defines basic rights and duties of partners, subject to any specific agreements, express or implied.
Agents:
• Partners are agents and fiduciaries of one another, with a duty to carry out activity in best interest of the other.
• This protects innocent partners by way of a claim of fiduciary duty. It also acts as insurance policy against partners
acting in such a way that puts partners at risk.
• When suing a partnership under BCSC rules, style of cause is: “Y v. X carrying on as a firm”. So the “firm” is a
euphemism for the partnership and ensures that all partners are jointly and severally liable should a lawsuit succeed.
Profits:
• Partnerships should seek profit as per s.2 definition.
• Under s.27, all partners must be entitled to some portion of the profit, often based on their contribution.
Control:
• Each partner has same power and capacity as other partners.
• This is different from COs, where there is a dichotomy of ownership by SHs and control by directors.
• SHs have no agency toward the CO, but as owners have claims to its assets.
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230.1 Introduction and Nature of Corporations
• Whereas Directors have to be elected and have agency (power to contract) on behalf of the CO.
Legal Personality:
• Partnership is legally recognized business entity, but not a separate legal person.
• The partnership is the people (including corporations) that make up the partnership.
Majority Rule:
• Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of
the partners, as per s.27(h)
• But no change may be made in the nature of the partnership business without the consent of all existing partners.
• This means that to admit new partners, there has to be unanimous consent between existing ones.
Expelling Partners:
• No majority of partners can expel a partner unless the power to do so is in the Deed, as per s.25.
• In absence of agreement, partners can seek judicial relief under s.35.
End of Partnership:
• Partnerships are dissolved when one partner dies or leaves the partnership, under s.29(1)
• However, most Deeds of Partnership contain provisions for to immediately reform between remaining partners.
Limited Partnership (LP)
Limited Partnership: A partnership where one or more of the partners are general partners who have unlimited
personal liability, and one or more are limited partners.
Limited Partner: A partner who enjoys a statutory privilege of liability limited to moneys or property that they have
already contributed or agree to contribute (s.57). A limited partner may contribute money and other property to the LP , but
not services. A limited partner's interest is personal property. Any partner who is not a limited partner is a general partner.
• LPs are a hybrid between COs and partnerships.
• LPs are an investment vehicle, facilitating investment in enterprises where traditional sources of funds are not available. To
raise money, COs issue more shares, but partnerships cannot go public and have to go to banks. LPs are an in between
solution, offering a quick, cheap way to raise money.
• LPs don’t exist except through statutory rule, which was introduced in BC in 1978 in Part 3 of Partnership Act.
• CO’s liability is unlimited, but liability of individual SHs is limited to value of their shares, unless agreed otherwise:
• With LPs the concept of liability is the same, but not for all partners.
• Investors can then become partners, but not face unlimited liability.
• General partners’ liability remains unlimited.
• Unlike in Canada, English LPs have a corporate personality and do not constitute a partnership.
• Partnerships or COs that are not incorporated elsewhere can come to BC to conduct business. In both Partnership Act (s.80)
and BCBCA, if they conduct business here, they must register in Victoria for reasons of service and process. The test for
jurisdiction under common law is presence.
Benefits of an LP:
• Limited partners have privilege of limited liability while having no management responsibility/
• LPs are a good way for entrepreneurs to gain investment by high-worth individuals who don’t have the interest or time in
running a CO.
• Sometimes tax deductions and credits are made available to LPs. When a CO earns profit it is taxed as one entity, but LP
profit is ascribed to individual partners.
• LPs are usually exempt from prospectus requirements. But not in ON.
• Transferability of interests is facilitated by statute: if a limited partner decides to sell his rights it should not affect general
partners, because the limited partner is not involved in management.
There are three formal Requirements to creation of a LP
1. An LP must file a certificate signed by all partners as per s.51(a). This will disclose things such as general nature, partner
information, assets, term of operation, and the profit-sharing basis.
2. The name of partnership must end with “Limited Partnership” or “LP” as per s.53. The surnames of limited partners
cannot appear in the title.
3. Limited partners must exclude themselves from management of business, lest they lose their limited liability under s.64.
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230.1 Introduction and Nature of Corporations
Limited Liability Partnership (LLP)
Limited Liability Partnership: An LP where each partner is not personally liable for actions or agreements of other
partners.
Limited Liability Partner: A partner who is not liable for partnership obligation, or an obligation under an agreement
between the partnership and another person. This does not relieve the partner from personal liability for their own negligent
acts, or negligent acts of other partners, that they knew of and did nothing. (s.104)
These are the most recent form of business association in BC.
LLPs did not exist in BC until 2004, when they were brought in as Part 6 of Partnership Act.
LLPs are a response to lawsuits of multi-national accounting and law firms in the 1970s.
Under s.104, a partner in LLP is not liable for partnership obligations beyond his own debts, agreements and liability.
• Under normal partnership, a single partner may incur liability to a client. If that liability was upheld by courts (or
agreed to by the partner), then the client could turn to the other partners for the amount.
• But LLP lets professionals limit liability to portion of amount that each individual partner is responsible for.
• This is good for law firms, which traditionally were partnerships where all partners wanted to be involved in the
management of the business.
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•
•
•
Corporations
Differences Between Corporations and Partnerships
1.
2.
3.
4.
5.
General Structure
• A CO is separate fictional legal entity, whereas a partnership is not.
• Partnerships need at least two people, whereas a CO can be sole-owned.
• Aside from limited partners, all partners can take part in management of business.
• But in CO, there is an “invitation for specialization” which creates flexibility to divide management and ownership:
• Directors are vested with power to manage and contract on behalf of the CO.
• SHs own the CO through shares and have a right to vote at meetings.
Nature of Core Business:
• In partnerships, the Deed of Partnership outlines the nature of business to be conducted, which cannot be changed
unless all partners agree.
• If a CO is public, the Directors can change the nature of business with majority rule. But there are two restrictions:
• CO’s constitution may place limits on type of business it can engage in. But constitution can be amended by a
special resolution either by ⅔ or ¾ vote.
• Sometimes there are provisions in BCA that trigger SHs’ right to get out if the nature of business is changed
drastically. This is called “appraisal remedy.”
Limited Liability:
• Liability is limited to the amount paid for shares in CO. This is one of the major incentives to incorporation.
• Partnerships do not enjoy limited liability unless if they are LLPs.
• But limited liability is not a necessary characteristic of a CO, it is a privilege granted by s.87.
• Sometimes it can be taken away when a CO is being used in a way that SHs are personally responsible for, such as
using it as a vehicle for fraud.
Transfer of Ownership:
• Partnership ceases to exist when one or more members leave, whereas CO goes on forever.
• In a partnerships, a partner can transfer his share but this requires unanimous support of the rest of the partners.
• In COs, under common law, shares are prima facie transferable.
• In Public COs fellow SHs do not care who you sell to unless you own significant percentage of the shares.
• In Private COs partners do not want strangers involved, so most constitutions of private COs place severe
restrictions on transferability and give rights of first refusal to existing SHs. But shares in private COs are usually
unattractive to outside buyers as it is, which means that this is rarely an issue.
Trading Capital and Its Publication:
• In partnerships the trading capital can be confidential and limited to what partners agreed to contribute to business.
• In COs, both public and private, it is part of incorporation process that the CO is to publish its existing capital.
• Capital of CO is a statement of ownership in terms of a number of shares.
• Once the full number of shares has been issued, COs cannot issue more shares without amending constitution.
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230.1 Introduction and Nature of Corporations
Four Ways One Can Become A Shareholder:
1. Subscribe for shares upon incorporation of private CO or IPO of public CO.
2. Allotment: purchasing shares later out of un-issued capital.
3. Transfer: purchasing shares from an existing SH.
4. Transmission: transfer upon the death of a SH by operation of law under their will.
Incorporation And Its Consequences
There are many incentives to incorporating, most of them outlined above under the Differences Between Corporations and
Partnerships heading. Once incorporated, the following provisions outline the general nature of the corporate entity.
30 Capacity and powers of company
A company has the capacity and the rights, powers and privileges of an individual of full capacity.
87 Liability of SHs
(1) No SH of a company is personally liable for the debts, obligations, defaults or acts of the company except as provided in Part 2.1.
(2) A SH is not, in respect of the shares held by that SH, personally liable for more than the lesser of
(a) the unpaid portion of the issue price for which those shares were issued by the company, and
(b) the unpaid portion of the amount actually agreed to be paid for those shares.
(3) Money payable by a SH to the company under the memorandum or articles is a debt due from the SH to the company as if it were a debt due or
acknowledged to be due by instrument under seal.
Interpretation Act BC
17 Corporate rights and powers
(1) A corporation has perpetual succession and may do the following:
(a) sue and be sued in its corporate name;
(b) contract and be contracted with in its corporate name;
(c) have a common seal and may alter or change it;
(d) acquire and dispose of property other than land for its purposes;
(e) regulate its own procedure and business;
(f) some crap regarding English and French names.
(2) A majority of the members of the corporation may bind the others and the corporation by their acts.
(3) Individual members of a corporation established by an enactment who do not contravene the enactment are exempt from personal liability for the
corporation's debts, obligations or acts.
Nature of the Corporate Entity
Before Salomon, there was a persuasive view that legal consequences of incorporation were fairly limited: that same principles
that courts applied to rights and liabilities of partners would apply to corporate SHs. But then shit went down.
Salomon v. Salomon & Co. [1897] HL
Corporations are separate legal persons apart from SHs and directors. A director or a SH can also be a
creditor.
Facts: PL was a sole proprietor of a shoe business which he incorporated with him and his family members as SHs. PL lent
CO money and issued a debenture to himself, which made him a secured creditor. At some point later, PL sold his debenture
to B. A year later, CO went into liquidation, and there was not enough money to normal creditors after the debentures were
paid. Liquidator argued that the CO was merely an alias and an agent for PL, and that PL was liable for the CO’s debts.
Liquidator also argued that PL’s debenture should not be given ordinary level of priority because it was issued to the original
owner, which means the B would get the shaft for having bought the debenture.
Issue: Is CO a separate legal entity? What priority should be accorded to PL’s debenture over unsecured creditors?
Discussion:
• A CO is not an alias of an owner but an entity distinct from its SHs and directors, even in the case of a one-man CO.
• SHs are not agents of the CO unless they have authority given to them as the director.
• A SH only has liability insofar as they have invested in the CO.
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230.1 Introduction and Nature of Corporations
• HL relies on the concept of Business Judgment Rule: Directors are business-people, and courts, who are not, should not
second-guess directors’ decisions.
• This is important for matters of policy, as it avoids huge amount of litigation over bad business decisions.
• The fact that PL raised money for the CO on debentures that belonged to him is strong evidence of his good faith and of
his confidence in the CO.
• The unsecured creditors of the CO may be entitled to sympathy, but they have only themselves to blame, as they had full
notice that they were no longer dealing with an individual, and they must be taken to have been aware of the
memorandum and of the articles of association.
• In Canada, there are no serious restrictions on a SH being able to become a secured creditor of his own company.
Ruling: Ruling for PL.
Debenture: A document that either creates a debt or acknowledges it. Usually used as a form of security for corporate
financing.
• Lee v. Lee’s Air Farming [1961] JCPC UK: CO can contract with someone through its agent. One can be both a SH and
employee.
Kosmopolous v. Constitution Insurance Co. [1983] ONCA
Affirmed proposition in Salomon in Canada.
Facts: PL, a leather-goods maker, had incorporated himself as a one-person CO, then transferred his assets to the CO in
exchange for shares. PL then took out an insurance policy on his store, however, the store was held in his CO’s name, but the
insurance policy was taken out in his name. Later on, when a neighbor's fire damaged part of the store, PL submitted the
claim, to which D replied that he is not the owner of the premises and had no property interest, and no insurable interest.
Issue: Is PL a distinct entity from his CO? Can the corporate veil be lifted to make him the beneficiary?
Discussion:
• The case hinges on the concept of insurable interest - does PL, as a SH, have interest in the assets of the CO?
• Usually, SHs have an interest in the profits, not the assets of the CO.
• PL claims that the corporate veil should be lifted, showing that he is the sole owner, and has insurable interest.
• If you lift the corporate veil all the time, you will regard the CO as a mere agent or puppet of the controlling SH. This
would be similar to using the CO as a sham and cloak.
• But a separate entities principle cannot be enforced if it would yield a result too flagrantly opposed to justice, convenience,
or the interests of the revenue. Sometimes an exception should be made.
• What case law is relevant?
• Macaura Test: Whether or not insured had some direct property interest in whatever was insured. Under this test, PL
gets shafted.
• This case is different because in Macaura’s day a sole proprietor could not incorporate.
• Lucena v. Crawford: Instead of direct property test, this case used a “benefit-detriment test.” It does not look at
proprietary interest, but whether insured will be prejudiced if property is destroyed or damaged.
• ONCA discusses Tennessee case that used this test.
• ONCA found that PL had interest in the CO because, as a sole SH, his interest in residual value of CO’s assets gave him
such a substantial stake in those assets that it could amount to insurable interest.
• SCC upheld finding of ONCA, but on different grounds:
• SCC refuses to go into the dangerous territory where we differentiate between sole and multiple-person CO
• Instead they decide that Macaura is not to be relied on.
• SCC changes law of insurable interest in Ontario. Basically adopted the “benefit-detriment” approach of Lucena.
• But the most important outcome here is the recognition and affirmation of Salomon principles in Canada.
Ruling: PL gets his money.
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230.1 Introduction and Nature of Corporations
Types of Corporations
Widely Held Corporation: Same as a public CO.
Public Company: Despite the usual meaning of being a widely-held (publicly traded), a public CO is defined chiefly in
terms of its reporting obligations. It must be:
1. A reporting issuer,
2. A reporting issuer equivalent,
3. Have any of its securities, within the meaning of the Securities Act, traded on or through the facilities of a securities
exchange, or
4. Have any of its securities, within the meaning of the Securities Act, reported through the facilities of a quotation and
trade reporting system;
5. Have registered its securities under the Securities Exchange Act of 1934 in USA,
• Public COs are required to have a minimum of 3 directors, and have to do an annual audit of its accounts under s.210.
Non-public ones can choose to waive this if all of the SHs agree.
• Securities Act is concerned with investor protection and anyone trying to raise money in BC through sales of securities to
the public is subject to it.
Reporting Issuer: Two ways that a CO is deemed to be reporting:
1. Shares have to be listed on stock exchange for trading.
2. Shares have to be offered to public along with a prospectus. The definition of “public” is based on the Need to Know
Test. The definition of a “reporting issues” is the same in SA and BCBCA.
Continuous Disclosure: Any CO required to disclose information to the public is required to do so on an ongoing basis.
There are more onerous financial reporting requirements for public COs under SA
Securities: The generic term that encompasses primarily shares or secured corporate debts, such as debentures or bonds.
However, in BC, the Securities Act also covers “investment contracts.” The issuer does not have to be a CO, as long as the
securities are issued to the public.
Blue Sky: State laws in the United States that regulate the offering and sale of securities to protect the public from
securities fraud.
Need to Know Test: Public is defined as those who need to be informed of the business of the CO through a prospectus
and press releases, as opposed to those Directors or employees of the CO that are aware of its operations. (Ralston v. Purina)
Closely Held Corporation: Same as a private CO.
Private Company: also known as unlisted CO or an incorporated partnership. These are COs set up under statute, which
do not trade stock publicly. These have fewer SHs, most of whom are directors. Private COs require three things:
1. Limits in constitution regarding transfer of shares
2. Having less than 50 SHs. But unlike public CO’s private can have only one director.
3. Prohibition on the sale of shares to general public.
Joint Venture: In some States in US, a joint venture is recognized as a legal form of business.
Conglomerate: A large CO that has several centres running several aspects of business which are unrelated to one
another in business terms. A multi-armed enterprise.
Syndicate: A group of investors who act together when investing in a CO.
Special Act Corporation: A CO incorporated by an Act of Legislature, that has not been incorporated as a CO under
BCBCA. For example, BC Hydro is created under the BC Hydro Act.
• Most have significant government SHs.
• These Acts often reference BCBCA for the more standard details of the CO’s operations. Thus, Special Act COs can be
said to have two governing statutes.
• s.4 explains, among other things, that if there is conflict or inconsistency between provisions of BCBCA and special act,
that the provision of BCBCA prevails.
Constrained Share Corporation: CO constrained by combination of legislation and self-regulation, such as restricting
transferability of shares or foreign ownership of shares under the “25/10” rule in chartered banks, where foreign investors
may own a maximum of 25%, and no one SH can own more than 10%. Also, Investment Canada Act applies to some very
large COs such as banks, transport, and communications.
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230.1 Introduction and Nature of Corporations
Lifting the Corporate Veil
Lifting the Corporate Veil: A legal decision to treat the rights or duties of a CO as the rights or liabilities of its SHs or
Directors, essentially ignoring the separate legal entities principle.
• Usually a CO is treated as a separate legal person, which is solely responsible for the debts it incurs and the sole
beneficiary of the credit it is owed.
• Common law countries usually uphold this principle of separate personhood, but in exceptional situations may "pierce" or
"lift" the corporate veil. So a court would look beyond the "legal fiction" to the reality of the situation.
• Courts in Canada have been conservative to ignore principle of legal fiction in Salomon.
• There are no specific provisions in the BCBCA that deal with this. Common law is the way to go.
• In the US there is an instrumentality doctrine, whereby if a CO is set up with dubious motives, then it loses some benefits
of it being separate legal entities principle.
• There are four general exceptions. These are not clear categories, but only situations when courts may be flexible with the
doctrine. There are no clear-cut rules.
1. Agency: Where the court thinks the CO is obviously an agent of its principle SH.
2. Fraudulent Purpose: Courts may be convinced on the facts the purpose for which the CO is engaged is fraudulent.
When a CO since its inception has been designed to commit fraud or to avoid a legislation, it will be seen as sham.
3. Avoidance of Regulatory Legislation: When a CO is set up for purposes of avoidance. This is primarily used in tax
legislation. When courts interpret securities and tax law, they tend to defer to statutory purpose behind regulatory
legislation and let it override strict separation.
4. Inactivity: The power of the registrar to strike COs from existence because he thinks they are inactive. This is outlined
in s.422.
Some other examples listed in the text are:
• Where a CO is clearly undercapitalized to meet foreseeable financial needs;
• Cases involving tort claims against the CO;
• Non-arm’s length transactions between parent and subsidiary CO.
Clarkson Co. Ltd. v. Zhelka [1967] HC
Only in the most flagrant cases of agency will the CO be seen as an agent of its owner or SH.
Facts: Selkirk incorporated and controlled several COs, including Industrial Ltd. and Fidelity Real Estate. In 1959
Industrial bought some land, and being without money paid for it with a cash advance from Selkirk’s other CO. In 1960,
Industrial Ltd. sold land to Selkirk’s sister, Zhelka, for a $120,000 promissory note. Zhelka mortgaged the land off, and after
going into default, she got $9,000, which ends up in the bank account of Fidelity. Selkirk then went bankrupt and the
appointed trustee Clarkson tried to sell the assets to pay the debts. The trustee wanted to claim the $9,000, saying that the
land, registered in Zhelka’s name, was held by her or by Industrial as a trustee for Selkirk, alleging that Industrial was a mere
agent and alter ego for Selkirk.
Issue: Is the conveyance fraudulent and so can the veil be lifted so the land used can be sold back to pay the creditors?
Discussion:
• The gift to Zhelka is reversible because it was fraudulent. There was no consideration, and it was entered into with the
intention of protecting the lands against claims by creditors. So the land, and the leftover $9,000 belong to Industrial.
• The question then is the relationship between Selkirk and Industrial.
• If it can be shown that the CO is a mere agent of a controlling corporator, it may be said that the CO is a sham.
• This is a question of fact, and should be done sparsely. The agency has to be flagrant.
• Having a controlling or total share in a CO does not make a CO an agent of a controlling company or person
• Present case is on the line, but not quite close enough to flagrancy.
• There is no evidence that the Industrial was ever used to defraud the creditors or as a sham and a cloak. It is a legit
CO, albeit it questionable in some ways.
• Despite the fact that the conveyance is found to be fraudulent, the resulting trust goes back to Industrial Ltd.. So does the
$9,000.
• There are no Canadian cases that have found a CO to be an agent of the SHs, though it could be possible.
Ruling: Money stays with Industrial.
De jure Control: 51% of the shares are held by a single individual or CO.
De facto Control: The ability to elect the majority of the board of the subsidiary CO (defined in s.2)
13
230.1 Introduction and Nature of Corporations
De Salaberry Realties Ltd. v. Minister of National Revenue [1974] FedTD
For the purposes of taxation, the courts are more flexible in lifting the veil of a group enterprise, even
though the individual COs remain individual persons in the eyes of the law.
Facts: The appeal of the income tax assessments to the Tax Appeal Board is regarding the profit by PL in selling land
alleged to be purchased only for shopping centre purposes. The COs in question form a pyramid structure, with a
grandparent CO managing parent COs, which create a network of sub-subsidiary COs, which are the land-holders. A new
sub-subsidiary was incorporated for every few purchases.
Issue: Are these CO really just agents of the larger CO, and so should the corporate veil be lifted?
Discussion:
• Complete examination of the CO as a whole is needed to determine if the corporate veil should be lifted - especially in
the case of pyramid structure of corporate ownership
• Some factors that the court considers:
• The people that are approached by potential customers are an indication as to the centre of policy and decisionmaking in each CO. Here the buyers went to the parent and grandparent COs instead of the actual land-holders.
• Despite the fact that shares of the sub-subsidiaries were only valued at $10, these COs were making purchases of
land in the millions of dollars which indicates strongly that the COs are merely an instrument of its grandparent. The
individual COs did not have the money to operate on their own, without having to rely on each other. Because of this
they had no free will and had no commercial viability.
• There was no horizontal interaction between lowest COs: all of their dealings were vertical with the parent COs.
• All of the boards of directors of the COs were appointed by the parent COs.
• They were not engaged on daily basis in commercial operations, but were simply engaged in holding property.
• The court finds this to be a “group enterprise”
• But they are still legal individuals in the eyes of the law, but for tax purposes, the court looks at the whole structure.
Ruling: The veil is lifted.
Guilford Case
A CO which was made for a fraudulent purpose will have its veil shamefully lifted and its face exposed
Facts: D quit his job as a taxi driver and signed an agreement stating that he will not set up a business within a specified
radius of the previous employer. So he went to his lawyer and asked him to set up a CO, which would make it a corporate
entity and not himself, allowing him to escape the contractual liability.
Issue: Is he in breach of contract for carrying on business?
Discussion:
• He created the CO for the purposes of breaching the contract
• He was under a pre-existing legal obligation to not do what he did anyway
• So the whole point of the CO was to defraud his previous employer.
Ruling: D is in breach of contract.
422 Dissolutions and cancellations of registration by registrar
(1) The registrar may, in accordance with this section, dissolve a company or cancel the registration of a foreign entity as an extraprovincial
company if the company or extraprovincial company
(a) fails, in each of 2 consecutive years, to file with the registrar an annual report required by this Act or a former Companies Act to be
filed,
(b) has, for a period of at least 2 years, failed to file with the registrar a record required by this Act or a former Companies Act to be filed,
other than an annual report,
(c) fails to comply with an order of the registrar, including an order to change its name or assumed name,
(d) fails, without reasonable excuse, to return a record to the registrar within 21 days after the date of a request furnished by the registrar
under section 420 (1),
423 Lieutenant Governor in Council may cancel incorporation of company
The Lieutenant Governor in Council may cancel the incorporation of a company and declare it to be dissolved.
14
230.2 Incorporation
The Process of Incorporation
The Place of Incorporation
• In US states market themselves as favourable to incorporation, competing for lower fees and higher privacy regulations.
• In Canada, this is largely a personal choice,and there is no real competition among provinces, or between federal and
provincial incorporation.
• Both federal and provincial governments have a power to incorporate. There are over 15 statutes that can set up COs.
• One can incorporate under any one of these, not just under the act of the province that the business is done in.
• Usually though, it is done out of the local province.
• But there is a recent trend towards federal incorporation, which could possibly a backlash against new BCBCA, or it may
be due in part to Quebec’s secession threat from mid-1990s.
• Non-for profit clubs and organizations can incorporate themselves under the Canada Corporations Act and are ruled by the
Society Act of BC.
Extra-Provincial Licencing
For the Purposes of the BC Business Corporation Act:
Corporation: As per s.1 it is any legal entity that has corporate personality, a body corporate, a body politic and corporate,
and incorporated association or a society, however and wherever incorporated, but not a municipal or a corporation sole.
Company: As per s.1 a company is any corporation that owes its existence to the BCBCA. A corporation is recognized as a
company under BCBCA or a former Companies Act, if it has not, since its most recent recognition or restoration as a
company, ceased to be a company.
Foreign Entity: A foreign corporation, a limited liability company, or extraprovincial society within meaning of Society Act,
that under s.191 of Financial Institutions Act, is deemed to have a business authorization; or under s.193(2) of Financial
Institutions Act, is ordered by the Financial Institutions Commission to apply for a business authorization.
Foreign Corporation: A corporation that
1. Is not a company (that is not incorporated under BCBCA),
2. Has issued shares,
3. Is not required under the Cooperative Association Act to be registered under that Act
4. 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,
• Any foreign entity that registers under s.377 becomes an “extraprovincial company”.
Extraprovincial Company: Means, as the case may be,
(a) A foreign entity registered under s.377 as an extraprovincial company or under s.379 as an amalgamated extraprovincial
company, or
(b) A foreign entity registered as an extraprovincial company or as an amalgamated extraprovincial company under
regulations made in accordance with Division 4 of Part 11,
and includes a pre-existing extraprovincial company;
Limited Liability Company: A business entity that was organized in a jurisdiction other than BC, is recognized as a
legal entity in the jurisdiction in which it was organized, is not a corporation; and is not a partnership, including, without
limitation, a limited partnership or a LLP.
375 Foreign entities required to be registered
(1) A foreign entity must register as an extraprovincial company in accordance with this Act within 2 months after the foreign entity begins to carry
on business in British Columbia.
(2) For the purposes of this Act and subject to subsection (3), a foreign entity is deemed to carry on business in British Columbia if
(a) its name, or any name under which it carries on business, is listed in a telephone directory
(i) for any part of British Columbia, and
(ii)in which an address or telephone number in British Columbia is given for the foreign entity,
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230.2 Incorporation
(b) its name, or any name under which it carries on business, appears or is announced in any advertisement in which an address or
telephone number in British Columbia is given for the foreign entity,
(c) it has, in British Columbia,
(i) a resident agent, or
(ii) a warehouse, office or place of business, or
(d) it otherwise carries on business in British Columbia.
(3) A foreign entity does not carry on business in British Columbia
(a) if it is a bank,
(b) if its only business in British Columbia is constructing and operating a railway, or
(c) merely because it has an interest as a limited partner in a limited partnership carrying on business in British Columbia.
• Part 11, which is made up of ss.374 to 399 contain a detailed code dealing with registration of foreign COs. It is like a
separate statute within a statute, with its own rules and structures.
• Prior to 2002, those COs that were not registered were incapable of bringing civil lawsuit in BC.
• After 2002, this was replaced with $50 per day fine, which is subject to a reverse onus clause under s.426.
• Usually a foreign CO needs an agent in province with address, so that it can be served documents.
• As per s.378(4), even if a foreign CO is not registered, no actions of its agents commits in BC are invalid. They are,
however, unable to launch civil lawsuits in the province.
• BCBCA is concerned with BC COs, but the BC Securities Act does not distinguish based on nationality or origin.
• Any corporate issuer that issues shares to the public in BC is subject to SA and so must follow disclosure requirements.
• Any conduct regulated by SA that happens in BC gives SA jurisdiction: such as insider trading in foreign CO that
takes place in BC.
Carrying on Business: Under common law, in order to be carrying on business, the foreign CO has to have an ongoing
presence in BC. Having a mere K with a BC CO is not enough as per Weight Watchers decision. Also, continuity is an
important element for carrying business.
Mergers
• There are friendly and unfriendly mergers (when management tries to resist the merger).
• The BCBCA has provisions for friendly mergers and amalgamations in ss.302-311. This is a new phenomenon, designed to
simplify CO’s immigration from one jurisdiction to another. Other options are to dissolve and reincorporate in another
jurisdiction, or to transfer all assets in to BC CO, wind up the foreign CO and buy shares in BC CO.
• There has to be a special resolution of SHs of both COs that they want to merge. And dissenting SHs can appeal this
before the judge.
• Continuance facilitates merger in these situations without having to start from the ground up, but there must be matching
provisions in both jurisdictions.
Corporate Names
It may not seem this way, but naming a newly incorporated CO raises a number of issues.
• Registrar under statute has discretion whether to approve a name or not.
• Several laws in Canada prohibit use of names by persons affiliation, such as the initials “RCMP”.
• Registrar wants a name that is distinctive and descriptive. “Western Canadian Electrical” may not be enough.
• One cannot use:
• One word names like “Electrical”, unless that word is registered trademark like “Sony”.
• Names of public figures.
• Any name that suggests government affiliation.
• Once a name is approved, no other CO can be registered under this name under the BCBCA.
• Even where COs are engaged in different lines of business, they will not be allowed to use similar names which might lead
public to believe they are associated. (Re Ebsco Investments)
• The phrase “likely to deceive” is interpreted to mean, “probably will mislead or confuse in the circumstances.” (Plumbing v.
Registrar of Companies AB)
• In the case that a new CO has a name that is much too close to an existing one, the existing one has several remedies
available. For example, if “Grant Powell Electrical” is a new CO, then an existing “GP Electrical” could:
• Bring actions in tort for damages: this is an intentional tort, and PL must establish damage and intent to mislead;
• Actions for trademark infringement: if “GP Electrical” is federally TM registered, PL may be able to bring actions
under Trade Marks Act. So this is one reason for incorporating federally;
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230.2 Incorporation
• If “GP Electrical” is registered and “Grant Powell Electrical” is allowed to register, GP can apply to SCC to have its
name changed under s.406.
•
•
•
•
•
•
s.22: A name can be reserved by applying to registrar for a period of 56 days.
s.23: The name must have Ltd., Inc., or Co., as part of name. You can have numbered name: “23443 BC Ltd.”
s.25: Prohibits the use of non-English or French names. You can use English/French translation of foreign names.
s.26: Foreign COs carrying business in BC must use an English translation of their name.
s.27: The name has to be displayed at the place of business.
s.263: Name change requires an amendment to the Notice of Articles. This action requires a special SH resolution
because it is constitutional change.
The Nature of the Corporate Constitution
Incorporation Technique
Letters Patent: A form of an open letter issued by the monarch that grant an office, status, or a right to an individual, or
to a CO. These are a residual carryover from when only Crown could incorporate COs. Letters Patent jurisdictions are
Federal, ON, and QB. There are two constitutional documents: “Articles of Incorporation” (public) and “By-laws” (not
public).
• ON and other former letters-patent jurisdictions (but not PEI) have all moved toward a system involving a minimum of
administrative discretion with respect to the grant of corporate status. Incorporation is effected by delivering to the
incorporating officer a document called “Articles of incorporation.”
• Three former memorandum jurisdictions (AB, SASK, NFLD) have also adopted the terminology and incorporated
techniques of the Federal Act, consistent with their adoption of the Act.
• Unfortunately for us, other memorandum jurisdictions such as BC and NS have retained the British legacy.
• Prior to BCBCA, there was the Company Act. Many changes are ones of terminology:
• Under old Act, one had to file “Memorandum” and “Articles” (constitution of a CO). These documents were kept on file
by government and were publicly accessible.
• In the new BCBCA the “Memorandum” is called “Notice of Articles” (equivalent of “By-laws” in federal jurisdiction).
• After 2004, Articles are no longer public, and are only available at records office to lawyers or accountants
• Because of this, constructive notice (idea that you were deemed to know what these documents said because they were
public) was abolished.
Constitution Documents in BC:
“Notice of Articles” , which is issued as a public memo, and “Articles” which are private by-laws of the CO. As per s.19
these documents are contractually binding on SHs. This is the origin of SHs’ rights.
3 When a company is recognized
(1) A company is recognized under this Act
(a) when it is incorporated under this Act,
(b) if the company results from the conversion, under this or any other Act, of a corporation into a company after the coming into force of
this Act, when the conversion occurs,
(c) if the company results from an amalgamation of corporations under this Act, when the amalgamation occurs, or
(d) if the company results from the continuation into BC of a foreign corporation under this Act, when the continuation occurs.
10 Formation of company
(1) One or more persons may form a company by
(a) entering into an incorporation agreement,
(b) filing with the registrar an incorporation application, and
(c) complying with this Part.
(2) An incorporation agreement must
(a) contain the agreement of each incorporator to take, in that incorporator's name, one or more shares of the company,
(b) for each incorporator,
(i) have a signature line with the full name of that incorporator set out legibly under the signature line, and
(ii) set out legibly opposite the signature line of that incorporator, the date and the number of shares.
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230.2 Incorporation
11 Notice of articles
Unless this Act provides otherwise, the notice of articles of a company must
(a) be in the form established by the registrar,
(b) set out the name of the company,
(c) set out the full name of, and prescribed address for, each of the directors,
(d) identify the registered office of the company by its mailing address and its delivery address,
(e) identify the records office of the company by its mailing address and its delivery address,
(f) set out, in the prescribed manner, any translation of the company's name that the company intends to use outside Canada,
(g) describe the authorized share structure of the company in accordance with section 53, and
(h) set out, in respect of each class and series of shares, whether there are special rights or restrictions attached to the shares of that class or series of
shares and, if there are or were special rights or restrictions, set out the date of each resolution altering those special rights or restrictions that was
passed on or after, and the date of each court order altering those special rights or restrictions that was made on or after,
(i) if the company is a pre-existing company, the day on which this Act comes into force, or
(ii) if the company is not a pre-existing company, the date on which the company is recognized under this Act.
• Notice of Articles must be filed in Victoria, and is kept open to public access.
12 Articles
(1) A company must have articles that
(a) set rules for its conduct ...
(2) The articles of a company must
(a) set out every restriction, if any, on
(i) the businesses that may be carried on by the company, and
(ii) the powers that the company may exercise,
(b) set out, for each class and series of shares, all of the special rights or restrictions that are attached to the shares of that class or series
of shares,
(c) ... Incorporation number and name
(3) Without limiting subsections (1) and (2), the first set of articles of a company incorporated under this Act must
(a) have a signature line with the full name of each incorporator set out legibly under the signature line, and
(b) be signed on the applicable signature line by each incorporator.
13 Incorporation
(1) A company is incorporated
(a) on the date and time that the incorporation application applicable to it is filed with the registrar
(2) After a company is incorporated under this Part, the registrar must issue a certificate of incorporation for the company and must record in that
certificate the name and incorporation number of the company and the date and time of its incorporation.
14 Withdrawal of application for incorporation
At any time after an incorporation application is filed with the registrar and before a company is incorporated in accordance with that incorporation
application, an incorporator or any other person who appears to the registrar to be an appropriate person to do so may withdraw the incorporation...
16 Articles on incorporation
... if, despite sections 12 and 15, articles have not been signed by all of those persons when the incorporation application is filed with the registrar to
incorporate the company, the company has as its articles,
(a) if a set of articles has been signed by one or more of the persons designated as incorporators in the incorporation application, those articles, or
(b) if none of the persons designated as incorporators in the incorporation application have signed articles for the company, Table 1.
17 Effect of incorporation
On and after the incorporation of a company, the SHs of the company are, for so long as they remain SHs of the company, a company with the
name set out in the notice of articles, capable of exercising the functions of an incorporated company with the powers and with the liability on the
part of the SHs provided in this Act.
18 Evidence of incorporation
Whether or not the requirements precedent and incidental to incorporation have been complied with, a notation in the corporate register that a
company has been incorporated is conclusive evidence for the purposes of this Act and for all other purposes that the company has been duly
incorporated on the date shown and the time, if any, shown in the corporate register.
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230.2 Incorporation
19 Effect of notice of articles and articles
(1) Subject to subsection (2), a company and its shareholders are bound by the company's articles and notice of articles in the manner contemplated
by subsection (3) from the time at which the company is recognized.
(2) A pre-existing company and its shareholders are bound, in the manner contemplated by subsection (3),
(a) by the company's notice of articles, if any,
(b) by the company's articles, and
(c) subject to section 373 (3) or 439 (3), as the case may be, by the company's memorandum.
(3) A company and its shareholders are bound by the company's articles and notice of articles or by its memorandum and articles, as the case may
be, and by any alterations made to those records under this Act or a former Companies Act, to the same extent as if those records
(a) had been signed and sealed by the company and by each shareholder, and
(b) contained covenants on the part of each shareholder and the shareholder's successors and personal or other legal representatives to
observe the articles and notice of articles or memorandum and articles, as the case may be.
• This section is the cornerstone of SH rights, making the Directors and SHs parties to a contract, which also includes the
entirety of the BCBCA
• In a sense, they are a mutually enforceable contract between SHs and company.
• If a SH is concerned that certain provisions of Notice of Articles or Articles are not being preserved, that SH has standing
at common law to go to court and seek non-pecuniary relief
• This contractual effect is peculiar to memorandum jurisdiction and is not applicable in letters patent jurisdictions
Par Value Shares: Shares described in terms of a monetary amount, such as “authorized capital consists of 100 shares of
$1 each”. Dollar value does not really mean anything: even where shares may imply that they are worth a certain amount,
their true value can fluctuate.
No Par Value Shares: Shares include no monetary amount, such as “authorized capital consists of 100 shares”. NPV is
favored because it does not suggest the real value of the shares to anyone, merely the stake in the ownership of the CO, so
that owning 50 shares of a CO with 100 shares, means owning 50% of the value of the CO.
Restriction on Powers and Practices of a Corporation
33 Restricted businesses and powers
(1) A company must not
(a) carry on any business or exercise any power that it is restricted by its memorandum or articles from carrying on or exercising, or
(b) exercise any of its powers in a manner inconsistent with those restrictions in its memorandum or articles.
(2) No act of a company, including a transfer of property, rights or interests to or by the company, is invalid merely because the act contravenes
subsection (1).
• In letters patent jurisdictions, it has always been that COs have powers of full capacity to do anything that is lawful, in
same way as persons of legal age.
• But in memorandum jurisdictions such as BC, COs only had powers that their constitutions conferred upon them. Thus,
ultra vires actions were held void and of no effect.
• This was formally abolished by s.30, which gives COs the capacity and the rights, powers and privileges of an individual
of full capacity.
• But COs can still be restricted in the scope of their business. This restriction is always self-imposed.
• This restriction has to be intended and specific.
• Under s.33(2), even if there are restrictions, the resultant actions are not invalid. Thus, third parties are thus protected.
• Directors who vote in favour or consent to the commission of an action restricted by s.33(1) are personally liable to restore
to the company any amount paid or distributed as a result and not otherwise recovered by the company as per s.154(1)(a).
• There is a defence available to the under s.157.
• Also, foreign companies operating in BC are still subject to their homegrown regulations and restriction under s.378
Remedies for Breach of Constitution
There are statutory remedies for a breach of the CO’s constitution.
• Under s.228, SHs, creditors, and other complainants can apply for a court order that the person committing a restricted
act under s.33(1) refrain from doing so or compensate the CO or party to K for having done so.
19
230.2 Incorporation
• Under s.259, CO can at any time add, delete, or modify any restrictions it has in place in Notice of Articles or Articles.
• This requires passage of Special Resolution.
• This section does not apply to change of name.
• A SH dissenting with the deletion of restriction, can vote against it or have recourse to an appraisal remedy.
• SHs may dissent by sending Notice of Dissent to the CO in respect of any resolution under s.259(1) to alter any
restrictions on the powers of the company or on the business it is permitted to carry on.
• A dissenter has a right to have his shares purchased at price subject to judicial review (s.245).
• There is more about this at the end of the notes, under the “Shareholder Remedies” section.
Under common law, there is always the recourse to fiduciary duty of the Directors to the CO
• This is outlined in s.142: Duties of directors and officers
• But the fiduciary duty is owed to the CO as a whole.
• Because of this, a SH suing for breach of fiduciary duty can have a hard time getting a cause of action, as the Directors
do not owe them individual duty. A SH cannot sue on behalf of CO unless the Board has agreed to do so, and they may
be loath to do so if they are the ones implicated.
• Derivative action gives the judge a power to allow the SH to sue in CO’s name. Much more about this later.
• Powers of the Board in s.136 have to be carefully differentiated from duties of the Board in s.142.
• With the advent of the statutory rule, the question is whether common law remedies have been largely phased out?
• In reality, s.19 is the last bastion of common law remedies, since CO’s Articles are seen as a contract between SHs and
Directors, which means that anyone in breach of Articles is in breach of contract.
• It would be interesting to see if a breach of s.142 duties by the Directors can be seen as breach of K under s.19
• According to Paterson, s.142 or s.228 cannot be relied on as cause of action for breach of K under s.19. But the
judicial authority for this is a little shaky it seems.
Pre-Incorporation Contracts
Pre-Incorporation Contract: A contract entered by and agent on behalf of the CO prior to its incorporation.
• Often people in pre-incorporation phase go out and contract on behalf of a CO that is about to come into existence, or
one that they think has already done so.
• This is problematic, since the CO is legal fiction created by its incorporation, and one cannot enter into a binding K with
someone who does not exist at the time of the K.
• Elsewhere this has been resolved through common law and statute, but BC was one of the last to deal with this problem.
• In 2002, BC enacted s.20, which is similar to provisions in every other province, albeit with significant variations.
• BC took the approach that CO exists as an entity prior to its incorporation.
Common Law
In common law there are three distinguishable situations of pre-incorporation contracts.
1. Both parties to K knew that CO was not yet incorporated. (Kelner)
2. Facilitator knows that the CO is not incorporated, but the contracting party does not.
3. Neither party knows, or the facilitator mistakenly believes that CO is incorporated and contracting party relies on this
interpretation (Black).
Kelner v. Baxter [1866] UK
A pre-incorporation K places the liability on the facilitator, if he knew that the CO does not exists and if it
is clear that he intended to be personally bound.
Facts: Baxter was a promoter (facilitator) of an opening hotel who ordered a large amount of beer from supplier Kelner in
preparation for opening. Both parties knew that the CO running the hotel was not yet in existence and that the facilitator
was acting on behalf of it nonetheless. The facilitator has signed the K on behalf of proposed company, which surely
proceeds to fuck up and collapse, after which the supplier sued D in personal capacity for payment.
Issue: Was D liable to pay supplier for beer, or was the non-existent CO liable?
Discussion:
• Court took note that both parties knew that the CO was not yet incorporated.
• D signed K on behalf of CO, which was interpreted by court as indicative of fact that D intended to be personally bound.
20
230.2 Incorporation
• D intended to be personally bound because there was provision in K requiring immediate delivery.
• Some read this case as saying since there was no principal in existence at time when D acted, in order to make his actions
legally effective, they had to be binding on him personally.
• This was the law in BC prior to 2002.
• It was dangerous because big deals were entered into during pre-incorporation phase, and if the facilitator was found not
liable, the parties got the shaft.
Ruling: Judgement for PL
Black v. Smallwood [1966] HCAU
A pre-incorporation K is void if there is a mistaken belief on both sides that the CO does exist. In this case
the facilitator is not liable.
Facts: Black signed a K for sale of land to a CO, on whose behalf Smallwood signed as one of the Directors. Both him and
PL thought that the CO was incorporated. But they were wrong. When shit went down, PL sued D for recovery in personal
capacity, thinking Kelner will result in their favor.
Issue: Is this the same as Kelner?
Discussion:
• This does sound pretty similar on the facts.
• But parties did not intend the agent to be personally liable, because they mistakenly thought the CO had been formed.
• Kelner is distinguished here as not supporting a wide ratio: it is not always that there is a personal liability on agent’s part,
but only where he knew that the CO did not exist and intended to be liable.
• There must be strong presumption that the facilitator meant to bind himself personally. The exact scope of this is not
clear, but the courts may try to place the onus on the facilitator to rebut the presumption that he intended to be liable.
• So K is void and PL gets fuck all
• Note, the name of this case is almost as good as Dick v. Queen. Oh, the irony.
Ruling: Judgement for D.
Breach of Warranty: A quasi-tortious remedy which is concerned with misrepresentation by the agent of his authority in
a particular matter. There must be:
1. Evidence that the agent making a representation (warranty).
2. Evidence that the Third Party has relied on that representation.
3. Existence of provable loss.
• But the cost of this remedy does not usually justify bringing the action
• One can rarely prove that a loss flows as a result of warranty being untrue.
Statutory
20 Pre-incorporation contracts
(2) Subject to ss.(4)(b) and (8), if, before a CO is incorporated, a person purports to enter into a contract in the name of or on behalf of the CO,
(a) the person is deemed to warrant to the other parties to the purported contract that the CO will
(i) come into existence within a reasonable time, and
(ii) adopt, under subsection (3), the purported contract within a reasonable time after the company comes into existence,
(b) the person is liable to the other parties to the purported contract for damages for any breach of that warranty, and
(c) the measure of damages for that breach of warranty is the same as if
(i) the CO existed when the purported contract was entered into,
(ii) the person who entered into the purported contract in the name of or on behalf of the CO had no authority to do so, and
(iii)the company refused to ratify the purported contract.
(3) If, after a pre-incorporation contract is entered into, the CO ... is incorporated, the new CO may, within a reasonable time after its incorporation,
adopt that pre-incorporation contract by any act or conduct signifying its intention to be bound by it.
(4) On the adoption of a pre-incorporation contract under subsection (3),
(a) the new company is bound by and is entitled to the benefits of the pre-incorporation contract as if the new company had been
incorporated at the date of the pre-incorporation contract and had been a party to it, and
(b) the facilitator ceases, except as provided in subsections (6) and (7), to be liable under subsection (2) in respect of the preincorporation contract.
(5) If the new CO does not adopt the pre-incorporation contract under subsection (3) within a reasonable time after the new CO is incorporated, the
facilitator or any party to that pre-incorporation contract may apply to the court for an order directing the new CO to restore to the applicant any
benefit received by the new CO under the pre-incorporation contract.
21
230.2 Incorporation
(6) Whether or not the new CO adopts the pre-incorporation contract under subsection (3), the new CO, the facilitator or any party to the preincorporation contract may apply to the court for an order
(a) setting the obligations of the new CO and the facilitator under the pre-incorporation contract as joint or joint and several, or
(b) apportioning liability between the new CO and the facilitator.
(7) On an application under subsection (6), the court may, subject to subsection (8), make any order it considers appropriate.
(8) A facilitator is not liable under subsection (2) in respect of the pre-incorporation contract if the parties to the pre-incorporation contract have, in
writing, expressly so agreed.
• Facilitator in this section is the agent signing the K on behalf of the CO
• The clause in s.20(6) only makes sense for the third parties who want to go after both the facilitator and the new CO.
• Since s.20 only applies to companies under the meaning of the Act (s.20(2)), then it cannot apply unless if the CO is
incorporated under BCBCA
• Other jurisdictions in Canada have similar sections, which be the ones to be enforced in such a case.
• Federal CBCA, s.14 only covers written contracts (whereas our s.20 makes no distinction between written and oral).
• Most likely courts will rely on equity and will give remedy to those who provided services which were not paid for.
• Also, in the case that the statute has exhausted its possibilities, common law principles will still apply.
22
230.3 Management And Control Of the Corporation
Management And Control Of the Corporation
Introduction
Berle and Means were the theorists that have reshaped the approach to modern corporate governments following in the
wake of the Great Depression. Their theories defined the corporate structure of our time:
• The power in COs lies with the Board, not with SHs
• Managers enjoyed so much discretion because of separation of ownership and control in US
• Dispersion of share ownership meant that no one SH had incentive to assume responsibility, so control was held by Board
who only had minor interests in capital of CO, and no motivation to act in concern for CO.
• Nexus of contractual relationships
Theory of Market for Corporate Control: (H. Manne, 1970s)
Any badly managed CO would not generate profits and have its shares go down. As shares go down, people would pay more
attention to the CO being a target of a takeover bid. They would have to involve premium in order to get takeover bid,
which would spark further interest. Once a more apt offeror got control of the CO, the offeror would replace the incumbent
management, puts his board in control, and run the CO properly, because of which shares go up.
• The law plays a peripheral role in regulating the management and control, and it doesn’t offer much assistance in the way
of maximizing economic efficiency.
• The best that it can do is stay out of making business decisions, and this is usually implemented though the business
judgement rule.
• If the Theory of Market would be perfect, there still would be two ways in which the law may have an important role:
• Markets may not work properly, that is shares may not be valued in tandem with mismanagement
• Statutes are like standard form contracts, which can save COs enormous costs and a whole lot of time.
Board of Directors
Outside Director: Member of the Board of directors who does not form part of the executive management team. He is
not an employee of the CO, nor is he affiliated with it in any other way. His only function is to go to Directors’ meetings.
Inside Director: Member of the Board who is also a member of CO’s management, almost always a corporate officer. So,
a CEO who is also a Chairman of the Board would be considered an inside director. They are also employees of the CO
and often hold equity in the CO.
Corporate Officer: An official who had corporate title conferred upon him a means of identifying their function in the
organization.
CEO: Usually the highest-ranking corporate officer in charge of total management, and of reporting to the Board.
CFO: Corporate officer primarily responsible for managing the financial risk of the CO. Also responsible for financial
planning and record-keeping, as well as financial reporting to higher management.
Chairman of the Board: The person leading the Board of Directors, presiding over meetings, leading the Board to
consensus from disparate point of view of its members. In US this is often interchangeable with the term “President”.
• Some think that there should be a demarkation between outside and inside directors, as there is in EU at the moment.
The formal distinction there is between Supervisory Board (outside directors) and Managerial Board (inside directors).
• Eisenburg would have the Supervisory board have formal auditing powers.
• This is somewhat present in BCBCA in the sections that outline the auditor committee.
1 Definitions
(3) An individual is appointed as a director of a company if the individual is
(a) appointed as a director of the company in accordance with
(i) this Act, or
(ii) the memorandum or articles of the company,
(b) designated as a director of the company on the notice of articles that applies to the company when it is recognized under this Act, or
(c) declared by the court to be a director of the company.
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230.3 Management And Control Of the Corporation
135 If no directors in office
If there are no Directors in office, an individual may be empowered by SH or incorporators to call meeting of SHs to elect
and appoint directors or appoint interim directors. May also be empowered to appoint as Directors, to hold office until the
vacancies are filled at that meeting, etc…
136 Powers and functions of directors
(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.
• The power vested here is not absolute, and there are other sections in the Act that undermine or override this grant of
authority.
• CO’s Articles can also establish authority different from the one granted by s.136.
• The words “manage or supervise the management” indicate that the Board may bestow its powers to the delegate, who is
usually in the senior management.
• Delegation may also be to committee of Board, President, CEO, Managing Director, etc.
• Non potest delegano: The delegated powers cannot be further delegated.
• Managerial power is vested in board as whole, not to individual director. At any time that a single director purports to
exercise powers under s.136, they must be doing so as either a delegate or agent.
• As there are no memoranda for COs incorporated under new BCBCA, the best way for us to treat s.136(1) is as if it only
reads “articles” so the law is the same as the old Act.
• The CBCA equivalent of BCBCA s.136 is s.102. It does not allow CO’s Charter to contain limits on directors’ powers. The
only way you can limit their powers is through a unanimous SH agreement: an external K between all SHs that reserves
certain powers to SHs and takes away from Directors. But this is not possible for widely-held COs.
• In ON the Board has power not only to manage affairs of CO, but to add bylaws at its discretion. The SHs can affirm or
veto this decision at next SH meeting.
124 Persons disqualified as directors
Person cannot be a Director if they are under 18, are found to be incapable of managing their own affairs, are bankrupt, or
have criminal record relating to corporate law.
128 When directors cease to hold office
(3) Subject to subsection (4), a company may remove a director before the expiration of the director's term of office
(a) by a special resolution, or
(b) if the memorandum or articles provide that a director may be removed by a resolution of the SHs entitled to vote at general meetings
passed by less than a special majority or may be removed by some other method, by the resolution or method specified.
137 Powers of directors may be transferred
By provisions of the Articles, the powers of the directors may be transferred to someone else.
138 Application of this Act to persons performing functions of a director
A number of sections in Act apply to non-directors as if they were directors, but only to extent of these functions.
139 Revocation of resolutions
Directors can revoke special resolutions before they are acted upon if they were given the power to do this by another special
resolution.
141 Officers
Officers may be appointed by directors and have specific duties. Subject to corporate constitution, anyone may be
appointed, but anyone not qualified to be a director under s.124 is not qualified to be an officer.
Automatic Self-Cleansing Filter v. Cuninghame [1906] UKCA
Once the board is vested with power by statute, they cannot be interfered with by SHs, save for a special
resolution to amend the Charter.
Facts: CO’s Charter had a provision worded like s.136, which vested management and control to Directors, subject to such
regulations as was passed by extraordinary resolution that required 3/4 vote of SHs. The board did not want to sell some
24
230.3 Management And Control Of the Corporation
assets in question, so SHs called a general meeting and passed a resolution by simple majority to order the Directors to do
so. The board refused to do so, as they viewed the sale as not for benefit of the CO.
Issue: Are Directors bound to carry out the resolution passed?
Discussion:
• This case has been applied in Canada, and has the power of precedent.
• The court emphasizes legal and functional power of board.
• If it is desired to alter powers of Directors, then it must be done not by resolution carried by majority at ordinary meeting,
but by a special resolution.
• Shs claim that they are the principals and the Directors are their agents. But this analogy does not apply:
• Directors become agents by consensus of all individual’s of the CO.
• It is not fair for simple majority to alter the mandate of an agent, as minority must also be taken into account.
• Mandate of directors can only be altered under machinery of Articles themselves.
• The only way SHs could accomplish what they wanted to do here was to convene an extraordinary meeting of the SHs
and amend the constitution of the CO to remove those powers from the Directors, or to have a special meeting to elect
new Directors after having removed old ones by some sort of a s.128(3) equivalent.
Ruling: The SHs get the shaft.
Special Resolution: A resolution of the SHs that requires either 2/3 or 3/4 of the vote, depending on the CO’s
constitution.
Deadlock Doctrine: If for some reason the Board cannot function as it is meant to, then the court can recognize the
residual powers of the SHs to have control and management of the CO. This is exemplified in (Barron v. Potter)
Audit Committee
Audit Committee: A formal requirement for public COs in BC, which create a procedural control on Director’s powers
by discussing audited financial statements.
223 Application
This Division does not apply to a company unless the company is a public company.
224 Appointment and procedures of audit committee
(1) The directors of a company must, at their first meeting held on or after each annual reference date, elect from among their number a committee, to
be known as the audit committee, to hold office until the next annual reference date.
(2) An audit committee must be composed of at least 3 directors, and a majority of the members of the committee must not be officers or employees
of the company or of an affiliate of the company.
(3) The quorum for a meeting of the audit committee is a majority of the members of the committee who are not officers or employees of the
company or of an affiliate of the company.
(4) ...
225 Duties of audit committee
The audit committee must, in addition to or as part of any responsibilities assigned to it under this Act, review and report to the directors on the
following before they are published:
(a) the financial statements of the company, referred to in section 185(1)(a),(b) or (c), other than any financial statements of the
company referred to in section 198 (2) (b);
(b) the auditor's report, if any, prepared in relation to those financial statements.
226 Provision of financial statements to audit committee
The directors must provide to the audit committee the financial statements and auditor's report referred to in section 225 in sufficient time to allow
the committee to review and report on those financial statements and auditor's report as required under that section.
• The symbolic value of these provisions may be more important than their real value.
• The provisions in the BCBCA do not say much about how the committee is to carry out this review.
• SHs have limited say as to who will sit on the committee, and it can be an issue where the relationships between the
committee and the board becomes too close.
25
230.3 Management And Control Of the Corporation
• Board is required to produce publicly available financial statements, which must be audited by accountants who are in
statutory relationship with the CO.
• If auditors do not carry out their task with diligence, they may be liable to the CO in negligence. They may also be sued
for breach of K in cases of major oversight.
• Only recently have Canadian courts held that auditors owe a duty of care to SHs of the CO.
• There are series of decisions where SHs have sued claiming prejudice because they bought shares in a CO without
realizing that the auditor had been negligent. Courts are reluctant to impose liability in such circumstances.
Sale of Undertaking
Sale of Undertaking: Sale of all or substantially all of the CO’s assets. Courts use two-prong test:
1. Quantitative significance of what is being sold measures the value of what is being sold in light of the value of the CO.
If the sale is more than 50% of the assets, then the sale is presumed to be out of the ordinary.
2. Qualitative approach looks at whether the sale is out of line with CO’s normal pattern of business activities, or whether
it strikes at the heart of business. Will it end up doing something totally different than before?
Where there is a quantitative majority of the sale, it is presumed that there is a qualitative.
301 Power to dispose of undertaking
(1) A company must not sell, lease or otherwise dispose of all or substantially all of its undertaking unless
(a) it does so in the ordinary course of its business, or
(b) it has been authorized to do so by a special resolution.
(2) If the directors do not get approval before the sale, any SH, director, or creditor can ask court for: injunction, rescission,
or “any order it considers appropriate.”
(3) A disposition of all or substantially all of the undertaking of a company is not invalid merely because the company contravenes subsection (1),
if the disposition is
(a) for valuable consideration to a person who is dealing with the company in good faith, or
(b) ratified by a special resolution.
(4) Despite a special resolution under (1)(b) or (3)(b) the directors may abandon the disposition at will.
(5) SHs can send notice of dissent to the special resolution under (1)(b) or (3)(b)
(6) The prohibition in (1) does not apply to a disposition of all or substantially all of the undertaking of the company
(a) by way of security interest,
(b) by a lease if
(i) the term of the lease, at its beginning, does not exceed 3 years, and
(ii)any option or covenant for renewal included in the lease is not capable of extending the total lease periods beyond 3 years,
(c) to a corporation that is a wholly owned subsidiary of the company,
(d) to a corporation of which the company is a wholly owned subsidiary,
(e) to a corporation if the company and the corporation are
(i) wholly owned subsidiaries of the same holding corporation, or
(ii) wholly owned by the same person, or
(f) to the person, other than a corporation, who holds all of the shares of
(i) the company, or
(ii)a corporation of which the company is a wholly owned subsidiary.
• This section gives restraint to the unqualified power of the directors in s.136 by limiting their ability to sell off everything
that the CO has and bugger off with the cash.
• Essential issue in most s.301 cases is whether or not the section applies, which involves determination whether a sale of
assets is a sale of substantially all of the undertaking.
• The provisions in s.301(3) is there to protect third parties that are involved in the sale.
• SHs who dissent to the Special Resolution are entitled to an appraisal remedy under s.238(1), which allows them to sell
their shares to the CO at value.
• According to Paterson, a business may sell more that half of its property to buy more property.
26
230.3 Management And Control Of the Corporation
C.B.C. Pension Plan v. BF Realty Holdings Ltd. [2000] ONCA
Whether assets owed by subsidiaries will count toward total undertaking has to be established on a case
by case basis. But most of the time they will.
Facts: Appeal by several debenture holders in BF Realty Holdings, from a decision that certain transactions entered into by
BF did not constitute sale of undertaking under the terms of the debentures. The debentures prohibited “the company”
from entering into any transaction which transferred "all or substantially all" of its assets to another CO unless that CO
assumed the obligation to pay under the debentures. BF transferred assets to and among its subsidiaries and related COs.
The trial judge held that the word "company" meant BF and its subsidiaries rather than BF alone. Therefore, the judge
found that BF had not transferred assets outside of the CO.
Issue: Do the assets of subsidiaries count towards sale of undertaking?
Discussion:
• Only a small portion of assets directly held by BF were transferred.
• The asset transfers did not involve BF divesting itself of its shares in its subsidiaries. The remainder of its property was
held by its subsidiaries.
• If, as the holders of the debentures urged, "the company" meant BF alone, then it was necessary to interpret "all or
substantially all" of the property as referring the BF’s property alone.
• If "the company" was intended to mean BF and its subsidiaries, then no transfer to any other CO had occurred.
• The asset transfers did not bring about any fundamental change in the relationship between BF and the debenture
holders.
• Also, at the time the debentures were issued, BF’s financial statements were consolidated and included the subsidiaries.
• BF did not transfer all or substantially all of its property.
Ruling: Appeal dismissed
27
230.4 Duties of Directors and Officers
Duties of Directors and Officers
142 Duties of directors and officers
(1) A director or officer of a company, when exercising the powers and performing the functions of a director or officer of the company, as the case
may be, must
(a) act honestly and in good faith with a view to the best interests of the company,
(b) exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances ...
• This section is the current statutory source of the duties of directors and officers. It is the result and expression of more
than a century of common law tradition.
• The two main points here are to act in good faith for the best interest of the CO, and to exercise diligence in general.
• Thus the two main duties of directors and officers are:
• Fiduciary duty towards the CO
• General duty not to be negligent.
Negligence
• Directors are vested with power to act as agent of the CO, contracting on its behalf. This agency can arise expressly or
implicitly. Curious nature of it is that the power of agency is held by the board collectively, but each director owes an
individual duty of care.
• For negligence, damages are available.
• But only equitable remedies are available for breach of fiduciary duty. Though this starting to change somewhat.
• Directors are somewhat analogous to trustees. But trustees have special responsibilities by operation of law and their
standards of care are very high.
• Whereas trustees are supposed to keep things safe, directors are business people and are encouraged to take risks. Business
judgment rule comes into play and dilutes idea that directors are trustees.
Business Judgement Rule: Directors are presumed to be motivated by the interests of the CO, and the court will refuse
to review the actions of the directors unless there is some allegation that the directors violated their duty of care to manage
the CO to the best of their ability. The burden is on the party challenging the decision to establish facts rebutting the
presumption.
Common Law
• There are few cases on this matter because the standards of management and accountability of directors have been dealt
with by other mechanisms such as specialized forms of legislation.
• Also, boards do not usually authorize proceedings against its own membership.
Re City Equitable Fire Insurance Co. [1925] UK
Standard of care for directors and officers is that of gross negligence.
Facts: Claim against the directors was brought after the CO went into receivership. The investigation showed a deficit of
£1,200,000 which appeared fraudulent, because the losses were the result of investments in securities which depreciated.
The managing director was jailed fraud, and the liquidator brought action against defendants and auditors alleging
negligence and breach of duty.
Issue: What is the standard of care for directors of a CO?
Discussion:
• Role of directors varies with the nature of the CO on whose board they serve. The court lays out the elements of a
common law action, and endorses lax and flexible standard.
• The test for standard of care for directors is subjective. Directors do not need to meet any certain threshold, and are
merely expected to exhibit care and skill reasonably expected by person of Ds knowledge and experience.
• The director does not have be constantly involved in the CO’s affairs. It is enough to act and supervise intermittently.
• This is exactly how most directors of companies in Canada operate.
• Directors can rely on management and are not required to second-guess management’s recommendations unless they are
put on inquiry. The main idea behind this point is the business judgment rule.
• A director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly.
28
230.4 Duties of Directors and Officers
• So long as a director acts honestly he cannot be made responsible in damages unless guilty of gross or culpable negligence
in a business sense.
• So a director who is a blithering incompetent fool who is honest and well intended has nothing to fear.
• So the directors here are not liable.
• But the provision under which they were relieved of liability would now be invalidated by the current statute.
Ruling: Action dismissed.
• Selangor United Rubber v. Craddock [1968] UK Court was unwilling to tolerate Board’s blatant disregard. Directors who
blindly do all that they are asked to do will be held to account.
• Two nominee directors blindly sanctioned conveyance of all assets of PL CO to another CO and enabled one of
principles of latter CO to gain control of PL company by using PL CO’s own assets.
• The directors never made any inquiries about resolutions they voted for.
• They liable in equity for wrongful conversion of P company’s funds.
Statutory Reform
One of the objectives of corporate law reform in Canada has been to upgrade the standard of care imposed on directors.
142 Duties of directors and officers
(1) A director or officer of a company, when exercising the powers and performing the functions of a director or officer of the company, as the case
may be, must
(a) act honestly and in good faith with a view to the best interests of the company,
(b) exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances,
(c) act in accordance with this Act and the regulations, and
(d) subject to paragraphs (a) to (c), act in accordance with the memorandum and articles of the company.
(2) This section is in addition to, and not in derogation of, any enactment or rule of law or equity relating to the duties or liabilities of directors and
officers of a company.
(3) No provision in a contract, the memorandum or the articles relieves a director or officer from
(a) the duty to act in accordance with this Act and the regulations, or
(b) liability that by virtue of any enactment or rule of law or equity would otherwise attach to that director or officer in respect of any
negligence, default, breach of duty or breach of trust of which the director or officer may be guilty in relation to the company.
• As per s.142(2) the new statutory provisions are an addition to common law, which means that the new standard will never
be more lax than the old common law.
• As per s.142(3), nobody can contract out of this duty.
154 Directors' liability
(1) Subject to section 157, directors of a company who vote to authorizes the company to do any of the following are jointly and severally liable to
restore to the company any amount paid or distributed as a result and not otherwise recovered by the company:
(a) to do an act contrary to section 33(1)(restricted acts) as a result of which the company has paid compensation to any person;
(b) to pay a commission or allow a discount contrary to section 67;
(c) to pay a dividend contrary to section 70(2) (when CO is insolvent);
(d) to purchase, redeem or otherwise acquire shares contrary to section 78 or 79;
(e) to make a payment or give an indemnity contrary to section 163.
(3) The liability imposed by subsections (1) and (2) of this section is in addition to and not in derogation of any liability imposed on a director by
this Act or any other enactment or by any rule of law or equity.
(5) For the purposes of this section, a director of a company who is present at a meeting of the directors or of a committee of directors is deemed to
have consented to a resolution referred to in subsection (1) or (2) of this section that is passed at the meeting unless that director's dissent
(a) is recorded in the minutes of the meeting,
(b) is put in writing by the director and is provided to the secretary of the meeting before the end of the meeting, or
(c) is, promptly after the end of the meeting, put in writing and delivered to the delivery address of, or mailed by registered mail to the
mailing address of, the company's registered office.
(7) Subject to subsection (8), a director who is not present at a meeting of the directors or of a committee of directors at which a resolution referred
to in subsection (1) or (2) is passed is deemed to have consented to the resolution if,
(a) in the case of a resolution passed at a directors' meeting, the individual was a director at the time of the meeting, or
(b) in the case of a resolution passed at a meeting of a committee of directors, the individual was a member of that committee at the time
of the meeting.
29
230.4 Duties of Directors and Officers
(8) Subsection (7) does not apply to a director who, within 7 days after becoming aware of the passing of a resolution referred to in subsection (1)
or (2), delivers to the delivery address of, or mails by registered mail to the mailing address of, the company's registered office, a written dissent.
(9) A legal proceeding to enforce a liability imposed by this section may not be commenced more than 2 years after the date of the applicable
resolution.
• This section is an outgrowth of s.142, extending it so directors are personally liable for specific statutory actions.
• It only refers to liability on part of directors for infractions of statute, whereas s.142 give liability of violation of common
law or law of equity.
157 Limitations on liability
(1) A director of a CO is not liable under section 154 and has complied with his or her duties under section 142(1) if he relied, in good faith, on
(a) financial statements of the company represented to the director by an officer of the company or in a written report of the auditor of the
company to fairly reflect the financial position of the company,
(b) a written report of a lawyer, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by
that person,
(c) a statement of fact represented to the director by an officer of the company to be correct, or
(d) any record, information or representation that the court considers provides reasonable grounds for the actions, whether or not
(i) the record was forged, fraudulently made or inaccurate, or
(ii)the information or representation was fraudulently made or inaccurate.
(2) A director of a company is not liable under section 154 if the director did not know and could not reasonably have known that the act done by
the director or authorized by the resolution voted for or consented to by the director was contrary to this Act.
• The onus is on the director to prove that he relied on this material.
• s.154 and s.157 apply to directors and not officers. But officers will never be voting on commission of acts, unless they are
also directors. So there is no big problem here.
• The lower down the corporate chain of command one is, the harder it becomes to say that you rely on other people. But
some defenses in s.157 seem as credible for lower level officers also.
• Paterson says he would apply them to both directors and officers, but this is a new provision in a new Act, and it may be
changed in the future.
Peoples Department Stores Inc. v. Wise [2003] QBCA
Directors owe duty of care to their CO's creditors or any other stakeholder.
Facts: Wise Stores acquired Peoples Department Stores. The Wise brothers were majority SHs, officers and directors of
Wise, and were also Peoples' directors. There were problems with the joint operation of the two CO, leading to problems
with the inventory records. The brothers implemented an inventory procurement policy that Peoples would purchase all
supplies from North American suppliers, and Wise would purchase all supplies from overseas. The COs would then charge
each other for supplies that they transferred to each other. Within a year, Wise and Peoples had declared bankruptcy.
Peoples' trustee filed a petition claiming that the brothers had breached their fiduciary duties and duty of care as directors to
the detriment of Peoples' creditors in violation of the CBCA, and that Peoples' assets had been transferred to Wise for less
than FMV in violation of the Bankruptcy and Insolvency Act. QBSC found a breach of duty, but was overruled by QBCA and
SCC.
Issue: Do directors owe a duty of care to creditors?
Discussion:
• Directors are personally responsible for the action of the CO only if they are grossly negligent. They must show no more
than fair and reasonable diligence in managing the CO and acting honestly.
• Here, there was no evidence of such gross negligence, so no breach of duty under s.122(1)(b).
• But there is a problem with claiming negligence. One is alleging negligent omission, not positive act. Omissions are
harder to prove, especially because there is no common standard as to how directors are supposed to act.
• Fiduciary duty refers to personal conduct of directors, not to the quality of their management.
• Despite the failure of the joint asset approach, the directors implemented it in an honest and good faith attempt to redress
the CO's financial problems.
• The new policy was a reasonable business decision made with a view to rectifying a serious and urgent business
problem.
• The directors acted reasonably in relying on the reports that they were provided. This reliance on reports moved into
being statutory provision under s.157 (Directors not liable under s.154 and have complied with duties under s.142 if
they relied on reports)
• Thus the brothers did not breach their fiduciary duties under s.122(1)(a) of the CBCA (equivalent of s.142 of BCBCA)
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230.4 Duties of Directors and Officers
• On appeal the SCC pointed out the difference in the language between s.122(1)(a) and s.122(1)(b).
• This difference, in their view, meant that other persons - stakeholders such as creditors, employees, etc - have a
standing to sue for the breach of duty under s.122(1)(b).
• But the directors did not breach the duty of care under s.122(1)(b) to Peoples' creditors.
• As well, the impugned transactions did not violate the Bankruptcy and Insolvency Act. The slight disparity between the FMV
of the assets and the consideration received did not constitute a conspicuous difference.
Ruling: Appeal dismissed.
Leveraged Buyout: Occurs when a financial sponsor acquires a controlling interest in a CO’s equity and where a
significant percentage of the purchase price is financed through borrowing (leverage). The assets of the acquired CO are
used as collateral for the borrowed capital, sometimes along with assets of the acquiring CO.
BCE Inc. v. 1976 Debentureholders [2008] SCC
Court will give deference to Business Judgements of directors as long as it is in the best interest of the CO
and does not violate legal rights of parties affected. Directors may consider the non-legal interests of the
parties affected.
Facts: Ontario Teachers Pension Plan Board led a consortium of purchasers, which made an $52bn offer to for a leveraged
purchase of all shares of BCE, which is a large telecom CO. Under the structure of the offer, Bell would assume a $30bn
portion of liability for the debt. Bell is a wholly owned subsidiary of BCE, but the two share a common set of Directors and
some senior officers. The Board deiced that the offer would be in the best interest of BCE and its SHs. In evaluating the
offer, the Board consulted several reputable financial advisors. The offer was approved by 97%of BCE’s SHs. The offer is
opposed by a group of financial institutions that hold $7.2bn worth of debentures of Bell, and who argue that the purchase
devaluated their debentures by 20%, which for 30 years have been seen as secure investments. They pursued an action on
the grounds oppression (s.241 of CBCA) and breach of fiduciary duty because the arrangement was not fair and reasonable.
Under s.192 CBCA there is a need for court approval to change CO’s structure. QBSC approved the transaction, but QBCA
overruled that decision.
Issue: Is there a breach of fiduciary duty here?
Discussion:
• Directors are subject to two duties: fiduciary duty to CO, and a general duty to exercise care, diligence, and skill.
• PLs claim that by failing to consider their interest, directors have breached the “fair treatment” component of their
fiduciary duty to the CO.
• In Peoples Department Stores SCC found that directors must consider the interest of the CO and may consider the interest of
SHs, stakeholders, employees, creditors, consumers, governments and the environment to inform their decisions.
• The content of the directors' fiduciary duty to act in the best interests of the CO was affected by the various interests at
stake in the context of the auction process and by the fact that they might have to approve transactions that were in the
best interests of the CO but which benefited some groups at the expense of others.
• Apparently s.142(b) does not give a SH individual cause of action.(???)
• Where conflicting interests arise, it falls to the directors to resolve them in accordance with their fiduciary duty to act in
the best interests of the CO. This duty means a duty to treat individual stakeholders affected by corporate actions
equitably and fairly.
• In this case there was a committee which did the research on the deal, so the Board did go through this diligently.
• The directors considered the interests of PLs, and concluded that while the contractual terms of the debentures would be
honoured, no further commitments could be made. This fulfilled their duty.
• The directors did not seek a fairness opinion in respect of PLs, taking the view that their rights were not being arranged.
• As for s. 192, to approve a plan of arrangement as fair and reasonable, courts must be satisfied that the arrangement has a
valid business purpose, and the objections of those whose legal rights are being arranged are being resolved in a fair and
balanced way.
• So SCC prefers the Business Judgement Rule, whereby the directors are free to make judgements, as long as they think
that it is in the best interest of the CO.
• In some circumstances interests that are not strictly legal can be considered,
• But PLs did not constitute an affected class under s. 192 since only their economic interests were affected by the proposed
transaction, not their legal rights, and since they did not fall within an exceptional situation where non-legal interests
should be considered (as they would if they were SHs, whose economic and equitable interests are to be pursued )
• This case is also significant, because SCC talks about not just SHs, but stakeholders, which were never previously
mentioned in corporate Canadian law.
Ruling: Appeal allowed. There is no breach of duty.
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230.4 Duties of Directors and Officers
Fiduciary Duty
Introduction
Fiduciary Duty of the Directors: The overriding duty to act honestly and in good faith. This gives courts flexibility, for
if they were to define the duty in more concrete terms, they would invite creative avoidance. Directors have a fiduciary duty
regarding two things:
• The property of the CO that they are in charge of
• Their own managerial powers under s.136. Directors must exercise these powers in best interest of CO and can’t put
personal interest at odds with that of CO.
• If SHs want to allege breach of FD, it can be in relation to CO property, or in relation to exercise of power by directors.
• Fiduciary obligations of directors and officers are similar to obligations of trustees but also different. Trustees have no or
little discretion to take risks with property they hold, whereas directors are by nature entitled to take risks.
• In general any actions by directors that are not done in good faith or ignore the best interest of the CO will be in violation
of the fiduciary duty.
• But the courts also recognize several different scenarios where the FD of the directors comes into question. These are:
• Self Dealing transactions when a director has an interest on both sides of the transaction.
• Corporate Opportunity where directors come across situations that they can exploit for their own benefit
• Competition where directors are on the Boards of two competing COs
• Hostile Takeovers where the interest of the director in a takeover is contrary to the interest of the CO
• Only equitable remedies are available for breach of fiduciary duty.
Self-Dealing
• A situation when a director of a CO also has an interest in the party that is on the other side of a business transaction
• Under common law, if a director has a conflict of interest in a dealings with another CO by being involved with both
sides, then any Ks between the two COs would be voidable by the SHs.
• But this can be circumvented by shareholders who can ratify the K by a vote.
• This was codified by ss.147-153 of BCBCA.
Aberdeen Railway Co. v. Blaikie Brothers [1843] HL
No one having fiduciary duties can enter into engagements that can lead to personal interest conflicts or
which can conflict with the interests of those whom he is bound to protect. Whether transaction is good or
bad for corporation is irrelevant.
Facts: Ds were the directors of the PL CO and played a large role in having the CO enter into a K with a partnership in
which Ds were also partners. Nothing bad happened, and the K worked well for both sides, but some bitchy SHs got their
panties in a knot. Or something along those lines.
Issue: Is this a breach of fiduciary duty?
Discussion:
• There is a great potentiality of risk that comes from such situations.
• Based on equity this is enough to allow for the creation of a very strict rule.
• The mere possibility that it could be disadvantageous or could lead to a conflict of interest is enough to create an
automatic right to rescind.
• There is no need to prove that the conflict of interest will actually arise, mere potential harm is sufficient.
• If SHs did not choose to rescind, the CO could ratify the K notwithstanding conflict of interest.
• Ratification would only be valid if the SHs knew everything about director’s involvement in K.
• In this case, the K is voidable.
Ruling: CO has a right to rescind the K.
• Porcupine Mines: SHs cannot ratify or validate something unless they know the full extent and nature of the director’s
interest in question.
• Northwest Transportation [1887] PC: A director whose breach of fiduciary duty is at issue can vote as SH to ratify the breach.
• When director performs duties under s.136, they stand in fiduciary relationship to CO and are liable for any breach
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230.4 Duties of Directors and Officers
• But when the same director is at a SH meeting in his capacity as a SH, they are entitled to vote their shares in favor of
affirmation, even where they are voting on affirmation of K made by themselves.
• This is all lovely and such, but common law in this area has now been overridden by statute.
• The BCBCA has created a complex set of provisions for the scenarios where a director had interest in K with CO.
• The caveat, however, is that s.147 does not refer to “directors and officers” as s.142 does, but only to directors and senior
officers. So these sections don’t apply to officers. Which means that officers are going to be still governed by common law
under Aberdeen Railway Co.
Senior Officer: means, in relation to a CO
(a) the chair and any vice chair of the board of directors or other governing body of the CO, if that chair or vice chair
performs the functions of the office on a full time basis,
(b) the president of the CO,
(c) any vice president in charge of a principal business unit of the CO, including sales, finance or production, and
(d) any officer of the CO, whether or not the officer is also a director of the CO, who performs a policy making function in
respect of the CO and who has the capacity to influence the direction of the CO.
The differences between provisions and common law are:
• Whereas common law has no obligation to disclose, s.153 makes disclosure of potential conflicting offices and property
ownership mandatory.
• It is now possible for the Board to ratify the interest under s.149, without having to go to SHs.
• A CO is now unable to create automatic ratification clause in their Articles as per s.142(3).
• SH are given standing as right to seek relief in respect of liability under s.150.
• Directors and SHs have standing to ask courts to set aside such K under s.150.
147 Disclosable interests
(1) For the purposes of this Division, a director or senior officer of a company holds a disclosable interest in a contract or transaction if
(a) the contract or transaction is material to the company,
(b) the company has entered, or proposes to enter, into the contract or transaction, and
(c) either of the following applies to the director or senior officer:
(i) the director or senior officer has a material interest in the contract or transaction;
(ii) the director or senior officer is a director or senior officer of, or has a material interest in, a person who has a material
interest in the contract or transaction. (once removed)
(2) ... A director or senior officer of a company does not hold a disclosable interest in a contract or transaction if
(a) the situation that would otherwise constitute a disclosable interest under subsection (1) arose before the coming into force of this Act or,
if the company was recognized under this Act, before that recognition, and was disclosed and approved under, or was not required to
be disclosed under, the legislation that
(b) both the company and the other party to the contract or transaction are wholly owned subsidiaries of the same corporation,
(c) the company is a wholly owned subsidiary of the other party to the contract or transaction,
(d) the other party to the contract or transaction is a wholly owned subsidiary of the company, or
(e) the director or senior officer is the sole shareholder of the company or of a corporation of which the company is a wholly owned
subsidiary.
(4) ... A director or senior officer of a company does not hold a disclosable interest in a contract or transaction merely because
(a) the contract or transaction is an arrangement by way of security granted by the company for money loaned to, or obligations
undertaken by, the director or senior officer, or a person in whom the director or senior officer has a material interest, for the benefit of
the company or an affiliate of the company,
(b) the contract or transaction relates to an indemnity or insurance under Division 5,
(c) the contract or transaction relates to the remuneration of the director or senior officer in that person's capacity as director, officer,
employee or agent of the company or of an affiliate of the company,
(d) the contract or transaction relates to a loan to the company, and the director or senior officer, or a person in whom the director or senior
officer has a material interest, is or is to be a guarantor of some or all of the loan, or
(e) the contract or transaction has been or will be made with or for the benefit of a corporation that is affiliated with the company and the
director or senior officer is also a director or senior officer of that corporation or an affiliate of that corporation.
• This applies only if K or transaction is material, whether already entered into or merely proposed.
• “Transaction”: if non-enforceable, it may fall under the Act.
• “Material”: No cases have considered the meaning of this. But a test may be along the lines of “whether interest is
such that there is any reasonable basis for a concern that it may affect the director’s ability to perform his duty.”
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230.4 Duties of Directors and Officers
• So it could mean that an interest that is relatively insignificant will not be deemed disclosable.
• "Other Party" means a person of which the director or senior officer is a director or senior officer or in which the director
or senior officer has a material interest.
• s.147(2) creates a plethora of exceptions for various forms of subsidiary holdings.
• s.147(4) gives exclusions from what is disclosable interest:
• Indemnification or insurance
• Loan guarantees
148 Obligation to account for profits
(1) Subject to subsection (2) and unless the court orders otherwise under section 150 (1) (a), a director or senior officer of a company is liable to
account to the company for any profit that accrues to the director or senior officer under or as a result of a contract or transaction in which the
director or senior officer holds a disclosable interest.
(2) A director or senior officer of a company is not liable to account for and may retain the profit referred to in subsection (1) of this section in any
of the following circumstances:
(a) the disclosable interest was disclosed before the coming into force of this Act under the former Companies Act that was in force at the
time of the disclosure, and, after that disclosure, the contract or transaction is approved in accordance with section 149 of this Act,
other than section 149(3);
(b) the contract or transaction is approved by the directors in accordance with section 149, other than section 149(3), after the nature and
extent of the disclosable interest has been disclosed to the directors;
(c) the contract or transaction is approved by a special resolution in accordance with section 149, after the nature and extent of the
disclosable interest has been disclosed to the shareholders entitled to vote on that resolution;
(d) whether or not the contract or transaction is approved in accordance with section 149,
(i) the company entered into the contract or transaction before the director or senior officer became a director or senior officer of
the company,
(ii) the disclosable interest is disclosed to the directors or the shareholders, and
(iii) the director or senior officer does not participate in, and, in the case of a director, does not vote as a director on, any
decision or resolution touching on the contract or transaction.
(4) A general statement in writing provided to a company by a director or senior officer of the company is a sufficient disclosure ...
(5) In addition to the records that a shareholder of the company may inspect under section 46, that shareholder may, without charge, inspect
(a) the portions of any minutes of meetings of directors, or of any consent resolutions of directors, that contain disclosures under this
section, and
(b) the portions of any other records that contain those disclosures.
• Unless if the interest is disclosed, or falls under any of the exceptions of s.148(2), then the director does not get to keep
any of the profit from it.
• Under s.148(5), SHs have the right to inspect minutes of Director’s meetings where consent resolutions are voted on.
149 Approval of contracts and transactions
(1) A contract or transaction in respect of which disclosure has been made in accordance with section 148 may be approved by the directors or by a
special resolution.
(2) Subject to subsection (3), a director who has a disclosable interest in a contract or transaction is not entitled to vote on any directors' resolution
referred to in subsection (1) to approve that contract or transaction.
(3) If all of the directors have a disclosable interest in a contract or transaction, any or all of those directors may vote on a directors' resolution to
approve the contract or transaction.
(4) Unless the memorandum or articles provide otherwise, a director who has a disclosable interest in a contract or transaction and who is present at
the meeting of directors at which the contract or transaction is considered for approval may be counted in the quorum at the meeting whether or
not the director votes on any or all of the resolutions considered at the meeting.
• In the case that all of the directors have an interest, then pure Board approval is not possible. In such a case, SHs have to
pass a special resolution.
• s.149(3) is mitigated by s.148(2)(b). This means that a Board resolution can approve the transaction, but the directors will
have to account for the money, and not keep the profit, unless if there is a further ratification by SHs.
150 Powers of Court
(1) On an application by a company or by a director, senior officer, shareholder or beneficial owner of shares of the company, the court may, if it
determines that a contract or transaction in which a director or senior officer has a disclosable interest was fair and reasonable to the company,
(a) order that the director or senior officer is not liable to account for any profit that accrues to the director or senior officer under or as a
result of the contract or transaction, and
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230.4 Duties of Directors and Officers
(b) make any other order that the court considers appropriate.
(2) Unless a contract ... has been approved in accordance with section 148(2), the court may,... if the court determines that the contract or
transaction was not fair and reasonable to the company:
(a) enjoin the company from entering into the proposed contract or transaction;
(b) order that the director or senior officer is liable to account for any profit that accrues to the director or senior officer under or as a result
of the contract or transaction;
(c) make any other order that the court considers appropriate.
• SH can’t argue the disclosable interest is actionable derivatively. That’s what this provision is for.
151 Validity of contracts and transactions
A contract or transaction with a company is not invalid merely because
(a) a director or senior officer of the company has an interest, direct or indirect, in the contract or transaction,
(b) a director or senior officer of the company has not disclosed an interest he or she has in the contract or transaction, or
(c) the directors or shareholders of the company have not approved the contract or transaction in which a director or senior officer of the
company has an interest.
• Despite non-disclosure or non-approval, the K is still valid to protect third parties from losing the K
• But remedies from s.150 can still be ordered.
152 Limitation of obligations of directors and senior officers
• Other then stated in these sections, a director has no other duty to disclose his interest.
• So common law cannot be used to create this obligation.
153 Disclosure of conflict of office or property
(1) If a director or senior officer of a company holds any office or possesses any property, right or interest that could result, directly or indirectly, in
the creation of a duty or interest that materially conflicts with that individual's duty or interest as a director or senior officer of the company, the
director or senior officer must disclose, in accordance with this section, the nature and extent of the conflict.
(2) The disclosure required from a director or senior officer under subsection (1)
(a) must be made to the directors promptly
(i) after that individual becomes a director or senior officer of the company, or
(ii) if that individual is already a director or senior officer of the company, after that individual begins to hold the office or
possess the property, right or interest for which disclosure is required, and
(b) must be evidenced in one of the ways referred to in section 148(3).
•
•
•
•
Any director who is also a director of another CO (regardless of having a material interest in it) must disclose his position.
So, anyone in a possible position of conflict must disclose the interest.
But the disclosure is not to the SHs but to the Board
Owing shares in another CO falls under the “property” in s.153(1).
Corporate Opportunity
• Situations where directors and officers in performance of their duties, come across opportunities which they would like to
explore for their own benefit.
• The issue is whether the director has usurped the authority in order to acquire a personal benefit.
• Breach of FD arises when a fiduciary takes something belonging to the CO, putting his personal interests ahead of his
duty to act in the best interests of the CO.
• Any financial benefit from engaging in behavior must be turned over to CO.
Cook v. Deeks [1916] ONPC
Directors breach their fiduciary duty when they use their position to actively promote their own interests
at the expense of the corporation.
Facts: Directors of the CO were negotiating a K on behalf of the principal. They devised a scheme to channel
opportunities they came across during term as directors for their own profit. They tried to exonerate themselves by
ratification of what they had done. They had done this a number of times before in their employment. The procedure
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230.4 Duties of Directors and Officers
would look like this: after all necessary preliminaries of the K were concluded, one PL said to another director, “Remember,
if we get this K it is to Mr. Deeks and I, not Toronto Construction.”
Issue: Are the directors liable for breach of fiduciary duty?
Discussion:
• Directors had taken for their own benefit opportunities from the CO.
• If a CO is negotiating an opportunity and there is a prospect of getting it, the CO has an interest in said opportunity and
the fiduciary is prohibited from exploiting it for personal gain.
• Any attempt to argue ratification here is ineffective because ratification is itself a part of the breach of fiduciary duty.
• Directors become constructive trustees. If they made profit from exploitation then the profit belonged to CO.
• There are two types of cases to be distinguished, with different approaches to ratification.
• Those where a director has an interest on both sides of the deal - the “self dealing” cases as discussed above. This is
an inherent conflict of interest and the harm to the CO is theoretical. Such can be ratified by the CO.
• Those where a director has developed an interest in the other side due to his position as director, and appropriated
something the belongs to the CO. In such cases ratification is impossible.
Ruling: Yes, the Directors are liable, and the K should be treated as if it was on behalf of the CO.
Regal (Hastings) Ltd. v. Gulliver [1942] UK HL
Any situation where directors made a personal profit due to their position as a director is a breach of
fiduciary duty even where thre
Facts: The PL CO has set up a subsidiary for the purpose of buying a movie theatre. But despite the attempts of the
directors, the PL CO did not have the £5,000 needed to pay for the purchase. It was decided that the directors would invest
£2,500 of their own money to finance the purchase. If not for this, the deal would not have gone through and nobody
would have made any profit. The purchase was a great success, and two month after, the subsidiary was sold for more than
a 300% profit. These directors were subsequently replaced by a new batch, who have sued the former ones for the breach of
fiduciary duty, trying to get back the profits that the former directors made on the sale of the subsidiary CO.
Issue: Can the directors profit from the opportunity that arose solely because of their position?
Discussion:
• The Directors’ profits arose from them trying to make money for the CO, acting in good faith and thinking of the best
interest of the CO.
• There is no evidence that CO was harmed in any way by the Directors buying the shares - in fact it was indirectly
benefited, because the sale of shares made the purchase possible, which gave the CO a profit of its own.
• The difference between this and Cook v. Deeks is that the latter could not have ratified the breach, as ratification would have
been a part of the fraud, whereas here ratification was possible, albeit too late by the time it came to the trial.
• But what this case leads to is that there is no mens rea component to breach of fiduciary duty, and it does not matter
if the Directors have acted honestly and in good faith.
• However, good faith is not a defence against breach of fiduciary duty, so the only place that it may come in is the
ability to ratify.
• So, despite the bona fide intentions of the Directors, they did not bother ratifying the profits, and are liable to account for
them.
• This is also the first time that HL has defined what is a corporate opportunity is. This is called the Conflict Rule.
• One is only liable for a breach of fiduciary duty in a corporate opportunity case where one makes a profit at a time
when there is a conflict between the duty to a CO to send the opportunities to it, and keeping the opportunities for
yourself.
• But some have argued that this is not right, and the Profit rule from Cook v. Deeks is the right approach.
• If directors had bona fide decided not to invest funds in investment, a Director who embarks his own money in that
investment is accountable for any profit he makes.
• The onus is on the PL CO to show the conflict. (?)
Ruling: Directors have breached the duty and are liable to the CO
Profit Rule: There is a breach at anytime that that a director made a profit due to their position as a director of the CO.
Conflict Rule: There is a breach when a director uses his position as a director to make a profit in the context of a conflict
of interest between the duty to the CO and private interest of the director.
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230.4 Duties of Directors and Officers
Peso Silver Mines Ltd v. Cropper [1966] BCCA
Conflict Rule is the law in Canada. When the CO turns down an opportunity, it no longer has an interest,
and the directors are free to do as they will.
Facts: D was a managing director of the PL CO, which was a private CO. When it went public, it was offered mining
property, which was turned down after receiving professional advice on the prospects. Immediately after this, D and some
friends formed a new CO to take up these properties, and making a hefty profit. When a new Board of PL CO found this
out, they decided to sue, hoping to rely on Regal Hastings.
Issue: Is this a breach of fiduciary duty?
Discussion:
• When the CO was considering the property, it had interest in it.
• But after they rejected it, they lost their interest, and the directors were free on individual basis to buy properties for
themselves and keep the profits.
• For conflict to arise, directors must have had access to opportunity only because of their position
• Even so, the only thing they cannot do then is take personal advantage of the opportunity through some action in their
capacity as director.
• Here, the property was acquired independently of D’s position as director, so there could be no breach of fiduciary duty.
• This is different from Regal Hastings since where CO desired to but was not financially able to exploit the opportunity that
arose except with the assistance of its directors. Here, the Board expressly rejected the opportunity.
• But this is a little strange, since the director would have been involved in the Board’s rejection, and could have voted
with the view to pick up the properties after they were rejected. I think that the key element here may be that they
received professional advice that suggested that the prospects were not in the CO’s interest.
• Paterson also thinks that this case is problematic, since it is impossible for a director to be truly impartial at rejecting
down an opportunity, and then following up on it himself.
• The onus is on the CO to prove that there is a possibility that the opportunity is beneficial to it.
• But US courts change onus of proof in these cases. Directors have to prove there is no possibility the opportunity can be
beneficial to company.
Ruling: D is not liable
Canadian Aero Service Ltd. v. O’Malley [1974] SCC
No one test is the proper approach in considering corporate opportunities, but the findings should be
concerned with the special circumstances of each case.
Facts: D and a few others were senior officers of PL CO. They were sent to South America by the PL to investigate a K to
do aerial mapping of Guyana. While there were there, they made some business connections acquired important
information about the K and the work in general. Upon their return to Canada, they quit their positions at PL, started their
own CO and relied on their trip to set up business that competing with PL CO. PL claims that the D had improperly taken
the fruits of a corporate opportunity in which PL had a prior and continuing interest.
Issue: Is D liable for profit? Were profits sufficiently linked to give rise to conflict and therefore accountability?
Discussion:
• A strict ethic in this area of the law disqualifies a director from usurping for himself or diverting to another CO with
whom he is associated a maturing business opportunity which his CO is actively pursuing.
• Laskin is not happy with either the Conflict or Profit rule. He thinks that the consideration of breach should focus on the
special circumstances of each case.
• There should be balance between strictness of trustee’s accountability and business judgment rule
• The two questions that should be asked are:
• Does the opportunity belong to the CO?
• Here, despite the fact that the new K is not the same one that D was involved with as an officer of PL, it is
substantially the same opportunity.
• It was also a maturing opportunity, as D did extensive work in preparation for it while with PL.
• What is the relationship of the fiduciaries to the opportunity?
• D was a high ranking officer who did preparatory work on the K for PL and negotiated on behalf of PL
• D learned about new opportunity through his position with and quit for the purpose of taking advantage of it
• So D stood in a fiduciary relationship to PL.
• D is also precluded from so acting even after his resignation where the resignation may fairly be said to have been
influenced by a wish to acquire for himself the opportunity sought by the CO, or where it was his position with the CO
rather than a fresh initiative that led him to the opportunity which he later acquired.
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230.4 Duties of Directors and Officers
• Courts will not enquire into whether CO would have obtained opportunity or if the appropriation caused loss to CO.
• This does not discuss Peso situation where the opportunity is rejected by Board. So Peso is still valid.
Ruling: D is liable for profit.
Appropriation of Opportunity as a Breach of Fiduciary Duty Test: (as per Canadian Aero Service Ltd. v. O’Malley)
1. Does the opportunity belong to the CO?
• Maturity: Has the CO done anything to develop opportunity? How close was it to acquiring it?
• Specificity: Was opportunity defined by the CO? How precisely? Was it only in the same general business area? How
closely does the appropriated opportunity resemble the opportunity that the CO was working on?
• Significance: Would opportunity represent major component of CO’s business if acquired? Was it unique or one of
many?
• Public or Private: Was the opportunity publicly advertised or widely known? Was it one to which fiduciaries had
access only by virtue of their positions?
• Rejection: Had the opportunity been rejected in good faith by the CO before the fiduciary acquired it?
• Unless fiduciary did what was reasonably possible to get the Board to accept it and was not in a position to
determine the outcome of the Board’s vote, the rejection may not be sufficient. [K.P. McGuiness].
2. What is the relationship of the fiduciaries to the opportunity?
• Position: The higher up in organization the fiduciary stands, the higher is level of duty imposed.
• Relationship between Fiduciary and Opportunity: Was opportunity in an area of his responsibility? Did he negotiate
for it on behalf of CO?
• Knowledge as a Fiduciary: How much knowledge did the fiduciary acquire about the opportunity through his
position?
• Involvement in Competing Business: Did fiduciary acquire the opportunity through an existing business that was
similar to or even competed with the business of the CO and in which the fiduciary was involved?
• Use of Position: To what extent did the fiduciary accomplish the appropriation of the opportunity through his
position?
• Time after Termination: If fiduciary took the opportunity after he terminated his relationship with the CO, how long
was it after termination? Did he leave voluntarily or was he fired? Did he leave for purpose or under inducement of
pursing the opportunity?
US case law on this issue is quite different:
• Burg v. Horn Fairness Test: Balances interests of CO in getting the opportunity for its own profit against fairness for
individual director. Directors should not profit in situations where actual harm occurs.
• Interest/Expectancy Test: Along Peso lines, asking whether the CO was in need of the opportunity. Was it connected with
CO? What were this CO’s needs and was profit-taking at odds with best interests of CO?
• Restrictive Approach: Line of Business Test: Defines the core of opportunities that the CO has an interest in, allowing the
director to pursue anything outside of this core. This is a common sense approach based on the relevance of opportunity
to the CO.
• American courts are more willing to fiddle around with burden of proof. Once the CO has shown that the director has
made personal profit, the onus is on him to show why he should not be liable.
There are some open questions left in Canada:
• What happens where an action is a breach of fiduciary duty, but the director does not make any profit? The court may
grant injunctive relief.
• What if person is not acting as a director when gaining the profit? Paterson thinks that there is a good chance of no
liability to be found based on Laskin’s factors in Canadian Aero Service Ltd. v. O’Malley.
Competition
• It is quite common for individuals to sit on the Boards of multiple COs
• There have never been attempts to make a law would prohibit directorships of more than one CO.
• There are only formal limitation is in Federal Bank Act, which limits directors of financial institutions from being on more
than one Board of a financial institution.
• So there is no danger of being in breach merely because of accepting directorship of another CO.
• Should a director agree as to how you will act in advance? Promising to vote in a certain way is fettering of the discretion.
As fiduciary, one cannot compromise their ability to act in certain situations when they arise.
• What if someone agrees to resign from Board if paid to do so? Someone will say they want to replace you, will you assist
my nomination and get SH support? This would be breach of fiduciary duty.
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230.4 Duties of Directors and Officers
Fettering: Any actions or obligations that prevent the director from exercising his s.136 powers in full. Directors cannot,
without the consent of the CO, fetter their discretion in relation to the exercise of their powers, and cannot bind themselves
to vote in a particular way at future board meetings. This is so even if there is no improper motive or purpose, and no
personal advantage to the director.
153 Disclosure of conflict of office or property
(1) If a director or senior officer of a company holds any office or possesses any property, right or interest that could result, directly or indirectly, in
the creation of a duty or interest that materially conflicts with that individual's duty or interest as a director or senior officer of the company, the
director or senior officer must disclose, in accordance with this section, the nature and extent of the conflict.
(2) The disclosure required from a director or senior officer under subsection (1)
(a) must be made to the directors promptly
(i) after that individual becomes a director or senior officer of the company, or
(ii) if that individual is already a director or senior officer of the company, after that individual begins to hold the office or
possess the property, right or interest for which disclosure is required, and
(b) must be evidenced in one of the ways referred to in section 148(3).
• If any profits arise from dealings between the two, then the director would need a s.148 ratification to keep the profits.
• Metropolitan Commercial v. Donovan [1989] NS: It is not a breach of fiduciary duty to terminate one’s relationship with a CO
and go into competition with it.
• Bendix Home Systems v. Clayton [1978] CPR: Fiduciary cannot use his fiduciary position and the opportunities afforded him
in that position to develop a competing business, then quit to begin competing. The difference between this and the case
above is subtle, and seems to be focused on intent and foresight.
• Pizza Pizza v. Gillespie [1990] OR: A fiduciary cannot use confidential information belonging to a CO, but it is not a breach
to use skills, know-how, experience, and personal goodwill acquired by fiduciary during his service to the CO.
• Abbey Glen Property v. Stumborg [1978] CA: There is no absolute rule involving multiple directorships, and each case will
depend on the facts. The relevant question will be whether the fiduciary could act in the best interests of both COs, using
factors similar to those in Canaero v. O’Malley.
Directors of Crown COs are in a somewhat ambiguous position when it comes to fiduciary duty:
• CCs are usually established under their own statute and are thus Special Act COs. But BCBCA is usually seen as being
parallel with their statute, and as governing any matters not addressed by it.
• All shares are owned by the Crown. Which can be a bit confusing when it comes down to SH provisions.
• Many CCs are managed to make profit. This sends a mixed message where the CCs are expected to both provide an
essential service and make profit. As a result, these boards have a mix of public servants and private outsiders.
• What then are the duties of a director of CC? Is it breach of fiduciary duty when museum directors sell priceless public
artifacts to make money in order to make ends meet?
• Often there are nominee directors who are appointed to the Board to bring perspective and outside knowledge. Are they
allowed to take into account interest of group of society they are representing?
• When breach of fiduciary duty in CCs is alleged, the action is usually brought by the AG who is Crown’s representative.
But AG will usually only bring action if it is politically advantageous. This is a bit of a pickle.
Hostile Takeovers
Hostile Takeover Bid: A hostile takeover allows a suitor to bypass a target CO’s management unwilling to agree to a
merger or takeover. A takeover is considered "hostile" if the target CO’s board rejects the offer, but the bidder continues to
pursue it, or the bidder makes the offer without informing the target CO’s Board beforehand.
• Offeror will almost always make a bid at some premium above the market price of the shares, buying them up from some
SHs of the target CO.
• Takeover bids are subject to detailed regulation in BC Securities Act. A bid falls within the scope of the Act if it aims for
20% or more of shares of the target CO.
• There are three kinds of takeover bids available in Canada:
• Circular: Takes place outside stock exchange by offeror making direct contact with SHs.
• Stock Exchange Bid: Takes place through the facilities of a stock exchange only.
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230.4 Duties of Directors and Officers
• Issuer Bid: CO is making takeover bid for itself, this going private by re-purchasing the shares. Or certain SHs may
want to turn CO into private/non-reporting CO and get rid of additional SHs.
• The takeover proceedings under the BC Securities Act aim to achieve two goals:
• Disclosure: Trying to make the parties to the bid disclose information that will be valuable to participants. Any offeror
making a bid for more than 20% of the shares has to provide to SHs of offeree a Takeover Bid Circular, where they
identify who they are, what assets they have, what existing shares they own, and such. This is done to assist SHs who are
being offered in evaluating whether to accept or not. If target CO wants to make any recommendation for bid at all, they
have to add to recommendation a Directors’ Circular, thus increasing the amount of info available.
• Substantive Fairness: Ensuring a certain level of equality as to how target SHs are treated. A bid is usually made on the
basis that offeror will only be bound by arrangement if they acquire certain level of shares. As bid progresses it becomes
harder to convince SHs to sell, as the fewer remaining ones may drive the price may go up. In US, there is no way that
SHs who sold early for cheaper can ask for more money, but in Canada, if the subsequent price of shares is increased,
those SHs who sold early can get the additional money. Also, in situations where the bid is for X% of outstanding shares
and more than X% of SHs tender shares, he offeror has to buy an proportionately equal amount from each SH.
• The policy behind this is the theory of the Market for corporate control. Society is seen to benefit from an active takeover
market because it simultaneously provides an incentive to all corporate managers to operate efficiently, and a mechanism
for displacing inefficient managers.
Poison Pills: Methodologies to prevent takeover bids that are written into Articles of COs, such as automatic increases of
votes attached to certain person’s shares, etc. Sometimes stock exchanges won’t list a CO if its Articles have such provisions.
Proper Purpose Doctrine: If the purpose of issuing new shares is to defeat an offeror from taking control of CO in
which case the directors will lose their jobs on the Board, then this is a breach of fiduciary duty. The issuance of shares can
be set aside and no damages will be paid.
• Classic Example of a hostile takeover bid that would involve fiduciary duty of the directors.
• A bid is made to the SHs and the offeree Board is unable to prevent the SHs from accepting. The Board taps into the
un-issued capital of the CO and issue new shares to themselves or to someone they know will not sell.
• On the surface, the directors have management power and can issue shares. But this process is supposed to make a
profit for the CO. Whereas here, the directors are motivated by desire to keep jobs, rather than benefit the CO.
• Issue of share to incumbent management that dilute votes to defeat takeover bid gives rise to Proper Purpose
Doctrine, and is a breach of fiduciary duty.
• Hogg v. Cramphorn [1867] UK: Issuing shares to defeat a takeover is always an improper purpose.
• Bonisteel v. Collis [1919] UK: Directors of private CO tried to maintain control by issuing shares unequally to certain
friends, and issuance was challenged in court. Court found that issuing shares to raise money is the proper purpose, but
doing so to keep the jobs is illegal.
• This is not as clear-cut as it may seem. For example, how does one determine that proper purpose was not to raise
money but to defeat takeover bid? Is it not premature to identify it that way? What if it is in the CO’s best interest to
the block takeover bid even though there may be element of self service by the directors? And what of the proper
purpose doctrine is in conflict with business judgment rule?
Teck Corp v. Millar [1973] BCSC
If the directors reasonably consider that a takeover bid will cause substantive damage to the CO’s interest,
they can rely on all of their powers to prevent it.
Facts: Millar was the President of Afton who needed capital but was having trouble raising money to run the CO. Suddenly
drilling results improved for Afton, but still not enough to raise enough money to develop their properties. D turned to a
large CO called Placer, and signed a K whereby Placer would provide funds through their subsidiary Canex, on the
condition that D would issue shares in Afton to Canex. While this was going on, Teck Corp began a takeover bid for Afton,
offering higher price to its SHs than Placer was. D and the Board were not happy with Teck and wanted to make permanent
deal with Canex. To facilitate this they revised the original K with Placer so that Canex would get a larger share of Afton.
PL CO claimed that D and fellow directors committed breach of fiduciary duty by agreeing to issue shares to Canex
because the motivation for doing so was not to get money from Canex, it was mainly to block success of PL CO’s bid and
keep their jobs.
Issue: Was the purpose of issuance to benefit the CO or to keep their jobs?
Discussion:
• The basic test is whether directors action is bona fide in best interests of CO.
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230.4 Duties of Directors and Officers
• Directors are entitled to consider 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 CO’s interest, they are entitled to use their
powers to protect company.
• The Australian case of Mills v. Mills was the first to developed the proper purpose test, where the first job for the judge is
to to isolate what court thinks was primary purpose for issuance of shares.
• The court looks at the facts finds that Millar issued shares to get best financing to develop the claims, not to defeat PL
CO’s bid. This is a proper purpose for the issuance of shares.
• Even if the primary purpose of issuance to defeat takeover there is a way out.
• As long as there are reasonable grounds that directors can point to justify taking measures to defeat takeover bid, even
issue of shares for such purpose may not be breach of fiduciary duty.
• In US, once PL shows that the primary purpose is to defeat takeover, the onus shifts to directors to show it was in best
interest of CO to defeat it.
Ruling: No improper purpose.
• Exco v. Nova Scotia Savings [1987] NS: The proper test was whether an action taken by the directors was not only in best
interests of CO, but also inconsistent with any other interests, including directors’ personal interests.
• Unocal v. Mesa [1985] DEL: US uses an intermediate standard between fairness and business judgment. Paterson thinks
that this is the best one around. It is a two part test:
a. Identify whether exercise of power represents conflict of directors interest and that of CO;
b. Once conflict is proven, next stage shifts the onus to directors to give reasonable grounds that what they did was in
CO’s best interest.
• This has led to takeover bid committees being formed in US COs to determine what may be reasonable and to strategize.
Such committees evaluate the bids and make recommendations to the Board.
• Pente Investment v. Schneider Co [1988] ONCA: Example of takeover bid committee being used. So long as the committee
acts reasonably and its recommendations are accepted by the Board, the Directors will be found to have fulfilled their
duty.
• Proportionality Test: Response to threat can only be by taking proportional measures. If there is no great likelihood that a
bid would succeed, the directors would not be justified in taking an extreme tactic, such as share issuance.
• Defensive tactics are mainly subject to regulation by Securities regulators rather than courts. They have developed a
national policy which is a statement of policies of all securities commissions in Canada.
• Tells everyone to chill and play nice during takeovers.
• Whenever possible, prior SH approval should be obtained for proposed defensive measures.
• The guiding principle is that SHs rather than directors should have right to determine to whom and on what terms
they may sell the shares.
• The primary purpose of this regulation is to protect interests of offeree SHs, and to permit takeover bids to proceed
in an open and even-handed manner.
Relief From Liability
Ratification of the Breach
In the event of a breach of duty by directors, the wrong can be rectified if the SHs ratify it. But the question is whether any
wrong can be ratified? And what level of ratification is needed? Unanimity would be the best, but it is highly impractical, as
every SH could have the power to control the CO. Special resolution? Bare majority?
North-West Transportation Co v. Beatty[1887] PC
Ratification by SHs is allowed, and directors with SH can to vote their shares in ratification at meeting.
Facts: Beatty was a SH of a North-West, which approved a purchase of a steamship from one of the directors. As this is
self-dealing, the purchase is ratified by the majority of SHs at a meeting. But the director in question was also a SH and has
1/3 of all of the shares in the CO. His votes were essential to the passing of the ratification.
Issue: Can SHs ratify a breach? Can the director vote to ratify his own breach?
Discussion:
• In this case there was nothing otherwise wrong with the K, as it was in the normal course of business and was fair and
reasonable, but for the conflict that it created.
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230.4 Duties of Directors and Officers
• When the Board creates a K and one of the directors has a conflict of interest, or is involved in self dealing, then the K is
voidable.
• But this K can be ratified by a simple majority of SHs to make it valid.
• Where the director whose conflict of interest is also a SH, he will be allowed to exercise his voting power to ratify, unless if
the CO’s Articles prohibit him from doing so.
• This is because his functions as a SH and a director are split.
• It is important to consider that the CO’s Articles did not prevent him from purchasing the SHs and acquiring such a
majority.
Ruling: The breach is ratified.
• Porcupine Mines: SHs cannot ratify or validate something unless they know the full extent and nature of the director’s
interest in question.
• Atlas Coal v. Jones [1953] US: Ratification can only have an effect if SHs have been fully and accurately informed of the
details of what it is they are ratifying.
233 Powers of court in relation to derivative actions
(6) No application made or legal proceeding prosecuted or defended under section 232 or this section may be stayed or dismissed merely because it is
shown that an alleged breach of a right, duty or obligation owed to the company has been or might be approved by the shareholders of the
company, but evidence of that approval or possible approval may be taken into account by the court in making an order under section 232 or this
section.
• Ratification is only referred to in the BCBCA with regard to derivative claims
• According to Paterson, SHs are likely to be unable to bring action for breach of fiduciary duty by requisitioning a GM
under s.167(1) and attempting to sue in CO’s name? Only the Board can been seen as having authority to sue in CO’s
name unless the Articles allow otherwise.
Statutory Limitations on Liability
142 Duties of directors and officers
(3) No provision in a contract, the memorandum or the articles relieves a director or officer from
(a) the duty to act in accordance with this Act and the regulations, or
(b) liability that by virtue of any enactment or rule of law or equity would otherwise attach to that director or officer in respect of any
negligence, default, breach of duty or breach of trust of which the director or officer may be guilty in relation to the company.
• This section prohibits contracting out of duties to BCBCA or regulations.
• The only loophole available would be to attempt to contract out of common law responsibilities, as opposed to the
statutory ones. But this is virtually impossible, as one cannot contract out of negligence, default, breach of duty, or trust.
• The prohibition on contracting out of liability extends to s.147-152,which are the provisions dealing with directors’
disclosable interest.
• Despite s.142 that says that fiduciary duty is owed to CO, there are situations at common law where directors could owe
fiduciary duty to SH:
• Allen v. Hyatt PC: Where a director takes a SH in confidence and offer to purchase shares without telling SH some
important info, then he D owes them a fiduciary duty because of the circumstance.
• A person in such circumstances can probably put in a waiver of liability and be contracted out of it. There is nothing
in s.142(3) excludes that possibility, but it may be against public policy.
• Extent to which BCBCA prohibits waiver are that limits are in the Act itself.
• You cannot contract out of legal obligations generally, but you do so out of it where your relationship is contractual.
157 Limitations on liability
(1) A director of a company is not liable under section 154 and has complied with his or her duties under section 142(1) if the director relied, in
good faith, on
(a) financial statements of the company represented to the director by an officer of the company or in a written report of the auditor of the
company to fairly reflect the financial position of the company,
(b) a written report of a lawyer, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by
that person,
(c) a statement of fact represented to the director by an officer of the company to be correct, or
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230.4 Duties of Directors and Officers
(d) any record, information or representation that the court considers provides reasonable grounds for the actions of the director, whether or
not
(i) the record was forged, fraudulently made or inaccurate, or
(ii) the information or representation was fraudulently made or inaccurate.
(2) A director of a company is not liable under section 154 if the director did not know and could not reasonably have known that the act done by
the director or authorized by the resolution voted for or consented to by the director was contrary to this Act.
• If the director is responsible for one of several types of infractions of statute, then he is usually personally responsible for
consequences. The defense in s.157 protects them from it.
• Probably most useful to outside Directors in saying that they had no choice but to rely on reports, since they usually do not
know enough about the affairs of the CO.
• This section is a specialized version of s.234, and the relationship has not been entirely worked out yet.
234 Relief in legal proceedings
If, in a legal proceeding against a director, officer, receiver, receiver manager or liquidator of a company, the court finds that that person is or may be
liable in respect of negligence, default, breach of duty or breach of trust, the court must take into consideration all of the circumstances of the case,
including those circumstances connected with the person's election or appointment, and may relieve the person, either wholly or partly, from liability,
on the terms the court considers necessary, if it appears to the court that, despite the finding of liability, the person has acted honestly and reasonably
and ought fairly to be excused.
•
•
•
•
•
This is rightfully know as the “Desperation Defense”
It comes from English Trustee Act, which sets out rules for trustees under BC law.
Lawyers always throw this section into a defense. Hell, you might as well. There is no harm trying.
Court may relieve person either wholly or partially, so one may be forgiven some aspect of liability and not others.
According to Paterson, this may only apply to outside directors. But what does he know?
Indemnification and Insurance
• The following section are done in an overview, and we don’t need to know that well.
• The basic idea here is that once the liability has been found, CO may reimburse a Director or an Officer for the
judgement against them.
159 Definitions
• Eligible Party is or was a director or an officer of CO or an affiliate, or holds a similar position at the request of the CO.
• Eligible Penalty is a judgment, penalty, or fine imposed in, or an amount paid in settlement of, an eligible proceeding.
• Expenses include costs, charges, and expenses, including legal and other fees, but does not include judgments, penalties,
fines, or amounts paid in settlement of a proceeding.
160 Indemnification and payment permitted.
• A CO may indemnify or cover expenses of an eligible party
161 Mandatory payment of expenses
• A CO must cover reasonably incurred legal defense expenses of an eligible party where they are wholly or substantially
successful in the outcome of the proceedings
• This section subject to s.163.
162 Authority to advance expenses.
• Preliminary expenses are allowed, but CO must first receive a written undertaking that if expenses are prohibited by s.
163, the party will repay.
163 Indemnification prohibited.
• (1)(a)(b) Where articles, memorandum do not permit CO to make indemnification.
• (1)(c) Where the eligible party did not act honestly and in good faith with a view to the best interest of the CO
• Suggests one cannot be reimbursed for remedy granted in breach of fiduciary duty action.
• (1)(d) Where eligible party did not have had reasonable grounds for believing his conduct was lawful.
• (2) Where the action is brought by the CO, which going to include claim by company for breach of fiduciary duty or
derivatively.
164 Court ordered indemnification
• If CO is permitted to indemnify but has not been willing to, an eligible party may ask the court for order of expenses.
• This probably does not operate where there was a pre-existing K and it probably operates in conjunction with s.161.
• It also probably overrides s.163 and says that a court could order indemnification even where s.163 applies.
s.165 Insurance
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230.4 Duties of Directors and Officers
• The CO may buy insurance for the benefit of an eligible party against professional liability.
• This only came about in Canada in 1970
• The problem is that most of the insurance COs were subsidiaries of US COs where the insurance rates on professional
liability are ridiculous, because everybody is a courtroom cowboy and everybody sues everybody all the time.
• So despite the low payout rates in Canada, the professional liability insurance is really expensive, both in premiums and
deductibles. Because of this they are quite rare.
• Policies are usually in two parts:
• CO insuring against indemnification it makes;
• Personal policy between directors or officer and the insurance CO, in case of they cannot be indemnified by the CO.
• Subrogation: On payment on terms of policy, insurance CO takes over legal rights insured against that belong to insured.
Insurance CO has right to proceed with any claims.
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230.5 Shareholders’ Rights
Rights Of Shareholders
SHs are usually described as owners of the CO. However, it is the CO, not them, that has title to its assets. SH’s possessory
interest is that of owners of bundle of rights which approaches ownership. Their rights are:
• The right to vote at SH meetings
• The right to dividends, even though the payment depends on Board’s discretion to pay only out of profits.
Furthermore, preferred SHs get paid before ordinary SHs
• Right to return of CO assets on winding up of CO.
These, and other SH rights originate from:
• CO’s Articles, which often describe the voting rights attaching to any shares, as well as the right to return of capital.
• Common law gives rights including the right to fiduciary duty by the Board.
• BCBCA created various statutory rights to remedies, such as oppression (s.227) or appraisal remedy (s.237)
• Binding Ks that SH may have with CO to clarify what each party’s rights are. This is not applicable for widely held COs.
Voting Rights and Shareholder Meetings
173 Voting
(1) Unless specified otherwise by the Articles, each share entitles each SH to one vote
• BC COs can issue non-voting shares if their Articles allow this.
• Voting can be by poll, showing of hands, etc.
• SHs are also entitled to authorize vote by proxy, where they relegate their voting powers to someone else.
174 Participation at meetings of shareholders
(1) Unless specified otherwise by Articles, SHs can participate in meetings by phone or other communication, as long as all
SHs have the ability to communicate with each other.
• But there is no obligation on the CO to take any action or provide any facility to permit or facilitate the use of any
communications medium at a meeting of SHs.
Annual General Meeting: A meeting that COs are required to hold. Every CO must have an AGM every 15 months as
per s.182(1) to elect the Board and inform their members of previous and future activities. It is an opportunity for the SHs
and partners to receive copies of the CO’s accounts as well to review fiscal information for the past year and to ask any
questions regarding the decisions the business will take in the future. Most common procedures are:
• Election of directors, as usually set out by CO’s Articles.
• Receiving Financial Reports/Statements/Auditors Reports.
• Appointment of auditors
• SHs can unanimously vote to agree that the accounts of the CO will not be audited under s.203(2). This is not possible for
widely held COs.
Extraordinary General Meeting: Any meeting of all SHs other than AGM. Normally called by Board when something
comes up. The standard rules of AGM apply to these under s.181.
SHs votes in AGMs are technically supposed to be the primary organ of the CO. But s.136 vests powers to run CO on the
Board. So in reality, SHs have little ability to influence what CO does. The statute attempts to mitigate this loss of power.
Sections 166-172 deal with the formalities prior to the AGM
• s.166 AGM must be held in BC, unless if the location is provided by the articles
• s.167 SH who holds at least 5% of shares may requisition an AGM
• s.169 CO has to send out notice of the AGM
• s.172 The quorum is usually established by the Articles, otherwise it is 2 SHs. If the quorum is not met, then the AGM
can be adjourned.
Sections 176-185 deal with the procedural aspects of AGM
• s.177 A subsidiary is not entitled to a vote.
• s.179 Minutes of a meeting must be kept.
• s.181 The rules outlined for AGMs are applicable to Extraordinary (Special General) Meeting.
• s.182 AGMs are to be held within 18 month of incorporation, and at least every 15 months after that.
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230.5 Shareholders’ Rights
• s.185 The annual financial statement is to be presented at the AGM.
• s.186 The court power to order a meeting of SHs based on a request by a director or a SH.
• This often occurs where there are practical problems with CO functioning, such as management not holding
meetings, or in a situation of crisis.
• So unlike other remedies, s.186 is a person remedy, which give individual SHs power to enforce.
• This may be a useful weapon in arsenal of disgruntled SH.
• May be used as alternative to full civil suit as it gives SH opportunity to address the issue directly with Directors.
Requisitioned Meetings
Requisitioned Meeting: A meeting called by a SH who holds at least 5% of the shares. These are often called relating to
takeover bids, where the offeror acquiring more shares wants to get rid of incumbent Board.
• s.167(1) SH who holds at least 5% of shares may requisition a meeting for the purpose of transacting any business that
may be transacted at a general meeting.
• s.167(3) The SH requesting the meeting must state their cause in a 1000 words or less
• s.167(5) If the requisition is valid, then the directors must call a meeting not more than 4 months after receiving it.
• s.167(7) Provides exceptions where the request can be declined. The onus of proof lies on the directors to show that this is
not a valid requisition.
• s.167(8) If directors don’t call the meeting within 21 days, then if there is more than 2.5% SH support for meeting being
held, they can go ahead and hold meeting (at their cost, but they have later right of reimbursement).
• If proposal relates to the management of CO, it cannot be binding.
• In order to make it binding, SH must pass Special Resolution that adjusts powers of Board and SHs.
• s.168 SHs don’t pay for costs of meeting.
Shareholder Proposals
Shareholder Proposal: Proposals submitted by SHs for a vote or consideration at the CO’s next AGM. This only applies
to public COs. Virtually all SH resolutions are non-binding ("precatory"). In this sense the voting on these resolutions more
closely resembles a poll than it does a referendum. But these have been an important tool of SH activism.
•
•
•
•
•
•
•
s.188(1)(a) The person submitting the proposal must have at least 1% of votes
s.188(1)(c) The proposal must be submitted at least 3 months before the AGM.
s.188(2) The proposal must be accompanied by a written statements not exceeding 1000 words in lengths
s.189(1) A CO that receives a proposal must send notice of it, along with its text to all SHs
s.189(3) The submitter must be allowed to present his proposal either in person or by proxy at the AGM
s.189(5) Lists exceptions under which a CO is not required to process a proposal.
s.191 Outlines the process of refusing the proposal.
There are four categories of SH Proposals:
1. Proposal to amend Articles
2. Propose 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 CO.
• Re Greenpeace Canada & Inco [1984] ONCA: A proposal to institute pollution-control measures to limit sulphur dioxide
emissions was held to be for purpose of advancing environmental cause. The court ruled that if primary purpose of
proposal is to advance environmental cause, the CO will not be obliged to distribute it.
• Varity v. Jesuit Fathers of Upper Canada [1989] ONCA: SH sought proposal to stop work in South Africa, but the language of
the proposal indicated its primary purpose to abolish apartheid. The court ruled that if the primary purpose of proposal
is a political or social cause, the CO will not be obliged to distribute it.
• Medical Committee Case: (Dow Chemical) [YEAR] US: Example of US court intervening in SH proposal
• Dow refused to distribute a proposal that was in favor of resolution to stop selling napalm. Dow relied on the
exception that if the proposal related to “general political and moral concerns” it was outside scope of section.
46
230.5 Shareholders’ Rights
Airline Industry Revitalization Co. v. Air Canada [1999] SCC
This case validates and clarifies statutory provisions regarding SH Requisitioned Meetings.
Facts: PL sought to take over Air Canada and merge it with Canadian Air. The SHs requested the Board to have a special
meeting to amend the Articles, thus facilitating the takeover bid, but the Board rejected the requisition. Air Canada argued
against requisition, saying that a requisite meeting cannot deal with amendment to CO’s Articles.
Issue: Should D be required to hold a meeting in response to the requisition?
Discussion:
• CBCA is the applicable statute here, so the section numbers may be wrong
• D argued that since they have called a meeting of their own, then the requested meeting will be in conflict with it under
the record date exception in s.143(3)(a). (equivalent to s.187 BCBCA)
• The exception in s.143(3) must be a date for a meeting at which there is some chance that the business stated in the
requisition will be heard
• But the directors called their meeting after receiving the request for the SH meeting.
• So the exception applies only to a previously scheduled meeting at which the requisitioners’ business may be
considered
• Air Canada argued that Articles cannot be amended at special meeting. But they provided no basis for this claim.
• The subject matter of SH meeting is not limited in any way. Anything that can be done at AGM can be done here.
• All business transacted at a special meeting is special business except the following:
• Consideration of financial statements
• Auditor’s reports
• The election of directors and the reappointment of the incumbent director
• If D did not call the meeting within 21 days, the SHs who requisitioned it may hold it, per s.143(4) of the CBCA.
• If this is impractical or the court sees fit, it may order a meeting to be held (CBCA s.144)
• But the court should be reluctant to order a meeting when a statutory remedy exists
• The court’s role is to decide issues of a procedural or substantive nature in order to enable the process to unfold in a
proper and timely fashion.
• So the requisition valid and the directors must call meeting.
Ruling: It’s party time!
Removal of Directors
128 When directors cease to hold office
(3) Subject to subsection (4), a company may remove a director before the expiration of the director's term of office
(a) by a special resolution, or
(b) if the memorandum or articles provide that a director may be removed by a resolution of the SHs entitled to vote at general meetings
passed by less than a special majority or may be removed by some other method, by the resolution or method specified.
• Irrespective of what the CO’s Articles say about election of Board, a director can be dismissed by SH at GM at any time
during his or her term if a Special Resolution can be passed in favor of that dismissal.
• Articles can provide that a director can be removed by less than special majority or by some other method.
• s.128(4) Deals with matters where only certain class of shares have right to vote.
131 Vacancies among directors
Subject to sections 132 and 133, a vacancy that occurs among the directors
(a) may, if the vacancy occurs as a result of the removal of a director under section 128 (3), be filled
(i) by the shareholders at the shareholders' meeting, if any, at which the director is removed, or
(ii) if not filled in the manner contemplated by (i) of this paragraph, by the shareholders or by the remaining directors...
47
230.6 Shareholders’ Remedies
Shareholders’ Remedies
The broad distinction between SH rights and remedies is that remedies are the means for ensuring that SHs are given the
rights to which they are entitled. There are two ways that SH can rectify a breach of their rights: individually or acting on
behalf of the CO through derivative action. Thus the remedies can take on one of four forms.
1. Derivative Action: indirect group action by individual SHs acting on behalf of the CO.
2. Individual Action: direct action by individual SHs acting on their own behalf.
• Private Ks such as shareholder agreements.
• Common Law recourse to personal action
• Statutory provisions such as the oppression remedy
Style of Cause:
Personal action under ss.19,150, 227, 228, 237, 301: PL and PL and PL v. D and D
Corporate action under s.142: CO v. D
Derivative action under ss.232, 233: CO v. D and D
Derivative Action
Since a CO is made up of SHs, where SHs have been injured by some wrongdoing, then the CO as a whole has also been
injured, and vice versa. Because of this, derivative action was developed, whereby a SH is permitted to bring an action to
rectify a wrong committed against the CO for which management did not seek redress, often because one or more of their
members were the alleged wrongdoers.
Rule in Foss v. Harbottle
• Foss v. Harbottle [1843] was the leading English case followed in Canada until 1970s.
• In any breach of duty owed to CO, the CO itself was the only proper PL to prosecute that claim.
• Courts in Canada have ousted common law all together, so nothing in this section is relevant to the course. But this is
likely good law in other Commonwealth jurisdictions that are so backward that they do not have statutory provisions.
• The underlying principles behind the Foss v. Harbottle rule are:
• Theoretical: This is premised on separate legal personality of CO and on majority rule in internal corporate affairs.
• Substantive: If we were to allow action by SH, during trial, other SHs may meet and choose to ratify the wrongdoing.
• Procedural: One still had to prove to court that he asked directors to refrain from acting before going to court.
• Ratification: If things can be ratified, we should not allow other persons besides CO to sue.
• Four exceptions to Foss:
• Ultra vires actions that are contrary to the Articles, because they could not be ratified
• Matters requiring a special resolution at a 75% of the vote, since ratification is based on simple majority
• SH claims of breach of contract under s.19 and similar provisions
• Fraud on Minority: a blanket exception where the court would prosecute directors who do things so heinous and
despicable that all decent men would be shamed and terrified. Something like this would never be ratified by SH,
without them becoming parties to the fraud.
• There are also implicit practical problems:
• Naturally, this leads to issues where SHs are at odds with the directors.
• Expensive litigation can deter many SHs from trying.
• Evidence can be sparse, as claimants are often shut out of corporate environment, and have no access to minutes,
financial info, etc.
• As this was riddled with issues, we have now moved on to a more civilized concept of statutory derivative action.
Statutory Derivative Action
232 Derivative actions
(1 A Complainant is the shareholder or a director of the company.
(2) A complainant may, with leave of the court, prosecute a legal proceeding in the name and on behalf of a company
(a) to enforce a right, duty or obligation owed to the company that could be enforced by the company itself, or
(b) to obtain damages for any breach of a right, duty or obligation referred to in paragraph (a) of this subsection.
(3) Subsection (2) applies whether the right, duty or obligation arises under this Act or otherwise.
(4) With leave of the court, a complainant may, in the name and on behalf of a company, defend a legal proceeding brought against the company.
48
230.6 Shareholders’ Remedies
233 Powers of court in relation to derivative actions
(1) The court may grant leave under section 232(2) or (4), on terms it considers appropriate, if
(a) the complainant has made reasonable efforts to cause the directors of the company to prosecute or defend the legal proceeding,
(b) notice of the application for leave has been given to the company and to any other person the court may order,
(c) the complainant is acting in good faith, and
(d) it appears to the court that it is in the best interests of the company for the legal proceeding to be prosecuted or defended.
(2) Nothing in this section prevents the court from making an order that the complainant give security for costs.
(3) Deals with costs (see below)
(4) Also deals with costs (that’s right, see below)
(5) No legal proceeding prosecuted or defended under this section may be discontinued, settled or dismissed without the approval of the court.
(6) No application made or legal proceeding prosecuted or defended under section 232 or this section may be stayed or dismissed merely because it is
shown that an alleged breach of a right, duty or obligation owed to the company has been or might be approved by the shareholders of the
company, but evidence of that approval or possible approval may be taken into account by the court in making an order under section 232 or this
section.
•
•
•
•
•
Either a director or a SH can be granted standing to sue.
Most cases cite a s.142 breach.
Leave aspect to sue derivatively and merits actions of case are separately dealt with.
The reason for s.233(5) are “strike suits,” where meritless SH claims were launched solely to extort costly settlements.
s.233(6) is based on the common law concept that there could be certain wrongs that can be committed by corporate
agents which can be ratified by a majority of SHs. In England, ratification has much more power, whereas in Canada, it is
merely one of the points for the court to consider when granting leave to pursue derivative action.
Procedure for Getting Leave to Derivative Action:
The complainant must go to judge and seek leave through a chambers application to commence the trial
1. Complainant must prove to judge they went to reasonable efforts to get the directors to sue as a CO. An affidavit would
be sufficient.
2. There has to be formal notice of the application given to CO.
3. Complainant must be acting in good faith. Acting in the best interest of the CO is presumed to be in good faith.
4. Complainant must show that he is action in best interest of the CO. This part turns on the merits of the case.
Re Northwest Forest Products Ltd. [1975] BCSC
Ratification of a breach is not an bar to derivative action claim, but it is an element to be considered
Facts: Assets of Fraser Valley Pulp, which was 51% owned by Northwest, were sold at a great undervaluation, without
obtaining an appraisal. SHs of Northwest petitioned the Board to set aside the sale, but the Board not respond. Claimant
SHs sought leave to sue in allegation of negligence breach of s.142, but did not specify the precise nature of the action.
Issue: Is it in the best interests of the CO to bring a derivative action?
Discussion:
• This is an example of how the courts dealt with leave at early stages. When bringing derivative action, court will consider:
• Whether minority SH first asked Ds to take action;
• Whether allegations, if true, would make it in CO’s best interests to allow claim by derivative person;
• If the allegedly guilty Ds voted in favor to defeat a motion to sue for conduct (not likely to be taken seriously by court);
• Court has residual discretion to grant leave or not depending on extraneous circumstances.
• The real question for determination was whether under s. 222(3) (which is the equivalent of the current s.223(1)(d))"it is
prima facie in the interests of the CO that the action be brought".
• It was sufficient to show that the action sought was prima facie in the interests of the CO without asking PL to prove a
prima facie case. A notice that refers to a sale of assets at under value without specifying the legal basis of the claim is
sufficient. There were very strong facts that suggested a successful prima facie case.
• As for the alleged ratification of the sale by the majority of SHs:
• s.233(6) should be kept in mind, but ratification is not an instant bar to a leave application.
• Ratification at common law was never valid if it was not based on full disclosure.
• No minutes were produced to indicate how many SHs or shares were represented at the meeting when it was decided
to sell Fraser’s undertaking. So there is not enough factual basis for this to be of any value.
Ruling: Applicants granted.
49
230.6 Shareholders’ Remedies
Bellman v. Western Approaches Ltd [1982] BCCA
The best interest of the company does not have to be proven, it is sufficient to show an arguable case
Facts: The Bellman group were minority SHs of Western applied under s. 232 of the CBCA for leave to commence a
derivative suit against the Duke group who were majority SHs alleging that certain actions they took constituted wrongful
acts to Western. Bellmans could elect 3 directors, and Dukes the other 5. The Dukes entered into a loan agreement with a
bank, which allowed them to purchase a majority of common shares, giving them the power to elect all of the directors. The
agreement provided for a disclosure of confidential information to the bank, and a promise that Western goes public.
Bellmans alleged wrongdoing and requested relief. Board promised to appoint a litigation committee, which included some
board members, and ask them to research whether it is in CO’s best interest to do this. Committee came back and said it
was not in best interest, based on which the Board decided not to go for proceedings. Bellman sought leave to sue.
Issue: What is effect of LC’s recommendations? What are interests of the CO?
Discussion:
• Dukes argue that all three conditions necessary for derivative action leave were not present.
• They claim that one of the grounds in the petition was not contained in the notice letter.
• But failure to specify each and every cause of action in a notice does not invalidate the notice as a whole.
• Because PL is seeking both derivative and oppression remedies, Dukes question their good faith.
• The relief is not the same as damages for breach of fiduciary duty are not available in the personal action. This is
enough to distinguish the two suits.
• The best interest question is the most important issue here.
• No action may be brought unless the court is satisfied that it appears to be in the interests of the CO to bring the suit.
• This means that it is sufficient to show an arguable case.
• One must first look to the decision of the directors who, having been given reasonable notice by a complainant in
good faith, decide not to assert a corporate right of action.
• Here, the decision was based on the report of a litigation committee formed of members who are part of the actions
being complained about. This raises enough suspicion of a dual relation which prevented them from exercising an
unprejudiced judgment.
• It is sufficient that it appears to be in the interest of the CO that the action be brought.
• Sidenote: if the litigation committee had not been flawed, would its report be binding or merely persuasive? This is not
fully resolved in Canada, but in US, the answer has gone in two directions:
• Should not be overturned due to business judgment rule (Auerbach v. Bennett [1979] NY)
• Making the litigation committee’s report binding would usurp court’s jurisdiction (Zapata v. Maldonado [1981] DEL)
Ruling: Appeal dismissed and leave granted
• Schadegg v. Alaska Apollo Resources [1994] BCJ: Overwhelming approval (80% in this case) and scant support for claimant’s
petition is not bar to action, but can be taken as evidence that a derivative action would not be in company’s interest.
• Richardson Greenshields v. Kalmacoff [1995] ONCA: Acquisition of securities after wrongdoing does not bar person from
being complainant as a SH.
• Shield Development Co. v. Snyder [1976] BCSC The statute is a complete code, but some older common law concepts are still
relevant.
Costs
• s.233(3)(b) The complainant can get interim costs reimbursed, such as legal fees and disbursements, but under s.233(4),
they may have to pay back if they lose.
• s.233(4) The courts can order CO or any party to proceeding to indemnify the complainant for all costs incurred.
• Reason behind this is that presumably all SHs would stand to benefit from the action and the costs are best distributed
proportionately amongst all.
• s.233(4)(b) Court may order recovery of costs against SHs if they lost under (4)b,c.
• s.234 If a director found guilty but acted honestly, court may relieve person from liability.
50
230.6 Shareholders’ Remedies
Other Shareholders’ Remedies
Shareholders Agreements
•
•
•
•
•
•
SH have a right to join with each other to combine voting rights. This is codified by s.175
This can be effected by separate Ks, which are called shareholders agreements.
These are usually found in closely held private COs, particularly when SHs are not Directors.
But they can also be useful to large COs with several major SHs who each control a large amount of votes.
These Ks can take many forms and include many varied provisions. There are few restrictions on what can be put in.
These are more stringent than the contractual obligations that arise out of Articles per s.19. Articles can be amended
without privity, whereas shareholder agreements require privity of K to modify.
175 Pooling agreements
Two or more shareholders may, in a written agreement, agree that when exercising voting rights in relation to the shares held by them, they will vote
those shares in accordance with the terms of the agreement.
Voting Trust: Created when the voting rights of some or all of the shares in a CO are settled upon a trust. The trustee can
vote in AGMs and collect dividends. Trust will set out what his obligations are to beneficiaries, but often this means acting
on behalf of SHs as permanent proxy. The degree of independence that the trustee has conferred on them can vary.
Unanimous shareholder agreements:
• Are found in closely held COs in Letters Patent jurisdictions, and are defined in CBCA in s.146.
• They are predicated on the assumption that the dominant interest of a closely held CO are the expectations and the needs
of the SHs.
• They have the effect of adding by-laws and changing the constitution of the CO, and are fully legally binding.
• This is the only way to modify or constrain the power of the Board in Letters Patent
• s.146 is protective of SH’s rights, giving even the minority SH importance, as unanimity is required.
• But in BC, restrictions can be drafted in the Articles, so none of this applies to COs under BCBCA
Ringuet v. Bergeron [1960] SCC
Directors cannot engage in shareholder agreements like SHs because restricting their votes would have the
effect of fettering of their discretion and decision making power.
Facts: The CO had seven SHs with an equal number of shares and votes. Three of them agreed to purchase the shares of
the fourth, which would given them the majority of shares. For this they came up with a shareholder agreement, by which
they (a) agreed to support one another when each nominated to Board (b) agreed that they would all vote same way at
meetings of CO. One of the three wanted to be on the Board, but the others did not support him as promised. So he went
to court to enforce this.
Issue: Is the shareholders agreement legit and binding in this case?
Discussion:
• Ds tried to argue by saying that the whole K was void, as it was contrary to public policy.
• SCC found that said if the K prescribes Directors to vote a certain way, then it is void as it fetters their directorial power.
• The K set out that the parties would all vote same way at meetings of CO.
• PL sought to rebut that CO meetings are not Directors’ meetings. These are only meetings of SHs. When making the K,
the parties did not have Directors’ meetings in mind.
• SCC found the K ambiguous, but wanted to hold up its terms the best that it could. So, even though it did not distinguish
SH’s from Directors’ meetings, the court decided that “CO meetings” referred to SH’s meetings, and did not fetter the
powers of the Directors.
Ruling: The agreement is good.
• Clark v. Dodge [1936] NY: Shareholder agreements can prescribe the way that Directors would vote, as long as there is
absolute unanimity, and nobody can be harmed. This has never been tried in Canada.
51
230.6 Shareholders’ Remedies
Personal Action
The term “Personal action” does not mean a specific remedy, but denoted any SH remedy that is personal to SH, and for
which he does not need support of directors or CO to sue. So, personal right of action belongs to the individual SH and
they have standing to seek peculiar relief on their own behalf and for their own benefit.
• These exist apart from any action the CO may have, including derivative action.
• Ratification is not an issue in these cases, because individual SHs cannot be prejudiced by actions of other SHs.
• These can be statutory remedy (s.227), common law, or equitable remedy.
• The right to action is based on Articles or SH agreement.
• But a breach of Articles that affects all SHs is best pursued through derivative action. Personal action will only work
where breach of Articles affect the particular SH differently than the rest.
• When directors cause the CO to do certain acts, which are primarily internal in nature (issue shares, make calls, refuse
transfers, solicit proxies) the directors assume a fiduciary obligation towards the CO as a whole, and thus to SHs as a
general body. If they breach that duty, SHs may sue in their individual capacities, through personal action.
• Breaches of proxy solicitation legislation such as Securities Act give rise to the personal action.
• If the statutory provisions have not been complied with, or if the material provided is inadequate or misleading, a SH
has a personal right to sue for a declaration that the meeting and all acts done at it are void.
Farnham v. Fingold [1973] ONCA
Derivative action is the exclusive basis to seek leave of the court to sue on the behalf of the CO
Facts: PL launches a complex action to try to receive damages from directors of CO. The damages are partially based on
breach of duty, partially on breach of Securities Act and ONBCA. Involved allegation that when majority SHs sold shares at
premium price based on the fact that they represented control of CO, that premium ought to be shared by all SHs, as it was
somehow company property.
Issue: Does PL have standing to sue?
Discussion:
• PL tried to argue when there are provisions for disclosure of financial information (mandated for SHs), and these
provisions are not complied with, SHs should have standing for non-pecuniary relief.
• Where an injury was an injury to the CO, and any injury to SH was incidental to CO’s injury, such as where breach of
fiduciary duty alleged, relief could only be claimed by CO itself, or by SH with leave by way of derivative action.
• The court finds that the derivative action is the proper way to proceed here. They give leave to PL to do so under s.99 of
the proper legislation, if they chose to, but dismiss the current action.
• Pappas v. Acan Windows [1991] NFLD: Claim for personal relief should not be permitted to proceed if the claim overall
was “so saturated by derivative claims that it cannot be allowed to stand.”
Ruling: Action dismissed.
• Perlman v. Feldman [1955] US:
• Example of a case where court gave personal remedy to SHs who sought derivative action
• Minority SH brought derivative action alleging majority appropriated a control premium on sale of their shares.
• Court ordered the premium to be held in trust for those who were SHs at time that the CO was sold.
• So the premium is the property of the CO, not of the individual SH sellers.
• Note: s. 233 of BCBCA does not allow such a personal remedy in a derivative action, but feds and Ontario do.
• Goldex Mines Ltd. v. Reville et al. [1975] ONCA
• It is possible from both personal and derivative action to proceed on the same set of facts.
• The question here was whether the majority of SHs owe to minority SHs a duty to act equitably.
• The status of this is questionable as there have been no follow up cases to say that this is good law.
• But the American equivalent of this is Jones v. HF Ahmanson
• Jones v. HF Ahmanson [1969] CALI:
• A case involving a very successful small savings and loan CO. Its shares ballooned and became quite expensive.
Because of this, they became difficult to trade. Working around this, majority SHs ganged up on one SH to make
their shares marketable in way they did not extend to the minority SH. She sued saying it was abuse of majority’s
rights.
• The same injury may affect a substantial number of SHs. If injury is not incidental to an injury to CO, an individual
cause of action exists.
52
230.6 Shareholders’ Remedies
• Court decided that the majority are not fiduciaries, but they owed the minority a duty to act in a just and equitable
manner, and this was a breach of duty.
• BC has not adopted this position of obligation of majority on minority.
• Given s.227, whether or not they owe duty, is not all that important.
Statutory Oppression Remedy
• Origins of the statutory oppression remedy are in the winding up provision of s.324, which have existed for long time.
This was a way for courts to bring an end of business association between two or more people when appropriate, winding
up partnerships and COs.
• s.324 allows the court to dissolve and liquidate the CO when it believes it “just and equitable” to do so.
• This means that the standard is high, anything short of bad faith is unlikely to make it past.
• Often this is not a viable solution to resolving issues because it is hard to achieve, and because one may not want the
business to end, if all they need is a personal remedy.
• In the middle of the XX century, England came out with version of our s.227 in the Companies Act.
• Oppression remedy tries to address the two problems:
• Winding up is not normally sought by applicant who merely want to have a personal wrong redressed.
• Just and equitable ground has been placed in BC with two separate substantive tests.
• Many people seek Oppression remedy because the business is not doing well, but that will not elicit favorable response,
since Oppression remedy is not about business judgment.
• The doctrine has significant overlap with claims for breach of fiduciary duty: Much of the conduct in oppression case can
be looked at from another angle as a breach of duty.
• Courts have found that as long as PL can show breach of fiduciary duty, this is prima facie evidence of oppression.
• Oppression remedy has traditionally been a remedy for closely-held COs because the intimacy of relationships needed for
personal prejudice is not usually present in public company.
• Most Oppression remedy claims also include Winding Up.
227 Complaints by shareholder
(1) For the purposes of this section, "shareholder" has the same meaning as in section 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.
(2) A shareholder may apply to the court for an order under this section on the ground
(a) that the affairs of the company are being or have been conducted, or that the powers of the directors are being or have been exercised,
in a manner oppressive to one or more of the shareholders, including the applicant, or
(b) that some act of the company has been done or is threatened, or that some resolution of the shareholders or of the shareholders holding
shares of a class or series of shares has been passed or is proposed, that is unfairly prejudicial to one or more of the shareholders,
including the applicant.
(3) On an application under this section, the court may, with a view to remedying or bringing to an end the matters complained of and subject to
subsection (4) of this section, make any interim or final order it considers appropriate, including an order
See the long list of possible remedies...
(5) If an order is made under subsection (3) (g), (i) or (m), the company must pay to a person the full amount payable under that order unless there
are reasonable grounds for believing that
(a) the company is insolvent, or
(b) the payment would render the company insolvent.
(6) If reasonable grounds exist for believing that subsection (5) (a) or (b) applies,
(b) the company must pay to the person as much of the amount as is possible without causing a circumstance set out in subsection (5) to
occur, and
Standing
• Per s.227(1), SHs have standing to sue, as well as any person the court considers to be an appropriate person.
• It is completely up to the judge to make decision, but likely at top of list are secured creditors, unsecured creditors,
representatives of deceased, persons with affiliated interests.
• It would be more challenging to give standing to employees, consumers of products, etc.
53
230.6 Shareholders’ Remedies
First Edmonton Place v. 315888 Alberta Ltd [1988] ABCA
Creditors have a standing to sue, as long as they get leave of the court.
Facts: PL leased this building to D for ten years. D had no assets and was in effect a shell company. As an inducement to
lease the building, PL gave the D a rent free period for eighteen months, after which D paid rent for the three months, but
no further. D had also handed over the sum which was the cash inducement to the three lawyers who ran it. PL sought leave
to bring a derivative action under the BCAA. It contended that the three lawyers as directors of D caused it to allow their law
firm to occupy the building rent free and without a lease and that they also caused D to pay over to them the cash
inducement which the PL had paid to D. PL further urged that these acts were flagrant breaches by the three lawyers of
their legal obligations to the corporate respondent.
Issue: Was PL a “proper person” to get leave?
Discussion:
• In this case, because of the money that PL gave to D as a cash inducement, PL’s relationship to D is that of a creditor.
• It does not matter that PL was not SH or a creditor. As long as the court considers them appropriate they are game.
• There are two circumstances in which justice and equity would entitle a creditor to be regarded as "a proper person".
• The first is if the conduct of the directors of the CO constituted using CO as a vehicle for committing a fraud upon
the creditor. In the present case there is no such evidence.
• Second is if the conduct of the directors of the CO constituted a breach of the underlying expectation of PL arising
from the circumstances in which the PL’s relationship with D arose. Where the applicant is a creditor of D, did the
circumstances, which gave rise to the granting of credit, include some element which prevented the creditor from
taking adequate steps when he entered into the agreement, to protect his interests against the occurrence of which he
or it now complains? Did the creditor entertain an expectation that, assuming fair dealing, its chances of repayment
would not be frustrated by the kind of conduct which subsequently was engaged in by the management of the CO?
• There is not enough evidence to give them standing under the oppression remedy.
• But they do get leave to pursue a derivative action.
Ruling: Standing denied.
• But creditors do not always get standing.
• In one case, a major debenture holder was denied standing, because PL was a sophisticated lender, and the debenture
contained a 600 page K with enough contractual protection. The courts do not need to supplement that.
• Some employees (and others) can get standing if they can convince the court that they are at same risk as result of conduct
as SHs, making them in essence constructive SHs.
• Naneff v. Con-Crete [1993] ONCA: A dismissed employee-shareholder may sue under the oppression remedy if the loss of
employment is intrinsically linked to his status as a SH.
• Lenstra v. Lenstra [1995] ONJ: Widow of a deceased SH can have standing
• Olympia & York Developments [2001] OTC: A trustee in bankruptcy can have standing
• Hui v. Yamato Steak House [1988] ONJ: It is possible for a majority SH to be oppressed by acts of a CO’s Directors.
Grounds
• Oppression remedy is generally regarded as very facts-specific.
• The main focus is on conduct itself: per s.227(2)(a) the question is whether the conduct is oppressive to the SH? This
focuses on the acts of the Directors and usually requires a finding of bad faith.
• Another avenue is through s.227(2)(b): if PL can’t prove level of bad faith on the part of Directors, he can argue unfair
prejudice, which focused more on effects on aggrieved party.
• Wording of s.227 indicates an isolated act can be sufficient to prove oppression.
• Some Canadian jurisdictions outside of BC have a third ground for oppression: “unfair disregard” of SH’s interest.
• When it comes to oppression remedy, ratification is irrelevant. It does not matter if other SHs vote to waive oppression.
The remedy is personal, so as long as one SH is affected, it is enough to give them standing.
Ferguson v. Imax Systems Corp [1983] ONCA
Majority SHs exploiting power contrary to the expectations of minority SH creates a basis for oppression
claim. The focus is on fairness.
Facts: A typical case involving a small closely held CO. PL sought relief under s. 234 of the CBCA. She alleged that the D
CO attempted by a special resolution to amend its Articles to reorganize its capital in a manner that was oppressive, unfairly
prejudicial or that unfairly disregarded her interests as a security holder. The effect of the resolution would have been the
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230.6 Shareholders’ Remedies
redemption of her class B non-redeemable shares and would, in fact, put her out of the respondent CO. It does not help
that one of the directors was her former husband who refused to pay her dividends out of profits and excluded her
participation in management.
Issue: Is there enough grounds for oppression?
Discussion:
• This is not codification of common law, this is a new personal remedy out there to redress a perceived need.
• The section should be interpreted broadly, when considering the interests of the minority SHs, so as to carry out its
purpose.
• D had not acted in good faith in exercising its power to amend its Articles.
• D was a small close CO that was promoted and was still controlled by the same small related group of individuals. PL's
part in that group and her work for the CO was important.
• The resolution authorizing the change in the capital structure of the respondent was the culminating event in a lengthy
course of oppressive and unfairly prejudicial conduct to PL. She was the only one so affected.
Ruling: Application allowed and CO’s resolution prohibited.
Scottish Co-op Wholesale v. Meyer [1958] UK
Oppression must be burdensome, harsh, and wrongful, and it connotes an element of bad faith.
Facts: Scottish Co-op was a parent CO who formed a subsidiary CO and employed Meyer as a director of the subsidiary,
while holding 51% of the CO’s shares. After five years he was no longer needed, and Scottish tried to force him out by
establishing their own department to perform the subsidiary’s tasks. At the same time, their nominees on subsidiary’s Board
drove the CO to the ground. Meyer applied for relief against the nominated directors.
Issue: Was action of nominated directors oppressive?
Discussion:
• Oppression remedy, as a personal remedy, will not be available where the PL cannot show any loss other than to share
value. It must be burdensome, harsh, and wrongful, and must connote an element of bad faith.
• Conduct that does not amount to legal fraud, but is evidence of something close to it shows an utter lack of good faith.
• Doing nothing to defend a CO’s interests can be held as oppressive as was the case with directors’ actions here.
• This case has bee adopted in Canada as the standard for oppression.
Ruling: Conduct is oppressive
Embrahimi v. Westbourne Galleries [1972] HL
Defines unfair prejudice. Minority rights can arise out of their expectations, and are not limited to the
rights specifically contracted.
Facts: Ebrahimi and Nazar were partners. They decided to incorporate as the business was highly successful, buying and
selling expensive rugs. They became the sole SHs in the CO and took a Directors' salary rather than dividends for tax
reasons. A few years later, when Nazar's son came of age, he was appointed to the Board and PL and Nazar both transferred
shares to him. Nazar and son then passed an ordinary resolution to have PL removed as a director. PL clearly unhappy at
this, applied to the court for a remedy to have the CO wound up.
Issue: Was the conduct oppressive?
Discussion:
• It does not matter that PL was a director. As long as he is hurt in capacity as SH, he can have standing to pursue
Oppression remedy.
• Shows meaning of unfair prejudice:
• Unfair prejudice creates more liberal basis for relief than oppression.
• The focus is on effect of the action on the PL, making it more subjective.
• Because of this case, courts are blatantly applying concept of equitable rights to oppression remedy.
• In the end the court finds that the CO can no longer function due to fundamental disagreements between the partners,
and is better off being dissolved.
Ruling: Judgment for PL and the CO is wound up.
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230.6 Shareholders’ Remedies
Diligenti v. RWMD Kelowna [1976] BCSC
Oppression will likely touch on legal rights, while unfair prejudice may touch on equitable rights such as
expectations. Oppression looks to the nature of conduct. Unfair prejudice looks to the effect on the party,
Facts: PL was removed by the majority as director of his CO under the equivalent of s.128(3) which is the dismissal of a
Director before the expiration of his term. He could no longer effect operation of business, and applied for relief under s.
227 as he felt that he was either oppressed or unfairly prejudiced, claiming that since given the fact that he could no longer
manage business, there was no point in him being a SH. He wanted company to buy his shares at fair price under the
appraisal provisions included in s.227(3),
Issue: Was the conduct oppressive to warrant the remedy?
Discussion:
• This case applies Embrahimi to BC and explains the separation between oppression and unfair prejudice.
• Ds claimed that while PL may have been oppressed or unfairly prejudiced, he was not a SH.
• When this case was decided, the “proper person” section was not law yet.
• The court decided that the status of director and SH are interchangeable when it comes to oppression.
• Oppression:
• The definition of oppression from Meyer is too narrow to allow finding of oppression in this case.
• PL’s mere dismissal from the Board, was not burdensome, harsh, or wrongful.
• And nothing in the nature of the conduct shows bad faith.
• What happened was unfortunate, but not high enough to be oppressive.
• Unfair prejudice:
• It is about time that the rules here were liberalized to go more along the lines of equity.
• Embrahimi allows the rights to be based out of SH’s expectations.
• PL had ongoing expectation to always be both director and SH. Without it, he would have no influence in CO, and
no interest in being a SH.
• So, when PL was fired from the Board, he was unfairly prejudiced in capacity of SH.
• It seems fair to give him the way out of the CO with proper compensation.
Ruling: Judgement for PL.
• Wind Ridge Farms v. Quandra Group [1999] SKCA: Court can order majority SHs to buy shares of PL minority SH. This is
another way to bring SH conduct within purview of oppression remedy, without having to find duty of care.
• Nystad: When PL is responsible for his treatment, he cannot claim oppression.
Indicia of Oppressive Conduct: (per Arthur v. Signum)
• Lack of valid purpose of corporate transaction, such as excessive salaries
• Lack of good faith of part of Directors
• Discrimination among SHs, which gives benefit to majority over minority
• Lack of adequate financial disclosure of material info to minority SH
• Plan or design to eliminate minority SH
• Refusing dividends to SHs
Forms of Relief & Orders
• s.227(3) gives a long list of orders that the court can make once standing and grounds are established.
• The list, however, is not exclusive.
• The orders can be interim or final orders.
• Courts will draw distinction between SHs who see themselves as inevitably involved in management of the CO (active
investors) and person who do not see themselves as Directors or managers (passive investors).
• s.227(4) creates a sort of a laches defense, creative a timely manner requirement. Paterson does not knows of any cases
where this has been used.
• s.227(5) says that if CO insolvent, or payment under order would render it insolvent, then they don’t have to pay in full
• If the CO cannot pay as per s.227(5), then under s.227(6) they still has to pay as much as possible, and the balance is
payable when the CO has the money.
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230.6 Shareholders’ Remedies
BCE Inc. v. 1976 Debentureholders [2008] SCC (BELL CASE)
This is the current state of law of oppression remedy.
Facts: Ontario Teachers Pension Plan Board led a consortium of purchasers, which made an $52b offer to for a leveraged
purchase of all shares of BCE, which is a large telecom CO. Under the structure of the offer, Bell would assume a $30b
portion of liability for the debt. Bell is a wholly owned subsidiary of BCE, but the two share a common set of directors and
some senior officers. The Board deiced that the offer would be in the best interest of BCE and its SHs. In evaluating the
offer, the Board consulted several reputable financial advisors. The offer was approved by 97%of BCE’s SHs. The offer is
opposed by a group of financial institutions that hold $7.2b worth of debentures of Bell, and who argue that the purchase
devaluated their debentures by 20%, which for 30 years have been seen as secure investments. They pursued an action on
the grounds oppression (s.241 of CBCA) and breach of fiduciary duty because the arrangement was not fair and reasonable.
Under s.192 CBCA there is a need for court approval to change CO’s structure. QBSC approved the transaction, but QBCA
overruled that decision.
Issue: Is there oppression here?
Discussion:
• The oppression remedy focuses on harm to the legal and equitable interests of a wide range of stakeholders affected by
oppressive acts of a corporation or its directors.
• This remedy gives a court a broad jurisdiction to enforce not just what is legal but what is fair.
• Oppression is also fact specific
• In assessing a claim of oppression, a court must answer two questions:
• Does the evidence support the reasonable expectation asserted by the PL?
• Useful factors from the case law in determining whether a reasonable expectation exists include: general
commercial practice; the nature of the corporation; the relationship between the parties; past practice; steps the
claimant could have taken to protect itself; representations and agreements; and the fair resolution of conflicts
between corporate stakeholders.
• Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms
"oppression", "unfair prejudice" or "unfair disregard" of a relevant interest?
• PL must show that the failure to meet the reasonable expectation involved unfair conduct and prejudicial
consequences.
• Where conflicting interests arise, it falls to the directors to resolve them in accordance with their fiduciary duty to act in
the best interests of the CO. This duty comprehends a duty to treat individual stakeholders affected by corporate actions
equitably and fairly.
• Where it is impossible to please all stakeholders, it will be irrelevant that the directors rejected alternative transactions that
were no more beneficial than the chosen one.
• Here, PLs did not establish that they had a reasonable expectation that the directors of BCE would protect their economic
interests. The reasonable expectation was that Directors would consider their position, and it was sufficient that they
honoured their legal contractual terms. This fulfilled their duty.
• Compliance with fiduciary duty is a reasonable expectation of any SH in the CO. A breach of fiduciary duty can
therefore be the basis for an oppression action.
• But not all breaches of fiduciary duty can be accepted as proof of oppression or unfair prejudice.
Ruling: Appeal allowed.
There is a risk that if s.227 is interpreted too generously, it could create duplicity in proceedings.
The two remedies have developed in isolation from one another, and there is little discussion of their relationship.
It is common in any action alleging breach of fiduciary duty to also allege oppression.
By focusing on fairness, oppression remedy offers broader substantive cause of action.
Remedies available under oppression remedy are broader than those of fiduciary duty.
So, oppression remedy is more expedient.
Then why would derivative action still be relevant?
• In larger public COs it may be hard to show prejudice to individual SHs, so derivative action may be the way to go.
• In cases of clear cut breach of fiduciary duty, where it is easier to argue and prove.
• Goldex Mines Ltd. v. Reville et al. [1975] ONCA: The test for deciding whether you could pursue oppression remedy in
respect of what also amounts to breach of fiduciary duty is: if injury to SH was only incidental to harm done to company
by alleged breach, then there is no standing for oppression remedy.
• BC courts say otherwise
• Furry Creek Timber Co v. Laad Ventures Ltd. [1992] BCSC: PL SHs in oppression remedy cases must show that the breach of
fiduciary duty has also affected them in manner different to or in addition to harm done to CO.
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230.6 Shareholders’ Remedies
Other Statutory Remedies
Compliance and Restraining Orders and Rectification
• Under s.19(3), the Memorandum and Articles are binding as if the CO and the SHs had been signed and sealed them.
• No court has ever awarded damages under s.19.
• s.19 can only be enforced by SHs in their capacity as SHs, not as directors.
228 Compliance or restraining orders
• This section extends rights similar to those set out in s.19 to include the Act and Regulations.
• In the case of any imminent contravention of the BCBCA or Regulations, this section allows SHs to get order from
court to force directors to comply with Act
• Creditors and any other appropriate persons can pursue this also.
• Sets out more clearly the orders the court can make: injunctions, declarations, etc.
• Refers to s.33: can order compensation to the CO or another party to the K.
• Under s.157, directors can be personally liable for compensation.
• You can’t rely on s.228 to enforce directors’ fiduciary duty under s.142 because that’s what derivative action is for.
229 Remedying corporate mistakes
• The rectification provisions in s.229 provide a remedy for the breach of s.19(3).
• On motion of court or any interested person, the court may make an order to correct an omission, defect, error, or
irregularity in the conduct of the CO that leads to a breach of the Act, causes non-compliance with Memoranda or
Articles, or renders ineffective a SH’s or Director’s meeting. The court is given wide powers to rectify.
• This is aimed at getting orders from judge retroactively forgiving procedural error of some sort, such as meetings with
no quorum, resolution passed with less than majority, etc.
• Validating acts of improperly instilled Director.
• Court asked whether in discretion it will forgive it considering the effect that the order might have on the CO and on
its directors, officers, creditors and SHs, aiming to avoid unnecessary inconvenience.
• The onus on applicant to prove something is wrong.
• The interest of third parties is protected in s.229(3)
• Goldhar v, Quebec Manitou Mines [1975] ONJ: Compliance orders can be used to require a CO to act on the statutory rights
of a dissenting SH to have his shares bought out.
• PL tried to argue they could avoid getting derivative leave to sue to enforce breach of fiduciary duty by using
Ontario’s equivalent of s.228.
• The court found that s.228 cannot be used if making a finding of non-compliance requires a determination of
complex issues of fact or law, such as a claim there has been a breach of fiduciary duty.
• It is intended for “housekeeping” matters (technical breaches).
• Duha Printers This remedy can be used to enforce compliance with unanimous shareholder agreement.
Dissent Proceedings: Appraisal Remedy
• The appraisal remedy is triggered by directors embarking on fundamental changes governed by Act.
• This is a personal remedy of SH, which grants them a statutory right to have the CO to buy their shares, as a way of
saying that the SH wants out.
• If management decides to do something drastic, they need to call extraordinary general meeting and put before it
resolution it be approved. Has to pass for continuation process to proceed.
• This applies to both private and public CO, but it is more useful to private ones, where a SH would not be able to dispose
of his shares otherwise.
• Both dissenting SH and CO can use this provision, as COs often want to get ride of troublesome dissenting SHs.
• Under oppression remedy, the court can order shares be purchased at their discretion. But here, this is an automatic right,
which does not depend on proof of wrongdoing.
• One can get appraisal remedy as long as fundamental changes are in play and the procedure has been followed.
• This remedy does not relate to any other potential kinds of relief.
Under s.238(1) there is a list of the fundamental changes that can trigger the appraisal remedy:
• Amendment to constitution on restrictions of powers;
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230.6 Shareholders’ Remedies
• Where two BC companies amalgamate and become one, Special Resolutions are required and still has to go before court
for final approval.
• Refers to s.301, which is the proposal to sell all, or substantially all of its undertaking.
• Continuation under s.309
• In respect of any other resolution, if dissent is authorized by the resolution
• In respect of any court order that permits dissent
The procedure is outlined in s.238(2), s.240, s.242.
• When a CO contemplates one of the changes under s.238(1), they must send a notice of resolution to all SHs as per s.240
• If the CO does not send notice and votes on a resolution without the SH being there, then a SH has 14 days to dissent
under s.240(3)
• A SH who wants to dissent must prepare a notice of dissent two days before meeting as per s.242
• A CO that receives this notice must send a notice informing SH of the intention to proceed.
• After this, the SH sends notice to CO that he intends to sell shares, and send in share certificates within a month.
• Price becomes remaining issue.
The price of shares to be paid is discussed in s.245:
• It is up to the CO and the SH to negotiate a price for the shares. SH may apply to court to determine payout value (s.37).
• If company and dissenter cannot agree on what the payout value is, s.237 says it is “fair value.” There is no onus on
dissenter, and the court must itself valuate the shares
• This is more of an accounting exercise than a legal one.
• Judges often refer these matters to experts, though they are not bound by them.
• Under s.245(5), the CO does not have to buy shares if potential for insolvency.
Three Methods of Share Valuation:
1. Market value: What shares are selling for on open-market. For timing, use average of mean daily price over preceding
21 days, which is called the New York Rule. If trading is sporadic or minimal, then something else has to be used.
Market value is only good for public COs.
2. Asset value: Appraise the value of the CO, and divide it by the number of shares. Problem is that it won’t work for
service or high-tech COs, which are more likely represented by income streams. Court will estimate future income of
CO and determine discounted present value of shares based on that. BC courts have not taken into account increase in
share value of getting rid of SHs.
3. Capitalization of earnings: Look at anticipated future stream of earnings and extrapolate, discount to present value.
• These all can be combined: Determine value based on consideration of value generated by the other three methods.
• New Quebec Raglan v. Blok-Andersen [1991] BLR: Valuation must be conducted as of a particular date with reference only to
the facts as they were known at the time.
• Domglass Inc v. Jarislowsky [1982] QBCA: It might be possible for dissenting minority SHs to demand premium on their
shares.
• This case also talks about share valuation.
• This question has not been dealt with in BC, but Paterson thinks that it would be workable.
• s.239 deals with waiver of right to dissent.
• PL cannot waive their right generally to exercise appraisal remedy, but can do so with respect to specific resolution.
• s.244(6) suggests that if PL invoked this remedy, you cannot seek any other remedy.
• Downside: Don’t have much time to consider whether this is best route for you.
• But PL can still get appraisal remedy from court if they only seek oppression remedy. But there is no guarantee.
• As per s.246, the right of dissent it lost:
• Where PL comes to the meeting and votes in favor of resolution, and is deemed to eliminate anything you said
previously.
• Where CO decides not to go ahead with performance of act.
Winding Up
324 Court may order company be liquidated and dissolved
(1) On an application made in respect of a company by the company, a shareholder of the company, a beneficial owner of a share of the company,
a director of the company or any other person, including a creditor of the company, whom the court considers to be an appropriate person to make
the application, the court may order that the company be liquidated and dissolved if
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230.6 Shareholders’ Remedies
(a) an event occurs on the occurrence of which the memorandum or the articles of the company provide that the company is to be
liquidated and dissolved, or
(b) the court otherwise considers it just and equitable to do so.
(2) Nothing in subsection (1) prevents the court from requiring that security for costs be provided by a person bringing an application under that
subsection.
(3) If the court considers that an applicant for an order referred to in subsection (1)(b) is a person who is entitled to relief either by liquidating and
dissolving the company or under section 227, the court may do one of the following:
(a) make an order that the company be liquidated and dissolved;
(b) make any order under section 227 (3) it considers appropriate.
(4) If the court orders under this Act that a company be liquidated and dissolved, the court must, in its order, appoint one or more liquidators.
(5) An appointment of a liquidator under subsection (4) takes effect on the commencement of the liquidation.
• CO can wind themselves up by special resolution.
• But here winding up is method of SH protection which allows to liquidate the assets of CO, use the proceeds to pay
liabilities and pay the surplus to SHs.
• The most important question is whether it is “just and equitable” to liquidate the CO as per s.324(1)(b)
• The “just and equitable” threshold is very high
• Because of this, the application is usually done along with other relief, most commonly the oppression remedy.
• The courts are usually very reluctant to grant this remedy, especially if the only reason for the application is to provide
monetary relief for disappointment.
• Under s.227, application for winding up can be changed by court into application for oppression remedy.
• Piggot v. Zubovits [1995] ONJ: Winding up can be ordered when it is no longer possible for the CO to carry on the business
for which it was created.
• Loch v. John Blackwood Ltd [1924] PC: Winding up can be ordered where SH seeking relief has “justifiable lack of
confidence” in conduct of management.
• Lack of confidence cannot consist only of disagreement, but must be some serious misbehavior on part of
management, such as fraud or deliberate violations of corporate policy, after which the management can no longer be
trusted
• Embrahimi v. Westbourne Galleries [1972] HL: Winding up can be ordered where CO is a partnership where the partners
disagree fundamentally on how the business should operate.
• Re Yenidje Tobacco Co [1916] CHANC: Winding up can be ordered when disagreement and deadlock makes it impossible
for the CO to act.
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