Page 1 of 30
Pure law – condensed for exam purposes. Use with Keith’s notes (it contains all the
policy/non-law stuff that will have an ancillary presence on the exam)
Chapters 2 and 3 – Agency ............................................................................................... 2
Chapter 4 – Sole Proprietorship ...................................................................................... 4
Chapter 5 – Partnership ................................................................................................... 5
Chapter 6 – Relationships Btwn Partners and Others .................................................. 7
Chapter 7 Limited Partnership ..................................................................................... 10
Chapter 8 Limited Liability Partnerships .................................................................... 12
Chapter 11 History of the Corporation -- Situation across Canada today ................ 13
Chapter 12 Corporations: The Constitutional Position ............................................. 14
Chapter 13 The Incorporation Process ......................................................................... 15
Chapter 14 Legal Status of Corporations ..................................................................... 17
Chapter 15 Pre-Incorporation Contracts ..................................................................... 18
Chapter 16 Piercing the Corporate Veil ....................................................................... 20
Chapter 17 and 18 Financing through Shares, Corporate Debt Finance .................. 22
Chapter 20 Powers of the Corporation and Authority of Directors and Officers
(ultra vires doctrine) ....................................................................................................... 25
Chapter 21 Directors and Officers ................................................................................ 27
Chapter 22 Shareholder Voting Rights......................................................................... 29
Chapter 24 Closely Held Corporations ......................................................................... 30
Page 2 of 30
Chapters 2 and 3 – Agency
General Principle
An agent affects the legal relations of his “principal” primarily by entering into contractual relationships
with third parties on behalf of the principal. The principal can also be vicariously liable for the torts
committed by the principal’s agent. The extent to which an agent can affect the legal relations of the
principal depends on the agent’s authority. Authority can be granted expressly by the principal either
orally or in writing. Authority can be implied as well and courts will look to the usual or customary
authority of such agents.
Usual Authority
The usual authority is determined by looking at what this particular agent has been allowed to do in the
past by the principal. If the agent has done certain things in the past outside the given express authority
but the principal has allowed the agent to do such things in the past, then the agent may be said to have
the usual authority (and hence actual authority) to do those things (see e.g., Freeman & Lockyer).
Customary Authority
Customary authority looks at what agents of this type are normally allowed to do. This allows one to
argue that agents of his or her sort customarily have the authority on which the agent acted, and there is
nothing in the express grant of authority, or in the circumstances in which the authority arose, that is
inconsistent with the customary authority (see e.g., Wiltshire v. Sims).
Duties of Agent to Principal
Agents are said to owe certain fiduciary duties to the principal, however these duties can be varied
expressly or by implication.
First duty: To perform the assigned tasks according to the terms of the agreement or the principal’s
instructions.
In performing these tasks the agent has a fiduciary duty to act in the best interests of the principal
Second duty: The agent must perform his tasks with reasonable care.
The standard of care is the degree of skill and diligence an agent in his position would normally possess or
exercise.
Third duty: There is a duty not to delegate.
There are exceptions where delegation is a reasonable implied term.
Fourth duty: To avoid conflict of interest between the duty to the principal and one’s personal interest.
Normal remedies for this include accounting, injunction and rendering the transaction void if possible.\
Fifth duty: Agents cannot make secret profits at the expense of their principals.
Normal remedy for this is accounting (see e.g., Thompson v. Meade).
Sixth duty: Duty to keep proper accounts.
If the agent fails to do so there is an evidentiary presumption against the agent.
Duties of Principal to Agent
First duty: To pay remuneration.
To get remuneration the agent must be performing the obligations required under the agreement.
Normally, the agent must be the effective cause of sale unless he is an exclusive agent entitled to
remuneration regardless. The default rule is agents receive no remuneration and an express agreement is
required. But if the circumstances are as such where the agent clearly would not have acted gratuitously,
courts will award remuneration on a quantum meruit basis (what would normally be received by agents in
similar circumstances).
Second duty: The principal must pay the expenses of the agent and indemnify the agent against losses
(provided the agent is acting within the scope of his actual authority).
Page 3 of 30
Termination of agency relationship
Agency relationships can be terminated by the acts of the parties. If the agreement provides for
termination, then pursuant to the terms of the agreement. If there are no terms in that regard, then it is
unilaterally terminable on notice. Agency can be terminated by operation of law – upon bankruptcy of
the principal or agent, when the agreement is frustrated, and when the principal or agent dies.
Ostensible Authority (aka apparent authority)
Ostensible authority binds the act of an agent between the principal and third party even if the agent had
no actual authority to act. Per Freeman & Lockyer, there are two required components to ostensible
authority. First, the alleged principal must have made or permitted a representation that the alleged
agent had the authority to act. Second, the third party must reasonably rely on the representation to his
detriment.
Breach of Warranty of Authority
If actual or ostensible authority is not found, the third party can claim against the agent for breach of
warranty of authority. Three elements must be satisfied. First, the agent must represent that he had
authority. Second, the representation must be false. Third, the third party must reasonably rely on the
representation to his detriment. The measure of damages for a successful claim is expectation damages
(see e.g., Wickberg v. Shatsky).
Ratification
Where the agent acts beyond his actual authority, the principal may nonetheless accept what the agent
has done by “ratifying” the contract. A principal can ratify if three elements are met. First, the agent
must have purported to have acted on behalf of the principal who wants to ratify. Second, the principal
must have been in existence and ascertainable at the time the agent acted (note chp 15 for preincorporation contracts). Third, the principal must have had legal capacity to do the act at the time the
agent acted and at the time of ratification.
For ratification to be effective, first the principal must accept it either expressly, by conduct, or by
acquiescence. Generally, part performance of the contract by the principal will suffice. Second,
ratification must be based on full knowledge by the principal of all important relevant facts. Lack of
knowledge of a minor detail doesn’t suffice.
The usual consequences of ratification are that the contract will be considered formed at the time it was
entered into with the agent. The agent will no longer be liable to the principal for exceeding his authority.
The principal will be liable to the agent for reasonable remuneration and to indemnify the agent against
his expenses. The agent will no longer be liable to the third party for breach of warranty of authority.
Undisclosed Principal
Generally, an undisclosed principal can disclose the agency relationship and sue the third party on a
contract entered into by the agent. This does not apply if the third party was looking to the agent alone
to perform the contract. The test applied is an objective test. Factors considered include: the terms of
the contract (expressly requiring performance by the agent), the circumstances indicate the third party
never would have entered a contract with the principal because e.g., the principal was barred from
trading, there is a personal aspect to the contract (see e.g., Said v. Butt), or when the principal is
bankrupt. On the other hand, the third party is protected in that he can sue the principal upon learning of
the agency relationship, can sue the agent as a party even after learning of the agency relationship, and
can set off (i.e., use) any rights the third party had against the agent against the principal.
Liability of Principal for Agent’s Torts
A principal is liable for torts committed by the agent if the agent was acting within his scope of authority.
In this context, that means simply doing things the agent would normally do in carrying his mandate. The
principal does not have to benefit from the agent’s fraud, nor does the agent have to intend to benefit the
principal for the principal to be liable (Lloyd v. Grace). It’s sufficient if the agent used the facilities of the
business to perform services normally performed by the business to carry out fraudulent transactions
(Ernst & Young v. Falconi).
Page 4 of 30
Chapter 4 – Sole Proprietorship
Introduction
Under a sole proprietorship (SP), one can form an SP simply by starting to do business. The SP is the only
equity investor. The SP is the ultimate decision maker but can delegate authority to agents or employees
(or the SP may be subject to control by a lender who put restrictions on the business). The SP is not a
legally recognized separate entity, thus assets and contracts are directly that of the business owner. The
SP is directly liable for torts, including being vicariously liable for his employees and agents. The SP faces
unlimited liability. SP’s can deduct business losses against other sources of income; thus, it’s a good form
of business ownership in the first few years as most businesses lose money then.
Business Name Registration Requirement
S. 88 of the BC Partnership Act requires one to file the business name with the registrar if 1. In the
business of “trading, manufacturing or mining” 2. Using a name indicating a plurality of persons when not
actually in a partnership and 3. When using a business name that is not actually the SP’s own name.
S. 89 states that the registrar will not register the name if it resembles the name of a corporation or is
likely to confuse and mislead unless the corporation consents in writing. This means there can be two
SP’s will the same or confusingly similar names.
S. 90 requires the registrar to maintain a register showing the business names on the left side with the
names of the persons associated with the business on the right side. This makes it easy to track down
business owners, avoids deception/confusion, and minimizes passing off claims.
Dissolution
Dissolution is simple. The SP simply stops carrying out business. He will have to pay his debts eventually
or be petitioned into bankruptcy however.
Page 5 of 30
Chapter 5 – Partnership
Formation
No formal steps required for a general partnership – just start carrying on business with another person
with a view to profit.
S. 87 of the BCPA states that legal actions can be brought against all or any one partner even if the
partnership didn’t register.
S. 81 requires partnerships engaged in trading, manufacturing, or mining to register with the registrar.
s. 82 requires this be done within three months of formation
s. 90 requires the registrar to keep an index showing the names of all partnerships registered with the
names of the partners beside them.
s. 83 requires a new registration statement be filed when there is a change or alteration in member (i.e., a
partner leaves the firm)
s. 84(b) states that failing to do so means that retiring partner is deemed to continue to be a
partner and can be liable for the partnership’s debts.
The Offence Act also imposes a potential fine of up to $2,000
Existence of Partnership
S. 2 defines a partnership as a relation between persons carrying on a business in common with a view to
profit.
Per s. 29 of the Interpretation Act, “persons” includes corporations
“carrying on business” presumably takes on its ordinary meaning – “a trade, profession, usual occupation,
buying and selling, trade, a commercial firm, a shop.” It is not necessary to show the partners carried on
business for some time. A single transaction will suffice. Active decision making is not required. A
partnership could be formed for the sole activity of passively collecting rent. (Backman)
“in common” suggests the parties must be carrying on business together in some way. Relevant factors
include the authority of alleged partners to bind each other, whether they held themselves out as
partners, whether there was a contribution of “skill, knowledge, or assets to a common undertaking, a
joint property interest, sharing of profits and losses, joint bank accounts, etc (Backman)
“view of profit” means non-profit associations are not partnerships under the BCPA. However,
unprofitable businesses are still partnerships under the BCPA. Profit need only be ancillary to the
overriding intention of the association (Backman)
s. 3 excludes corporations and non-profits from the BCPA
Not a separate legal entity, but may be treated collectively
Re Thorne – Partnerships are not separate legal entities and so a partner cannot contract with his
partnership (that would be akin to contracting with oneself)
However, it may be treated as a collective entity in some circumstances. S. 1 of the BCPA defines “firm”
as a “collective term for persons who have entered into partnership with one another.” For tax purposes,
the income of the business is calculated for the firm itself. Also, per Rule 7 of the BC Rules of Court,
actions may be commenced and defended against in the partnership name.
Governance and the default rules
The default rules in the BCPA assume equal capital contributions, equal management responsibilities, and
equal rights to profit. The terms can be varied by a partnership agreement.
s. 21 states that the mutual rights and duties of partners may be varied by the consent of all partners, and
consent can be express or inferred (i.e., you can contract out of the default rules)
s. 23(1) states that partnership property must be held and applied for the purposes of the partnership in
accordance with the partnership agreement
Page 6 of 30
s. 6 provides that “partnership property” means property brought into the partnership, acquired
on account of the firm or property acquired for the purposes of and in the course of the business
s. 23(2) states that land held by one member of the partnership is held in trust for the
partnership
s. 24 states that property bought with money belonging to the firm is deemed partnership
property
S. 27 – the default rules
s. 27(a) – partners share equally in capital, profits, and losses
s. 27(b) – The firm must indemnify every partner for payments/liabilities in the ordinary and proper
conduct of the business or for the preservation of the business or property of the firm
s. 27(c) – A partner who makes an advance of capital over and above the contribution of capital he agreed
to make is entitled to receive a payment of interest at a fair rate
s. 27(d) – A partner is not entitled to interest on contributed capital until profits have been ascertained
s. 27(e) – Every partner may take part in the management of the business (even if a dormant partner, one
is still liable for acts of other partners Cox v. Hickman)
s. 27(f) – Partners are not entitled to remuneration for acting in the partnership business
s. 27(g) – No new partner may be admitted without the consent of all existing partners
s. 27(h) – Decisions on ordinary business matters are decided by a majority of the partners. But no
change in the nature of the partnership is permitted without the consent of all partners
s. 27(i) – Partnership books are kept at the principal place of business and every partner may access them
s. 28 – no majority of partners can expel a partner unless power to do so is granted by the partnership
agreement
s. 34 – a partnership interest can be assigned, but this only means an assignee of a partner is entitled to a
share of the profits and a share of assets on dissolution – the assignee does not become a partner
Codified fiduciary duties
s. 31 – Partners are bound to render true accounts and full information of all things affecting the
partnership to any partner or his legal representatives.
s. 32(1) – A partner must account to the firm for any benefit derived by the partner without the consent
of the other partners from any transaction concerning the partnership, or from any use by the partner of
the partnership of the partnership name, property, or business connection
Rochwerg v. Truster – Accounting obligation arises even if no damages and no proof of
competing activity – merely using the partnership business connection or name suffices for
liability to be found
s. 33 – Requires partners account for and pay over profits made from engaging in competing businesses
carried out without the consent of the other partners
Also cite McKnight v. Hutchinson
Dissolution
s. 29 – if no set term has been agreed upon, any partner may end the partnership at any time on giving
notice to all the other partners of his intention
s. 35 – a partnership is dissolved by (a) expiration of the set term (if there is one), (b) by
termination of all adventures/undertakings intended to be taken on by the partnership, (c) or by
a partner giving notice to all the other partners
A partnership is dissolved automatically on the death, bankruptcy, or dissolution by a partner. But what if
the remaining partners want to continue doing business? Put a provision to that effect in the partnership
agreement. Or, rely on the default statute: s. 36 states that where there are more than two partners,
the death, bankruptcy, or dissolution, by a partner only dissolves the partnership as between that partner,
and the remaining partners continue to remain subject to the partnership agreement
Page 7 of 30
Chapter 6 – Relationships Btwn Partners and Others
(start with the definition of partners, s. 2)
Voluntary Relationships – s. 7-11
S. 7 – Apparent authority of partners  Remember, law of agency applies to partners too
s. 7(1) – every partner is an agent of the firm and other partners for the purposes of the partnership
business
s. 7(2) – where a partner does an act for “carrying on in the usual way business of the kind carried on by
the firm” it binds the firm and its partners unless i) the partner lacked authority and ii) the third party
either knew the partner had no authority, or did not know or believe the person was a partner (like
ostensible authority)
s. 8 – an act or instrument executed in the firm name by someone authorized is binding on all partners
s. 9 – when a partner pledges credit for a purpose apparently not connected to the firm, the firm is not
bound unless the partner was specifically authorized
s. 10 – if a third party has notice of a restriction on the power of the partner but proceeds any way, the
partner’s actions do not bind the firm
s. 11 – every partner is jointly liable for all debts and obligations of the firm as long as one is a partner.
After the partner’s death, his estate is also severally liable subject to prior payments of the partner’s
separate debts
Torts
s. 12 – the firm is liable for wrongful acts (torts) of partners where a partner
a) acted with the authority of co-partners
b) acted in the ordinary course of business of the firm
s. 14 – the liability under s. 12 is joint and several (tort victim can seek full compensation
from any one or more of the partners, and the partners will have to seek contribution
from each other separately)
Cite Ernst & Young v. Falconi – If the partner used the resources of the business and did acts
normally consistent with the usual business of the firm, the firm will be liable
Involuntary Relationships
s. 16 – someone who represents himself to be a partner or allows himself to be represented that way will
be liable to anyone who’s given credit on faith of the representation
s. 16(1) – the representation could be made by another person as long as the first person allowed
himself to be so represented
s. 16(2) – s. 16(1) applies whether or not the representation was made with the apparent
partner’s knowledge
Example: Dominion Sugar – One of the wealthy partners retired, the business couldn’t get loans
without that partner so the stationery still mentioned the retired partner’s name. The retired
partner was being represented as a partner under s. 16 and was liable for the debts
Liability of New and Retired Partners
s. 19(1) – a person who joins an existing partnership is not liable for debts that arose before the person
joined the firm
s. 19(2) – once a person leaves a partnership, he does not cease to be a party to contracts he entered into
while part of the partnership (he would have to seek a release)
Determining when two parties are in fact acting in common and can be sued as a partnership
s. 4(a) – common ownership of property does not of itself make the co-owners partners
e.g., Three persons own a building and operate separate stores – likely not partners
But if they rented part of the building to someone else and shared in the management,
probably they are partners to the extent of that rental arrangement
Page 8 of 30
AE Lepage v. Kamex – co-owners are not agents for each other and can deal
with their own interests in property without requiring the consent of other
owners. This is unlike partners
s. 4(b) – the sharing of gross returns does not of itself create a partnership
s. 4(c) – the receipt of share of profits is proof in absence of evidence to the contrary that one is a partner
This arguably codifies the common law position of Cox v. Hickman where the HoL stated that
sharing profits creates a rebuttable presumption of partnership (also, Cox stands for the principle
that dormant partners can be liable like regular partners) – if profits shared, must rebut presump
Qualifications to the s. 4(c) presumption:
s. 4(c) – Receipt of a share or payment that varies depending on profits received does not in itself make
one a partner
s. 4(c)(i) – payments of a debt or liquidated amount by instalments out of profits does not of itself make
one a partner
s. 4(c)(ii) – a contract for remuneration of an employee/agent by shares of the profits does not in itself
make one a partner
(perhaps it would if also significantly involved in management decisions. Also, this might not
apply if profit sharing isn’t limited to a predetermined fixed waged or salary [bonuses?
Commissions?])
s. 4(c)(iii) – a spouse or child of a deceased partner who receives an annuity out of profits is not a partner
merely because of a receipt of profits (perhaps they would if became involved in business though)
s. 4(c)(iv) – an advance of money by way of a loan, to a person engaged in business or about to engage in
business, on a contract between that person and the lender, where the contract is in writing, the contract
is signed by or on behalf of all parties to it, and under the contract the lender is to receive a rate of
interest varying with the profits or a share of the profits does not in itself make the lender a partner of the
business
s. 5 – lenders who enter such an arrangement are in a subordinate position (SEE DISCUSSION)
s. 4(c)(v) – a person receiving payment for goodwill out of profits is not a partner merely because of this
fact
However, s. 5 subordination applies (SEE DISCUSSION BELOW FOR ADD’L RELEVANT INFO)
Essential to the above is Pooley v. Driver and Martin v. Peyton which state that a court must weigh
factors consistent with the partnership versus those that are not. Just because people state they are not
partners is insufficient.
Consider factors such as this:
An interest in the capital of the partnership – suggests a partnership
Ability of lenders to participate and enforce the terms of the partnership – suggests a partnership
Having the return on the lender’s investment vary with the amount loaned – suggests a partnership
Terminating a loan agreement when the lender goes bankrupt – suggests a partnership
Having the term of the loan coincide with the term of the partnership agreement – suggests a partnership
Martin v. Peyton offers other factors that point towards a partnership:
Profit sharing
Having a right to be informed about the business and to be consulted about important matters
A right to inspect the books and veto business proposals
Holding an option to join the firm
Martin v. Peyton offers factors to consider that are inconsistent with a partnership:
Demanding a security interest on capital forwarded – suggests a lender
Agreeing to return property contributed to a partnership to the contributor – suggests a lender
Requiring contributed capital not to mingle with other partnership assets – suggests a loan
Requiring permission of a particular person to sell the property – suggests a lender because normally
partners don’t have to account to each other to sell partnership property
Being paid in dividends and interest from the loaned property – suggests a lender because partners are
paid from profits
Having a right to deal separately with partnership property and keep the proceeds to oneself – a lender
Being able to substitute property of other value into the partnership – a lender
Page 9 of 30
Being UNABLE to initiate any action or bind the firm – a lender
S. 4(c)(iv) and 4(c)(v) subordination of profits under s. 5
s. 5 – a lender who lends under s. 4(c)(iv) or 4(c)(v) is subordinated to other creditors
Re Fort – s. 5 applies whether or not the loan agreement is in writing
CDIC v. Canadian Commercial Bank – s. 5 doesn’t apply if the lender is only being paid from the profits up
to the amount of the principal plus interest, s. 4(c)(i) applies in that case
Sukloff v. Rushforth – Subordination under s. 5 doesn’t apply to the extent there is a security interest for
the debt
Retirement of Partners
Recall above:
s. 19(1) – a person who joins an existing partnership is not liable for debts that arose before the person
joined the firm
s. 19(2) – once a person leaves a partnership, he does not cease to be a party to contracts he entered into
while part of the partnership (he would have to seek a release)
s. 19(3) – a retiring partner may be discharged from the partnership’s debts by agreement to that effect
between the retiring partner, the creditors, and the members of the firm
s. 39(1) – persons dealing with the firm after the retirement of a partner can treat all “apparent”
members of the pre-retirement firm as partners until they have notice of the change in partnership
Dominion Sugar and Ingram – “Apparent” means apparent to those dealing with the firm. A
finding in this regard is fact sensitive – perhaps the person’s “notoriety” as partner can make one
an apparent partner. Perhaps the use of the person’s name on letterhead, or on advertisements.
s. 39(2) – persons who have not had prior dealings with the firm can be notified of retirement of a partner
by way of Gazette
Dominion Sugar and Ingram – this suggests something more is required for persons who have
had prior dealings. Per these cases, these persons must receive “actual” notice.
s. 39(3) – a retired partner will not be liable to those who didn’t know that the retired partner was a
partner of the former partnership
Note: s. 39 is of considerable importance to those who convert from a partnership to a corporation
s. 84(b) – if one fails to file a new registration statement on the retirement of a partner, this is evidence
that person continues to be a partner (note “evidence” so not conclusive)
Steps to take when a partner retires
1. Provide actual notice to all those with whom the firm has had prior dealings
2. Put a notice of retirement in the Gazette
3. File a revised registration statement removing the name of the retired partner
4. Per s. 19(3), try to get creditors to agree to relieve the retiring partner from liability
5. A good idea is to have these steps written into the partnership agreement as a right of the
retiring partner to demand
Joint and Several Liability
The BCPA makes reference to J+S liability, but the distinctions are largely irrelevant due to s. 53 of the Law
and Equity Act which states that 53(1) if one has a claim against jointly liable persons, one can serve
notice against any one of those persons and doesn’t have to serve notice against all of them, and 53(2)
The obtaining of an order against any one person jointly liable does not release the others jointly liable,
whether the others have been served with process or not, and 53(3) every person against whom an order
has been obtained is entitled to demand contribution from the others held jointly liable
Also, Rule 7 of the BCSC rules states that you can sue a partnership in the name of the firm.
Page 10 of 30
Chapter 7 Limited Partnership
What is a Limited Partnership (LP) and how is it formed?
s. 50 – LP’s consist of one or more general partners and one or more limited partners
s. 57, 63 – Liability of limited partners is limited to the amount the limited partner contributes or agrees to
contribute to the limited partnership
s. 51 – a limited partnership is formed ONLY by the filing of a certificate (otherwise it’s a general
partnership)
s. 51 – the certificate must state who the general partners are
s. 51 – the certificate must state the contribution provided, or agreed to be provided by the
limited partners
s. 53 – a cautionary suffix “Limited Partnership” must be on the end of the name to signal to third parties
the limited liability
s. 53(2) – the surname of a limited partner must not appear in the name of the limited partnership
UNLESS:
a) the surname is also the surname of one of the general partners
b) the business of the limited partnership was carried on under that name before the admission
of that partner as a limited partner
s. 53(4) – If a limited partner’s surname does appear in the name of the limited
partnership then that limited partner will no longer have limited liability
s. 64 – a limited partner may not take part in the management of the business
Haughton Graphic Ltd. v. Zivot – if a limited partner takes part in the control of the business
then he is liable as a general partner even if no reliance by third parties)
Nordile Holdings Ltd. v. Breckenridge – Accepts Haughton, but states that an agreement with
the third party making it clear the limited partner is a limited partner absolves liability. Also,
states that if the limited partner is acting solely in capacity as officer for the general partner
corporation, the limited partner is not liable because that would be an exception to the Solomon
principle.
s. 55 – a limited partner may not contribute services to the business
s. 59 – no return of capital to partners (general or limited) is permitted if doing so would render the
business insolvent
Protections against general partners abusing limited partners
s. 56 – General partners cannot do an act which makes it impossible to carry on the partnership nor can
they consent to a judgment against the partnership. Also, general partners cannot possess partnership
property or dispose of it other than for a partnership purpose. These constraints cannot be altered in the
partnership certificate.
s. 58 rights (arguably just default rights as the provision is prefaced by the term “a limited partner has the
same right as a general partner to do any of the following” and a general partner can waive these rights):
s. 58(1)(a) – limited partners have a right to inspect and make copies of the partnership books
s. 58(1)(b) – limited partners have the right to be given on demand true and full information of all things
affecting the partnership and to be given a formal account of partnership affairs whenever the
circumstances render it just and reasonable
s. 58(1)(c) – limited partners have the same right as general partners to obtain dissolution and winding up
by court order (this right probably cannot be waived)
s. 66 – a limited partner must not assign his interest in whole or in part unless
all the limited partners consent or the partnership agreement permits it, and the assignment is
made in accordance with the terms of the consent or the partnership agreement
s. 51(4)(b) – where assignment is permitted, the certificate must set out the provisions
concerning the right to make such an assignment
Page 11 of 30
Admission of additional partners
s. 56(d) -- a general partner has no authority to admit a person as a general or limited partner unless the
right to do so is stated in the certificate
s. 51(4)(c) – a right to admit additional limited partners must be set out in the limited partnership
certificate and agreement
s. 65 – an additional limited partner is not to be admitted to a limited partnership except in accordance
with the partnership agreement and by entry into the register of limited partners that must be kept
pursuant to s. 54(2)
Sharing of profits
s. 61 – limited partners share in the profits and in any return of capital in proportion to their contributions
unless the limited partnership agreement provides otherwise
Page 12 of 30
Chapter 8 Limited Liability Partnerships
Partial versus full shield liability
In Ontario, LLP’s grant only partial shield liability. Partners are not liable for the malpractice of fellow
partners or employees unless they were directly supervising the activity. They are still liable for contract
debts.
In BC, however, one can have full shield liability and be immune to contract debts too. But this creates
tax concerns (full shield LLP’s are taxed different) and so an LLP may opt out of full shield liability.
LLP’s are arguably superior to LP’s because they allow the protections of an LP even if one engages in
management.
BC LLP’s
Part 6 of the BCPA (s. 94 to 129) allows for LLP’s in BC
s. 94 – LLP’s don’t come into effect unless registered
s. 100 – LLP’s must use a cautionary suffix beside the business name
s. 104(1) – a partner in an LLP is not personally liable for a partnership obligation merely because he’s a
partner. This includes tort and contract liability
Comment: This section opens with “Except as provided… in the partnership agreement” allowing
LLP’s to opt out of full shield liability protection (which one may want to do for tax reasons)
s. 104(2) – regardless of anything, one is fully liable for his own negligent or wrongful act or omission and
when a fellow partner commits a tort and you knew of it but didn’t take actions a reasonable person
would do to prevent its occurrence
s. 114 – extra-provincial or foreign LLP’s can receive the benefit of LLP protection only if they register
Page 13 of 30
Chapter 11 History of the Corporation -- Situation across
Canada today
a) It is at least theoretically still possible for a corporation to be created by grant of a
Crown charter although it is unlikely to happen today.
i) However, there still are some existing corporations that were formed by the
grant of a Crown charter. E.g. Hudson’s Bay Company.
b) It is also still possible for a corporation to be formed by special Act and this has
been done, and is still often done
i) E.g. for endeavours such as hospitals, municipalities, universities, stock
exchanges and many other similar sorts of activities.
c) Then there are the general statutes of incorporation under which incorporation can
usually be relatively easily accomplished by the filing of certain documents
specified in the general statute of incorporation.
i) The general statutes of incorporation include not just the Canada Business
Corporations Act (CBCA), the Canada Corporations Act (CCA), and their
provincial equivalents (e.g. BCBCA and Society Act) but also several other
general statutes of incorporation for particular types of businesses.
(1) E.g. much of the federal Bank Act is a general statute of incorporation
(adopting much of the CBCA, such as the articles of incorporation style).
(2) In addition, at the federal level there is the Insurance Companies Act and
the Trust and Loan Companies Act (and there are provincial counterparts
to each of these).
ii) Some general statutes are of the Articles style: CBCA, Que, Ont, Man, Alta,
Sask, Nfld, NB,
iii) PEI (letters patent)
iv) Some are memorandum of association style: NS, BC
d) Of course one of the first things one should do as a lawyer when dealing with a
corporation (or company) is to find out how it was incorporated. This is vitally
important because it determines what statute governs the internal affairs of the
company.
Page 14 of 30
Chapter 12 Corporations: The Constitutional Position
Power of Feds vs. Provs to Incorporate
Both provinces and federal gov’t can pass valid legislation for the incorporation of companies
Constitution Act s. 92(11) – provinces may make laws in relation to: “The Incorporation of Companies with
Provincial Objects”
Constitution Act s. 91 – Federal government has the power to make laws “in relation to all Matters not
coming within the Classes of Subjects by this Act assigned exclusively to the Legislatures of the Provinces”
This “residual power” gives the feds the power to incorporate companies with objects other than
“provincial objects”
Constitution Act s. 91(15) – Federal power has power to regulate in the area of banking and has a specific
power concerning the “Incorporation of Banks”
Interplay of Federally Incorporated Companies with the Provinces
Early jurisprudence suggesting federal companies were immune to provincial regulation
Bonanza Creek – Provincial corporations can operate outside the province in which they were created,
but doing so requires the approval of the other jurisdiction – “provincial objects” are territorial
Citizens Insurance – Feds can incorporate companies under its residual power
John Deere Plow – Federally incorporated companies have the power and right to operate throughout
the country. Provinces cannot prevent federally incorporated companies from carrying on business in the
province, however, these companies are still subject to provincial regulatory laws. Specific to this case,
federally incorporated companies can maintain actions in provinces and cannot be prevented from
registering to carry on business in a province on the basis that the corporate name is similar to a
provincial corporation.
s. 15(2) codifies the finding that fed companies can operate throughout Canada
Great West Saddlery – Provincial legislation prohibiting a company from suing in the province unless it
obtained a license cannot be applied to a federally incorporated company (doing so prevents them from
carrying on business in the province as they cannot enforce contracts)
Colonial Building – A federal company needn’t carry on business in more than one province
AG Canada v. AG Manitoba – Under Manitoba’s early securities registration, federally incorporated
companies could not be refused a license to issue shares
Later jurisprudence backing off from this “immunity” concept
Lymburn – Alberta statute prohibiting sale of securities except through licensed broker applicable to
federal companies. After all, this requirement doesn’t prevent the company from selling shares.
Canadian Indemnity – If the provincial prohibition applies to all companies, federal or provincial, then it’s
valid against federal companies. In this case for example, the right to sell car insurance was granted
exclusively to ICBC.
Multiple Access – Provincial regulatory legislation identical to federal legislation can still be applied to
federal companies. The otherwise valid federal legislation was said not to have “occupied the field” if it
did not conflict with the otherwise valid provincial legislation.
Reference Re Constitution Act – Provincial legislation requiring federal companies to register their
corporate names and any names under which they carry business are valid.
Re Royalite Oil – Provincial legislation requiring federal companies to obtain licensing is valid. This means
federal companies have to get one extra registration done compared to provincial corporations.
Summary
Provincial laws apply to federal companies with the exception that provinces cannot deny a license to
federal companies based on having a similar corporate name to a provincial one (John Deere Plow). Also,
a province cannot prevent a federal company from maintaining a legal action in the province (Great West
Saddlery).
Page 15 of 30
Chapter 13 The Incorporation Process
Pre-incorporation Steps for CBCA corporations
s. 2(1) and s. 260 – the following must be filed by the Director (The administrator of the CBCA)
Step one: File articles of Incorporation
s. 5 – (1) one or more individuals over 18, of sound mind, and not bankrupt or (2) one or more bodies
corporate may file articles
s. 6 – the articles must abide by Form 1 and set out: i) the corporate name ii) any restrictions on the
business of the corporation iii) any limits on the authorized capital iv) the classes of shares and any
maximum number of shares that the corporation is authorized to issue v) if there is more than one class
of shares, the rights, privileges, restrictions and conditions attaching to each class of shares vi) the
province in Canada where the registered offices will be situated vii) any restrictions on the transfer of
shares viii) the number of directors the corporation is to have, or the minimum and maximum number ix)
any other matters that one chooses to put in the articles
Articles are the primary constitutional document of the corporation and can normally be
amended by a supermajority vote only so don’t put more than what’s necessary in them and use
the bylaws instead
Step two: File a notice of the registered office
s. 7 – the articles must be sent to the Director along with the documents required by s. 19 (19(2) requires
Form 3) and s. 106
s. 19(2) – a notice of the registered office of the corporation must be sent to the Director
Step three: File a notice of directors
s. 7 – the articles must be sent to the Director along with the documents required by s. 19 and 106 (106(1)
requires notice of directors of the corporation – Form 6)
Step four: Pay the prescribed fee
s. 97 of the Regulations and Schedule 5
Step five: If the corporation is to have a name other than a numbered name, file a NUANS Status Report
The Issuance of a Certificate of Incorporation
s. 8 and 12(1) – upon filing of the documents and upon the Director accepting the corporate name, the
Director shall issue a certificate of incorporation
“Shall” means the incorporators have a right to a certificate, not subject to Crown prerogative
s. 9 – the corporation comes into existence on the date shown in the certificate of incorporation
Post-incorporation Steps Under the CBCA
s. 104 – after the issue of the certificate of incorporation, a meeting of the directors shall be held at which
the directors may: make bylaws, adopt forms of security certificates and corporate records, authorize the
issue of shares, appoint officers, appoint an auditor, make banking arrangements, adopt a corporate seal
(though no longer required per s. 23) and transact any other business
A Note on Corporate Names
A corporate name usually contains a descriptive part, a distinctive part, and the suffix. E.g., Shoes by Mike
Ltd.
s. 12(1) – a corporation may not be incorporated or carry on business under a name that is:
a) Prohibited,
Reg. 23: obscene names are prohibited. Reg 21: Names such as “Air Canada” “RCMP”
are prohibited. Reg 22: Names that suggest business is carried on under gov’t approval
or authority. Reg 24: Names that are too general (e.g., “A shoe store”). Reg 18: a
corporate name is prohibited if confusing in the sense that it might be confused by
other corporate names, business names, or trade names.
a) or deceptively misdescriptive
Page 16 of 30
Reg. 25: It is deceptively misdescriptive if it misdescribes the business, goods, or
services provided in association with the name, the conditions under which they will be
supplied, or the place of origin of the goods or services
s. 12(2) – The Director may order a corporation to change its name if it doesn’t comply with the above
s. 11(1) – You can reserve a name up to 90 days ahead of time
Doing Business As (DBA) – Partnership Act Applies to Corporations
s. 88 of the BCPA applies to any “person” (that includes corporations) who uses as his business name
some name or designation other than his “own name”
The CBCA requires a corporation to use the full corporate name including the cautionary suffix in all
corporate documents
Where to Incorporate – CBCA or BCCA
Three reasons for CBCA
1. Quasi-name protection per John Deere Plow (still vulnerable to passing off claim though)
2. No restriction on maintaining an action in any province (Great West Saddlery)
3. Lawyers and shareholders in other provinces are familiar with it
Four reasons for BCCA
1. Local lawyers tend to be more familiar with it
2. It is easier to deal with Victoria than with Ottawa when you live in BC
3. It is cheaper – the CBCA registration charge is higher and it has one more extra-provincial registration
to apply for
4. BCCA has retained par value shares providing some tax advantages
Reincorporation and Continuance
Procedure for a continuance out of the CBCA (an “export” continuance)
s. 188(1),(5) – Obtain a resolution from the shareholders permitting the continuance
s. 188(1) – Obtain approval from the Director
Register in the destination jurisdiction – this usually involves amending the incorporation documents to
conform to the requirements of that jurisdiction and satisfying the name requirements for the jurisdiction
Procedure for a continuance into the CBCA (an “import” continuance)
Obtain needed approval from shareholders and registrar of the provincial jurisdiction
s. 187(1) – Apply for a certificate of continuance by sending articles of continuance to the Director
s. 187(3) – Send a notice of registered office of the corporation and a notice of the directors
Extra-provincial registration requirements in BC
BCBCA s. 375 – “foreign entities” must register as an “extra-provincial company” within two months of
beginning to carry on business in BC
BCBCA s. 1(1) – defines a foreign entity as a foreign corporation (a corporation that issues shares not
incorporated under the BCCA) or a limited liability company
BCBCA s. 375(2) – a foreign company is deemed to carry on business in BC if: (deemed means you ARE
even if you AREN’T)
Its name or any name under which it carries on a business is listed in a phone directory, its name
is in any advertisement in which an address or phone number is given for the company, it has an
agent resident in BC, it has a warehouse or place of business in BC. Basically, the degree of
presence is questioned. Merely shipping goods into the province has been held not to be
carrying on business in the province
BCBCA s. 376 – if registration is required, the registration requirements include:
Reserving the name of the foreign entity, and filing a registration statement
BCBCA s. 386 – appointing one or more attorneys who, per s. 388 are deemed authorized to
accept service of process
BCBCA s. 381-382 – extra-provincial companies must file notice of any changes such as change in
attorney for service, amalgamation, etc and per s. 380, must file an annual report updating info
Page 17 of 30
Chapter 14 Legal Status of Corporations
Salomon – de facto one person corporations are legitimate. Corporations are a separate person. This
means its possible for shareholders to be creditors of the companies they own shares in. (Important case,
cite it always for the principle that corporations are separate persons)
Lee’s Air Farming Ltd. – A shareholder can be a director, officer, or employee of the corporation even if
the sole shareholder
Macaura – It is the corporation that owns the assets and not the shareholders. So if you give assets to a
corporation, your insurance policy on those assets is of no use – the corporation has to get its own.
Kosmopolous – Shareholders do not own the assets of a corporation. But in some circumstances, they
may have an insurable interest.
Refer to expanded outline for the policy difficulties inherent in the Salomon principle. But remember the
corporate veil can be pierced.
Page 18 of 30
Chapter 15 Pre-Incorporation Contracts
Common law position
A corporation cannot ratify a contract that a promoter purported to enter into on behalf of the
corporation before the corporation came into existence (Kelner v. Baxter). A promoter can be liable on a
pre-incorporation contract but only if it can be said that it was intended in the circumstances that the
promoter be a party to the contract (Kelner v. Baxter as interpreted by Newborne v. Sensolid Ltd., Black
v. Smallwood, and Wickberg v. Shatsky).
Where the promoter purported to act on behalf of a corporation before it came into existence the
promoter can be liable for a breach of warranty of authority. (Black v. Smallwood and Wickberg v.
Shatsky). However, the damages may be nominal where the corporation, or the business which it was
intended would be carried on by the corporation, is now insolvent (Wickberg v. Shatsky).
CBCA – Modifies the Common Law Rule
s. 14(1) – unless the contract expressly provides otherwise, a promoter who enters into “or purports to
enter into” a “written” contract in the name of or on behalf of a corporation before it comes into
existence, is personally bound by the contract and is entitled to the benefits of the contract
This codifies the “automatic rule of law – automatic liability of promoter” approach of Kelner v.
Baxter.
Note it applies to written contracts only. The common law appears to continue to apply for oral
contracts.
s. 14(2) – a corporation can “adopt” a contract within “a reasonable time” after it comes into existence
This overrides Kelner v. Baxter.
Landmark Inns – a corporation cannot subsequently adopt a contract that has been
repudiated
Note: Adoption may differ from ratify in that mere acquiescence may not suffice for
adoption whereas it does for ratification
s. 14(3) – a court can apportion liability between the corporation and the person purporting to act on
behalf of the corporation
This avoids the situation where, when the contract turns out to be not-so-great, the promoter
creates a no-asset shell company to take the legal liability hit for subsequently breaching the
contract
Bank of Nova Scotia – s. 14(3) was not applied when the creditor knew it was dealing with a
corporation and knew there was a risk it could go insolvent
s. 14(4) – the parties can expressly agree in the written contract that the promoter is not bound by the
contract or entitled to its benefits
Landmarks Inns – simply writing the corporate name on the contract is insufficient. The
agreement must be express
Comment: s. 14 may affect pre-incorporation subscription (offer) to buy shares
Constitutional Argument Against s. 14
The provinces have exclusive jurisdiction over property and civil rights (contracts). Yet this federal statute
purports to regulate the enforceability of contracts. The federal government does have an ancillary
power associated with the power to incorporate companies. But does this ancillary power include a
power to regulate contracts (and hence alter provincial contract law) that were entered into before the
CBCA corporation even existed?
Conflict of laws problem
See page 181 of the outline in the unlikely event this comes up (e.g., a contract to be completed in BC
with a corporation that is supposed to be incorporated in Ontario or Manitoba)
Page 19 of 30
BCBCA and Pre-Incorporation Contracts
BCBCA s. 20(1) and (2) – equivalent to s. 14(1) of the CBCA except that it applies to oral contracts as well
Also, s.20(2) doesn’t make the promoter liable to perform the contract. It makes him vulnerable
to damages. S. (20(2)(c) sets the damages – as if the company existed when the contract was
entered into, the person who entered into the contract had no authority to do so, and the
company refused to ratify the purpoted contract (producing the same result as Wickberg v.
Shatsky)
BCBCA s. 20(8) – parties can expressly agree in writing that the promoter is not warranting the company
will come into existence and adopt the contract within a reasonable time
BCBCA s. 20(3) – a company may, within a reasonable time, adopt the pre-incorporation contract after
coming into existence
BCBCA s. 20(4) – on adoption, the promoter ceases to be liable under 20(2) for the deemed warranty (but
still leaves the possibility open of being a party under the common law)
BCBCA s. 20(5) – If not adopted within a reasonable time, the promoter or third party may apply to the
court for an order making the company return the benefits it received
BCBCA s. 20(6) – similar to CBCA allowing for apportionment of liability between the company and the
promoter
When all else fails: Creative judicial methods of enforcing pre-incorporation contracts
Promoter as trustee of a chose in action: The promoter is a trustee for the third party and has a fiduciary
duty to ensure the contract is entered into with the non-existent corporation
Company as assignee
Restitutionary principles
Infer a second contract (between the third party and the new corporation) from a course of dealings
Promoter as agent for the third party to make an offer to the company: Thus, upon incorporation the
promoter has the authority to make an offer to that company which the company can accept
Provisional contract to become binding on a future event (the incorporation of the company)
Practical Solicitors Advice
First, warn the promoter of the potential for personal liability if the jurisdiction has a provision like the
CBCA s. 14
Advise perhaps that they could get a corporation incorporated very quickly
Check the corporate registry to confirm the corporate status
Require a certified copy of the certificate of incorporation as a closing document for the transaction
Page 20 of 30
Chapter 16 Piercing the Corporate Veil
First cite both of these cases
The Salomon case is often cited for the proposition that a corporation is a separate legal entity. But on
rare occasion, courts are willing to pierce the so-called corporate veil and render shareholders, directors,
or officers liable.
Kosmopolous – The situations in which courts disregard the separate corporate personality follow no
consistent principle. It can be said that the veil is pierced when it would be “too flagrantly opposed to
justice” to apply the Salomon case.
Categories where the corporate veil gets pierced
Affiliated Enterprises
Smith, Stone and Knight Ltd. – This case is often cited for the tests in making a linkage between two
corporations and for piercing the veil. It asks a) Were the profits treated as the profits of the parent
company? b) Were the persons conducting the business appointed by the parent company? c) Was the
parent company the head and brain of the trading venture? d) Did the parent company govern the trading
venture, decide what should be done and what capital should be embarked on the venture? e) Did the
parent company make profits by its skill and invention? f) Was the parent company in effectual and
constant control?
The problem is the answers are virtually yes in every parent-subsidiary relationship. Must cite
more cases
Alberta Gas Ethylene – In addition to the Smith test, one must consider the purpose and context in which
the subsidiary is being ignored.
Gregorio – A subsidiary, even a wholly owned one, will not be found to be an alter ego of its parent unless
the subsidiary is under the complete control of the parent and is nothing more than a conduit used by the
parent to avoid liability. The “alter ego” principle is applied to prevent conduct akin to fraud.
Gap-Filling in contract
Gilford Motor Company Ltd. – Defendant created a company solely to avoid a non-competition clause.
Court called this conduct akin to fraud and treated the corporation and defendant as one and the same.
By doing so, the court filled a “gap” in the contract which failed to consider the effect of corporations.
Remember, conduct akin to fraud doesn’t have to actually be common law fraud
Saskatchewan Economic Development Corp – Loans from shareholders not permitted so the
shareholders create a corporation and have it grant the loan. Court says, conduct akin to fraud,
disregards the corporation on the basis that the court is getting the result the parties presumably would
have agreed to had they turned their minds to it in the written contract.
Corporations formed to avoid statutory requirements
British Merchant Transport Co. Ltd. – Corporations formed that are “mere devices” used to bypass the
intent of legislative restrictions are disregarded. The court may “fill the gap” in the legislation in this case.
Representations of Unlimited Liability – Not Complying with Corporate Formalities
Gelhorn Motors Ltd. – In the context of an ongoing business relationship, if one party decides to
incorporate and doesn’t inform the other party and continues the business relationship as normal, the
court may disregard the corporate entity.
Chiang v. Heppner – Failing to abide by the corporate formality of putting the “ltd.” suffix on all
documentation might cause the court to pierce the corporate veil.
Tato Enterprises Ltd. – Putting the wrong name of your corporation on a contract may lead to direct
liability. It points to the idea of a failure to comply with corporate formalities – if even you disregard the
corporate entity, then why should third parties be subject to it?
Roydent Dental Products Inc. – Corporate formalities – failing to register the business name of an
unincorporated division of a company made the shareholder personally liable
More on failure to use the cautionary suffix:
s. 10(5) of the CBCA makes it an offence under s. 251 to fail to use the cautionary “ltd.” suffix on
every order form, invoice, contract, etc. Courts will seize upon this to pierce the corporate veil
Non-Consensual Claimants
Page 21 of 30
Courts have shown strong willingness to pierce the corporate veil to compensate non-consensual tort
victims and sometimes take peculiar measures to do so.
Wolfe – Plaintiff injured on the defendant’s property. Defendant’s corporate veil pierced because the
ticket displayed the improper corporate name.
Mangen – defendant owns parent company that owns a number of cabs in a number of subsidiary
corporations. One cab hits pedestrian, court pierces veil to make parent company liable.
Walkovsky – on the other hand, courts won’t automatically pierce veil in such circumstances. in
this case there was no parent company and a mere direct owner of the corporations. The court
did not make the owner directly liable. Perhaps out of a policy concern about the implications of
making an individual personally liable.
Other ways of Getting Around the Corporate Entity – Tort action against directors/officers
Berger – An officer of a corporation or a director may have a personal duty to ensure a particular tort
does not occur
Said v. Butt – Someone acting bona fide on behalf of a corporation within the scope of his authority
cannot be personally liable for the tort of inducing breach of contract
McFadden – The Said v. Butt exception does not apply to torts committed by agents of corporations when
the acts committed were not in furtherance of their duties and obligations to the corporation
ADGA Systems International Ltd. – Directors are directly liable for all torts except for the tort of inducing
breach of contract (Yikes – raises the spectre of potential substantial tort liability for directors)
Rafiki Properties Ltd. – a BC case that narrows the scope of ADGA. “A director can only attract personal
liability if he is acting outside the scope of his authority in being motivated by advancing a personal
interest contrary to the interests of the company, or by fraud, or with malice.”
Better Off Dead Productions Ltd. – Another BC case narrowing ADGA. An individual defendant will bear
personal liability for acts committed on behalf of a company only where the torts are those of the
individual and the allegations show an identity or interest separate from that of the company. (i.e., not in
good faith)
Oppression Remedy – Shareholders could use the oppression remedy to make directors and officers liable
CBCA s. 241 – allows the court to make an order for relief on the basis that the conduct of the affairs of
the corporation have been oppressive to the interests of the complainant in the complainant’s capacity as
security holder, creditor, debtor, or officer
s. 241(3)(j) – the court can make an order compensating the aggrieved person (an order directly against
directors or officers)
This was done, for example, in PCM Construction Control Consultants Ltd.
Statutory Provisions that Pierce the Veil (s. 118 of the CBCA)
s. 118(1) – directors can be liable for issuing shares without receiving full payment
s. 118(2) – directors can be liable for acquiring shares, paying commissions for the sales of shares, paying
dividends, providing financial assistance to shareholders, directors, officers, or employees, or paying
indemnities to directors if certain tests of insolvency aren’t met
s. 118(4) – shareholders can be liable to pay a director who was held liable under s. 118(2)
s. 119 – directors could be held liable to employees for up to 6 months of unpaid wages (some exceptions
under s. 119(2) and (3))
s. 96 of the BC Employment Standards Act provides similar protection for up to 2 months of
wages
Page 22 of 30
Chapter 17 and 18 Financing through Shares, Corporate
Debt Finance
What are shares?
Sparling – A share is not an isolated piece of property. It is rather, in the well known phrase, a ‘bundle’ of
interrelated rights and liabilities against the corporate entity.
Classes of shares
Different bundles of rights are divided into different classes of shares; each class is a separate bundle.
Three main rights that must appear somewhere – voting right, dividend right, and right to proceeds on
dissolution
s. 24(3) – if only one class of shares, then that class has the three main rights
s. 24(4) – if more than one class of shares, then must set out the rights of each class in the articles
Presumption of Equality of shares
Jacobsen – presumption that shares are equal in all respects unless otherwise indicated (codified in 24(3))
McClurg – there must be some distinction in at least one right to make a separate class of shares. The
difference can be minor – the right of directors to select which class gets dividends can suffice for instance
Share certificates
s. 49(1) – Each shareholder is entitled to a share certificate (or to obtain one upon request)
s. 49(13) – The certificate shows rights on its face or provides a statement that the shareholder has the
right to receive a copy of the rights on request
Shareholder register
s. 50 – corporation must maintain a register recording names and addresses of shareholders and number
of shares held, plus date and particulars of issue and transfer of shares
s. 20 – register must be kept at the registered office of the corporation
Types of shares – common shares vs preferred shares (preference WRT dividends or proceeds on diss.)
Preferred Shares
International Power – If a preference with respect to dividends, presumption that the right is limited to
the preferred amount and cannot receive more than that amount (must explicitly have participation rght)
International Power – preferred shares presumed to have a right to share in the proceeds on dissolution
beyond the preferred amount
Participation right – lets preferred shareholder participate in dividends beyond the preferred right
Cumulative preferred share – when unpaid dividends in previous years accumulate to future years
Webb – If no indication either way, presumption that preferred shares are cumulative, and when
the shares are entitled on dissolution to “priority as to dividends and capital” presumption that
the preferred shares are entitled to all arrears on unpaid dividends
Conversion right – a right to be converted into common shares at a predetermined ratio
Retraction right – Lets shareholder sell back shares to company at a predetermined price
Redemption right – Lets company buy back preferred shares at a predetermined price. Aka call provision
s. 36(1) – lets CBCA corporations purchase its own shares if the articles so provide, see below
All Shares, Generally
Non-voting common shares – same rights as voting shares except no voting right
Another way to maintain control is with special voting shares – e.g., shares that get 10 votes
Pre-Emptive Right – The right of existing shareholders to purchase any newly issued shares of that class
s. 28 – there is a pre-emptive right if the articles so provide to buy a number of newly issued
shares in proportion to what they already own
Dividends
s. 43 – dividends can be paid in cash, stock dividends (more shares in company), or in specie (property)
s. 102  (implicit in s. 115(3)(d)) – directors have the power to declare dividends subject to a unanimous
shareholder agreement
Directors are not obliged to declare dividends, however, this power must be exercised in the best
interests of the corporation (Dodge) and not in a way that is oppressive to shareholders (Fergusson)
Page 23 of 30
Dividends become debt of company once declared (shareholders can sue to receive) and can only be paid
out of profits (payments in excess are returns of capital and different procedures must be followed)
s. 42 – Dividends can’t be paid if it would leave the company insolvent
s. 118(2)(c) – directors consenting to such a dividend can be personally liable
s. 118(5) – shareholders receiving such dividends can be ordered to repay to directors
Record Date and Ex Dividend Date
s. 134(1) – A record date can be set to determine which shareholders are entitled to get dividends
s. 134(3) – If no record date is set, then the record date is the close of the business day on the day the
directors declare the dividend
Ex dividend – publicly traded shares go ex dividend a few days ahead of the record date (shares traded
after this date do not receive dividends)
Voting
s. 2(1) – shareholders vote in directors by “ordinary resolution” (majority), and on major transactions such
as amalgamation, continuance, dissolution, or sale of all or substantially all assets, by “special resolution”
(super-majority, 2/3)
s. 140(1) – presumption that each share gives one vote unless otherwise specified
Jacobsen – one class of share then shares equal in all respects. Can’t make distinctions based on the
characteristics of the person who owns the shares
Bowater – Within a given class the shares must have equal rights (subject to separate series rights)
Rights on Dissolution
s. 24(4) – at least one class of shares must have right to proceeds on dissolution
Presumption that all shares equally entitled to such proceeds unless articles say otherwise
Issuing and Paying for Shares, authorized limits
s. 25(1) – directors have the power to decide when to issue shares, who to issue them to and for what
consideration – a power subject to the articles, by-laws, or unanimous shareholder agreement (USA)
s. 115(3) – directors cannot delegate this power
s. 6(1)(c) – articles may set out an authorized limit on the number of shares, but a limit is not required
Subscription and Allotment
Subscription – When someone applies to purchase shares
Re Canadian Tractor Co – if someone applies to purchase shares in a corporation that doesn’t yet exist,
the prospective shareholder can withdraw the offer before acceptance (and the corporation can also
decline to accept the offer) since the corporation cannot accept the offer
Allotment – When the directors decide which subscriptions to accept and to whom the shares are issued
Consideration for an Issue of Shares and Assessable Share Prohibition
s. 25 – directors can issue shares for whatever consideration the directors determine (incl. property, serv)
s. 25(3) – watered stock is prohibited – a share cannot be issued until consideration is paid in full
s. 118(1) – directors who permit watered stock are liable to pay the balance of consideration owing
s. 251 – directors can also be liable for a penal sanction
s. 118(6) – defence that the directors did not know and could not reasonably have known the
share was issued for less consideration than if the share was issued simply for money
(actions may be available against shareholders who paid less than required, incl. oppression rem)
s. 25(2) – assessable shares let the corp. demand further payments from shareholders. Prohibited
Redemption and Repurchase of Shares
s. 34(2) – corporation can repurchase its own shares but cannot do so if a) the corporation wouldn’t be
able to pay its liabilities as they come due and b) the value of liabilities would exceed that of liabilities
s. 30(1) – corporation cannot hold shares in itself and must cancel them upon purchase
s. 36(1) – corporation can purchase its own shares in a class if the articles say it can
s. 36(2) – can’t do so if the tests in 34(2)(a) and (b) aren’t satisfied
s. 118(2) – directors who let shares be purchased anyway despite the insolvency tests are personally liable
s. 118(5) – shareholders can be required to compensate directors liable under 118(2)
Series of Shares
Creating new classes of shares is a slow process requiring shareholder resolutions so make series instead
s. 27 – directors can make new series within a class if the articles provide
Page 24 of 30
s. 27 – but no series in a class can have priority over other series WRT dividends and dissolution
Par Value Shares
Ooregum Gold Mining Co. – issuing shares below par value is ultra vires act of the company
s. 24(1) – shares can be issued only for no par value
Stated Capital Account, Reduction of Stated Capital
s. 26(1) – there must be a stated capital account maintained for each class or series of issued shares
It’s a bookkeeping entry that records the amount raised through the sale of shares. It commonly does not
reflect the amount of cash/assets the company presently holds.
s. 39 – on redemption or purchase of shares, the reduction in the stated capital account must be equal to
the stated capital value per share * the number of shares redeemed or purchased
s. 38(1) – return of capital must be approved by the shareholders by special resolution
s. 38(3) – return of capital can’t be made if a) the corporation wouldn’t be able to pay its liabilities as they
come due and b) the value of liabilities would exceed that of liabilities
Corporate Debt Finance
Non-Securitized Loans
Typically offered by a single lender (a bank).
Lines of credit allow borrower to borrow up to a specified limit, then pay it down, then reuse it again.
Used for short term fluctuations
Term loans are for longer periods, often require fixed payments of interest with principal due at the end
of the term. Common practice is to match the term of the loan with the lifespan of the assets
Bank might protect itself, require ratio of liability to assets, maintain a minimum capital ratio, take a
security interest, or have an acceleration clause requiring payment in full immediately if failing to comply
with agreement
Securitized Loans
Notes/Commercial Paper – promises to pay specified amount of money in the future (usually short term).
Promise may not state interest but it may be implied as it may be issued at a discount. It’s like getting a
short term bank loan but instead of getting the cash from the bank, you get it from potentially numerous
investors who buy the commercial paper
Bonds/Debentures – Large amount of debt finance, say $50 million, may be divided into 50k bonds having
a face value of $1,000 each. Usually for a long term. Do not usually carry voting rights. May include
special features like the right to convert the bonds into other securities of the corporation or the right to
share in profits of corporation beyond payment of interest (thoughts: does this create a partnership?)
Enforcement of Bonds/Debentures
Because of the small stake and free rider problem, it is common to appoint a trustee to enforce the terms
of the indenture on behalf of the bondholders or debenture holders. For fairness, the CBCA has the
following rules regarding appointment of bond trustees:
s. 84 – qualification – trustee must be incorporated under and subject to controls under statutes
governing the incorporation of trust companies
s. 83 – conflict of interest – trustees cannot have a conflict of interest with the bond issuer
s. 85 – access to list of debenture holders – trustees must be permitted to access this list
s. 86-88 – power to demand evidence of compliance with terms of the indenture – trustees have this
power
s. 90 – must give notice of default – trustees must give this notice to debenture holders
s. 91 – duty of loyalty and duty of care – trustees must act honestly and in good faith for the interests of
debt holders and with the care skill and diligence of a reasonably prudent trustee
Page 25 of 30
Chapter 20 Powers of the Corporation and Authority of
Directors and Officers (ultra vires doctrine)
*** Remember, the directors and officers are agents of the corporation, actual authority granted
expressly through the constating documents, and implicitly through usual and customary authority. They
have ostensible authority too and can be subject to breach of warranty of authority ***
Ultra Vires Doctrine
The objects and powers of the corporation are interpreted as reflecting the capacity of the corporation.
Acts contrary to the objects and powers are not legally valid acts. Contracts entered into in that regard
are completely void.
Ashbury Ry. Carriage & Iron Co. – The old common law rule: Contracts for matters contrary to the
objects of the memorandum of association are ultra vires and not just voidable but void.
Corporate responses to ultra vires doctrine
Lawyers would draft very broad and very long objects clauses. The clauses would also include broad
incidental powers.
Judicial response to the ultra vires doctrine
Courts tended to read objects clauses very broadly and gave wide scope to incidental powers. Problems
continued however:
Re Introductions Ltd. – Court would not raise a mere power to an object of the company simply by having
a clause that said all the clauses should be read independently (e.g., can’t say that a power to raise capital
means a power to raise capital for anything)
Legislative Response – CBCA
s. 15(1) – The corporation has the capacity, and subject to the Act, has the rights, powers, and privileges
of a natural person
s. 6(1)(f) – restrictions in what the corporation may engage in can be set out in the articles
s. 16(2) – a corporation shall not carry on any business or exercise any power that it is restricted by its
articles from carrying or exercising, nor shall the corporation exercise any of its powers in a manner
contrary to its articles, but
s. 16(3) – no act of a corporation, including any transfer of property to or by a corporation is
invalid by reason only that the act or transfer is contrary to its articles or the Act. *** OVERRIDES
ULTRA VIRES DOCTRINE ***
Instead, to stop such activity, the shareholders could start a derivative action s. 238, 239 or bring an
oppression action against the directors
Ultra Vires doctrine probably doesn’t apply to Crown Charter or Letters Patent companies – early
authority states that these associations are separate legal entities with powers of natural persons
Where else the Ultra Vires Doctrine might be found
s. 3(4) – no CBCA corporation may carry on the business of (a) a bank, (b) a company to which the
Insurance Companies Act applies, (c) a company to which the Trust and Loans Companies Act applies
This might mean it is beyond the capacity of a CBCA corporation to engage in such business (or, s.
15 and 16 might be interpreted to avoid the application of the ultra vires doctrine)
When the corporation is formed under another statute – these statutes often set out the objects and
powers of the corporation. If the statutes don’t contain provisions altering the ultra vires doctrine then
the common law _might_ apply.
Also consider corporations incorporated in other jurisdictions/countries which might be subject to the
common law ultra vires doctrine
Common Law Doctrine of Constructive Notice
Because the memorandum and articles are publicly filed, third parties under this rule are deemed to have
knowledge of their contents.
Common Law Doctrine of the Indoor Management Rule
The third party is deemed not to know of any indoor/in-house (not publicly available) restrictions on the
authority of directors or officers.
Page 26 of 30
Legislative modifications under the CBCA (and thus applicable ONLY to the CBCA)
s. 17 – No person is deemed to have notice or knowledge of the contents of a document concerning a
corporation simply because it was filed by the Director or is available for inspection at the office of the
corporation (does away with constructive notice doctrine, and implicitly, the indoor management rule)
s. 18 – the corporation cannot assert against a person dealing with the corporation that the articles, bylaws, or USAs have not been complied with (as a defence, for instance, to backing out of a contract)
s. 18(2) – exception: the corporation can do so where the person has, or ought to have,
knowledge of the constraint by virtue of the person’s relationship with the corporation (e.g., an
in-house lawyer)
Is there a constitutional division of powers issue here?
The constructive notice doctrine was a concept developed by courts in the context of actions, usually to
enforce a purported contract, in which an apparent authority argument was made. This would be part of
property and civil rights and thus a provincial area of jurisdiction under section 92(13) of the Constitution
Act. But might Parliament have an ancillary power to enact such a provision in legislation which in pith
and substance is about the incorporation of companies with objects other than provincial objects?
The general cautionary point is that when one is dealing with a corporation, should always find out how it
came to be incorporated
Page 27 of 30
Chapter 21 Directors and Officers
s. 102 – The directors shall manage, or supervise the management of the business and affairs of the corp
(the “general” or “residual” power. E.g., s. 115(3) no delegation rule suggests those powers are residual)
s. 102(1), 146 – unanimous shareholder agreements (USAs) can reallocate management control from the
directors to the shareholders
Qualification requirements for directors
s. 105 – directors must be i) natural persons, ii) over 18 years of age, iii) not adjudicated mental
incompetent or bankrupt,
s. 105(2) – directors needn’t own any shares in the corporation, but the articles could set out this req.
s. 102(2) – the minimum number of directors for a non-public corporation is 1, for a public corp, 3
s. 102(2) – for public corps, at least 2 directors must not be officers or employees of the
corporation or its affiliates
s. 105(3) – at least 25% of the directors must be resident Canadians, and if the corp has fewer than 4
directors, at least 1 must be resident Canadian
s. 2(1) – resident Canadian is defined as citizens of Canada ordinarily resident, landed immigrants
(except those eligible for Canadian citizenship but have elected not to apply), and certain citizens
of Canadian ordinarily resident abroad (see CBCA Regs. S. 13)
First and subsequent election of directors by shareholders
s. 106(1) – to form a corporation, a notice of the first directors must be sent
s. 106(2) – the first directors hold office until the first annual meeting (AM)
s. 133(1) – the first AM must be held within 18 months of incorporation and every 15 months thereafter
s. 106(3) – at the first AM and every subsequent AM, directors are voted by ordinary resolution
Many provisions say “subject to the articles, etc…” not this one, suggesting this requirement
cannot be altered or waived
Term of Office Requirements
s. 106(5) – term of a director begins at the time of the AM he was elected and ends at the following AM
s. 106(3) – the articles can allow a term of up to 3 years however
s. 106(4) – articles can provide that not all directors be elected at the same meeting (staggered boards)
s. 145 – a corporation, shareholder, or director can apply to court to resolve any controversy surrounding
the election or appointment of the director, and the court can make any order it deems fit (restraint, etc)
s. 108 – a director ceases to hold office upon death, resignation, disqualification, or removal by resolution
s. 109(1) – a director may be removed by ordinary resolution
s. 6(4) – the articles cannot require anything more than an ordinary resolution
Bushell – perhaps a majority might be avoided if each director holds a special class of
share giving substantial voting power only on a resolution to remove that director
s. 109(3) – the shareholders can then elect a new director at the same meeting. If they fail to do
so, the directors can appoint a new director until the next AM is held
s. 111(1) – directors can fill vacancies on the board (e.g., resulting from death, resignation, bankruptcy)
Default Director Management powers
s. 25 – directors have power to issue shares
s. 27 – directors have power to issue shares in series (if power was given in the articles)
s. 133 – directors are to call AMs or special meetings of shareholders
s. 106(8) – if articles provide, directors can appoint additional directors up to 1/3 of the directors elected
at the previous AM of shareholders
s. 166(1) – if auditor resigns/dies/etc during his term, directors can appoint a new interim auditor
s. 166(3) unless articles provide that the position can only be filled by a vote of the shareholders
s. 121 – subject to articles/bylaws/USAs the directors designate the offices of the corporation, appoint
officers, and delegate powers
s. 125 – the directors set compensation
Director adoption, amendment, or repeal of by-laws (subject to articles/bylaws/USAs)
s. 103(1) – directors have the power to adopt, amend, or repeal bylaws, but this is a default power only
Page 28 of 30
s. 103(2) – bylaws made by directors are effective until the next AM, where they must be approved
The Scope of the Directors’ Power to Delegate Their Powers
s. 115(3) – directors cannot delegate the following powers: c) issuing securities including a new series of
shares (BUT see also s. 25(1), d) declaration of dividends, a) submission to the shareholders of any
question or matter requiring shareholder approval, i) approval of a financial statement put before the
shareholders, h) approval of a takeover bid or a directors’ circular, g) approval of a management proxy
circular, b) filling a vacancy among the directors or the office of auditor, h) adopting, amending, or
repealing by-laws
s. 189(2) – directors may delegate the power to borrow to a director, a committee of directors, or an
officer (subject to any restriction to do so in the articles/bylaws/USAs)
s. 115(1) – directors can appoint a managing director (resident Canadian) or a committee of directors and
delegate to them any powers of the board
Hayes – Even before 115(3), courts said you can’t delegate all director powers to non-voted committees
or officers
Sherman & Ellis – Can delegate management powers through a management contract, but not if the
contract is for a very long duration and not if it delegates substantially or all of the directors’ power
Kennerson – Board can delegate its authority to act but not to govern; whether the delegation is OK is a
matter of degree
Removal of Officers by Directors
Recall s. 121 and keep it in mind with:
s. 122 – requires directors and officers to a) act honestly and in good faith with a view to the best
interests of the corporation; and b) exercise the care, diligence and skill that a reasonably prudent person
would exercise in comparable circumstances
(See large outline for trade-off between easy removal of officers with long-term contracts)
Re Paramount Publix Corp – Directors can remove officers using their statutory power, but employment
law still applies. Court suggests that you can remove someone from office but if they are still employed
then one is not running afoul of employment law
But see Montreal Public Service Co. as a Canadian example where the court describes the above
as being “constructive dismissal” which entitles the officer to damages
Directors’ Meetings
The CBCA says little about these meetings because the size and use of corporations varies immensely.
s. 114(1) – subject to the articles/bylaws/USAs, directors may meet at any place and on such notice as the
bylaws require
s. 114(2) – subject to the articles/bylaws/USAs, the quorum needed is a majority of the board or a
majority of the minimum number of directors in the articles
s. 114(3) – MANDATORY: at least ¼ of the directors present must be resident Canadians
s. 114(5) – if the directors’ meeting regards anything under s. 115(3) then the notice of the meeting must
specifically indicate that such a matter will be dealt with at the meeting
s. 114(6) – a director may waive notice of the meeting in any manner. The attendance of a director at a
meeting is a waiver of notice except where the director attends for the express purpose of objecting to
the meeting on the grounds that it was not lawfully called
s. 114(9) – meetings by conference call or other electronic means are acceptable
s. 114(8) – where the corporation has just one director, the director can constitute a meeting
s. 117 – a meeting is unnecessary if all of the directors sign a written resolution in lieu of meeting
s. 122(1)(b) – failure to hold meetings might give rise to liability for breaching duty of care under this
proviso
Other requirements for publicly traded corporations
s. 102(2) – the minimum number of directors for a non-public corporation is 1, for a public corp, 3
s. 102(2) – for public corps, at least 2 directors must not be officers or employees of the
corporation or its affiliates
s. 171 – public corps must have an audit committee made of three or more directors, a majority of which
must not be employees or officers of the corporation
Page 29 of 30
Chapter 22 Shareholder Voting Rights
Shareholder powers are specifically set out in the CBCA. These powers are the power to: Elect directors,
Approve amendments to by-laws, Approve fundamental changes such as changes to the articles, An
amalgamation of the corporation, Continuance of the corporation under another corporate statute, The
sale, lease or exchange of all or substantially all of the corporation’s assets, The dissolution of the
corporation. *** remember s. 2(1) – “ordinary resolution” is ½ majority, “special resolution” 2/3 maj. ***
Shareholder power to manage
Automatic Self-Cleansing – shareholders do not hold residual control over the corporation. They cannot
dictate to the board of directors how the directors should exercise their power, nor can they override
their decisions
Barron – Shareholders can break a deadlock on the board of directors by holding an extraordinary
meeting in which new directors are appointed.
Amendment of bylaws
s. 103 – directors can change the bylaws unilaterally, but these changes must be ratified by the
shareholders at the next AM (default arrangement can be taken away in the bylaws/articles/USA)
s. 103(5) – even where the power to make changes in the bylaws is left in the hands of directors,
shareholders can always make proposals for changes in the bylaws
Fundamental changes and class voting rights
s. 173 – sets out several significant (fundamental) changes that require a special resolution (2/3 maj) by
shareholders with a general voting right. These involve changes to articles: a) Changing the corporate
name, b) registered office, c) restriction in business of the corporation, d) create a new class of shares, e)
increase or decrease the number, or the minimum and maximum number of directors, f) change
restrictions on share transfer Only shares with general voting right can vote under this section
Other fundamental changes requiring special resolution
s. 183 – amalgamation
s. 189(3) – sale or lease of all or substantially all of the corporation’s assets
s. 188 – continuance
s. 211 – liquidation and dissolution of the corporation
Class and series voting rights (see page 271-2 of outline for theories behind voting rights)
A class must approve a change that alters or prejudices its rights by separate resolution of that class. This
is a mandatory right.
s. 176(5) -- even if the class normally doesn’t have a general voting right, each share has a right to
vote if s. 176(1) applies
s. 176(1) – sets out situations in which a class vote is required: a) increase or decrease the authorized
limit on the number of shares, b) when there is an exchange, reclassification, or cancellation of shares, c)
to add, change or remove rights, privileges, or restrictions on a class of shares, e) to create a new class of
shares equal or superior to a particular class, f) to make an inferior class of shares superior or equal to a
particular class
s. 176(4) – a separate series of a class can have the right to vote separately if the series is affected by a
resolution in some manner different from the other series in the class
s. 176(6) – when a class vote is required, a separate resolution of that class is required, and it must be
done by special resolution (2/3 vote)
Class voting in fundamental changes
Class voting rights often arise in other fundamental changes as well.
s. 183(4) – on amalgamation a class voting right may arise if amalgamation would entitle the class to vote
under s. 176
s. 189(7) – a sale, lease, or exchange of all or substantially all of a corporation’s assets might trigger a class
vote if the proposed change would affect the class in a manner different from the shares of another class
or series
s. 211(3) – if the corporation has more than one class of shares, liquidation or dissolution requires special
resolution approval by each class of shares
Page 30 of 30
Chapter 24 Closely Held Corporations
Statutory Definition of Closely Held Corporations
s. 2(1) and Reg. s. 2 -- The global definition is whether or not the corporation is a “distributing
corporation” meaning one that distributes its shares under a prospectus or similar disclosure document
pursuant to provincial securities laws.
Statutory Modifications for non-public companies
s. 136 – the corporation will not have to provide notice to a shareholder for a shareholder meeting if the
shareholder has waived his right to notice of shareholder meetings
s. 139(4) – one shareholder meetings are permitted
s. 142 – shareholder resolutions in writing in lieu of meetings are OK. Resolution must be unanimous
s. 163 – non-distributing corporations may dispense with the need of appointing an auditor
s. 171 – non-distributing corporations are not required to have an audit committee
s. 149 – non-distributing corporations are not mandated to solicit proxies
Unanimous Shareholder Agreements (USAs)
s. 102 – directors shall manage the corporation “subject to any USA.” (Note: ONLY USAs! USAs ONLY
directors’ s. 115(3) because s. 115(3) powers aren’t mentioned elsewhere so they must fall under s. 102)
s. 146(1) – director power can be taken away by a USA. USAs must be unanimous by all shareholders.
s. 146(6) – shareholders can fetter their discretion in exercising the power of directors allocated to them
To see if it is possible to transfer a power to shareholders, follow these steps:
(i) identify the power that is to be reallocated to the shareholders (see directors/officers section)
(ii) determine the provision under which such a power is provided in the Act (e.g. borrowing power is
under s. 189(1) and (2); power to appoint officers is under s. 121, and so on)
(iii) see what methods can be used to reallocate the power (e.g. s. 121 says that the power can be
reallocated in the articles, by-laws or a unanimous shareholder; s. 102 [implicitly 115(3)] says only by USA)
(iv) assess which of these documents would be the most appropriate document for reallocating the power
(in a closely-held corporation this will normally be a USA. USAs are cheaper than changing articles and
bylaws can possibly be changed by directors if they still have the default power in s. 103)
(v) once power reallocated to shareholders in the document considered most appropriate to do so, then
question of determining how shareholders want to agree to vote on the matter and put the terms of that
agreement in the shareholders’ agreement (vi) keep in mind oppression remedies.
Shareholder agreements
Shareholders can enter into shareholder agreements as to how they will vote their shares. This can be
used to create control blocks in a corporation. They are different from USAs in that they are agreements
outside of the corporate entity that needn’t be unanimous. Idea: Take power away with USA then do this
Ringuet – Shareholder agreements are valid contracts between the shareholders that sign onto them.
(Alternatively, shareholders could assign their voting rights to a trustee who will ensure the votes are
done in a certain way; not done often in Canada because of tax consequences)
Ringuet – However, it is contrary to public policy for directors to constrain how they would vote as
directors as they owe a duty to act in the best interests of the corporation.
But shareholders are free to do this. S. 145.1 codifies this right. They could use a USA to take
the power away from a director and then subsequently have a shareholder agreement dictate
how the shareholders will vote to have the power exercised.
Share Transfer Provisions (they control the transfer of shares to avoid undesirable business assocs.)
Edmonton Country Club – There is a presumption that shares are freely transferrable, but the transfer of
shares can be restricted. Thus, restrictions are generally valid except possibly absolute restrictions.
Types of restrictions: absolute restrictions (no transfer at all), consent restrictions (require consent of
certain persons), shot gun restriction (gives shareholder who receives an offer to buy shares the right to
accept the offer or sell his own shares at the same price), first option (shareholder receives offer from 3P,
must put it before other shareholders who have right to buy proportionate amount at same price), forced
buyout (allows shareholders to buy out one another on the happening of certain events like divorce or
death. Usually the agreement will also include an unbiased method of valuing the shares)