BUSINESS ASSOCIATIONS FINAL EXAM OUTLINE
INTRODUCTION
Different Forms of Association
Describe each of the following forms of association for carrying on business noting the
particular features of each of them that are set out in the “Notes on Business Associations”.
Agency
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Sole
Proprietorship
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Partnership
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Limited
Partnership
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A person carrying on business may choose to have another
person act on their behalf.
Agent not a party to the K – K on behalf of principle
Single investor with ultimate management authority
 Single equity investor
 Sole proprietor has legal title to the assets of the business
 Manages the business (or overseas the management)
Agents and employees: may hire
Creditors
 Will usually obtain funds on credit
 May put constraints on how you manage business
Not a separate legal entity (contracting personally, if tort
committed then your personal belongings may be taken)
Comes to an end on the death of sole proprietor – except could
continue through administrator of the estate until all assets
distributed
Can hire agents and employees
Partners themselves are treated as agents for each other
Partnership not a separate legal entity (partners are personally
liable)
‘the partnership’ cannot enter into contract – it is the partners
themselves who enter into contracts.
Partners responsible for torts committed in the conduct of the
business directly or vicariously (personally liable)
Partnership comes to an end on the death or bankruptcy of any
one of the partners
Partners have a limit on their liability
Must have one general partner – one without limited liability
 To get around that – make a corporation the general
partner and ensure they have no assets
If you’re a limited partner you’re not supposed to be involved in
the management of the business
Can have creditors
Not a legally recognized entity
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Limited Liability
Partnership
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Corporations
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Business Trust
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Not the same as limited partnership
In B.C. available on a broader basis, not just for professional
partnerships
Not recognized as a separate legal entity.
Partners are not liable for the acts of their fellow partners or
employees unless they were directly supervising the activity that
caused the loss.
Still personally liable – can go after personal assets
Separate legal entity
 The corporation is liable when it enters into K – not
shareholders
 Corporation is liable for torts
 Corporation that owns the assets and not the equity
investors
Often has several equity investors - Equity investors are usually
referred to as shareholders
Interests are usually divided into shares – equity investors are
only liable for the amount of their investment (like limited
partners)
No constraint on the extent to which shareholders can become
involved in the management of the business (unlike partners)
Continued existence even upon death of shareholders
Can have creditors, can hire employees (through its agents) –
when directors act, it is the corporation acting – when anything
below that acts, it is the directing mind
Shareholders can be held personally liable
Allows you to flow income directly through to investor (only
taxed once) – unlike in corporations where the corp income is
taxed and the dividends are taxed
Type of trust used in the business trust is an express trust.
One or more persons (settlors) put title to property in trust in the
hands of one or more persons (trustees) with instructions that
the trustees hold that property for the benefit of other persons
(beneficiaries)
Settlors, trustees, and beneficiaries can all be different ppl, or
settlors can be either trustees or beneficiaries or both
Details of the operation of the trust set out in the trust instrument
Trust not recognized as a separate person although basically
taxed as one
2 main sources of liability risk for investors/unitholders: (1)
implied right of trustees to be indemnified for their losses by
beneficiaries in some situations (Default rule – rule unless you
say otherwise); (2) possibility that the trustees will also be
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considered agents of the investors in some situations.
Co-operative
Associations
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Societies or Nonprofit
corporations
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Unincorporated
Association
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Joint Ventures
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Much of what was noted about corporations applies to cooperative associations
Unique feature – typically distributes is profits to its members in
a form other than dividends
 In the form of lower prices or reduced fees for services or
in benefits of some sort
Common to have separate statutes for the incorporation of nonprofit corp that will carry on their activities on a non-profit basis
Members usually elect board of directors or executive committees
Member vote to:
 Elect a board of directors or exec committee
 Amend the articles, bylaws or other constitutional docs of
non-profit corp
 Members may also be persons who receive the benefits of
the activities performed by the non-profit corp
Non-profit corporation is the term used in many jurisdictions in
Canada – society in B.C.
1+ person, not for profit, activity carried on in common
Don’t need to do anything formal to form it – just have to carry on
activity in common
Not separate legal entity – some similarities to partnership
 cannot enter in K with other persons – member enters
 not responsible for torts committed in the conduct of the
association’s activities
 member can be personally liable
 members considered agents for each other
 can engage other agents and employees and creditors
Not recognized as separate legal entity
describes a relationship among persons who agree to combine
skills, property, funds, time, resources, knowledge or experience
to pursue some common objective
typically each member of the joint venture has some control over
the mgmt of the joint activity and agrees to share in the profits
and losses of the activity
could be set up as a partnership (members of the JV might be two
separate corporations carrying on the JV though a partnership) or
could be carrying on the joint venture through a corporation with
the corporations that are the members of the joint venture being
shareholders in the corporation (terms might be contained in a
shareholders’ agreement among the members) or could simply be
a contractual arrangement that does not amount to partnership
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Franchises
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Multiple
Contracts
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Arrangement in which a franchisor grants a franchisee one or
more rights such as the right to sell the franshisor’s products, use
its business name, adopt its methods, or copy its symbols, trademarks or architecture over a specified period of time in a
specified place
Franchisor often also provides marketing support and training in
the franchisor’s method of carrying on business
Franchisee pays a royalty or licence fee to the franchisor
Arrangement has one or more of three basic elements:
 The provision of know-how
 Image recognition
 Purchasing power
key = license to use the name, trade mark etc.
franchise is not a separate legal entity
franchisor and franchisee nearly always a corporation
governed by provincial law since dealing with K’s that fall under
provincial powers with respect to prop and civil rights
Plastic pen example – every step could be done by separate
persons acting independently subject to the terms of separate
contractual arrangements
Could involve high transaction costs
Forms of business association as means of reducing these costs
Show how a trust can be used to replicate features of a corporation such as shareholders,
shares, directors of the board and officers.
 How does a trust replicate a corporation?
The basic framework for the management of a corporation is that shareholders elect a
board of directors who then appoint officers who either manage the day to day business of
the corporation themselves or delegate various management responsibilities to other
persons they hire.
A business trust replicates the corporate structure in that the equity investor (settlor) in a
trust is equivalent to the shareholders in a corporation. The trustees are equivalent to the
directors in that they are elected by the settlor and appointed to manage the trust. In a
business trust, the trustees are liable (the beneficiaries/unitholders are not liable). As long
as the investor-beneficiaries are not trustees they will have some protection against
personal liability that may roughly approximate the limited liability of shareholders in a
corporation.
Who are the stakeholders of a business?
 The stakeholders of a business are the persons who are affected by the conduct of the
business. These include equity investors, creditors, managers, employees, and can also
include the businesses customers (or consumers), suppliers, competitors and the local
community and the broader community (national or international).
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Note four commonly used financial statements.
4 commonly used financial statements:
- balance sheet
- income statement
- statement of retained earnings
- statement of changes in financial position.
Explain what a balance sheet shows.
Balance sheet – assets (shows what was done with funds) vs. liabilities and equity (where
funds obtained from) -- if everything is properly accounted for the sides should balance
Explain what an income statement (or statement of profit and loss) shows.
Income Statement – shows the revenues of the business (sales, royalties, license fees,
rental income) less the expenses of the business –total expenses are deducted from total
revenue (revenue – cost of goods sold = gross profit – other expenses = net income)
Explain the terms “assets,” “liabilities” (or “debt”), “equity,” “trade credit,” “accounts
receivable,” and “accounts payable”.
Assets, Liabilities and Equity
 Assets are acquired for the business that will have a continuing value
 Liabilities/debt represent fixed obligation (bank loan)
 Equity is the entitlement to residual amounts (amounts left over) - Persons who have
advanced funds as an “equity” investment share in the profits that are the residual
amount of revenues left after payment of expenses including interest expense.
Trade Credit, Accounts Payable and Accounts Receivable
 Trade credit – goods or services acquired for a business on credit
 Appears on balance sheet as accounts payable
 If business is one extending the credit it will appear on balance sheet as
accounts receivable (asset)
PART I:
AGENCY
Relationships Between Principal and Agent
An agent is a person who affects the legal relations of another person, called the principal,
primarily through entering into K’s on behalf of the principal.
Quick Notes:
- Principal can be vicariously liable for the torts committed by the agent when committed
within the scope of their employment
- Distinguished from employment in that an employee does not necessarily have the right
to enter into K’s on behalf of the employer
- Agency and trust similar in that agents and trustees both owe fiduciary duties
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An agent can possess two types of authority: (1) Actual authority; (2) ostensible
authority. Actual authority can be: (A) Express or (B) implied.
STARTING POINT: If the agent has actual authority to enter into a particular contract with
another person on behalf of the principal, and if it is clear that the agent is acting as agent
in its dealings with that other person, then the K, if otherwise valid, will be a binding K
between the principal and the third party.
Express actual authority – when principal has stated either orally or in writing what the
agent’s authority is; includes authority that can be inferred from the written or oral words
Implied actual authority – refers to the authority that the principal and agent would have
expected the agent to have in the circumstances; to determine the implied authority of an
agent, courts look to the usual or customary authority of such agents:
- Usual authority – determined by what the agent has been allowed to do in the past
(Freeman & Lockyer)
- Customary Authority – determined by looking at the kind of authority agents of that
type normally have (Wiltshire v. Sims)
CAREFUL: Usual authority looks at this principal and this agent while Customary authority
looks at what agents of this type are normally allowed to do.
POLICY: Protecting reliance interest of the agent – unjust enrichment (do something for
the principle 5 times, on 6th time if it doesn’t turn out right, they could threaten not to pay
the agent)
Freeman & Lockyer v. Buckhurst Park Properties – Kapoor acting as a managing director
of Buckhurst although the board never appointed him. Actual authority was implied –
scope of authority was based on what the directors has usually allowed Kapoor to do in the
past.
- No express actual authority – never appointed, but the board allowed him to act as the
president of the company.
- Case really about 3rd parties – Kapoor acting for Buckhurst and hired architecture firm if 3rd party wants to say this agent had authority, they can claim actual (usual) or
ostensible – both argued in case (resolved on ostensible authority)
- Buckhurst can then go after Kapoor – question of actual authority, not ostensible –
customary? usual?
Wiltshire v. Sims – court held that while stockbrokers usually have authority to sell shares
on behalf of their clients, they normally do not have the authority to sell shares on credit.
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Duties of the agent to the principal
1. Agent must perform the tasks that have been assigned by the terms of the agreement or
according to instructions of the principal
2. Must perform with reasonable care – standard of care is the degree of skill and
diligence which an agent in his or her position would normally possess or exercise.
3. Agent must act in the best interests of the principal:
 Agent owes certain fiduciary duties to the principal – implied, parties can vary
them or can be varied by implication from the circumstances
 Agent is not allowed to delegate responsibilities to anyone else – exception when
implied term of non-delegation is not considered to be a reasonable implied
 Remedies for delegation – damages for any loss and possible injunction
 Two old sailor cases
 Agent is not to put himself in a position where his duties to the principal and his
personal interests conflict
 Remedies for conflict of interest – transaction is void and the agent is
required to account for any profits made plus compensation for losses
and a possible injunction
 Agent is not allowed to make secret profits (can’t be told to sell for $10, sell for
$12 and pocket the difference) – will have to account to the principal for the
extra (Thompson v. Meade)
 The agent has a duty to keep proper accounts (books of account of transactions)
Duties of the principal to the agent (default rules)
1. Principal often required to pay remuneration
 Does not require consideration – agent may act gratuitously (power of attorney –
you don’t usually pay your POA)
 Court might look at implied circumstances – if they had of written it out, would they
normally have expected payment for services, or would it be gratuitously
 Normally rule is that agent is expected to perform (effective cause) – make sale, get
commission
o Can be overridden – exclusive agency – doesn’t matter who makes the sale,
as long as it is made, agent gets commission
2. The principal is required to pay the expenses of the agent and indemnify the agent
against losses
Events that terminate an agency agreement
1. Act of the parties
 Provided by agreement
 Unilaterally terminable on notice by either party immediately.
2. By operation of law
 When either becomes bankrupt – if agent goes bankrupt and continues to collect
payments for principle, creditors could swipe principles payments; if principle is
bankrupt, agent gets no remuneration etc.
 Frustration - where whole purpose no longer exists
 Death of either party
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AGENCY II
Relationships with Others (ostensible authority)
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STARTING POINT: If the agent has actual authority to enter into a particular contract
with another person on behalf of the principal, and if it is clear that the agent is acting
as agent in its dealings with that other person, then the K, if otherwise valid, will be a
binding K between the principal and the third party.
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HOWEVER: if the agent did not have actual authority (or principal claiming no actual
authority), the third party may still be able to enforce the K or recover damages by
claiming the agent had ostensible authority, claim a breach of warranty of authority, or
argue the K was ratified
Ostensible Authority (Apparent authority/agency by estoppel)
- Unique to principal and 3rd party r/ship – non-existent b/w principal and agent
- Can arise even where the agent does not have actual authority (express/implied)
- The representation when acted upon by the third party by entering into a K with the
agent operates as an estoppel.
Elements of Ostensible Authority
1. The alleged principal must have made a representation, or permitted a representation,
that the alleged agent had the authority to act on behalf of the alleged principal (rep can
be express or implied); and
2. The third party reasonably relies on the representation to her or his detriment
(Freeman & Lockyer v. Buckhurst Park Properties)
What are possible reasons for the law on apparent authority?
POLICY Reasons behind the Ostensible/Apparent Authority:
- Protects the reliance interest of third parties who are led to reasonably believe the
person acting as agent has authority to act
o VS. the principal’s potential unfair surprise at being bound by a K when he
would not have reasonably expected to be bound
- Least cost avoidance – puts the obligation to avoid the loss on the person who can avoid
it at least cost (probably principal in most cases)
o Check agent’s trustworthiness beforehand
o Monitor agent’s behavior
o Dismiss agent who acts beyond his authority
o Sometimes the third party is in the best position to avoid – when the alleged
agent is a complete fraud and the alleged principal has never had any contact
with the person purporting to be an agent
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o If P dismisses Agent – it is a good idea to notify any 3rd party who has
engaged with P/agent in the past
Breach of Warranty of Authority
A claim by a third party against an agent where the agent warranted that she had authority
but in fact did not have either actual or ostensible authority.
Elements of a breach of warranty of authority:
1. Agent represents that she has authority;
2. Representation is false; and
3. Third party acts reasonably to her detriment
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REMEMBER, the third party could have 2 claims: (1) against the alleged principal on
basis that agent have authority (actual or ostensible); (2) against the alleged agent on
basis of a breach of warranty of authority
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Expectation measure of damages used for a claim for breach of warranty of authority –
intended to put third party in position he would have been in had the agent’s promise of
authority been true.
 Problem if the corporation the 3rd party entered into a K with later went
bankrupt – if promise of authority had been true, would have entered into K
with corp, they would go bankrupt and you would have nothing, so
expectation damages = $0
Ratification
When agent acts beyond his authority the principal can choose to accept what the agent did
and ratify the act of the agent.
1. Other person purported to act on behalf of person who seeks to ratify
2. Person seeking to ratify was in existence and was ascertainable at time (Corporation
must have been incorporated already); and
3. Person seeking to ratify must have had legal capacity to do the act both at the time of
the action and at the time of the ratification
Ratification can be:
- Express – oral or writing
- By conduct (principal provides some service/delivers goods) – any performance or part
performance of the terms of the K by the principal
- By acquiescence – simply waiting to see what happens over a period of time
Ratification must be based on knowledge of all relevant facts – a principal trying to
ratify a K would need to know the facts of the K – however, they would probably not be
relived of obligations if they were not informed of just a minor aspect of the deal
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Consequences of Ratification:
- Ratification relates back to time of offer and acceptance b/w agent and party
- Principal can sue 3rd party and be sued
- Agent no longer liable for breach of warrant of authority
- Agent no longer liable to principal for exceeding authority
- Principal will be liable to agent for reasonable remuneration and to indemnify agent for
expenses reasonably incurred by agent in effecting the K
What are possible policy reasons for the principles of ratification?
POLICY reasons for ratification:
- Mutual benefit – at the time entered into, it appeared mutually beneficial to both
parties
- Unjust enrichment due to speculation (waiting and seeing if it is better to go through
with the K or not):
 UE Principle at expense of Agent – principle would benefit by not
remunerating or indemnifying agent for expenses if they acted beyond their
authority, potential gain of the K at little/no risk (could seek compensation
from agent)
 UE Principle at the expense of 3rd Party – Several principles address the
following concerns:
 The principal would have the potential upside gain if the prices went
down while having downside risk protection from ratification of the
contract with the third party if prices went up (Ratification by
Acquiescence)
 If the principal could perform parts of a contract and still not be
considered to be bound by the contract then the principal might perform
as required until the contract turns out to no longer be to the benefit of
the principal (Ratification by Conduct)
 Promoters of the corporation could wait to see if the deal was a good one
then incorporate the corporation and ratify the contract (Principal in
Existence)
 If the principal were not ascertainable then the principal could come
forward and ratify the contract if it were beneficial but could remain
unascertainable if the contract turned out to be unfavourable to the
principal (Principal Ascertainable)
 UE of third party – Suppose the ratification did not relate back to the time of
offer and acceptance the third party could wait to see if the contract were
favourable and then choose to enforce it against the principal. But if before
the principal ratified the contract it turned out be unfavourable to the third
party then the third party could revoke his offer (or acceptance).
- Cures minor defects in the grant of authority – Litigation over claiming losses from
agent or claiming remuneration/indemnification from principle can be avoided where
the principal has ratified the contract (upon ratification principal is bound to
indemnify/remunerate agent and no longer entitled to compensation for losses) –
avoids litigation between the principal and the third party over whether the agent acted
within her actual or ostensible authority.
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Undisclosed Principal
General principle = an undisclosed principal can disclose the agency relationship and sue
the third party on a K entered into by the agent with the third party – however, does not
apply if the 3rd party was looking to the agent alone to perform the K (Objective test).
The third party will be considered to be looking to the agent alone to perform if:
(1) terms of K require only agent perform the terms of the K; or
(2) circumstances indicate that the 3rd party clearly intended to K with the agent alone
(personal aspect to K, would not have contracted with principal had they known, K is for
agent’s services  Said v. Butt)
Rights of the 3rd Party:
- Can sue principal, agent, set off rights (paid $4000 to agent, principal suing for $10,000
– set off the $4000 and just owe principal the $6000)
- When sued can use defences of duress, mistake, or misrepresentation.
What are possible policy reasons for the law concerning undisclosed principals?
POLICY reasons for law concerning undisclosed principals
- Mutual benefit – If the third party wasn’t looking particularly to the agent to perform
the contract then the third party is arguably still getting the expected benefit from the
contract even if the principal performs the contract. Thus there would be a mutual
benefit to the contract at the time the agent enters into the contract on behalf of the
undisclosed principal. Enforcement of these contracts will facilitate such mutually
beneficial transactions.
- Potential unjust enrichment of the third party – The principal may well believe that she
has a binding contract with the third party and proceed to perform the contract. If the
third party could avoid performance of his part of the contract on the basis that the
agency relationship was undisclosed then third party would be enriched at the expense
of the principal.
- Potential unjust enrichment of the principal - If the principal were able to say that he
was not a party to the contract and thus is not liable on it, the principal would have the
benefit of the goods at the expense of the third party.
Saide v. Butt
Facts: Saide is play critic. Mr. Butt banned him from theatre due to unfavourable reviews.
Mr. Saide got agent, Mr. Pollock, to purchase ticket for him – could not disclose and sue b/c
they never would have contracted with Pollock had they known ticket was going to be
given to Saide
Liability of Principals for torts committed by their agents
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Legal test  Principal liable for a tort committed by the principal’s agent if the agent
committed the tort while acting within the scope of her authority (Lloyd v. Grace, Smith &
Co.; Ernst & Young v. Falconi)
What are the likely policy reasons for the law concerning the liability of the principal for
the torts of the agent?
POLICY reasons for the liability of the principal for the torts committed by the agent
- Deterrence/ least cost avoidance – gives the principal an incentive to take
steps to avoid the loss.
- Allocation of the loss to the activity causing the loss – loss allocated to the activity
resulting in an increase in the price reflecting the full cost to society and the demand for
the goods/services should adjust in response to the increased price (supply/demand).
- Concern for compensation of the victim – (defrauding the old lady in law firm – Lloyd)
- Other – accessibility of legal services (people reluctant to seek out legal services)
Lloyd v. Grace, Smith & Co.
Facts: Clerk at law firm defrauded a client by convincing her to sell cottages when actually
had her transfer them into his name.
Held: as long as you are within scope of kinds of things you would do (drawing up deeds,
having clients in to sign deeds) as clerk in a law firm, you are within scope of your authority
Ernst & Young v. Falconi
Facts: Falconi was a lawyer in a firm and plead guilty to helping someone make fraudulent
dispositions of their property – Partner in firm had no idea.
Held: court need not find that action was within ordinary course of business of a law firm
(conspiring to defeat creditors) but it is sufficient if partner used facilities of the law firm to
perform the services (making use of support staff, trust account, letterhead and
documents)
SOLE PROPRIETORSHIP
Explain how a sole proprietorship is formed.
A SP is the simplest form of business association. In a sole proprietorship, the SP is the only
equity investor, owns all the assets of the business and is the ultimate decision-maker. It is
possible for sole proprietorships to become very complex; however, one simply needs to
start carrying on business to initially form a SP.
Note the legal status of the sole proprietorship.
Note the legal consequences of the legal status of a sole proprietorship in terms of:
(i)
who owns the assets of the business;
(ii)
who can be liable on contracts and in tort; and
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(iii)
what assets can be obtained in the enforcement of judgments arising out of
the conduct of the business.
SP Characteristics:
- SP not a separate legal entity
- Assets of business are owned directly by sole proprietor
- When entering K’s, SP is contracting party – business is not a party
- SP will be liable for torts committed in carrying on business b/c of direct involvement
or through vicarious liability for acts of agents and employees
- Judgments against SP (from conduct of business/outside of business) can be satisfied
out of assets of the business and also out of SP’s personal assets
Name
- One can carry on business as SP in one’s own name without having to register
- Must register name if using name other than one’s own or a name indicating a plurality
of persons
- Rule 7 – could sue in business name
- The Partnership Act
 S.88  If one, (1) Is in the business of trading, manufacturing or mining;
(2) is not in partnership; and (3) the business name is not the sole
proprietor’s own name or the business name consists of a phrase
indicating a plurality of persons, then the name must be filed with the
registrar. (No definition of terms “trading, manufacturing or mining”)
 S.89  the Registrar is not to register name if it resembles name of a
corporation in B.C. or if it is likely to confuse or mislead unless (1) the
corporation consents in writing; or (2) the business name was used
before the corporation first used its name
 S.90  requires Registrar to maintain register showing business names
and names of persons associated
- **use of words “and company” does not necessarily mean it is incorporated or
partnership – could still be a SP just using the phrase in name (still need to register)**
Discuss the various purposes that the business names registration requirement may serve.
- Purposes served by the registry
 Identifying the SP for credit check purposes –
 Identifying the SP for purpose of starting an action –
 Avoid deception of a name indicating a plurality of persons
 Avoid passing off – ability to check register to avoid using someone else’s
business name
Funding
- Investment by SP
- Funds borrowed from lenders (usually bank)
- Trade credit – SP may buy goods to be used or sold, on credit (buy now, pay later)
Management
- SP has ultimate control over decisions
- May delegate some authority to employees or agents
- Lenders may put restrictions on business that attempt to control degree of risk to which
their loans will be exposed (SP has constrained ultimate control)
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Dissolution
- SP simply stops carrying on the business
Explain why one might choose to operate as a sole proprietor rather than through other
forms of business association.
Why this form?
- Easy to form – no formal process
- Very easy to dissolve – just stop
- Tax consideration – profits in SP business are taxed directly in hands of SP
- Tax advantage of SP over incorporation – Corporation is treated as separate taxpayer
Downsides to this form:
- Personal liability rather than limited liability
 Maybe not so much of a downside because even if you incorporate you
are often asked to be personally liable (waive limited liability) when
leasing, getting loan, etc.
PARTNERSHIP
Answering a Question on Partnership:
1. Is it a partnership? – go through s.2 and identify that 4 key elements are present
2. Consider whether business is being carried on as a corporation (s.3)
3. Discuss the legal status of a partnership
4. Any indication that the name has not been registered (J&S liability implication)
5. Address whether the partnership is governed by a partnership agreement formed by
the default rules of the PA or whether the terms have been expressly/implicitly altered
(Rochwerg v. Truster; McKnight v. Hutchinson)
6. Address any funding issue ()
7. Consider whether the partnership has been dissolved
8. What is the partnership being used for – was it created by default?
9. Are we dealing here with 3rd parties?
a. Consider liability in tort/contract due to acts of another partner
b. Consider s.4 and expanding on “carrying business on in common”
c. Are lenders benefiting from profits and benefiting upon bankruptcy?
Consider s.5
d. Are there issues with the retirement of a partner?
I.
THE RELATIONSHIP BETWEEN THE PARTNERS
Formation of Partnership
- No formal steps required to create a general partnership
- Failure to register a general partnership may result in a fine but does not mean it does
not exist
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Partnership = the relation which subsists b/w persons carrying on business in
common with a view of profit (S. 2 Partnership Act )
Four Key Elements: Persons (more than one); Carrying on business; In common; and with a
view of profit
1. Persons
o “Person” defined in s.29 of IA as “a corporation, partnership or party, and the
personal or other legal representatives of a person to whom the context can apply
according to law”
2. Carrying on Business
o “Business” presumably takes on its ordinary meaning – “a trade, profession, a
person’s usual occupation; buying and selling, trade; a commercial firm; a shop”
3. In Common
o Suggests that the persons must be carrying on business together in some way
o S.4 provides some guidelines about what is “in common”
4. View of Profit
o Means that a non-profit association is not treated as a partnership under the Act
o Business only needs to be carried on with a view of profit – no profits actually have
to be made (Backman)
Backman v. Canada (2001)
Facts: Investors wanting to buy interest in an (unprofitable) apartment development and
deduct the loss from their income taxes then sell the apartments to realize capital loss. This
could only happen if the relationship was a partnership
Issue: was the r/ship a partnership?
Held: only an attempt to appear as a partnership for tax purposes, no real expectation of
profits
- Not necessary to show that the parties held meetings, entered into transactions or
made decisions
- Partnership does not need to be long term – can be for one single transaction
- Carrying on Business = (i) occupation of time, attention and labour; (ii) the incurring of
liabilities to other persons; (iii) the purpose of a livelihood or profit (Gordon v. The
Queen)
- In common –
o Authority of any partner to bind the partnership is relevant however, fact that
mgmt of partnership rests in single partner does not mean it wasn’t “in
common”.
o Relevant whether parties held themselves out to third parties as partners
o Consider other factors as well: contribution of skill, knowledge or assets to a
common undertaking, a joint property interest in subject matter, sharing of
profits and losses, filing of income tax returns as a partnership, financial
statements and joint bank accounts, correspondence w/ third parties
- View of profit –
o Tax motivation will not derogate from validity
15
-
o Profit doesn’t have to be overriding intention – sufficient if ancillary profitmaking purpose
o Does not require net gain over a period of time
Weigh factors in the context of the surrounding circumstances (Pooley v. Driver and
Martin v. Peyton)
What is the purpose of s. 3 of the B.C. Partnership Act?
S. 3 of Partnership Act
- Where the business is carried on through a corporation then the particular corporate
statute applies and the Partnership Act does not apply ** KNOW THIS**
- Does not say a corporation cannot be a partner – a corporation is a person (s.29 IA) and
so can be in a partnership
- Sets out various ways a corporation might be formed and then says that these
corporations are not partnerships
- Does not say that corporations cannot be partners
Describe the legal nature of the partnership and note the consequences of that legal nature.
The Legal Status of Partnership
A partnership is not recognized as a separate legal entity (Thorne v. New Brunswick)
 Each partner is liable to the full extent of his personal assets
 Partner cannot be an employee of the partnership business (shareholders of a
corporation can be employees)
 Partner cannot be a creditor of the partnership (because you cannot enter into a
contract with yourself)
 Rule 7: Can sue in the name of the partnership firm; can serve to place of business
 For income tax purposes – income is allocated b/w partners and partners are taxed
individually
Thorne v. New Brunswick
Facts: Thorne and Robichaud partners in tree-felling and sawmilling operation – Thorne
injured and sought workers’ comp but was denied on basis that he was not a worker.
Board argued: he was not an employee b/c he was a partner (Thorne would have to have
made a K with himself)
Held: Partnership (not employment situation) because you cannot make a K with yourself
Bottom Line: court held that a partnership is not a legally recognized entity
Name and Registration and Actions Against Partnerships
Persons associated in a partnership for trading, manufacturing or mining must file a
registration statement with Registrar (S.81)
16
-
Failure to register may result in fine and partners become jointly and severally liable
for debts – not just jointly liable
If J&S – plaintiff can sue each one separately and individually – if just jointly, the
plaintiff is barred from suing other partners if already sued one
Registrar keeps an index (s.90) showing name of partnerships and persons who are
partners
S.83 requires that when there is any change in membership of firm (partner retires,
new partner taken on, etc.) new statement must be filed
o Failure to file Registration Statement or Statement for Changes
 Fine
 Failure to register a retiring partner will (s.84(2)) mean they continue to
be a partner and therefore liable for debts
Note and describe the default nature of the Partnership Act as between the partners.
The Partnership Agreement
Default rules contained in ss.21-34 of the PA govern the r/ship b/w partners if they have
not either expressly or implicitly agreed otherwise (s.21 allows for variation to the default
rules by express or inferred consent)
-
Default rules based on assumption of equal partners with respect to their capital
contributions, rights to participate in mgmt of business and share of the profits
If the default rules are not overridden by express written agreement there is a risk that
the partners will be stuck with terms they don’t want
Important to be familiar with default rules and to have express agreement that
overrides them
Also useful to write up comprehensive partnership agmt and put in provisions that may
be consistent with default provisions (only have to look to written agmt to determine
rights)
Partnership interest can be assigned but this does not result in assignee becoming a
partner – all it assigns is interest in share of profits and right to a share of partnership
assets on dissolution
Default Position
- S.6 provides that partnership property means property brought into partnership, prop
acquired on account of the firm or property acquired for purposes of and in the course
of business
- S.23(1) says partnership property must be held and applied in accordance with
partnership agmt
- S.23(2) – Land held by one or more partners is held in trust for the partnership
- S.24 Prop bought with money belonging to firm is deemed to be partnership prop
- S.27
(a) partners share equally in capital, profits and losses
(b) firm must indemnify every partner
(c) entitled to interest for additional contribution
(d) just entitled to profits
17
-
(e) all partners have equal right to participate in management
(f) no remuneration for work
(g) no new partners can be admitted to partnership without consent of all partners
(h) ordinary business decisions will be governed by majority votes of partners – but if
it is a decision regarding nature of partnership, everyone has to agree
(i) must keep books and all partners must have access
S.28 – no majority of the partners can expel any partner unless power to do so has been
conferred by express agreement b/w the partners and power is exercised in good faith
S.29 – (1) If no set term has been agreed on, any partner may end the partnership at any
time on giving notice to all the other partners of his or her intention to do so
Fiduciary Obligations
- S.22 requires that “a partner must act with the utmost fairness and good faith towards
the other members of the firm in the business of the firm”(general fiduciary duty of
partners)
o S.31-33 (specific fiduciary duties) (McKnight v. Hutchinson)
 S.31 – partners bound to render accounts and full info of all things
affecting partnership
 S.32 – partners must account for any benefits derived w/out consent of
other partners
 S.33 – requires partners account for profits mad from engaging in
competing business
Rochwerg v. Truster
Facts: Rochwerg became a director of a corporation (which entitled him to shares and
stock options) that was the client of his partnership accounting firm
Issue: whether the other partners were entitled to an accounting for the shares and stock
options?
Held: No written partnership agmt so governed by PA  no obligation to account under
s.30; must account under first branch of s.29(1) – “concerning the partnership” and under
the second branch of s.29(2) – benefit derived from use of partnership business connection
McKnight v. Hutchinson (example of fiduciary duties of partners)
Facts: Law partnership that ended when McKnight learned that Hutchinson had received
earnings from part ownership in a private company
Held: Relevant sections of PA are ss.22(1), 31, 32(1) and 33 and these obligations can be
varied by consent of partners.
Funding
-
The funding of a partnership is usually done by a portion of trade credit and typically a
loan (bank or other lenders)
Partners are the equity investors – could make cash contributions but invest could be in
form of property or services (or combo)
18
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Typically partners will share profits in proportion to relative contributions, but not
necessarily – if nothing is said, the default under s.27(a) is an equal share in capital,
profits and losses
Possible (although rare) that a partnership interest may be considered a security and if
so would be subject to provincial securities legislation
o If partner does not take part in management of business (dormant partner)
o Loans from persons other than bank
Dissolution
A partnership can be dissolved by the act, death, bankruptcy or dissolution of a partner.
By Act of the Partners
- S.35(a) – set a fixed term for the partnership – dissolved unless partners agree
otherwise
- S.35(b) – dissolved at the end of a particular venture
- S.29 & S.35(c) – If neither of the above, it may be dissolved by notice of intention to
dissolve and the dissolution will take effect from the date of the notice or the date
specified in the notice
Dissolution on Death, Bankruptcy or Dissolution of a Partner
- Partnership is dissolved automatically upon the death, bankruptcy or dissolution of a
partner
o Why?
 Upon a death it is not the same partnership anymore, don’t want to have
administrator of estate stepping in
 Upon bankruptcy the other partners do not want to have to cover the
debt of the bankrupt partner
- Will need a whole new partnership agreement among the remaining partners to
continue
- Often expressly altered by agreement between partners such that a death, bankruptcy,
or dissolution of a partner does not result in the dissolution of the partnership between
the remaining partners
Uses of Partnership
Note and discuss four situations in which partnerships are often used.
- Professionals
o For many years prov leg prevented most licenced professionals (doctors,
lawyers, dentists, engineers, accountants) from carrying on bus thru corp so they
used partnerships
o Still common for professionals to form partnerships (also using the recent form
of LLP)
- Joint Venture – (no legal definition/not really a recognized bus ass.)
o 2 or more corporations can engage in a joint venture formally organized as a
partnership
19
o common choice partly due to flow through tax benefits
Tax Reasons
o Tax advantages for SP also apply to partnerships b/c partnership is not a
separate legal entity (or taxpayer)
 A partner can use their/its share of the losses against their/its other
sources of income
Default
o Ppl might be in partnership w/out knowing it – no formalities to formation
-
II.
RELATIONSHIPS BETWEEN THE PARTNERS AND OTHER PERSONS
Relationships Between the Partners and Third Parties
Partners can be liable to third parties through contract or tort because every partner is an
agent of the firm and other partners for purposes of a partnership business
-
Liability of Partners in Contract: SS.7-11 of the PA
o S.7 – apparent authority of partners
 (2) where partner does act for “carrying on in the usual way business of
the kind carried on by the firm” it binds the firm and partners, unless:
 partner had no authority to act for firm in the particular matter;
and
 third party either knew the person had no authority or did not
know or believe the person was a partner
 parallels ostensible authority (agency law)
 reliance by the third party must be reasonable – third party should be
suspicious of unusual behaviour and make inquiries to confirm that the
partner has authority
o S.8 – actual authority of agent or partner
i. An act or instrument (document);
ii. Relating to the business of the firm;
iii. Done or executed in the firm name, or in any manner showing an intent to
bind the firm;
iv. By any person authorized to do so (whether partner or not)
 Is binding on the firm and all partners
 Does not limit actual authority – appears to cover both actual and
ostensible
o S.9 – No Ostensible Authority then the Partners are not Bound Unless the
Particular Partner had Actual Authority
 Where partner pledges credit of firm for a purpose not connected with the
firm’s ordinary course of business, the firm is not bound unless person
was specially authorized by other partners
 Action not connected to firm’s ordinary course of business so third party
has no reasonable reason to believe partner has authority (no ostensible
authority)
o S.10 – Third Party Notice of Restriction on Authority of Partner
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If a third party has notice of restriction on power of partner, then actions
of partner do not bind the firm
 Overlap with S.7 – except here person has notice, doesn’t just possess
knowledge alone
o S.11 – Joint Liability for Debts of Partnership
 Every partner is jointly liable for all debts and obligations
 After partners death his estate is also severally liable subject to prior
payment of the partners separate debts – allows for action against estate
of deceased partner while estate is being administered without barring
actions against other partners
 Joint and several liability = claimant can pursue obligation against either
party and becomes responsibility of D’s to sort out their respective
portions of liability. P may recover all damages from any of the D’s
regardless of their share of the liability.
 Jointly liable = parties are each liable up to the full amount. One or other
or both can be sued for full amount (creditor’s can only sue for each debt
once)
 Severally liable = parties are liable for only their respective obligations

o S.19 – Liability of New Partners and Retired Partners
 19(1) person who joins an existing partnership is not liable to creditors
for debts of partnership that arose before person joined
 19(2) person does not cease to be a party to K’s just because he/she left
partnership
 19(3) if creditor agrees to relieve retiring partner form further liability
then agreement will be binding
-
Liability of Partners in Tort:
o S.12 – firm is liable for wrongful acts or omissions where a partner:
i. Acted with the authority of co-partners; or
ii. Acted in the ordinary course of business of the firm
 It is not necessary for a partner to conspire with others for others to be
held liable for tort – sufficient if partner uses facilities of the law firm to
perform services normally performed by the business (Ernst & Young v.
Falconi)
o S.14 – liability under s.12 is joint and several (You can sue A, B, C, or/and D
together/separate)
Ernst & Young v. Falconi (scope of s.12)
- Facts: Falconi was lawyer and plead guilty to charge of assisting persons making
fraudulent dispositions of their property
o Klien had no personal involvement with transactions – but each transaction
involved use of legal services of firm
- Klien argued that acts of Falconi could not be considered within ordinary scope of
business
21
-
Held: not necessary for a partner to conspire with others to defeat creditors – sufficient
if partner uses facilities of the law firm to perform services normally performed by law
firm (prep and completion of mortgage docs, pre and completion of docs for transfer of
title and prep of corporate minutes and resolutions)
 Indemnification – liability of a partner is independent of any right of the partner to
seek indemnification (seek contribution for loss) or contribution from the other
partners
o Partner may seek contribution from fellow partners according to partnership
agreement
o When supplier sues A, A is 100% liable for full amount – then up to that partner
to seek indemnification from each other partner (B, C, D) – might be a good idea
as A/supplier to join B, C, D/fellow partners
- S.53 of Law and Equity Act – serving any one of the partners involved in a
joint liability suit, sufficiently serves all.
Outline policy reasons for the law on the existence of partnership as it relates to third
parties.
Underlying Values or Policy
o Reliance on a Known Participant in the Business – persons dealing with the business
may reasonably assume that the person dealt with was acting not only for herself but
also as agent for others involved in mgmt
o Reliance on a Person not Known to the Third Party – person may advance credit to
business on reasonable assumption that there is someone who has the funds to pay the
debt
o Unjust enrichment
- If a person gets a share of profits (benefit) and does not bear the burden of the
expense of the supplies because they claim they are not a partner, they are receiving
a benefit at the expense of a creditor who has supplied goods/services (and cannot
come after them if debt not paid)
 counterargument – if creditor priced goods or services and set terms of
credit based on the persons in the business he was aware of, then being able
to make a claim against a person he was not aware of is itself a windfall
o Least Cost Avoidance – who will bear the loss? Supplier-creditor or some other person
who has some connection to the business
- Position to assess the risk and control for it – persons who are involved in the
business b/c they have made invest/share in profits usually in better position to
assess risk of failure and control for it
 Third party creditors (especially who only advanced small amount) have
much less inventive to spend substantial sums investigating the risk of
failure
- Lowers overall cost of credit – putting risk of failure on person who is in better
position to assess and control risk lowers the overall cost of credit (if you personally
guarantee loan/credit – often the interest rate is lowered)
22
o Other Concerns – distributional concerns may be inconsistent with other policy
concerns and override them (unique to each case)
PA Section 4: in context of third party relationships
S. 4 is a gloss on the definition of partnership in section 2 and provides guidance on when
persons will be considered to be carrying on business “in common”. S.4 provisions do not of
themselves make the person a partner. The more facts that suggest the person is carrying
on business in common, the more likely she will be considered a partner.
-
-
-
-
-
S.4(a) common ownership of property does not of itself make co-owners partners
 If some other aspects exist in addition to co-ownership, then might be
considered a partnership (ie. Share profits and have some involvement in mgmt
of property)
 Finding a co-ownership as opposed to a partnership has significant implications
– under co-ownership:
 Co-owners are not agents for each other (partners are)
Co-owners can deal with their own interests in the property w/out the
consent of the other co-owners (unless otherwise agreed, a partner
cannot transfer interest without consent since their property is held by
the partners jointly as an asset of the business itself)
 A.E. Lepage v. Kamex Developments
S.4(b) sharing of gross returns (revenues before deduction of expenses) does not of
itself create a partnership (ex. Traveling play company performing in theatre operated
by theatre owner)
 not carrying on business in common
 just a presumption – something over and above the sharing of gross profits
(sharing expenses) may indicate they are carrying on a business in common (and
is partnership)
S.4(c) opening words = the sharing of profits is proof of partnership in the absence of
evidence to the contrary (default assumption) – it then goes on to say that receipt of a
share or payment contingent on or varying with the profits does not itself make a person
a partner (Cox v. Hickman codified)
S.4(c)(i) payment of a debt or liquidated amount by installments out of profits does not
of itself make a partner (creditor temporarily taking a % of the profits)
S.4(c)(ii) contract for remuneration of an employee or agent by a share of the profits
does not of itself make the person a partner (articling student gets Christmas bonus set
at a % of the yearly profits)
S.4(c)(iii) spouse of child of a deceased partner who receives an annuity out of the
profits is not a partner merely because of the receipt of profits
S.4(c)(iv)
 An advance of money by way of a loan;
 To a person engaged in business or about to engage in a business;
23
On a K between that person and the lender;
Where the K is in writing;
The K is signed by or on behalf of all parties to it; and
Under the K the lender is to receive a rate of interest varying with the profits or a
share of the profits from the business
Does not of itself make the lender a partner with the person carrying on business.
 Not part of CL of partnership – introduced in England in Bovill’s Act
 Controversial provision – possible for a person to invest in a business (get
a share of the profits) and yet not be considered a partner
o Close to a ‘pure equity’ claim  lender would be entitled to share
with the other creditors in the proceeds form the sale of assets
ahead of claims by the partners
 Justification = a struggling SP (motel) will have a hard time attracting new
equity investors (their funds could be completely lost if business doesn’t
pick up) or fixed rate investors (if it does turn around, all these investors
get back is principle plus fixed rate, nothing more)  S.4(c)(iv) allows
investors to share in the upside gain through a share in the profits while
allowing them a degree of downside risk protection in that they don’t
become partners and liable for all other debts
 Martin v. Peyton & Pooley v. Driver
 Canadian Commercial Bank has something to say about this – fixed
amount would fall under 4(c)(i) – open ended possibility to share in gains
falls here
S.4(c)(v) a person receiving payment for goodwill out of the profits of a business is not
a partner merely because of the receipt of profits
 “Goodwill” – value of a business that is not fully reflected in the market value of
the assets
 Ex. Business is sold and the purchaser pay value of business upfront and agrees
to pay additional amount for goodwill out of the subsequent profits of the
business (current owner and vendor will not be carrying on business in
common)
S.16 provides that a person who represents himself to be a partner (orally, written,
conduct) or who knowingly allows himself to be represented as a partner, will be liable
to anyone who had given credit on the faith of the representation
 Ex. Person with good credit allowing user of his name by SP to help them obtain
credit




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Cases Dealing with Definition of Partnership
 Sharing of profits creates a rebuttable presumption of partnership (Cox v. Hickman)
 An agreement between parties stating that they are not partners is NOT determinative
(Pooley v. Driver) (Martin v. Peyton)
CASE
FACTS
CONSIDERATION/
HELD
POLICY
24
A.E.
Lepage v.
KamexDev
elopments
Group of persons
formed syndicate to
buy a property. One
co-owner exclusively
listed property for
sale. Sold by another
company but Lepage
still entitled to
commission and
trustee for syndicate
refused to pay.
Ownership in
common, not
partnership
 Reliance – no indication that coowner was held out as having authority
and not clear Lepage relied on the other
members as partners
 Unjust enrichment – Lepage would be
paid commission and was not responsible
for sale of the property
 Least Cost avoidance – Syndicate
members had very limited control over
mgmt – Lepage could have simply
checked with officers of Kamex before
approaching co-owner
Cox v.
Hickman
(1860)
Codified in s.4(c)(i)
Creditors were not
partners (even
though receiving
cut of profits to pay
off debt) and were
not liable to pay
other creditor’s
debt.
Sharing of profits
creates a rebuttable
presumption of
partnership.
 Reliance – Hickman does not appear
to have relied on trustees (likely didn’t
know who they were)
 Unjust Enrichment – creditors
benefited from supply of goods at the
expense of Hickman (might have been a
factor, but not an overriding one)
 Least Cost Risk Avoidance – creditors
likely not in any better a position to
assess risk of business failure than
Hickman was
 Other (Promoting Arrangements) – if
case had gone against creditors it would
have been foolish for any creditors in
future to agree to arrangement such as
this
Pooley v.
Driver
(1876)
Deals with
provisions
similar to
s.4(c)(iv)
All funds of grease,
pitch and manure
business provided by
lenders – Pooley held
several bills
endorsed by
partnership and sued
the Drivers (a
lender) arguing they
were also partners.
Found to be a
partnership
 Reliance – no direct reliance since
Pooley admitted he was not aware of
connection of Drivers to business – maybe
(Court mentioned
indirect reliance similar to Cox
that agreement
 Unjust enrichment – Drivers would
between the parties benefit from advance of goods on credit
stating that they
and a share in the profit
were not partners
 Least Cost Avoidance – Drivers in
was NOT
good position to assess risk associated w/
determinative)
business
 Can’t have this kind of arrangement
w/out being partners (Would effectively
give Drivers limited liability; Persons
dealing with business would find it
difficult/costly to determine whether
25
there was significant equity in business)
Martin v.
Peyton
(U.S. Case
1927)
Partnership obtained
loan of securities
from D’s (D’s denied
offer of partnership
because of the poor
financial state of the
company); loan
repayment provided
on basis of a share of
the profits
Provisions taken
together do not
constitute a
partnership
(Statements that no
partnership is
intended is not
conclusive)
 Reliance – Peyton et al. were not part
of operations of the business so their
involvement was probably unknown to
third parties (no reliance) However,
reliance may have taken form of third
party expecting business to have
substantial equity capital behind it
 Unjust Enrichment – maybe, if they
got a share of profits while others
provided goods to KNK and suffered loss
 Least Cost Avoidance – PPF had some
ability to assess risk
 Other Concerns – No one would want
to help out a firm in financial difficulty if
the options are limited to the usual fixed
return creditor investment or full
partnership.
Subordination of Lenders for a Share of the Profits
It may lead to unfair results if “lenders” are able to enjoy the benefits of profits upon
success, but are also able to recover (even partially) their loan/investment as creditors
upon bankruptcy if business fails (Especially unfair if “lenders” have equal priority claim to
assets of business as other creditors who did not enjoy potential of benefiting from profits)
Section 5
 IF:
(i) a person whom money is advanced by way of a loan on K as mentioned in s.4; or
(ii) a buyer of good will in consideration of share of profits;
EITHER
(iii) becomes insolvent;
(iv) enters into an arrangement to pay creditors < 100 cents on the dollar; or
(v)
dies in insolvent circumstances;
THEN the lender, or seller of goodwill, is not entitled to recover anything in respect of the
loan or share of the profits until the claims of the other creditors of the borrower or buyer
for valuable consideration in money or money’s worth have been satisfied.

Policy behind s.5 = one who shares in the profits should share in the risks
RE Fort
26


Schofield loaned Fort money at interest rate plus half of the profits of business net of
management salary – loan agreement was not in writing
Held: s.5 applies whether or not K is in writing
Canadian Commercial Bank
 Bank in financial difficulties so loan arrangement was made whereby lenders got a right
to share of the profits (only until the principal of the loan was paid in full)
 Held:
o s.4(c)(iv) does not apply in situations where payment out of profits was for just
repayment of principal plus interest
o Instead, falls within s.4(c)(i) as the repayment of a liquidated amount out of a
share of the profits
o S.5 did not apply to s.4(c)(i) since it refers to a “contract” of the type mentioned
in s.4 and s.4(c)(i) does not refer to a “contract”
Suckloff v. Rushforth
 Facts: Loan was provided under agreement for repayment as a share of profits, but later
the lender obtained a security interest in part of the loan - Upon bankruptcy, other
creditors argued that lender’s claim should be subordinated according to s.5
 Held: s. 5 does NOT apply to security interests

Most provinces now have a common registration system for security interests under
personal property security legislation.
o Allows a person considering advancing credit to check security interests granted
by the potential debtor
o Reliance on availability of assets subject to registered security interests would
arguably not be reasonable since the existence of these security interests can be
checked in the registry at low cost.
Retirement of Partners


S.19(2) a partner who retires from a firm does not cease to be liable for partnership
debts/obligations incurred before retirement
o A retiring partner can also be liable for debts of partnership arising after
retirement due to third party reliance (unaware partner retired)
S.39 and 84(b)
o S.39(1) – person dealing with firm after retirement of partner can treat all
“apparent” members of the pre-retirement firm as partners until they have
notice of the change
 “Apparent” partner = notoriety of the person as a partner in a particular
town or region, use of a persons name on notepaper, letterhead, or on
sign outside office, can be due to the particular third parties dealings
with the firm (not what was apparent to whole world/community in
general) (Tower Cabinet v. Ingram & Dominion Sugar v. Warrell)
27
o S.39(2) – for persons who have not had prior dealings with the firm the notice
can be effected by way of a notice in the Gazette
 Has been held that persons who have had prior dealings must be given
“actual” notice (Tower Cabinet v. Ingram)
 Notice in the registry is notice to persons who have not had prior
dealings with firm (suggests something more is needed if persons with
prior dealings)(Dominion Sugar v. Warrell)
o S.39(3) – retired partner will not be liable to those who can be shown not to
have known that the retired partner was a partner
o S.84(b) – if one fails to file a new registration statement on the retirement of a
partner that person will continue to be considered to be a partner
POLICY Reasons for SS. 39 and 84(b)
 Reliance of third party:
o Reliance not reasonable if the persons who dealt with the firm could be shown
not to have known the retiring partner to have been a partner
 Least cost avoidance – cheaper for retiring partner to notify persons who have had
prior dealings with the firm than to require those persons to check the Gazette and
Registry every time they wish to deal
STEPS that can be taken when a partner retires:
 S.39 and s.84(b) allow partner to leave partnership without being liable for subsequent
liabilities, but the onus is one the retiring partner to take steps to protect against
reliance
 S.39 and s.84(b) set out means that retiring partner can satisfy onus:
i. Provide actual notice to all those with whom firm has had prior dealings
 Look to accounts payable
 Look to limitation periods to determine how far to go back
ii. Put notice or retirement in the Gazette
iii. File revised registration statement removing name of retired partner from list of
partners
 Providing actual notice to all persons who had prior dealings with firm may create
practical difficulties - may not be possible to identify them all
 Look through firms current creditors
 Check through accounts payable in previous years
 If it has been several years since person dealt with firm, it is arguably reasonable
that they should at least check the registry again to determine who is still a
partner
 S.19(3) allows for an agreement between a retiring partner, the remaining partners,
and creditors relieving the retiring partner from liability
 Have the partnership agreement provide right to a retiring partner to require that
specific steps be taken to reduce risk of continuing liability of retiring partner
-
Why Use this Form of Association
Partnerships are not tax payers - flow through taxation
28
-
-
Corporate form has often not been available for several professional businesses
- Easy to form
- Flexible – very little that is mandatory
- Corporate form has constraints
Disadvantage: partners are personally liable for K’s entered into in respect of the
partnership and for torts
LIMITED PARTNERSHIP
A limited partnership (LP) consists of one or more LP’s and one or more general partners
(s.50). Liability of limited partners is limited to amount the limited partner contributes or
agreed contributions (that you have not actually invested) (ss.57&63). Liability of general
partner is not limited (personally liable). A limited partner is not to contribute services to
the partnership (s.55) or take part in the management of the partnership (s.64).
LP’s allow some of the partners (investors) to have limited liability but only if the
partnership does business under a name that adds the works “Limited Partnership” as a
suffix to name. The “cautionary suffix” is intended to signal to third parties that some
partners have limited liability.
Describe a limited partnership in terms of the types of partners, the nature of the limitation
on the liability of limited partners and the extent of the liability of the general partner(s).
Set out and discuss seven features of the limited partnership provisions that may serve to
protect the interests of third party creditors.
Characteristics of LP’s that may serve to protect 3rd Parties
Provisions of the Act (Part III)
1. S.53 – calls for cautionary suffix by requiring name of LP must end with “Limited
Partnership”
2. S.53 – requires, subject to certain exceptions, that name of a limited partner must not
appear in the name of the LP
 If it does, and does not fall within an exception, that limited partner will no
longer have limited liability
3. S.55 – provides that a LP is not to contribute services to the partnership business
4. S.64 – a LP is not to take part in the management of the partnership – if they do, they
are treated as general partners
5. S.59 – no return of capital to partners is permitted if after the return of capital the
partnership would be insolvent
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
those funds may be the only recourse for 3rd party creditors – “No abandoning
ship” provisions
6. S.51 – Certificate must state who partners are
 Not a limited partnership unless registered – it will remain a general partnership
 allows 3rd parties to assess creditworthiness of general partners)
7. S.51 – Certificate must state the contribution provided, or to be provided, by LP’s
 might assist 3rd party creditors in determining the amount of capital in the firm
(although capital at the onset of business may tell us nothing about the net
capital of the business now)
Discuss the problem that may arise if a limited partner is also an officer of a corporate
general partner noting relevant case law.
Cases on Taking Part in the Management of the Business
A common structure for a LP is to have a corporation as the general partner. Promoters of
the business can be made officers of the corporation and participate in management of the
business. These promoters also often want to be investors and want to have limited
liability and invest as limited partners (who cannot have part in management).
The problem is whether the limited partners who are also officers in the general partner
corporation (managers) are liable as general partners on basis they have taken part in
management.
Haughton Graphic Ltd. v. Zivot (1986)
Held: if a limited partner takes part in the control of the business he is liable as a general
partner even though the 3rd party did not rely on him as being personally liable (statute
says nothing about reliance)
Nordile Holdings Ltd. v. Breckenridge and Rebiffe (1992)
Held: The corporate partner took part in the management in their capacities as officers and
directors of the corporation, but not in their capacities as limited partners (therefore not
liable under s.64)
- Key Points:
o If you are limited partners and doing what Haughton did – there is a chance of
being liable  but can K out of it like Nordile
o Next time this is litigated, parties will not agree in facts that person was acting as
officer of general corp. (likely what persuaded court)
**Be nervous relying on this case**
Relationships among the partners
The separation of ownership and control:
- The limited partners are usually the major contributors of the capital and in that sense
are sometimes referred to as “owners” – but the limited partners do not “control” the
business
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-
-
-
-
-
-
This puts the LP’s at the mercy of the managers of the business
Partnership acts tend not to have (mandatory) provisions that protect the limited
partners from being taken advantage of by managers
o However they do provide a relatively flexible form of association in terms of
organizational structures that might be set up in partnership agmts
o Partnership agreements can provide protections
S.56 – provides that general partners cannot do an act that makes it impossible to carry
on the partnership business or consent to a judgment against the partnership (varying
this requires consent of all LP’s)
o (d) provides that a general partner has no authority to admit a person as a
general partner or a limited partner unless the right to do so had been given in
the certificate
S.58(1)(c) – limited partner can seek court order for dissolution and winding up if the
partnership (general partners right is set out in s.38) – one situation in which court can
order dissolution is “whenever circumstances have arisen that, in the opinion of the
court, render it just and equitable that the partnership be dissolved”
Right to inspect books and right to disclosure (s.58(1)(a)(b))
 General partner’s right to inspect books is provided in s.27(i) and is prefaced by
the words “subject to any agreement express or implied between the partners…”
IF LP interests sold to members of investing public, the general partner would be
subject to obligation under Securities Act to provide certain forms of disclosure on the
sale of the LP interests and on an ongoing basis
S.66 – a limited partner must not assign interest in LP unless: (a) all LP’s and general
partners agree or partnership agmt permits it; and (b) assignment is made in
accordance with terms of consent (default rule)
 If permitted by partnership agreement s.51(4)(b) provides that the certificate must
set out provisions concerning assignment rights
S.51(4)(c) – right to admit additional limited partners must be set out in the limited
partnership certificate
S.65 – additional limited partner is not to be admitted except in accordance with the
partnership agreement and register must be kept pursuant to s.54(2)
Share 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
Reasons for using the limited partnership form of association
Taxation – any losses can be passed on to the limited partners and they can make use of
these losses against their other sources of income
Limited liability (although there are other ways of creating limited liability for investors
– incorporation)
- Greater flexibility
LIMITED LIABILITY PARTNERSHIP
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Explain the origins of and reasons for the creation of the limited liability partnership form
of association.
Background
- Many professions do not have access to limited liability forms of business association
because the they are either expressly or impliedly restricted from carrying on through a
corporation or professional partner needs to take part in the business (thus taking
away their limited liability)
- Increasing scope of liability and increasingly large awards created an insurance crisis
that made it difficult to obtain adequate insurance coverage
The Structure of LLP’s in Ontario and Alberta
- Partial Liability Shield (only protects against negligent/wrongful acts)
o In Ontario, only available for professionals
o Ontario LLP Act provides that partners are not liable for the malpractice of
fellow partners/employees unless they were directly supervising the activity;
not liable to indemnify fellow partners; otherwise partners are personally liable
for debts of the firm
- Business Name Registration
o Ontario LLP Act provides that LLP is not allowed to carry on business unless the
registered business name contains the words “Limited Liability Partnership”,
“LLP”, or French equivalents
LLP’s in BC
- January 2005 BC passed legislation allowing for LLP’s. the Partnership Amendment Act
added part 6 to the PA (sections 94-129)
- Not limited to professional partnerships (subject to Act governing particular
professions – ie. Law Society of BC allows for LLP’s)
- Full Shield Liability
o S.104(1) – provides that a partner in a LLP is not personally liable for a
partnership obligation merely because the person is a partner
 Gives partners limited liability on K debts such as bank loan or trade
credit (subject to personal guarantee)
o S.104(2)
 (a) a partner is not relieved of liability in a LLP for his own negligent or
wrongful act or omission; or
 (b) negligent act or omission of a fellow partner
 (i) when he knew of; or
 (ii) did not take reasonable actions to prevent it
- Full Shield Liability Protection Subject to Partnership Agreement
o S.104 allows the partners to opt out of the full shield liability protection in the
partnership agreement (ex. for tax reasons - below) or by personally
guaranteeing a loan
 Amount of losses you can claim is limited to extent of investment – this is
why the act allows for one to opt of full shield liability and become only
partially shielded
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-
-
Limited Liability Partnership vs. Limited Partnership
o The full shield liability protection in a LLP give the partners the equivalent
protection from liability that limited partners have in a LP but with the
advantage that the partners in a LLP can take part in the management of the
partnership without becoming personally liable for debts
Registration Necessary
o LLP does not come into effect unless it is registered
o S.94 – LLP defined as “a partnership registered…”
Cautionary Suffix
o S.100 – provides that a LLP must have the words “limited liability partnership”
or “LLP” as part of its business name (or French equivalent)
Registration of Extra-Provincial or Foreign LLP’s
o S.114 – provides that the partners of an extra-provincial or foreign LLP that
carries on business in BC and is not registered in BC will be liable as if they were
partners in a general partnership
CORPORATIONS
I.
THE NATURE OF THE CORPORATION: ESSENTIAL CHARACTERISTICS
Describe the general structure of a corporation noting the characteristics of the equity
interests of the corporation and the basic management structure of the corporation.
General Structure of a Corporation
- General features regardless how big/small corporation is
- Equity interests divided into shares and holders are referred to as shareholders
- 3 basic rights must be provided somewhere in the various sets of share rights (do not
need to all be assigned to same set of shares):
 voting rights – right to elect directors who will manage, or supervise, the mgmt of
the corp.
 dividend rights – right to receive distributions out of the profits of the corporation
when the directors choose to provide such a distribution by declaring a dividend
 liquidation right – right to receive what remains when the assets of the corporation
are sold and the liabilities of the corp are paid off
- Management Structure of corp includes:
 Board of director(s)(could be just one director) (elected by shareholder(s) – could
be just one) who appoint officers to manage the day-to-day operations of the corp
 Officers (may be given titles such as president, CEO, vice-president, secretary,
treasurer, etc.) may engage others to assist in carrying out managerial tasks
 Directors are similar to agents – but not legally considered agents (they are the
directing mind)
There are 3 key features which distinguish a corporation from partnership and SP:
1. Limited liability – liability of the shareholders is limited to amount they invested **
2. Separate personality – treated as separate legal entity so can own property, enter
into K’s and commit torts and crimes
33
3. Perpetual existence – does not come to an end just b/c a shareholder has died or
has sold shares to another person
II.
THE BENEFITS OF LIMITED LIABILITY
Identify and explain the possible benefits of limited liability.
The Benefits of LL
1. Valuation
Costs
What is cost to value
investment in a
partnership (usually
look at cash flow &
risk)?
2. Monitoring
Costs
3.Diversification
Don’t put all your eggs
in one basket
4.Liquidity
refers to the ease with
which an investment
can be shifted to
another or withdrawn
for some other use
Unlimited Liability
Need to Check
-earning capacity (future cash
flows) and risk
-wealth of fellow investors
** Because partners are
personally liable – if fellow
partners have no wealth, you will
be paying full amount
Need to control against
-managers putting wealth at risk
-changes in wealth of fellow
investors:
-due to sales of their
investment
-due to changes in their
personal assets
Each investment carries risk of
loss of all personal wealth therefore keep number of
investments to a minimum
lack of liquidity due to:
-high costs of assessing value
-controls on transfer of shares –
restrictions on selling etc.
Limited Liability
Need to check
-earning capacity (future cash
flows) and risk
(but not wealth of fellow
investors)
-less need to control managers
since smaller potential loss
-don't need to monitor wealth of
others or control their exit from
the firm
-potential for control block of
investment to monitor
management
-increased number of investments
doesn't increase risk since
personal wealth is not exposed
with each investment
**reduces risk for investors,
thereby reducing compensation
they demand and reducing prices
business must charge (benefit to
society)
provides liquidity since:
-lowers cost of valuation
information
-less need for control over other
investors selling their investment
**investors will demand
compensation for a lack of
liquidity and to provide this costs
will have to be raised – increased
liquidity reduces societies costs
34
5. Optimal
Investment
Decisions
managers may not make highest
value investment since must take
account of diversifiable risk to
which investors exposed
6. Market Price
Impounding
Information
no single price since each
investment must be valued
separately (see 1 above)
Economies of Scale
- Less likely to have funds to
increase size of production to
achieve economies of scale
investors can diversify risk and
this allows managers to ignore
diversifiable risk in investment
decision and make highest value
investment
single price for units of
investment - price reflects just
estimate of future cash flow and
risk (see 1 above)
-thus price impounds important
information on value of firm
-per unit cost of providing goods,
etc. may decrease as the size if the
number of units produced
increases.
-Increasing the size of production
requires capital – LL tends to
favor greater infusions of capital
than UL
Explain why the costs of an unlimited liability investment probably increase with an
increase in the number of investors
Valuation costs and monitoring costs depend on the number of unlimited liability
investors: the greater the number of investors, the greater the costs. In a partnership with
unlimited liability, partners must determine the wealth of fellow investors because
partners are personally liable – if a fellow partner has no wealth, you will be paying full
amount. Monitoring costs also increase with increased investors in a UL business
association because there is a need to control against managers putting wealth at risk,
changes in wealth of fellow investors due to sales of their investment or due to changes in
their personal assets.
III.
HISTORY OF THE CORPORATION IN ENGLAND AND CANADA
Provide a summary of the various ways in which a corporation can be formed in Canada
noting as well, by giving examples, the existence of several different general statutes of
incorporation.
Three ways in which corporations might be formed:
1. Crown Charter –
 Separate legal entity if created by Crown Charter
 Almost never happens anymore
2. Special Statutes of Incorporation – legislature would pass statute stating “an act to
incorporate ABC company…”
 Has nothing to do with BCA or CBCA
3. General Statute of Incorporation – relatively recent (150 yrs) – like Canada Business
Incorporation Act (don’t need to get parliament to pass specific statute for each
corporation)
 Federal: CBCA, Canada Corporations Act, Bank Act, Insurance Companies Act, Trust
and Loan Companies Act
 BC: BCA, Society Act, Cooperative Association Act, Financial Insitutions Act
35
 As a lawyer the first thing you should do when dealing with a corporation (or company)
is to find out how it was incorporated – it determines what statute governs the internal
affairs of the company
Three Types of General Statutes of Incorporation
1. Memorandum of Association
 English company law statute approach
 Memorandum of association as a K among the members
 Incorp as of right by filing the required docs (the MOA and AOI)
 MOA a simple doc showing original subscribers of the shares, authorized capital
2. Letters Patent
 Early Canadian approach used in the early federal statutes, Ontario, Alberta, PEI
 Based on Crown Charter concept – grant of letters patent was an exercise of Crown
prerogative – therefore incorp (grant of letters patent) not as of right but by
permission only
 Tended to be a more detailed document with more mandatory terms
3. Articles of Incorporation
 Modern style used in most Canadian jurisdictions (Alta, Sask, Man, Que, NB, NFLD,
NWT, Yukon, Nunavut, and in the federal CBCA)
 Modeled on the US corporate statutes (primarily NY and Cal)
 Articles of incorp is relatively simple doc – contains elements of memorandum of
association plus
 Incorp as of right on filing of required documents
 In BC it is the MOA style
 What is the Dickerson Committee?
 In the early 1970s the federal government appointed a committee (the Dickerson
Committee) to examine corporate law.
 The Dickerson Committee produced a draft act that was largely followed in the
enactment of the Canada Business Corporations Act (the “CBCA”) by Parliament in
1975.
 Federal government conducted another review of corporate legislation in the 1990s
 Concluded that the CBCA continued to be a fairly modern and effective corporate
statute – several amendments were made but the fundamental structure of the
legislation remained the same.
IV.
THE CONSTITUTIONAL POSITION
Describe the scope of the power to incorporate companies in each jurisdiction.
Note the basis for federal and provincial powers to incorporate companies.
The Power to Incorporate
Both federal (POGG) and provincial (s.92(11)) governments have power to incorporate
companies.
BASIS FOR PROVINCIAL POWER
36


s.92(11) - provinces can make laws "in relation to" ..."The Incorporation of Companies
with Provincial Objects"
Prov. Gov. can only make laws for incorporation of companies with “provincial objects”
Scope of Provincial Power:
 Province can confer powers to carry on bus within province and outside province
(anywhere in the world)
 Cannot confer on a company the right to operate in another jurisdiction (that is up to
the other jurisdiction)
BASIS FOR FEDERAL POWER
 s.91 - federal government can make laws "in relation to all Matters not coming within
the Classes of Subjects... assigned exclusively to the Legislatures of the Provinces"
 Residual power (POGG) to make laws for incorp of companies with objects other than
“provincial objects”
Scope of Federal Power:
 Since the province can not incorporate a company with the right to operate elsewhere
in the country besides the province the federal residual power must be the power to
incorporate companies with the right to operate throughout Canada
 Cases have put limits on provincial legislation that prevent federally incorporated
companies from carrying on business in a province
 HOWEVER, federal companies are subject to provincial laws as long as those laws are
not designed to just prevent federal companies from operating in the province
CASE
Citizens Insurance Co v. Parsons (1881)
John Deere Plow v. Wharton/Duck (1914)
Great West Saddlery v. The King (1921)
Colonial Building and Investment Association
(1883)
AG Can v. AG Man (1929)
HELD
Fed gov had a broader power (not just
banking) to incorporate companies in
relation to all matters not coming within the
classes of subjects assigned to the provinces.
A federally incorporated company had the
power and the right to operate throughout
the country (a province cannot prevent a fed
incorporated comp from carrying on
business in the province)
Legislation prohibiting a company from
maintaining an action in the province unless
it had obtained a licence to carry on
business in the province could not be
applied to a federal company
Not necessary for validity of a federal
incorporation that the company carry on
business in more than one province
Highlighted the potentially wide ranging
consequences of the broad power of feds in
John Deere – if a otherwise valid prov leg
prohibited a type of bus, could leg be
avoided by incorporating under fed leg?
RETRENCHMENT ON POTENTIAL SCOPE OF FEDERAL POWER
Potential breadth of John Deere Plow reigned in by series of cases:
Lymburn v. Mayland (1932)
Alberta statute could be applied to a fed
37
Great West Saddlery (1921)
(followed in Canadian Indemnity Co.)
Canadian Indemnity Co. (1977)
incorporated company (statute would not
prevent the fed company from carrying on
bus in the prov)
Suggested that a fed comp incorporated for
purpose of holding land would be unable to
successfully attack prov leg that prohibited
corporation, wherever incorporated, from
owning land
The prov can enact leg to stop fed insurance
comps from operating in the prov as long as
they don’t discriminate against them
(blanket prohibition against all, other than
ICBC)
Reconciling John Deere and Canadian Indemnity – might be said that the leg in Indemnity did
not prevent federally incorp companies from carrying on bus in the province. It prevented
all companies from carrying on a particular type of business
Multiple Access v. McCutcheon (1982)
Prov leg identical to leg in the Act under
which fed company was incorporated could
still be applied to the fed company (no
conflict)
Re Constitution Act (1991)
Provincial leg requiring a fed comp to
register its corporate name has been held to
be valid
Re Royaltie Oil Co. (1931)
Prov leg imposing penalties for failure to
comply with requirement to obtain extraprov licence before commencing business in
prov can validly be applied to a fed incorp
company
 An Ontario incorporated company can be refused from carrying on business in BC – but
BC can not refuse a federally incorped company from carrying on business (although
they can regulate – Indemnity)
Note the implications of the constitutional position.
IMPLICATIONS OF THE CONSTITUTIONAL POSITION
 Both provinces and fed gov can pass valid leg for the incorp of companies

A corporation incorped under a prov statute can carry on bus throughout the rest of the
country as long as other provinces permit it

A fed incorped company can operate throughout the country or in one or a number of
provinces

One can choose to incorp under fed or prov statute and still practically carry on bus
anywhere (would this choice raise competition for incorporation (fees)?)

Fed incorped companies have to obtain at least one extra-prov registration in order to
carry on bus in Canada (adds to the cost of fed incorp)
38

Federally incorporated company has a quasi name protection in that it can not be
prevented from operating in another province just because there is already a company
incorporated there with the same or a confusingly similar name – however, the
federally incorporated company can still be liable for passing off if it carries on business
in that province where the pre-existing provincial company has carried on business
under that name there before.
 Bottom Line: You can incorporate anywhere! BC, Federal, Delaware
V.
THE INCORPORATION PROCESS
Steps in the Incorporation Process (Under the CBCA)
Who may incorporate a corporation under the CBCA?
 S. 5 (1) One or more individuals (or bodies corporate – an existing corporation) not one
of whom:
(a) is less than eighteen years of age,
(b) is of unsound mind and has been so found by a court in Canada or elsewhere, or
(c) has the status of bankrupt,
may incorporate a corporation.



Summary  One + individuals or bodies corporate may incorporate a corporation
under the CBCA by:
o Filing articles of incorporation (ss.5 and 6 and Form 1);
o Filing notice of the registered office (ss.7, 19, and Form 3);
o Filing a notice of directors (ss.7, 106, Form 6);
o Paying the prescribed fee (Reg. s. 97 and Schedule 5); and
o If the corporation is to have a name other than a numbered name, filing a NUANS
Name Status Report
** NOTE: Capital “D” Director is the administrator of the CBCA – lower case “d” director
refers to directors of the corporation
Corporation has to have a name that is not the same as or confusingly similar to the
name of another (If not a numbered company, corporation must file a NUANS name
search report – contains list of names registered in Canada)
The Issuance of a Certificate of Incorporation
 Ss. 8 and 12(1) – on receipt of required docs and upon their assessment, Director shall
issue a cert
o “Shall” – once requirements satisfied, the incorporators have a right to cert of
incorp
 S.9 – corporation comes into existence on date shown in the certificate of incorp
Articles (This says what company cannot do – if any)
 S.6 – Articles of incorporation must follow the form set out in this section (i-viii)
39

Articles are the primary constitutional doc of the corp – difficult to change provisions in
the articles, but it can normally be amended by the supermajority vote of shareholders
Post-Incorporation Steps Under the CBCA
 S.104 – after the issue of the certificate of incorp, a meeting of the directors shall be held
at which the director may (i-vii)
o (i) make by-laws – normally at the first meeting the directors will pass a set of
general by-laws that deal with matter such as:
 procedure at directors’ meetings;
 Notice for and procedures with respect to shareholder meetings;
 Procedures for the allotment and issuance of shares;
 Procedures for the declaration and payment of dividends; and
 Procedures for the appointment of officers
 *By-laws are another important constitutional doc of the corp governing
internal procedures
o (ii) adopting a form of share cert (Security certificates include certificates for
shares and debentures)
o (iii) allotting shares to persons they intend to have become shareholders and
issue shares to them
o (iv) appointing persons as designated officers and may delegate particular tasks
o (v) appoint an auditor to hold office until the first meeting of shareholders
o (vi) as to the bank with which the corp will deal and to indicate who will have
signing authority
o (vii) transact any other business
Corporate Names and the Name Approval Process
 Names may be important b/c of value of consumer recognition (goodwill)
 Complex web of law dealing with commercial use of names (fed trade name and trade
mark law, prov business name laws, and fed and prov registration of corp names
law…and CL dealing with appropriation (taking without permission for use) of names
 S.12(1) – Director has power to refuse prohibited or deceptively misdescriptive names
o S.12(2) or order a change of name of an existing corporation
 Certain names are prohibited
o Prohibited words: obscene, suggests corp carries on bus under gov approval
o Too general: just describes quality or characteristic of goods/services (running
shoe), primarily the name of an individual (Jim Smith), primarily a geographic
name (Canada)
o Confusion with other names (reg.18) – prohibited if it is confusing in sense that
it may creat confusion with other names
o Misdescriptive names (reg. 25) – protecting public from a deceptive corp name
 Essential Elements of Most Corporate names = descriptive part, distinctive part, and
suffix (Kwitfit Shoemaker Ltd.)
 You can reserve a name for up to 90 days ahead under CBCA s.11 – you can also use a
numbered name and then later apply for a name change
 DBA (doing business as) names – a corporation that uses a business name other than its
own corporate name must register that business name (s.88)
40
Why Incorporate?
Advantage of Incorporation
1. A corp provides LL for its shareholders
as against the J&S liability of partners
Critical Evaluation of Advantage
 May not provide much benefit where SP
or partners have to provide a personal
guarantee (to bank, lessor, major suppliers)
 Protection against tort claimants may be
qualified by courts “piercing the corporate
veil”; if the person acting on behalf of the
corporation commits the tort, they are
personally liable without the need to PCV
2. A corp provides the perpetual succession  May not provide a significant advantage
of a body corporate contrasting with
over SP or partnership – assets in SP would
indefinite tenure of partnerships
go to estate and business could be carried
on
3. A corporation allows for ease of transfer
of shares as against difficulty and
inconvenience of terminating
partnerships to permit changes in
personnel
 No significant difference in how freely
one might transfer shares in a closely-held
corporation and how freely one might
transfer partnership interests in a
partnership
 Closely held corporations will likely have
restrictions on share transfers – this is often
due to fact that shareholders will have
substantial involvement in business and
don’t want just anybody buying the shares;
also due to securities regulations
4. Individual partners may bind the firm
but a shareholder alone cannot obligate
the body corporate
 However, in a closely held corp the indiv
shareholders are usually officers of the corp
and authority is often delegated to them as
agents to bind the corp
 Corp will be vicariously liable for torts
committed by its officers, agents, and
employees – in a closely-held corp where
shareholders are officers, agents, or
employees there will be very little difference
with partnership liability
5. A shareholder can contract with or sue a
body corporate; a partner cannot sue or
K with his firm
 Ways of achieving same/similar result in
partnership – partner can K with other
partners separate from partnership
agreement
6. Facilities for a body corporate to secure
 Corporation can sell shares or issue
41
additional capital are not possessed by a
partnership
7. Tax advantages may accrue to the sole
proprietor or small partnership which
converts to the corporate form
debenture – you don’t have to be a corp
entity to issue debentures; partnership
cannot sell shares but they can take on
another partner to get additional capital
which accomplishes same ends (more
money)
 Side note: a debenture is a doc that
provides evidence of indebtedness
 Forming corporation that operates as
small business does come with a reduced
tax rate on first $400,000. However, double
taxation (corp is taxed on income and then
same income is taxed again in hands of
shareholders) and flow through losses
(passing losses through investors to be
applied against other sources of income) are
not possible with a corp (just SP and
Partnership)
PLUS – Costs of Incorporation do not arise with SP or partnership
 Fee for incorporation itself
 Legal fees
 Fees associated with filing annual reports
The Choice Between the CBCA and the BCBCA
 Reasons for preferring CBCA:
o Name protection
 unlike provincial registration John Deere Plow – it cannot refuse
registration just based on similar name
 Can still be sued for passing off
o No restriction on maintaining an action (which can be a concern re uncertainty
with respect to “carrying on business”; and
o Lawyers and shareholders in other provinces are familiar with it
 Reasons for preferring BCBCA:
o Lawyers tend to be more familiar with it;
o It is easier to deal with Victoria than with Ottawa (get to know ppl, time change);
o It is cheaper (CBCA has one more extra-prov registration than incorporation)
Reincorporation
Define a “reincorporation” and give an example of how a reincorporation can be effected
other than by way of continuance.
42


A corp that has been incorporated in one jurisdiction may decide to become incorped
under a different statute in another jurisdiction – process of changing the statute of
incorp referred to as “reincorporation”
Example of how a reincorporation can be effected other than by way of continuance:
 Incorporate a new corporation under the statute in the destination jurisdiction, then
have the new corporation issue shares to the shareholders of the original
jurisdiction corporation in exchange for their shares of the original jurisdiction corp.
 Once done, the new jurisdiction corp will own all the shares of the original
jurisdiction corp – the original jurisdiction corp can then be wound up with
the assets of the original jurisdiction corp transferred to the new juris corp
Continuance
Note the steps in the process of continuance and the reasons for them.
 “Continuance” is a more convenient way of reincorporating
 Procedure for continuance out of CBCA (export continuance):
i. obtain a resolution from the shareholders permitting the continuance (CBCA
s.188(1), (5));
ii. obtain approval from the director (CBCA s.188(1));
iii. register in the other jurisdiction making amendments to the incorporation docs
to make them conform to the requirements of the jurisdiction in which the
company is being incorporated (note that one still have to satisfy the name
requirements for registration)
 Procedure for a continuance into CBCA (import continuance) usually involves
similar procedure since statute under which it is incorporated will typically require
a resolution from shareholders and approval from registrar who administers that
statute
 Continuance under statute other than CBCA may result in a significant change in the
rights of shareholders (since rights might not be same under other statute)
Extra-Provincial Registration
Explain the main purpose behind foreign corporation (or extra-provincial corporation)
registration.
 Common for jurisdictions around the world to require corporations that are carrying on
business in the jurisdiction (but are not incorporated in that jurisdiction) to register 
referred to as “foreign corporation registration”
 In Canada this is referred to as “extra-provincial registration”
o Requirement includes a requirement to have a registered attorney in the province who
can receive service of legal docs in prov (one of the essential steps in beginning a civil
law suit)
 MAIN PURPOSE behind registration requirement is to provide a means through
which a foreign corporation carrying on business in the jurisdiction can be
served with legal documents within the jurisdiction – without this a foreign
43

corporation might well be able to sue persons it dealt with in the jurisdiction
while avoiding suits by persons within the jurisdiction
Registration requirement enforced through various means including fines ($100/day)
against the foreign corporation and/or its agents, a prohibition against the foreign corp
maintaining a suit in the jurisdiction and sometimes a prohibition against the foreign
corp holding an interest in land in the jurisdiction
Extra provincial registration under the BC Business Corporations Act
 S.375 – foreign entities must register as an extra prov company within two months of
beginning to carry on business in BC
 Foreign entity = a foreign corporation or a LL company
 Foreign Corporation:
o Foreign corporation = s.1(1) a corporation that is not a “company”
o Company = s.1(1) a company incorporated under the BC BCA or a
prior Companies Act
o Bottom line: a corporation not incorporated in BC
 Limited Liability Companies
o Idea of a LL company is to allow investors to carry on business
through a corporate entity but still pass through any losses to the
investors for tax purposes
o LL company = a business entity that was organized in a
jurisdiction other than BC and that is recognized a s a legal entity
in the jurisdiction in which it was organized and that is not a corp,
partnership or a LP
 Carry on Business = s.375(2) – a foreign entity is deemed to carry on business
in BC if:
 its name, or any name under which it carries on business is listed in a
telephone directory for any part of BC together with an address or
telephone number
 announced in any advertisement (giving address or telephone number in
BC)
 if it has an agent resident in BC
 if it has a warehouse, office, or place of business in BC
 Or otherwise (for courts’ discretion)
o Said to be a question of the degree of presence of the foreign entity
in the province
 Registration Requirements
 Reserving of the name of the foreign entity
 Filing of a registration statement
 Appointment of one or more attorneys
 S.386 – extra-prov companies must have one or more attorneys who can
be either an individual or a company
 S.388 – each attorney is deemed to be authorized to accept service of
process on behalf of the extra prov company in each legal proceeding by
or against it in BC and to recieve notices to the company
44
VI.
LEGAL STATUS OF CORPORATIONS
 Examining the separate legal personality characteristic in more detail
Legal Status of the Company/Corporation
A company is a separate legal entity (Salomon v. Salomon)
Set out some implications of the legal nature of the corporation.
Some Implications of the legal nature of companies/corporations
 A shareholder can be a (secured) creditor of the corporation (Salomon)
 Shareholder who is also a creditor can rank equally with other creditors for the
amount of the debt or even ahead of other creditors to the extent of any security
held for the debt
 A shareholder can be a director, and officer and/or an employee of the corporation (Lee
v. Lee’s Air Farming Ltd) unlike in a partnership where a partner cannot be an employee
of the partnership/K with themselves (re Thorne)
 The corporation owns the assets not the shareholders, the shareholders just have
shares which are “bundles of rights” (Macaura v. Northern Assurance)
 However, shareholders can have an insurable interest (Kosmopolous)
 Furthermore, a corporation can go into debt, enter into contracts, be liable in tort, can
sue of be sued, and can also be found guilty of committing a crime
Identify four potential problems the legal nature of the corporation creates.
Potential Problems
 Notion of LL coupled with separate personality of the corporation creates a number of
potential problems:
1. Shareholders becoming creditors when the corporation is insolvent
 May be able to defeat interests of creditors and other 3rd party claims
 Shareholders may be able to put themselves ahead of other creditors by
taking a security interest
2. Company may make payouts to shareholders when it is insolvent
3. A company may enter into K’s with some shareholders that are very unfavorable
to other shareholders or creditors
4. Person might set up a company with very little capital and defeat the interests of
creditors who act in reliance on the presence of some minimum adequate amount
of capital
5. 3rd parties may be deceived into thinking they are dealing with an individual or
partnership business when they are in fact contracting with a corporation that has
a separate personality and in which shareholders have limited liability
6. persons may incorporate a company to avoid personal obligations or restrictions
Salomon v. Salomon & Company, Limited
 Facts: Mr. Salomon sold his SP boot manufacturing company to a company that he had
formed
 Holding
45

 Trial – company was Mr. Salomon’s agent
 CA – company was a trustee
 House of Lords – company was a separate legal entity
Policy Concerns:
 Potential fraud of creditors – House thought likelihood of fraud was small in this
case given apparent value of the business at the time it was sold and fact that
Salomon’s loaned money to business in attempt to keep it going – accepted that
motive was to bring other family members into business
 Could creditors have been deceived? – may not have been aware that business was
now a limited company; may have been deceived by book value of bus if they looked
at books since excessive value was paid for business
Lee v. Lee’s Air Farming Ltd. (New Zealand)
 Remember: in re Thorne Thorne could not be a worker under Worker’s Comp
legislation since he was a partner and thus could not hire himself as a worker on
principle that one cannot K with oneself
 Facts: Lee was the sole shareholder, sole director, president, and only employee of Lee’s
Air Farming Ltd. – died and his wife made a claim for compensation under the worker’s
compensation legislation
 Claim resisted on basis that Lee would not be an employee or worker within
meaning of legislation because he was employing himself
 Held: Lee was not employing himself – company employed him (not same person)
 Implication: company is a separate person that acts through its shareholders
or directors to the extent they have powers to authorize certain acts by
company
Macaura v. Northern Assurance
 Facts: Macaura transferred all assets into a corporation and incorporated and took
shares – signs insurance K’s on timber
 Holding: Macaura could not claim on insurance because he did not have an insurable
interest (he did not own timber, only owner can insure) – only company had insurable
interest (even though he owned all the shares in the corporation)
 Shares are “bundles of rights”
 Implication: The company is the person that has an interest in the assets not the
shareholders
VII.
PRE-INCORPORATION CONTRACTS
Pre-Incorporation Contracts
Often promoters of companies enter into K’s on behalf of proposed corporations in order to
secure the K before the time of incorporation. Normally, the promoter does not have any
intention of being personally liable and sometimes the promoter is not even aware the
46
corporation has not been incorporated (3rd parties often do not know). The promoter who
purports to act on behalf of the corporation for a pre-incorporation K has no authority to
act as an agent for the corporation because the corporation does not exist (not
incorporated).
Explain why, under the common law of agency, a corporation cannot ratify a preincorporation contract.
GENERALLY – a person can ratify a K entered into by another person on his/her behalf if:
a) The other person purported to act on behalf of the person who seeks to ratify;
b) The person who seeks to ratify must have been in existence and ascertainable at
the time the other person purported to act on his/her behalf; and
c) The person who seeks to ratify must have the capacity to do the act both at the
time the other person acted and at the time of ratification
HOWEVER – b) and c) make it impossible for a corporation to ratify a pre-incorporation K –
a corporation that was not in existence when the pre-incorporation K was entered into
does not meet either of these conditions.
THE CL POSITION
 Kelner confirmed that a company cannot ratify a K (or purported K) entered into on its
behalf if company not in existence at time person purported to enter into K on its behalf
Explain and distinguish the “rule of law” and the “rule of construction” approaches
to the liability of promoters for pre-incorporation contracts.
o After Kelner uncertainty existed on whether promoters were automatically liable
(“rule of law” approach – clearly an intended K) or whether the promoter’s
liability depended on whether it was intended that the promoter be a party to
the K (“rule of construction” approach)
 A promoter can be liable on a pre-incorp K but only if it can be said that it was intended
in the circumstances that the promoter be a party to the K (Kelner as interpreted in
Newborne, Black, Wickberg)
Where a claim is made against a promoter on the basis of a breach of warranty of
authority to act for a corporation that subsequently went bankrupt what are the
damages likely to be? Explain why.
 The damages are likely to be nil. If the warranty of the promoter had been true then the
third party would have had a contract with the corporation. Since the corporation is
now bankrupt the third party would have had an action against a bankrupt corporation
and would have gotten nothing even if the third party succeeded in an action against
the corporation.
PROBLEMS WITH THE CL
 Created risk for both promoter and third party that there would be no enforceable K –
risk that reliance on K will be defeated along with potential for an unjust enrichment of
promoters at the expense of third parties or vise versa
47

Creates unnecessary costs – to deal with risk of potentially unenforceable K, both
parties will have to take precautions to ensure that the corporation is in fact
incorporated
How does the CBCA modify the common law position on pre-incorporation contracts?
CBCA S.14 MODIFICATION OF THE CL
 S.14(1) provides that unless K expressly provides otherwise (see.14(4)), a person who
enters into, or purports to enter into a written K in the name of or on behalf of a
corporation before the corp comes into existence, is personally bound by K
 Codification of “rule of construction” approach
 Only applies to written, CL will likely still apply to oral K’s etc.
 “purports to enter into”  S.14(2) provides that a corp can adopt a K after it comes into existence – If adopted the
corp is bound and the person who purported to act on behalf of the corp is not longer
liable (must be adopted within a “reasonable time”)
 Anything they do to indicate they intend to be bound
 S.14(3) allows the court to apportion liability b/w the corp and a person purporting to
act on behalf of the corp
 S.14(4) provides that parties can expressly agree in written K that the person who
enters into the K on behalf of the corp before it came into existence is not bound by the
K or entitled to the benefits of the K
POTENTIAL PROBLEMS WITH S.14
 Constitutional Problem
 Property and civil rights falls to provinces with a federal ancillary power associated
with incorporating companies – does this power allow it to regulate K’s that were
entered into before a CBCA corporation came into existence? Court would probably
uphold s.14 under federal gov’s ancillary power to incorporate companies with
objects broader than prov objects
 “Written Contract” – referred to in s.14
 CL will likely still apply because s.14 only applies to “written contracts” **EXAM**
 Jurisdictional or “Conflict of Law” Problem – was it intended to be governed by BCBCA
or CBCA?
BCBCA (S.20(2))
 In BC it could be written or oral and the section would apply
 The promoter is deemed to warrant that the company will come into existence or adopt
the purported K within a reasonable time – if not, promoter liable
 Lays out damages
 Over rules CL s.20(3) – company can adopt K
OTHER WAYS TO ENFORCE PRE-INCORP K’S/HOLD PROMOTERS LIABLE UNDER THE CL:
 Promoter as trustee of a chose in action – promoter would be under a fiduciary
obligation to enforce the K
 Company as assignee – court may be able to treat K as having been assigned to the
company (as opposed to ratification)
48




Restitutionary Principles – although there was now valid K, there was a “quasi-contract”
Infer a second K from a course of dealing – court may look at part performance and
infer another K b/w the 3rd party and corporation
Offer to promoter as agent for the third party to make an offer to the company –
promoter might be viewed as agent of third party with authority to make offer to
corporation on same terms as those involved in the dealing b/w promoter and third
party
Provisional K to become binding on a future event (incorp of the company)
Practical Notes
 IF you are asked to incorp company – warn client that if they go out an act on behalf of
the company and enter in K’s on behalf of company they are personally liable (under
CBCA)
 Not so strong in BC but they could be liable under breach of warranty of authority
 Solution: Incorp immediately under a numbered name and change name later –
however, potential problem that client will still go out and K under the name of the
company they hope to incorp/change name to later
Cases Applying Provisions Equivalent to CBCA s.14
Landmark Inns v. Horeak
Held: Company could not ratify/adopt K,
because there wasn’t one – as soon as they
decided to rent space elsewhere, the K was
repudiated (didn’t apply s.14(3))
VIII.
Bank of NS v. Williams
Held: As long as 3rd party knew they were
dealing with company, you should not
succeed in apportionment
LIABILITY FOR CORPORATE ACTS: PIERCING THE CORPORATE VEIL
Piercing the Corporate Veil
Salomon is often cited for the proposition that a corporation is a separate legal entity.
However, courts have often disregarded the concept to assign liability to individual
shareholders, directors or officers of a corporation, known as piercing the corporate veil.
Where it would be too “flagrantly opposed to justice” to apply Salomon principle
(Kosmopolous), courts are likely to PCV. The situations in which courts will PCV follow no
consistent principle (Kosmopolous). Courts seem most likely to PCV in cases of:
 Gap filling and implied contractual terms (Gilford Motor Company Ltd. v. Horne;
Saskatchewan Economic Development Corp v. Patterson-Boyd Mfg. Corp)
 When a corporation was formed to avoid statutory requirements (ie. Taxes) (British
Merchandise Transport Co. Ltd. v. British Transport Commission)
 Affiliated corporations (Magen v. Terminal Cabs Ltd. and Walkovsky v. Carlton)
 Misrepresentation to avoid LL premiums (Gelhorn Motors Ltd. v. Yee;
Chiang v. Heppner; Tato Enterprises Ltd. v. Rode; Roydent Dental; Wolfe v. Moir)
49
 Non-consensual claimants and incentive costs

Caution: courts rarely pierce the corporate veil and asking the court to do so will
probably be an uphill battle
The basis of POSSIBLE EXCEPTIONS to the Salomon Principle (PCV)
 The corporation is just an agent of the shareholders and the debts incurred by the
corporation are really debts of shareholders as principles (TJ in Salomon)
o This concept has been picked up in subsequent cases, referring to the
corporation as the agent, Alter Ego, Puppet, or Instrumentality of the
shareholder (same person/entity), as a “conduit”, Sham or Cloak for the
shareholder
 Courts may refer to the failure of the shareholder(s) to maintain the separate identity of
the corporation (don’t make annual filings, don’t keep minute books, no separate
accounting records) (Salomon)
 Courts may say that they are PCV on the basis that the promoters of the corp used the
corp to engage in “conduct akin to fraud” (Gilford Motors v. Horne)
 Courts appear to be more willing to disregard the corporate entity where the effect of
doing so is to link a parent company with its subsidiary or to link a subsidiary with one
or more other subsidiaries through a parent corp.
o TESTS (Smith, Stone and Knight Ltd.) for determining whether the subsidiary is
an agent of the parent corporation:
 Were the profits treated as profits of the parent company?
 Were the persons conducting the business appointed by the parent?
 Was the parent the head and brain of the trading venture?
 Did the parent govern the trading venture, decide what should be done
and what capital should be embarked on the venture?
 Did the parent make profits by its skill and direction?
 Was the parent in effectual and constant control?
o PROBLEM: All the answers seem to be “Yes” in every parent-subsidiary r/ship,
but the corporate entity of subsidiaries is not disregarded in every case –may be
more going on in these cases.
o Not sufficient to consider the 6 criteria in Smith, Stone and Knight Ltd. (and
ignore the separate legal existence of the subsidiary company – must have
something more (Alberta Gas Ethylene Co. v. MNR)
o Generally, a subsidiary will not be found to be the alter-ego of its parent (even if
6 tests are satisfied) 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 –
Need 6 tests satisfied plus something (conduct akin to fraud)(Gregorio v. Intranscorp)
 Court seems to be more willing to pierce in situations of affiliated companies where you
would be considering the entities as one (PCV) to get at assets of parent company, not
necessarily the assets of shareholders (in essence negating benefits of LL)
 What you are looking for is something appears that they are not treating
company as separate, conduct akin to fraud, affiliated enterprises
50
Articulate possible policy reasons for disregarding the corporate entity in each of the
situations in which courts appear to be more willing to disregard the corporate entity.
Situations in which Courts Appear to be more Inclined to PCV and the Possible Associated
Policy explanations
Gap Filling and Implied Contractual Terms
 Courts may disregard the  Problems could be avoided by a more carefully drafted
corporate entity in a way
non-competition clause (Gilford Motor Company Ltd. v.
that amounts to filling in the Horne)
gaps in K’s
 If the court did not PCV, lawyers would have to write
 Court is essentially saying extensive clauses to cover all possible means to avoid the K
that although parties did not – filling the gaps avoids unnecessary transactions costs in
include a provision in their
the drafting of K’s (Saskatchewan Economic Development
agreement, such a provision Corp v. Patterson-Boyd Mfg. Corp)
would have been put in had
the parties directed their
minds to it
Corporations Formed to Avoid Statutory Requirements
 Corporations may be used as a means of avoiding a
 Addressing all possible ways
statutory requirement or restriction
ppl might avoid restrictions in
 If court PCV in these cases it is arguably engaged in a the legislation is costly and will
form of gap filling
delayed the legislation (British
 Court is effectively saying that if the legislature had
Merchandise Transport Co. Ltd. v.
turned its mind tot the situation, it would surely have
British Transport Commission)
dealt with the matter by putting in a provision that
 Trying to anticipate every way
prevented the use of a corporation to avoid the
in which a corp might be used to
statutory obligation/restriction
avoid all the taxing provisions of
 Tax Avoidance Cases are the most frequent case that the Act may be impossible and
would fit into statutory gap filling category
make the Act more complex
Courts may be more willing
to PCV between affiliated
corporations
 If the business enterprise
is conducted through a form
of association that provides
LL for equity investors and if
Affiliated Corporations
 Policy: the benefits of LL are not lost when the veil is
pierced and a parent comp is held liable (Terminal Cabs) as
opposed to the personal liability that is incurred when the
veil is pierced and an indiv is held liable (Walkovsky)
Misrepresentations
POLICY: if this was allowed to succeed, it would make it
more difficult for persons dealing with bus enterprises to
determine LL (would have to incur additional screening
costs, incur cost of obtaining personal guarantees, charge
51
the persons who choose to
deal with the business
(voluntary/consensual
claimants) are aware of this
they can either refuse to deal
with the bus enterprise or
charge a premium that
reflects any added risk
 Often the case when a bus
carried on by a SP or
partners is transferred to a
corp unbeknownst to
persons who dealt with SP
or partnership
premium without bothering to assess)
 If evidence indicates that P had not been made aware of
the incorporation, the D’s may be held personally liable
(Gelhorn Motors Ltd. v. Yee)
 If the D made himself out to be a SP and name gives no
indication of LL then D may be held personally liable
(Chiang v. Heppner)
 Even if it is unlikely that P’s decision to do business with
D was influenced by type of business association, P might
still have had a reasonable expectation that the business
would have insurance to cover losses due to fire (Chiang v.
Heppner)
 Even though third party P contracted with “corporation”
not in existent (wrong corporate name used on K),
 Persons operating bus
contracting D could be held personally liable (could have
might be inclined to
arguably avoided mistake at least cost (Tato Enterprises Ltd.
misrepresent or mislead
v. Rode)
persons into believing equity  Even if P appears not to have relied or type of business
investors will not have LL to being incorporated, shareholder(s) of company may still be
avoid premiums
personally liable as it would have been difficult for P to
 PCV allows court to
make inquiries since they had failed to register the bus
compensate persons who
name (not complying with legislatio) (Roydent Dental
are misled and creates an
Products Inc. v. Inter-dent Int’l Dental Supply Co. of Canada)
incentive for those
 D may be held personally liable where (even when P
transferring bus assets to
didn’t rely on LL) the corporate name was not used and by
corp entities to inform
not following statutory requirements, took the risk of being
persons who previously
held personally liable (Wolfe v. Moir)
dealt with them
o Nothing in the statute says that the consequence
of not using the cautionary suffix is the
disregarding of the corporate entity.
o If the corporate name had been displayed it is
unlikely Wolfe have made a different decision
about roller-skating.
Non-Consensual Claimants and Incentive Costs
Greater willingness to PCV in  Perfect example of an involuntary claimant would be the
situation were there is a tort victim of a tort committed in the carrying on of the business
claimant, were person had
enterprise
no intention to deal with
 Compensation – the corp entity may be disregarded in
corporation (nonorder to compensate a tort victim (the assets of a corp may
consensual claimant) (Wolfe not be sufficient to fully compensate the victim)
but not in Walkovsky)
 Imposing liability on a deliver bus, for example, for
52
reckless drivers with incentive to deliver quickly injuring
claimants, could create an incentive for manager to take this
risk into account when devising a method for compensating
drivers
A Tort action against director or officer directly, is another way of disregarding the
corporate entity (shareholders are often directors/officers). It will not just be the
corporation that is vicariously liable, the employees/directors/officers will also be directly
liable (Berger v. Willowdale A.M.C.)
POLICY: Could overcome the “deterrence trap” problem and restore the incentive to take
sufficient care – however, this could lead to managers over protecting themselves at
expense of investors – could be controlled by indemnifying directors/officers through
insurance
SAID V. BUTT is cited for the proposition (obiter) that as long as an officer is acting in good
faith within scope of authority, they are not liable for any tort. HOWEVER, this is not what
court said, they emphasized that it was just for tort of inducing breach of K. The court in
MCFADDEN clarified the principle and held that as long as you’re acting bona fide, w/in
scope of employment, in best interests of company, an officer is protected from tort of
inducing breach of K only (not all torts).
SO – basically, you can sue a manger/director/officer/employee directly for all torts except
inducing breach of K. The RATIONALE being that two sets of damages could be recovered
otherwise.
HOWEVER, ADGA limits Said v. Butt exception to cases involving the tort of inducing breach
of K holding that if you want to sue directors/managers/etc. personally, you have to show
some independent tort , that they have done something that wasn’t really w/in scope of
authority but was serving personal interests.
 This is an Ontario case, and not followed everywhere, however it is good to refer to.
IN Rafiki Properties, ADGA was cited. It was a negligent misrepresentation claim, extending
the principle beyond breach of K. However, the court followed a much narrower principle
(like the old principle) and exonerated the employee.
Use of corporate Oppression Action
S.241 CBCA allows court to make an order for relief on the basis that the conduct of the
affairs for the corp has been oppressive or unfairly prejudicial to a “complainant” in the
complainant’s capacity as a security holder, creditor, director, or officer.
 S.241(3) – wide powers for providing relief
53
 Ex. PCM Construction – employee dismissed by corp with no assets – employee was also a
shareholder and was able to make oppression action and court ordered directors to
personally pay damages
STATUTORY PROVISIONS UNDER WHICH SEPARATE CORPORATE PERSONALITY
AVOIDED
CBCA s. 118
 S.118 sets out a number of circumstances in which directors may be found personally
liable
o (1) liable for issuing shares without receiving full payment for them
o (2) liable for purchasing, redeeming or otherwise acquiring shares, paying
commissions for the sale of share, paying dividends, providing financial
assistance to shareholders, etc. or for paying indemnity to a director/officer if
certain tests of insolvency are not satisfied.
Unpaid Wages
 s.119 CBCA overrides any argument that the directors are not liable on the basis that
the employee K’s are with the separate corporate legal entity – directors are J&S liable
to employees for up to 6 months of unpaid wages
 Side note: is this not property and civil rights (provincial concern)? – never
challenged – perhaps an ancillary power of fed gov
 Gillen would take these provisions out
GENERAL THEORY FOR THE DISREGARD OF THE CORPORATE ENTITY




IX.
Avoid costs of transacting around avoidance of obligation – gap filling in K’s by courts
may avoid transactions costs if the parties do not have to anticipate every means of
using a corporation
Avoid costs of gathering information – in cases of misrepresentation, if promoters were
not made liable then the outsiders would have to be much more careful to make sure
they knew exactly who they were dealing with
More likely to PCV in one-person or few shareholder companies
More likely to PCV where it leads to Claim Against LL Parent Co. Rather than
Shareholders (affiliated corporations) – no individual investor will be made personally
liable (benefits of LL would not be lost)
FINANCING
FINANCING
To finance a corporation both equity finance and debt finance (and instruments that
have features of both debt and equity) can be used. Equity interests in for-profit corps
are referred to as shares
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1. SHARES
Describe the nature of a share, the three main rights attached to shares, and the share
certificate requirement and share register requirement.

Shares typically described as being “bundles of rights” (McCaura v. Northern Assurance)
or “bundles interrelated of rights and liabilities” (Sparling)
 A share is not a property right in the assets of the corp

Separate bundles of rights are referred to as classes – the CBCA allows for different
classes of shares with different rights and restrictions (s.6(1)(c)(i); s.24(4))
 Where there is more than one class of shares, the rights and restrictions must be set
out in the articles (s.6(1)(c)(i); s.24(4))
Where there is one class of shares that class will have each of the three rights: voting,
dividend, and rights to proceeds on dissolution (s.24(3))
 Shares are presumed to be equal in all respects unless otherwise indicated (s.24(3))
(Jacobsen v. United Canso) and not much is required to make a sufficient distinction b/w
classes (R v. McClurg)
 Frequently used types of shares are common shares and preferred shares
Share Certificate Requirement
 Each shareholder is entitled to a share certificate upon request. The certificate must
show on its face the rights, restrictions, privileges and conditions on the shares or a
statement of the right of the shareholder to have a copy of the rights, privileges,
restrictions and conditions of the share provided to them on request.

Share Register Requirement
 The corporation is required to maintain a register in which it records the names and
addresses of its shareholders, the number of shares held by each shareholders and the
date and particulars of the issue and transfer of each share. The register must be kept
at the registered office of the corporation or at a separate records office of the
corporation.
Describe:
 The main types of equity securities (common/preferred)
 The rights attached, or that can be attached, to those securities.
COMMON SHARES (ordinary shares) have 3 main rights attached to them:
 right to vote
 right to receive dividends
 right to proceeds on dissolution of corporation
PREFERRED SHARES are “preferred” because they typically have a preference with respect
to some/all right(s):
 Features:
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






Typically do not carry a voting right
Preferred shares will get specified amount in liquidation before any proceeds can be
distributed to common shareholders
 If you don’t say anything more, upon dissolution, after preferred is paid, they
share the remainder with the common shares (McMaster University)
Cumulative vs. non-cumulative – a preferred share is cumulative if any dividend that
is unpaid in any given year accumulates and is to be paid in a subsequent year
 Non-cumulative preferred shares are not common – only when some
controlling shareholder controls preferred shares
 Presumption in favor of cumulative (Webb v. Earl)
Participating vs. non-participating – participation right allows preferred
shareholder to participate in the distribution of dividends beyond the preferred
dividend right – anything left over after distribution of preferred dividends, they get
a share
 Presumption in favor of non-participating – must be written into articles
(International Power)
Convertible/Non-convertible – conversions rights allows shares to be converted
into common shares at a predetermined conversion rate
Retractable/Non-retractable – retraction rights allow the shareholder to sell the
shares back to the company at a predetermined price
Redeemable/Non-redeemable – a companies reserved right to buy back the
preferred shares at a predetermined price (this is b/c the company may want to
refinance)
DIVIDENDS
 S. 43 CBCA allows for 3 forms of dividends:
 Cash – dividends are usually paid in cash
 Dividends in specie – Property (ie. Shares in another company/turkey )
 Stock Dividend – more shares in the same company

The power to issue payment of dividends falls to directors under the residual power to
manage under s.102 CBCA. The power is not explicitly given to directors anywhere in
the act, but is given implicitly, if not given to anyone else, as s.115(3)(d) states that
directors cannot delegate power to declare dividends.
 Dodge v. Ford Motor – not paying a dividend was found to be a breach of the duty to
act in the best interests of the corporation
 Fergusson v. Imax – power to declare dividends must not be oppressive to one or
more shareholders

Once directors have declared a dividend, it becomes a debt of the corporation
(shareholders can sue to be paid the amount of the dividend)
Dividends can only be paid out of profits (ie. Retained earnings of the corporation)
Dividends cannot be declared/paid if the corporation is insolvent at the time or if
payment would make the corp insolvent (CBCA s. 42) – directors can be held personally
liable (s.118(2)(c)) (no abandoning ship)


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

Shareholder receiving such dividends can be ordered to repay the amount to the
directors (s.118(5))
Company will prepare a list of shareholders of record on that date and the dividend will
be paid to “shareholders of record” on that date (CBCA s. 134) – shares traded after the
ex dividend date will not receive the dividend
VOTING
 Directors are elected by a majority of votes cast by shareholders (“Ordinary
resolution”) (s.2(1) CBCA)
 Holders of voting shares have to approve changes to the articles of incorporation
(“special resolution”)
 Typically preferred shares do not carry a voting right – BUT classes of shares that do
not carry a voting right may be given the right in particular circumstances
 Unless articles otherwise provide, each share entitles the holder to one vote s.140(1)

Voting restrictions and equal treatment (**EXAM**):
 Bushell v. Faith – upheld article that allowed director to have 3 votes per share on
any resolution to remove that director (s.109 does not say that the resolution must
be based on one voter per share)
 Jacobsen v. United Canso Oil & Gas – by-law that provided a shareholder could only
vote a max of 1000 shares (no matter how many shares were owned) was not valid
(per. S.24 CBCA) – one could not make a distinction in the number of voters per
share on the basis of characteristics of the particular shareholder who held the
shares
 Bushell and Jacobsen can likely be reconciled on policy reasons – in Bushell the 3
siblings likely all consented to the provision – in Jacobsen it is less likely
shareholders consented to the transaction
o Not a good idea to use Bushell because of Jacobsen and Bowater (Canadian
cases)
 Bowater Canadian Ltd. v. RL Crain Inc. – within a given class the shares must have
equal rights (subject to separate series rights) or all shareholders of a class must be
treated equally
 Poison pill plan – involve the issuance of rights to buy further shares of the issuer to
existing shareholders – allows existing shareholders to acquire shares below market
price (upheld)
ISSUING AND PAYING FOR SHARES
 The directors decide on when to issue shares, who to issue them to, and for what
consideration – subject to articles, by-laws, or unanimous shareholder agreement
(S.25(1)) (s.115(3) – director cannot delegate this power)
 Authorized limit on power of directors to issue shares was common approach in the
past (common now to have a high limit that is for practical purposes, an authorization
for directors to issue as many shares as they want – CBCA also allows for no authorized
limit to be set
Describe the issuance of shares in series and note the purpose for it.
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SERIES OF SHARE
 If it is decided that existing shares should be issued to raise funds, this can normally be
done by the directors (subject to authorized limit) without delay (except for securities
regulation requirements)
 HOWERVER, if different share rights are going to be offered then the directors will have
to go to the shareholders to approve the creation of a new class of shares
 AND the rights for such a class are not set out in the articles so the articles will need
amendment
 TO AVOID the delay of amending articles, directors can be allowed to issue the shares of
a class of shares in “series” (s.27)
 Authority to issue shares of a particular class in series has to be given to directors
when class created – right would have to appear in articles
 Risk that subsequent shareholders of a class will be better treated than the holders
of earlier series of shares of the class – CBCA tries to protect against this by
providing that no series in a class can be given any priority over any other series in
the class with respect to dividends or proceeds on liquidation.
2. CORPORATE DEBT FINANCE
 Corporate debt finance may take form of trade credit or loans
COMMON TYPES
BANK LOANS:
 Two general types:
o Line of Credit – to finance short term fluctuations in a firm’s cash requirements
o Term Loan – provided for longer periods of time and normally involve a fixed
sum to be paid at a later time with interest payments to be made on a regular
basis
 Bank concerned that the borrower not engage in business that are very risky since
could lead to inability of borrow to pay – so bank may restrict businesses borrow can
carry on
 Bank may require that the ratio of liability to total assets be limited to some percentage
(risk management)
 Bank may take security interest (ie. Collateral) over certain assets of the borrower –
borrower doesn’t pay bank can seize the assets
COMMERCIAL PAPER, BONDS, AND DEBENTURES:
 Notes/Commercial Paper – promissory notes which a corporation may sell that
constitutes promises to pay a specified amount of money at a specified time in the
future (usually short time)
o May just be fixed amount, or fixed amount plus interest
 Bonds/Debentures – sold to the public (separate individuals) to produce a large
amount of $
o Usually long periods until maturity
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o Do not generally carry the right to vote – subject to numerous contractual terms,
which are typically set out in an indenture (agreement K).
o
ENFORCEMENT
 There can be problems with enforcement of terms of indenture where there are a large
number of bondholders
 Common for issuers of bonds/debentures to appoint a trustee to enforce the terms of
the indenture on behalf of the bond/debenture holders – otherwise might be hard to
sell b/c investors would know that it was unlikely that the terms of the indenture would
be enforced
 CBCA and other corporate statutes in Canada have rules governing trustees:
o Qualification – trustee must be incorporated under and subject to controls under
statutes governing the incorp of trust companies (s.84)
o Conflict of interest – trustees cannot have COI with issuer (s.83)
o Access to list of debenture holders – trustees must be permitted access to list of
debenture holders for the purpose of communicating with them for the purpose
of voting or other matters relating to enforcement (s.85)
o Trustees have power to demand evidence of compliance (s.86-66)
o Trustees must give the debenture holders notice of a default by the corp (s.90)
o 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 (s.91)
3. SECURITIES REGULATION
If you are setting up any business: are you getting money from somewhere other than your
own pocket? Yes – then you have a securities law issue (even if you issue shares to
yourself)
In Canada, securities regulation is a matter of provincial jurisdiction and is typically dealt
with in separate securities statutes
Most provincial securities acts provide that a prospectus is required when there is a
“distribution” of a “security”
 “security” = not just shares and debentures but also warrants, options, rights and other
instruments or transactions that have a similar investment character
 “Distribution” = includes, among other things, “a trade in a security of an issuer that has
not been previously issued
 Distribution of securities to anyone (including yourself) – exempted if only to
yourself
 Trade = broadly defined to include any sale of disposition of a security for
valuable consideration
You can be exempted form the Prospectus Requirement if you are a “private issuer” (small
business) that has fewer than 50 shareholders and has only distributed securities in
reliance on the private issuer exemptions.
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Provincial securities act disclosure requirements include annual info forms, financial
disclosure, proxy circular disclosure, insider trading reports and timely disclosure
Takeover Bid Regulation
 A takeover bid is a bid to acquire sufficient shares of a corp in order to control the
management (20% or more of the equity securities of any class of the issuer)
 Where an offeror makes a takeover bid the bid must comply with certain rules: must be
made to all holders of the target shares of the class sought; bud must be kept open for a
minimum of 35 days; shares tendered by offerees can be withdrawn within bid period;
bidder must provide a takeover bid circular.
 Poison pill plan – involve the issuance of rights to buy further shares of the issuer to
existing shareholders – allows existing shareholders to acquire shares below market
price
o Rights only come into effect when a person acquires more than a specified
amount (usually 20%)
X.
GOVERNANCE
POWERS OF THE CORPORATION AND AUTHORITY OF DIRECTORS AND OFFICERS
The division of powers in a corporation is like the constitutional division of powers
(directors/officers vs. shareholders). The court’s developed doctrines: ultra vires,
constructive notice (indoor management rule) relating to restrictions on the business that
corporations could carry on and relating to the ostensible authority of agents acting on
behalf of the corporation. Due to continued problems with the doctrines, the ultra vires and
constructive notice doctrines are no longer in our CBCA; however, the doctrines might still
arise if a company is not incorporated under the CBCA or a special statute (that does away
with them).
FIRST – the objects and powers of the corporation are set out in the memorandum of
association/articles to help investors assess the risk to which they would be exposed
o Objects of a corporation – the kinds of businesses that the corporation would
engage in
o Powers of a corporation – the kinds of things the corporation could do in
carrying on the business of the corporation
SECOND – the scope of an agent’s authority (actual or ostensible) is limited to the capacity
of the corporation because an agent cannot enter in a K that the principal (corporation)
could not enter into himself.
UNDER THE ULTRA VIRES DOCTRINE (abolished under the CBCA) if an agent entered into
a contract that was contrary to the powers or objects of the corporation, the K would be
held ultra vires (beyond the power of) the corporation and the K would be void (never
legally valid and impossible to sue on) (Asbury Railway Carriage & Iron Co. v. Riche)
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

K cannot be ratified by unanimous shareholder agreement b/c there was no K to ratify
Principle could not ratify b/c the principle had no power (capacity) to enter into the K
JUSTIFICATIONS for the ultra vires doctrine:
 Investor and creditor protection against changes in the risk – if a company could start
carrying on businesses other than those listed in its objects then investors/creditors
might be exposed to much riskier types of businesses than they anticipated
 Constraining Quasi-public corporations to their quasi-public purposes – protects
against misuse of corporate funds since uses outside the objects would simply not be
valid use of funds
 Controlling against the risk of bankruptcy for some types of corporations (particularly
banks and insurance companies)
Articulate the problems with the ultra vires doctrine, the practical response to it and the
subsequent legislative response to it in corporate statutes such as the CBCA.
PROBLEMS with the ultra vires doctrine:
 Could create hardship on 3rd parties who had to bear the risk that contracts they had
entered into could not be enforced – could lead to unjust enrichment where 3rd party
has (begun to) perform
 Corp’s might find K’s are not enforceable and 3rd parties might be unjustly enriched
 Solution: either charge a premium to cover risk or check objects of corporation
RESPONSE to the ultra vires doctrine
 Corporations had lawyers draft broad objects clauses with catchall ancillary power
(give corp capacity to do just about anything) to avoid risk
 Courts tended to read objects clauses very broadly and give wide scope to incidental
powers
PROBLEMS CONTINUE with the Ultra vires doctrine:
 Responses helped keep problems at bay, but there were still residual costs and risks
o Cost of having lawyer review extensive objects clauses
o Still risk that K’s may go beyond the objects of a particular corporation
o Courts might still find K entered into is ultra vires
 Re Introductions Ltd. – objects clause (providing services for visitors to
the Festival of Britain) held not to include the business of breeding pigs
LEGISLATIVE RESPONSE to the continuing problems with the Ultra Vires doctrine:
 Most general statutes of incorporation in Canada gave corporations the powers of a
natural person (s.15(1) CBCA) but allowed restrictions that are not constraints on
capacity, but constraints on the powers/authority of persons acting on behalf of corp
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


16(2) – prohibited from carrying on business that articles restrict (saying what
corporation cannot do – articles do not need to contain objects/what company can do)
16(3) – no act of a corp is invalid only by reason of a restriction of that action by articles
(must be some other reason) – avoiding unjust enrichment (of 3rd parties/corporation)
s.247 – remedy for doing something that is restricted: court order for compliance
Describe the constructive notice doctrine, the indoor management rule and the legislative
modifications to these doctrines in the CBCA.
CONSTRUCTIVE NOTICE AND THE INDOOR MANAGEMENT RULE
Before legislative modifications that gave corporations the capacity of natural persons,
memorandum of association set out powers of the corp to give effect to its objects. Because
memo and articles are publicly filed, third parties are deemed to have knowledge of
constraints on exercise of power (Constructive Notice). This created an additional risk for
3rd parties.
THE INDOOR MANAGEMENT RULE limits the application of constructive notice rule. 3rd
parties are not deemed to know (no constructive notice) of any indoor/in-house
restrictions on the authority of directors or officers (if documents are not publicly
available).
LEGISLATIVE MODIFICATIONS have abolished the constructive notice rule with respect to
a corporation that is incorporated under the CBCA (s.17). Once the constructive notice
doctrine is removed, there is no need for the indoor management rule (although it is still
codified in s.18 CBCA).
CONSTITUTIONAL ISSUE? The constructive notice rule was developed by courts in the
context of actions predominantly brought to enforce a K, which is part of property an civil
rights, a provincial area. Can the federal CBCA abolish it?
To what extent do the Ultra Vires doctrine and the constructive notice doctrine still apply?
 The statutes that do away with Ultra Vires doctrine and the constructive notice
doctrine do so only for corporations incorporated under those particular statutes
 If a company has not been incorporated under the CBCA or a special statute that
explicitly does away with them, the doctrines may still apply.
 The ultra vires doctrine does not apply/never applied to Crown Charter or letters
patent companies (b/c always had powers of a natural person)
DIRECTORS AND OFFICERS
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DIRECTORS:
THE ROLE OF DIRECTORS is to manage (or at least supervise the management of) the
corporation (subject to any unanimous shareholder agreement)(s.102 CBCA). The directors
normally have the power to appoint the officers of the corporation (s.121), who generally
conduct the day-to-day mgmt duties.
Comment upon the effectiveness of residency requirements for directors.
The CBCA contains a residence requirement for directors. At least 25% of the directors
must “resident Canadians” (and where the corporation has less than four directors at least
one of the directors must be a resident Canadian).
The idea is presumably that the corporation will be more responsive to Canadian national
interests. However, there is no duty imposed on the directors (or on Canadian resident
directors) that they take Canadian national interests into account).
A common practice has been to appoint nominee Canadian directors but to strip away their
powers using a unanimous shareholder agreement. The consequence may be that the
directors then have no powers and therefore no ability to influence the decisions of the
corporation taking account of Canadian national interests.
CBCA s.105 sets out THE QUALIFICATION REQUIREMENTS FOR DIRECTORS:
 S.105(1) – directors must be:
o (i) natural persons (individuals, not corporations);
o (ii) over 18 years of age; and
o (iii) not adjudicated mental incompetents or bankrupts
 s.105(2) – a director need not own shares of the corporation (although it does allow for
share qualification in articles)
 Minimum number of directors for corporations that does not publicly distribute shares
= 1; corp that makes a public distribution = 3 (s.102(2)) – no max number of directors
 S.105(3) – at least 25% of directors must be “resident Canadians” (where < 4 at least
one must be)
AUTHORITY AND POWERS OF DIRECTORS
Note each of the powers that directors typically have.
Management power (s.102)
 Several powers that implicitly fall within s.102 (broad residual power) are highlighted
in s.115(3) (cannot delegate these, can only be taken away in a unanimous shareholder
agreement):
a. Submission to the shareholders of any question or matter requiring approval of
shareholders
b. Fill a vacancy among directors or auditors or add additional directors
c. Issue securities/shares (also ss.25 and 27)
d. Declaration of dividends
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e.
f.
g.
h.
Purchase, redemption or other acquisition of shares issued by the corporation
Pay a commission under s.41
Approval of a management proxy circular
Approval of a takeover bid by the corporation or directors’ circular (prepared in
connection with a bid to takeover the corp.)
i. Approval of any financial statement put before the shareholders
j. Adopt, amend or repeal by-laws (also s.103)
 Directors may not delegate the powers listed in s.115(3)
Subject to articles, the bylaws, or a unanimous shareholder agreement:
 Directors have the power to adopt, amend or repeal the by-laws (s.103)
o Only a default allocation in favour of directors – any change the directors make
in the bylaws must be put before the shareholders and is not effective until
approved
 Power to borrow (s.189(1)) and power to delegate borrowing power (s.189(2))
 Power to issue shares (s.25) and power to issue shares in a series (s.27)
 Appointment of additional directors (s.106(8)) if the articles so provide
 Filling a vacancy on the board of directors that arises due to death or resignation of a
director (s.111) or due to shareholders not replacing director (s.109(3))
 Filling a vacancy in the position of auditor (s.166(1)) unless articles stipulate position
of auditor can only be filled by a vote of the shareholders (s.166(3))
 Calling of meetings of shareholders (s.133)
 Appointment and compensation of officers and the delegation of powers (s.121)
 Power to determine remuneration for the directors, officers, and employees of the corp
(s.125)
Cases dealing with delegation:
 Prior to enactment of s.115(3) – court still held that directors could not delegate all
their powers (Hayes v. Canada-Atlantic & Plant SS Co.)
 A corporation can delegate certain managerial duties to strangers for a limited period
(not indefinitely) – Longer the period of time they delegate, the greater likelihood
delegation is improper (Sherman & Ellis v. Indiana Mutual Casualty)
 How far one goes in delegating their powers is a matter of degree – if the K attempts to
delegate substantially all corporate powers to an agent, it has gone too far (Kennerson v.
Burbank Amusements Co.)
 The cases are still relevant in jurisdictions where the corporate statue does not address
the scope of delegation – still might also be relevant for a CBCA company (complying w/
restrictions in s.115(3) and delegating all other powers for 50 years might still be
considered improper delegation)
ELECTION OF DIRECTORS
 One document that must be sent to the “D”irector to form the corporation is a notice of
the first directors of the corporation (s.106(1)) – these first directors hold office until
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the first annual meeting (s.106(2)) which must be held w/in 18 months of the
incorporation (s.133(1))
 At every subsequent annual meeting, directors are elected by an “ordinary resolution”
of the shareholders (majority vote)(s.106(3))  cannot be altered or waived in articles
 Term of director begins from time of election and ends at the subsequent annual
meeting – however articles may provide for term up to 3 years (s.106(3)(5))
 No limit on the number of times a director can be re-elected – if no one new re-elected,
current directors remain
 S.106(4) – articles may provide for staggering boards (not all directors need be elected
at the same meeting) (have 9 directors but only elect 3 each year)
 S.145 – a corp, shareholder, or a director may apply to court to resolve any controversy
concerning the election or appointment of a director
CEASING TO HOLD OFFICE
 S.108 – a director ceases to hold office when he dies, resigns, becomes disqualified or is
removed upon a resolution of the shareholders
REMOVAL OF DIRECTORS
 S.109(1) allows for the removal of a director by ordinary shareholder resolution
(Bushell v. Faith – suggests that in some circumstances the requirement for a majority
might be avoided)
 S.209 – shareholder can remove a director by ordinary resolution and can be filled at
the same meeting
REMOVAL OF OFFICERS
What is the justification for the position on the effect of constraints on the removal of
officers?
 Directors may remove officers.
 The power to remover officers is key to the effectiveness of the election and removal of
directors as a shareholder control device.
 Trade off between replacement of management and job security
o Cases indicate a tendency to uphold long-term employment K’s – may be
motivated by the reliance of the employee
o May give employee incentive to build firm specific human capital
o Long run effect of allowing dismissal without consequence would be that
companies would not be able to enter into these kinds of K’s and might well end
up having to pay higher compensation to compensate for the lack of security in
the job

Parachute Provisions (Policy considerations):
o Golden Parachute – lucrative compensation for corporate executives should they
be dismissed from their job
o Tin Parachute – extravagant parachutes struck down (by the US courts) and
replaced with less lucrative K’s
o Reduce incentive of management to resist takeovers – b/c managers would not
get compensation as good as severance package – allows management to be
replaced when performing poorly
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Re Paramount Publix Corp.
 Court suggested that a person could be removed from office without consequence – it
would only be if person was dismissed entirely from their employment that the usual
consequences of breach of an employment K would arise
Montreal Public Service Co v. Champagne – constructive dismissal
 Hired as general manager subject only to “such direction and control as it is the duty of
the directors to exercise”. However, president was later appointed and Champagne was
placed under the direct supervision  court held Champagne was entitled to damages
for breach of K
Shindler v. Northern Raincoat Co. Ltd.
 Principle: where a party enters into an arrangement whose effectiveness requires
continuance of an existing state of circumstances, there is an implied engagement on his
part that he shall do nothing of his own motion to put an end to that state of
circumstances
DIRECTORS’ MEETINGS
 The details of directors’ meetings are left to the bylaws of the corp
 S.114 – subject to bylaws/articles directors may meet at any place
 S.114(2) – subject to articles/bylaws the quorum is a majority of the board or a
majority of the minimum number of directors in articles
 S.114(5) – if meeting will deal with any matters set out in s.115(3), notice of the
meeting must specifically indicate that – otherwise no requirement to specify the
purpose
 Meetings by conference call or other electronic means (s.114(9))
 S.114(8) permits a corporation to have one director and in that case, that director may
constitute a meeting
 It is not necessary to hold a meeting where all of the directors sign a written resolution
in lieu of the meeting (s.117)
 CBCA does not prescribe how frequent directors’ meeting should be – although, at some
point failure to hold meeting might give rise to liability for breach of the duty of care
under s.122(1)(b)
HOW BOARDS OF PUBLIC CORPORATIONS OPERATE
 Board Structure Requirements under CBCA:
o S.102(2) requires that at least two directors of a public corp not be employees
or officers of the corporation or any of its affiliates (mandatory) – however, it
does not require that the majority of the directors be “outside directors” (may
not be entirely independent)
 Securities Regulatory Corporate Governance Requirements for Public Corporations
o When a corp goes public in Canada it is common to list on the TSX or Toronto
Venture Exchange
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o To list on the Exchange, the issue of securities must enter into a listing
agreement under which the issuer agrees to comply with the rules, bylaws, and
policies of the Exchange
o National Instrument 58-101 – requires that when a corp that had distributed
securities to the public it must include certain specified disclosure on its
corporate governance in its management info circular
o National Policy Instrument 58-201 – guidelines given on what good corporate
governance is (composition of the board, board mandate, orientation and
continuing education, code of business conduct and ethics, nominating
committee, compensation committee, regular board assessments, and
enforcement)
Comment on the use of “outside” (or “independent”) directors and on the effectiveness of
having outside directors.
Compare the legal notion of the function of directors with the reality and be able to suggest
alternative functions that the directors of the board may fulfill.
Shareholder Power (Voting Rights)
Shareholder powers are set out specifically in the CBCA and include the power to: elect
directors, approve amendments to by-laws, approve fundamental changes to articles, an
amalgamation, continuance, sale, lease, or exchange of all or substantially all of the corp’s
assets, and dissolution
Set out a list of and describe the particular voting powers of shareholders.
SHAREHOLDER CONTROL OVER DIRECTOR: SHAREHOLDER RESIDUAL POWERS?
 Directors have the power to manage (s.102) and normally do so by delegating the dayto-day management to officers whom they appoint
 Shareholders do not manage the company
 Shareholders do not have the overriding residual power to dictate to directors how to
manage the company (Automatic Self-Cleansing Filter Syndicate v. Cunninghame)
o All depends whether it is a power of the director – if it is, shareholders cannot
dictate
 Shareholders have power in cases of a deadlock on the board of directors to appoint
new directors (Barron v. Potter)
ELECTION OF DIRECTORS
 Shareholders have the power to elect directors at annual shareholder meetings – allows
them a means to exert some control over who manages the corporation
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AMENDMENT OF BYLAWS
 Default rule that directors have the right to initiate bylaw changes in CBCA corporations
BUT shareholders must ratify these changes and the next annual meeting of
shareholders
o Default and can be altered by articles, bylaws, or an unanimous shareholder
agreement (s.103)
 Shareholders can make proposals for by-law changes (s.137)
FUNDAMENTAL CHANGES
 The CBCA provides shareholders with some control over significant changes to the
business or the capital structure – could be provided through the share rights or by
promoters of the corp
o Our statutes make right mandatory – have these rights regardless of what
articles say
o Control is provided by way of a voting right
o May have mandatory class voting rights
o Partial minority shareholder protection through supermajority voting
requirement
 S.173 – amendment of the articles – “special resolution” is required to amend the
articles (only for shares with voting rights):
o change the corporate name
o change the registered office
o change in a restriction on the business of the corp
o create a new class of shares
o increase or decrease the number or the minimum or maximum number of
directors
o change restrictions on share transfers
 Other fundamental changes requiring “special resolutions” (ie. Shareholder approval):
o to improve an amalgamation of the corp with another corp (s.183)
o the sale or lease of all or substantially all of the corps assets (s.189(3))
o a continuance of the corp under the laws of another jurisdiction (s.188)
o a liquidation and dissolution of the corp (s.211)
 A “special resolution” = two-thirds of the votes cast in respect of the particular
resolution (s.2(1))
CLASS VOTING RIGHTS
 Shareholders are given protection against changes in their share rights without their
approval and against the creation of rights for other classes of shares that would
prejudice their share rights
o This is done by giving classes of shares class voting rights – that is, the class must
approve a change that alters or prejudices the rights of that class
o Under CBCA the class voting right is mandatory and cannot be taken away
 CBCA s.176(1) sets out situations in which a class vote is required (p.330)
o Increase or decrease authorized limit on a class of shares
o Where there is an exchange, reclassification or cancellation of shares
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




o To add, change or remove rights, privileges or restrictions on a class of shares
o To increase rights or privileges of any class of shares having rights equal to or
superior to the shares of such class
o To create a new class of shares equal to or superior to a particular class
o To make an inferior class of shares equal or superior to a particular class
If a series of shares is affected by a resolution in a manner different from other series of
the class then the series of the class will also have the right to vote separately as a series
(s.176(4))
S.176(5) – the shares of a class having a right to vote carry the right to vote whether or
not the class otherwise carries the right to vote (s.176(1) things)
S.176(6) – a separate resolution of the class is required and the resolution must be a
“special resolution”
Class voting rights often arise in other fundamental changes:
o on an amalgamation (s.183(4))
o a sale, lease or exchange (s.189(7))
o a liquidation and dissolution (s.211(3))
class vote might also arise on a continuance to the extent any change were to occur in
the relative rights of the classes of shares on the continuance
Closely Held Corporations
Note the typical characteristics of closely-held corporations and the reasons for treating
them differently than widely-held corporations.
 Characteristics:
o Relatively few shareholders;
o Shareholders are generally active in the management of the business;
o No established market for the shares of the corporation; and
o Usually a restriction on the transfer of shares.
 B/c of characteristics, they are treated differently  Reasons for Different Treatment:
o Large stake –
 shareholders in a closely-held corp tend to have substantial investments
in the corp
 they have a much greater incentive to be involved in monitoring the
management of the corporation (usually through being involved in the
management themselves).
 With fewer shareholders wanting to be involved in management it may
make sense to have more of the day-to-day decisions in the closely held
corporation in hands of shareholders
o Separation of ownership and control problem not as severe –
 the problem of shareholder rational apathy (they don’t care to vote b/c
they believe their vote wont make any difference and the potential loss is
not worth the effort to understand the corporation) due to having a small
stake and being inclined to free-ride on monitoring efforts of others is not
nearly as significant a problem in a closely held corporation.
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Shareholders will be inclined to take steps to inform themselves and to
exercise their voting rights.
o Desire to control who one is in business with –
 without an established market the shareholders investment will be
difficult to liquidate.
 Shareholders will not want to be in business with others they don’t trust
so they tend to want control over who they are in business with and tend
to want to put in share transfer restrictions

Statutory Definition of Closely-Held Corporation
 Drafters of the CBCA took a functional approach
o Overall question being whether the particular mandatory provisions outweigh
the benefits
 Recent amendments to the CBCA moved away from functional towards a global
definition
o Whether the corporation is a “distributing corporation” = a corp that has made a
distribution of its shares under a prospectus or similar disclosure doc pursuant
to provincial securities laws
Note at least three modifications to the CBCA with respect to closely-held corporations.
 Waiver of notice to meetings – corp does not have to provide notice to a shareholder for
a meeting if the shareholder has waived her right to notice (s.136)
 One shareholder meeting – s.139(4) expressly recognizes one shareholder meetings
(one person can incorporate a company – possible to have a one shareholder company)
 Unanimous consent in writing to resolutions in lieu of meeting – s. 142 – most likely to
be feasible in corporations with relatively few shareholders
 Dispensing with an auditor – s.163 allows a corp to dispense with requirement of
appointing an auditor where the corp is not a distributing corp
 No requirement for an audit committee where the corp is not a distributing corp
(s.171)
 Avoidance of management proxy solicitation requirement – mandatory solicitation of
proxies by mgmt is not required where the corp is not a distributing corp and has 50 or
fewer shareholders (s.149)
Note the reasons for the use of shareholder agreements under the CBCA.
 Shareholders can enter into agreements as to how they will vote their shares (s.145.1)
 Can allow shareholders to increase their collective voting power and potentially
exercise control over the corp  Used to make sure certain persons continue to be
elected director in the corp or otherwise have involvement in the management of the
corp
 Shareholders in a closely held corp can agree to vote their shares to make each other
directors of the corp – however, cannot agree on how they would vote as directors
(Ringuet v. Bergeron) (s.145.1)
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
o It is contrary to public policy for directors to constrain how they would vote as
directors (b/c they have a duty to act in the best interests of the corp) – no
fettering
o Consequence of not voting your shares the way you agreed to may result in you
forfeiting your shares
Unanimous shareholder agreement can provide certain management decisions
normally made by directors allocated to shareholders (CBCA s.146 and s.102)
o S.102 – the directors shall manage the corporation “subject to any unanimous
shareholder agmt”
o S.146 – allows for a unanimous shareholder agmt that restricts, in whole or in
part, the powers of the directors to manage or supervise the mgmt of the
business of the corp
o Thus, for a shareholder to reallocate powers of directors it must be unanimous –
thus such an agmt is only likely to be practical in the context of closely-held
corps.
Powers can be reallocated from the directors to the shareholders – the general
approach is to:
1. Identify the power that is to be reallocated to the shareholders
2. Determine the provision under which such a power is provided in the Act
3. What methods can be used to reallocate the power (articles, by-laws, unanimous
shareholder agreement)
4. Assess which of these documents would be the most appropriate (in closely held it will
normally be unanimous shareholder agreement)
5. Once allocated, question of determining how shareholders agree to vote on the matter
and put the terms of that agreement in the shareholders’ agreement
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