Contents
Chapter 1: Introduction ................................................................................................................................ 7
Business and Shareholders ....................................................................................................................... 7
Forms of Association ................................................................................................................................. 7
Simple Accounting .................................................................................................................................. 11
Chapter 2: Relationships between Principal and Agent ............................................................................. 11
Introduction ............................................................................................................................................ 11
Actual Authority ...................................................................................................................................... 12
Chapter 3: Agency and Third Party Relationships....................................................................................... 13
Ostensible/Apparent Authority .............................................................................................................. 13
Breach of Warranty of Authority ............................................................................................................ 14
Ratification .............................................................................................................................................. 14
Undisclosed Principal .............................................................................................................................. 16
Liability of Principals for Torts Committed by their Agents .................................................................... 16
b.
Falconi (1994, OHC): Were utilized activities part of the ordinary course of business .............. 16
Chapter 4: Sole Proprietorship ................................................................................................................... 17
Structure ................................................................................................................................................. 17
Legal Status and Liability of the Sole Proprietor ..................................................................................... 17
Name ....................................................................................................................................................... 18
Funding ................................................................................................................................................... 18
Dissolution .............................................................................................................................................. 18
Advantages.............................................................................................................................................. 18
Chapter 5: Partnership I .............................................................................................................................. 19
Introduction ............................................................................................................................................ 19
The Formation of Partnership ................................................................................................................. 19
iii. Backman (2001, SCC): Test for partnership: Partners are carrying on business, in common, with
a view of profit; weigh all relevant factors in context of all surrounding circumstances ................... 19
The Legal Status of Partnership .............................................................................................................. 20
Name, Registration and Actions against Partners .................................................................................. 20
Governance – Partnership Agreement ................................................................................................... 20
Funding ................................................................................................................................................... 22
Dissolution .............................................................................................................................................. 22
Chapter 6: Partnership II ............................................................................................................................ 23
Relationships between partners and third parties ................................................................................. 23
Section 4: Business in Common .............................................................................................................. 24
Underlying Values or Policy .................................................................................................................... 25
Cases on Section 4 .................................................................................................................................. 26
1.
A.E. Lepage (1977): Distinguishing between tenancy in common and partnership (s.4(a))....... 26
2.
Hickman (1860): Decision is Codified in s.4(c)(i) ......................................................................... 26
3.
Pooley (1876): Decision is a matter involving provisions similar to 4(c)(iv) ............................... 26
4. Martin (1927): s.4(c)(iv) justifying a means of allowing financing of a business experiencing
temporary financial difficulties ........................................................................................................... 27
Section 5: Subordination of Lenders for a Share of Profits .................................................................... 28
2.
Re Fort (1897): Written contract not required ........................................................................... 28
3. Canadian Commercial Bank (1992, SCC): s.5 does not apply when lender’s right to share in
profits is limited to repayment of loan principal ................................................................................ 29
Retirement of Partners ........................................................................................................................... 29
Advantages of Partnerships .................................................................................................................... 30
Chapter 7: Limited Partnership ................................................................................................................... 30
Introduction ............................................................................................................................................ 30
What is a Limited Partnership ................................................................................................................. 30
Characteristics of Limited Partnerships for the Protection of 3rd Parties ............................................... 30
Cases on Taking Part in the Management of the Business ..................................................................... 31
2. Zivot (1986 ABCA): Limited Partners taking management roles in the general partner will be
personally liable for the partnership .................................................................................................. 31
3. Nordile (1992, BCCA): If limited partner acts solely in their capacity as an officer of the general
partner, they will not be personally liable .......................................................................................... 31
Relationships among the Partners .......................................................................................................... 32
Why Use Limited Partnership ................................................................................................................. 32
Chapter 8: Limited Liability Partnership ..................................................................................................... 32
Background ............................................................................................................................................. 32
Structure of Limited Liability Partnerships ............................................................................................. 33
Chapter 9: Overview of the Corporation .................................................................................................... 33
General Structure of a Corporation ........................................................................................................ 33
Capital Structure ................................................................................................................................. 33
Management Structure....................................................................................................................... 34
Key Features of the Corporate Form ...................................................................................................... 34
Chapter 10: Benefits of Limited Liability ..................................................................................................... 34
Chapter 11: History of the Corporation in England and Canada ................................................................ 36
Chapter 12: The Constitutional Position ..................................................................................................... 37
a.
Provincial Power: Bonanza Creek (1916): Scope of Provincial Power ........................................ 37
ii. John Deere Cases: Residual Federal power of incorporation gives federally incorporated power
and right to operate throughout Canada ........................................................................................... 38
Chapter 13: Incorporation Process ............................................................................................................. 40
Incorporation .......................................................................................................................................... 40
Seven Advantages of Incorporation & Related Criticisms ...................................................................... 41
Choice between CBCA and BCCA ............................................................................................................ 43
Reincorporation & Continuance ............................................................................................................. 43
Extra-Provincial Registration ................................................................................................................... 44
Chapter 14: Preincorporation Contracts..................................................................................................... 44
Cases on Preincorporation Contracts & Criticisms of Common Law Position ........................................ 45
1. Kelner (1866): Companies cannot ratify contracts entered into on its behalf if company did not
exist at the time; agents may be liable for preincorporation contracts if they intended to be a party
45
2.
Newborne (1953): Promoter liability is based on a rule of construction approach ................... 45
3.
Black (1966): Adopts Newborne’s rule of construction, look to the nature of the contract ...... 45
4.
Wickberg (1969, BCSC): If contract’s nature is personal liability, promoters will be liable ........ 45
CBCA s.14 & Cases................................................................................................................................... 46
Landmark Inns (1982): Corporations cannot adopt repudiated ......................................................... 46
BNS v. Williams (1976): As long as the third party is aware of who they are dealing with, they risk
the solvency of the corporation .......................................................................................................... 47
BCBCA s.20 .............................................................................................................................................. 47
Other Ways of Enforcing Pre-Incorporation Contracts under the Common Law ................................... 47
Practical Notes ........................................................................................................................................ 48
Chapter 15: Legal Status of Corporations ................................................................................................... 48
Salomon v. Salomon (1897): Corporations are separate legal entities .............................................. 48
Corporations as separate legal entities .................................................................................................. 49
b.
Lee’s Air Farming (1961): Shareholder can be director, officer or employee of the corporation
49
Chapter 16: Disregarding Corporate Entity (Piercing Corporate Veil) ........................................................ 50
a. Smith, Stone and Knight Ltd. (1939): Where the corporation is simply an agent of the
shareholder, the Corporation is not a separate entity & Test ............................................................ 50
c.
Gregorio (1984, OCA): Unless subsidiary is used to unjustly avoid liability, it is separate ......... 51
d.
Transamerica (1996, OGD affirmed by OCA): Gregorio upheld.................................................. 51
Situations Where Courts Will Pierce the Corporate Veil & Policy Explanations ..................................... 51
i.
Gilford Motor (1933): Gap Filling where Company is used as sham ........................................... 51
ii. Patterson-Boyd (1981, SKCA): Gap Filling Where Company is used to work around explicit term
in contract ........................................................................................................................................... 51
ii.
British Merchandise (1961) ......................................................................................................... 52
i.
Gelhorn Motors (1969, MBCA): Changes in liability must be brought to attention ................... 53
ii.
Chiang (1978, BCSC): Personal dealings without indication of limited liability; personal liability
53
ii.
Wolfe (1969): Failure to follow statutes, increased risk of personal liability ............................. 54
Other Ways of Disregarding the Corporate Entity .................................................................................. 54
i.
Berger (1983): Executives hold personally liable for negligent actions including failure to follow
up 54
ii.
Said v. Butt (1920): No breach of contract where there is undisclosed principal ...................... 55
iii.
McFadden (1984): When officer acts outside scope of authority, they are personally liable.... 55
iv.
ADGA Systems (1999, OCA): ....................................................................................................... 55
v.
Rafiki Properties (1999, BCCA): Director can attract personal liability in 3 ways ....................... 56
vi. Better Off Dead (2002 BCSC): Director can attract personal liability where torts are individual
and interest is separate from that of the company ............................................................................ 56
Other Stakeholders Affected by Limited Liability and Piercing Corporate Veil .................................. 57
Statutory Provisions Can Hold Directors and Shareholders Personally Liable ....................................... 57
General Theory for Disregarding Corporate Entity ................................................................................. 58
Chapter 17: Shares ...................................................................................................................................... 58
Nature of Shares ..................................................................................................................................... 58
Types of Shares Frequently Used............................................................................................................ 59
Dividends................................................................................................................................................. 60
Voting ...................................................................................................................................................... 61
b.
Bushell 1970: Granting of different amounts of votes is legitimate ........................................... 62
c.
Jacobsen 1980: Granting of different amounts without special class is illegitimate .................. 62
e.
Bowater (1987, OCA): Within a given class shares must have equal rights............................... 62
f.
Note: Poison Pill Provisions – Controlling takeover bids ............................................................ 62
Pre-Emptive Rights .................................................................................................................................. 63
Issuing and Paying for Shares.................................................................................................................. 63
Restrictions on Redemption and Repurchase of Shares ......................................................................... 64
Series of Shares ....................................................................................................................................... 64
Par Value Shares ..................................................................................................................................... 65
Stated Capital Account............................................................................................................................ 65
Chapter 18: Corporate Debt Finance .......................................................................................................... 66
Common Types of Corporate Debt Finance ............................................................................................ 66
Chapter 19: Note on Securities Regulation................................................................................................. 67
Sources of Securities Law ........................................................................................................................ 67
Distribution of Securities to the Public ................................................................................................... 67
Continuous Disclosure ............................................................................................................................ 68
Regulation of Insider Trading .................................................................................................................. 69
Takeover Bid Regulation ......................................................................................................................... 69
Chapter 20: Corporate Objects and Powers, Restrictions on Management .............................................. 70
Objects, Powers, Agency and Capacity ................................................................................................... 70
Ultra Vires ............................................................................................................................................... 70
a.
Ashbury Railway (1875): Contract contrary to objects is void.................................................... 70
Constructive Notice and Indoor Management Rule ............................................................................... 72
Does Ultra Vires Doctrine and Constructive Notice Still Apply? ............................................................. 72
Chapter 21: Directors and Officers ............................................................................................................. 73
Role of Directors ..................................................................................................................................... 73
Qualification Requirements for Directors ............................................................................................... 73
b.
Bushel (1970): Majority may be avoided by assigning special voting rights............................... 74
Authority and Powers of the Directors ................................................................................................... 74
Scope of Directors’ Power to Delegate their Powers ............................................................................. 75
b.
Hayes (1910): Certain powers cannot be delegated by directors .............................................. 76
c. Sherman & Ellis (1930): Powers of directors cannot be delegated for too long, and not all
powers of management can be delegated to outsiders ..................................................................... 76
d.
Kennerson (1953): Corporation can delegate authority, but cannot delegate function to govern
76
Removal of Officers................................................................................................................................. 76
i.
Re Paramount Publix: Manager can be replaced, but damages must be paid ........................... 77
Directors Meetings.................................................................................................................................. 77
How Boards of Public Corporations Operate .......................................................................................... 78
Chapter 22: Shareholder Voting Rights ...................................................................................................... 79
Shareholder Control over Directors: Shareholder Residual Powers ....................................................... 79
b.
Cunninghame (1906): Shareholders cannot dictate to the directors ......................................... 79
Chapter 23: Shareholder Meetings ............................................................................................................. 80
Basics of Shareholder Meetings .............................................................................................................. 80
Conduct of Meetings............................................................................................................................... 80
ii.
Wall (1898): Chair must allow for reasonable time, act in good faith, impartial ....................... 80
iii.
Re: Marshall (1981): Chair is not obligated to be behind beneficial title ................................... 80
Shareholder Requisitioned Meetings ..................................................................................................... 81
Meetings by Court Order ........................................................................................................................ 81
Deadlock Cases ................................................................................................................................... 81
1.
Re: El Combrero (1958): Test: In all circumstances is it practical to hold the meeting? ............. 81
2.
Re: Opera Photographic (1989): Cannot deprive majority shareholder right to remove directors
82
Intervening in Battles for Control Cases ............................................................................................. 82
Intervening on Basis of Fault Cases..................................................................................................... 82
1.
Re: Routley’s Holdings (1960): Court will intervene where one party is breaking the law ........ 82
Widely-Held Corporations Cases ........................................................................................................ 82
Powers of Shareholders at Court Ordered Meetings ......................................................................... 83
Proxies ..................................................................................................................................................... 83
Proxy Circulars [Information Circulars in Provincial Securities] .......................................................... 84
Shareholder Proposals ........................................................................................................................ 84
Financial Disclosure............................................................................................................................. 85
Access to List of Shareholders ................................................................................................................ 85
c.
Encana (2005, ABCA): s.21 does not allow corporation to require intended use of the list ...... 85
f.
Pilsbury (1971, USA): Proper purpose is one connected with genuine economic interest ........ 86
Chapter 24: Closely-Held Corporations ...................................................................................................... 86
Nature of Closely-Held Corporation ....................................................................................................... 86
Statutory Definition of Closely-Held Corporations ................................................................................. 86
Shareholder Agreements ........................................................................................................................ 87
Share Transfer Provisions ....................................................................................................................... 88
Chapter 1: Introduction
Business and Shareholders
1. Explain what a business involves
a. Provision of goods or services; can extend to non-profit or government activities
b. Require some form of organization
2. Identify the various potential stakeholders
a. Stakeholders are those various persons affected by the conduct of a business activity
b. Priority Stakeholders:
i. Equity Investors: People affected by the conduct of a business activity
ii. Creditors: Those who provide the funds to acquire the assets
iii. Managers: Conduct or oversee the business
iv. Employees
c. Lower priority
i. Consumers’ customers, suppliers, competitors, local and broader community
ii. Other business providing goods and services
Forms of Association
You should be able to describe each of the forms of association described below, identifying the
particular features for each of them
1. Agency
a. Person carrying on business (principal) transfers legal authority (to the agent) to
conduct various aspects of the business on their behalf
2. Sole Proprietorship
a. Single Investor with Ultimate Management Authority; they are the sole equity investor
i. They may engage agents and/or hire employees
ii. Creditors can put constraints on how the sole proprietor manages the business
iii. Not a separate legal entity
iv. Death ends the existence of the sole proprietorship
3. Partnership
a. More than one equity investor, each being a partner with some say in how business is
run
i. They may engage agents and/or hire employees
ii. Partners are considered agents for each other
iii. Creditors can put constraints on how the partners manage the business
iv. Not a separate legal entity
1. Land owned by one party is held in trust for all partners
v. Death or bankruptcy of one partner ends the existence of the partnership
4. Limited Partnership
a. Limited Partners with limited liability, one (or more) general partners without limited
liability
i. One “general partner” has unlimited liability (could be a corporation)
ii. Limited partners may not have a substantial stake in partnership business
1. Their stake is limited to the amount of their investment
iii. They may engage agents and/or hire employees
iv. Partners are considered agents for each other
v. Creditors can put constraints on how the partners manage the business
vi. Not a separate legal entity
1. However, the liability of limited partners is limited to their investment
2. Still, the contracts are between the partners and the other party
5. Limited Liability Partnership
a. Not a separate legal entity
b. Partners not considered agents for each other
6. Corporations
a. Several equity investors typically
i. Interests are divided into shares, investors referred to as shareholders
ii. Corporation contracts with others, its liable, owns assets of the business
1. Shares do not give shareholders legal title to assets
b. Separate legal entity
i. Liability is limited to the investment
ii. Corporation can have creditors
iii. Corporation acts through humans, the “directing mind” of the corporation can
hire employees or use agents
iv. No constraint on the extent to which shareholders can become involved in
management of the business
1. Shareholders elect a board of directors
2. Board of Directors appoint officers of corporation
3. Officers manage day-to-day business or delegate responsibilities
c. Existence of the corporation is potentially perpetual
7. Limited Liability Companies
a. Essential Characteristics
i. Limited Duration to the life of an LLC
ii. Restriction on transfer of the shares in LLCs
b. Separate legal entity
i. No requirement there be a general partner without limited liability; no
restriction on the limited liability equity investors taking part in the control of
the business
1. Unlike Limited Liability Partnerships
c. Developed to prevent double-taxation: where corporation is taxed, and shareholders
are taxed
8. Unlimited Liability Companies
a. Shareholders are jointly and severally liable for the debts and liabilities of the company
i. Former shareholders may also be liable, but only if the liabilities were incurred
before the person ceased to be a shareholder
b. Provides tax advantages for US Investors
i. Qualify for flow-through tax treatment under US tax laws
c. Treated the same was as corporations with limited liability
9. Business Trusts
a. Trusts: settlors put title in trust of a trustee, with instructions the trustee hold it for a
beneficiary
i. Equity investors invest by settling funds on the trustee who manage the funds
for beneficiaries
ii. Beneficial interests are divided into shares; trust instrument provides for
election of trustees
iii. Trustees are given authority to manage, allowing them to engage agents etc.
b. Not a separate legal entity
i. The trustees will face personal liability since they are the only ones engaging in
contracts, and will be liable for torts committed (directly or indirectly)
ii. Investors may face liability through (i) implied right of trustees to be
indemnified by losses; or (ii) if trustees will be considered agents of investors
1. This chance of liability is remote, should get trustees to waive right to
indemnification
10. Co-Operative Associations
a. Corporations
b. Distributes its profits to its members in a form other than dividends
i. The surplus tends to be returned to the members in benefits
1. Eg. lower prices, reduced fees for services etc.
c. Co-operative Associations Act s. 28: Membership
i. Must be open in a non-discriminatory manner, each member has one vote,
members contribute to the capital of the association, members receive limited
or no return on capital, surplus funds are used for development etc.
11. Societies or Non-Profit Corporations
a. Corporation carrying on charitable activities, not carrying on with primary view of profit
i. In British Columbia, there are societies, not non-profit corporations
12. Unincorporated Associations
a. More than one person, not for profit, activity carried on in common
i. Where there is a view of profit involved, persons in business together are
considered partners
ii. No steps are taken towards forming a corporation
iii. Not a separate legal entity
1. In the same way as a partnership, partners are agents for each other
13. Mutual Organization
a. Non-profit corporations (typically) formed for the benefit of the members
i. Members pay fees to provide capital for mutual organization
ii. Typically the benefit is derived from the services the mutual fund provides
iii. What is the difference between a mutual organization and a co-operative?
1. Likely a lower amount of regulations/requirements to set one up
14. Social Enterprise
a. Carried in for a combination of both profit and non-profit social, cultural or
environmental objectives
b. BC Business Corporations Act: Community Contribution Company
i. Organization form for social enterprise that is potentially more flexible than a
not-for-profit corporation or charitable organization
ii. At least one primary purpose of such a company must be “community
purposes” which is a purpose beneficial to (a) society at large, or (b) segment of
society larger than the group of those related to the company
15. Joint Ventures
a. Generally involves persons combining resource for a common objective without a
precise legal meaning
i. Each member has some control over the management of the activity and agrees
to share in profits, and losses of activity
1. Could be two corporations, could be a partnership agreement, could be
a contractual arrangement that doesn’t amount to partnership
ii. Not a separate legal entity
16. Franchises
a. Arrangement in which a franchisor grants a franchisee one or more rights
i. Eg. rights to sell franchisor’s product, use its name, adopt its methods etc.
ii. Franchisor often provides marketing support and training, in exchange a loyalty
or licence fee is paid to the franchisor
iii. Franchise is not a separate legal entity
1. Franchisor or franchisee itself could be a sole proprietor, partnership or,
typically, a corporation
b. 3 Basic Elements
i. Provision of know-how by the franchisor
ii. Image recognition from franchisor’s marketing support
iii. Benefit of joint purchasing power allowing for quantity discounts
17. Multiple Contracts
a. Business activity carried on through a series of separate contractual arrangements
i. High transaction costs
1. Forming a business association may reduce these costs
Simple Accounting
1. Identify four commonly used financial statements
a. Balance sheet
b. Income statement
c. Statement of retained earnings
d. Statement of changes in financial position
2. Explain what a balance sheet shows
a. A balance sheet shows the source of funds for the business and the uses of those funds
b. Liabilities and equity
i. Where funds for the business were obtained from
c. Assets
i. What was done with those funds
3. Explain what an income statement shows
a. An income statement shows revenues of the business less the expenses of the business
i. Revenues
1. Sales, royalties, license fees etc.
ii. Expenses
4. Explain the terms
a. Assets – Things acquired for the business that will have a continuing value to the
business
b. Liabilities or debt – Fixed obligations (eg. obligation to pay back loan from bank)
c. Equity – Entitlement to residual amount
d. Trade Credit – Goods and services acquired for a business on credit
e. Accounts Receivable –Trade credit extended from the business to another business
f. Accounts Payable – Trade credit extended to the business
Chapter 2: Relationships between Principal and Agent
1. There is no expectation in this section to refer to cases or statutes as authority
Introduction
1. Agency: The relationship that exists between two persons when one, called the agent is
considered in law to represent the other, called the principal, in such a way as to be able to
affect the principal’s legal position in respect of strangers to the relationship by making of
contracts or the disposition of property
Actual Authority
1. Scope of the agent’s authority as between the principal and the agent
a. The extent to which an agent can affect the legal relations of the principal depends on
the authority the agent has
b. Actual authority – Where the principal intended to give the agent authority to affect his
legal relations, or where both would have reasonably expected the agent to have
authority
i. Express Actual Authority
1. Explicit statement as to what the agent’s authority is
ii. Implied Actual Authority
1. Authority principal and agent would have expected the agent to have in
the circumstances
2. To determine the implied authority, courts look to the usual or
customary authority of such agents
3. Usual Authority: what this principal allowed this agent to do in the past
a. Determined by looking at what the agent has been allowed to
do in the past
b. If the agent has done certain things in the past that are outside
the express authority of the agent, but the principle allows the
agent to do those things, there is usual authority
c. Rationale: To let agents do things until it is to the detriment of
the principal, and then be sued is unfair
4. Customary Authority: what agents of this type are normally allowed to
do
a. Determined by looking at the kind of authority agents of that
type normally have
i. Eg. Bank managers do certain things for the bank
5. Note: Any express grants of authority override implied authority
iii. Does not require consideration
c. Ostensible authority
2. Duties of the agent to the principal
a. Agent owes certain fiduciary duties to the principal which are implied terms of the
relationship; The principal can vary these terms by express agreement
b. Duties:
i. Perform Agency Obligations
1. Duty to perform tasks assigned to them by the terms of the agreement
or according to principal’s instructions
ii. Duty of Loyalty
1. Duty to act in the best interests of the principal
2. Duty not to put oneself in a conflict of interest
3. Duty not to make secret profits
iii. Duty to perform as agent with reasonable care
iv. Duty not to delegate responsibilities to others
1. Exceptions: where this implied term is not considered to be reasonable
(where the agent has been given express authority, has implied
authority in the circumstances)
2. Remedy for breach: resulting damages and possible injunction against
any further delegation of authority
v. Duty to keep proper accounts
3. Duties of the principal to the agent
a. Requirement to Pay Remuneration
i. If the circumstances are such that the agent would clearly not have been
inclined to act gratuitously, the court will award remuneration on what they
could have expected to be paid in a similar situation
ii. Note: there can be gratuitous relationships
b. Requirement to pay agent’s expenses and indemnify the agent against losses
i. Note: The agent must have been acting within scope of their actual authority
4. Events which terminate an agency agreement
a. Act of parties
b. Operation of law
i. Bankruptcy of either agent or principal
ii. Death of either agent or principal
iii. Frustration – purpose of agency relationship no longer exists
Chapter 3: Agency and Third Party Relationships
Ostensible/Apparent Authority
1. What is Ostensible Authority
a. It is “apparent authority”; it can arise even where the principal does not expressly or
impliedly give agent authority to act in the way the agent did
b. Policy: It promotes the reliance interest of 3rd parties who are reasonably led to believe
the person acting as agent has authority to act as agent
2. Set out the circumstances in which an agent can be said to have ostensible/apparent authority
a. Alleged principal made a representation, or permitted a representation, that the alleged
agent had authority to act on behalf of the alleged principal and,
b. The third party reasonably relies on the representation to her or his detriment
3. Articulate possible reasons for the law on apparent authority
a. Protection of reliance by third parties (prevent unfair surprise)
i. But what about the principal’s unfair surprise: Where the principal could have
taken steps to avoid potential reliance on a reasonably perceived authority the
principal should not be unfairly surprised
b. Least cost avoidance
i. Puts the obligation to avoid the loss on the person who can avoid it at the least
cost
1. Hopefully, this will give the person an incentive to avoid the loss and
costs incurred in avoidance of such losses will be reduced
ii. The principal can
1. Check the agent’s trustworthiness before engaging them
2. Monitor agent’s behaviour
3. Terminate agency relationship with agent acting beyond their authority
iii. Note: Consider an extreme circumstance where the alleged agent is a complete
fraud, alleged principal had no contact with the fraud;
1. The third party would be in the best position to avoid the loss since they
had some contact with the fraudster
c. Defeating the purpose of agency
i. If the 3rd party had to contact the principal to confirm agent’s authority, the
purpose of having an agent (delegating responsibility) would be spoiled
Breach of Warranty of Authority
1. Set out the circumstances in which an agent may be liable for a breach of warranty of authority
a. Elements of a breach of warranty of authority
i. (i) Agent represents that they had authority
ii. (ii) Representation is false and
iii. (iii) Third party acts on the representation to their detriment
b. Damages Consideration
i. Reliance damages – used for negligent misrepresentation
ii. Expectation damages – used for breach of warranty of authority
1. Puts 3rd party in the position they would have been in had the promise
been true
iii. Note: Third party can claim against (a) alleged principal on basis of
actual/ostensible authority; (b) alleged agent on basis of breach of warranty of
authority
Ratification
1. Under what circumstances can the principal ratify a contract the agent did not have authority to
make on behalf of the principal
a. Requirements
i. A person purported to act on behalf of another who seeks to ratify
ii. The person who seeks to ratify was in existence and ascertainable at the time
the other person purported to act as its agent and
1. Typical when the person is a corporation and had not been incorporated
iii. The person who seeks to ratify had legal capacity both at the time the other
person acted and at the time of ratification
2. Identify what is required for an effective ratification
a. Express Ratification – Oral or in writing
b. Conduct Ratification – Partial Conduct may be sufficient
i. If the principal partially performs the contract, it may be sufficient
c. Acquiescence Ratification - Waiting to see may be sufficient
i. If the principal simply waits to see what happens over a period of time
1. Ex. if principal may be required to buy goods, and they wait to see what
happens with the price, then they may have ratified by acquiescence
d. Note: Ratification must be based on a knowledge of all relevant facts
i. However, principal who has ratified a K will not be relieved of obligations just
because the principal was not informed of a relatively minor aspect of the deal
3. Identify the consequences of ratification
a. Ratification relates back to the time of offer and acceptance
b. Principal can sue third party and can be sued by them
c. Agent is no longer liable for a breach of warranty of authority
d. Agent is no longer liable to principal for exceeding their authority
e. Principal will be liable to agent for reasonable remuneration and indemnify agent for
expenses incurred for effecting the contract
4. Discuss policy reasons for the principles of ratification
a. Mutual Benefit
b. Unjust Enrichment of Principal
i. At expense of Agent: If it goes well, the agent will be remunerated; if it does
not, the agent will be liable; principal has no downside risk
ii. At expense of Third Party:
1. Ratification by Acquiescence – Avoids speculation that leaves third party
in a position of pure risk while principal has no downside risk
2. Ratification by Conduct – Avoids principal performing parts of a contract
and dropping it when the benefit to principal ends; similar pure risk to
third party
3. Principal be in Existence - Will prevent parties waiting to incorporate
(similar reasons as ratification by acquiescence)
a. Third party would still have action against the agent
c. Unjust Enrichment of Third Party
i. At expense of principal: Similar problem revolving around acquiescence; all the
risk would be borne by the principal
d. Cures Minor Defects in the grant of authority
i. Litigation between agent and principal can be avoided where principal has
ratified the contract, because of the requirements of the agency relationship
Undisclosed Principal
1. When can an undisclosed principal disclose the agency relationship and take both obligations
and benefits
a. Suing third party
i. General rule: An undisclosed principal can disclose the relationship and sue a
third party on a contract between the agent and third party
ii. Exception: Third party was looking to agent alone to perform the contract
1. Objective Test: (a) Terms of contract require only the agent perform the
terms; or (b) circumstances indicate the third party clearly intended to
contract with the agent alone (such as where the third party would not
have contracted with the principal if they had been known)
a. Note on (b): there must be corroborating evidence such as
previous relations to back up the claims
2. Identify the rights of the third party where there is an undisclosed principal
a. Third party can sue the principal
b. Third party can sue the agent
c. Third party, in addition to action against the principal, can set off any rights against the
agent and use any defence against the agent
3. Discuss possible policy reasons
a. Mutual Benefit
b. Potential unjust enrichment of the third party
i. If the third party could get out of contracts just because of the unknown agency
relationship, there will be no risk on their part
c. Potential unjust enrichment of the principal
i. If the principal was able to say he was not a party to the contract, and thus not
liable, there would be no risk on their part
Liability of Principals for Torts Committed by their Agents
1. Articulate the legal test for the liability of a principal
a. Principal is liable for torts committed by his agent if the agent committed the tort which
acting within the scope of her authority
i. The agent simply has to be doing the kinds of things that the agent would
normally do in carrying out her mandate
1. Ex. If fraud occurs while carrying out business within their delegated
power entrusted to them in that capacity, the principal will be liable
even when they derive no benefit from said fraud (Lloyd)
b. Falconi (1994, OHC): Were utilized activities part of the ordinary course of business
i. Falconi was partner at a firm, and assisted fraudulent dispositions of their
property, Falconi used legal services of the firm within his authority, Klein had
no personal involvement
1. Partners are agents for each other
2. Because the activities of Falconi were utilized normal legal services
given the circumstances, and were part of the ordinary course of
business of the law firm
2. Discuss possible policy reasons
a. Deterrence
b. Least cost avoidance
c. Allocation of the loss to the activity causing the loss
i. In Falconi, the cost of law firms exercising better control over their partners
should be reflected in the prices of legal services
d. Concern for compensation of victims
i. The justice system concerns itself with the victims of torts, and would not want
people like the widowed plaintiff in Lloyd to be left without a source of income
Chapter 4: Sole Proprietorship
Structure
1. Describe the legal structure of the sole proprietorship
a. The sole proprietor owns assets of the business and is the ultimate decision-maker
2. Explain the potential for the management structure to become complex
a. Sole proprietor can hire several managers to oversee various aspects of the business
i. Each manager could have authority to engage others to assist in working
b. Nonetheless, the apex of the hierarchy would be the sole proprietor
3. Explain how a sole proprietorship is formed
a. Simply start carrying on the business
i. There may be a requirement to register the business name, but not to register
the business itself
Legal Status and Liability of the Sole Proprietor
1. Describe the legal status of the sole proprietorship
a. The business is not treated in law as separate from the sole proprietor
i. The sole proprietorship is not an entity capable of entering into contracts
2. Who owns the assets of the business
a. The assets of the business are owned directly by the sole proprietor
3. Who can be liable on contracts and in tort
a. When contracts are entered into, the sole proprietor is the contracting party
b. The torts are those of the sole proprietor; the business cannot be vicariously liable
4. What assets can be obtained in judgements arising from conduct of the business
a. Those obtaining judgements can go after the assets of the business as well as those
assets of the sole proprietor
Name
1. Elements of the requirement to register the business name
a. Where one uses a name other than one’s own name, or using a plurality of persons,
registration is required (s.88(iii) Partnership Act)
i. Name cannot be registered if it resembles the name of a BC corporation or
would be likely to confuse or mislead unless (Section 89)
1. (i) Corporation consents in writing
2. (ii) Business name was used before the corporation first used its name
ii. Note: The specificity of BC corporation could leave open two identical business
names on the register if neither is the name of a corporation
2. Discuss the various purposes that the registry may serve
a. Credit Check Purposes
b. Identifies proprietor for purposes of starting a legal action
c. Avoid Deception of a partnership
d. Avoid Passing off claims since there are duplicate names
Funding
1. How are sole proprietorships typically financed
a. Investment by sole proprietor
b. Funds borrowed from a lender
i. Bank loan: may contain several provisions which provide protection to the bank
1. Eg. Bank may take security interest on assets of the business
2. Or the bank may place constraints on the running of the business to
protect against risky business ventures
c. Trade credit – Buy goods to be used or sold in business, or engage services necessary to
carrying on the business on credit (pay later)
Dissolution
1. How is a sole proprietorship dissolved
a. Sole proprietor simply stops carrying on the business
i. There is no difficulty with how assets is distributed: once the debts are paid off,
the proprietor keeps what remains
Advantages
1. Why choose a sole proprietorship
a. Easy to start and dissolve
b. Tax Considerations
i. The sole proprietor can deduct the business losses against income from other
personal sources or employment
ii. A shareholder, for example, cannot deduct the corporation’s losses from their
own taxable income
Chapter 5: Partnership I
Introduction
1. Identify Origins of partnership law and codification
a. It was developed through common law and equity courts
b. Partnership was codified by the Partnership Act
2. Discuss four situation in which partnerships are used
a. Professionals – Groups of lawyers, dentists, doctors, engineers etc.
b. Joint Ventures – Two or more corporations (defined as persons)
c. Tax Reasons – The partners can deduct the business losses against income from other
personal sources or employment since the partnership is not a separate entity
c. Easy to start – No formalities, two or more persons carrying on a business in common
are partners
3. Describe the default nature of the Partnership Act as between partners
a. The Partnership Act sets out a default contract, that unless otherwise stated or inferred
from dealing, the statute presumes things about the relationship between the partners
The Formation of Partnership
1. There are no formal steps required to create a general partnership
a. There is a registration requirement, but the partnership can exist without compliance (it
may simply lead to a fine)
2. Set out the law in respect to the existence of partnership from ss. 2 and 3 of the Partnership Act
a. Section 2
i. “Partnership is the relation which subsists between persons carrying on business
with a view of profit”
ii. Four key elements
1. Persons: could be two or more people or corporations or a mixture
2. Carrying on business
3. In common: most difficult part of the definition
4. With a view of profit
iii. Backman (2001, SCC): Test for partnership: Partners are carrying on business, in
common, with a view of profit; weigh all relevant factors in context of all
surrounding circumstances
1. Limited partnership established in Texas, bought by Canadians at a loss
to deduct the losses from income taxes; court looks to key elements to
determine whether it was a partnership
2. Carrying on business:
a. Yes, partners don’t need to carry on business for long
b. Partnership cold be formed from a single transaction
3. In Common:
a. Authority of one partner to bind partnership is relevant
b. The fact that management rests with a sole partner doesn’t
equate to failure to meet this definition
c. Other Considerations: Did the parties hold themselves out to
third parties as partners; contributions of all members; sharing
of profits and losses; joint bank accounts; joint property etc.
4. View of Profit
a. This is a question of intention, even where there is an ancillary
profit-making purpose, it suffices
5. Decision: There was no real expectation of or view of profit
b. Section 3
i. Where the business is carried on through a corporation then the particular
corporate statute applies and the Partnership Act does not apply
1. Note: Corporations can still be partners even if the Partnership Act
doesn’t apply, but the corporation is not a partner itself
The Legal Status of Partnership
1. Describe the legal nature of the partnership
a. Partnerships are not a legal entity
i. Re Thorne (1962, SCC): one partner is injured sawmilling, fails requirement to
get workers compensation since as a partner, Thorne cannot be an employee
1. Affirms that partnerships are not a legal entity
ii. McCormick (2012, BCCA): partner not subject to employment section of Human
Rights Code, because of the requirement that the person be an employee
1. There was no separate entity employing McCormick
2. What are the consequences of this legal nature
a. Each partner is liable to the full extent of his personal assets for debts and other
liabilities of the partnership business
b. A partner may not be an employee of the partnership business
c. Partner cannot be a creditor of the partnership
d. The partnership firm is not taxed, instead income is allocated between partners
Name, Registration and Actions against Partners
1. Registration requirement
a. Persons in partnerships must file a registration (s. 81 Partnership Act)
2. Index – Shows names of partners in the registration index (s. 90 Partnership Act)
3. Failing to file a retirement statement (s. 83 Partnership Act) will mean that the retiring partner
will continue to be liable with respect to partnership even after their retirement
Governance – Partnership Agreement
1. Know what sections 21-24, 27-28, 31-34 are about
a. These sections are default rules that govern the relationship between the partners,
unless there are explicit or implicit agreements otherwise (it’s a standard form contract)
i. They are built on the assumption that partners are equal with respect to capital,
management and profits; however, this is often not the case in partnerships
b. s.22: Partners are treated as agents for each other; reinforced with fiduciary obligations
c. s.23(2): Property held in name of individual partner (that is for the purposes of the
partnership) Held in trust for the partnership
d. s.27: Rules that govern the day-to-day operation of the partnership
i. (a) Share equally in capital, profits and losses
ii. (b) Firm indemnifies all partners for payments/liabilities
iii. (e) Every partner may take part in the management of the business
iv. (f) Partners not entitled to remuneration
v. (g) no new partner can be admitted to partnership without consent of all
partners
vi. (h) Decisions on ordinary business matters to be decided by majority; No change
to nature of partnership business permitted without consent of all partners
e. s.28: Partner cannot be removed from the partnership without partner’s consent; this
rule cannot be altered by implication, it must be expressly altered
f. s.31: Partners must provide full information of all things affecting partnership to any
partner (similar to agency requirement that agent keep proper records)
g. s.32: Partners must account for any benefits derived without consent of other partners
from transactions involving the partnership
h. s.33: Partners must turn over profits made from engaging in competing businesses to
partnership
i. s.34: When a partner sells their interest in the partnership, the assignee is entitled to a
share of profits, but not a say in management or administration of the business
i. Thus selling your interest does not mean the assignee will become a partner
2. Cases on Fiduciary Duty
a. Rochwerg (2002, ONCA)
i. Chartered accountant and partner at RTZ, in 1995, he became a director of
Teklogix, a client of RTZ, he does not disclose the shares and stock options to
RTZ before he leaves RTZ, the other RTZ partners believe they were entitled to
accounting for the shares
ii. No written partnership agreement existed among partners of RTZ, thus the
agreement was set to the Partnership Act default
1. He therefore owed fiduciary duties to his partners, and there was an
obligation to disclose the compensatory benefits which concerned the
partnership and for which he must account (s.31, 32 Partnership Act)
b. McKnight (2002, BCSC)
i. McKnight learns partner receives earnings from part ownership in private
company, partnership ends
ii. Although there was a separate partnership agreement, it did not extinguish the
default ss. 31 and 32 provisions
3. Explain the risk of not having a written partnership agreement
a. Without a written partnership agreement, partners who are putting in unequal capital
or work will be subject to default agreements that are founded on a presumption of
equality
4. Identify the main purposes of partnership agreements
a. Many partnerships do not meet this presumption, it is important to have an express
agreement where the default rules are inconsistent with the desires of the partners
i. There is a risk that partners will be stuck with terms they do not want
b. A written agreement also provides a document for the partners that can serve as notice
Funding
1. Describe the usual sources of funding for a partnership
a. Investment by partners (form of cash, property or services)
i. Typically the profits will be shared in proportion to their contributions
b. Funds borrowed from a lender
i. Bank loan: may contain several provisions which provide protection to the bank
1. Eg. Bank may take security interest on assets of the business
2. Or the bank may place constraints on the running of the business to
protect against risky business ventures
c. Trade credit – Buy goods to be used or sold in business, or engage services necessary to
carrying on the business on credit (pay later)
2. Identify the potential application of securities legislation
a. Partnership interests and loans to the partnership may be considered a “security” and
thus subject to provincial legislation; a prospectus would be required for the sale
Dissolution
1. Identify three ways in which a partnership can be terminated by the act of the partners
a. By Act of the Partners
i. Set a fixed term for the partnership (s.35(a) Partnership Act)
ii. At the end of a particular venture for which the partnership was created
(s.35(b))
iii. Notice of intention to dissolve (s.35(c))
b. Death of a partner
c. Bankruptcy of a partner
d. Dissolution of a partner
2. Explain why a partnership is normally automatically dissolved on the death, bankruptcy or
dissolution of a partner and note how the BC Partnership Act deals with such a dissolution
a. Partnerships are based on trust and sharing of losses; without the other person there is
no basis for the partnership’s existence
i. Eg. You don’t want to be sharing losses with a bankrupt partner or be in
business with the executor of a deceased partner’s estate
b. The Partnership Act has a default provision that where there are more than two
partners, death, bankruptcy or dissolution of a partner only dissolves the partnership as
between the deceased and remaining partners
i. Thus, in a multi-partner regieme, the entire partnership agreement won’t be
held hostage by one partner looking for a better deal
ii. Rather, the partnership agreement continues to apply to the remaining partners
Chapter 6: Partnership II
Relationships between partners and third parties
1. Know what sections 7-12, 14 and 19 Partnership Act are about
a. s.7: Apparent authority of partners
i. Every partner is an agent of the firm and other partners for partnership business
ii. Where a partner does a partnership act it is binding on the partners unless:
1. Partner had no authority to act for the firm in the matter and
2. The third party either knew the person had no authority or did not
know he was dealing with a partner
3. Basically the third party must make reasonable inquiries to see if the
way the supposed partner is behaving makes them legitimate
b. s.8: Actual or ostensible authority binds the firm and partners
i. An (i) act or instrument, (ii) relating to the business of the firm, (iii) done in the
firm name, (iv) by any person authorized to do, binds the firm and partners
c. s.9: Where the credit of the firm is pledged for a purpose not connected with the firm’s
ordinary course of business, firm is not bound unless the person was specially
authorized by one of the other partners
i. Since it outside the ordinary course of business, 3rd party has no reason to
believe there is ostensible authority
d. s.10: If a 3rd party has notice of a restriction on partner’s powers, then actions in
contravention of the restriction do not bind the firm
e. s.11: Every partner is jointly liable for debts; and after his death the estate is also
severally liable
f. s.12: Firm is liable for wrongful acts or omissions where a partner (i) acted with
authority of co-partners; or (ii) acted in the ordinary course of business of the firm
i. “Ordinary course of business” – Employer has introduced the risk of the wrong
(Bazley)
ii. s.14: liability under s.12 is joint and several
g. s.19: A person who joins an existing partnership is not liable for debts of the partnership
arising before they joined the firm
i. s.19(2): Once they are in the firm, they are bound by contracts formed by the
partnership even after they leave
Section 4: Business in Common
1. Discuss each part of s.4 with an example of a paradigmatic case
a. s.4(a): Common ownership does not itself make co-owners partners
i. Co-owners are not agents for each other
ii. Eg. 3 people buy property, each takes a piece to run a different business
1. These three people are not partners, because they aren’t carrying on
business “in common”
2. If 3 people rent out the basement and take equal profits, different story
iii. Note: The more sharing of profits and involvement in property, greater
potential for relationship to be construed as partnership
b. s.4(b): Sharing of gross returns does not itself create a partnership
i. Eg. Traveling company uses theatre, and theatre owner shares in profits
1. They share gross return but are not carrying on business “in common”
c. s.4(c): Where there is a share of profits in a business it creates a rebuttable presumption
that they are a partner
i. A contingency arrangement for profits does not itself create a partnership
ii. s.4(c)(i) Payment of a debt by instalments of profits does not itself create a
partnership
1. Eg. a debtor who offers to pay less than his instalments + 10% of profits
for a limited time does not mean the creditor becomes a partner
iii. S.4(c)(ii) Contract for remuneration of employee by share of profits does not
simply create a partnership; includes bonuses based on profits
iv. s.4(c)(iii) Spouse or child of a deceased partner is not a partner simply because
they receive annuity out of profits
v. s.4(c)(iv) – Mechanism for funding businesses caught in difficult situations
1. (1) a loan of money, (2) to a person engaged or about to engage in
business, (3) on a contract between that person and the lender, (4)
where the contract is in writing, (5) the contract is signed by or on
behalf of all parties, (6) under the contract the lender is to receive a rate
of interest varying with the profits does not itself make the lender a
partner
2. Makes an investment that is almost pure equity, not conducive to
partnership
3. It also creates the risk that people advancing credit to the business may
be deceived
a. Business funds could come completely from non-partner
creditors that share in the profits, but share in the remaining
assets in the event of insolvency (perhaps ahead of them with a
security interest)
4. Eg. Debtor offers to pay his instalments with profits for a temporary
amount of time does not mean the creditor becomes a partner
5. Note: 4(c)(iv) is open to abuse, though abuse is addressed by s.5
vi. s.4(c)(v) Person receiving payment for goodwill is not a partner simply because
of receipt of profits
1. Goodwill – value of the business not fully reflected in the market value
of individual assets used in the business
2. Eg. A sells business to B and requests an extra $5k on top of the assets
coming from the profits of the business after the sale; Once the
arrangement is made, the current owner is no longer involved in the
business
a. Note: If the current owner retains an interest the vendor will
likely be considered a partner
2. Describe potential for liability under s.16
a. s.16: Person who represents themselves to be a partner will be liable to anyone who has
given credit on the faith of the representation
i. Eg. If a person with good credit allows the use of their name by a sole proprietor
to help obtain credit, the good credit person will be liable to the creditor
ii. The person allowing themselves to be represented does not have to make those
representations themselves, as long as they allow it
Underlying Values or Policy
1. Discuss policy reasons for existence of partnership as it relates to third parties
a. Reliance
i. On a known participant in the business: Third parties rely on those involved to
satisfy obligations made
ii. On a person unknown to the third party: Third parties rely on those not involved
in the business and whose connection they are unaware of
1. Credit may be advanced on the reasonable assumption someone has
the funds to pay the debt
2. Eg. if someone is receiving payment for a loan through profits of the
company, court will want that person to be included for the sake of
third parties who relied on the credit of the business
b. Unjust Enrichment – A person sharing in the profits gets the benefit of credit advanced
i. They ought to share in the losses as well, but beware of s.4(c)(i) to (iv)
c. Least Cost Avoidance – Who bears the loss, the supplier-creditor or some other?
i. Position to assess the risk and control for it – Those sharing in the profits are in
a better position to assess the risk of business failure than third party creditors
ii. Lowers overall cost of credit – Those sharing in the profits should bear the risk
of failure rather than the supplier-creditor because they are in a better position
to assess the risk and control for it
1. Thus they will charge less for bearing that risk than the creditor would
Cases on Section 4
1. A.E. Lepage (1977): Distinguishing between tenancy in common and partnership (s.4(a))
a. A group formed syndicate to buy property, defendant incorporated to hold property in
trust, agreement provided profits from a sale would be distributed according to
interests, deficiencies would be taken care of in proportion to interests, decision to sell
was to be made by majority, no co-owner could sell without offering to other co-owners
i. AE was granted rights to commission on sale of property by March even if AE
didn’t sell it; Trustee refused to pay AE, AE argues partner’s decision bound all
b. Decision: Arrangement was ownership in common
i. Partners normally do not have rights to deal with individual property interests
1. Members also treated their interests separately for tax purposes
c. Note: Sharing in deficiencies and requirement for a majority vote may show partnership
i. However, reliance, unjust enrichment and least cost risk points to co-ownership
ii. Unjust Enrichment: AE would be unjustly enriched: not responsible for the sale
iii. Least cost risk: Co-Owners had limited control over management of property,
ability to control the risk was limited, AE could have avoided the risk by checking
with the ownership group
2. Hickman (1860): Decision is Codified in s.4(c)(i)
a. Iron business had financial issues, creditors ordered trustees run the business, pay off
creditors and then return the assets to iron business, creditors also had access to the
books of the business, elect trustees and make rules for the conduct of the business
i. Goods were supplied by Hickman while trustee oversaw business,
ii. Business was insolvent, Hickman sues creditors
b. Decision: Creditors were not partners and thus not liable to pay
i. Sharing of profits does not necessarily mean partnership
ii. Dormant partners can be liable to third party claimants
iii. Test of partnership is really one of whether an agency relationship exists
1. Were the persons carrying on the business acting as agents of the
person alleged to be a partner?
c. Policy:
i. Reliance: Hickman didn’t know creditors, didn’t think they conducted business,
and wasn’t aware of the business arrangement
ii. Unjust Enrichment: Creditors benefitted from the supply of goods at expense of
Hickman, however, the benefit would have been limited since they only wanted
to collect their owed profits (so it wasn’t an overriding factor)
iii. Least Cost Risk Avoidance: Creditors did have some control over the business
including access to the books at the time Hickman became a creditor
iv. Other Concerns: A judgement against the creditors may have inhibited future
investments of this kind
3. Pooley (1876): Decision is a matter involving provisions similar to 4(c)(iv)
a. Partnership agreement provided profits to be shared in proportion with investments,
except for B and H who were allocated for their work, 100% of funds came from lenders
i. Creditor’s loan agreement had several requirements, including that bankruptcy
terminated the loan agreement, and the loan was to be repaid from assets
ii. Pooley was owed, and sued the creditor when the partnership went under
b. Decision: Compare the relationship with the typical partnership relationship
i. This arrangement indicated more than a loan:
1. Creditor had an interest in the capital of the partnership
2. Ability to enforce the terms of the partnership agreement gave creditor
a degree of control in the business
3. Return on the lender’s investment varied with the amount loaned
4. Terminating loan agreement when lender goes bankrupt
5. Term of loan agreement coincided with partnership term
ii. Agreeing not to be considered partners is not determinative
iii. Note: s.4(c)(iv) trumps s.4(c)
1. While there is a presumption that share of the profits is proof of
partnership (s.4(c)); s.4(c)(iv) says that if there is a share of profits in a
loan agreement on a written K, something else must be shown for
partnership
c. Policy:
i. Reliance: May have been indirect reliance
ii. Unjust Enrichment: Creditor would have unfairly benefitted
iii. Least cost avoidance: Creditor was in a good position to assess and control the
risk, they could determine the potential for profits and risk of loss and had
control over several business measures due to the incorporation of the
partnership agreement into the loan agreement
iv. It is a bad precedent to have this kind of arrangement without being partners
1. It would have given the creditor limited liability along with substantial
control over the business
4. Martin (1927): s.4(c)(iv) justifying a means of allowing financing of a business experiencing
temporary financial difficulties
a. H was a partner at KNK Securities, P loaned to KNK, H asked P to become a partner, P
declines; P’s partnership which included F (PPF) lends $2.5 million in securities with
unusual terms including a provision providing PPF 40% share of the profits of KNK
i. KNK goes bankrupt, creditors want at PPF’s assets
b. Decision: Court weighed this relationship with a typical partnership relationship
i. Taken together, the balance was tipped towards not constituting a partnership
ii. Inconsistent with partnership
1. Securities were to be returned to PPF; normally partners do not get
property returned personally
2. KNK were to turn over some of its securities as collateral to PPF, rare to
have partners provide others with a security interest
3. Loaned securities were not to be mingled with other KNK securities
4. KNK could only sell PPF’s security with their permission
5. PPF would be paid all dividends and interests from loaned securities
6. PPF could sell securities and keep proceeds to themselves
7. PPF could substitute the securities (partnership property) unilaterally
8. PPF partners could not initiate any action or bind the firm
iii. Consistent with partnership
1. 40% share in profits (although there was a maximum)
2. P and F were kept advised of conduct of business and were consulted
on important matters
3. P and F could inspect books of KNK
4. P and F could veto business
5. P and F could remove KNK as partners
6. KNK assigned interests in the firm to P and F as trustees
7. Partners’ right to draw funds from firm was fixed, no loans could be
made to KNK
c. Policy:
i. Reliance: 3rd parties may have relied on the business to have substantial equity
ii. Unjust Enrichment: There may have been if PPF received a share of the profits
while others provided goods and suffered a loss
iii. Least Cost Avoidance: PPF had some ability to assess and control for the risk,
they presumably should have made a careful assessment of the risk involved,
they could inspect the books, veto business and remove KNK as partners
iv. The court wants to support partnerships in temporary financial trouble, and will
thus protect these kinds of arrangements to keep suffering partnerships afloat
Section 5: Subordination of Lenders for a Share of Profits
1. When will s.5 subordinate a loan
a. s.5: If a person to whom money is advanced through loan on contract as mentioned in
s.4 or a buyer of goodwill either (i) Becomes insolvent and enters into an arrangement
to pay creditors under fixed agreement; or (ii) Dies in insolvency THEN the lender is not
entitled to recover anything in respect of the loan or share of profits until the claims of
the other creditors are satisfied
2. Re Fort (1897): Written contract not required
a. S loans $3K to F with interest and 50% of F’s business, loan was not in writing, F failed to
pay and became bankrupt while S’s judgement went unsatisfied; S put in a claim but
was refused by F’s trustee because S was subordinated under an equivalent to s.5; S
argues the contract was not written
b. Decision: s.5 will apply regardless of whether the contract is written out
i. Policy: Wealthier party will get limited liability and the right to share in the
remaining assets of the partnership since the oral K cannot be challenged
3. Canadian Commercial Bank (1992, SCC): s.5 does not apply when lender’s right to share in
profits is limited to repayment of loan principal
a. CCB was in financial difficulties, loans were given, lenders got a right to share in profits
only until principal and interest was paid in full; bank fails, creditors look to line up
equally with unsecured creditors; trustee does not accept this claim
b. Decision (Iacobucci): Where the share of profits is limited to repayment of principal
amount of the loan plus interest, 4(c)(iv) does not apply; falling instead to s.4(c)(i)
i. s.5 does not apply to 4(c)(i)
1. s.5 refers to a contract of a type mentioned in s.4, and s.4(c)(i) does not
refer to a contract
ii. Policy: The participants did not get the benefit of a share of profits over and
above repayment of the principal and interest at prime rate
4. Rushforth (1964, SCC): s.5 does not apply to the extent there is a security interest
a. First loan by S for $45K plus a 50% share of profits, S later obtains $35K fund serving as
security interest for this loan, Second loan by S for $5K with no right to share in profits
b. Decision: S ranked ahead of the unsecured creditors to the extent of the security
interest, with the unsecured creditors for the $5K advance with no share of profits, and
subordinated under s.5 for the initial loan because it was for a share of the profits, and
thus mentioned in s.4(c)(iv)
c. Policy: Third parties can check a registration system to see if there are security interests
Retirement of Partners
1. Set out requirements of section 39
a. s.39(1): Persons dealing with a firm after retirement of a partner can treat all apparent
members of the pre-retirement firm as partners until notice is given
i. Actual notice is required for those with past dealings (Ingram)
ii. Apparent partner: Aparent to those dealing with the firm and not what was
apparent to the world (Ingram)
b. s.39(2): Persons who have not had prior dealings with the firm notice can be effected
through Gazette
c. s.39(3): A retired partner will not be liable to those who can be shown not to have
known a retired partner was a partner
2. Set out requirements of section 84
a. 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 a partner
3. What is the policy behind these sections
a. Reliance: Without notice those dealing with partnership will continue to believe it
i. This is why notice to Gazete is sufficient, or actual notice is required
4. What steps should be taken when a partner leaves
a. Onus is placed on the retiring partner to take the following steps:
i. Provide actual notice to all those with whom the firm has had prior dealings
1. It will be difficult, but it is advisable to call all the creditors possible
2. The longer it has been since the person dealt with the firm, it will be
more reasonable they should at least check the registry again
ii. Put a notice of the retirement in the Gazette
iii. File a revised registration statement removing the name of the retired partner
from the list of partners in the firm
b. It is also advisable to have the partnership agreement provide a right to a retiring
partner to require that specific steps be taken to reduce the risk of continuing liability
Advantages of Partnerships
1. Corporations are often not available for professional businesses
2. Partnership is easy to form
3. Partnerships are a flexible form of association
a. Corporations require several statutory requirements to be met
4. Beneficial for tax reasons since losses can be used by partners to offset gains from other sources
5. Partnerships do, however, carry personal liability
Chapter 7: Limited Partnership
Introduction
1. Why use limited liability
a. Creditors and investors could make a contractual arrangement in which the creditors
agreed they could not seek recourse to the personal assets of the investors
i. With a limited liability, this becomes the default rule
2. Explain the purpose of the cautionary suffix signalling limited liability
a. It signals to third parties that some of the partners have a limited liability
What is a Limited Partnership
1. Describe a limited partnership
a. A limited liability partnership consists of one or more general partners and one or more
limited partners
i. Liability of general partners is not limited
ii. The liability of limited partners is limited to the amount they contribute to the
limited partnership
2. Explain how a limited partnership is formed
a. Filing a certificate under s.51 is essential to the formation of a limited partnership
b. Without a certificate, no limited partnership will be found, even where intention exists
Characteristics of Limited Partnerships for the Protection of 3 rd Parties
1. Discuss seven features of the limited partnership provisions that protect 3rd party interests
a. s.53(1): Cautionary suffix is required
b. s.53: name of a limited partner must not appear in the name of the limited partnership
c. s.55: Limited partner cannot contribute services to the partnership
i. It might lead a third party to believe the limited partner is a general partner
d. S.64: Limited partner cannot take part in the management of the partnership
e. Certificate must state who the general partners are
f. S.59: No return of capital to partners is permitted if after the return of capital the
partnership would be insolvent (“no abandoning ship provision”)
i. The equity investors can only recollect after the creditors
g. S.51: Certificate must state the contribution provided by the limited partners
i. Helps third parties determine the amount of capital
Cases on Taking Part in the Management of the Business
1. Discuss the problem that may arise if a limited partner is also an officer of a corporate general
partner
a. A corporation can be the general partner
i. Limited partners will be personally liable if they take part in the management
2. Zivot (1986 ABCA): Limited Partners taking management roles in the general partner will be
personally liable for the partnership
a. Z promoted “Goodlife” magazine produced by affiliates with ads provided by LP
Princast, Z was a limited partner; General partner was a corporation called Lifestyle, Z
was the president of Lifestyle and took part in running of Princast as officers of the
general partner (Lifestyle)
i. Z dealt with Haughton Printing; and Haughton claimed that Z took part in the
control of the limited partnership and was thus liable as a general partner
b. Decision: If a limited partner takes part In the control of the business they are liable as a
general partner
i. This is true even if the third party did not rely on their personal liability
1. In this case, Z was in control of the general partner of the partnership,
thereby controlling the partnership generally
2. Therefore Z was held to be personally liable owing to his involvement in
the control of the limited partnership
3. Although, Haughton Printing did not know what LP was, so they didn’t
rely on the partners, but “no specific reliance” is not a defence
3. Nordile (1992, BCCA): If limited partner acts solely in their capacity as an officer of the general
partner, they will not be personally liable
a. B was an officer in Arbutus, the general partner of Arman LP; Arman bought property
from Nordile with mortgage attached; mortgage includes clause that only the LP and
general partner would be personally liable; “takes part in management” is much
broader than “takes part in control” (s.64)
b. Decision: The clause had made it clear B could not be held liable, even though he took
part in the management of Arbutus but not in the management in their capacities as
limited partners
i. In other words, B acted solely in his capacity as officers of the general partner,
not in their capacity as limited partner
ii. Therefore, they were not liable under s.64
c. Question: Was B a limited partner of Arman?
Relationships among the Partners
1. Explain separation of ownership and control
a. Limited partners are typically the major contributors of the capital and are thus owners
b. The limited partners do not control the business leading to the separation
2. Explain potential for limited partners to be taken advantage of
a. Separation of ownership and control puts limited partners at the mercy of the managers
3. How does the Partnership Act protect limited partners
a. There are no mandatory provisions protecting limited partners; however, partnership
agreements can still provide protections for limited partners
b. s.56: General partners cannot do something that makes it impossible to carry on the
partnership business, or agree to a judgement against the partnership
c. s.58(1)(c): Provides limited partner same right as a general partner to obtain dissolution
and winding up of the limited partnership
i. This can happen when circumstances are “just and equitable that the
partnership be dissolved” eg. when business conducted by general partners is
operated in an oppressive manner to limited partners
4. Describe four other aspects of the relations among partners
a. Right to inspect books and disclosure s.58(1)(a),(b)
i. Note: These may be default provisions
b. Partner cannot assign interest in the partnership without consent of other partners
c. Restriction on the admission of additional partners
i. s.56(d): A general partner has no authority to admit another partner unless
they’ve been given the right to do so
d. Limited partners share in the profits and any return of capital in proportion to their
contributions s.61
Why Use Limited Partnership
1. Financing the start of a business
a. Losses can be passed on to the limited partners who can use the losses against other
sources of income
i. Note: does not apply to LPs that have publicly traded units
2. Greater degree of flexibility as opposed to a corporation
Chapter 8: Limited Liability Partnership
Background
1. What are the origins of the limited liability partnership
a. Increasing scope of liability amongst professions made it difficult to obtain adequate
insurance coverage, leading to a form of liability that still allowed partnerships
Structure of Limited Liability Partnerships
1. Saskatchewan, Alberta, Ontario: Partial Liability Shield
a. Partners are not liable for the malpractice of fellow partners/employees unless they
were direct supervisors for the activity
b. Partners do not have to indemnify fellow partners liable for malpractice
c. Partners are still personally liable for the firm’s debts
2. British Columbia: Part 6 Partnership Act
a. Full Shield Liability, subject to changes in the partnership agreement
i. s.104(1): Partner in a limited liability partnership is not personally liable for a
partnership obligation
ii. s.104(2): Partners are liable where they knew of the wrongful act of a fellow
partner and did not take actions a reasonable person would take to prevent it
1. And liable for their own wrongful act or omission
b. s.100: Cautionary suffix “LLP” required as part of its business name
c. Registration is required, without it, partners are treated as if they were in a general
partnership
i. s.114: extra-provincial or foreign LLPs require registration as well or they will be
treated as if they were in a general partnership
3. Differences from Limited Partnerships
a. Gives the LLP the advantage that partners can take part in the management of the
partnership business without becoming personally liable for partnership debts
Chapter 9: Overview of the Corporation
General Structure of a Corporation
Capital Structure
1. Structure of For Profit Corporations
a. Equity interests are divided into shares, holders of shares referred to as shareholders
i. Shareholders invest for return, their liability is limited to the amount of their
investment
b. Three essential shareholders’ rights: voting, dividend and liquidation
i. Voting right: Right to elect directors who will manage the corporation
ii. Dividend right: Right to receive distributions out of the profits of the
corporation
iii. Liquidation right: Right to receive what remains when the assets of the
corporation are sold and liabilities are paid off
2. Structure of Not-for-profit Corporations
a. Members, instead of shareholders pay fees to provide capital required to carry on
corporation
b. Have voting rights
Management Structure
1. For Profit Corporations
a. Board of directors – Elected by shareholders
i. Responsible for managing the corporation
ii. Directors appoint officers to manage day-to-day operation
1. Officers can engage others to carry out managerial tasks
2. Not-For-Profit
a. Executive Board – Elected by members
i. Reponsible for managing the corporation
ii. Directors appoint officers to manage day-to-day operation
1. Officers can engage others to carry out managerial tasks
Key Features of the Corporate Form
1. Identify three features of the corporation
a. Limited Liability
b. Separate Personality
i. A corporation can own property, enter into contracts, and commit crimes
c. Perpetual existence
i. Corporations don’t end when a shareholder dies or sells their shares
2. How do these three features involve policy choices
a. These three features are not immutable features of corporations
i. There is no statute that requires them, it might just be a choice to distinguish
corporations from other forms of association
Chapter 10: Benefits of Limited Liability
1. Explain the possible benefits of limited liability (could be an essay question)
a. Valuation Costs
i. Reduces the costs of valuing a business
ii. There is no need to consider the wealth of the partners to assess risk
1. Individual wealth is irrelevant since shareholders aren’t personally liable
b. Monitoring Costs
i. Reduces the costs of monitoring a business: no need to monitor the wealth of
other partners
ii. In partnerships, bad management decisions could also put one’s personal
wealth at risk, but there is no such risk where individual liability is limited
c. Diversification – Investments in different fields is a good thing
i. Investments do not expose one’s personal wealth to risk, since a bankruptcy
would only mean loss of the investment, not personal assets
1. In partnerships an investment could mean risking personal wealth
ii. Lowers the risk facing investors, which lowers compensation and thus prices
1. It is good for society as a whole
d. Liquidity – Investments you can retrieve and reinvest elsewhere are good
i. Highly unlikely there will be any restrictions on the resale of investments
1. More difficult to sell unlimited liability investments since purchaser will
want increased compensation from the returns
2. Also, partners are likely to construct restrictions on sales to control who
they are in business with and protection from less wealthy investors
who may not indemnify the remaining partners
ii. Lowers the risk facing investors, which lowers compensation and thus prices
1. It is good for society as a whole
e. Optimal Investment Decisions
i. Although there may be excellent investment opportunities, the risks may
require investors to demand higher returns, which may prevent investments
ii. Through protection from risk, investors are more willing to invest in ideas with
lower returns
f. Market Price Impounding Information
i. Historical price paid for investment in unlimited liability companies means little
1. The wealth of the partners plays a huge role in determining what an
investment in the partnership is worth given its relationship with risk
ii. In limited liability, it does not matter what the wealth of fellow investors is
1. The relevant items to consider in valuation are cash flows and risk
2. The quoted prices are much more reliable and stable, and provide a
reliable source of information as to what an investment ought to cost
g. Economies of Scale - Increasing size of production process decreases cost of providing
goods
i. Increasing the size of production requires greater capital
1. Limited liability favours greater infusions of capital than unlimited
liability, it is easier to accumulate large amounts of capital from large
amounts of investors
2. Large numbers of investors are turned off by the high monitoring and
valuation costs required in partnerships
ii. This benefits society since costs are correspondingly lower for goods
2. Explain why the costs of an unlimited liability investment increase with number of investors
a. Valuation
i. In partnerships one incurs the additional cost of assessing the wealth of other
partners
ii. Cost of valuing investments in unlimited liability increases with the number of
investors since additional individual wealth assessments are required
b. Monitoring
i. As individual wealth decreases so may the desire to be in a partnership
ii. Thus, monitoring the wealth of fellow partners is important, and will increase
with the number of investors
3. Note: Creditors typically charge higher rates of interest where there is limited liability
Chapter 11: History of the Corporation in England and Canada
1. Describe the Historical Development of Corporations in England
a. Public and ecclesiastical bodies (eg. monasteries) were separate legal persons prior to
15th century
b. Merchant guilds were arrangements made by people that regulated their trade (eg. it
operated like a cartel)
c. Early Partnership: commenda – loans to trader for share of profits; societas – forerunner
to our modern partnerships
d. Foreign Trade Ventures: Companies like Hudson’s Bay were formed by Crown charter,
took investments from traders and sent profits to investors based on the sale of goods
e. Joint Stock Companies: Partnership interests divided into transferable shares,
agreements started to be made with creditors limiting liability to assets of the business
f. Domestic Chartering: Basically local trade monopolies established by Charter
g. Companies Created by Separate Statutes: Companies formed under separate statutes,
17-18th century; Not to be confused with general statute of incorporation
h. South Sea Bubble: Ponzi scheme leads to Bubble Act which made joint stock companies
(large partnerships) illegal; Corporations formable only by Charter or separate statute
both of which were very difficult
i. The Bubble Act delayed development of corporations, and led to partnerships
which restricted share transfers and business trusts
ii. 1825: Bubble Act was repealed, unincorporated joint stock companies are legal
i. General Statutes of Incorporation: 1844 joint stock company regulation is passed
providing incorporation by registration and preservation of personal liability
i. To form a company one need only fulfil the requirements of the Joint Stock
Company Act, you no longer required a separate statute
ii. 1856: Regulation is revised to provide for limited liability
2. Why did general statutes of incorporation providing for limited liability come into existence
a. Pressure to accumulate capital dramatically increased in 19th century resulting from
technological improvements in transportation and production processes
i. The requirement for large amounts of capital increased, but the costs of
unlimited liability caused investors to flake; creating a desire for limited liability
1. These desires led to a statutory grant of limited liability
b. The industrial revolution also produced a very large group of wealthy investors
i. Constraints on corporate forms of organization would have limited investments
3. Describe the Historical Development of Corporations in Canada and British Columbia
a. Early Crown Charters
b. 1850: United provinces enact general incorporation statute for companies, which
allowed limited liability, was a separate entity and an expeditious incorporation process
c. 1864: Another general statue requires letters patent, public notice of incorporation and
satisfaction of a novel corporate name
d. Memorandum of Association: Contract amongst shareholders, makes incorporation a
matter of right; Became the model for general incorporation statutes in British Columbia
e. Memorandum of Association and Letters Patent Distinguished: Letters patent were
granted as an exercise of Crown prerogative, while memorandum were a matter of right
i. Letters were much more detailed with specific unalterable provisions
ii. Articles of Association were completely flexible
f. Modern Developments: Articles of Incorporation become basic corporation document
i. Canada Business Corporations Act is copies by several provinces
g. 2002: BC replaces Company Act with Business Corporations Act
i. It replaces memorandum with an incorporation agreement and notice of articles
as the main incorporation documents (the contents are similar to those
required in memorandum)
4. How can a corporation form in Canada, note the different general statutes of incorporation
a. Still theoretically possible for corporations to be created by Crown Charter (unlikely) or
separate statute (has been done for hospitals, municipalities, universities etc.)
b. General statutes of incorporation make the formation of corporations relatively easy
i. Simply file the specified documents in the general statute of incorporation
ii. These statutes include Canada Business Corporations Act, Canada Not-for-profit
Corporations Act, their provincial equivalents and general statutes for particular
types of businesses (ex. Bank Act, Insurance Companies Act etc.) as well as
those provincial equivalents
Chapter 12: The Constitutional Position
1. Identify the basis for federal and provincial powers to incorporate companies
a. s.92(11) Constitution Act: Each province has the power to incorporate companies with
provincial objects
b. s.91 Constitution Act: Federal government is given power to make laws in relation to all
matters not exclusively assigned to the provinces
i. The Federal Government, through its residual powers can make laws for
incorporation of companies with objects other than “provincial objects”
2. Describe the scope of the power to incorporate companies in each jurisdiction
a. Provincial Power: Bonanza Creek (1916): Scope of Provincial Power
i. Facts: Bonanza was incorporated via an Ontario general statute of
incorporation; Federal government granted mining leases to Bonanza with a
right to obtain licenses on relinquished adjacent licenses; Bonanza sought to use
this right, but was refused by the federal government
ii. Decision: Province of Ontario could confer powers to companies to carry on
business within and outside the province but could not give a company the right
to operate in another jurisdiction
1. The Yukon government, in granting a licence to Bonanza had granted
the right to carry on business in the Yukon
2. A company can be incorporated under a provincial statute and still carry
on business in that province and any other province
a. The limitation is if the other jurisdiction grants the company the
right to carry on business within its jurisdiction
b. Federal Power
i. Power to incorporate companies relating to all matters not within the provinces
powers, that is to say, things outside of “provincial objects” (Parsons)
ii. John Deere Cases: Residual Federal power of incorporation gives federally
incorporated power and right to operate throughout Canada
1. Wharton (1914): Wharton was a shareholder in John Deere(1), which
was incorporated in BC and sought to stop John Deere(2), which was
federally incorporated, from carrying on business in BC; BC legislation
allowed non-BC incorporated companies to operate so long as it
obtained a license; one condition was that the corporate name be novel
a. Wharton argued the names were too similar for JD2 to get a
provincial license
2. Duck (1914): Duck purchased a tractor from JD(2) and he failed to pay;
Duck says there can be no action because the company was not
registered and therefore JD(2) could not maintain an action
3. Decision: Federal government’s residual power to incorporate
companies meant federally incorporated companies had power and
right to operate through Canada
a. Although the Registrar could refuse licenses, it would be
contrary to the constitutional right of federally incorporated
companies to do business through Canada
b. Wharton: Although the names were similar, the registrar could
not refuse to incorporate the federally incorporated JD(2)
c. Duck: Remitted to the court below
i. Great West Saddlery (1921): Legislation prohibiting a
company from judicial action in province without a
license could not be applied to a federal company
iii. A federally incorporated company need not carry on business in more than one
province to be valid (Colonial Building and Investment Association)
iv. Federally incorporated companies can concern matters outside enumerated
federal powers listed in s.91 Constitution Act
v. Note: Several cases have upheld provisions of federal corporate law that might
fall within Provincial power with respect to property and civil rights
1. The key is if the power is ancillary to federal power to legislate
c. The potential implications of Wharton and Duck were quite broad
i. AG Can v. AG Man (1929): Provincial legislation could not be applied to federally
incorporated companies (specifically in this case, provincial securities legislation
would make it difficult to even begin to carry on business for federally
incorporated companies)
d. The Federal scope was reigned in
i. Lymburn (1932): Alberta statute of securities could be applied to a federally
incorporated company since it did not prevent the company from raising
necessary funds to carry on business
ii. John Deere Plow: Incorporation does not confer immunity from provincial
regulatory laws
iii. Canadian Indemnity (1977 SCC): Provincial public automobile scheme prohibits
sales of automobile insurance by anyone other than ICBC and is upheld
1. Effectively overturns John Deere Cases
iv. McCutcheon (1982 SCC): Provincial legislation identical to legislation in the
federally incorporated legislation could still be applied to the federal company
v. Re: the Constitution Act (1991): Provincial Legislation regulation requiring
registration of corporate name is valid
vi. Re: Royalite Oil (1931) Provincial legislation imposing penalties for failing to
obtain extra-provincial licence before carrying on business can be applied to a
federally incorporated company
3. Discuss the implication of the constitutional position
a. Both provinces and government can pass valid legislation for company incorporation
b. One can choose to incorporate either under Federal or Provincial statute and still carry
on business anywhere (meaning there are 14 possible jurisdictions of incorporation)
i. Corporation incorporated under a provincial statute can carry on business
through Canada (and the rest of the world) so long as they permit it to do so
ii. Federally incorporated companies can operate in one or more provinces
c. Provincial legislation requiring federally incorporated companies obtain licenses to carry
on business is valid and can be imposed through fines
i. This legislation can extend to extra-provincially incorporated companies as well
d. Federal incorporation provides a protection of the corporate name
i. Provincial registrar cannot refuse the extra-provincial registration of a federally
incorporated company
ii. Note: A provincial business can sue a federally incorporated company for trying
to pass off if it tries to use the same name
Chapter 13: Incorporation Process
Incorporation
1. Who may incorporate a corporation under the CBCA
a. One or more individuals or bodies corporate may incorporate (s.5)
i. Individuals cannot be under 18, have unsound mind as found by a court or be
bankrupt
2. What documents must be filed and what steps must be taken to incorporate under the CBCA
a. s.7: Articles must be sent to the Director with documents required by ss. 19 and 106 in
compliance with the requirements of s.6
b. (1) Sign articles of incorporation
c. (2) File a notice of registered office
i. s.19(2): Notice of the registered office of the corporation be sent to the Director
d. (3) File a notice of directors
i. s.106(1): Notice of the directors of the corporation be sent to the Director
1. Director: Administrator of the CBCA
2. directors: directors of corporations
a. No individual power unless specifically granted by the group
e. (4) Pay filing fee (s.97)
f. (5) If corporation has a non-numbered name, it must file a NUANS Name Status Report
i. The name cannot be confusingly similar to the name of another corporation or
business
ii. A novel numbered name with Canada Ltd. is acceptable
iii. A non-numbered name requires incorporators to search through the NUANS
database
g. Director shall issue a certificate of incorporation after the corporation meets the
requirements, including the acceptability of the corporate names
h. Articles are the primary constitutional document of the corporation
i. Must set out the name, restrictions, classes of shares, which province the
registered office is in, number of directors (may include other things as well)
3. Identify required post-incorporation organizational steps and reasons for them
a. s.104: After the issue of certificate of incorporation a directors meeting shall be held
where they may:
i. Make by-laws, adopt security certificates, authorize shares, appoint officers,
appoint auditors, make banking arrangements, transact business etc.
1. s.20: Company must maintain certain records, first meeting can
establish how
ii. by-laws: set procedures at meetings, allotment and issuance of shares,
declaration and payment of dividends and appointment of officers
4. Describe the approach of the CBCA to corporate names
a. Common, Provincial and federal laws regulating corporate names
b. Director has power to refuse prohibited or deceptively misdescriptive names (s. 12(1))
or alternatively order a corporation to change its name (s. 12(2)
i. Names which are outright prohibited
1. eg. “Parliament Hill”, “RCMP”
ii. Names which are too general
1. Where it describes a quality of goods (Running Shoes Ltd.), or is the
name of an individual or geographic place (Jim Smith Ltd.)
iii. Names which cause confusion with other names
1. Other names: corporate names, business names, or trade names
2. NUANs helps identify names which may be confusingly similar
3. This avoids persons looking at the wrong information in the registry
iv. Names which are misdescriptive
1. Misdescription of the business, goods or services, conditions under
which it will be produced or supplied, or the place of origin
c. Essential Elements of most corporate names
i. Created with a descriptive part, a distinctive part and the suffix
1. Eg. Kwitifit Shoemakers Ltd.
d. s.11: You can reserve corporate names for 90 days, or use a numbered name and switch
e. s.29 Incorporation Act: A corporation using a business name other than its corporate
name must have it registered
i. Ex. Acme Shoe Co. may do business as “PlusGuppies”, it must register the name
Seven Advantages of Incorporation & Related Criticisms
1. Limited liability
a. Partnership: Joint and several liability
b. Critique: It is common for creditors to ask for a personal guarantees from shareholders
before advancing substantial amounts of credit; effectively reversing limited liability
i. Also common for lessors of property, suppliers
ii. There may still be protection against personal liability for a relatively
insignificant amount of trade credit
c. Protects against personal liability to tort claimants for torts committed in the business
i. However, there is a possibility a court may pierce the corporate veil, finding
officers have committed the torts themselves
ii. Regardless, insurance against tort claims is recommended in corporations
2. Perpetual succession
a. Partnership: Indefinite tenure
b. Critique: May not be a significant advantage over sole proprietorship and partnership
i. It may not be a large problem, the business might be bequeathed and continued
ii. Contracts may anticipate death, addition or bankruptcy of partners
3. Ease of transfer of shares
a. Partnership: Difficult to terminate partnerships in order to permit personnel changes
4.
5.
6.
7.
b. Critique: Securities laws place restrictions on initial distribution and subsequent transfer
of shares particularly likely to constrain the transfer of shares in small corporations
i. In small corporations, shareholders manage and will want to be careful about
who they are in business with which will limit who receives shares; Also, it is
expensive to comply with securities laws if shares are publicly distributed
1. Therefore, it is common for small corporations to restrict transfer of
shares that is identical to restrictions placed in partnerships
Shareholder cannot obligate body corporate alone
a. Partnership: Individual partners can bind the firm
b. Critique: In small corporations, individual shareholders are typically officers and are thus
given authority to bind the corporation in certain capacities
i. Important to ensure the shareholder isn’t cloaked with ostensible authority to
bind the corporation; 3rd parties will need to be aware of authority restrictions
1. The difference between partnerships is thus quite small
c. Torts will be binding on small corporations because the corporation will be vicariously
liable for torts where shareholders are officers
i. The shareholders who did not commit the tort themselves will still have the
protection of limited liability, but this is not a beneficial as it first seems
Shareholder can contract with or sue a body corporate
a. Partnership: Cannot sue or contract with the firm
b. Critique: There are often ways of doing some similar in partnerships
i. Eg. Partners can enter into a contract with other partners that is separate from
the partnership agreement
Facilities to secure additional capital
a. Partnership: Does not possess these heightened facilities
b. Critique: Partnerships can raise capital in a partnership the same way it is raised in
corporations
i. Shares: Make partnership units resemble shares (eg. attaching voting rights)
ii. Debentures: Anyone can produce an evidence of indebtedness with attached
terms (eg. voting rights)
iii. Compliance with securities legislation when selling such instruments broadly to
the public makes them as ready a financing source as partnership interests
Tax advantages can convert to the corporate form
a. Critique: While corporations receive tax advantages, there are tax disadvantages
i. Tax advantages from reduced rate will be of no advantage without a profit
ii. Double taxation: Even with the reduced tax rate for corporations, after the
corporation is taxed, the shareholders will have to pay taxes on that money
iii. Passed Losses: In partnerships losses incurred during start-up can be passed
through other sources of income, which cannot be done in partnerships
b. Advantages: (1) One can control the timing of distribution through corporation which
permits tax planning in reference to timings; (2) Tax paid at which is usually the higher
tax rate for the individual can be deferred which provides a tax saving for the individual
8. Pure Criticism: Costs of Incorporation
a. Incorporation fee, legal fees, filing of annual reports, maintaining corporate records,
filing tax returns
Choice between CBCA and BCCA
1. Why prefer Canadian Business Corporations Act (CBCA) over BCBCA
a. Name Protection
i. Provincial registrar cannot refuse the extra-provincial registration of a CBCA
corporation even if there is another similar name in the province
b. No restriction on maintaining an action
i. Can be a concern regarding uncertainty with respect to carrying on business
c. Lawyers and shareholders in other provinces are familiar with it
i. Model for statutes of incorporation in several other provinces
2. Why prefer British Columbia Business Corporations Act (BCBCA) over CBCA
a. Local lawyers trend to be more familiar with it
b. Easier to deal with Victoria than Ottawa (few hours to communicate with Ottawa)
c. Cheaper (CBCA has more registration than incorporation in BC does)
Reincorporation & Continuance
1. Define a reincorporation
a. Reincorporation – The process of changing the statute of incorporation
i. Corporation may decide to incorporate under a statute in another jurisdiction
2. Give an example of how reincorporation can be effected other than by continuance
a. Incorporating a new corporation in the destination jurisdiction, then have it issue shares
to the original jurisdiction’s shareholders in exchange for the original shares; Original
corporation will be wound up with the assets transferred to the new corporation
3. Identify the steps in the process of continuance and the reasons for them
a. Continuance is a more convenient way of reincorporating; the process:
i. Obtain resolution from the shareholders permitting continuance (CBCA s.188(1))
1. It protects against adverse changes in shareholder rights
ii. Obtain approval from the Director (CBCA s.188(1))
1. Another protection against adverse changes in shareholder rights
iii. Register in other jurisdiction making amendments to incorporation documents
making them conform to the requirements of new jurisdiction (including name
requirements)
b. Import Continuance: Continuance into CBCA is a similar procedure:
i. Obtain resolution from the shareholders permitting continuance
ii. Obtain approval from the registrar who administers the home statute
iii. Obtain approval from the Director for certificate of continuance (s.187(1))
1. Send articles of continuance to the Director with notice of registered
office and notice of the directors (s.187(3))
Extra-Provincial Registration
1. Explain the main purpose behind foreign corporation registration
a. Foreign Corporation Registration – Requirement corporations not incorporated in a
jurisdiction, register there if they are “carrying on business”
i. Ex. Bonanza Creek was incorporated in Ontario, carrying on business in Yukon,
could do it with permission; it has obtained a license
b. Requirement provides a means through which a foreign corporation can be served with
legal documents within the jurisdiction
i. Without registrations the corporation will be subject to penalties
2. Identify situations where foreign corporations could be required to register in British Columbia
a. s.375 BCBCA: Foreign entities must register as an extra-provincial company within two
months of beginning to “carry on business” in BC
i. Foreign Entities:
1. Foreign Corporation – Corporation that is not incorporated in BC
2. Limited Liability Companies – Business entity organized in a jurisdiction
other than BC recognized as a legal entity which is not a corporation,
partnership or limited partnership
ii. Carry on Business
1. S.375(2): Foreign entity carries on business in BC if its name is listed in a
telephone directory or an advertisement with an address or telephone
number in BC, or has an office/place of business in BC
2. Carry on business is intentionally left to liberal interpretation
3. Shipping goods into the province is not carrying on business
4. On the other hand, frequent visits by salespersons selling substantial
quantities may require registration
b. Registration requirements
i. Reserving of the name, filing of registration statement, appointment of attorney
ii. S.380: Must file an annual report updating its filed information
Chapter 14: Preincorporation Contracts
1. What is a preincorporation contract?
a. Preincorporation contracts arise through promoters who enter into contracts for a
company before the expense of incorporation is incurred
b. Party purports to act as an agent has no authority, and the contract cannot be ratified:
i. Party seeking to ratify must have been in existence and ascertainable at the
time the other person purported to act on its behalf
ii. Party seeking to ratify must have capacity to do the act at the time the other
person acted and at the time of ratification
Cases on Preincorporation Contracts & Criticisms of Common Law Position
1. Kelner (1866): Companies cannot ratify contracts entered into on its behalf if company did not
exist at the time; agents may be liable for preincorporation contracts if they intended to be a
party
a. Facts: Kelner contracted with agent of preincorporated company, decision was ratified
but promoters did not receive certificate of incorporation until after ratification; A
second ratification made days before company went bankrupt
b. Decision: A company cannot ratify a contract entered into on its behalf if the company
was not in existence at the time
i. 1st ratification invalid since company was not in existence, 2nd ratification was
invalid because the can only be done by a principal with capacity to contract at
the time the contract was entered into
ii. A promoter can be liable on pre-incorporation contracts, but only if it was
intended in the circumstances that the promoter was a party
1. Here, there was an intended contract as between the agent, therefore it
is valid amongst the purported agents acting on behalf of the
corporation and Kelner
2. Newborne (1953): Promoter liability is based on a rule of construction approach
a. Facts: Newborne entered into a contract signed by Newborne with the name of his
preincorporated company; sues as the corporation and under his own name
b. Decision:
i. Company: No incorporation at time of contract, action dismissed
ii. Name: Promoter liability is based on a rule of construction approach: Promoters
are only liable if it was intended in the circumstances that they were to be
parties to the contract
1. Here, the contract was intended to be with a corporation that did not
exist, Newborne could not be a party to it himself
3. Black (1966): Adopts Newborne’s rule of construction, look to the nature of the contract
a. Black contracts with directors of preincorporated company;
b. Decision:
i. Kelner does not mean agent signing for a non-existent principal is bound
ii. The defendant promoters are bound by contract according to the nature of the
contract itself
1. Contract with the company was intended, therefore no contract
c. Note: Defendants could be liable for breach of warranty for authority since they
purported to act on behalf of a non-existent corporation
4. Wickberg (1969, BCSC): If contract’s nature is personal liability, promoters will be liable
a. Defendants decide to incorporate a new company, RDW, but it is never formed; instead
they form CD with Wickberg as manager; employment contract was on RDW letterhead,
defendants tell Wickberg company is to be referred to as RDW
i. Wickberg is dismissed but tries to enforce employment contract
b. Decision: It was not the intention that the defendants would be personally liable on the
employment contract
i. Someone signing on behalf of a non-existent company is not automatically
personally liable
1. Is it reasonable given the circumstances that there was a contract
between the plaintiff and persons who signed on behalf of the nonexistent corporation
a. In Kelner there was; in Black there wasn’t
ii. Wickberg is entitled to damages due to breach of warranty of authority
1. Defendants had represented RDW and could enter into contracts while
knowing the company did not exist; however, there was no connection
between the damages and breach
a. Damages are nominal since the corporation is insolvent
5. Criticism of Cases:
a. There is a risk of no enforceable contract
i. Allows for unilateral reliance and unjust enrichment
b. Creates unnecessary costs
i. Parties must take precautions to ensure the corporation has been incorporated
ii. Instead, allocate the costs of confirmation to whom confirmation costs the least
CBCA s.14 & Cases
1. s.14 modifies the common law
2. s.14(1): Unless the contract excludes (s.14(2)), a person who contracts as a purported agent of a
preincorporated company is personally bound and is entitled to the benefits
3. s.14(2): Corporation can “adopt” a contract after it incorporates if it does so within a reasonable
time; Corporation is bound by and entitled to the benefits of the contract
a. Corporation must merely signal intent to do so
4. s.14(3): Court may apportion liability between the corporation and purported agents
5. When does s.14 apply?
a. If the contract is not in writing s.14 does not apply
b. Constitutional Problem: Preincorporation deals with contract law, a provincial power
i. Response: Regulation of pre-incorporation contracts may be a necessary
ancillary power to the Federal Government’s power to incorporate companies
with objects broader than provincial objects
c. Jurisdictional Problem: What happens if preincorporation contract happens in a
province where the common law normally applies?
i. Response: Presumably if the CBCA is constitutionally valid, it is paramount
Landmark Inns (1982): Corporations cannot adopt repudiated contracts
6. Facts: Defendant signs lease as chairman of preincorporated company, Landmark incurs costs,
defendant then rescinds lease; Landmark claims for costs
a. Defendant argues the corporation takes liability per s.14(2) and he signed in the name
of the corporation he was not bound per s.14(4)
7. Decision: Corporation cannot adopt a repudiated contract since there is nothing to adopt, thus
14(2) cannot relieve the defendant; Having the name of the company on a contract is not
sufficient to alter liability of a promoter under s.14(4), there must be an express provision
BNS v. Williams (1976): As long as the third party is aware of who they are dealing with, they
risk the solvency of the corporation
8. Facts: A gets a second mortgage from BNS, proceeds are loaned to defendant’s preincorporated
company, 15 days later the company is incorporated; Company becomes insolvent, A makes a
claim
9. Decision: Court does not apportion liability
a. A was not misled as to which party she was advancing money to
b. Defendant did not mislead her as to who would assume responsibility for repayment
BCBCA s.20
1. s.20(2): Does not make the promoter liable on contract itself but on a deemed warranty
a. (a) Anyone who purports to enter into a contract for a preincorporated company
warrants that the company will
i. (i) come into existence within a reasonable time,
ii. (ii) adopt the contract within a reasonable time
b. (b) Will be liable to 3rd parties for damages for breach and
c. (c) measure of damages are the same as if
i. (i) company existed when contract was entered into
ii. (ii) person who entered it had no authority to do so
iii. (iii) company refused to ratify the purported contract
2. s.20(3): Corporations can adopt preincorporated contracts by signifying its intention to be
bound by it
a. s.20(4): (a) company will thus be bound by the contract as if it has been an original party
3. s.20(5): If company does not adopt contract within a reasonable time, any party to the contract
may apply for an order to make the company restore any benefit received by the new company
from the contract
a. This essentially insures against unjust enrichment
4. s.20(6): Any party to preincorporation contract can apply for an order (a) setting obligations of
the new company under the contract or (b) apportion liability between company and promoter
a. s.20(7): Court has discretion to do other things with the order
5. s.20(8): Promoters are not liable if the parties have expressly agreed so
Other Ways of Enforcing Pre-Incorporation Contracts under the Common Law
1. Promoter as trustee of a Chose in Action: puts promoter under fiduciary obligation to enforce
2. Company as assignee: Circumstances may allow court to treat contract as assigned to company
(as opposed to ratification)
3. Restitutionary Principles: Court may say there was a “quasi contract” or unjust enrichment
allowing for restitutionary remedy; thus redressing reliance in belief there was a valid contract
4. Infer a second contract: Court can look at past performance of terms and infer another contract
5. Order promoter to be an agent for the third party, and thus to make an offer to company on the
same terms as original contract
6. Consider the provisional contract as becoming binding on the effect of incorporation
Practical Notes
1. Promoters are at risk when they offer preincorporation contracts
2. To incorporate quickly, simply use a numbered name then switch; however, the numbered
name would need to be used on the contracts
3. Advisable for contracting parties to check the corporate registry to confirm the corporate status,
and standing
Chapter 15: Legal Status of Corporations
Salomon v. Salomon (1897): Corporations are separate legal entities
1. Facts: Salomon ran sole proprietorship and sold it to a company he formed; he was paid via
20,001 $1 par value shares (issued fully paid) out of 40,000 authorized shares, and $10,000 in
debentures; ($30,001 total payment plus cash when it was available up to $39,000) 6 shares
were issued to family; Salomon and wife lent money to company , debentures mortgaged to
Broderip which was followed by a default and a personal bankruptcy;
a. Authorized shares – Directors can have power to sell shares limited, in this case it was
40,000 shares and 20,001 were issues to father
b. Par value – nominal value assigned to the shares, in this case $1 which were issued to
father as fully paid making him a shareholder
c. Debentures – Document evidencing a debt, subject to specific terms set out in a
indenture (which is a document); Here it provided for securities
d. Broderip claimed debentures and accrued interest ($5,000) and was served first,
Salomon claimed equitable interest in debentures and received the remaining $1055
i. Liquidator challenged because the debentures were fraudulently issued to
defeat interest of creditors, and Salomon must pay $20,001 for his shares in the
company
2. Decision: Company is a separate legal entity, one person company is valid
a. Companies Act was complied with in all its particulars
b. When company was formed it was a different person than shareholders
i. Otherwise limited liability would be defeated
3. Policy:
a. Potential Fraud on Creditors: This is not fraud given the apparent value of business and
that Salomons loaned money to the business (which is not something one would do if
they wanted to defeat the creditors)
b. Deceiving creditors: Creditors may not have known business was now limited company,
or by book value of the business; but the court said that they had full notice in their
opportunity to check out the situation
Corporations as separate legal entities
1. Identify implications of Corporations as separate legal entities
a. Shareholder can also be a creditor of the Corporation
i. Shareholder who is also a creditor ranks equally with other creditors for debt
even ahead of other creditors to the extent of any security held for the debt
b. Lee’s Air Farming (1961): Shareholder can be director, officer or employee of the
corporation
i. Facts: Lee was sole shareholder, director, president and employee; died in
carrying it out, wife makes claim for compensation
ii. Decision: Lee was not employing himself since company and Lee are different
persons: Company was simply giving orders through its agent, Lee
c. Macaura (1925): Corporation owns the assets, not the shareholders
i. Facts: Macaura transferred company interest for $42,000 in the form of $1 par
value shares; timber was destroyed by fire after five insurance contracts are
signed, Macaura does not have an insurable interest; fraud charges fail
ii. Decision: The company had a separate existence, and assets were not
Macaura’s; Macaura could not claim on insurance without insurable interest
1. Only the company had insurable interest in the assets
2. Shareholders have contractual claims against company with respect to
rights given in the shares, but they do not have ownership in assets
3. Note: Shareholders may have insurable interest in assets (Kosmopolous)
but it does not mean shareholders own assets of a company (Sparling)
2. Identify potential problems
a. Shareholders may cause the company to become indebted to the shareholders when
company is about to become insolvent, may be able to defeat interests of creditors
i. Eg. eve of insolvency, corporation might issue secured debentures to
shareholders in exchange for shares
b. Company may make payouts to shareholders when insolvent, leaving creditors with no
assets to take since it has been distributed to shareholders prior to bankruptcy
c. Company may enter into unfair contracts with shareholders
d. Persons might set up a company with little capital and thus defeat the interests of
creditors who act in reliance of minimum amount
i. This could defeat tort claimants of a corporations
e. Third parties may be deceived into thinking they are dealing with an individual or
partnership when they are dealing with a corporation (eg. events in Solomon)
f. Persons may incorporate a company to avoid personal obligations or restrictions
i. Eg. a person commits not to carry on business in a given area, and incorporates
a company to carry on business in the area instead
ii. Eg2. Limiting licences per person, corporation and shareholder can each acquire
Chapter 16: Disregarding Corporate Entity (Piercing Corporate Veil)
1. Courts occasionally disregard concept that corporations as separate entities to assign personal
liability where it would be “too flagrantly opposed to justice” to apply the Salomon principle
a. Courts, however, rarely pierce the corporate veil
2. Articulate out the reasons courts have given for disregarding the separate corporate personality
a. Agency, Alter Ego, Instrumentality, Sham or Cloak
i. If the corporation is found to be an agent of the shareholder, and the
shareholder is thus found liable on a contract or vicariously liable for a tort the
person is treated as a principal, not a shareholder
b. Disregard of corporation by shareholders:
i. Court may pierce the corporate veil when the shareholders fail to maintain a
separate identity for the corporation
c. Conduct Akin to Fraud: Corporation Promoters used corporation to engage in conduct
akin to fraud
d. Affiliated Enterprises: Courts disregard corporate entity where the effect would link a
parent company with its subsidiary
3. Cases
a. Smith, Stone and Knight Ltd. (1939): Where the corporation is simply an agent of the
shareholder, the Corporation is not a separate entity & Test
i. Facts: SSK Ltd. owned all shares of a subsidiary company with business in B, City
of B expropriates subsidiary’s premises; SSK Ltd. seeks compensation
1. Law was that expropriation for subsidiary was lower than SSK Ltd.’s
ii. Decision: Where the corporation is simply an agent of the shareholder, the
Corporation is not a separate entity; Test:
1. Were profits treated as profits of the parent company?
2. Were those conducting the business appointed by the parent company?
3. Was the parent company the head and brain of the trading venture?
4. Did the parent company govern the trading venture, decide what should
be done and what capital should be embarked on the venture
5. Did the parent company make profits by its skill and direction?
6. Was the parent company in effectual and constant control?
a. In this case: the subsidiary was not a separate legal entity
iii. Criticism: Answers seem positive in virtually every parent-subsidiary relationship
b. Alberta Gas Ethylene Co. (1989, FTD, Affirmed in FCA): When SSK tests are all met ,
ignore separate legal existence of subsidiary company
i. Facts: AGEC sought financing, incorporated a Delware subsidiary under name
ASCO, US loans made to ASCO who made a corresponding loan to AGEC and
AGEC paid interest to ASCO in the same amount it was required to pay to US
1. MNR assesses AGEC for withholding taxes on payments made to nonresident company
ii. Decision: The six SSK tests are all met; thus ignore the separate legal existence
of the subsidiary company
1. For what purpose and in what context is the subsidiary being ignored?
c. Gregorio (1984, OCA): Unless subsidiary is used to unjustly avoid liability, it is separate
i. Facts: Gregorio bought a defective truck, defendant bought truck through
Canadian subsidiary ; Gregorio claims subsidiary and parent are the same
ii. Decision: A wholly owned subsidiary is separate, unless it is under the complete
control of the parent and is nothing more than a conduit used to avoid liability
1. It is applied to prevent fraud that would otherwise unjustly deprive
claimants of their rights
d. Transamerica (1996, OGD affirmed by OCA): Gregorio upheld
i. Facts: Transamerica lost $60 million from 54 defaulted mortgages, Canada Life
Mortgages acted as mortgage broker, is a wholly-owned subsidiary;
1. Transamerica argues separate entity of subsidiary should be disregarded
ii. Decision: Upholds Gregorio;
1. No triable issue that the court should look behind corporate veil
Situations Where Courts Will Pierce the Corporate Veil & Policy Explanations
1. Gap Filling: Courts disregard the corporate entity to achieve what the parties would have agreed
to had they turned their minds to the particular facts arising in the case
a. The court is essentially filling the gap; the parties would have provided for something
had they thought about it
b. Policy: Transaction Costs: Thinking of every creative use of corporations is costly
i. Eg. Creative uses may allow parties to avoid a basic obligation of a contract
ii. Without gap filling, cost of transactions would substantially increase
iii. Note: Courts must not fill in gaps the way parties likely would have, as it may
lead to higher transaction costs if the courts aren’t reasonably certain
c. Cases
i. Gilford Motor (1933): Gap Filling where Company is used as sham
1. Facts: Horne is managing director of Gilford until resignation, contract
had non-competition clause for five years, Horne sets up company with
shares divided between wife and employee, Horne was employee and
competed with Gilford
2. Decision: Company was a sham; Horne violated non-competition clause
a. Court filled in a gap in the contract in a way the parties
presumably would have
ii. Patterson-Boyd (1981, SKCA): Gap Filling Where Company is used to work
around explicit term in contract
1. PB received a loan with contract where PB shareholders were parties,
MG was bound to anyone until plaintiff was paid, and prohibited sales
to any company where PB shareholders were interested unless it was
made at prevailing market prices, PB shareholders also postponed all
claims against PB to plaintiff
a. PB did not have sufficient funds, PB incorporated new
corporation to deposit funds, and made a loan to PB with a
debenture that gave new corporation first access of inventory
2. Decision: Contract with plaintiff provided for this new corporation
a. Even if it did not, the court was willing to life the corporate veil
b. The shareholder had done things they contracted not to do
c. This decision brought the shareholders to the breach and
allowed for personal liability
2. Corporations Formed to Avoid Statutory Requirements:
a. Statutory gap filling: corporations may be used as a means of avoiding statutory
requirements or restrictions
i. The court is effectively saying if legislature turned its mind to the situation it
would have put in provisions preventing avoidance of the statutory obligation
ii. British Merchandise (1961)
1. Facts: Legislation permitted one licence per person; did not permit
holder of C to hold A; Corporation held C and formed subsidiary
applying for A; Licence was refused, Corporation responds subsidiary
was a separate person
2. Decision: Subsidiary was a device to do what legislation said it couldn’t
a. Licence was legitimately refused
b. Tax Avoidance Cases: Corporation being used to avoid taxes
i. Courts are willing to disregard corporate entity where companies are formed to
avoid taxes
3. Affiliated Corporations
a. Two identical cases with different results based on access to assets of individual
shareholders
i. Walkovsky: Ten taxi companies established by C, each company has two taxis,
each company carried statutory minimum of liability insurance; W sued one
company but the assets and insurance weren’t enough to cover damages
1. Courts would not make C personally liable
2. Access to personal liability had veil been pierced
ii. Mangen: TC was parent company of four subsidiary taxi; TC owned owning 60%
of the shares of subsidiary; M sues TC
1. Courts pierced veil to make subsidiaries and parent TC as one enterprise
2. No access to assets of individual shareholders when the corporate veil
was pierced
4. Misrepresentations
a. If a business enterprise is conducted through association with limited liability, and those
who deal with business are aware, they can charge a premium for added risk
i. Voluntary claimant can check this ahead of time
ii. Claimant’s costs are reduced with a legal requirement the enterprise provide a
cautionary suffix (eg. Ltd.)
b. Making investors personally liable where they misrepresent the extent of their liability
avoids incurrence of increased costs
i. Even if misrepresentation is inadvertent, it is still cheaper to make shareholders
personally liable
c. Cases
i. Gelhorn Motors (1969, MBCA): Changes in liability must be brought to attention
1. Facts: Defendants had car exchange business, dealt with GM; after a
month defendants incorporate; orders for cars made after incorporation
a. GM sues defendants for unpaid amounts; defendants claim the
suit should be with their corporation
2. Decision: GM was not made aware of incorporation; personal liability
ii. Chiang (1978, BCSC): Personal dealings without indication of limited liability;
personal liability
1. C gives watch to H for repair; business issues receipt for name without
suffix; watch parts were lost, then it was destroyed in a fire
2. Decision: H gave no indication of limited company, no evidence of
awareness thus the dealing was done on a personal basis
a. Thus, there is personal liability
3. Note: Although the decision to have H repair watch was not influenced
by misrepresentation, but this decision may have simplified matters
iii. Tato Enterprises (1979, AB Dist. Court):
1. Facts: TE was owed money from SB from contract signed by secretary
and president of SB; There was no SB, but there was an SBM; president
was paying amounts personally; SBM did not purport to ratify
president’s decisions
2. Decision: The failure of the president to comply with statutory
requirements (eg. getting the name right) deny him of limited liability
a. Thus, there is personal liability
3. Note: Although TE must have assumed it was dealing with a
corporation, president was still liable
4. Criticism: TE should have made sure who it was dealing with
a. Response: President was best placed to avoid this mistake
iv. Roydent Dental (1993, ONSC):
1. Facts: RDP was owed money by IIDS Co.; RDS made no inquiry whether
IIDS Co. was a corporation, it was actually an unincorporated division of
SHS Ltd.
2. Decision: Sole shareholder of SHS Ltd. was personally liable, since he did
not register business name of IIDS
a. No reliance, but it would have been difficult for plaintiff to make
inquiries since business name wasn’t registered
i. Name also gave a misleading impression
b. Lower cost for the shareholder to register the business name
i. Thus making it clear who was ordering the supplies
3. Note: Just because company fails to use cautionary suffix doesn’t mean
the plaintiff is off the hook (consider partnerships with co. in name)
d. Failure to use a Cautionary Suffix
i. S.10(5) of CBCA require corporation to use cautionary suffix on every order
form, contract, invoice etc. of the corporation
ii. Failing to use it is a punishable offence under CBCA s.251;
1. May make a shareholder personally liable
e. Seizing Upon Misrepresentation in Tort Actions to Effect Compensation
i. Failing to treat company as a separate entity will lead to courts effecting
compensation in tort actions, even though claimants aren’t those who deal with
company in advance, and thus not misled as to nature of the entity dealt with
ii. Wolfe (1969): Failure to follow statutes, increased risk of personal liability
1. Facts: Roller skating, words “Fort Whoop Up” everywhere, but business
was actually carried on by Chinook Sports Ltd.; other formalities were
not followed, Wolfe was injured, sued Moir (shareholder) personally
2. Decision: Moir had failed to follow statutory requirements, thus took
the risk of being held personally liable
5. Tort Claims (Non-Consensual Claimants, Distributive Justice and Incentive Costs)
a. Compensation: Corporate entity may be disregarded to compensate tort victim
i. Sometimes assets are inadequate, one way to deal is to make shareholders,
directors, officers or employees personally liable to make up for a shortfall
ii. Courts are sensitive to compensation for tort victims; however they will not
automatically pierce the corporate veil (consider Walkovsky, taxi hit person)
b. Policy: Incentive Costs and Efficiency: Risk of Personal Liability gives incentives to
companies to eliminate unnecessary risks in the business
Other Ways of Disregarding the Corporate Entity
1. Tort Action against Directors or Employees: Agents may be personally liable for tortious acts
a. Cases
i. Berger (1983): Executives hold personally liable for negligent actions including
failure to follow up
1. Facts: Ice on sidewalk, president of FA Inc. told employees to clear ice,
employees failed and president did not follow up; snowed again, ice
concealed by snow, employee Berger slipped and sued president
2. Decision: President had a duty to ensure walkway was safe and was
negligent by neglecting to do so
a. Although Workers Compensation Act precludes actions against
employer or fellow employee, it did not apply since an
executive officer was not an “employee”
ii. Said v. Butt (1920): No breach of contract where there is undisclosed principal
1. Facts: Said made allegations against Butt (managing director, PT Ltd.)
and other officials; Said sent Pollock to buy ticket for play, did not
disclose it was for Said, Butt prohibited admission and offered money
for ticket, sues Butt personally for breach of contract
2. Decision: Before breach of contract, there must be a contract
a. Pollock did not disclose who principal was, it was an undisclosed
principal; PL Ltd. would not have contracted had they knew
b. Thus, Butt could not be liable for breaching a contract that
didn’t exist
c. Also cited for broader notion that directors or officers can’t be
liable for torts committed when they were acting bona fide
within scope of their authority as agents for a corporation
iii. McFadden (1984): When officer acts outside scope of authority, they are
personally liable
1. Facts: McFadden was employed by PMAI Inc., US company;
employment contract was for a fixed term, and terminable on 60 days’
notice; Taylors incorporate PMAC Inc. which buys PMAI and continues
to employ McFadden under same terms; business assets sold back to
PMAI; remaining funds in PMAC withdrawn as salary for Taylors
a. McFadden is dismissed, Taylors withdraw funds from PMAC
which becomes insolvent; McFadden sues Taylors personally
2. Decision: IF an officer or director is to be relieved as an agent of the
consequences of tortious acts, it is because he acts under compulsion of
a duty to the corporation
a. it is not because he is the company’s alter ego
b. Where he does not act under compulsion of duty, he does not
act bona fide within the scope of his authority
i. Act is no longer justified, he is personally liable
c. Taylors were not acting in furtherance of obligations to PMAC
iv. ADGA Systems (1999, OCA):
1. Facts: ADGA had contract with CSC for tech support and maintenance of
security systems in federal prisons, contract up for renewal in 1991;
Tender required 25 senior technicians, Valcom had none but convinced
senior ADGA employees to work for them if tender was successful
a. ADGA sought damages for inducing breach of contract against
director and senior employees
2. Decision: Limits Butt exception to cases involving tort of breach of
contract
a. No basis to protect director and employees of Valcom from
liability for conduct on the basis that such conduct was in
pursuance of the interests of the corporation
3. Note: Broadened in British Columbia by Rafiki
v. Rafiki Properties (1999, BCCA): Director can attract personal liability in 3 ways
1. Facts: Rafiki contracted with Integrated for development management
services and construction; Rafiki alleged it relied on false
representations to its detriment
2. Decision: Director can only attract personal liability if acting (1) contrary
to interests of the company, (2) by fraud, or (3) with malice
vi. Better Off Dead (2002 BCSC): Director can attract personal liability where torts
are individual and interest is separate from that of the company
1. Facts: BOD claimed they relied on misrepresentations in advancing
funds to PP and extended claim to PP president
2. Decision: Personal liability for acts committed on behalf of a company
only where torts are individual, and allegations show identity or interest
separate from that of the company
b. Policy Considerations
i. Restores incentive to take sufficient care
1. Critique: This could lead to excessive deterrence, emptying coffers at
expense of investors for protection from personal liability
2. Counter: Controlled by indemnifying directors for liability incurred
through purchase of insurance; no liability of investors
3. Re-Counter: Uncertainty about potential scope of liability
a. Counter: Solution rests in insurance regulation
2. Use of Corporate Oppression Action
a. s.241 CBCA allows court to make orders for relief when conduct of corporation has been
oppressive or unfairly prejudicial to, or unfairly disregarded the interests of a
complainant in their capacity as a security holder, creditor, director or officer
i. s.241(3): Wide powers for relief, including orders compensating (s.241(3)(j))
b. Personal orders against directors or officers are appropriate where they personally
benefitted from the oppressive conduct, or furthered their control over the company
from it (Budd)
c. Oppression actions used by employees or directors
i. Heeger: Plaintiff was wrongfully dismissed, various wrongful acts, corporation
had no assets, ordered directors to personally compensate
ii. Platinum Wood: Plaintiff accepted lower interest in corporation in return for a
salary, after he had cancer, other directors removed salary
1. Wrongful dismissal grounded finding of oppression, directors who
removed salary were personally liable for damages
d. Oppression Actions used by creditors
i. Glasscell Isofab: GI supplied to TSL on credit, GI obtained judgement, but TSL
funnelled assets and employees to other companies, TSL ceased to exist
1. Oppressive application was successful against the directors personally
3. Knowing Assistance in Breach of Trust
a. Liability for knowing assistance in breach of trust a person requires actual knowledge of
the breach, recklessness or wilful blindness (carelessness not sufficient)
b. Air Canada (1993, SCC): Directors who knowingly breach the trust face personal liability
i. Facts: ML contracts with AC to sell tickets, ML was trustee, but violated the trust
contract when they put funds gained into a general account, a bank took funds
from general account saved for AC; AC sues ML and directors; ML was insolvent
ii. Decision: Because the directors were knowing in their assistance of ML’s breach
of trust the directors were held personally liable; They were in complete
disregard of the trust obligations with AC
1. Although one director was not as culpable, he was found to have
sufficient knowledge and thus liable
a. This knowledge requirement is not difficult to find
Other Stakeholders Affected by Limited Liability and Piercing Corporate Veil
1. Consumers can lose out on warranties
2. Employees lose out on the same wages
Statutory Provisions Can Hold Directors and Shareholders Personally Liable
1. CBCA s.118
a. S.118(1): Liable for issuing shares without receiving full payment
b. S.118(2): Liable for purchasing, redeeming or otherwise acquiring shares, paying
commissions for the sale of shares, paying dividends, providing financial assistance to
shareholders, directors, officers or employees or for paying an indemnity to a director or
officer if certain tests of insolvency are not satisfied
c. S.118(4): Shareholders can be compelled to indemnify a director liable under s.118(2)
who are recipients
2. Unpaid Wages
a. Vulnerabilities of employees who may not be paid when a business goes under
b. S.119 CBCA: Overrides any argument directors are not liable where there are unpaid
wages
i. Liable for up to 6 months of unpaid wages
ii. S.96 BC Employment Standards Act: Similar protection as s.119 for 2 months
c. Issue: When corporations face difficulties, directors fearing risk of personal liability,
resign leaving no board of directors when it needs one
i. Response: s.81.3, 136: Bankruptcy and Insolvency Act: high priority in asset
distribution given to those owed amounts for up to six months and $2,000
General Theory for Disregarding Corporate Entity
1. Voluntary Relationship – Consensual Claimants
a. Avoids costs of transacting around avoidance of obligations
b. Avoids costs of gathering information
2. Involuntary or non-consensual claimants
a. More likely to pierce in one-person or few shareholders
i. Costs imposed by limited liability are likely to outweigh benefits of limited
liability
b. More likely to pierce where it leads to claim against limited liability parent company,
rather than shareholders
Chapter 17: Shares
Nature of Shares
1. Describe the nature of a share
a. Shares are bundles of rights, but those bundles can be made of many things
i. Different bundles are referred to as “classes”; it must be set out in the articles if
there is more than one class (s.6(1)(c) CBCA)
b. Shares are presumed equal in all respects unless otherwise indicated (s.24(3) CBCA)
i. To create a validly separate class of shares there must be a distinction in some
right one class has over another, this distinction does not have to be large
ii. McClurg: Although shares are presumed to be equal, a discretionary dividend
clause gave sufficiently differentiated rights between classes to displace
presumption
1. Minority opinion: Discretionary dividend clause applied to all classes,
and thus was not sufficient to displace the presumption; also allocation
was based on personal characteristics rather than share structure
2. Describe the three main rights attached to shares
a. Right to vote on company matters requiring shareholder voting
i. Specifically votes for directors of the company
b. Right to receive dividends when declared by the board of directors
c. Right to receive property of the corporation remaining after creditors and claimants are
paid off on dissolution of the corporation
d. Even if these three rights are not expressly provided for in the incorporating documents,
it is expressly provided for in s.24(3) CBCA
i. Note that with different classes of shares means some shares may not have all
three main rights, but some class of shares must
3. Describe the share certificate requirement
a. Each shareholder entitled to a written acknowledgement of right to certificate (s.49(1))
i. Certificate must either show rights, restrictions and conditions on the share or a
statement of the right to have a copy provided to them on request (s.49(13))
4. Describe the share register requirement (s.50 CBCA)
a. Corporation is required to maintain a register at their registered office with
i. Names and addresses of shareholders
ii. Number of shares held by shareholders
iii. Date and particulars of the issue and transfer of each share
Types of Shares Frequently Used
1. Main types of equity securities and rights attached to them
a. Common Shares
i. 3 Rights main attached to them
1. Right to vote on company matters (especially voting for directors)
2. Right to receive dividends when declared on pro rata basis (subject to
preferred dividend rights)
3. Right to a pro rate share of the proceeds on a dissolution of the
corporation net of payments to creditors or other claims, and net of
claims of classes of shares with preferred claims
b. Preferred Shares
i. There is a preference with some right, typically with dividends
1. Ex. You will get money per preferred share before any dividends can be
paid on common shares
2. There is no presumed right to dividends beyond the fixed amount unless
expressly provided for (International Power)
a. Ex: After preferred shares receive preferred dividend, they are
not entitled to dividends that go to the common shares
i. Unless the incorporating documents specify otherwise
ii. Can work with proceeds on liquidation, preferred over common shares
1. Ex. You will get liquidated assets per preferred share before any assets
can be shared with common shareholders
2. Presumption of equality with respect to preference shares when it
comes to a share in the proceeds on dissolution
a. Ex. If preferred shares have preferred right they will also share
with the common shares (International Power)
i. Unless the incorporating documents specify otherwise
iii. Features
1. Presumed Cumulative Preferred Share: Any dividend unpaid in a given
year accumulates and is to be paid in a subsequent share (Webb)
a. Ex. Yr 1: Dividend $5 per share unpaid, $10 per share in Y2 owed
b. Non-cumulative: Yr 2: still $5 per share (no accumulation)
2. Non-Presumed Participating Preferred Share: Allows shareholder to
participate in distribution of dividends beyond preferred dividend right
a. Ex. After preferred shareholders are paid, they share in the
remainder of dividends with the common shareholders
b. Must be specified, presumed to be non-participating
(International Power)
3. Conversion Right
a. Allows preferred shares to be converted into common shares
4. Retractable Right
a. Allows shareholder to sell shares back to company
5. Redeemable Right
a. Allows Company to buy back shares, company can refinance at
a predetermined price (a “call premium”)
c. Non-Voting Common Shares
i. Common Shares without the voting rights, merely allow for further financing
ii. Two means to create non-voting shares
1. Dual Class Recapitalization
a. New voting shares issued to preferred persons, existing
common share rights are amended to remove voting rights
i. Requires special resolution of the shareholders
2. Dual Class Share Insurance
a. New class of shares without voting Rights is created and sold
b. Existing common shareholders retain common shares with right
i. They can sell common shares and buy non-voting shares
d. Special Voting Shares and Subordinate Voting Shares
i. Special voting shares may carry 10 votes per share, while subordinate voting
shares may carry one vote per share
Dividends
1. Describe different types of dividends (which are expressly allowed by s.43 CBCA)
a. Typically paid in cash
b. Can be paid in other forms of property (“dividends in specie”)
i. Ex. Pair of running shoes for every 100 shares; or shares of another company
c. Can be stocks in the same company (“stock dividend”)
i. Assets of the company will not change as a result of the stock dividend
ii. Shareholder has is just more shares carrying residual rights to the proceeds
from the same assets having the same value
1. Adding 5 shares means holder with 105 shares has value of 100 shares
2. Describe scope of power to distribute dividends and distribution process
a. Subject to unanimous shareholder agreement, dividends is power of directors
i. Cannot be delegated (s.115(3)(d))
ii. Power is not specifically allocated to shareholders
iii. Thus it falls under residual management director powers (s.102 CBCA)
b. Directors are not obligated to declare dividends; it is a management decision
i. They must simply do so in the best interests of the corporation, and not in an
oppressive manner
ii. Rare situations where directors are under an obligation to pay dividends
1. Ford Motor: Not giving a dividend for charitable benefits for society is a
breach of the duty to act in the best interests of the corporation
2. Fergusson: Refusal to give dividends since it excluded the only nonemployee from return on investments was oppressive
c. Once directors declare a dividend it becomes a debt of the corporation
i. Shareholders can sue to be paid the amount
d. Dividends can only be paid out of profits of the corporation
i. Dividends can’t be paid if payment would leave company insolvent (CBCA s.42)
1. Cannot be paid if: (i) unable to pay liabilities; (ii) realizable value of
assets would be less than the aggregate value of its liabilities and stated
capital of all classes
e. Directors can set a record date (s.134(1)) which is the day dividends are owed
i. If none is set, it is the close of business on the day the resolution declaring the
dividend is passed (s.134(3))
ii. Company prepares a list of “shareholders of record” on that date who will be
paid out
iii. Publicly traded shares go “ex dividend” a few days ahead of the record date;
shares traded after “ex dividend” date do not receive dividend
3. Identify risks that directors could be made personally liable for the declaration of dividends
when the corporation is insolvent or that would make the corporation insolvent
a. Dividends can’t be paid if payment would leave company insolvent (CBCA s.42)
i. Cannot be paid if: (i) unable to pay liabilities; (ii) realizable value of assets would
be less than the aggregate value of its liabilities and stated capital of all classes
b. Directors can be personally liable if they consent to give a dividend when there are
reasonable grounds for believing s.42 would be kicked in (s.118(2)(c))
i. In such a circumstance the shareholder can be ordered to pay received money
as a result of violating s.42 (s.118(5))
Voting
1. Directors are elected by “ordinary resolution”
a. s.2(1) CBCA: Ordinary resolution passed by majority of votes by shareholders who voted
2. “Special Resolution” required when voting shareholders change articles of incorporation or
other major transactions (eg. amalgamation, continuance or dissolution)
a. s.2(1) CBCA: Special Resolution passed by two-thirds of votes cast by shareholders who
voted
3. In some scenarios non-voting shareholders will be given a voting right
a. Preferred shareholders (typically do not have voting rights) may be given a right to vote
where dividends have not been declared for a significant period of time
b. The CBCA gives “class voting rights” in special situations; typically involving changes to
articles of incorporation or some other major corporate decision which will have a
prejudicial impact on the rights or interests associated with a particular class of shares
4. Presumption of Equality
a. General presumption all shares are equal unless otherwise indicated
i. This includes one share per vote (s.140(1) CBCA)
b. Bushell 1970: Granting of different amounts of votes is legitimate
i. Facts: BCS Ltd. gave director 3 votes per share if there was a resolution to
remove them, three shareholders had 100 shares each, two sought to remove
the third who was also director; votes were 2-1, but the director has 3 votes per
share and beat them 300-200
1. Two shareholders claim only ordinary resolution was required
ii. Decision: Act did not preclude granting of different amounts of votes
1. The director had validly defeated the resolution
c. Jacobsen 1980: Granting of different amounts without special class is illegitimate
i. Facts: UCOG created under Companies Act by-law saying shareholders could
vote maximum of 1000 shares; shareholders alleged by-law was invalid
ii. Decision: By-law was not valid; presumption of law is shares confer equal rights
1. Varying voting rights must be done through separate classes
2. ss. 102,103 of Companies Act: One vote per share
a. s.12 CA: Each share was was to be equal subject to special rights
b. s.140 CBCA is similar to these sections
3. s.24(3) where there is only one class of shares (as in UCOG) they are all
equal and shares have equal voting rights
d. Bushell and Jacobsen seem to be irreconcilable, on a policy basis they make sense
i. In Bushell the shareholders likely consented to the transaction
1. 3rd investor may have been squeezed out; good to lend extra protection
ii. In Jacobsen it was less likely shareholders consented to the transaction
e. Bowater (1987, OCA): Within a given class shares must have equal rights
i. Facts: C held common shares of RL with one vote per share, C also held all
shares of another class “special common shares” which gave them 10 votes per
share if they were held by C, but 1 vote if held by someone else; shares were
transferred; another shareholder challenged the extra voting rights for the
transferee
ii. Decision: Within a given class shares must have equal rights
1. Shares could not have one vote on transfer
a. Transferee would have to have the same rights as C; but there
are different classes
2. Note: It is possible that this case stands for all shareholders of the same
class being treated equally
f. Note: Poison Pill Provisions – Controlling takeover bids
i. When one shareholder gets 20%, the poison pill provision comes into effect
ii. The shareholders have rights to buy more shares at a very low price, but the
20% shareholder does not have these rights
1. If all shareholders of the same class must be treated equally, then this
provision cannot been valid
Pre-Emptive Rights
1. Describe Pre-emptive rights
a. Gives existing shareholders of a class right to purchase newly issued shares of that class
2. Describe the purpose of pre-emptive rights
a. Allow shareholders to maintain proportionate interest in shares of a class
3. Describe the CBCA positions on pre-emptive rights
a. s.28: If articles provide for it, there can be a pre-emptive right
Issuing and Paying for Shares
1. Identify who has the power to issue shares and the scope of the power
a. Directors decide when to issue shares, to whom and for what consideration (s.25(1))
i. s.115(3): This power cannot be delegated away from directors
b. Power to issue shares can be limited (s.6(1)(c)), but does not need to be
i. Limited is the “authorized” amount of shares directors can issue
1. Ex. Limit is 1000; after issuing 1000 shares, the directors would require
an extension to increase the authorized limit (authority comes from
shareholders meetings)
c. Consideration for issue of shares can be whatever directors determine (s.25(1))
i. Watered Stock problem: Tendency to issue shares in return for significantly
overvalued assets
1. ex. See: Bought assets for 2 million, conveyed to company for bonds
with value of 1 million, and shares were issued for 4 million; 5 million
worth of financing, 2 million of assets the rest was “goodwill”
a. Creditors were deceived by inflated figures (“watered figures”)
ii. Prohibition against Watered Stock (s.25(3))
1. Shares must be fully paid for (s.25(3))
a. Shares cannot be issued until consideration for the share is paid
fully in money, property or past services not less in value than
the fair equivalent that corporation would have received if
shares had been issued for money
b. Cannot sell shares and receive a portion of the value in money
and a promissory note for remainder
i. Promissory notes not adequate consideration (s.25(5))
iii. Remedies for Watered Stock
1. Directors personally jointly and severally liable (s.118(1))
a. Defense of not knowing and could not reasonably have known
share was issued for consideration less than FMV of money
(s.118(6))
2. Directors subject to penal sanction (s.251)
3. Actions against shareholders
iv. Non-reliance defence: Not contemplated in CBCA
d. Shares cannot be subject to additional assessments (further contributions) (s.25(2))
2. Describe terms “subscription” and “allotment”
a. Subscriptions for shares: When the corporation proposes to issue shares, persons can
enter applications (“subscriptions”) to purchase
i. Issues with subscriptions made before incorporation
1. Shareholder could withdraw subscription before acceptance;
Corporation could not accept once incorporated
2. This was held not to be the case where subscription was in
memorandum of association or letters patent (Buff Pressed Brick)
a. Dealt with by
i. Treating subscription as continuing offer
ii. Regarding shareholder’s conduct after incorporation as
consulting new offer
b. Allotment: Decision of directors of which subscriptions to accept
Restrictions on Redemption and Repurchase of Shares
1. Corporations can repurchase its own shares so long as it does not violate s.34(2) solvency tests:
a. Corporation is unable to pay liabilities when they come due
b. Realizable value of assets after payment is less than aggregate value of its liabilities and
states capital of all classes
2. Corporations cannot hold shares itself (s.30(1))
a. Repurchased shares must be cancelled or restore shares to level of authorized but
unissued shares
b. Corporation may purchase own shares if there is an express term in its articles (s.36(1)),
unless it violates solvency tests in s.36(2):
i. Corporation is unable to pay liabilities when they come due
ii. Value of assets would be less than liabilities plus amount required to pay claims
of other classes of shares on dissolution
3. Directors may be personally liable to restore any amounts paid contrary to 34(2) or 36(2)
a. Shareholders receiving amounts from this would be required to return them (s.118(5))
Series of Shares
1. If it is decided different share rights should be offered to finance the corporation, the director
requires the shareholders to approve the creation of the new class of shares
2. This requires an amendment to the articles which requires shareholder approval
3. Going to shareholders is slow, so directors can issue shares of a class in “series” (s.27)
a. Each series can be given separate rights and restrictions
b. The authority to issue shares in a series would need to appear in articles
c. No series in a class can be given priority over another series in the class with respect to
dividends or proceeds on liquidation (protects against subsequent shareholders getting
better treatment)
Par Value Shares
1. Explain par value concept and what purposes of using par values are
a. Par value is the amount shareholder requires to contribute to the company
i. Provides a ready source of finance, since those who pay less than par value
could be called upon to pay the difference
1. Since the shareholder could contribute less than the par value to get a
share, a bankrupt company could result in creditors seeking payment
from shareholders for the difference
ii. Provides creditors with a basis for assessing capital they could assess
2. Identify and explain problems par value concept created
a. Figure became meaningless,
i. Issuing shares for under par value was ultra vires act of the company (Ooregum)
ii. Companies set the par value price very low so it wasn’t an issue
b. Contributed surplus deceiving
c. Deceived investors as to representing the worth of a share
3. CBCA provides for shares without par value only (s.24(1))
a. Directors assign stated value for shares for purposes of capital accounts
Stated Capital Account
1. Explain how a stated capital account works
a. Maintained for each class or series issued (s.26(1))
b. Consists of total amount for which shares of the class have been issued
i. Tracks how many shares are issued, to which classes and how much money has
been raised from sales to those classes
ii. It is the stated capital per share (multiplied) by the number of shares purchased
c. Capital is not cash, funds received are an asset
i. Capital accounts simply record the amount that was raised through the sale of
the shares of each class or series
ii. Amount is not affected by fluctuations in the value of the assets
d. Shareholders can approve (by special resolution) reductions in stated capital where
there is a desire to distribute it to shareholders (s.38(1))
i. Cannot be made if it violates s.38(3) test:
1. Corporation would be unable to pay liabilities
2. Realizable value of corporation’s assets would be less than aggregate of
liabilities
Chapter 18: Corporate Debt Finance
Common Types of Corporate Debt Finance
1. Describe types of debt finance for corporations
a. Bank Loans: Corporation is borrower, and party to the agreement (Shareholders may
guarantee the loans
i. Line of Credit
ii. Term Loan
1. Long periods of time and involves a fixed sum to be paid at later time
2. Typically terms of loans are matched to assets
3. Bank may restrict types of businesses borrower can engage in
4. Bank may restrict management of business
a. Ex. Maintain minimum “working capital ratio” (things business
can turn into cash quickly) be at least at some number times the
sum of liabilities that will have to be paid off
5. Bank may require a security interest
6. Bank may require acceleration clause
a. If borrower defaults on any payment, all payments become due
b. Commercial Paper: Promissory notes that company will pay money at a later time
i. Will typically sell for less than its promise is for to account for interest
ii. Typically used for short term loans (60-90 days)
c. Bonds or Debentures: Evidences of indebtedness
i. Ex. Debt of $100 million could be divided into 100K bonds/debentures with a
face value of $1000, sold to public, and would require payment of $1000 at
some point in the future (“face value” of the bond)
ii. Typically used for long term loans (5-20 years)
1. It could also provide interest at 5% semi-annually, $50 every 6 months
until maturity at which time holder gets $1000
iii. Can also be subject to terms, including right to appoint receiver, directors, seize
assets or special features to convert bond into other securities (like common
shares), a participation right to share in profits or sold with warrants to allow
bondholder to buy shares of the corporation at a specified price
iv. Bond: Secured payment obligations (by assets of borrower)
v. Debenture: Unsecured payment obligations
2. Explain why a trustee is appointed for enforcement of bond
a. Costs of bondholders enforcing terms may be larger than the potential benefit; they will
also want other bondholders to incur the costs while they enjoy the benefits
b. Trustees are appointed by bondholders to enforce the terms
c. Trustees appointed by the issuer may lead to problems of conflicts of interest
i. Thus CBCA created rules governing trustees
3. Explain CBCA requirements relating to trustees appointed for enforcements of bonds
a. Qualification: Trustees must be incorporated under and subject to controls under shares
governing incorporation of trust companies (s.84)
b. No Conflicts of Interest with issuer (s.83)
c. Trustees must be permitted access to List of Debenture Holders to communicate with
them for voting or other matters relating to enforcement (s.85)
d. Trustees must have power to demand evidence of compliance with terms (s.86-88)
e. Trustees must give holders notice of a default by issuing corporation (s.90)
f. Trustees must act honestly and in good faith for interests of debt holders and with care,
skill and diligence of a reasonably prudent trustee (s.91)
Chapter 19: Note on Securities Regulation
Sources of Securities Law
1. Describe sources of securities regulation
a. Matter of provincial jurisdiction (each province has statutes dealing with it)
i. Grants power to Lieutenant Governor to create subordinate legislation known
as “regulations”
ii. Provincial security regulators also have powers to create a form of subordinate
legislation known as “rules”
1. Gives provincial securities administrators wide discretionary powers
b. Canadian Securities Administrators try to harmonize the provincial statutes
i. They draft rules (“national instruments”) to be adopted across the country
1. When rules are only adopted by some administrators they are
“Multilateral Instruments”
ii. They draft administrative policies (“National Policy Statements”) as well
2. Indicate how and when regulation by a stock exchange will apply
a. When securities issuer chooses to issue on public stock exchange they are regulated by
stock exchanges
Distribution of Securities to the Public
1. Discuss scope of prospectus requirement
a. Prospectus is required when there is a “distribution” of a “security” (BCSA s.61)
i. Security: Shares, debentures, warrants and other similar transactions
1. Determinations should use a Howey-Foreman test (Pacific Coast Coin):
a. Contract or scheme whereby a person invests;
b. In a common enterprise and;
c. Efforts of a third party are undeniably significant in providing
profits the person expects from the investment
ii. Distribution: A trade in security of an issue that has not been previously issued
1. Trade: Any sale or disposition of a security for valuable consideration
b. Requirement applies to distributions by corporations, individuals and trustees
c. Any offering of securities not previously issued requires a prospectus even if securities
are not offered to the public
i. There are however, several exemptions considering how expensive this is
2. Explain exemptions from prospectus
a. Small business exemptions: “Private issuer exemption”
i. Private issuer: Has fewer than 50 shareholders and has only distributed
securities in reliance on the private issuer exemptions
ii. Can sell securities without prospectus to: (i) director/officer/employee; (ii)
family member of director/officer, or (iii) family members of family members in;
(iv) close personal friend of director/officer; (v) close business associate of
director/officer; (vi) family member of the selling security holder of the issuer;
(vi) security holder of issuer; (viii) accredited investor [banks, trust companies,
governments, persons with net assets over 5m]; (x) trust or estate of which all
beneficiaries or majority of trustees are those above; (xi) person not the public
b. Exemptions for issuers with publicly traded securities
i. Issuers already distributing securities do not need protection of a prospectus
because they are sophisticated investors or have investment advisors
3. Describe process for distributing securities under prospectus
a. Forms of prospectuses set out required items of disclosure of material information that
would affect decision to acquire securities (arrangements with underwriters, expected
proceeds of issues etc.)
b. Process for issuing securities (the waiting period)
i. File preliminary prospectus with securities administrators (waiting period starts)
ii. Administrators vet prospectus to ensure compliance with requirements
iii. Administrators write a comment letter with problems or concerns
iv. Issuer responds to problems, then files a final prospectus
v. Administrators file a receipt (end of waiting period)
vi. Sale of securities begins
vii. During the waiting period selling activities are limited to soliciting expressions of
interest disclosing only the nature of the issuer’s business, price of security,
where one can acquire the securities and the preliminary prospectus
Continuous Disclosure
1. Indicate how an issuer normally becomes a “reporting issuer”
a. Reporting issuer: Securities issuer that made a distribution of securities with prospectus
2. Describe the continuous disclosure requirements for an issuer of securities that has become a
“reporting issuer”
a. There are continuous disclosure requirements set by incorporating jurisdictions
i. CBCA corporations are subject to provincial securities act requirements
b. Disclosure requirements include annual information forms, financial disclosure, timely
disclosure, insider trading reports etc.
i. Insider trading reports require disclosure of trades made by directors and senior
officers of the issuer within 10 days of the trade
Regulation of Insider Trading
1. Describe who is subject to the prohibition
a. Insiders are persons in a “special relationship” with the issuer; includes
i. Directors, officers employees, those of affiliated corporations,
ii. Those providing professional or business services,
iii. Persons proposing a takeover, merger or other business combination, or
persons formerly in those relationships,
iv. Those directly or indirectly who have received a tip
2. Indicate what is prohibited
a. Persons in a special relationship cannot:
i. Trade with information about an issuer if information is not generally disclosed
ii. Inform others of information not been generally disclosed unless it is in the
necessary course of the issuer’s or person in special relationship’s business
b. Action can be brought by a security holder of the issuer or by the securities commission
Takeover Bid Regulation
1. Indicate when rules apply
a. Takeover bid: Offer for securities that would result in offeror owning 20% or more of the
equity securities of any class of securities
2. Brief outline of takeover bid rules
a. Bid must be made to all holders of issuer’s shares, and kept open for 35 days minimum
i. Consideration must be the same for all offerees tendering under the bid
ii. Collateral consideration cannot be paid to a holder of a significant block of
shares (eg. new car or house)
b. Bidder must provide a takeover bid circular
i. Sets out information that assists offerees in assessing whether to tender shares
ii. Director of target issue must send to offeree a circular within 15 days of the bid
1. Directors must recommend acceptance or rejection of bid with reasons
3. Describe poison rights plan and explain how securities commissions can regulate the plans
a. Plans involve issuance of rights to buy further shares of issuer to existing shareholders at
a price below market value when one shareholder acquires more than a specified
percentage of voting securities (typically 20%)
b. Provisions can allow directors to waive effectiveness of the rights
i. Typically happens when the person with the shares makes a bid that complies
with rules
ii. Gives directors time to respond by searching out other competing bids
c. Regulation through administration powers of securities administrators:
i. Encourages auctions for takeovers that lead to higher prices for issuer shares
ii. Opposed to defensive tactics that increase price per share for target
shareholders
iii. Administrators can stop operation of poison rights plan by issuing a cease trade
order on the rights
iv. As long as the rights plan is serving the function of encouraging competing bids
or extracting a higher price, securities administrators will not cease trade poison
pill rights
Chapter 20: Corporate Objects and Powers, Restrictions on Management
Objects, Powers, Agency and Capacity
1. Object and Powers
a. “Objects” of the corporation – Kinds of businesses corporation would engage in
b. “Powers” of the corporation – Identifies the kinds of things corporation could do in
carrying on the business of the corporation
c. Example: Corporation manufacturing widgets
i. Objects: Object of corporation is the manufacture of widgets
ii. Powers: In order to raise funds needed, corporation had power to borrow
money and grant security interests in assets to the lender
2. Agency and Capacity
a. Authority of Agents
i. Actual authority: Decisions of directors treated as decisions of corporations
1. Officers are agents of the corporation; act with actual authority
ii. Ostensible Authority: Officers have ostensible authority, kind third parties rely
on in circumstances in which they encounter the agent
b. Scope of Authority is limited to the capacity of the corporation
i. Directors cannot enter into a contract on behalf of the corporation, the
corporation could not enter into
1. Such contracts are said to be ultra vires the corporation
3. Objects and Powers and Capacity
a. Acts of the corporation contrary to these objects or powers would not be legally valid
acts; any contract that does this would not be a legally valid contract
Ultra Vires
1. Explain the doctrine of ultra vires
a. Ashbury Railway (1875): Contract contrary to objects is void
i. Objects: Make, sell, lend or hire, railway plant, fittings, machinery, rolling stock
ii. Facts: Special resolution was needed to alter the objects, Ashbury enters into
contract to construct railway, two years after construction starts, Ashbury
repudiates the contract claiming it was ultra vires the contract
iii. Decision: Contract was ultra vires because it was contrary to the objects
1. Contract was contrary to the objects, thus it could not even be ratified
by a unanimous ratification by the shareholders
2. Contract is not just voidable, but void
2. Explain justifications of ultra vires doctrine
a. Investor and creditor protection against changes in risk
i. Credit is advanced based on risk associated with the particular business involved
b. Constraining Quasi-Public Corporations to their Quasi-Public Purposes
i. Protects against misuse of corporate funds since anything outside the objects is
not a valid use, any commitments would not be binding on the corporation
c. Controlling against risk of bankruptcy since funds cannot be used for risky behaviour
3. Articulate problems with ultra vires doctrine, practical response to it and subsequent legislative
response
a. Problems with the ultra vires doctrine
i. Could create hardship on third parties who bear risks the contracts they enter
into could not be enforced, leading to possible unjust enrichment
ii. Corporations might find contracts were not enforceable, creating unjust
enrichment the other way
iii. Expensive as both may charge premiums and incur legal costs to observe
purpose sections
b. Practical response: Give the corporation capacity to do virtually anything
i. Example: With widgets, object may be enlarged to allow the manufacture,
wholesale retail distribution of widgets, wompoms, doodads etc. and on and on
c. Judicial response: Read objects clauses broadly, give wide scope to incidental powers
i. Still, courts would find ultra vires obligations:
1. Re Introductions Ltd. (1970): Objects clause states company provided
services to visitors, then years after inactivity corporation started
breeding pigs; although there was a borrowing power, it could not be
read independently of the objects clause
d. Legislative response:
i. Give corporation powers of a natural person
ii. Allow business to be restricted in memorandum of articles, but provide that
while an act of corporation may be invalid (for illegality) it would not be invalid
by reason the particular act was subject to restriction on business
1. s.15(1): Corporations have capacity, rights, powers and privileges as a
natural person
2. s.16(2): Corporations cannot carry on business or exercise powers that
is restricted by its articles
3. s.16(3): No act of a corporation is invalid by reason only that the act is
contrary to its articles
iii. If the directors cause the corporation to engage in restricted businesses, or
exercise restricted powers, shareholders can take remedial action
1. Shareholders might be able to remove and replace the directors
through restraining order (s.247) because they acted beyond authority
iv. Gives the corporation a broad capacity like other natural persons, but allows
restrictions that are not constraints on anyone but the persons acting on behalf
of the corporation
1. Investors and Creditors are granted protection
a. Shareholders can control deviations from proposed objects by
taking action against the agents who cause those deviations
b. With relatively liquid markets one can control change in risk as a
result of the corporation
v. Puts control over making sure the company confines business to those the
investors relied on in the hands of investors in a better position to control for it
by monitoring the managers of the business
4. Note: Ultra Vires does not apply to crown charter or letter patent companies
Constructive Notice and Indoor Management Rule
1. When the question (does this belong)?? is not whether the corporation has capacity to act, but
in what way the directors would have to exercise a power
a. Corporate power to borrow may be limited in some way (ex. opinion from lawyer)
2. Describe constructive notice doctrine
a. Because memorandum and articles of a company are publicly filed, third parties are
deemed to have knowledge of the contents
i. If documents provide for constraints, third parties deemed to have knowledge
b. A third party would not succeed in establishing the reliance element
i. Creates an additional risks (and costs) for the third party
3. Describe Indoor management rule
a. Limits application of constructive notice doctrine if documents are not available
b. Third party is not deemed to know of any restrictions on authority of directors if the
relevant documents were not publicly available
4. Describe legislative modification to these doctrines in the CBCA
a. Constructive Notice: Done away with, in respect to corporations under CBCA (s.17 CBCA)
b. Indoor Management: With the removal of constructive notice, no need for an exception
i. CBCA: Still codified (s.18); the corporation must show that a third party ought to
have known about a certain power
5. Constitutional issue: Constructive notice enforced purported contracts, but may be part of
s.92(13); Parliament might have ancillary power to enact provisions regarding incorporation of
companies
Does Ultra Vires Doctrine and Constructive Notice Still Apply?
1. Statutes of incorporation other than the CBCA and Provincial counterparts may set out objects
and powers of corporate entities they incorporate
a. If the statutes do not contain provisions altering ultra vires and constructive notice, they
may still apply
b. Statutes of incorporation from other countries might still follow Asbury
2. Collective notice doctrine may still exist in s.18’s codification
a. Ex. A person dealing with corporation is a director, should such a person be deemed to
know contents of corporate documents because they ought to know by virtue of their
relationship
3. Note: When dealing with a corporation, one should be aware of how it became incorporated
Chapter 21: Directors and Officers
Role of Directors
1. Identify who is responsible for managing the corporation
a. Directors manage, not the shareholders (CBCA s.102)
b. Directors typically have power to appoint officers, delegate their powers (CBCA s.121)
i. Officers handle the day-to-day management of the corporation
2. Discuss the consequent significance of shareholder voting rights
a. Shareholders elect the directors, primary mode of their control
Qualification Requirements for Directors
1. Identify qualification requirements
a. (i) Natural persons, (ii) over 18 years of age and (iii) not adjudicated mental
incompetents or bankrupts (CBCA s.105)
b. Requirement for directors to be shareholders (“share qualification”) is optional (CBCA
s.105(2))
c. Private minimum number of directors is one; Public is three (CBCA s.102(2))
i. No maximum; articles can provide for a fixed number different from this
2. Comment on effectiveness of residency requirements for directors
a. 25% (or were less than 4, 1) of the directors must be resident Canadians (s.105(3))
b. The idea is to protect national interests, however the Canadian resident may not have
the nationalistic perspective those who argued for the requirement expected
i. The old requirements (majority of shareholders be resident) were avoided by
stripping the board of any power
3. Identify requirements for election of directors, and scope of restrictions on their terms of office
a. First Directors
i. First directors of corporation must be sent to Director to incorporate (s.106(1))
ii. They hold office until the first meeting of the corporation (s.106(2)), held within
18 months of incorporation (s.133(1))
b. Subsequent Election
i. At the first meeting and annual meetings, are directors elected by “ordinary
resolution” (s.106(3))
ii. “Ordinary resolution” – Resolution passed by majority of votes cast by
shareholders who voted on the resolution (s.2(1))
c. Note: These are mandatory requirements since there is no mention of “subject to
articles” in s.106
d. Term
i. Articles may provide for a term of up to three years (s.106(3),(5))
ii. No limit on re-election (s.106(6))
iii. Articles may provide not all directors be elected at the same meeting (s.106(4))
iv. Term ends when they die, resign, becomes disqualified or is removed by
resolution (s.108)
e. Note: Regarding controversies of elections or appointments, a corporation, shareholder
or director may apply to court for resolution (s.145)
i. Court can make “any order it thinks fit”
4. Identify the means by which vacancies on the board of directors can be filled
a. Directors have the power to fill vacancies on the board (s.111(1))
b. Directors may not fill vacancy resulting from:
i. An increase in the number,
ii. Minimum number of directors,
iii. Failure by the shareholders to elect the number of directors required by articles
c. Shareholders may remove director (s.109(1)) and replace at the same meeting (s.109(3))
i. If the shareholders do not fill the resulting vacancy, the remaining directors may
5. Extent to which right to remove directors can be circumvented by assigning special voting rights
a. Ordinary resolution of shareholders can remove a director (s.109(1))
i. Articles may not require majority higher than statute (s.6(4))
b. Bushel (1970): Majority may be avoided by assigning special voting rights
i. Facts: Three shareholders, brother and sisters; sisters wanted to remove
brother, but articles prevented this because they gave brother more votes
ii. Decision: Article was not invalid, special voting shares can be given
c. Special voting rights relating to removing directors can circumvent s.109(1)
Authority and Powers of the Directors
1. Identify and Describe each of the powers that directors typically have
a. Management Power (or supervision of management) (s.102)
i. Operates as a residual power, if power not allocated elsewhere it is part of s.102
ii. s.115(3) highlights powers that fall within s.102 by limiting them
1. Submission to shareholders of any question or matter requiring
approval of shareholders
2. Declaration of dividends
3. Purchase, redemption or other acquisition of shares issued by
corporation
4. Approval of a management proxy circular
b.
c.
d.
e.
f.
g.
h.
i.
5. Approval of a takeover bid by the corporation or a directors’ circular
(prepared in connection with a bid to takeover the corporation)
6. Approval of any financial statement put before the shareholders
Adoption, Amendment or Repeal of the By-laws (s.103)
i. Only a default allocation since power is subject to (i) articles, (ii) by-laws, (iii)
unanimous shareholder agreement
ii. Power is qualified by requirement that any change in by-laws must be put
before shareholders at the next annual meeting
1. Changes are only effective until the next meeting, and then either
approved thereafter, amended or rejected
Power to Borrow
i. Power is subject to articles, by-laws or unanimous shareholder agreement
(s.189(1))
ii. Directors can delegate the power to director, committee of directors or officer
subject to the same restrictions as above (s.189(2))
Power to Issue Shares (s.25)
i. Directors can issue shares in a series unless articles state otherwise (s.27)
Appointment of Additional Directors
i. IF the articles provide, directors may appoint one or more additional directors,
but limits to one-third of directors elected at previous meeting (s.106(8))
Filling a Vacancy on Board (s.111)
i. Directors can fill a vacancy caused by death or resignation
ii. Can fill a vacancy created by removal of a director at a shareholders’ meeting if
shareholders do not replace the director (s.109(3))
Filling a Vacancy in the Position of Auditor (s.166(1))
i. If an auditor resigns, directors can replace them unless articles of corporation
require it be filled by vote of shareholders (s.166(3))
Calling Meetings of Shareholders (s.133)
i. Directors of the corporation are to call annual or special meeting, sending out
notice and determining the agenda (allows them to exert considerable control
over governance of corporation)
Appointment and Compensation of Officers and Delegation of Powers (s.121)
i. Directors can designate offices, officers and powers of the corporation Subject
to articles, by-laws or unanimous shareholder agreement
ii. Directors can determine remuneration, subject to above limitations (s.125)
Scope of Directors’ Power to Delegate their Powers
1. Directors cannot delegate all of their powers
i. s.115(3): Cannot delegate filling vacancies among directors, issuing securities,
declaring dividends, purchasing, redeeming or otherwise acquiring the shares
issued by the corporation, or adopting, amending or repealing by-laws of the
corporation
b. Hayes (1910): Certain powers cannot be delegated by directors
i. Facts: Directors could annually appoint committee with powers and duties as
by-laws determined, directors had to appoint two directors with full powers of
the board of directors; Acting as the committee, H and G effectively froze the
majority shareholder out of control
ii. Decision: Restriction of certain delegations; this is an attempt to shut out
shareholders
1. Directors could not delegate all powers and put up new management
2. Things like removing someone from office, determining compensation
could not be removed from powers of directors
c. Sherman & Ellis (1930): Powers of directors cannot be delegated for too long, and not all
powers of management can be delegated to outsiders
i. Facts: Company contracted for underwriting and executive management to to
be provided through S&E firm, contract was terminated, S&E sought specific
performance and money damages for breach; validity challenged on basis that it
was contrary to public policy
ii. Decision: Corporation can delegate certain duties to strangers for a limited
period
1. However, such duties cannot be indefinitely delegated
2. Contract was not valid because it was for too long and delegated all
powers of management
3. The corporation ought to be managed by those elected by shareholders
d. Kennerson (1953): Corporation can delegate authority, but cannot delegate function to
govern
i. Facts: Contract between K and company called for K to manage all matters
including exclusive right to fix and establish all policies for five years, board of
directors wanted to cancel the contract
ii. Decision: Board can delegate authority to act, but cannot delegate its function
to govern
1. The corporation’s affairs must be managed by the duly elected board
e. Summary: The longer the period, and the more power delegated, the greater the
likelihood the delegation is improper
Removal of Officers
1. Explain justification for position on the effect of Constraints on removal of officers
a. Directors may remove officers, but there may be long-term contracts involved
b. It may be beneficial to the corporation to have long-term contracts
i. Security: less compensation, more loyalty in return for a long-term contract
ii. Human capital: knowing the business, customers, staff, internal procedures etc.
iii. Cost: it is expensive to retrain and replace the management
c. Parachutes
i. Golden: Liquidated damages term gives them compensation if dismissed
ii. Tin: When someone tries to take over, existing management resists to keep jobs
1. Reduces incentives to resist takeovers
d. Note: If market is aware there is no potential for takeover, may not pay much for shares
e. Cases
i. Re Paramount Publix: Manager can be replaced, but damages must be paid
1. Facts: K employed by corporation for 3 years, gets dismissed and files
for action
2. Decision: Ability to remove directors regardless of the term would mean
employees could be dismissed without cause or consequence
a. Sum would be companies couldn’t have binding employment
contracts
3. Note: A person can be removed from office without consequence, so
long as they are not dismissed entirely from their employment
ii. Constructive Dismissal
iii. Shindler (1960): If there is a long term contract in place, you can’t end it without
cause
1. Facts: S was managing director and controlling shareholder, sold shares
to corporation which agreed to retain S as managing director for 10
years, corporation sold to another which did not want to retain S;
second corporation passes resolution to remove him
2. Decision: Where a party enters into an arrangement whose
effectiveness requires continuance of circumstances, there is implied
engagement that he should do nothing of his own motivation to end
those circumstances
a. Entitled to wrongful dismissal damages
Directors Meetings
1. Describe the legal provisions concerning mechanics of directors meetings
a. Mechanics per By-Laws: Details of directors meeting left to by-laws of corporation
b. Place: subject to articles or by-laws, directors meet at any place and on such notice as
by-laws require (s.114(1))
c. Quorum: Subject to by-laws/articles quorum is majority of board or majority of the
minimum number of directors in articles (s.114(2));
i. At least one quarter of directors present must be resident Canadians (s.114(3))
d. Notice: If the directors deal with a matter in s.115(3) notice of the meeting must
specifically indicate such a matter will be dealt with (s.114(5))
i. s.115(3): Substituting matters for approval of shareholders, filling vacancy,
issuing securities or new series of shares, declaring dividends, acquiring shares
ii. Directors may waive notivce of meetings in any manner (s.114(6))
iii. Attendance of director at meeting of directors is waiver of notice of the meeting
1. Except: Where director attends meeting to object to transaction on
grounds meeting was not lawfully called
e. Meetings not in person: Permitted (s.114(9))
f. One Director Meeting: If corporation has one director, it constitutes meeting (s.114(8))
g. Resolution in lieu: Not required to hold meeting where all directors sign written
resolution in lieu of meeting (s.117)
How Boards of Public Corporations Operate
1. Compare legal notion of function of directors with reality
a. Directors do not have much of a role in setting corporate strategy or management
i. Management often controls the board, board’s effectiveness if a function of the
president’s desire for tolerance of its informed input
ii. Directors are hesitant to fire top management
iii. Employed person cannot attend to director duties if has over two directorships
2. Suggest alternative functions which directors may fulfil
a. Directors do give useful advice and replace presidents
b. Eisenberg: Should select, monitor and remove the presidents; should have sole control
over proxy solicitation (means of shareholder communication for meetings)
c. Saucier Report: 5 Core functions of the board:
i. Choosing. coaching, monitoring, assessing CEO, setting compensation, setting
parameters for management team operation and providing assurance to
shareholders about the integrity of financial performance
3. Comment on the use of outside directors and on the effectiveness of having outside directors
a. ALI: Recommends majority of directors be independent of the corporation management
b. Requirements under CBCA
i. At least two directors cannot be employees or officers (s.102(2))
1. This allows people with business relationships who become directors
c. Companies on the TSX must follow National Instrument 58-101
i. Requires disclosure of directors independence, and whether a majority of the
board is independent; but no requirement of independent board
ii. Non-independent: director has a relationship with the corporation that could be
reasonably expected to interfere with the exercise of independent judgement
1. Employees/officers within 3 years or related family, partner/employee
of issuer’s auditor
d. National Instrument 58-201 provides guidelines on corporate governance
i. Board should consist of a majority of independent directors including chair
ii. Should be independent director only meetings
iii. Nominating Committee: Independent directors should be tasked with
establishing what is required to be a director
iv. Compensation Committee: Independent directors should decide when to
engage any outside advisor required by the corporation
v. There should be regular assessments
e. CBCA should consider strengthening outside director requirements
i. Independent monitoring of management should increase value of a company
ii. However, often the most useful outside director is one related to the firm
Chapter 22: Shareholder Voting Rights
Shareholder Control over Directors: Shareholder Residual Powers
1. Discuss scope of power of shareholders to manage a corporation
a. Directors manage corporation by delegating to officers (s.102)
b. Cunninghame (1906): Shareholders cannot dictate to the directors
i. Facts: Shareholders resolve to approve a sale, directors do not execute
ii. Decision: Directors not obliged to sell, sales are directors’ prerogative
1. Directors are not the agents of the shareholders
c. Fundamental change control
i. Protection for minority interests with respect to major changes through
supermajority (66% of votes cast) (s.2(1))
ii. Fundamental Changes: Corporate name, registered office, resolution,
restrictions of share transfer change, increase/decrease in number of directors,
new class of shares (s.173)
1. Amalgamation (s.183), sale/lease of all/substantial assets (s.189(3)),
liquidation (s.211)
d. Class voting right control: protection over prejudicing their share rights
i. Affected class must approve the change by separate resolution of the class
ii. Cannot be abandoned in any document or a unanimous shareholder agreement
iii. Class vote is required when anything is done to affect the class (s.176(1))
iv. Series vote required when series is affected, they will vote separately (s.176(4))
2. List and describe particular voting powers of shareholders
a. Deadlocks: Ties on board of directors, can give shareholders means to act
b. Election of Directors: Shareholders can elect directors at annual shareholder meetings
c. By-law Changes: Must be ratified by the shareholders, or can be altered by unanimous
shareholder agreement (s.103) or can make proposals for changes (s.103(5))
3. Discuss significance of voting rights
a. Rational shareholder apathy: voting may just not matter all that much
i. Shareholders with small stakes do not have power making it worthwhile to
monitor management, they freeride on other shareholders’ efforts
b. Voting blocks control senior management of a corporation
c. Shares can be taken up in a takeover bid allowing shareholders to take control
i. By allowing for the possibility of takeover bids, managers must be responsible
d. Voting rights protect against post-transaction opportunism
Chapter 23: Shareholder Meetings
Basics of Shareholder Meetings
1. Explain various terms
a. Annual Meetings: Shareholder meetings must be held annually (15 months from last
meeting (s.133(1)) [Note: 1st meeting must be 18 months from incorporation]
b. Special Meetings: Non-annual meetings (s.133(2))
i. In memorandum of association jurisdictions these are extraordinary meetings:
c. Ordinary Business: Election of directors (s.106(3)), consideration of statements and
appointment of auditors (s.162(1)); Requires ordinary resolution for business (s.2(1))
d. Special Business: Non-ordinary business; requires special resolution (s.2(1))
2. Describe various requirements of meetings
a. Place: Held in Canada designated by directors unless in bylaws (s.132)
i. Can be held outside Canada if articles specify or all shareholders agree (s.132(2))
b. Quorum: Unless by-laws state, majority shares entitled to vote at the meeting (s.139(1))
i. Can be present or represented by proxy, without quorum shareholders cannot
transact other business (s.139(3))
c. Notice: Notice period of at least 21 days, not more than 60 (s.135(1), s.44)
i. Special business must state nature of business in detail to allow shareholder to
make reasoned judgement on whether to vote for resolution (s.135(6))
ii. Securities: Record date of meeting at least 30 days not more than 60 (NI 54-101)
Conduct of Meetings
1. Describe normal meeting process and voting at shareholder meetings
a. Designated person takes chair
i. Typically it’s the chair of the board or president
ii. Wall (1898): Chair must allow for reasonable time, act in good faith, impartial
1. Facts: Resolution to sell company, chair alleged to not allow adequate
time to speak on the issue
2. Decision: Chair must act in good faith, impartial and allow speaking
a. However, given costs of meetings, chair need only allow
reasonable time for reasonable arguments and can put down
minorities bent on obstructing business
iii. Re: Marshall (1981): Chair is not obligated to be behind beneficial title
1. Facts: Chair at meeting was instructed to tabulate votes according to
instructions of beneficial owners, but didn’t want to
2. Decision: Chair could not go behind legal title and assess dispute
between beneficial and legal owners
iv. United Casno (1980): Chair cannot adjourn meetings on his own, authorizations
unnecessary without reasonable doubts about authenticity
1. Facts: Chair refuses certain proxy votes, including ones with facsimile
signatures, and ones without evidence of authorization
b.
c.
d.
e.
f.
2. Decision: Facsimile signatures are acceptable, client and board
authorizations unnecessary unless there was evidence bringing validity
of authorizations into question
a. Chair cannot adjourn meetings on his own
b. Chair cannot act impartially
v. Blair (1993): Chair must act in good faith or face punitive damages
1. Facts: Question as to whether chair could rule on whether proxies
should be voted for or against management slate of directors
2. Decision: Seeking legal advice does not sanctify director alone, but it
should be considered
a. Chair has interest in company, but that interest doesn’t
automatically make a decision non-bona fide
b. A decision had to be made by chair, there was no obvious error
Chair receives report of scrutineers on proof of notice of meeting and quorum
Motion typically requested to dispense with reading of minutes of the last annual
meeting; motion for approval is requested (s.20(1)(b))
Annual report typically presented with president remarks; auditor’s reports read;
approval is requested
Election of directors, typically slate is proposed; Where additional nominations are
heard, ballots are given noting number of shares being voted or show of hands (s.141(1)
Motion for appointment of auditors; usually the same ones; remuneration of auditors
Shareholder Requisitioned Meetings
1. Discuss and assess when shareholders can requisition a meeting
a. Shareholders can have requisitioned meetings if not less of over 5% of shares with right
to vote seek out a meeting (s.143)
2. Discuss and assess what shareholders must do to requisition a meeting
a. Shareholders must prepare a document setting out the purpose of the meeting; sign
document and send document to each director and registered office
b. Directors must call meeting unless they already given notice for a meeting, or purpose
of the meeting is one the directors could refuse under s.137(5)(b-e)
c. If the directors do not call meeting within 21 days of requisition receipt, any signing
shareholder can call it; cost of requisitioning the meeting are incurred by corporation
Meetings by Court Order
1. s.144: Court can order meeting if it is impractical to call a meeting: (1) in the manner in which
they may be called; (2) to conduct meeting in manner prescribed in by-laws or Act or (3) for any
other reason court thinks fit
Deadlock Cases
1. Re: El Combrero (1958): Test: In all circumstances is it practical to hold the meeting?
a. Facts: Quorum for meeting was two shareholders, no shareholder meetings called
because the incumbent directors refused to go, third shareholder asked for court order
b. Decision: Impractical is not impossible: question: in all circumstances is it practical to
hold the meeting?
i. Directors were in breach of duty to call a meeting and denied other
shareholders right to remove directors
ii. Deadlock resolved in favour of the person with the substantial majority
2. Re: Opera Photographic (1989): Cannot deprive majority shareholder right to remove directors
a. Facts: Quorum is two shareholders, and one wouldn’t come to meeting
b. Decision: One can’t prevent the majority shareholder from exercising right to remove
person as director; remedy for minority is to sell out or bring action for oppression
Intervening in Battles for Control Cases
1. Re: Morris Funeral (1957): Courts will not order meetings that favour one faction over another
a. Facts: Majority shareholder was an estate, but a deadlock meant estate couldn’t be
represented at the meeting, and no meeting could be held due to quorum requirement
b. Decision: No court ordered meeting to favour one faction over another
2. Re: Barsh and Feldman (1986): Court will not vary matters that were part of original agreement
a. Facts: Three shareholders, one share each, quorum of three, one dies leaves shares to
another, difficulties with quorum
b. Decision: Varying quorum would eliminate requirement of consent from Feldman, basis
of original agreement
i. Answer was negotiation to an agreement or winding-up of company
ii. Court will not exercise discretion to change quorum where it would lock one
party into the company; will not favour one faction over another
Intervening on Basis of Fault Cases
1. Re: Routley’s Holdings (1960): Court will intervene where one party is breaking the law
a. Facts: No annual meeting had been held for years, quorum requirement was 3
shareholders holding 50% of shares; minority shareholder ignored the requirements and
was holding meetings by himself at his own locales, rejecting proxies
b. Decision: Clear breaches of law by Boland and need to prevent further breaches
i. Court ordered meeting at which quorum would be 50% of shares represented,
meeting as to be held at neutral locale
Widely-Held Corporations Cases
1. Re: Canadian Javelin (1977): Court can order a meeting if it is impractical to call a meeting, and
the impasse is detrimental to the company
a. Facts: Two groups claimed to be valid board of directors, no annual shareholders
meeting was held, no notice for meeting had been given
b. Decision: Court can order a meeting if for any reason it is impractical to call a meeting
i. Impractical did not mean impossible, one needs to ask if the meeting could be
conducted without an order of the court, and in this case, it was doubtful
ii. The situation was detrimental to the company, and court made orders to ensure
fairness (i.e. appointing independent chair)
1. Court should do as little violence to the articles and by-laws as possible
c. Note: Effect of the case was siding with one party for control (person indicted of fraud)
Powers of Shareholders at Court Ordered Meetings
1. Charlebois (1968): Court ordered meetings acceptable if they do not give shareholders power
beyond what they would have had in any other meeting
a. Facts: Existing directors not re-elected, they argued meeting was not valid
b. Decision: Ordered meeting on basis that until resolution of the case, no one would know
which board could act for the company, and was thus impractical to call a meeting
i. Could the court ordered meeting give shareholders power beyond those at any
other meeting?
ii. Could the proposed election of directors at a meeting other than an annual
meeting be beyond the powers of the shareholders?
iii. Power for the court to order a meeting did not give the court power to give
shareholders powers beyond what they would have had in any other meeting
Proxies
1. Common Law: No right to be represented by proxy unless articles/by-laws allowed
a. Shareholders require sufficient information to form reasoned judgement on whether to
vote for a resolution; If form of proxy does not allow real choice, courts would not
approve
2. Describe what a proxy is: form signed by voting shareholder appointing proxyholder (s.147)
a. Proxyholder: Person appointed to act on behalf of a shareholder; enjoys same rights as
shareholder subject to authority granted (s.148); may be constrained in show of hands
vote (s.152(2))
3. Describe who must solicit proxies: Management must solicit from each shareholder entitled to
vote (s.149(1))
a. Unless: It is not a distributing corporation (corporation made distribution by way of
prospectus) and has under 50 shareholders entitled to vote at the meeting (s.149(2)).
b. Failure to solicit proxies is an offence (s.149(3,4), could be enforced through compliance
(s.247)
4. Describe the requirements of the form of proxy (Reg. 54)
a. Clear indication someone other than designated person can be appointed (NI51-102,
s.9.4(3))
b. Person soliciting proxies state who is soliciting (NI51-102, s.9.4(1))
c. Allowing voting on resolutions or indication of how proxyholder will vote (NI51-102,
s.9.4(4))
d. Providing means by which shareholder can vote in favour of or withhold voting with
respect to appointment of an auditor or the election of directors (NI51-102, s.9.4(6))
Proxy Circulars [Information Circulars in Provincial Securities]
1. Who can send a proxy circular: Anyone who solicits (s.150)
2. Describe proxy circulars
a. Document containing sufficient information to allow a shareholder to make a decision
on each matter of business for which the proxy is solicited
3. Indicate required standard of disclosure and consequences of inaccurate disclosures
a. If there’s an omission/untrue statement not misleading the court can (on application)
make any order it sees fit regarding the proxy in post-meeting remedies (s.154)
4. Articulate meaning of solicitation; assess when person will have solicited proxies
a. Solicitation includes request to execute or not a form of proxy or revoke (s.147(b)) and
the sending of a form of proxy or other communication to shareholders under
circumstances intended to result in a proxy or rejecting it (s.147(c))
b. Duby (1980): Asking not to sign a proxy is solicitation
i. Facts: Company sent out letters asking not to sign any proxy for a certain slate
of directors, complaints that the solicitation of proxies was not in required form
ii. Decision: Letter was a proxy and did not comply with required form
1. Sending the letter in US does not excuse non-compliance with CBCA
2. But the court did not grant an injunction, since it would make it difficult
to solicit proxies since management would get to shareholders first
putting dissidents at substantial disadvantage
5. Comment on changes to definition of solicitation in the US followed in Canada
a. The old proxy definition made it difficult for international investors to influence voting
b. Change: Shareholders can publicly announce and can communicate with others about
how they will vote with reasons without triggering proxy solicitation requirements
i. So long as the communication is not made under circumstances reasonably
calculated to result in procurement of a proxy (s.147 (v-vii))
Shareholder Proposals
1. Shareholders may put proposals before meeting and put supporting statements on the
management proxy circular; including registered or beneficial shareholders (s.137(1)(a))
a. Requirements: Merely need 1% of voting shares or value of $2000 and shares held for at
least 6 months (s.137(1.1) Reg. 46) set out in proxy circular (s.137(2)); submitted at least
90 days in advance (Reg.47) , Can include supporting statement up to 500 words
(s.137(3) Reg. 46))
b. Cannot: Purpose of redressing personal grievance, Relate significantly to affairs of
corporation, Like a similar proposal that failed to get minimum support in 2 years
(s.137(5)(c,d), For publicity (s.137(5)(e))
c. Shareholders with over 5% of shares can nominate directors (s.137(4))
2. If corporation refuses proposal it must give notice (s.137(7))
a. Shareholders can apply to court for redress (s.137(8)); corporation can ask court
whether proposal can be propertly refused (s.137(9))
3. Critique: Bad to have management decisions at shareholders meetings, lack expertise
Financial Disclosure
1. Shareholders provided with financial disclosure to assess performance of management (s.155)
2. Distributing corporation must appoint an auditor; non-distributing no requirement (s.162, 163)
a. Distributing must have audit committee with at least 3 directors, majority are not
officers or employees (s.171(3)); auditor must be present at all committee (s.171(4)
b. Auditor must make examinations and report on financial statements (s.169)
c. Auditor cannot have any conflicts of interest (s.161)
d. There is an auditor supervisory body (NI 52-108) requires corporations to have an
auditor from a public accounting firm with an agreement to with the CPAB
i. Annual/interim financial statements must be certified by CFO & CEO (NI 52-109)
3. Access to Records: Corporation is required to maintain accounting records and minutes of
directors’ meetings (s.20(1)); corporation’s records available for public
a. Non-distributing corporations: no statutory access to directors’ meetings and
accounting records (s.21(1))
4. Securities Laws: Company distributing securities must continuously disclose finances/other info
Access to List of Shareholders
1. Note purposes for which access to list of shareholders is provided
a. Engaging in proxy selection, requisitioning meeting, making a takeover bid
2. Note ways in which list of shareholders can be obtained
a. Distributing corporation: Any person can request list of shareholders (s.21(3))
b. Non-Distributing: Shareholders and creditors can have a list provided
3. Set out the process one must go through to get access to list of shareholders
a. Requested by paying reasonable fee(s.21(3)), sending affidavit (s.21(7) and indicating list
will only be used for (s.21(9)): (i) influencing voting, (ii) offer to acquire shares (iii) any
other matter relating to the affairs of the corporation
i. Corporation must provide list within 10 days (s.21(3))
b. Distributing: Right to inspect list at records office (s.20(1)(d)) with affidavit (s.21(1.1))
i. Non-Distributing: Shareholders and creditors only (s.21(1))
4. Assess likelihood of company refusing to allow access
a. In Canada Corporation may not refuse access to list on basis it intends to be used for
purpose other than those listed in s.21(9)
b. Courts are adverse to attempts to interfere with access to list of shareholders (Cooper)
c. Encana (2005, ABCA): s.21 does not allow corporation to require intended use of the list
i. Facts: Invested in corporation to find lost shares, applied to obtain list,
corporation refused since the purpose wasn’t clearly within s.21(9)
ii. Decision: Bigger issue is that investor was getting information for his company
1. The corporation would have to apply directly
2. If they filled out the affidavit, they do not have to specify the purpose
3. If they do not follow purpose in s.21(9), it is an offence (s.21(10))
4. S.21 does not allow corporation to require intended use of the list
5. No privacy concerns if it was used for a purpose in s.21(9)
6. Communication for sake of economic gain is not prohibited by s.21(9);
relates to the affairs of the corporation making list more accurate
a. On the other hand a mailing list to advertise another enterprise
would not be a matter relating to affairs of the corporation
d. Cooper (1945): Court will intervene where right to inspection is unreasonably refused
i. Facts: Company secretary interferes with access to list
ii. Decision: There is a statutory right of inspection, the refusal was unreasonable
e. Opposite approach in USA
f. Pilsbury (1971, USA): Proper purpose is one connected with genuine economic interest
i. Facts: Bought one share to see shareholder list to convince them to stop making
bombs, not for economic well-being of company; company refused to give list
ii. Decision: Access to list to impose political views is not a proper purpose for
access to shareholder list
1. Proper purpose is one connected with genuine economic interest of
company; Mere sentiment one has proper purpose is not sufficient
iii. Note: Canada’s approach is quite difference
Chapter 24: Closely-Held Corporations
Nature of Closely-Held Corporation
1. Identify typical characteristics of closely-held corporations
a. Relatively few shareholders which are generally active in management;
b. Generally no established market for shares of corporation and restrictions on transfers
2. Discuss reasons for treating closely-held corporations differently
a. Large Stake: Shareholders tend to have substantial investments
i. Greater incentive to be involved in monitoring management, usually being
involved directly; makes more sense to give them day-to-day decision control
b. Separation of Ownership and Control Problem not as Severe
i. Greater inventive to be involved in monitoring management;
1. Less of a need for mandatory proxy solicitation:
a. Shareholders will inform themselves; exercise their voting rights
2. Less need for mandatory financial disclosures and auditors
c. Desire to Control who One Does Business With
i. Without established market for shares, difficult for shareholder to sell shares
1. Shareholder cannot deal with dissatisfaction by selling shares
ii. Shareholders are “stuck” with co-investors, and will need to trust them
1. They want some control over who they are in business with
a. Thus restrictions on transfers of shares
Statutory Definition of Closely-Held Corporations
1. Note defining approach of CBCA
a. Functional approach taken to closely held corporations
i. Overall query: when costs of particular mandatory provisions outweigh benefits
b. Global Definition: whether corporation is a distributing corporation
i. Distributing: Corporation that made distribution of shares under prospectus or
similar document pursuant to provincial securities laws (s.2(1))
2. Note modifications to the corporate statutes with respect to closely-held corporations
a. Waiver of Notice to Meetings (s.136)
i. Corporation will not have to provide notice for meetings if they’ve waived their
right to notice of meetings
b. One Shareholder Meetings (s.139(4))
c. Unanimous Consent in Writing to Resolutions in Lieu of Meeting acceptable (s.142)
i. This would be in place of a usual annual meeting
d. Dispensing with an Auditor (s.163)
e. No Requirement for audit committee (s.171)
f. Avoidance of Management Proxy Solicitation Requirement (s.149)
i. Mandatory solicitation of proxies by management not required where there are
less than 50 shareholders
Shareholder Agreements
1. Note reasons for use of shareholder agreements and unanimous shareholder agreements
a. Shareholders can enter into agreements as to how they will vote their shares
i. Agreements have been allowed in court (Ringuet); and statute (s.145.1)
ii. Shareholder can assign share to trustee under indenture instructing how to vote
iii. Ex. Agreement to make sure certain people continue to be elected director
b. Voting Agreements to Constrain Directors’ powers
i. Note: Not acceptable for directors to constrain how they will vote (Ringuet)
1. Directors have duties to act in best interests of corporation each time
2. Ex. Can set votes as shareholders but not as directors
c. Constraining Directors’ Power under CBCA: Reallocation via Unanimous Shareholder
Agreements
i. Management powers of directors can be reallocated to shareholders under a
unanimous shareholder agreement (s.146, [also s.102 “directors manage
subject to unanimous shareholder agreement”])
1. Such a thing is only practical in closely-held corporations
2. Ex. Deciding on who the directors will be decided by shareholders, not
directors; then shareholders (as shareholders) agree on who it is
3. Ex. of reallocation: Declaration of dividends, issuance of shares
ii. Process:
1. (1) Determine power for reallocation and identify its provision
a. Ex. (1) Borrowing power (s.189(1,2))
2. (2a) Identify methods available to reallocate the power
a. Ex. (2a) power can be reallocated in the articles, by-laws or via a
unanimous shareholder agreement (s.121)
3. (2b) Assess which method is most appropriate to reallocate power
a. Ex. (2b) In closely held corporations use a unanimous
shareholder agreement; it will be easiest
4. (3) Reallocate
5. (4) Determine how shareholders agree to vote on the matter and put
the terms of that agreement in the shareholders’ agreement
Share Transfer Provisions
1. Identify and explain reasons for share transfer restrictions in shareholder agreements
a. Control Transfers: (i) Avoid undesirable business partners (ii) Preserves relative interests
b. Allow Transfers: When they want to get out of business they can do it without dissolving
c. Allow Forced Buyouts: Desire to have mechanism allowing shareholders to:
i. (i) force out to resolve deadlock; (ii) rid people who can no longer be dealt with
ii. Forced buyouts will not force dissolution of the company
d. Allow buyouts on occurrence of particular events
i. Forced transfers or option to buy out when some event (ex. death) happens
1. Ex. Shareholders may not want to deal with inheritor of the shares
2. Other Ex.: Divorce if shares are part of division of property; bankruptcy
e. Provide a mechanism for establishing a fair price for shares
i. Without this, shareholders looking to sell may be forced to sell at low price
ii. Shareholders forced out may also risk being paid a low price
2. Identify and explain the types of share transfer restrictions
a. Absolute: Does not allow any kind of share transfer
i. Advantage: avoids undesirable business associates, preserves interests,
prevents shareholders from squeezing out another (taking shares for low price)
ii. Disadvantage: Doesn’t allow to deal with deadlocks, doesn’t allow shareholders
to get money out of the business; only solution would be to force dissolution
b. Consent: Shares can be transferred on consent of certain people (typically the board)
i. Advantage: Allows shareholders to sell shares and get out of the business; helps
to avoid introduction of undesirable business associates; preserves interests;
could resolve deadlocks as long as a shareholder is willing to sell
ii. Disadvantages: Not very effective at resolving deadlocks (not practical), weak in
providing shareholders with a market, consent can be used to force a departing
shareholder to accept a low price
c. Shotgun: Person receiving offer has right to accept offer or impose it on initial offeror
i. First offer is an offer to buy or sell: Offer to Buy:
1. One person makes offer to buy shares of other, other person can either
accept offer or buy the shares of the initial offeror at the same price
ii. Advantages: Provides cheap means for setting fair price for shares; initial offeror
will want to set fair price knowing his own shares could be purchased
iii. Disadvantages: Where oferee is financially unable to acquire the shares, puts
offeror at a significant disadvantage for less than value of shares
d. First Option: Shareholder arranges for offer from third party put before shareholders
who can buy proportionate amount of shares on the same terms as arranged
i. Advantages: Allows non-selling shareholders to keep out third party they do not
approve of; retain relative shareholding positions
3. Identify and explain typical share transfer provisions
a. Forced Buyout
i. Shareholder agreement will contain provision allows for shareholders to remove
another shareholder they cannot deal with
b. Event Options
i. Provide for acquisition at happening of certain events leading to another person
gaining control over shares and introducing a person they cannot deal with
1. Ex. bankruptcy, divorce, death
c. Price Determination
i. Shareholder agreement provides means for determining value of shares for
event options or forced buyouts
1. Can involve arbitration or agreed upon valuators or other techniques