Camille Chisholm
Hawes (December 2010)
Corporations Law 230
Contents
INTRODUCTION ..........................................................................................................................................................6
WHAT IS A CORPORATION:.....................................................................................................................................6
Dodge v Ford ......................................................................................................................................................6
WHY INCORPORATE: ..............................................................................................................................................6
TYPES OF CORPORATIONS: .....................................................................................................................................6
WHERE TO INCORPORATE – Federal or Provincial: ................................................................................................7
Federal Versus Provincial Incorporation ................................................................................................................7
Bonanza Creek Gold Mining Co. v. The King (1916 PC) ......................................................................................8
SEPARATE LEGAL ENTITY ............................................................................................................................................8
Salomon v. Salomon & Co, Ltd [1895-1899] ER..................................................................................................8
Lee v. Lee’s Air Farming Ltd. (1961) PC ..............................................................................................................8
LIFTING THE CORPORATE VEIL ...................................................................................................................................9
Macaura v. Northern Assurance Co Ltd and others (1925) HL ...........................................................................9
Big Bend Hotel Ltd. v. Security Mutual Casualty Co. (1980) BCSC......................................................................9
Rockwell Developments Ltd. v. Newtonbrook Plaza Ltd. (1972) Ont CA ...........................................................9
642947 Ont. Ltd. v. Fleischer (2001) Ont CA ......................................................................................................9
Parent and Subsidiary Companies and the Veil......................................................................................................9
Adams v Cape Industries [General Rule] ...........................................................................................................9
Smith, Stone & Knight [Agency Exception] ........................................................................................................9
De Salaberry Realties Ltd v Minister of National Revenue [Parent LIABLE] ................................................... 10
Transamerica Life v Canada Life (Ont Gen Div; aff’d Ont CA) [Parent NOT liable] ......................................... 10
Thin Capitalization ............................................................................................................................................... 10
Walkovszky v Carlton (US case) ....................................................................................................................... 10
Use Company’s Name when Dealing with Outsiders .......................................................................................... 10
Wolfe v Wolfe (AB) [Personal liability without lifting veil] ............................................................................. 11
Statutory Lifting the Veil...................................................................................................................................... 11
CORPORATE CAPITAL STRUCTURE - Shares ............................................................................................................. 11
What is a Share .................................................................................................................................................... 11
Atco v. Calgary Power Ltd. (1982) SCC ............................................................................................................ 11
Rights Attached to Shares ................................................................................................................................... 11
Power to Issue Shares ......................................................................................................................................... 11
Edmonton Country Club v Case ....................................................................................................................... 12
Shares Terminology ............................................................................................................................................. 12
Classes of Shares ................................................................................................................................................. 12
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International Power Co. v. McMaster University (1946) Que CA.................................................................... 12
In re The Isle of Thanet Electric Supply Co (Eng CA) ........................................................................................ 13
Variation of Class Rights of Shareholders............................................................................................................ 13
Special Resolution............................................................................................................................................ 13
Limitations on Share Classes ............................................................................................................................... 13
Re Bowater Canadian Ltd. v. R.L. Crain Inc. (1987) Ont CA ............................................................................. 13
Jacobsen v. United Canso Oil & Gas Ltd. (1980) Alta QB ................................................................................. 13
Dividends ............................................................................................................................................................. 13
Dodge v Ford (US case) .................................................................................................................................... 14
The Queen v McClurg (SCC) ............................................................................................................................. 14
CORPORATE STRUCTURE - Debt .............................................................................................................................. 14
Debts and Shares Compared ............................................................................................................................... 14
Institutional Investors.......................................................................................................................................... 15
Directors Decisions .............................................................................................................................................. 16
Baron – you have to agree you are in a meeting for it to be considered a meeting ...................................... 16
Shareholders Decisions – Voting Rights .............................................................................................................. 16
Shareholder Meetings ......................................................................................................................................... 16
Shareholder Ordinary and Special Resolutions [BCBCA s 1; CBCA s 2(1)] .......................................................... 17
Notice Requirements – Shareholders Meetings ................................................................................................. 17
Proxy Voting ........................................................................................................................................................ 17
Challenging a Shareholder Resolution................................................................................................................. 17
Division of powers between shareholders and Directors ................................................................................... 18
Automatic Self-Cleansing Filter Syndicate Co. v. Cunninghame (1906) CA ..................................................... 18
Hollinger Inc v Hollinger International Inc (US case) [What is “substantially all” of co’s assets] ................... 18
MEETINGS ................................................................................................................................................................ 18
Shareholder Meeting - Chairperson .................................................................................................................... 18
Blair v. Consolidated Enfield Corp. (1993) Ont CA [Good Faith Duties of the Meeting Chair] ....................... 18
Re Marshall (1981) Ont HC .............................................................................................................................. 19
Warring Board Factions – How Far Should Courts Intervene.............................................................................. 19
Re Canadian Javelin Ltd. (1976) Que SC [Court calls s/holder meeting] ........................................................ 19
Charlebois v. Bienvenu (1968) Ont CA ............................................................................................................ 19
sHAREHOLDER pROPOSALS: ................................................................................................................................ 20
CONTRACTS WITH OUTSIDERS ................................................................................................................................ 20
Actual Authority .................................................................................................................................................. 20
Hely-Hutchinson v Brayhead [Implied Actual Authority] ............................................................................... 20
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Ostensible/Apparent Authority ........................................................................................................................... 21
Canlab Supplies v Engelhard Industries Ltd (1979) SCC .................................................................................. 21
When will an Outsider not have Protection under s 146(1) Assumptions .......................................................... 21
1394918 Ontario Ltd v 1310210 Ontario Inc [when does an outside “know”/ “ought to know”]................. 21
DIRECTORS AND OFFICERS DUTIES.......................................................................................................................... 21
WHO IS A DIRECTOR OR OFFICER ........................................................................................................................ 21
DIRECTOR DUTIES .................................................................................................................................................... 22
Duty of Care & FIduciary Duty ............................................................................................................................. 22
Peoples Department Stores Inc. (Trustee of) v. Wise (2004 SCC) ................................................................... 22
Smith v. Van Gorkom (US case 1985) .............................................................................................................. 23
Avoiding Liability for Breach of Duties ................................................................................................................ 23
Business Judgment Rule .................................................................................................................................. 23
Peoples Department Stores Inc. (Trustee of) v. Wise (2004 SCC) ................................................................... 24
Smith v. Van Gorkom (US case 1985) .............................................................................................................. 24
Reliance ........................................................................................................................................................... 24
Indemnification and Insurance ........................................................................................................................ 24
Conflicts of Interest ............................................................................................................................................. 25
Aberdeen Ry. Co. v. Blaikie Brothers (1854) HL .............................................................................................. 25
Taking Advantage of Corporate Opportunities [‘Secret Profits’] ........................................................................ 25
Regal (Hastings) Ltd. v. Gulliver (1942) HL ...................................................................................................... 25
Ways For Directors and Officers to Avoid Liability .............................................................................................. 26
Disclosure of Interest....................................................................................................................................... 26
Shareholder Ratification .................................................................................................................................. 26
Peso Silver Mines Ltd. v. Cropper (1966) SCC.................................................................................................. 27
Irving Trust Co. v. Deutsch 1935 US case ........................................................................................................ 27
Business Opportunities that Arise After Director Leaves Company .................................................................... 27
Canadian Aero Service Ltd. v. O’Malley (1974 SCC) ........................................................................................ 27
Competing with the Company ............................................................................................................................. 28
PUBLIC COMPANIES –Q about Director’s duties in public co consider whether they have fulfilled duty to public
(also consider insider trading) ................................................................................................................................. 29
Exemptions .......................................................................................................................................................... 29
Policy Behind Exemptions ............................................................................................................................... 29
Exemption Categories...................................................................................................................................... 30
CONTINUOUS DISCLOSURE REQUIREMENTS ...................................................................................................... 30
“Material Change” in Continuous Disclosure ...................................................................................................... 30
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Pezim v BC ....................................................................................................................................................... 31
Kerr v Danier Leather....................................................................................................................................... 31
Consequences for Breach of Securities Law ........................................................................................................ 32
Available Defences .............................................................................................................................................. 32
Re YBM Magnex International Inc. (2003) Ontario Securities Commission .................................................... 32
Insider Trading ..................................................................................................................................................... 32
REMEDIES ................................................................................................................................................................ 33
dERIVATIVE aCTION ............................................................................................................................................. 33
Primex Investments v. Northwest Sports Enterprises Ltd. (1995) BCSC [Test for leave to bring derivative
action (under BCBCA)] ..................................................................................................................................... 33
Re Northwest Forest Products Ltd. (1975) BCSC [“Reasonable efforts to cause co to bring action”] ........... 34
First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988) Alta QB [“Proper Person” to Bring the Application]
......................................................................................................................................................................... 34
Oppression Remedy [first remedy you should apply for] ................................................................................... 35
BCE Inc. v 1976 Debentureholders (S.C.C. 2008) [“Reasonable Expectations” of parties] ............................ 35
Clitheroe v. Hydro One Inc. (2002) Ont SCJ [“Any other person” (CBCA)] ..................................................... 36
Downtown Eatery (1993) Ltd. v. Ontario (2001) Ont CA [“Any other person” (CBCA)] ................................. 36
West v. Edson Packaging Machinery Ltd. (1993) ON [“Any other person” (CBCA)] ....................................... 36
First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988) Alta QB [“Any other person” (CBCA)] ................... 36
Oppression Remedy: Family Disputes ................................................................................................................. 37
Ferguson v. Imax (1983) ONCA ........................................................................................................................ 37
Naneff v. Con-Crete Holdings Ltd. (1993) ON [Oppression is a remedy not a punishment] .......................... 37
Oppression Remedy: Public Companies .............................................................................................................. 38
Ford Motor Co. of Canada v. Ontario Municipal Employees Retirement Board (2006) ONCA ....................... 38
Some Typical Situations Where ‘Oppression’ Remedy Has Been Given ......................................................... 38
Compliance and Restraining Order ..................................................................................................................... 38
Compulsory Liquidation (Winding Up) Order ...................................................................................................... 38
“Just and Equitable” ........................................................................................................................................ 39
Ebrahimi v. Westbourne Galleries Ltd (1973) HL ............................................................................................ 39
Dissent and Appraisal Right ................................................................................................................................. 40
Remedies for Public Company Stakeholders ....................................................................................................... 40
PARTNERSHIPS......................................................................................................................................................... 40
Partnership vs Corporation ................................................................................................................................. 40
Existence of Partnership ...................................................................................................................................... 40
A.E. LePage Ltd. v. Kamex Development Ltd. (1977) ONCA [do co-owners of property = partners] ............. 41
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Volzke Construction v. Westlock Foods (1986) ABCA ..................................................................................... 41
Lansing Building Supply (Ontario) Ltd. v. Ierullo (1989) Ont Dist Ct................................................................ 42
Backman v Canada........................................................................................................................................... 42
Liability of Partners.............................................................................................................................................. 42
Ernst & Young Inc v Falconi (1994) Ont Gen Div ............................................................................................. 43
Fiduciary Duties / Liability to other Partners....................................................................................................... 43
Olson v Gullo (1994) Ont CA ............................................................................................................................ 44
Limited Liability Partnership (LLP) ....................................................................................................................... 44
Limited Partnership (LP) ...................................................................................................................................... 44
Haughton Graphic Ltd. v. Zivot (1986) Ont HC ................................................................................................ 45
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INTRODUCTION
WHAT IS A CORPORATION:
- Legal person/entity
- Bundle of rights: including own property, make contracts, hire people, sue or be sued
- Limited liability for shareholders
- Exist in perpetuity (unless dissolved)
- Can include non-profits
Dodge v Ford (USA) – can’t ignore interests of shareholders to benefit society
Purpose of corporation is to benefit shareholders – benefit to society might be ok as a secondary goal
WHY INCORPORATE:
 Investors (shareholders) get limited liability
 Corporation is separate legal entity – can make contracts, sue, be sued
 Perpetual Existence
 A shareholder acting alone has no power to bind the corporation (different than partnerships)
 Ability to buy and sell shares – can sell shares to get rid of interest in corporation
 Business expands a lot – selling shares is an efficient way to raise money from many people
o Has additional facilities for raising additional capital (including shares and debentures)
o “Debentures” – evidence of indebtedness; anyone can produce a debenture and sell it to
another person
 May be some tax benefits – many places have lower corporate tax rate (than high income tax rate)
o Can leave funds in corporation and have them taxed at lower rate – instead of paying out and
having them taxed as your income
o Double-taxation aspect of incorporation – corporation is taxed on income, then that same
income is taxed again in the hands of the shareholders when distributed
o Partnership – partners are taxed based on individual income from partnership
 Flowthrough of losses in partnership/sole proprietorship is not available with a
corporation
 Keep in mind: incorporation has a bit more regulation than partnership – but now it is pretty simple and
cheap to set up a corporation; there is a cost to incorporation but it is small
TYPES OF CORPORATIONS:
Letters Patent
 Main documents = letters patent and bylaws
 Government has discretion whether to approve incorporation (may impose conditions on incorporation)
Memorandum and Articles of Association
 In BC and Nova Scotia; create “companies”
 BC: main documents = notice of articles and articles of association
o Documents form a contract between shareholders, directors and company
o When you buy shares in the company you are deemed to have agreed to this contract – can be
sued for any breach of the articles
o Memorandum and articles set out terms of contract and incorporation is in effect by registration
of that agreement with the government
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o
o
Basic allocation of powers between directors and shareholders is set out in the incorporating
documents
complete freedom to include in the memorandum and articles any conditions not in conflict
with the statute
Division of Powers Corporations
 Based on USA model
 Main documents = articles of incorporation and by-laws
o Articles and by-laws are not a contract
o May adopt unanimous shareholder agreement (“usa”) – to give shareholders more control over
management, to entrench control and give contractual rights
o Makes setting up these corporations more difficult – requires an extra legal agreement
 Includes all other provinces and the Canada Business Corporations Act (CBCA)
o CBCA contains rules regarding how corporation can be structured and run (instead of allowing
corporations to decide themselves – like in BC)
o By-laws are easier to change than in BC – only requires 50% of shareholders
o Directors of the company can change by-laws and later seek shareholder approval
o Leads to less stable by-laws than in BC
WHERE TO INCORPORATE – FEDERAL OR PROVINCIAL:
 Under the Constitution Act the power to incorporate is given to both the federal and provincial
governments
 s.92(11) Constitution Act – allows provincial legislatures to incorporate companies with “provincial
objects”
 Different types of corporations because of competition
o Governments competing to attract business to their provinces by offering easier incorporation,
clearer rules, etc.
o Province by province legislation may also be better able to address localized interests of
corporations in each area
FEDERAL VERSUS PROVINCIAL INCORPORATION
 Each province has legislation requiring a corporation incorporated outside of the province to register
with an official in order to carry on business in the province – a CBCA corporation will have to
register in each province it wishes to do business
 Issuance of license is at official’s discretion
o Most common ground for denial of registration is confusion of corporate names between
the applicant and a corporation already qualified to do business within the province
 Certain provinces have reciprocal agreements allowing companies incorporated in either province to
carry on business in the other without a license
 “Extra-provincial corporation” includes corporations organized outside Canada – but non-Canadian
corporations will usually not do business here without incorporating into a Canadian subsidiary (see
Income Tax Act s.219)
 Because BCBCA is unique, it might be more difficult for business people/corporations from other
provinces to understand it
o If doing inter-provincial business it might be better to use the CBCA for convenience
 Under CBCA – once name is approved you are allowed to use it throughout Canada (without reapplying
for name in different provinces)
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

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o Under BCBCA – name is only protected in BC (have to apply to use that name in other provinces)
CBCA is simpler act to read and understand
If doing BC only business = use BCBCA; if doing business nationally = use CBCA
BCBCA:
o Don’t have to have resident Canadians as directors in corporation (to attract foreign business to
BC)
 Under CBCA – have to have at least ¼ of directors as Canadian residents (and at least 1 if
you have fewer than 4 directors)
o Articles are more stable in BC company – more difficult to change them
 CBCA – bylaws are easier to change; can use USA to fix the bylaws in place
o BCBCA gives more flexibility in customizing rights and powers of people (more flexibility in
structuring company)
 CBCA – much more fixed in terms of what you can do
There aren’t large differences – it is up to the client what they wish to do
Bonanza Creek Gold Mining Co. v. The King (1916 PC)
 Provincial incorporated companies – don’t have right to do business in other provinces
 But provincial companies have capacity to do business extra-provincially – need permission from
provinces doing business in
SEPARATE LEGAL ENTITY
BCBCA s 13; CBCA s 9 – company comes into existence on date of filing application, or date specified in
incorporation application
BCBCA s 30; CBCA s 15 – legal capacity and powers of company/corporation are the same as an individual
person
Salomon v. Salomon & Co, Ltd [1895-1899] ER
1. Ensure that the company was set up in accordance with the legislation (BCBCA or CBCA)
2. Ensure there was no fraud when the company was set up
 The company is a separate legal entity
 Unless fraud is proven, once the company is legally incorporated it must be treated like any other
independent person with rights and liabilities appropriate to itself, and the motives of those who
took part in the promotion of the company are absolutely irrelevant in discussing what those rights
and liabilities are
 The creditors have notice that they are dealing with a company the liability of the members of which
is limited, and the register of shareholders informs them how the shares are held, and that they are
substantially in the hands of one person, if this be the fact
Lee v. Lee’s Air Farming Ltd. (1961) PC
 Application of Salomon – the company is a separate legal entity
o Lee and company were separate legal entities – therefore could contract with each other
o Lee and company were separate legal entities - so company could give an order to Lee
 It is possible to have a position in the company and also be a worker for the company – as long as
when you sign the contract it is clear that it is the company that is signing
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LIFTING THE CORPORATE VEIL
Macaura v. Northern Assurance Co Ltd and others (1925) HL
 Assets belong to the corporation and aren’t owned by a shareholder – therefore the shareholder has
no insurable interest in those assets
 Neither a simple creditor of nor a shareholder in a company has any insurable interest in a
particular asset which the company holds
Kosmopoulos v. Constitution Insurance Co. (1987) SCC
Issue: whether a sole shareholder of a corporation has an insurable interest in the assets of that corporation
 The law on “lifting the corporate veil” is inconsistent – lack of overarching regime or policy
 CA: would lift the veil because they thought this was unfair
 SCC: don’t lift the veil because this would go against Salomon
o If you choose to incorporate you choose the benefits and also get the burdens
 Instead – redefined “insurable interest”
o Because Kosmo is only shareholder and would be affected by destruction of company’s
assets (loss to him personally as company’s only shareholder) – he has insurable interest in
company’s assets
Big Bend Hotel Ltd. v. Security Mutual Casualty Co. (1980) BCSC
 Circumstances in which the veil was lifted – equity will not allow an individual to use a company as a
shield for improper conduct or fraud
 If there is fraud by the people who control the corporation the court will not allow them to get
away with this fraud by invoking the separate legal entity concept
Rockwell Developments Ltd. v. Newtonbrook Plaza Ltd. (1972) Ont CA
 Shows difficulty of getting courts to lift veil despite informality and total control of corporation by
shareholders where no fraud present
 Court found no fraud because: company was incorporated properly and Newtonbrook knew they
were signing with a company (company name was on contract) – therefore should be aware of
limited liability
642947 Ont. Ltd. v. Fleischer (2001) Ont CA
 Obiter remarks – but indicates when veil might be lifted
 Shareholders made undertaking to pay damages when they knew corporation didn’t have assets
 Some kind of fraud or bad behaviour on the part of shareholders creates risk they will lose limited
liability – court likely to lift the corporate veil and find them personally liable
PARENT AND SUBSIDIARY COMPANIES AND THE VEIL
Adams v Cape Industries [General Rule]
 General Rule: each company is a separate legal entity
o Generally parent companies won’t be liable for debts of subsidiary companies because of
limited liability
Smith, Stone & Knight [Agency Exception]
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
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Exception: where one company acts as agent for the other courts will view them as one company
1. Express Agency: one company signs contract “as agent for” other company; by agreement
o Parent co will be liable for subsidiary as long as agent is acting within their authority
2. Implied Agency: parent completely dominates and controls subsidiary (subsidiary has no
independent decision making power of its own)
6 Elements of Implied Agency:
1. Were the profits treated as profits of the parent co
2. Were the persons conducting the business appointed by the parent co
3. Was the parent co the head and brain of the trading venture
4. Did the parent co govern the adventure, decide what should be done, and what capital should
be embarked on the venture
5. Did the parent co make the profits by its skill and direction
6. Was the parent co in effectual and constant control
Very difficult test to meet – most subsidiaries have slight independence from parent co
De Salaberry Realties Ltd v Minister of National Revenue [Parent LIABLE]
Subsidiary co claimed land was purchased for shopping complex, then sold; but subsidiary was part of
parent conglomerate that was a realty/land transfer business
 Court looked at question of control: was there total domination and control of subsidiary by parent
o Two companies each owned 50% of De Salaberry, but they were working together and
parent cos made all decisions for De Salaberry
 Followed Smith, Stone & Knight – treated subsidiary as part of conglomerate group
**Keep in mind: this is a tax case; courts are more willing to lift veil to ensure taxes are paid**
Transamerica Life v Canada Life (Ont Gen Div; aff’d Ont CA) [Parent NOT liable]
 Shows how difficult to make parent co liable for subsidiary
 Parent not liable because:
o Even though only shareholder and appointed directors – not all directors were same
o Evidence that cos had different accounting systems
o Evidence that it was more of an arms length relationship between cos
o Some difference/distinction between cos – behaved slightly differently
THIN CAPITALIZATION
Walkovszky v Carlton (US case)
Taxi case – injured by taxi, sue taxi corp, no assets to pay out settlement
 Court maintained separate legal entity principle from Salomon
 To hold shareholder personally liable it is not enough to just show that the company has little or no
assets
 Must have more than thin capitalization to make shareholders personally liable for debts of corp
o Ex. intermingling of personal and corp funds, no regard for formality of corp structure,
breach of statute (illegality), etc.
 Can set up a corporation with virtually no assets as long as at the time you set up you don’t owe
money that you are trying to get out of paying = fraud
USE COMPANY’S NAME WHEN DEALING WITH OUTSIDERS
BCBCA s 27 – in all public communications, a company must display its name in legible characters
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Wolfe v Wolfe (AB) [Personal liability without lifting veil]
 Court finds that there was a breach of the Corporations Act (BCBCA s 27) – therefore don’t have to
follow Salomon
 If no outsider could have known they were dealing with the corporation then the relationship is
with you personally and not the corporation
o Moir held personally liable because portraying everything in his name (not corporation’s)
made the relationship with him personally
o The company still has a separate legal entity but it was not involved in this relationship
STATUTORY LIFTING THE VEIL
BCBCA s 142 – directors and officers personal liability
BCBCA s 227 – oppressive behaviour by shareholders
CORPORATE CAPITAL STRUCTURE - Shares
WHAT IS A SHARE
 Share – connotes a common, divided, participation interest in the corporation’s business
o Provides no title to the assets of the company
o Ownership of shares gives investor a bundle of rights – defined in the co’s constitution and
the corporations act
Atco v. Calgary Power Ltd. (1982) SCC
 Shareholders have no proprietary interest in the assets of the company in which they hold shares –
their proprietary interest is in their shares only
 See also Salomon; Macaura
RIGHTS ATTACHED TO SHARES
 Largely dependent on co’s constitution
 If only one class of shares rights generally include [CBCA s 24(3)]:
o Right to vote on shareholder’s resolutions (including electing directors)
o Right to receive dividends – if they are declared
o Right to share in assets remaining after liquidation
 If more than one class – rights may be divided up between classes
 Transfer rights: Common law default rule – shares are transferable
o Can be restricted by co’s constitution or corporations Act
o Once company becomes public – can’t restrict transfer of shares
 Shareholders also have limited liability [BCBCA s 87]
o Shareholder is not personally liable for co
o Shareholder can only be liable for the amount invested
POWER TO ISSUE SHARES
 Usually board of directors have power to issue shares – subject to articles/bylaws [BCBCA s 62;
CBCA s 25(1)]
 BC Table 1 Articles s 20.2 – shares cannot be sold, transferred or disposed of without consent of the
directors
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Edmonton Country Club v Case
Golf club with three provisions in articles: (1) annual fee – if not paid shares forfeited; (2) transfer fee for
shares; (3) directors have discretion to review share transfers for any reason
 (1) Requiring you to continue paying is against limited liability – once you’ve paid for your shares
initially you don’t have to pay more
o Can have an annual fee, but can’t make share ownership contingent on payment of fee
 (2) You can only be charged the administrative costs of transferring shares – can’t be charged an
unreasonable transfer fee that would be more than the costs incurred
 (3) Common law rule that shares are transferrable – this can be limited by co’s articles
o Common law rule is subject to co’s articles
SHARES TERMINOLOGY
Authorized Capital [BCBCA s 53(b)] = maximum # of shares co permits itself to issue
 Most cos have a very high number to permit future growth
 This is now basically meaningless – abolished in the CBCA; and optional in BCBCA
Share Capital – how much money co has raised from issuing shares since it was founded
 Amount has to be included in co records
Issue Price [BCBCA s 63] – cost of buying share in co when shares first issued
 Only important when you first buy shares from co; price will fluctuate with success of co
Market price/value – better reflection of how co is doing; may be higher or lower than issue price
CLASSES OF SHARES
 Different classes of shares = different rights; may be different class even if not called a class
 Companies can call their shares whatever they want – no fixed terms for shares
o Look at co’s constitution to determine what rights of each class are
 Common – share in profits and also have voting rights
 Preference – receive dividends before common shares; usually give up voting rights except in issues
that directly affect their share class
o If liquidation occurs the preferred stock has priority, but only with reference to the common
stock –creditors are first priority
 Therefore this priority only has meaning and value if asset values remain after
creditors have been fully satisfied
 Cumulative – if dividends are not paid one year, have right to double dividends next year (arrears
accumulate)
 Participating – if co makes extra profits over dividends agreed to pay to preference shareholders,
those shareholders can share in those extra profits
 Convertible – convertible to a common share after certain period of time at option of shareholder
 Different rights of share classes must be included in co’s articles [BCBCA ss 11(g), 12(2)(b); CBCA s
6(1)]
o *Make sure articles are clear about what rights of each share class are*
International Power Co. v. McMaster University (1946) Que CA
Preference shares receive 7% dividends before common shares; co was paying common shares 8% and
preference 7%; McMaster wanted back pay for the 1% extra profit they wanted preference shares to share
in – no mention in articles of whether preference shares were participatory or non-participatory
 If co’s articles don’t say that preference shares are participatory then they are non-participatory
o Therefore preferences shares not entitled to share in extra 1% profit
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
On winding up under common law shareholders have right to share in money left after all debts paid
o Court said preference shares could share in profits left after debts paid out – based on
common law rights of shareholders
o Viewed the shares as participating (in relation to winding up) even though articles didn’t
specify they were participating
In re The Isle of Thanet Electric Supply Co (Eng CA)
 If articles don’t specify that shares are participating – they are non-participating shares
VARIATION OF CLASS RIGHTS OF SHAREHOLDERS
BCBCA s 61; CBCA s 176 – rights of a share class can’t be varied without a separate special resolution of
those shareholders
Special Resolution
 BCBCA s 1 – default is 2/3 majority; ranges from 2/3 – ¾ majority depending on articles
 CBCA s 1 – 2/3 majority
LIMITATIONS ON SHARE CLASSES
Re Bowater Canadian Ltd. v. R.L. Crain Inc. (1987) Ont CA
Facts: one class of shares divided into common and special common shares. Special common shares had 10
votes per share unless sold to a new shareholder who would only receive 1 vote per share.
 CBCA s 24(3) – where a corporation has only one class of shares, the rights of the holders thereof
are equal in all respects
o If only one class of shareholders they each have to be treated the same (have same rights)
 s 24(4) – the articles may provide for more than one class of shares
o Court read in that if there is more than one class, the rights which are attached to a class of
shares must be provided equally to all shares of that class – founded on the principle that
rights, including votes, attach to the share and not to the shareholder
Jacobsen v. United Canso Oil & Gas Ltd. (1980) Alta QB
 CBCA s 24 – all shareholders, if there is only one class, have to be treated equally
o Where shareholders only allowed to vote up to 1000 shares – not treating shareholders
equally; ex. those with 2000 shares are only getting ½ vote per share = discrimination
within a single share class
 [Company gave up CBCA designation and moved to Nova Scotia where they were allowed to
maintain this restriction]
o *Always consider – if you can’t get away with it under one corporation act, try another one
in a different jurisdiction*
DIVIDENDS
Dividend – distribution of company profit to shareholders
BCBCA s 136 – usually directors make decision of whether to pay dividends; implied in their s 136 powers
Profit can be reinvested into the company to allow for growth – rather than paying dividends
CBCA s 102(1) - The power to declare dividends is a power of the directors subject only to a unanimous
shareholders’ agreement
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Directors are not obligated to declare dividends
 There is no duty on the corporation, or the directors on behalf of the corporation, to declare
dividends
 The directors must exercise their powers in the best interests of the corporation; and in a way that is
not oppressive, or unfairly prejudicial toward one or more shareholders, or that unfairly disregards
the interests of one or more shareholders
BCBCA s 70(1); CBCA s 42(b) – in BC can pay dividends out of profit, capital, however co chooses; under
CBCA co can only pay dividends out of profits
BCBCA s 70(2); CBCA s 42(a) – if you pay out a dividend and the co becomes insolvent because of that, the
directors will be personally liable to creditors for money lost due to co’s insolvency
Dodge v Ford (US case)
 If directors don’t have a reason that is in the best interest of the company – it is unfair and
oppressive to shareholders to not distribute dividends
The Queen v McClurg (SCC)
 “Discretionary dividend clauses” – directors have discretion to decide whether any class can get
dividends and which class should get it
 Majority viewed this as ok – directors have general power to declare dividends or not, so if included
in articles, why not give them power to decide which class will get dividends in which year
 The declaration of dividends is limited legally in that it must be exercised in good faith and in the
best interests of the company
 The rights carried by all shares to receive a dividend declared by a company are equal unless
otherwise provided in the articles of incorporation
o Prima facie shareholders participate in the benefits of membership equally. It is only when a
company divides its share capital into different classes with different rights attached to
them that the prima facie presumption of equality of shares may be displaced
 Shareholder rights attach to the shares themselves and not to shareholders
o The division of shares into separate classes is the means by which shares are distinguished
and in turn allows for the derogation from the presumption of equality (Bowater Canadian
Ltd.)
 Dissent – directors shouldn’t have this much discretion to divide the profits of the company; idea is
against principle of equality of dividends (HAWES: doesn’t understand dissent reasoning)
CORPORATE STRUCTURE - Debt
DEBTS AND SHARES COMPARED
Shares:
 Potential for dividends
 Not guaranteed to get initial investment back if company wound up
 Potential for higher return – if profitable = higher dividends, sell shares for high price
 Can get voting rights (depending on class of share)
 Don’t have to give security over shares – may not be able to get loan because don’t have security
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

Debts:








Shareholders are last in line if company is wound up
Shareholders have more control over management of company – by virtue of their rights and
remedies
Guaranteed return
Must be repaid when co wound up
Fixed return – ensured that you will get back amount in loan agreement
No voting rights
Interest paid on debt
Tax benefits – can write off a lot of costs of loan against income
“Convertible Debt” – hybrid security which starts as a bond and after a few years, bondholder has
option to convert into shares at agreed formula
Debt Securities
o A corporation may issue and sell debt securities to the public, just as it might issue and sell
equity
o A debt security represents a right to receive periodic payments of interest and return of
principal on specified dates and in accordance with the other terms of their issue
o The main advantage in issuing debt securities – very large amounts of money may be
borrowed through the issue of securities without the need to identify a single lender that is
prepared to advance the entire amount
o When a large loan is carved into smaller pieces issued by debt securities, it is more difficult
for the “lenders” to act in concert to try to monitor or discipline the corporate borrower
INSTITUTIONAL INVESTORS
 Investors buy units in the mutual fund
 Shareholder in the company is the mutual fund – it holds all the voting rights; investor has no voting
rights
 Basically bad investment – would be better to just buy and hold shares (meant to be long term
investment)
DIVISION OF POWERS BETWEEN DIRECTORS AND SHAREHOLDERS




IF THERE IS A DISPUTE BETWEEN SHAREHOLDERS AND DIRECTORS:
o 1. LOOK IN ARTICLES OR USA FOR HOW POWERS ALLOCATED
o 2. LOOK AT RELEVANT CORPORATIONS ACT TO SEE WHO HAS POWER
Powers are divided up in the business corporations acts and corporate articles, bylaws or
shareholder agreements
o Includes procedures for company to follow
o And rules about who decides various corporate issues
Directors: primary power is to manage the co (BCBCA s 136; CBCA s 102)
o Includes most decisions relating to co issues – except if limited by Act or articles
o Management powers can be delegated to officers too
o Restriction on powers – will be in articles or USA
Shareholders: Powers to vote on certain major co decisions
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o
o
Includes: electing directors, changing articles, changing co type, voluntary winding up, sale
of all assets (see Hollinger), etc
 Board of Directors makes initial proposal and shareholders have the right to approve
or not
Have to look to corporations act to find out what powers are
DIRECTORS DECISIONS
 Director’s mandatory qualification requirements [BCBCA ss 120-124]:
o Must be natural persons
o Over 18 years old
o Not bankrupt
o Must not be of unsound mind – or “incapable of managing the individual’s own affairs”
 Make decisions by passing director’s resolutions
 A single director cannot make decisions unless they have the power delegated to them by the BoD
Two ways to pass director’s resolutions:
1. By meeting – majority of directors pass the director’s resolution
Requires a “quorum” – number of people that must be present to have a valid meeting where a
resolution can be passed
Must tell all the directors about the meeting – have to give proper notice
Meetings can be done by phone or other means if this is written into the articles
2. No meeting – have the directors sign a resolution
To pass this must be unanimous – signed and approved by all directors on the board
If co only has one director – that director = a meeting
Any resolutions passed must be written down and signed; included in company’s records
Baron – you have to agree you are in a meeting for it to be considered a meeting
SHAREHOLDERS DECISIONS – VOTING RIGHTS
 Shareholders make decisions by voting in meetings or passing resolutions
o Resolutions are passed in the same two ways as for directors
 Shareholders have the right to elect directors of the co
 Shareholders are given the right to vote in relation to certain changes that are considered
“fundamental”
o On these fundamental changes, shareholders are generally entitled to vote whether or not
the shares of the class they hold otherwise carry the right to vote
SHAREHOLDER MEETINGS
 Notice:
o must be given 21 days in advance
o must be given to all shareholders
o any non-ordinary business to take place at the meeting must be set out in the notice
 Annual General Meeting:
o Co must have these meetings every year
o Directors are elected, look at financial statements, etc.
 Extraordinary General Meeting (Special Meeting):
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


o Meeting called at another time, to discuss something co must decide right away
Directors have power to call s/holder meetings
S/holders can call s/holder meetings if they have 5% or more of the votes in the co
o S/holders can combine to equal 5% and call a meeting in conjunction
Quorum = in BCBCA minimum of 2 s/holders present
o CBCA - If none specified a quorum is present if holders of a majority of the shares entitled to
vote at the meeting are present or represented by proxy
o If single shareholder co – only one present
o Most cos will specify a higher number of shareholders must be present (in articles)
SHAREHOLDER ORDINARY AND SPECIAL RESOLUTIONS [BCBCA S 1; CBCA S 2(1)]
 Ordinary resolution – passed by majority
 Special resolution – passed by special majority (at least 2/3 majority)
o For major decisions that change the structure of the co
 Special business – no correlation with special resolution
o Must give notice if discussing special business at the s/holder meeting
o Any business outside of ordinary business – must give notice that this business will occur
 Ordinary business: electing directors, looking at financial statements, appointing
auditor
NOTICE REQUIREMENTS – SHAREHOLDERS MEETINGS
 Notice requirements for s/holder meetings are much more strict than for directors meetings
 Notice must sufficiently specify the nature of the business of the meeting – if special business
 Director’s must fully disclose facts that may affect s/holder decision to vote or attend meeting
 Information sent to s/holder must be:
o Fairly presented
o Reasonably accurate
o Clearly written and
o Not misleading
 Garvie v Axmith (1961) Ont HC – applies in BC
o Shareholders may attack decisions made at shareholder meetings if notice was insufficient
o The court may nullify a meeting if notice didn’t clearly state what the meeting would be
about
 Means another meeting must be held, with proper notice
PROXY VOTING
 Public cos must provide proxy forms with the notice of s/holder meeting
o Management’s obligation is that shareholders are notified of their proxy rights and given the
opportunity to exercise them
o Where management fails to send the required information with the proxy a court will nullify
the results of the shareholders meeting
 If ordinary business – directors don’t have to give space to allow voting for or against
o Only choices: for or withheld
 If special business – have to give the option to vote for, against or withhold
CHALLENGING A SHAREHOLDER RESOLUTION
 Challenge for unfairness, oppressive to minority shareholders (includes not in best interest of co)
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



Proxy form contents – should include ability to vote against if it is special business
Argue ultra vires the co purpose if co has an “objects clause”
Decisions relating to remuneration is considered management of co – shareholders can’t decide this
(BoD decides remuneration)
Argue that the decision is something which is not in the scope of powers of s/holders – it’s a
decision only directors can make
DIVISION OF POWERS BETWEEN SHAREHOLDERS AND DIRECTORS
 The formal grant of authority to directors implicitly removes power from shareholders
o Also CBCA s.102 – focuses contests for control of the corporation around the shareholders’
right to elect directors
Automatic Self-Cleansing Filter Syndicate Co. v. Cunninghame (1906) CA
Issue: whether the directors are bound to accept, in substitution of their own view, the views contained in
the resolution of the company
 Within the authority granted by the co’s constitution, the board may act independently of the views
of the majority of shareholders and in a manner opposed by a majority
 Shareholders don’t have the right to interfere with management powers granted to the directors
in the articles
o Even with a majority of votes shareholders can’t directly engage in management of the co
o Once this power has been assigned to the directors you must let them manage, as long as
they are acting within their powers
 The only way s/holders can get involved in managing the co is through election of directors
Hollinger Inc v Hollinger International Inc (US case) [What is “substantially all” of co’s assets]
 Selling all or substantially all of the co’s assets requires shareholder approval
 Substantially all:
o Vital part of co’s business – when co can no longer properly function after that asset is sold
off
o Not based on percentage – something which leaves the co with hardly any business left
 Controlling shareholders have no inalienable right to usurp the authority of the BoD that they elect
MEETINGS
 On an application by shareholders under CBCA s.144 (BCBCA s.186) a court may order a
shareholders’ meeting be called
o Such orders may be made if it is “impracticable” to call or conduct a meeting in another way
or “for any other reason a court thinks fit”
o Court is careful to disrupt as little as possible – and will order that any meeting should be
called and conducted in conformity with such articles and regulations as far as practicable
SHAREHOLDER MEETING - CHAIRPERSON
Blair v. Consolidated Enfield Corp. (1993) Ont CA [Good Faith Duties of the Meeting Chair]
TRIAL: should proxy forms, altered to include another candidate for director, be accepted
 Chairpersons duty is one of honesty and fairness to all individual interests, and directed generally
to the best interests of the company
o Includes interests of shareholders not present at the meeting
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o
The duty of fairness relates to the decision making process and the conduct of a proper
corporate meeting
o Chair should act in a quasi-judicial manner (has to act impartially even if shareholder and
involved in election to be director) – if they fail to do this their decision should not stand
APPEAL: Blair wanted indemnification for costs of trial
Rule for most cos: will pay costs (including legal costs) if there hasn’t been bad faith on behalf of the director
 Director has to act in good faith when making decisions for the co
 Legal advice does not automatically make conduct which is based upon that advice honest and in
good faith for the purpose of claiming indemnity
o But legal advice should be considered in assessing good faith – should be considered in the
context in which it was given and alongside the duty of the chairperson to act fairly
o Where legal advice relating to the decision was sought and followed, and no evidence
lawyers were motivated by personal gain – likely can’t say that the Chair or director was
acting in bad faith
Re Marshall (1981) Ont HC
 General rule in company law that the persons entitled to vote as a shareholder are those shown
on the company’s books to be shareholders
 A chairman at an AGM should not have to determine the legal rights of beneficial owners of shares
registered in the name of others – he is entitled to rely on the votes as cast by the registered owner
of those shares
o When counting votes, you don’t to go behind the vote to find out who is the real owner of
the vote – this would be too inefficient
 Registered shareholders can vote however they want – don’t have to go behind the
list of registered shareholders
WARRING BOARD FACTIONS – HOW FAR SHOULD COURTS INTERVENE
You can challenge decisions made at meetings or have courts order meetings – won’t always succeed
*a lot depends on the wording of the corporation act and the co’s articles*
Re Canadian Javelin Ltd. (1976) Que SC [Court calls s/holder meeting]
Director applied to court to order a s/holders meeting to elect new BoD because of inability of divided board
to agree on how to control the company
 Court ordered a s/holder meeting and appointed an independent chair whose decisions had to be
followed
o Court felt there was no other way to rectify this situation – board was in a deadlock
o This was the only way to give effect to s/holders wishes
Charlebois v. Bienvenu (1968) Ont CA
Issue: can the court order for the calling and conducting of a shareholders meeting to achieve some
purpose which is beyond the powers of shareholders at a meeting called in any other manner
 CBCA s.144 is directed at and limited to the removal of difficulties militating against the calling of a
shareholders meeting or militating against the conducting of business which lawfully might come
before the meeting
 Once these difficulties are removed it is open to the shareholders present at the meeting to conduct
only such business thereat which could have been conducted at a meeting legally called in any other
manner
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o
o

Co’s bylaws said a new board could only be elected yearly
Court shouldn’t go behind corporations act or co’s constitution to interfere with procedures
of co
This provision does not allow the court to “order” shareholders to do in a meeting what they
would otherwise have no power to do simply because it had been established that without the
help of the court it was “impracticable” to call, hold or conduct the meeting
SHAREHOLDER PROPOSALS:
 Usually just a way to have opinion voiced, issue discussed
o Directors manage the co and don’t have to act on any proposal – even if it is voted on
o Can be influential on management – in order to avoid negative publicity
 No need to include proposal at meeting if:
o Proposal is in relation to personal interests or grievances – issues co shouldn’t necessarily be
discussing at s/holder meeting
o If not related to co’s business in any way
o If only for publicity
o If proposal has been presented in previous years and only got a small minority of votes
 Have become more popular recently as a way to comment on co’s social policy
CONTRACTS WITH OUTSIDERS



Co’s may enter into contracts
o Directly – through one of its organs, usually BoD
o By an officer or agent with delegated authority
Outsiders don’t have to read the articles or notice of articles – can assume co complied with its
articles
If the co holds someone out you can assume they are what they are held out to be
ACTUAL AUTHORITY
A relationship based on agreement between the co and an agent
Given expressly or implied
 The actual authority of an officer may be determined by the officer’s employment contract or a
formal board resolution
 Actual authority will also be found to exist where an officer, without formal permission, exceeds the
authority that usually attaches to his position but does so with the knowledge and acquiescence of
the corporation
 Managing Director cannot act in respect of “critical matters” (something that affects the whole of
the co) without authorization of the board
 Normally a single director (chair, officer) – can’t bind the co without the authority of the board
o Unless the co has allowed them to do this for a period of time and they have built up a
course of business where the person has been allowed to bind the co (implied authority)
Hely-Hutchinson v Brayhead [Implied Actual Authority]
Richards signed K on behalf of co; co said he had no authority therefore K wasn’t binding
 If you allow someone to sign for you then that person will have implied actual authority to bind
the co to Ks
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
Co had allowed Richards to sign many previous Ks on their behalf and had never prevented him from
doing this
o The co had acquiesced to his behaviour – created implied actual authority to bind the co
OSTENSIBLE/APPARENT AUTHORITY
 Ostensible authority is the appearance of authority even though no actual authority has been
granted.
o It creates an agency by estoppel: the company cannot claim that the agent’s acts were
unauthorized
 A representation or holding out to the outsider, intended to be and in fact relied upon by the
contractor, that a person (the agent) has authority to enter into contract(s) on behalf of a company
(the principal). (Freeman and Lockyer v Buckhurst Park Properties)
 Representation can be by words or by behaviour/conduct
 IMPORTANT: the person doing the representing must have actual authority to act for the
company: (Freeman and Lockyer)
 Apparent authority can be a single transaction – implied authority requires a built up course of
conduct
Canlab Supplies v Engelhard Industries Ltd (1979) SCC
 Doesn’t matter if you are in a low position – if your area of the co’s business is purchasing and you
have been allowed to purchase on behalf of the co then you have implied actual authority to make
Ks and bind the co in that area where you have been given authority
WHEN WILL AN OUTSIDER NOT HAVE PROTECTION UNDER S 146(1) ASSUMPTIONS
 BCBCA s.146(2) - when they have knowledge or ought to have knowledge due to their relationship
to the company that these assumptions were incorrect (compare CBCA s.18(2))
o You cannot rely s 146(1) where you know or ought to have known about company
procedure because of personal knowledge of the co or working in the co
1394918 Ontario Ltd v 1310210 Ontario Inc [when does an outside “know”/ “ought to know”]
Ontario Business Corporations Act – similar to CBCA s 18(2)
 Normally for an outsider it doesn’t matter if the co’s articles aren’t being complied with – but where
you know the articles aren’t being complied with you aren’t protected
DIRECTORS AND OFFICERS DUTIES
WHO IS A DIRECTOR OR OFFICER
BCBCBA s 1:
“Director” means,
(a) in relation to a company, an individual who is a member of the board of directors of the company as
a result of having been elected or appointed to that position, or
(b) in relation to a corporation other than a company, a person who is a member of the board of
directors or other governing body of the corporation regardless of the title by which that person is
designated
"senior officer" means, in relation to a corporation (applicable to “officers” too),
(a) the chair and any vice chair of the board of directors or other governing body of the corporation, if
that chair or vice chair performs the functions of the office on a full time basis,
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(b) the president of the corporation,
(c) any vice president in charge of a principal business unit of the corporation, including sales, finance or
production, and
(d) any officer of the corporation, whether or not the officer is also a director of the corporation, who
performs a policy making function in respect of the corporation and who has the capacity to influence
the direction of the corporation
Whether or not you actually are a director – if you behave like a director, the courts will treat you like one in
terms of legal liability
DIRECTOR DUTIES
DUTY OF CARE & FIDUCIARY DUTY
BCBCA s.142(1) A director or officer of a company, when exercising the powers and performing the
functions of a director or officer of the company, as the case may be, must
(a) FIDUCIARY DUTY - act honestly and in good faith with a view to the best interests of the company,
- Directors are in a position of trust in the co and therefore must act in the best interests of the
people relying on them (shareholders and co)
(b) DUTY OF CARE - exercise the care, diligence and skill that a reasonably prudent individual would
exercise in comparable circumstances
- Where you are in a position of responsibility you can’t act carelessly
- There is a certain standard of care that must be met and if directors fall below it they have
breached the standard of care – can be sued for negligence if you cause loss to someone
Peoples Department Stores Inc. (Trustee of) v. Wise (2004 SCC)
Duty of Care [BCBCA s 142(1)(b); CBCA s 122(1)(b)]
 “Duty of care” – imposes a legal obligation upon directors and officers to be diligent in supervising
and managing the corporations’ affairs
o This provision requires more of directors and officers than the traditional common law duty
of care
 Directors must be “reasonably informed”
 Diligence standard – have to attend meetings if you can attend, must have good excuse for missing
meetings
 The standard of care is an objective, contextual standard
 Contextual – dependent on the type of co
 No breach of the duty of care: if directors act prudently and on a reasonably informed basis.
o The decisions they make must be reasonable business decisions in light of all the
circumstances about which the directors or officers knew or ought to have known
o Perfection is not demanded
 HAWES: doesn’t think the standard is very high for directors
Fiduciary Duty [BCBCA s 142(1)(a); CBCA s 122(1)(a)]
 “Fiduciary Duty” – requires directors to act honestly and in good faith with a view to the best
interests of the corporation
o Must respect the trust and confidence that have been reposed in them to manage the
assets of the corporation in pursuit of the realization of the objects of the corporation
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o
o
o
o
o
o
Must avoid conflicts of interest with the corporation
Must avoid abusing their position to gain personal benefit
Must maintain confidentiality of information they acquire by virtue of their position
All circumstances may be considered in evaluating good faith and honesty
In determining whether they are acting in the best interests of the corporation, it may be
legitimate for the board of directors to consider the interests of shareholders, employees,
suppliers, creditors, consumers, governments and the environment
At all times the directors owe their fiduciary obligation to the corporation. The interests of
the corporation are not to be confused with the interests of the creditors or those of any
other stakeholder
UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc. (2002 Ont SCJ) [What is standard of care]
Case of the ridiculously huge compensation package for Berg; approved by BoD after getting an incomplete
remuneration consultant report; Breach of duty of care for approving this compensation package?
 The duty of care requires that where directors make decisions likely to affect shareholder welfare,
their decision must be made on an informed and reasoned basis
 Retention of advisors is encouraged, but does not relieve directors of the obligation to exercise
reasonable diligence
Smith v. Van Gorkom (US case 1985)
 Here there was a breach of duty of care because:
o No attempt to get an independent valuation by an expert
 When selling co you must get it valued – can’t rely on share price
o Price was fixed to benefit purchaser not shareholders – not considering interests of
shareholders when fixing price
o None of the board read the merger agreement before signing it – didn’t know it prevented
them from seeking other offers
 Board making decisions for a company must:
o Get independent advice
o If talking about valuations you need to get professionals to do it for you and then you can
maybe make your decision based on that info - if you fail to even try to get that information
you are breaching duty of care
o Read agreements before you approve them
AVOIDING LIABILITY FOR BREACH OF DUTIES
Business Judgment Rule
 Courts will defer to the business judgment of the directors if they have been duly diligent and have
made informed decisions
o Duly diligent – includes ensuring they are informed, have considered various courses of
action, and have made the decision in the best interests of the corporation
 The courts will assess the reasonableness of the decision, not whether it was perfect - if directors
have acted in a range of reasonableness, the court will not substitute its own opinion for theirs
*Applied in Peoples Dept Stores; not successful in UPM-Kymmene, Van Gorkom – because they were
careless*
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Peoples Department Stores Inc. (Trustee of) v. Wise (2004 SCC)
 Canadian courts have developed a rule of deference to business decisions called the “business
judgment rule”
o The court looks to see that the directors made a reasonable decision, not a perfect decision.
Provided the decision taken is within a range of reasonableness, the court ought not to
substitute its opinion for that of the board even though subsequent events may have cast
doubt on the board’s determination
UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc. (2002 Ont SCJ)
 “Business judgment rule” protects Boards and directors from those that might second guess their
decisions - The court looks to see that the directors made a reasonable decision, not a perfect
decision
 Directors are only protected to the extent that their actions actually evidence their business
judgment
o Courts are entitled to consider the content of their decision and the extent of the
information on which it was based and to measure this against the facts as they existed at
the time the impugned decision was made
o The business judgment rule cannot apply where the Board acts on the advice of a director’s
committee that makes an uninformed recommendation
Smith v. Van Gorkom (US case 1985)
 The business judgment rule is a presumption that in making a business decision, the directors of a
corporation acted on an informed basis, in good faith and in the honest belief that the action taken
was in the best interests of the company
o The party attacking a board decision as uninformed must rebut the presumption that its
business judgment was an informed one
o The determination of whether a business judgment is an informed one turns on whether the
directors have informed themselves prior to making a business decision, of all material
information reasonably available to them
Reliance
 Reliance on qualified professionals, audited financial statements, or other reliable information
o If you rely on these reports you can escape liability yourself
BCBCA s 157
 Allows for very broad reliance
 Must be reasonable and in good faith
CBCA s 123(4)(5)
 Much narrower than BCBCA
 Reliance must be in good faith and also requires directors to exercise care, diligence and skill that a
reasonably prudent person would have exercised in comparable circumstances
Indemnification and Insurance
 “Indemnification” – company agrees to pay costs, legal fees, etc. that a director has been found
liable to pay to someone else
o Restricted in what co can indemnify directors for
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o
o

No indemnification if director has breached fiduciary duty
No indemnification if there is unlawful conduct by the director (where director knew they
were acting unlawfully)
o Co can indemnify director for negligence – if has been careless and breached duty of care
“Insurance” – money will be paid by an insurance co; co only pays insurance premiums
o No restrictions
o Insurance paid if director found liable for any behaviour
o But in practice insurance co will probably put restrictions on what will be insurable – ex.
probably won’t insure for acting in bad faith
CONFLICTS OF INTEREST
Aberdeen Ry. Co. v. Blaikie Brothers (1854) HL
 The directors have a fiduciary duty to act in the best interests of the corporation
o No one having such duties shall be allowed to enter into engagements in which he has or
can have a personal interest conflicting or which possibly may conflict with the interests of
the corporation
 This is applied strictly – no determination of the fairness or unfairness of the contract entered into is
required
o Inability to contract doesn’t depend on the subject-matter of the agreement, but on the
fiduciary character of the contracting party
 Very strict rule – even if no direct conflict, applies where there is the possibility of conflict
 Consequences: rescission of transaction and/or compensation to co for losses caused by breach
TAKING ADVANTAGE OF CORPORATE OPPORTUNITIES [‘SECRET PROFITS’]
 Where opportunity is something the company would be in the business of the director must offer
the opportunity to the company
o Where director hears about the opportunity due to his position as a director in the company
o If the director diverts the opportunity to themselves or to a company the director controls
or is on the board of - the first company can sue for any profits that were made from that
opportunity because the profit rightfully belonged to this first company
Regal (Hastings) Ltd. v. Gulliver (1942) HL
 Directors may be liable to account for profits which they made by reason and in course of a
fiduciary relationship with the co
 The liability arises from the mere fact of a profit having – not necessary to prove fraud or bad faith,
or that the co was damaged in any way
 The plaintiff company has to establish two things:
o That what the directors did was so related to the affairs of the company that it can properly
be said to have been done in the course of their management and in utilisation of their
opportunities and special knowledge as directors
o That what they did resulted in a profit to themselves – may not be liable if you don’t
personally make the profit out of these opportunities
 If you control the cos that you are using to take the opportunity and make the profit
you will be liable
 The directors would have been absolved from liability in this case if they had secured approval of
their conduct from the Regal shareholders
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WAYS FOR DIRECTORS AND OFFICERS TO AVOID LIABILITY
Disclosure of Interest
 Disclosure of material interest in material transactions [BCBCA s147-153; CBCA s 120]
 Directors will be held to have a material interest in a contract with their corporation, even when
that interest is based on a close personal relationship with the principal of the counterparty
 What is “material” (Zysko v. Thorarinson AB):
o If there was a possibility that the director was to benefit from the contract more than de
minimus then the transaction should be disclosed to the corporation
o There should be disclosure whenever the directors/officers involvement might be relevant
to the corporation's decision making process
o Ex. if the director has disclosed their interest would the company have to do more due
diligence to find out whether this really is in the best interest of the company; would they
assign a different director or officer to be involved in the negotiations around this
transaction
o Some exceptions for e.g. remuneration, transactions with affiliated companies (BCBCA s
147(2)(4))
 What is adequate disclosure (Gray v New Augarita Porcupine Mines)
o Adequate disclosure requires telling the board what exactly is your interest and how would
you be benefiting from this decision
o Have to explain what kind of benefit you are getting out of this - this will probably have an
impact on whether they decide to approve it or not
o When you disclose a conflict of interest, it is not enough to just say you have a conflict of
interest, unless the board actually knows what exactly your conflict is and how much
benefit you are getting out of this
 Level of disclosure required to meet the statutory requirement (CBCA s.120) (UPM-Kymmene Corp):
o The amount of detail required depends on the nature of the contract and the context
o Disclosure must make the board “fully informed of the real state of things”
 Director/senior officer must disclose interest to other directors, and other directors can approve
transaction (BCBCA s.148-9)
o If you stay out of the voting and the transaction is then approved you will not be held liable
to pay over profits made due to that conflict of interest - it was a decision made by the
company without you being involved in it
 Alternatively, shareholders can approve transaction by special resolution after full disclosure (BCBCA
s.148(2)(c))
o Reason this is there - sometimes all the directors have a conflict of interest in a transaction where they are all benefiting from a transaction
 Result of failure to disclose: court can set aside transaction and order accounting (BCBCA s.150)
**If you have a conflict of interest as a director/officer - disclose it to the board of directors and then stay
out of the voting**
Shareholder Ratification
 If material self-interested transaction would breach directors’/officers’ duty, shareholders can
approve in advance by special resolution (BCBCA, s.148(2)(c))
o Requires proper disclosure
 Minority shareholders can bring an action against directors for breach of their duties (BCBCA
s.233(6))
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o Because of provision requiring a special resolution, and remedies of shareholders - you can


still bring an action against directors even if there has been a shareholders resolution
approving the directors decision
Ratification is one thing the courts will take into account, but won't prevent the directors from being
liable
If you don't get a special resolution of shareholders to approve the transaction and it hasn't been
approved by the board after proper disclosure then shareholders will be able to sue even if there is
an ordinary resolution approving it (ordinary resolution is not enough)
Peso Silver Mines Ltd. v. Cropper (1966) SCC
 If a board considers an investment which is offered to the company and bona fides decides it is not
an investment the company should make – any director who it bona fides come to, who chooses to
put up the money for that investment himself is not liable to account for this to the company
o Director is then acting as “an individual member of the public”
o Almost like the fiduciary duty has stopped with respect to that particular transaction
because the board has decided not to take it for good business reasons
 Where a director, acting in that capacity, learns of an opportunity within the corporation’s line of
business, he must offer the opportunity to the corporation
o Where the corporation determines not to pursue the opportunity, the director is free to
pursue it on his own
 HAWES: main difference between Regal and Peso is the timing
o Regal - this decision was made at the same time that the profit would be made - there was a
real temptation for the directors here to make a profit for themselves
o Peso - no idea that this property had any silver in it, just one property in many, only after a
year or two that the company found out it was a good opportunity; dispute only arose after
a new shareholder took over and had a dispute with Cropper
 Consider whether it is fair or not to force the directors to pay over money that they have earned
through their own efforts - and their company wasn't interested in it initially
Irving Trust Co. v. Deutsch 1935 US case
 Impossibility – if directors are permitted to justify their conduct this way, there will be a temptation
to refrain from exerting their strongest efforts on behalf of the corporation since, if it does not meet
the obligations, an opportunity of profit will be open to them personally
o Courts will be extremely suspicious of any director who says it would be impossible for the
company to take this opportunity
HAWES:
facts were so different in Peso because there were so many opportunities for the company

in Peso
o This Deutsch case might be more similar to Regal where it was impossible for the company
to put in more money to buy the leases (probably could have made more effort to find a
bank loan)
BUSINESS OPPORTUNITIES THAT ARISE AFTER DIRECTOR LEAVES COMPANY
Canadian Aero Service Ltd. v. O’Malley (1974 SCC)
 Senior officers owe the same fiduciary duty to the company as directors
 The fiduciary duty of a director or officer does not terminate upon resignation and it cannot be
renounced at will by the termination of employment
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

If the opportunity is a maturing one - the company that you are leaving has already started getting
involved in this business opportunity, it's not completely profitable yet but the company is aiming to
get it, and you resign to take up that same opportunity then the profit that you get are payable over
to the company that you left because you obtained the opportunity by reason of the fact that you
were officers of that company
o Even though you are not longer still working for the company you could not have got that
opportunity without working for that company
o Main thing to look for - is this opportunity something that the company started to be
interested in before you left the company
If you are a director/officer of the company you cannot use confidential information of the company
to benefit yourself or others with whom you have a relationship - This is part of the fiduciary duty
COMPETING WITH THE COMPANY
When serving as a director/officer:
 Generally not acceptable - can't compete with a company in which you are a director
 But fairness test applied: Johnston v Greene (US case, text p.785-7) to consider whether it is
something the company would really be interested in as part of its normal business
o Big companies with lots of different businesses - Not clear whether company is really
interested in that opportunity or not - so many interests that they could argue they are
interested in any opportunity
 The connection between the two businesses was not really obvious
 Fairness is an issue and used in the States - implied by some Canadian cases (if taking up an
opportunity have to ask whether the company would really be interested in that opportunity)
After resignation:
 Depends on contract
 Some companies require non-competition agreements
 If you don’t have a non-compete agreement or clause in your contract - after you resign as a
director/officer you are allowed to compete with your former company - this is part of freedom of
individuals to make a livelihood
o If you are a director or officer there is a bit of a restriction because you have found out a lot
of information that may be confidential to the company
o If you found out this information because you were a director of the company you are not
allowed to use that information when you leave the company and set up a competing
business
 Competing may be permissible, but not direct solicitation of clients!
 See W.J. Christie v Creer (Man. CA, 1981): text p.784-5
 You can compete with the company but you can't use confidential information that you learned
while you were working for that company
o Could not directly solicit the customers because the information was confidential to the
company
o If customers had come to him - that would be fine, but he was not allowed to directly go
after them
 HAWES: other cases have said that if you can remember customers' information you can inform
them that you have left and are starting up this new business (aren't allowed to take customer lists,
etc.)
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Can compete where:
 Company allows you to compete - allows you to take up business in the same area as the company
 Requires consent - by directors or shareholders after proper disclosure and special resolution
PUBLIC COMPANIES –Q about Director’s duties in public co consider whether they have fulfilled duty to
public (also consider insider trading)
 “Reporting Issuer” – any co that issues securities if those securities are not covered by an exemption
 “Securities” – include shares, bonds, debentures, and units in a limited partnership
o Definition should be interpreted broadly to encourage disclosure to the public
o Are distributed to investors to raise the capital necessary to carry on business
o May be distributed at the inception of a business, or subsequently to take advantage of
business opportunities where funds from business earnings are insufficient
o Pacific Coast Coin Exchange – bags of silver coins were interpreted as securities
 Even though this didn’t fit into the definition in the Securities Act, it should be
considered securities because – it is a risky situation people are getting into and the
co has more knowledge than the prospective investors
 No prospectus was produced = breach of Securities Act
 Anytime securities are distributed the substantive requirements of securities law are engaged
o Expensive disclosure requirements are activated:
1. Prospectus – issued every time new shares (that aren’t exempt) are issued
Must also set out “risk factors”
BCSA s.61 – no person or company can trade in a security where the trade would be
considered under the definition of a distribution of security unless a preliminary
prospectus and a prospectus have been filed
2. Annual information forms
Produced yearly; provide detail about co and what has happened/is expected
3. Published financial statements
4. Continuous disclosure
If anything changes which may affect share value – must disclose immediate (via press
release)
5. Extra corporate governance requirements come into effect
EXEMPTIONS
Policy Behind Exemptions
 Four main policy objectives of prospectus exemptions:
o 1. Allowing more flexibility in generating initial capital for small or medium-sized issuers
o 2. Acknowledgement that some wealthy and/or sophisticated investors are capable of
making investment decisions without the information that a prospectus provides
 Assumption that these investors are capable of acting rationally in their own
economic self-interest and will seek out directly from the issuer any information
they consider relevant to their investment decision making
o 3. Where issuers are issuing securities to those with whom they have a pre-existing
relationship – prospectus requirements may be relaxed
 Assumption is that the investor has access to adequate current information about
the issuer and its financial prospects
o 4. Some types of securities are so safe that a prospectus is considered redundant
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

Ex. Bonds, debentures or other debts guaranteed by the government of Canada, any
province or territory of Canada, the government of the UK or any foreign country,
Canadian municipal corporations, financial institutions governed by other
legislation, securities issued by charitable issuers, etc.
Where risk to investor is low, disclosure rules can be relaxed
Exemption Categories
1. The Private Issuer Exemption
 50 non-employee shareholders or less
 Applies to issuers where a small number of security holders are involved
 No restriction on number of investors to whom securities are offered as long as the maximum
number of ultimate security holders isn’t exceeded
2. The Family, Friends, and Business Associates Exemption
 No restriction on the number of investors to whom securities may be distributed
 Cannot rely on this exemption if the issuer advertises or pays a commission or finder’s fee to a third
party to find purchasers under this exemption
 Must be in a close relationship
3. The “Accredited Investor” Exemption
 Accredited investor includes: a variety of sophisticated financial institutions, levels of government
and “persons other than individuals” with net assets of $5 million
 In practice many accredited investors obtain from the issuer an offering memorandum that contains
a good deal of prospectus-like information
 Accredited investor designation can be applied to individuals as well – based on “financial assets”
test, “net income” threshold, or “net assets” threshold
4. The Minimum Amount Investment Exemption - controversial
 Exemption if the security has an acquisition cost to the purchaser of not less than $150,000 paid in
cash at the time of the trade
5. Offering Memorandum Exemption
 Exemption if the issuer provides the purchaser with an offering memorandum instead of a
prospectus
o Only allowed to use an OM instead of prospectus for certain kinds of investors (ex. very rich,
have had financial advice, etc.)
 Purchaser must also sign a “risk acknowledgement” in a prescribed form
 The OM must provide a statutory or contractual right of action against the issuer for
misrepresentation
CONTINUOUS DISCLOSURE REQUIREMENTS
 Reporting issuers must immediately disclose to the public any “material change” in the co’s
business, operations or capital that may reasonably be expected to have an effect on the value or
market price of the co’s securities
o Each co is different – “material change” will depend on what type of business you are in
“MATERIAL CHANGE” IN CONTINUOUS DISCLOSURE
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

“Material Fact” – a fact that significantly affects or could reasonably be expected to significantly
affect the market price or value of the securities
“Material Change” – a change in the business, operations or capital of the issuer that would
reasonably be expected to have a significant effect on the market price or value of any of the
securities of the issuer
o Relevant to the assessment of when a reporting issuer needs to update the information
available to the secondary market about its securities
Pezim v BC
 Managers were found liable for failure to disclose
 Three directors/officers set up system where they were not allowed to receive drilling results from
Calpine's operation - did this so they could invest in the company and profit from it [set up "Chinese
Wall" which prevented information about drilling results from coming back to them]
 Positive drilling results would count as something which should normally be disclosed - because it
affected share price
 It is the directors responsibility to be informed about the company's duty - if they don't stay
informed they have breached the duty of care
 Court said they were not insider trading (because they didn't actually know the drilling results) but
at the same time they can't just have this "Chinese Wall" and refuse to be responsible when the
company fails to disclose information
 The company was liable for failure to disclose information and directors were also liable for failing
duty of care
Kerr v Danier Leather
 Managers were found not liable for failure to disclose
 Final prospectus issued (May 6 - $4.5 mill); final day to buy shares (May 20); before May 20 CEO and
CFO questioned whether co would make $4.5 mill that year (thought they would make it up in 2
sales, but didn’t)
o After sales and difference not made up – disclosed they were short (June 4); share price
went down
o By end of June (end of year in prospectus) co ended up making almost exactly what was
expected
 Investors who bought shares in May 6-20 period and sold shares after June 4 at a loss sued co: said
they should have disclosed information before May 20
 Court of Appeal: they didn’t have to disclose this change on May 19 because it was not a material
change in the company's business operations or capital (didn't fit into definition of what needs to
be continuously disclosed)
o Partly because there was a reasonable belief by CEO and CFO around May 19 that they
could still reach the forecast
 Not a material change because forecast was still possible - wasn’t a change in business operation
or capital of the company
 One reason sales were low was change of weather - change of weather is not material change in
operation of business or capital because this is not something that directors would be expected to
take into account when deciding whether to disclose or not
o HAWES: in some businesses a change in weather could be considered material because it
could totally cause a material change in your business (ex. farming)
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
HAWES: not sure if it would have been decided differently if they hadn't made almost the same
amount they had forecast; this showed that the forecast was still accurate since they ended up
making basically what they had forecast
CONSEQUENCES FOR BREACH OF SECURITIES LAW
1. Civil Action
 Can be sued by shareholders; parties who lose money because of failure to disclose
 Can demand that share contracts be rescinded – money returned for purchase of shares
2. Criminal prosecutions under Crim Code and Securities Act
3. Administrative penalties decided by the Securities Commissions
 Usually fines; sometimes disqualification from managing a co for a year or two
Usually directors/officers that are liable for failure to disclose, misrepresentation, or misleading disclosure
Lawyers may be liable if they have improperly advised – ie. said don’t have to disclose when you do
AVAILABLE DEFENCES
 Defences to statutory civil liability include:
o Showing P had knowledge of the misrepresentation
o Showing the misrepresentation did not cause the loss
o Showing the misrepresentation was not made by the particular D and that the D had no
reason to believe and did not believe that the statement was false
o That the D either did not consent to the filing of the prospectus or withdrew his consent
prior to the purchase of the securities by the purchaser
o Due Diligence – D must show that he conducted a reasonable investigation to provide
reasonable grounds for a belief that there was no misrepresentation and that he did not
believe that there was misrepresentation
 Standard of reasonableness is that required of a prudent person in the
circumstances of the particular case
 The issuer of the securities is not entitled to claim the defence of due diligence, the defence of not
having consented to the prospectus or the defence that the misrepresentation was not made by the
issuer
o The issuer is effectively strictly liable for misrepresentations in a prospectus
Re YBM Magnex International Inc. (2003) Ontario Securities Commission
FBI investigating co not disclosed in prospectus
 Directors who knew about investigation (in whole or in part) = liable
 Directors who did not know about investigation at all, and couldn’t have known = not liable
 Consider each director according to his degree of participation, access to information and skill
INSIDER TRADING
 Relates to disclosure issue
 Trading on information that is not publicly available that could affect the company’s share value
o Information that is only known to insiders to the company - directors, officers, employees
and their family members
o Information must be "not publicly available" - not required to disclose stuff that would be in
the news, etc.
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o

Includes material changes (only relates to changes in company's business operation or
capital) in company's business and any material facts (any material facts which would affect
share price but aren't know publicly) which may affect company's share price
See also “tipping” and “tippees”
o "Tipper": If you tell someone information about the company and they act on that
information you will be liable because you have given the information selectively and not ot
the public as a whole
o "Tippee": Person who receives information knowing it is insider information will also be
liable
 Typical example of a tippee – lawyer
REMEDIES
DERIVATIVE ACTION
BCBCA s 232, 233; CBCA s 238, 239, 240
Test to get leave to bring lawsuit:
[For BCBCA only – have to make reasonable efforts to have the co bring the action]
1. Have to give notice to directors of co that you are planning to bring this application to court
2. Have to be acting in good faith
3. Has to appear to be in the best interests of the co that the action be brought



Once you get leave other side will likely settle – a judge has already determined this is in best interests
of co
Benefits usually go back to the co – court does have power to order benefits paid to shareholders or
whoever brought action [BCBCA s 233; CBCA s 240(c)]
Re MacRae - any other person under the BC Act should be restricted to persons who have “a direct
financial interest in how the company is being managed”
 A debentureholder was not permitted to bring a derivative action
Primex Investments v. Northwest Sports Enterprises Ltd. (1995) BCSC [Test for leave to bring derivative
action (under BCBCA)]
 TEST:
1. Effort to cause directors to bring action [stronger than CBCA which only requires notice]
2. Good faith
o Must show some kind of financial purpose (can’t be personal vendetta)
o But personal dislike of directors is not enough to show bad faith
o Personal interest may coincide with action – because you are shareholder
3. In the best interests of the co
o Doesn’t require evidence that case would be won – just evidence that this is an arguable
case
o Directors raising defence won’t prevent leave – unless watertight defence, won’t stop court
from giving leave
o If it is asserted that the proposed defendants in the derivative action have a defence to the
claim, the Court must decide whether such a defence is bound to be accepted by a TJ
following the completion of the trial of the derivative action
 Where the applicant is acting in good faith and otherwise has the status to commence the action
and where the intended action does not appear frivolous or vexatious and could reasonably succeed
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

and where such action is in the interest of the shareholders, then leave to bring the action should be
given
The court should also be satisfied that the potential relief in the proposed action is sufficient to
justify the inconvenience to the company of being involved in the action
Court granted application to bring an action on behalf of the co
Re Northwest Forest Products Ltd. (1975) BCSC [“Reasonable efforts to cause co to bring action”]
 “Reasonable efforts to cause the co to bring the action” (BCBCA s 233(1)(a)):
o Making reasonable efforts requires some specifics about the precise nature of the action –
but no more is required than that sufficient to found an endorsement on a writ
o Not required to be exactly the same as subsequent law suit you bring
o Only requires that you tell directors you plan to bring lawsuit and the lawsuit you eventually
bring is approximately the same
 If shareholders have voted not to bring the lawsuit
o Look at how the meeting was conducted (see notes above on “Meetings”)
o What information was provided at the meeting
o Shareholder vote is one factor courts will take into consideration [BCBCA s 233(6)]
 Court here decides not to take apparent approval of the shareholders into consideration – unclear
who voted proxy shares, or if any shares were voted by proxy
o Shareholder vote is a factor courts can take into account – but it is not determinative
 Shareholder ratification may be evidence of the fairness of the transaction or of the desirability of
forgiving the breach (CBCA s.242)
o Persuasiveness of such evidence may depend on many factors:
 Such as the adequacy of proxy disclosure
 How outside shareholders have voted
 The nature of the impeached transaction
First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988) Alta QB [“Proper Person” to Bring the Application]
**Under the ABCA – use for CBCA corporations**
 CBCA s.238(d) – a person may be a complainant if he is a person “who in the discretion of the Court
is a proper person to make an application under this Part”
 Issue: is a landlord owed money under a lease a “proper person” to bring a lawsuit on behalf of the
co?
 Court found there was harm done to the co and no one else related to the co who would bring the
action
o If you have some kind of financial interest in the co you can be a complainant under the
CBCA
o If this interest has been harmed and the co has been harmed too – you can apply for leave
to bring a derivative action
 Appeal Court – refused to allow derivative action until claim in contract asking to lift the veil and find
directors personally liable was settled
o Don’t bring derivative actions if you can get what you want through breach of contract
action and arguing to lift the corporate veil (especially where co completely controlled by
individuals who have diverted co assets – like here)
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OPPRESSION REMEDY [FIRST REMEDY YOU SHOULD APPLY FOR]
BCBCA s 227; CBCA s 241
Comparison with the Derivative Action
 Procedural differences:
o In order to bring a derivative action, a complainant must seek leave of the court
o The court exercises a statutory supervisory jurisdiction over the derivative action that
enables it to issue orders
o The damages awarded in a derivative action will ordinarily go to the corporation in whose
name the action was begun, unless the court orders otherwise
 An oppression remedy has no leave requirement and the court has no statutory power to intervene
in the conduct of the application
o Except: s.242(2) requires court approval of any settlement, discontinuance or abandonment
of an oppression remedy application or a derivative action
 An oppression remedy claimant can pursue a claim for personal compensation for harm to the
complainant’s interests from the oppressive actions
 Basically – an oppression remedy looks to whether shareholder interest was harmed; derivative
action looks to whether co’s interest was harmed
Applying Oppression Remedy: Two Stage Test
1. Look to “reasonable expectations” of parties within the corporation
2. See if those expectations were dealt with unfairly
The court has broad discretion with this remedy – decisions are very fact dependent, very unpredictable,
courts tend to be quite generous with the oppression remedy
BCE Inc. v 1976 Debentureholders (S.C.C. 2008) [“Reasonable Expectations” of parties]
*Argued under CBCA – fit into “complainant” as security holders
 1. Must have reasonable expectations – will depend on type of co dealing with and who you are
o Factors to consider:
 Normal business practices
 Nature of corporation (family, friends or public)
 Past practice (but keep in mind practice can change)
 Could plaintiff have protected himself
 Any representations or agreements made by the company
 Whether directors attempted to resolve or consider competing interests (if they
ignore an interest completely than can be indication of unfair treatment)
 2. If reasonable expectation of parties not met, was it unfair
o Was the behaviour ‘oppressive,’ or unfairly prejudicial to (or under CBCA, did it unfairly
disregard the interests of) the relevant person(s)?
 “Oppressive” = intentionally harsh, burdensome, abuse of power, bad faith (difficult
test to meet)
 “Unfairly prejudicial” = results in unfairness to the person, even if not intentional
and not in bad faith
 “Unfairly disregard” = ignoring interests of the person, leading to unfair result
 Directors don’t have to intend to hurt you, but if their action results in harm
to you it can still fit into unfairly prejudicial or unfairly disregards
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Clitheroe v. Hydro One Inc. (2002) Ont SCJ [“Any other person” (CBCA)]
 Generally the oppression remedy is not to be used as a substitute for a wrongful dismissal action
o Oppression remedy is designed to protect interests of security holders, creditors, directors
or officers – it is not designed to provide a mechanism where employees who have been
terminated may bring an application for wrongful dismissal
o Its purpose is to redress oppressive conduct in relation to the claimant’s position as a
security holder, creditor, director or officer of a corporation – it does not operate to provide
a remedy to employees
 It is a limited remedy
 Remedy may apply to cases of wrongful dismissal only if the termination of employment is part of a
pattern of oppressive conduct
o Where the dismissal is part of an overall pattern of oppression and where the complainant’s
position of employment is closely connected with his rights as a shareholder, officers and
director of the company, the dismissal may properly be considered as part of that pattern of
conduct
 Has to be something more than just losing your job to use the oppression remedy
Downtown Eatery (1993) Ltd. v. Ontario (2001) Ont CA [“Any other person” (CBCA)]
 The oppressive conduct that causes harm to a complainant doesn’t have to be undertaken with the
intention of harming the complainant
o If it is established that a complainant has a reasonable expectation that a company’s affairs
will be conducted with a view to protecting his interests, the conduct complained of need
not be undertaken with the intention to harm the plaintiff
o If the effect of the conduct results in harm to the complainant, recovery under the
oppression remedy may follow
o It doesn’t matter if you do something for a valid business reason, if it results in unfairness
to someone with some kind of financial interest in the co it can be considered oppression
 Factors to be considered in determining whether an oppression remedy should lie:
o The protection of underlying expectations of a creditor in its arrangement with the company
o Extent to which the acts complained of were unforeseeable or the creditor could reasonably
have protected itself from such acts
o Detriment to the interests of the creditor
o These factors are not exhaustive – other considerations may be relevant based on the
particular case
West v. Edson Packaging Machinery Ltd. (1993) ON [“Any other person” (CBCA)]
 Oppression remedies sought for non-fulfilment of reasonable expectations
o Successful – even though parties weren’t shareholders at time the buy-back promise was
made, the harm related to their reasonable expectations regarding their shares
 The court should broadly interpret the definition of “complainant” under the oppression provision
First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988) Alta QB [“Any other person” (CBCA)]
 What about potential judgment creditors?
 Have brought a law suit against company but trial hasn't been held or
 Even before you bring a law suit there has been some breach of your legal rights by the
company
 Landlord was not "any other person" who could bring an oppression action
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



First Edmonton Place was not yet a creditor when the wrongful actions happened
o that lawyers got rent free accommodation - not a breach of lease
o the $140,000 given to company as inducement was paid to lawyers - didn't make
landlord a creditor because hadn't said the company had to keep this money; money
was paid out a long time before First Edmonton brought a law suit
Because the harm was done earlier and before there was a breach of agreement then First
Edmonton could not be counted as a creditor at the time when the harm occurred
Court emphasized that First Edmonton should have protected itself (differs from Downtown Eatery
where Alouche could not have protected himself)
The test of unfair prejudice or unfair disregard should include the following considerations:
o The protection of the underlying expectation of a creditor in its arrangement with the
corporation
o The extent to which the acts complained of were unforeseeable or the creditor could
reasonably have protected itself from such acts
o The detriment to the interests of the creditor
OPPRESSION REMEDY: FAMILY DISPUTES
 You cannot punish people who are shareholders, directors, officers of a co for family reasons =
oppression
Ferguson v. Imax (1983) ONCA
 CBCA s 241 – must be interpreted broadly
o When dealing with a close corporation the court may consider the relationship between the
shareholders and not simply legal rights as such
o The court must also consider the bona fides of the corporation transaction in question to
determine whether the act of the corporation or directors effects a result which is
oppressive or unfairly prejudicial to the minority shareholder
o Each case turns on its own facts
 In this case, the resolution authorizing the change in the capital of the company is the culminating
event in a lengthy course of oppressive and unfairly prejudicial conduct to the appellant
Naneff v. Con-Crete Holdings Ltd. (1993) ON [Oppression is a remedy not a punishment]
Son excluded from management (still a shareholder) because his family didn’t like his girlfriend
 Court considered:
o History of company
o Fact that son had worked there for years
o Fact they hadn't paid dividends and probably wouldn't
 This was enough to find oppression
 Trial decision:
o Remedy should be that this company and all sub-companies should be sold off and three
people can bid (the father and two sons) and highest bid should be accepted
 Appeal decision:
o Because Mr. Naneff was in total control until he died, Alex and Boris would never have
had an expectation that they could own this company while father still alive
o Should do minimum possible to correct the unfairness; shouldn't tip the balance in
favour of party who was hurt
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o

Proper remedy is to order the company to buy Alex's shares at a fair market value based on date when he was kicked out of management of the firm
Oppression is a remedy, not a punishment
OPPRESSION REMEDY: PUBLIC COMPANIES
 Shareholders have a reasonable expectation that directors will fulfill their duties to the co
 If directors fail to fulfill their duties to the co and this results in unfairness to shareholders – can
bring oppression action
Ford Motor Co. of Canada v. Ontario Municipal Employees Retirement Board (2006) ONCA
Ford Canada and Ford US – transfer pricing agreement
 In looking at reasonable expectations of minority shareholders:
o Considered public statements of the co
 Reasonable expectation was not fulfilled
o It was misleading for the cos to tell shareholders it was an arms-length agreement and
market price
 This was considered oppression because minority shareholders’ reasonable expectations were not
met
o Shareholders were awarded money to compensate for losses due to transfer pricing
agreement – to be added to buyout price per share
 Business Judgment – can’t argue a defence based on business judgment when there is no evidence
you have made a judgment at all (ie. when no evidence directors even looked into the arrangement)
 Even though majority of shareholders were happy with the agreement – directors must still consider
the interests of the remaining minority shareholders
 “Rational Director Test” – any rational director of Ford Canada acting in the interests of that co
would not have accepted this agreement
Some Typical Situations Where ‘Oppression’ Remedy Has Been Given
 Warning: every case turns on its particular facts
 Lack of valid corporate purpose for transaction
 No reasonable attempt to do arm’s length transaction
 Directors’ lack of good faith
 Discrimination against minority shareholders to benefit of majority
 Failure to disclose required information to minority shareholders
 Attempting to eliminate shares of minority without fair compensation
o Examples from Arthur v Signum Communications
COMPLIANCE AND RESTRAINING ORDER
BCBCA s 228; CBCA s 247
COMPULSORY LIQUIDATION (WINDING UP) ORDER
BCBCA s 324; CBCA s 214
BCBCA s 324 - Court may order company be liquidated and dissolved
324 (1) On an application made in respect of a company by the company, a shareholder of the company, a
beneficial owner of a share of the company, a director of the company or any other person, including a
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creditor of the company, whom the court considers to be an appropriate person to make the application,
the court may order that the company be liquidated and dissolved if
(a) an event occurs on the occurrence of which the memorandum or the articles of the company provide
that the company is to be liquidated and dissolved, or
(b) the court otherwise considers it just and equitable to do so.
(2) Nothing in subsection (1) prevents the court from requiring that security for costs be provided by a
person bringing an application under that subsection.
(3) If the court considers that an applicant for an order referred to in subsection (1) (b) is a person who is
entitled to relief either by liquidating and dissolving the company or under section 227, the court may do
one of the following:
(a) make an order that the company be liquidated and dissolved;
(b) make any order under section 227 (3) it considers appropriate.
(4) If the court orders under this Act that a company be liquidated and dissolved, the court must, in its order,
appoint one or more liquidators.
(5) An appointment of a liquidator under subsection (4) takes effect on the commencement of the
liquidation.


Under BC Act it is a much broader remedy available to almost anyone; under CBCA only available to
shareholders
Liquidation remedy much less important in Canada now that we have broader oppression remedy
(may be more useful in BC where oppression remedy is more limited than under CBCA)
o Generally going to be used where you have a deadlock among shareholders
o You can also ask for liquidation to be ordered under the oppression remedy
“Just and Equitable”
 1. Winding up has been ordered in cases of deadlock
o Courts will also find deadlock where there is constant fighting and mutual sabotage among
owners whose cooperation is necessary for the conduct of business
 2. Winding up has been ordered in cases like Ebrahimi where the firm is described as an
“incorporated partnership” and there has been an irreversible breakdown of mutual trust and
confidence
 3. Commonly asserted but less commonly successful – management has demonstrated a “lack of
probity” in the conduct of a corporation’s affairs
 [4. (Only under CBCA) In situations of oppression – unfairness to a shareholder]
Winding up is viewed as a “drastic remedy” and is not lightly granted
If you can satisfy the "just and equitable" test then you can ask the court for a remedy other than the
liquidation order
Ebrahimi v. Westbourne Galleries Ltd (1973) HL
Following in BCSC in Diligenti v R.W.M.D. Operations
 Test for winding up co that was like a partnership:
o Doesn’t have to have previously been a partnership
o Must be a small company with very few shareholders and association between shareholders
is based on personal relationship where there is a level of trust built up
o There is an understanding or agreement that the shareholders will participate in
management of the co
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
o Restrictions on transfer of shares – small private co where it is difficult to sell shares
In this situation where someone is excluded from management they may apply for winding up – the
implied agreement built up over years and established through conduct has been broken
DISSENT AND APPRAISAL RIGHT
BCBCA s 237-247; CBCA s 190
 If company does certain transactions you are allowed to dissent - your right is to have your shares
bought out
 Appraisal - shares will be valued by company and they will offer to buy those shares from you for
that value
 Allowed if - written in articles, amalgamation agreement, selling the company's business, to change
jurisdiction
 Only for a limited number of very major transactions which will affect the company's whole
business
 Encourage company and shareholder to negotiate before coming to the court
 CBCA is very similar to BCBCA
REMEDIES FOR PUBLIC COMPANY STAKEHOLDERS
 Sell shares on market
 Securities actions under securities regulations
 Misrepresentation in prospectus or other disclosure document (BCSA, s.131-132.1)
 Failure to make timely disclosure (BCSA s.140.3)
 Class actions
PARTNERSHIPS
PARTNERSHIP VS CORPORATION
 Partnerships don’t have to be registered (except some forms of LP and LLP) – you can be in a
partnership without knowing it
 If you are a partner you will be fully, personally liable for debts related to the partnership business
of all other partners
 Partners have a fiduciary duty (to act in best interest) toward the partnership and other partners
 Partnership is not a separate legal entity (Re Thorne and New Brunswick Workmen’s Compensation
Board (1962) NBCA)
 The Partnership Act provides default rules that will govern the relationship between partners to the
extent they have not agreed otherwise
o This facilitates partnership formation by allowing person to create a partnership without
having to create their own set of rules to govern the relationship (this reduces transaction
costs)
o Ability of partners to create their own set of rules to govern their relationships makes
partnership a very flexible form of business association – viewed as key advantage of
partnership
EXISTENCE OF PARTNERSHIP
 Partnerships are regulated provincially – no federal statute
Partnership Act RSBC s.2 – Partnership is the relation which subsists between persons carrying on business
in common with a view of profit
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
Four essential elements of a partnership:
o Partnership is a relationship between persons
 A corporation can be a partner (s.29 Interpretation Act – “person” )
o Carrying on business in common, and with a view to a profit
 Co-ownership of land is not automatically a partnership, but it may be
 If not actively pursuing a business it won’t be considered a partnership
 Non-profit associations are not treated as partnerships
 If the object of the association is social or cultural it will generally not be a
partnership
Typical Indications of a Partnership (ss 2-4 BCPA)
 Don’t have to have all indications but must have some to be considered partnership:
o Sharing net profits
o Sharing losses
o Calling oneself a partner
 But denial of being a partner doesn’t mean no partnership (Lansing v Ierullo)
o Acting as a principal – allowing others to enter agreements on one’s behalf
o Management participation in the business
o Mutual trust and confidence with others in the business
 Ex. sharing bank accounts, payments made to one person are shared with the group
o Contributing to capital
A.E. LePage Ltd. v. Kamex Development Ltd. (1977) ONCA [do co-owners of property = partners]
 The mere fact that property is owned in common and that profits are derived from it does not of
itself constitute the co-owners as partners – must do something more to be considered “carrying
on a business”
 Whether the position of co-owners becomes that of partners depends on their intentions as
evidenced by the facts of the case – it is necessary to determine whether the intention of the coowners was to “carry on a business”
 A common intention that each should be allowed to deal with his undivided interest in the land as
his own would be incompatible with an intention that both should be bound to treat the corpus as
joint property – the property of the partnership
o The property of the partnership is not divisible among the partners in specie; here:
 Any owner had the right to sell their interest in the building independently from the
others – sign of no partnership (usually if you sell your interest in a partnership it
comes to an end)
 Hadn’t done enough to show they were carrying on a business – were merely
owning a building and then selling it
Volzke Construction v. Westlock Foods (1986) ABCA
 Factors considered in finding a partnership:
o Lack of control is irrelevant; control has nothing to do with the existence or non-existence
of a partnership
o Sharing in costs and profits is an indication of partnership
o Parties spoke to each other as partners
 Court looks at agreement, past conduct, mutual involvement in financing, costs and profits, and
mutual involvement in running of business
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
Saying you are or are not in a partnership will be a factor to consider but isn’t determinative –
courts will look at the reality of the situation and your actions, not just your words
Lansing Building Supply (Ontario) Ltd. v. Ierullo (1989) Ont Dist Ct
 In determining whether a partnership exists, one must look at the intention of the parties as
disclosed by their agreement and their conduct
 Parties cannot contract out of a partnership by a clause stating no partnership is formed
o If a partnership in fact exists, use of a legal phrase will not prevent the substance and reality
of the transaction being adjudged to be a partnership
o Insertion of a clause indicating that the relationship is not a partnership (in the coownership agreement) does not preclude the court from finding that a partnership did in
fact exist
 Where the rights of the co-owners to deal with their interest in the land are severely restricted by
the agreement = great importance in the distinction between partnership and co-ownership
 HAWES: in this case it was particularly significant that the party signing the contract held himself out
to be a partner (acting for a partnership with the others)
o This is a case by case analysis – high fact dependent
Backman v Canada
 No view to profits = no partnership
o Have to be carrying on business with a view to a profit - to be a partnership
o They had no intention of making profits, their intention was to make a loss – therefore not in a
partnership
 Despite what you say about your business, if you aren't complying with definition of a partnership
you won't be able to get advantages of being in a partnership
 There was a way the courts said they could have gotten around this - if they had some other
business venture apart from this property which was obviously going to lose money
o An ancillary profit making purpose - they might have been able to call themselves a partnership
 Has to be some aspect of the business which could possibly make a profit
o You don't have to make a big profit or even actually profit in every year, but you have to have
the intention of making a profit - and it has to be a realistic intention of making a profit
LIABILITY OF PARTNERS
Liability of partners: entering agreements
s 7 (1) A partner is an agent of the firm and the other partners for the purpose of the business of the
partnership.
(2) The acts of every partner who does any act for carrying on in the usual way business of the kind
carried on by the firm of which he or she is a member bind the firm and his or her partners, unless
(a) the partner so acting has in fact no authority to act for the firm in the particular matter, and
(b) the person with whom he or she is dealing either knows that the partner has no authority,
or does not know or believe him or her to be a partner.
 Third party reliance unreasonable where:
o If the partner was doing something not associated with the business of the firm
o Where the business is of the kind carried on by the firm but the partner is doing something
inconsistent with the usual way in which that business is carried on
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Liability of partners for firm debts
s 11 A partner in a firm is liable jointly with the other partners for all debts and obligations of the firm
incurred while he or she is a partner, and after his or her death his or her estate is also severally liable in a
due course of administration for those debts and obligations, so far as they remain unsatisfied, but subject
to the prior payment of his or her separate debts.
 Every partner is jointly liable with the other partners for all debts and obligations of the firm as long
as he is a partner
 After death a partner’s estate is also severally liable
Liability of New Partners and Retired Partners [BCPA s 19]
 A person who joins an existing partnership is not liable to creditors for debts of the partnership that
arose before the person joined the firm
 Once a person is a member of the firm and partners of the firm enter into contracts that bind the
firm, the person doesn’t cease to be a party to those contract just because he left the partnership
o If a creditor agrees to relieve a retiring partner from further liability that agreement will be
binding
“Holding Out” [BCPA s 16]
 A person who represents himself as a partner, or knowingly allows himself to be represented as a
partner, will be liable to anyone who has given credit on the faith of the representation
This could apply even where there is no partnership
Ernst & Young Inc v Falconi (1994) Ont Gen Div
 The firm is liable for wrongful acts or omissions where a partner acted with the authority of the
other partners or acted in the ordinary course of business of the firm [BCPA s.12]
 Klein argued that these transactions were not within the ordinary scope of business of the law firm because they were fraudulent; also trying to say they were not the kind of business the firm
normally did [s 7(2) - has to be some kind of business the firm carries on in their ordinary business]
 Falconi had used the facilities of the law firm, and letterhead of firm, had also used the trust account
to hold money while these transactions were going ahead
 Because of all this evidence, it was enough to show this was the kind of business the law firm usually
did
o The fact that various actions were improper and with intent to defraud creditors does not
take the acts themselves out of the ordinary course of business of the law firm if they are in
the nature of acts normally performed by the law firm in carrying on its usual business
o Even if law firm doesn't normally do these types of transactions, as long as law firm's facilities
are used and the activities are the kind usually done by commercial law firm - then the firm
and all partners will be liable for the debt
 This was not an LLP - this was a regular partnership
o A lot of law firms today are actually LLPs and if it had been an LLP it may be that Klein would not
have been liable
FIDUCIARY DUTIES / LIABILITY TO OTHER PARTNERS
 BCPA s 22 – a partner must act with utmost fairness and good faith toward the other members of
the firm in the business of the firm
 Specific fiduciary duties (BCPA ss 31-33):
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o
o
o
Partners are bound to render accounts and full information of all things affecting the firm to
any partner (s 31)
Partners must account for any benefits derived without consent of the other partners from
transactions concerning the partnership or from the use of partnership property (s 32)
Partners must account for profits made from competing businesses – ie. they must turn over
these profits to the firm (s 33)
Olson v Gullo (1994) Ont CA
Partnership to purchase and develop land; Gullo said farmers wouldn’t sell then bought and sold some land
for big profit
 Olson sued Gullo saying this was profit from the partnership - should be shared with the partnership
(accounting of profit to the partnership - Olson should get half)
 Was this a transaction concerning the partnership? [ss 32, 33]
 Court looked at a lot of evidence:
o Reference to each other as partners
o Evidence supporting “carrying on business” as partners
o It was clear Gullo was trying to make this transaction for his own benefit
o At the time the transaction was made they were still in a partnership ( even though Gullo said he
viewed it as no longer being in a partnership)
o Because this was in the 1000 acre area they were trying to develop, was also a land developing
transaction = similar to business they originally wanted to go into
o It was a transaction concerning the partnership
o Profits should be paid over to the partnership
 Trial - because Gullo behaved so badly, Olson should be allowed to keep 100% of the profits
o Should have to give up all profits because we are trying to discourage this kind of behaviour
 CA - the provision actually says the partner must account to the firm
o The profit has to be paid over to the partnership and then the partnership divides it among
partners based on their original agreement
o If no clear agreement - Partnership Act says it is divided equally
o Even though he behaved badly that is not a reason for going against Partnership Act
o Punished Gullo by making him liable for costs in the actions
LIMITED LIABILITY PARTNERSHIP (LLP)
 Most provinces restrict LLPs to certain professional firms (ex. law, accounting, doctors)
o professions that have insurance so liability is covered by insurance instead of partners
 In BC any business can register as an LLP (since 2005)
 In (BC and Ont) LLPs – partners are not liable for other partner’s tort, contract or negligent wrongs
or debt
o Unless they knew about the wrong, were directly responsible for it, or were negligent
themselves
o Certain amount of due diligence required – but generally if you don’t know you aren’t liable
o Will be liable for those you are directly responsible for – ie. staff working directly under you
 In other provinces LLPs only protect against negligence of other partners
 LLPs must be registered with the province
LIMITED PARTNERSHIP (LP)
 Provides protection against liability for passive investors in the partnership (s 57)
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o
o


Liability is limited as long as they don’t take part in management of the business (s 64)
Limited partners will not be personally liable – any debts, etc. will be borne by the general
partners and any available partnership assets
Business is managed by general partner(s) (s 54) – also enters agreements for the LP
LPs must be registered pursuant to requirements in the statute for the jurisdiction in which the
partnership functions (s 51)
Haughton Graphic Ltd. v. Zivot (1986) Ont HC
 s 63 of ABPA – a limited partner becomes liable if he takes part in the control of the business
o No requirement of reliance by the creditor on belief that limited partner was general
partner
o Degree of control of the business required from the limited partner to make him liable as a
general partner is determined on case by case basis
 s 63 applies only if two conditions met:
o 1. The person is a limited partner and
o 2. He takes control of the business of the limited partnership
 The section does not apply to someone whose sole role in and connection with the limited
partnership is that of an officer, director or other controlling mind of the general partner
Nordile Holdings Ltd. v. Breckenridge (1992) BCCA
 s 64 of BC Partnership Act – A limited partner is not liable as a general partner unless he takes part in
the management of the business.
 Being director/officer of general partner and participating in limited partnership management solely
in capacity of director/officer of general partner is allowed – therefore won’t be held liable as a
general partner
 Court: two pieces of evidence that showed outsider this was LP
o 1. in mortgage agreement itself, it says that only Arbutus Mgt Ltd. would be liable for any
default on mortgage
 Actual agreement limits liability to general partner
 By itself might not have been enough - if limited partners had actually been taking part
in management they might have been liable
o 2. agreed statement of facts - said B and R are solely the managers and directors of the general
partners and they are not the managers or directors of the partnership as a whole
 This statement of facts distinguished the case from Haughton Graphics
 Because Nordile agreed to that they can't turn around and say they didn't actually agree
to this
 Court: you can't say they were engaged in management of partnership because you have agreed
they were not
o Doesn't fit into s 64 of BCPA
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