Business Associations Final Outline – O’Brien
Asif Abdulla – 2011 Fall
SOLE PROPRIETORSHIP ........................................................................................................................................ 4
Partnership Act: ....................................................................................................................................................................4
Section 88 – Trading under firm name implying plurality of partners ........................................................4
Section 89 – Names similar to corporation .............................................................................................................4
Section 90 – Indices .........................................................................................................................................................4
Section 90.3 – Search of the Registrar ......................................................................................................................4
Section 90.4 – Misleading Statements an Offence .................................................................................................4
Section 90.5 – Penalty .....................................................................................................................................................4
AGENCY ....................................................................................................................................................................... 5
Definition: ...........................................................................................................................................................................5
Relationship Between Principal and Agent: ...............................................................................................................5
Actual Authority, Implied Authority, Usual Authority ........................................................................................5
Duties of the Agent to the Principal ...........................................................................................................................6
Duties of the Principal to the Agent ...........................................................................................................................6
Termination of the Agency Relationship .................................................................................................................7
Relationship Between Principal and 3P, and Agent and 3P: .................................................................................7
Ostensible Authority; Agency by Estoppel ..............................................................................................................7
Ratification .........................................................................................................................................................................8
Undisclosed Principal .....................................................................................................................................................9
Liability of Principal for Agent’s Torts .................................................................................................................. 10
PARTNERSHIP ........................................................................................................................................................11
Formation of Partnership ............................................................................................................................................... 11
Four Elements of Section 2: ....................................................................................................................................... 11
Partnership Act .................................................................................................................................................................. 11
Section 1 - Definitions .................................................................................................................................................. 11
Section 2 – Definition of Partnership ..................................................................................................................... 11
Section 3 – Exclusion of Corporations .................................................................................................................... 11
Indicia of Partnership ...................................................................................................................................................... 12
Section 4 – Rules for Determining Partnership .................................................................................................. 13
Relationship Among the Partners ............................................................................................................................... 14
Partnership Act Default Rules .................................................................................................................................. 14
Liability of Partners to 3Ps ............................................................................................................................................. 16
Partnership Act Liability to 3Ps ............................................................................................................................... 16
Dissolution of Partnerships ........................................................................................................................................... 17
Partnership Act Dissolution: ..................................................................................................................................... 17
Retirement of Partners ............................................................................................................................................... 18
Registration of Partnerships ......................................................................................................................................... 18
Partnership Act – Registration Requirements.................................................................................................... 18
Joint Ventures ..................................................................................................................................................................... 19
Advantages of General Partnerships .......................................................................................................................... 19
Limited Partnerships – Part 3 ....................................................................................................................................... 19
Essentials: ........................................................................................................................................................................ 19
Partnership Act – Limited Partnerships ............................................................................................................... 20
Significant Aspects of LP Partner Relations ......................................................................................................... 21
Advantages of a Limited Partnership ......................................................................................................................... 21
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Limited Liability Partnerships – Part 6 ..................................................................................................................... 22
Partnership Act - LLPs ................................................................................................................................................. 22
Partnership Act – Formation of LLPs ..................................................................................................................... 22
Partnership Act – Obligations of LLPs .................................................................................................................... 23
CORPORATIONS .....................................................................................................................................................24
General Corporate Structure ..................................................................................................................................... 24
Constitutional Jurisdiction......................................................................................................................................... 25
Implications of Constitutional Position ................................................................................................................ 26
BCBCA – Extra Provincial Registration .................................................................................................................. 26
CBCA Basics .......................................................................................................................................................................... 27
Forms: ................................................................................................................................................................................ 29
CBCA – Directors and Officers ................................................................................................................................... 29
Consequences of Incorporation ................................................................................................................................... 30
Incorporation Process: ................................................................................................................................................ 30
Post-Incorporation Steps Under the CBCA ........................................................................................................... 30
Advantages of Incorporation: ................................................................................................................................... 31
Corporate Personality and the “Corporate Veil” .................................................................................................... 31
CBCA Sections – Shareholder Immunity................................................................................................................ 31
Piercing the Corporate Veil (Disregarding the Legal Entity) ........................................................................ 33
Requirement to Display Corporate Name ................................................................................................................. 35
Section 10(5) – Publication of Name ...................................................................................................................... 36
BCBCA Sections – Corporate Naming: .................................................................................................................... 36
Jurisdiction of Incorporation ........................................................................................................................................ 36
CBCA Advantages:.......................................................................................................................................................... 37
BCBCA Advantages: ....................................................................................................................................................... 37
Change of Jurisdiction of Incorporation................................................................................................................ 37
CBCA Continuance ......................................................................................................................................................... 37
Pre-Incorporation Contracts ......................................................................................................................................... 38
Section 14 – Personal Liability ................................................................................................................................. 38
Ultra Vires Acts of Certain Corporations ................................................................................................................... 39
Ultra Vires ........................................................................................................................................................................ 40
Constructive Notice and Indoor Management Rule .......................................................................................... 40
Shares and Shareholders ................................................................................................................................................ 41
The Nature of a Share, and the Share (Securities) Register ........................................................................... 42
Issuing and Paying for Shares ................................................................................................................................... 42
Share Rights and Restrictions ................................................................................................................................... 43
1. Voting Rights .............................................................................................................................................................. 43
2. Dividend Rights ......................................................................................................................................................... 44
3. Rights on Liquidation or Winding Up ................................................................................................................ 46
Redemption and Repurchase of Shares ................................................................................................................ 47
GOVERNANCE – DIRECTORS AND OFFICERS ................................................................................................47
Appointment and Powers of Directors and Officers ............................................................................................. 47
Appointment, Removal, Meetings of Directors ................................................................................................... 48
Powers of Directors ...................................................................................................................................................... 50
Access to Records of Directors ................................................................................................................................. 52
Duties of Directors and Officers ................................................................................................................................... 52
Fiduciary Duties ............................................................................................................................................................. 52
Other CBCA Duties of Directors ................................................................................................................................ 57
Obligations Under Other Legislation...................................................................................................................... 59
Tort Liability of Directors and Officers ................................................................................................................. 60
Indemnification and Insurance ................................................................................................................................ 60
GOVERNANCE - SHAREHOLDERS .....................................................................................................................62
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General Powers of Shareholders.................................................................................................................................. 62
No Usual Management Powers ................................................................................................................................. 62
Access to Information About Corp .......................................................................................................................... 62
Resolutions ...................................................................................................................................................................... 62
Election and Removal of Directors ......................................................................................................................... 63
Amendment of By-Laws .............................................................................................................................................. 63
Review Financial Statements .................................................................................................................................... 63
Appoint an Auditor ....................................................................................................................................................... 64
Shareholder Meetings ...................................................................................................................................................... 64
Fundamental Changes ...................................................................................................................................................... 66
4 Fundamental Changes .............................................................................................................................................. 66
Amendment of Articles ................................................................................................................................................ 66
Continue (Export) to Another Jurisdiction .......................................................................................................... 67
Extraordinary Sale, Lease or Exchange of Assets............................................................................................... 68
Voluntary Liquidation and Dissolution ................................................................................................................. 68
Shareholder Initiatives .................................................................................................................................................... 69
SH Proposals ................................................................................................................................................................... 69
Proxy Solicitation and Circulars .............................................................................................................................. 70
Access to Other Corp Information ........................................................................................................................... 72
Closely Held Corporation ................................................................................................................................................ 73
Vote Pooling Agreements ........................................................................................................................................... 73
Unanimous Shareholder Agreements ........................................................................................................................ 74
Requirements for Unanimous SH Agreements: .................................................................................................. 74
SHAREHOLDER REMEDIES .................................................................................................................................76
Personal Action .............................................................................................................................................................. 76
Derivative Actions ......................................................................................................................................................... 76
Oppression Action ............................................................................................................................................................. 76
Requirements for Oppression: ................................................................................................................................. 76
Compliance and Restraining Orders ........................................................................................................................... 80
Section 247 – Restraining or Compliance Order ................................................................................................ 80
Section 248 – Summary Application to Court ..................................................................................................... 80
Rectification of Corporate Records ............................................................................................................................. 80
Section 243 – Application to Court to Rectify Records .................................................................................... 80
3

No formal legal structure – owned by an individual
Legal ownership of the business assets is not separate from the sole proprietor’s own assets
Benefits: o Almost no cost to run a business this way o Losses are deductable against personal income
Individual owners make all their own decisions, assets are all owned in the same way that personal assets are owned o Growing business would likely convert to corporation after making money
Where indicating a plurality of partners, there must file with the registrar
(1) Must not file a business name that o (a) Is used by a corporation registered or continued in BC o (b) Nearly resembles a name such that it is likely to confuse or mislead, or is a name that the registrar disapproves in its discretion
(2) Registrar may file the certificate if corp consents in writing or business used the name for registration before the corp first used the name
Registrar must keep two indices of the declarations filed under the Act
Lays out the administrative process for these indices
Any person may o (a) conduct search by name of firm or name of partner o (b) inspect records and information maintained by the registrar o (c) obtain copy of all or any part of a record maintained by registrar o (d) require that copy by certified by registrar
(1) Person who makes a statement in registration commits an offence if the statement o (a) is false or misleading of any material facts or o (b) omits any material fact that makes the statement false or misleading
(2) directors who knowingly authorize, permit or acquiesced to the commission of the offence are party to the offence and guilty
(3) Not guilty if that person o (a) didn’t know the statement was false or misleading and o (b) with the exercise of reasonable diligence, could not have known that the statement was false/misleading
Liable fine of not more than $5000 (if person); or fine of not more than $2000 (if individual)
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The “agent” is a person who affects the legal relations of another person, called the “principal” o Agent can effect the legal relations of the principal in several ways but primarily through entering contracts on behalf of the principal
“The relationship that exists between two person when one, called the agent, is considered in law to represent the other, called the principal, in such a way as to be able to affect the principal’s legal position in respect of strangers to the relationship by the making of contracts or the disposition of property”
Businesses require agents to carry out their function
Agent is considered at law to represent the principal
Agent may effect the principal’s legal position
Agency may exist through written agreement, oral agreement, and does not require consideration
Agent owes fiduciary duty to principal – chosen based on trust
Differs from Employment relationship o Employee does not necessarily have the right to bind the employer
Differs from Trust relationship o Both owe fiduciary duties, but acts of trustee do not bind the settlor or the beneficiary
Express Actual Authority: o Can be written or oral o Provides specific authorities and powers o Where tasks are required to complete the subject matter expressly authorized, then those tasks are seen as impliedly authorized
Implied Actual Authority: o Constitutes authority in the absence of express actual authority o Usual Authority:
 What this specific agent has been allowed to do in the past
 Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd (1964, QB) – see below
 Actual authority implied from the circs – scope of authority would be based on what directors of the board usually had allowed Kapoor to do in the past
Customary Authority: o Look at what agents of that type typically are authorized to do o Bank managers, stock brokers, etc o Wiltshire v. Sims – below
 Stockbrokers did not customarily have authority to sell shares on credit – no authority here o Differs from usual authority:
 Usual looks at what THIS principal allowed THIS agent to do the past
 Customary looks at what agents OF THIS TYPE are NORMALLY ALLOWED do in other similar relationships
Freeman & Lockyer v. Buckhurst Park Prpoerties (Mangal) Ltd (1964 QB)
P was a firm of architects engaged by Kapoor on behalf of the D
P was not paid by D for the work they did, so sued D for the fees
Held: o Principal is liable to a 3P who enters into K with principal through an agent who has actual authority to act on behalf of the principal o Here, Kapoor was acting as a managing director, but never actually appointed by the board of directors
 But board was aware that Kapoor was acting in this capacity
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o Actual authority is implied from the circs
 Scope of authority is based on what directors of the board usually had allowed Kapoor to do in the past
Wiltshire v. Sims (1808)
While stockbrokers usually have authority to sell shares on behalf of clients, they don’t normally have authority to sell shares on credit
So in absence of express authority/prohibition, look to customary authority of agents of that particular type
Held: o Stockbrokers do not generally have authority to sell shares on credit – so no authority here
Fiduciary duties are owed to the principal – implied terms of the relationship
May be varied by express agreement, but not by implication from the circs
Duty to Perform Agency Obligations: o Must perform the assigned tasks according to principal’s instructions o Standard – all reasonable and best efforts to perform the duties o Must not exceed authority o Agent not liable if the act they are authorized to perform is illegal
Duty to Perform with Reasonable Care o Standard of care is the degree of skill and diligence that an agent in his/her position would normally posses o Professionals – act within the degree of skill or a reasonably competent professional in their trade
Fiduciary Duties: o Loyalty - Agent must act in the best interests of the principal – must put principal’s interests ahead of agent’s o Conflicts of Interest:
 Not to put himself in position where agent’s interests conflict with the principal’s interests
 Remedy – transaction is void and agent is required to account to the principal any profits made in the transaction
 Damages would compensate for any losses caused by the conflict o Not to Make Secret Profits:
 Cannot act as a double-agent
 No kickbacks or finder’s fees for performing principal’s contracting
 Remedy – Agent required to account for profits made by agent to the principal
Duty not to Delegate: o Principal-Agent relationship is based on trust – only principal can determine who is an agent o Remedy – damages for any loss resulting from delegation – possible injunction from further delegation o Delegation may be appropriate where there are extraneous circs – where done in good faith and is necessary to carry out a simple (but important in some cases) task on behalf of the principal
Keep Proper Records: o Keep books/accounts in order – separately from agent’s own accounting o Must be able to produce records upon request o Remedy – evidentiary presumption against agent – amount of profit to the agent or loss to principal
– whichever is most favourable to the principal
To Pay Remuneration o Generally requires express agreement – commissions only where agent is successful o Where it is clear that agent would not have been inclined to act gratuitously
 Quantum Meruit – compensation for what work was actually done
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To Pay Agent’s Expenses and Indemnify Against Losses o Agent must be acting within scope of actual authority – not expenses through the fault of agent o Must be reasonable and necessary expenses o Negligence of agent that results in additional costs does not require repayment o Cannot have reimbursement for illegal expenses
By Act of the Parties: o Where agency agreement provides for termination o Unilaterally terminable on notice
By Operation of Law: o Principal or Agent becomes bankrupt o Frustration
 Where purpose of the agency relationship no longer exists o Death/Incapacity of Principal or Agent
Agent cannot enforce contract and is not party to the contract – contract exists between principal and 3P
Recall Actual Authority o Where actual authority exists and it is clear agent was acting for principal in dealings with 3P, then the K, if otherwise valid, will be a binding K between the principal and the 3P
Principal has never in fact authorized agent’s actins, but by representations or actions, is estopped from denying the agent’s actions
Occurs where 3P and Principal are at disagreement as to whether the agent had authority to bind principal o Protects the reliance interests of 3P who are led to reasonably believe the person is acting as agent
To the public it appears as if the agent had the authority o Either principal represented or permitted the agent to represent self that he had actual authority
Essential Elements:
Representation or permitting of representation that the agent had authority o Rep can be express, implied or circumstantial
Reasonable reliance on the representation to the 3P’s detriment
Freeman & Lockyer – above – Kapoor – not actually a director – implied/customary actual authority
Also ostensible authority – reasonably relied upon that Kapoor had the usual authority
Lloyd v. Grace, Smith & Co – more below
Client wants help from lawyer – lawyer left conveyancing clerk in charge of the office
Clerk committed fraud – client sued law firm saying they were liable for agent’s action
Held: o Firm didn’t authorize clerk, but they did hold out the clerk as someone who is authorized by the office to do things that clerks do o Fact that clerk did something illegal doesn’t change the fact that the rep of trust and authority was made by the firm o Client reasonably believed the clerk was agent of the firm – lawfirm was the principle
 Therefore, firm was liable for the actions of the agent
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Reasons for Ostensible Authority:
Protection of reliance by 3P o Competing interest is unfair surprise – principal will be surprised at being bound to a K o But principal could have taken steps to avoid the potential reliance interest
Least Cost Avoidance o Obligation is on the person who can avoid risk at least cost o Principal can check agent’s trustworthiness, monitor agent, dismiss agents
Breach of Warranty of Authority (Tort)
Claim by 3P against an agent, where agent warranted that he/she had authority but in fact did not have actual or ostensible authority
Developed before negligent misrepresentation
Elements: o 1. The agent represents that he/she has authority o 2. Representation is false and o 3. The 3P acts on the representation to his/her detriment
Claims: o 1. Against the alleged principal on the basis that the agent had authority (actual/ostensible) o 2. Against the alleged agent on the basis of breach of warranty of authority
Damages: o Negligent misrepresentation – reliance damages o Breach of warranty of authority – expectation measure of damages
 Includes lost expected profits from the transaction
 Put the 3P in the position he/she would have been had the ‘agent’s’ promise been true
Where agent acts beyond authority, but principal chooses to accept what the agent has done
Generally occurs in instances of usual authority
Circumstances: o 1. Person purported to act on behalf of another person who seeks to ratify o 2. Person who seeks to ratify was in existence and was ascertainable at the time the other person purported to act as agent; and o 3. Person who seeks to ratify must have had the legal capacity to do the act both at the time the other person acted and at the time of the ratification
 Commonly related to corporations that come into existence after Ks are in place
Requirements: o 1. Ratification can be express, by conduct or by acquiescence
 Generally, performance of the K is sufficient
 Also, simply waiting and seeing what the outcome of the K will be, is sufficient o 2. Ratification must be based on a knowledge of all the relevant facts
 Principal must be aware of the nature of the deal
 Minor aspects may not allow the principal to escape duties under the K
Consequences: o Creates an enforceable contract between 3P and Principal – they can sue each other o 1. Relates back to the time of the offer and acceptance between the agent and 3P (formation time) o 2. Principal can sue 3P and vice versa o 3. Agent is no longer liable for breach of warranty of authority o 4. Agent is no longer liable to the principal for exceeding his/her authority o 5. Principal will be liable to the agent for reasonable remuneration and to indemnify the agent for expenses reasonably incurred by the agent in effecting the K
Policy Reasons: o Mutual benefit
 K is determined to be good for everyone
 Promotes certainty
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o Unjust Enrichment of the Principal at the Expense of the Agent
 w/out ratification, principal would have no down-side risk – if deal went through, they win if it goes south, then sue the ‘agent’
 Also, principal would be able to go through with K and not indemnify/pay agent o Unjust Enrichment of the Principal at the Expense of the 3P (principal’s speculation)
 Rat by acquiescence
 avoids potential upside gain for the principal
 Rat by conduct
 Ensures principal cannot just perform K until it’s not beneficial anymore
 Principal in existence
 Ensures that persons cannot wait to see if the deal is good before creating the principal – no ratification unless principal was in existence at formation
 Principle Ascertainable
 Same argument o Unjust Enrichment of the 3P at Expense of Principal (3P’s speculation)
 Protects principal from 3P reneging on deal to get a better deal in rising market o Cures Minor Defects in the Grant of Authority
 Reduces legislation in actual/ostensible authority
Where Agents act on behalf of principals without disclosing the relationship to the 3P
Contract is believed to be between 3P and Agent o Principal can still sue the 3P in some circs o Once principal discloses they are the principal, they effectively take over the K
Where Principal can Sue 3P o Generally, they can sue once they disclose their principal relationship and take over K o But if 3P was looking to contract with agent alone, then this does not apply
 Maybe agent has special skills – 3P may be able to escape the deal o Objective test:
 3P will be seen to be looking to the agent alone to perform if:
 1. The terms of the K require that only agent perform the terms agreed upon OR
 2. Circumstances indicate that 3P clearly intended to contract with the agent alone o Must be some corroborating circs such as previous relationships
Said v. Butt
Said wanted to attend an opening night performance in London, but had said terrible things about the staff
Had a friend (agent) buy tickets for him – but manager refused his entry
Held: o If staff knew they were contracting with Said, they never would have sold the ticket o No enforceable contract
Rights of the 3P:
Reciprocal protections for the 3P: o 1. 3P, on learning of the agency relationship, can sue the principal if needed o 2. 3P can still sue agent (as party to the K)
 Principal/agent have joint-severable liability, but the principal will indemnify the agent and return any costs, including 3P’s suit, and o 3. In action against 3P by the principal, 3P can set off any rights the 3P would have against the agent and can use any defence that the 3P would have against the agent
 May request an accounting of prior transactions
Policy Reasons for Undisclosed Principals:
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Mutual Benefit o If not looking for the agent to perform, then the same benefit is derived from allowing the principal to contract with the 3P as would have been achieved from the agent
Unjust Enrichment of the 3P (potential) o 3P should not be able to avoid performance after principal has carried out obligations
Unjust Enrichment of Principal (potential) o Principal should not be able to escape liability after the 3P has carried out obligations
Similar to vicarious liability
Agent can also affect legal relations of the principal by committing torts while acting on behalf of the principal
The Legal Test:
Principal is liable for a tort committed by the agent if the agent committed the tort while acting within the scope of his/her authority o Simply must be doing the type of things that agent would normally do to carry out mandate o Principal has deeper pockets usually
Lloyd v. Grace, Smith & Co (1912 AC)
Clerk in law firm defrauded a client in a conveyancing act
Even where principal did not authorize agent to commit fraud, he/she may have put the agent in a place to do that sort of act, and must be answerable for the manner in which that agent has conducted himself/herself o MacKay and Barwick
Held: o Clerk had authority to receive deeds and carry through sales and conveyances o Fraud occurred in carrying out that capacity o Principal does not have to benefit from the agent’s fraud, nor does the agent have to intent to benefit the principal - Principal is liable.
Ernst & Young v. Falconi (1994 ON)
Partnership – partners are agents for one another and are liable for the torts of fellow partners, so long as the tort was committed in the scope of authority
F was a lawyer, pled guilty to charge under Bankruptcy Act – fraudulent disposition of property, Partner had no involvement with the transaction
Held: o This was not in the regular course of duties of the law firm, but it is sufficient that the agent used the facilities of the law firm to perform services normally carried out by the law firm in carrying out the transaction that resulted in the loss o F’s actions were of the nature of the normal legal services provided by a lawyer within the practice o The fact that they were intended to defraud creditors of the bankrupts does not take the acts out of the ordinary course of business of the law firm
Policy Rationale for Liability of Principal for Agent’s Torts:
Deterrence / Least Cost Avoidance o Encourages principal to take steps to avoid harm that activity may cause
Allocation of the Loss to the Activity Causing the Loss o Price increases can be worked into the service/product to reflect the cost of potential loss
Concern for Compensation of the Victim
Other Concerns - Trust for a particular profession - General policy considerations in tort
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Three types of partnerships: o General Partnerships (GP); o Limited Partnerships (LP); o Limited Liability Partnerships (LLP).
Benefits of GP: o Like minded people decide to work together on a business venture o Smaller localized businesses that are self-financed are often set up this way o Avoid paperwork and business tax scheme
Legal Consequences: o Each partner liable to the full extent of persona assets for debts and other liabilities of the business o Partner may not be considered an employee of the business (Thorne) o Partner cannot be a creditor of the partnership (exceptional circs in the Partnership Act) o Income from business is calculated from the partnership firm – firm itself is not taxed, the shares are apportioned to the partners individual personal taxes
Do not carry separate legal entity o May exist without partners being aware of it o Carrying out business with someone, with intention of generating profit – partnership – s.2
Partners are the owners in common of business and assets o They carry on business in their own right in common, they are not employees
No formal steps required to set up a GP
There is a registration requirement, but GPs can exist without registration
Basically a question of the nature of the relationship
1.
Persons (more than one, and includes corporations)
2.
Carrying on business (ordinary meaning – trade, profession, occupation, buying/selling, commercial, etc)
3.
In common (together in some way – see section 4)
4.
With a view of profit (no actual profit is required, just a view towards it)
“Business name” – name under which a business is carried on or is to be carried on and includes firm name
“Firm” – collective term for persons who have entered into partnership with one another
“Firm name” – style or name under which the business of a firm is carried on
“Principal place of business” principal premises in BC where business is carried on
“Registrar” – registrar of companies under the BCA
“Writ of Execution” – order for seizure and sale issued under small claims rules
Partnership is the relation which subsists between persons carrying on business in common with a view of profit
Relations between members of a company or association that is o (a) incorporated under an Act or o (b) formed or incorporated under an other statute or letters patent or royal charter
Is not a partnership within the meaning of this Act
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Backman v. Canada (The Queen) (2001 SCC) – View to Profit (can be ancillary purpose), here – no.
39 Canadian tax payers were arguing that a partnership had been formed, so that they could use losses that had accrued on ‘partnership property’ to deduct against their law practice profits in Canada
Texans purchased land in Dallas, property value diminished significantly o 39 Cdns purchased interest in property, converted from limited partnership to general partnership o Texans created new partnership and bought it back for the same price – but not before 39 Cdns were able to use it for to write losses against their profits back in Canada
Issue: was there a “view to profit” in this endeavour?
Held: There was never a view of profit here – this was a specific view to loss o Mere manoeuvre to crystallize losses for tax purposes – no business carried out that could have been profitable in any way – one day transaction o Carrying on a business – organized commercial effort over a period of time; incurring liabilities to other people; purpose of gaining livelihood or profit o Tax motivation does not necessarily mean that it’s not carried out with a view of profit – so long as there is a secondary intention of earning profit other than tax benefit, then s.2 is satisfied o Must look to true intention of the parties
Takeaway points: o Calling something a GP doesn’t make it a GP o View of profit can be an ancillary purpose of the partnership o Must have objectively provable criteria for section 2
Thorne v. NB (Workman’s Comp Board) (1962 NBSC App Div)
GP between Thorne and R – each agreed to take 75$/week in wages
Registered GP with WCB and paid premiums for ‘employees’ – Thorne injured on the job – claimed WCB o WCB ownership protection was not paid for
Held: o GPs are relationships, not a separate entity at law o Wages does not mean that they were employees – actually just taking partnership draws o Loss cannot be compensated because T is not an employee
Takeaway: o Partners are personally liable for debts of the firm o Any creditor can look to any partner for entire debt – partners can then seek indemnity from others o GPs – personal belongings of partners are pooled with the business assets
1.
Sharing of Net Profits: a.
Income minus expenses – if the profits are shared in proportion of interest, then that is indication that there is a partnership
2.
Persons are in Agency Relationship:
Policy Considerations
1.
Reliance a.
Reliance on a known participant in the business – 3Ps may rely on those involved in the business to satisfy obligations in connection with that business – 3P may reasonably believe the person dealt with was acting as agent for the others b.
Reliance on person not known by 3P
2.
Unjust Enrichment a.
Persons sharing in profits of the business is getting the benefit of creditor avoidance
3.
Least Cost Avoidance a.
Position to assess the risk and control of it b.
Lowers overall cost of credit
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In determining whether a partnership does or does not exist, regard must be had to the following rules:
(a) Common ownership of property does not itself make the co-owners(holders) partners o This is only an indicator of partnership – common intention for profit is still required o Co-ownership vs. Partnership
 C – not agents for one another; can deal with their own interest in the property w/out consent of the other co-owners
 P – agents for one another; unless agreed by all partners, cannot transfer interest in property
(b) Sharing of gross returns does not of itself create partnership o Think of the relationship between the travelling play owner and the theatre owner
(c) Receipt by a person of a share of the profits of the business is proof in the absence of evidence to the contrary, that he/she is a partner in the business. But not proof in of itself (but strong indicator), puts the burden on other party to show it’s not a partnership. o Specifically not presumptively a partnership where: o (i) Payment of a debt or liquidated amount by instalments out of profits o (ii) Contract for the remuneration of an employee or agent by share of the profits of a business o (iii) Spouse or child of a deceased partner who receive an annuity out of the profits
AE Lepage v. Kamex Developments (1977 aff’d by SCC) – s. 4(a) issue – TIC v. Partnership
Distinguished between TIC and partnership (s. 4(a))
Group formed syndicate to buy property; Kamex was incorporated to hold the property in trust on their behalf – the group entered into agreement: o Property held in trust in proportion to their own interests – profit distributed in ratio o Decision to sell could be made by majority of the parties
 No individual could sell without first offering to other group members
AE entered into agreement with March to sell property – March signed on behalf of group w/out their authority o S. 7 Partnership Act would bind the partners to March’s action if they are a partnership
 S. 7(2)(a)(b) – where no authority and AE knew that, then can escape s. 7
Property sold by someone else – AE suing them as partners for breach of k
Issue: o Whether March’s actions were binding on all of the group members o Was March in a partnership with the group members?
Held: o Agreement among group was an ownership in common, NOT a partnership o Ability of individual co-owners to deal with the individual property interests was inconsistent with partnership – partnership interests cannot be sold without authority – fiduciary relationship
 Right of refusal is indicative, but not determinative – its avail in co-ownership as well
 Each member treated the property differently for their personal taxation
Takeaway: o Partners cannot usually deal with particular partnership property as if it is their own, but it is possible to have a partnership in which such right is provided o Policy considerations seem to point to lack of partnership
 Reliance – no indication that March had been held out as having authority
 Unjust Enrichment – AE would be unjustly enriched if paid without selling the place
 Least Cost Avoidance – AE could have simply just checked with Kamex o Failed to claim ostensible authority; and failed to sue March for breach of warranty of authority
Volzke Construction Ltd v. Westlock Foods Ltd (ABCA)
V is arguing that W was in a partnership with another company – V contracted with the other company B
Oral construction contract existed between V and B – but V seeking recovery from both B and W
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W owns IGA franchise and makes agreement to put it in B’s mall; W seeks construction contract with V, holding out B as W’s partner o A joint account existed, but B had all the signing authority and all tenancy issues were forwarded directly to B – W did not partake in any of those matters o In a previous matter, W obtained a ruling that W and B were partners o Now W is claiming they are not partners for this claim against B
Trial – no intention for partnership; W had insufficient control of the business
CA – They are partners o Nothing in the defn of partnership that requires each part to act in the management of business o W and B agreed to share profits/expenses of the entire centre 80/20; spoke of themselves as GPs o Therefore V can make a claim against W as well as B.
Default rules are created by the Partnership Act – Written Agreement can be made to override the rules
Based on the assumption that partners are equal with respect to their capital contributions, rights to participate in management of the business and share in the profits of the business
Principles: Equality, Consesnualism, Fiduciary Character, Partnership Agreement
21 Variation of Rights and Duties by Consent
Mutual rights and duties of partners as determined by agreement of this Part, may be varied by consent of all partners – this may be express or implicit consent
22 Fairness and Good Faith
(1) Partner must act with utmost fairness and good faith towards other members of the firm
(2) Duties imposed by this section are in addition to any rules of equity
24 Property Bought with Firm Money
Unless contrary intention appears, property bought with money belonging to a firm is deemed to have been bought on account of the firm
27 Rules for Determining Rights and Duties of Partners in Relation to Partnership
Subject to any agreement express or implied between parties, partnership interests, rights and duties with regard to partnership property must be determined by the following rules:
(a) All partners are entitled to share equally in capital and profits of business and must contribute equally towards losses of the firm
(b) Firm must indemnify every partner in respect of payments made and personal liabilities incurred in
(i) ordinary and proper conduct of business or (ii) about anything necessarily done for the preservation of business of the firm
(c) Any capital advanced beyond agreed upon amounts is entitled to interest at a fair rate from the date of payment or advance
(d) Partner is not entitled to interest on the capital subscribed by him or her
(e) Every partner may take part in the management of the partnership business
(f) Partner is not entitled to remuneration for acting in the partnership business
(g) Person may not be introduced as a partner without the consent of all existing partners
(h) Differences in ordinary business must be decided by majority of the partners – but no change to the nature of the partnership without consent of all existing partners
(i) Partnership books are to be kept at place of business of partnership – every partner must have acess
(j) Partner may refer a difference in interpretation or application of partnership K to arbitration
28 Majority Cannot Expel Partner
Majority of partners cannot expel a partner unless a power to do so has been conferred by express agreement between the partners and is exercised in good faith
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29 Ending the Partnership
(1) If no term is set, partner may end partnership at any time on giving notice to all other partners
(2) If originally constituted by deed, notice is also sufficient
30 Continuation of Partnership After Expiry
(1) If partnership entered into for a set term is continued after expiry, without new agreement, rights and duties of the partners remain the same as they were prior to expiry of the previous term
(2) Continuance of business as habitually acted in during the term, without settlement or liquidation, is presumed to be a continuance of the partnership
31 Partners Must Render Accounts
Partners are bound to render true accounts of the information of all things affecting the partnership
32 Partner Must Account for Benefits
(1) Partner must account to firm for any benefit derived by the partner without the consent of the other partners, from transactions conducted on behalf of the partnership
(2) Applies also to transactions after a partnership is dissolved by death of a partner and before the affairs of the partnership have been completely wound up
33 Profits of Partner Carrying on Similar Business
If, without consent, carried on business of the same nature and competing with firm, partner must account for and pay over profits made in that competing business
34 Assignment by Partner of a Share
(1) Partnership share can be assigned, but that does not result in assignee becoming a partner o Assignee is entitled to a share of profits and share of assets on dissolution o Not entitled to participate in management or administration of the business o Based on fiduciary principles – trust relationships
91 Rules of Equity and Common Law
Rules of equity and common law applicable to partnership continue in fore, except in so far as where inconsistent with express provisions of this Act
Rochwerg v. Truster (2002 ONCA) – must account for benefits – s. 32
R was a partner in RTZ – R left and partnership dissolved
Prior to leaving, R became director of Techlogic and its subsidiary, which both were clients of RTZ o R disclosed this involvement and remitted his director’s fees to RTZ for the first year o R also received stock option purchases which amounted to huge profits when IPO’d
Issue: Whether partners were entitled to an accounting of R’s shares and stock options as well?
Held: Shares constituted compensatory benefit – obliged to disclose and account (s. 32) o Fiduciary duties between partners – loyalty, utmost good faith and avoidance of conflicts of interest o S. 32(1) – obligation to account for profits of a competing activity – any benefits o Does not have to be a business that is the same or similar to the partnership business
 Relationship with clients was a business asset of RTZ – stocks are linked in
 R became director of new company only because of his role in RTZ
Dockrill v. Coopers & Lybrand – Disclosure duty between partners and operation of s. 28 - expulsion
Consent existed for managing partners to make termination decisions – they terminated Dockrill with notice
Section 28 – majority cannot expel partner unless there is express authority to do so and good faith o Docs delivered to Dockrill – some solicitor/client privilege docs that were discussing his expulsion o D applied for disclosure of those docs as he was a director at the time of analysis and preparation
Held: o D is entitled to see all the books/docs while he was a partner – cannot be privileged for partners
 Common property of all partners, therefore, entitled
 Fiduciary duty to disclose everything to each other – mutual agency – knowledge sharing
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Based on presumption of equality, consensualism and fiduciary obligations
Partnership Act is the default partnership agreement – recall from above section
6 Definitions
“Business” – every trade, occupation or profession
“Court” – includes every court and judge having jurisdiction in the case
“Partnership Property” – property and rights and interests in property o (a) originally brought into the partnership stock o (b) acquired, whether by purchase or otherwise, on account of the firm o (c) acquired for the purposes and in the course of the partnership business
7 Liability of Partners
(1) Partner is agent of the firm and the other partners for purpose of firm business
(2) Acts of every partner for business that is the type carried on by the firm, bind the firm and partners unless: o (a) the partner so acting has in fact no authority to act for the firm on that particular matter, and o (b) the 3P knows that the partner has no authority, or does not know or believe him/her to be a partner of the firm
9 No Pledge of Credit for Nonfirm Business
(1) If partner pledges credit of the firm for a purpose not apparently connected with the firm’s ordinary business, then the firm is not bound unless the partner was specifically authorized
(2) This does not affect any personal liability incurred by individual partners
10 Notice of Restriction of Power of Partner
If agreed upon by partners that certain acts are restricted upon a particular partner, those acts, if committed are not binding on the partnership
11 Liability of Partners for Firm Debts
Partners are jointly liable for all debts and obligations incurred while partners; after death, estate is also severally liable in a due course of administration for those debts and obligations
12 Liability of Firm
Firm is liable to the same extent as the partner who commits an act/omission that causes loss or injury to any non-partner in the ordinary course of firm business with the authority of partners
13 Liability for Misapplication
A firm must make good any loss arising from: o (a) partner acting in scope of apparent authority receives money/property from 3P and misapplies it o (b) firm, in the course of business receives money/prop from 3P and money is misapplied by one or more of the partners while in custody of the firm
14 Liability Under sections 12 and 13
Partner is jointly and severally liable with partners for everything for which the firm, while he/she is a partner, becomes liable under either section 12 or 13.
16 Person Representing Self as Partner
(1) Person who by spoken/written words or by conduct represents self, or knowingly allows representation of self, as partner in a particular firm is liable as a partner to anyone who has, on the faith of that representation, given credit to the firm
(2) Subsection (1) applies whether rep has or has not been made to the 3P with knowledge of the apparent ‘partner’ making the representation
(3) If after a partner’s death, partnership continues with old name, this does not itself make estate liable for any partnership debts contracted after death of the partner
17 Partner’s Evidence
Admission/representation made by any partner concerning partnership affairs, if made in ordinary course of business, is evidence against the firm
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18 Notice to Partner
Notice to any partner who habitually acts in the partnership business of any matter related to firm business, operates as notice to the firm o Except for fraud on the firm committed by the partner
19 Liability of Partners
(1) A person who is admitted as a partner into existing firm does not become liable to creditors for anything done before becoming partner
(2) Partner who retires does not cease to be liable for partnership debts incurred before retirement
(3) Retiring partner may be discharged from existing liabilities by agreement between retiring partner and the members of the firm and the creditors
(4) Agreement under (3) may be either express or inferred as fat from course of dealings between creditors and new constituted firm
Ernst & Young Inc (Mancini) v. Falconi (1994 ON) – s. 7 – liability for acts of the partner – ordinary business
F was a lawyer in firm KFA – F pled guilty to charge under Bankruptcy Act for assisting with fraudulent dispositions of property; K had no involvement with the transaction
Each transaction involved the legal services of KFA
Creditors sued F and K as part of the partnership;
Issue: Whether F’s acts were within the ordinary course of business
Held: Acts were within the ordinary course of business – K also liable as partner o S. 7 – every partner is liable for the acts of the partners of the firm o Even though fraud was not the ordinary course of business, the type of transactions were within the ordinary honest transactions of the firm o Sufficient that F used the facilities of the lawfirm to perform services normally performed by the law firm in carrying out the transactions that resulted in the loss to creditors
 Improper acts in of themselves do not take the action out of the ordinary course of business
Can be dissolved by action of the parties, death or bankruptcy
Automatic dissolution upon death, bankruptcy or dissolution
When dissolution occurs in this manner, entirely new partnership agreement is required
Recall Section 34 – Assignment by Partner of a Share
Recall section 30 – Continuance of regular business = continued past termination
Section 35 – Dissolution of Partnership
(1) Subject to agreement between partners, partnership is dissolved: o (a) if entered into for a set term, by the expiration of that term o (b) if entered into for a single adventure or undertaking, by the termination of that adventure or undertaking; or o (c) if undefined end date, by any partner giving notice to the other’s of intention for dissolution
(2) In (1)(c) – partnership is dissolved as from date mentioned in the notice as the date of dissolution, or if no date, from the date of communication of the notice
Section 36 – Dissolution by bankruptcy, Death, Dissolution of Partner or Charging Order
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(1) On death, bankruptcy or dissolution of partner o (a) partnership of 2 partners is dissolved; and o (b) subject to agreement among the partners, a partnership of more than 2 partners is dissolved as between the bankrupt, dead or dissolved partner and the other partners
Recall section 19(2) – partner who retires from a firm does not cease to be liable for partnership debts or obligations incurred before retirement
Section 39 – Retirement of partners o (1) persons dealing with firm after retirement of a partner can treat all “apparent” partners as partners until they have notice of the change in partnerships o (2) persons who have not had prior dealings with the firm, the notice can be effeted by way of notice in the Gazette o (3) retired partner will not be liable to those who can be shown not ot have known the retired partner was a partner
Section 84(b) – if one fails to file new registration statement on the retirement of a partner, that person will continue to be considered to be a partner
Policy: o 3P who had prior dealings with firm may have relied on the particular retired partner o Where no prior dealings, 3P can reasonably check gazette o Those who have prior dealings cannot be made to check gazette regularly o If didn’t know partner existed at all, then there’s no reliance
Steps to Protect when Retiring: o Onus is on retiring partner to take steps to protect against potential reliance on retiring partner o Follow steps from the Act: provide actual notice; put notice in Gazette; file revised registration
There is a requirement to register GPs, but there’s really no repercussion for not doing so
There can be fines, but it’s unlikely that a GP gets fined
Section 80.1 – Definition
“Registration statement” – a registration statement in the prescribed form or prescribed information submitted to the registrar in a prescribed manner
Section 81 – Duty of General Partnership to File Registration Statement
(1) Requires persons associated in partnership for trading, manufacturing or mining to file a registration statement with the Registrar o Purpose: system of knowledge of who is dealing with who
Subsequent subsections detail the requirements for the registrar to maintain the registration statement
Section 82 – Registration must be filed within 3 months after formation
Section 83 – Registration statement must be filed on change and alteration of firm
Section 84 – Allegations in registration statement is evidence
Section 85 – Rights and liabilities of the partners are not to be avoided by not including them in the registration
Section 86 – On dissolution any/all partners can advise the registrar of dissolution
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Section 87 – Actions
(1) If no registration statement is filed under this Part, action may be brought against any member of the firm
(2) partners are jointly or severally liable on the original cause of action
Recall Section 90.3 – Search of the Registrar
Any person may: (a) conduct a search by name of firm/partner; (b) inspect records and information; (c) obtain copy of all or any part of a record; (d) require that a copy be certified by the registrar
Recall Section 90.4 – Misleading statements are an Offence
See sole proprietorship above
Recall Section 90.5 – Peanlty – persons $5k; individuals $2k.
Section 35(1)(b) – deals with partnership joint ventures – partnership is dissolved if entered into for a single adventure or undertaking at the termination of that adventure or undertaking
Suggests that some partnerships are accurately defined as joint ventures, but this is likely not the right terminology in the majority of cases
Easy form – no formal steps
Very flexible form of association – less stat requirements than corporation
Same disadvantages as sole proprietorship – personal liability o Where few investors, this is less advantageous
Taxes – losses can be passed to the partners and used by them to offset gains from other sources
Responds to the risk that 3Ps would be deceived by undisclosed limited liability
Shift away from the rule in GPs that personal liability applies
Allows some partners (Investors) to have limited liability, but only if the partnership does business under a name that adds the words “Limited Partnership” as the suffix
Facilitates having a large number of investors – limited partners are generally the major capital contributors
Must be a partnership – as per s. 2
Must have a certificate filed – as per s. 51
Must have at least one GP and one LP – as per s. 50
Must have “LP” in business name – as per s. 53(1)
LP name must not contain LPs’ surname or corporate name – as per s. 53(2)-(4)
LP’s cannot contribute to management – as per s. 64
Limited Partners only liable only up to contribution amount – as per s. 57
General partners do not have limited liability – as per s. 56
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Parts 1 and 2 of the Act apply except where inconsistent with Part 3
Relationships governed primarily by written agreement – reproduced in the certificate
48 Defintion
“Certificate” – certificate filed under s. 51 and includes all amendments made to the certificate
49 Application of Part 3
Limited Partnership Sections
50 Limited Partnership
(1) LP may be formed to carry on any business that a GP may carry on
(2) LP consists of: (a) one or more general partners and (b) one or more limited partners
51 Formation of Limited Partnerships
(1) LP is formed when certificate is filed with registrar, signed by each general partner
(2) Certificate must state: o (a) business name o (b) general nature of the business carried on or intended to be carried on o (c) full name and residential addresss of each general partner o (d) term for which the LP is to exist o (e) aggregate amount of cash and the nature and fair value of any property contributed by LPs o (f) additional contributions agreed to be made by LPs and times of happening o (g) basis on which LPs will be entitled to share in profits
(3) Certificate may state full name and last known address of LPs
(4) Specific provisions of the partnership agreement must be stated in the certificate as well – listed
53 Name of Partnership
(1) Business name of each LP must end with “Limited Partnership” or French equivilent
(2) Surname of LPs are not to be in the firm name unless (a) also name of a GP or (b) name of the business had that name before the LP joined
(3) Corporate name of an LP or significant part of that name should not appear in firm name
(4) Those contrary to (2) and (3) are liable as general partners to any creditor of the LP who has extended credit without actual knowledge that the LP is not a general partner
56 Rights of General Partners
GPs in an LP have all the rights and powers and are subject to all the restrictions and liabilities of a partner in a general partnership, EXCEPT (without consent to the ratification of specific acts by all
LPs): o (a) act which makes it impossible to carry on the business of the LP o (b) consent to a judgement against the LP o (c) possess LP property, dispose of rights in LP property, for other than partnership purpose o (d) admit a person as GP or to admit a person as LP, unless right to do so is in certificate o (e) continue business of LP on bankruptcy, death, retirement, mental incompetence or dissolution of a GP, unless right to do so is in the certificate
57 Liability of Limited Partner
Except as otherwise provided, LPs are not liable for obligations of the LP except in respect of the amount they have contributed or agreed to contribute to the capital of the LP
Also see section 58 – Rights of the Limited Partner
59 Share of Profits
(1) LPs have the right to (a) share of the profits or any other compensation by way of income and (b) to have his/her contribution returned
(2) LP may receive profits or compensation by way of income stipulated in the certificate, so long as after payment, whether from limited partnership property or general partners’ property, all the LP’s
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assets exceed all the LP’s liabilities, except liabilities to limited partners on account of their contributions and to general partners
64 Liability to Creditors
LPs are not liable as general partner unless he/she takes part in management of the business
77 Parties to the Proceedings
Legal proceedings against an LP, it is not necessary to name LPs.
1.
Right to Inspect Books and Right to Disclosure a.
No mandatory right to disclosure of information to LPs b.
S. 58(1)(a) – gives LPs right to inspect and make copies of partnership books c.
S. 58(1)(b) – right to be given, on demand, true and full information of all things affecting the LP i.
Recall s. 27(i) for GPs – that requirement can be varied by agreement
2.
Assignment of Limited Partnership Interests a.
Default rule – partners cannot assign interests without consent of the other parties b.
S. 66 – LPs must not assign interest unless (a) all LPs and GPs consent AND (b) accordance with partnership agreement i.
Recall s. 51(4)(b) – if permitted, it must be in the certificate!
3.
Restriction on the Admission of Additional Partners a.
Recall s. 56 limitations on what GPs can do without consent of the LPs or ratification after the fact b.
Recall s. 51(4)(c) – requires any such right to admit to be in the certificate
4.
Share of Profits a.
S. 61 – LPs share in the profits of any return of capital in proportion to their contribution unless LP provides otherwise
The Queen v. Robinson Trust – LPs are by nature partnerships
R was an limited partner in an LP – R was a trustee holding legal title to estate assets o R has the power to invest assets on behalf of beneficiary o Invested in Holidy Haven Nursing Home LP – had two GPs, both corps
Tax Issue: whether the income of R was income from a business or property o R claims no decision making, so not carrying out a business
Court of Appeal – all the partners of an LP are carrying out a business, whether limited or general partners
Relatively common for start up operations
Taxation – any losses, which are more likely at start-up, can be passed on to limited and general partners personally and they can deduct against personal gains
Greater flexibility than corporate model
Facilitates investment capital – encourages venture capitalism
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Response to lobbying by large accounting and management consulting firms
Goal was to obtain limited liability for individual partners of a firm
Commonly used amongst professionals – accountants, lawyers, engineers, doctors, dentists, architects, etc o These professions have been subject to various corporate restrictions
Liability Structure – see s. 104
First liability insurance, then Firm Assets, then partner who was negligent
LLPs in ON – each partner is only liable for up to own personal negligence, or those being directly supervised by that partner o Still LLP business is first liable, then any extra goes to the negligent partner
LLPs in BC – personal assets are only vulnerable for partners’ own negligence, or actual knowledge of some else’s negligence that partner did not act upon o After LLP business property is exhausted (and liability insurance), then comes personal assets of those negligent partner(s).
Section 94 – Definitions:
“General Partnership” – partnership in BC that is neither an LP or and LLP
“Limited Liability Partnership” – partnership registered as an LLP under this Part
“Profession” – Profession or occupation that is governed or regulated by an Act or body under an Act
“Partnership Obligation” – Any debt, obligation or liability of a partnership, other than personal partnership debts, obligations or liabilities
Section 95 – Application
(1) Subject to (2), section 1 and Parts, 1, 2, 4, and 5 apply to LLPs
(2) Subject to s. 129(5), sections 11, 14, 80.1 to 88, 90 and 90.3 do not apply to LLPs o Recall – 11 – liability of partners for firm debts o Recall – 14 – liability of partners for acts/omissions/misapplications by firm o Recall – 80.1 – 88 – registration requirements for GPs – stops before similar names section o Recall – 90 and 90.3 – other registration issues
96 Application for Registration
(1) Partners may apply to register the partnership as LLP
(2) In order for registration, must be file a registration statement
(3) Registration statement may be filed on behalf of partnership by (a) person who has received approval of partners to do so or (b) person authorized to do so under partnership agreement
(4) Registration must: o (a) set out: (i) the business name and (ii) name that is to be the business name of the partnership after it is registered as LLP o (b) set out the mailing address of main office o (c) if partnership is professional partnership, (i) indicate that fact and (ii) confirm authorization s97 o (d) if partnership is a LP or a registered GP, then indicate that o (e) contain statement that (i) person submitting has received approval of all partners or (ii) partnership agreement authorizes the action o (f) set out any other info required by the regs
(5) Allegations in the registration statement are evidence of information contained in allegations
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97 Professional Partnerships
If a partnership wishes to be an LLP and is an professional partnership, it may not register unless: o (a) members of that profession are expressly authorized under the Act governing that profession and o (b) any prerequisites to that authorization have been established under the Act have been met
98 Registration of LLP
(1) If registration statement under s. 96 is satisfactory, the registrar MUST o (a) file the registration statement o (b) publish a notice of the registration of the LLP and o (c) acknowledge receipt and filing of the registration statement and filing date by
 (i) sending an acknowledgement to applicant and
 (ii) sending acknowledgement to registered office of LLP
(2) On filing of registration, the partnership is registered as an LLP
100 Name of Partnership LLP
LLPs must have the words “Limited Liability Partnership”, “LLP” or French equivalent in name
104 Limited Liability for Partners
(1) Except as provided in this Part, in another Act or in partnership agreement, a partner in an LLP o (a) is not personally liable for a partnership obligation merely because that person is a partner o (b) is not personally liable for an obligation under k between the LLP and a 3p and o (c) is not personally liable to the LLP or another partner for an obligation to which (a) or (b) applies
(2) Partner is not relieved from personal liability o (a) for that partner’s own negligent or wrongful act or omission OR o (b) the negligent or wrongful act/omission of another partner or an employee of the partnership, if that partner: (i) knew of the act/omission and (ii) did not take the actions that a reasonable person would have taken to prevent it
(3) Subsection (1) does not protect a partner’s interest in the partnership property from claims against the partnership respecting a partnership obligation
NOTE: This protection can be lost if not properly registered as per sections above.
105 Partners Subject to Same Obligations as Corporate Directors
(1) Partners in LLPs are personally liable for a partnership obligation if and to the same extent they would be liable for the obligation if o (a) the obligation was an obligation of a corporation and o (b) they were directors of that corporation
106 Previous Obligations
Partnership obligations that arose before the formation of LLP or arose out of a K entered into before becoming an LLP are not limited in liability by this Part
Section 107 – Notice to Clients
Promptly after registered as LLP, partnership must take reasonable steps to notify all existing clients in writing of the registration and the changes resulting from registration, in the liability of the partners
Section 129 – Cancellation of Registration
If cancelled, protection from s. 104 no longer applies
Failing to file annual reports; termination of association; etc
Must notify LLP by letter that registration is cancelled and give one-month’s notice
(4) does not dissolve LLP, just removes liability protection and it becomes a GP
(7) Cancellation doesn’t effect liability that arose before the cancellation
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No precise structure
Definition in s.1 – BC Interpretation Act o “Incorporated association, company, society, municipality or other incorporated body, where and however incorporated, and includes a corporation sole other than Her Majesty or the Lieutenant
Governor
Historical Context:
Originally two types of corporations o Letters Pattent – almost out of existence o Memorandum of Incorporation – only exists in BC – results in different terminology from other provinces
BC: mostly online o Memorandum of Incorporation – constitution o Articles of Incorporation – form the structure of the business
CBCA: pure registration system – formally letters patent system o Articles of incorp – equiv to BC memorandum of incorp - constitution o By-laws – structure of the business
Is ‘born’ with certificate of incorporation – legal personality
Equity interests are divided into shares and holders are the shareholders (SH)
Three basic rights must be provided somewhere throughout the share structure:
1. Voting Rights – most importantly to elect directors
2. Dividend Rights – receive distributions out of profits when directors declare dividends
3. Liquidation Rights – right to receive what remains when assets of corp are sold and liabilities paid
Management Structure:
Shareholders o Equity claimants – invest for return o Rights – voting, dividend and liquidation o Liability limited to investment capital
Corporation o Separate personality, perpetual existence
Directors o Board of directors appointed by voting SH – majority required o Manage business affairs of the corp – obligation to act in best interest of corp’s business and affairs o Appoints officers to manage day-to-day decisions on corp policy
Officers o President (CEO), VP, Secretary, Treasurer, etc o Manage the corp – hire others to assist in management and carry out functions of the business
NOTE: Rights and obligations associated to these structural elements is the focus of corporate law
Key Features of Corp:
Limited liability – to SH in the amount they have invested in capital
Separate personality – treated as its own legal entity (person) – can enter into contracts, commit torts, etc
Perpetual existence – does not come to an end just because a SH has died or sold shares to someone else
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S. 92(11) – provincial power to make laws in relation to “the incorporation of companies with provincial objectives”
S. 91 – federal power to make laws “in relation to all matters not coming within the classes of subjects by this Act assigned exclusively to the provinces”
Bonanza Creek Gold Mining v. The King (1916 PC) – Provinces can confer powers that are valid elsewhere
fed granted mining leases to B in the Yukon – fed refused to grant additional licences needed – B sued govt
B was incorporated by ON statute; had licence from Yukon to carry out business there
Fed argued that B had no capacity to operate outside ON
Held: o ON could confer powers on corp to carry on business within the province and extra-provincially o Could not confer right to operate in another province, but Yukon had every right to licence B to operate there – therefore, valid contract with feds
Takeaway: o Company can be incorporated under a provincial statute and still carry on business not only in that province, but in other provinces, and anywhere in the world, so long as that other jurisdiction grants the company the right to do so
Citizens Insurance Co v. Parsons (1881 PC) – Meaning of Federal Power
Federal govt had a broader power to incorporate companies under its power to incorporate companies “in relation to all matters not coming within the classes of subjects by the act assigned exclusively to the legislatures of the province”
John Deer Plow Co v. Wharton and John Deer Plow Co v. Duck (1914 PC) – Fed corps rights to operate in prov
Wharton:
W was sole SH of John Deer Plow Co. Incorporated in BC; W sought to stop J2 from carrying on business in BC – J2 was federally incorporated with almost identical name
BC legislation allowed company outside BC to carry on business in BC if licenced – condition was that name of company could not be the same or confusingly similar to name of company already incorp in BC
Duck:
D purchased tractor from federally incorporated J2 and J2 alleged that D failed to pay for it
J2 sued D, and D resisted the claim on the basis that the BC legislation for licencing companies outside BC provided that a company incorporated outside BC, but not registered in BC pursuant to legislation, could not maintain action in BC
Held:
Federally incorporated companies had the power and the right to operate throughout the country
Provincial registrar cannot refuse them for reason of name alone o If allowed it would operate such that a provincial legislation could deprive a Dominion company of its status and power
Takeaway:
Federally incop corps have the right to carry business in provinces, and their regulations cannot be denied for name requirements
Fed Corps are not immune to provincial corp law – regulations still apply to fed corps if they are laws of general application (Canadian Indmenity below)
Canadian Indemnity Co v. AG BC (1977 SCC) – prov laws of general application apply to fed corps
BC replaced private auto insurance regime with public scheme – destroyed business that offered private insurance, some of which were fed
Held: o Legislation was valid and enforceable against fed corps, because it was not restricted to just fed corps, but applied to all companies o Province cannot legislate to remove fundamental aspect of fed incorporated bodies, but it can cast legislation of general application effecting all corps operating in the prov evenly
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Multiple Access v. McCutcheon (1982 SCC) – fed legislation can co-exist with prov on same subject matter
Provincial insider trading legislation that was identical to legislation in fed corp Act could still be applied to the federally incorporated corp
Issue: Could prov legislation be enacted that is in effect the same as fed legislation?
Held: Both sets of laws were valid o Fed attached to ownership of the shares in fed corp; ON securities act were valid under property and civil rights power – did not impede on fed powers o Simultaneous compliance was possible – so both exist concurrently o Fed legislation did not occupy the field if it doesn’t conflict with provincial leg
Both Prov and Fed can pass valid legislation for the incorporation of companies
Under Prov leg, can still carry on business extra-provincially, but needs licence - Bonanza
Fed corp can operate throughout the country o Prov leg requirement to register corporate name is valid, but cannot stop fed from registering for name violation alone – John Deere
Prov leg imposing penalties for failure to comply with requirements can be validly applied to fed corps
Fed corp’s “right” to be registered, does not mean that Province cannot require registration o But prov cant refuse registration from a fed corp though
Fed corps will need to obtain at least one extra-provincial registration to operate in a province
BC Section 1 – Definitions
“Foreign Entity” – a foreign corporation; limited liability company…
“Foreign Corporation” – a corporation that is: o not a company, has issued shares, is not required under the cooperative association act to be registered under that act, and was: incorporated, continued or amalgamated
“Extra-provincial Company” – foreign entity, registered under s. 377 as an extraprovincial company or under s. 379 as an amalgamated extraprovincial company
BC Section 375 – Foreign Entities Required to be Registered
(1) Must register as an extraprovincial company within 2 months after beginning business in BC
(2) Deemed carrying on business if o Name listed in phone book, name used in advertisement, has a BC agent or property, or otherwise carries on business in BC
(3) Does not carry on business in BC o If it’s a bank, constructing/operating railway; or mere interest as an LP in a LP operating in BC
(4) Deemed registered if principal business is operation of ships and doesn’t maintain a BC warehouse
(6) sections 384 and 385 apply to foreign entity referred to in (4) as if it were an extraprovincial company
BC Section 376 – Application for Registration
How to apply for registration – all done online now
Describe the directors, corp year, last annual meeting, etc
(1)(a) does not apply to fed corps – does not have to reserve its name
BC Section 377 - Registration
Once compliance with 376 is met – Registrar MUST if federal, and MAY if not federal o (a) file the registration statement and o (b) register the foreign entity as an extraprovincial company
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BC Section 378 – Effect of Registration
(1) Registration is effective evidence for the purposes of corporation
(2) Once registered, BC laws are applicable to the corp and its charter applies
(3) Registration does not expand powers or capacities of its charter
(4) No act of an entity that carried on business in BC is invalid merely because that act contravenes (3) or the corp was not registered as an extraprovincial company.
BC Section 398 – Cancelation of Registration of Extraprovincial Corps
Lieutenant Governor can cancel registration and can restore it as well
Cannot cancel fed corp’s registration
2(1) Definitions
Corporation – a body corporate incorporated or continued under this Act
Body Corporate – includes company or other body corporate wherever or however incorporated
Distributing Corp – subject to (6) and (7), publicly traded
Articles – original articles of incorp and amendments
Incorporator – person who signs articles
Director – Big D director appointed under s. 260 – Director of the registrar
director – person occupying the position of director by whatever name called
Officer – appointed as officer under s. 121
2 (2) Affiliated Bodies Corporate o (a) affiliated with another body corp if one of them is subsidiary of the other or both are subsidiaries of the same body corp or controlled by the same person; and o (b) if two bodies corp are affiliated with same body corp at the same time, they are deemed affiliated
(3) Control o body corp is controlled by person or by two or more bodies corp if
 (a) securities of the body corp are attached more than 50% of the votes and
 (b) votes attached to those securities are sufficient to elect a majority of directors
(4) Holding Body Corporate o Where a body corp is held by another body corp such that it is a subsidiary
(5) Subsidiary Body Corporate o Body corp is a subsidiary of another if:
 (a) it is controlled by
 (i) that body corp; (ii) that body corp and other bodies corp each of which is controlled by that other body corp or; two or more bodies corp each of which is controlled by that other body corp or
 (b) it is a subsidiary of a body corp that is a subsidiary of that other body corp
(6) Exemptions – on application by corporation o On application of a corp, Director may determine that the corp is not a distributing corp if the Director is satisfied that the determination would not prejudice the public
5 Incorporators – Who Can Incorporate?
(1) One or more individuals, not one of whom is less than 18, is of unsound mind or has the status of bankrupt, may incorporate by signing articles of incorporation and complying with section 7
(2) Bodies Corporate – one ore more bodies corporate may incorporate by signing articles per s. 7
6 Articles of Incorporation – form 1
(1) Articles shall follow the form that Director fixes and shall set out in respect of proposed corp o (a) name of the corp
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7
8
9
10 o (b) province where registered office is to be situated o (c) classes and any max number of shares that corp is authorized to issue and
 (i) if two or more classes of shares, the rights, privileges, restrictions and conditions attaching to each class of shares; and
 (ii) if a class of shares may be issued in series, the authority given to the directors to fix the number of shares in, and to determine the designation of, and the rights, privileges, restrictions and conditions attaching to, the shares of each series o (d) if the issue, transfer or ownership of shares is restricted, a statement to that effect and nature o (e) number of directors, subject to 107(a), the min and max number of directors of corp and o (f) any restrictions on the business the corp may carry out
(2) additional provisions can be entered
(3) special majorities – subject to (4), if the articles or a USHA require a greater number of votes of directors or shareholders than required by the Act, the provisions of the articles or of the USHA prevail
(4) articles may not require a greater number of votes of SH to remove a director than the number required by s. 109
Delivery of Articles of Incorporation
Send to Director as required by s. 19 and 106
Certificate of Incorporation
(1) Subject to (2), on receipt of articles, Director SHALL issue certificate of incorp in accordance w s. 262
(2) Exception – Director may refuse certificate if a notice that is required under 19(2) or 106(1) indicates that the corp would not be in compliance with this Act
Effect of Certificate
Corporation comes into existence on date shown in certificate
Name of Corporation
(1) “limited”, “incorporated”, “corporation” or abreviations or French must be in the name
(2) Director may exempt corps from (1)
(3) Alternate names; (4) Alternate names outside Canada
(5) Publication of Name – Name must be set out in legible fashion on all corp docs
(6) May carry business under other name if no suffix is associated (no ltd, or corp, etc)
11
12
15
Reserving Name
(1) Director may reserve a name for 90 days for an intended corporation
(2) If requested, Director will assign a number with “Canada” after it
Prohibited Names
Cannot use deceptively misdescriptive or names reserved for another corp
Capacity of a Corporation
(1) corp ahs capacity and rights, powers and privileges of a natural person, subject to Act
(2) May carry on business throughout Canada
(3) Corp has capacity to carry on its business affairs in any jurisdiction outside Canada to the extent that the laws of such jurisdiction permit
19(2) Notice of Registered Office
Notice of registered office shall be sent to Director together with any articles that designate or change the province where the registered office of the corp is located
Change of registered office – form 3
106(1) Notice of The Directors
At the time of sending articles of incorporation, shall send to Director a notice of directors
Change of directors – form 6
263 Annual Return
Every corp shall send to Director annual return in the form that Director fixes
Form 22 – Annual Return Form
266 Inspection and Copies
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(1) person who has paid required fees is entitled to examine docs required by this Act sent to the
Director
(2) Director shall furnish any person with copy, extract, certified copy or certified extract of the document required by this Act
Form 1 – Articles of Incorporation
Form 3 – Change of Registered Office Address
Form 6 – Changes Regarding Directors
Form 22 – Annual Return
102 Director’s Power to Manage
(1) Duty to manage or supervise management – subject to USHA, directors shall manage, or supervise management of the business and affairs of the corp o Note: affairs are not business – they are inter-corporate relationships; business is income earning
(2) Number of directors – corp shall have one ore more directors but a distributing corp shall have not fewer than 3 directors, at least 2 of whom are not officers or employees of the corp or affiliates
103 By Laws
(1) Unless articles, by-laws or USHA states otherwise, directors may make resolution to make, amend, or repeal any by-laws that regulate the business or affairs of the corp
(2) directors shall submit by-law or amendment to the SH at next meeting of SH – SH by ordinary resolution can confirm, reject or amend the by-law, amendment or repeal
(3) effective date from time of resolution fro directors until confirmed or rejected
(4) if rejected by SH, by-law ceases to be effective; directors cannot resolve new make, repeal, amendment that is of substantially the same nature without SH approval
(5) Shareholder is entitled to make proposal to make, amend, or repeal a by-law at SH annual meetings
NOTE: not reported to Director – not public docs like other constitutional docs – they do have to be at the registered office though
Often repetitive of CBCA provisions or articles
Procedural issues are generally contained in them
104 Organizational Meeting
(1) After certificate of incorporation, a meeting of directors of corp shall be held where directors may o (a) make by-laws o (b) adopt forms of security certificates and corporate records o (c) authorize the issue of securities o (d) appoint officers o (e) appoint an auditor to hold office until the first annual meeting of SH o (f) make banking arrangements and o (g) transact any other business
105 Qualifications of Directors
(1) Lists persons who are disqualified from being directors of a corp o (a) less than 18; (b) unsound mind; (c) person who is not an individual or (d) bankrupt
(2) Unless required by articles, directors do not have to hold shares issued by the corp
(3) Residency requirements – at least 25% of directors must be resident Canadians, if less than 4, at least one director must be resident Canadian
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o Section 2(1) – Resident Canadian – Candian citizen ordinarily resident in Canada or not ordinarily resident in Canada, but designated under Regulation 13 o Regulation 13:
 (a) full-time employees of Govt of Canada/Provinces, whos principle reason for living abroad is for employment
 (b) full-time employees who work abroad for a body corp which is 50% owned by resident Canadians, majority of directors are resident Canadian OR is a subsidiary of
(i) or (ii)
 (c) full-time students fewer than 10 years abroad consecutively
 (d) full-time members of intnl association/organization of which Canada is a member
 (e) snow-birds – persons who were ordinarily resident when turned 60 gone for less than 10 consecutive years
121 Appointment of Officers
Subject to articles, by-laws or USHA, o (a) directors may designate the offices of the corp, appoint officers persons of full capicty, specify their duties and delegate to them powers to manage the business and affairs of the corp, except anything under s. 115(3) o (b) director may be appointed to any office of the corporation; and o (c) two or more offices of the corp may be held by the same person
1. Filing articles or incorporation (see. S. 5 and 6 and Form 1)
2. Filing a notice of the registered office (ss. 7, 19, and Form 3)
3. Filing a notice of directors (ss. 7, 106 and Form 6)
4. Paying the prescribed fee (Reg s. 97 and Schedule 5); and
5. If corp is to have a name other than a numbered name, filing a NUANS Name Status Report
6. The Issuance of a Certificate of Incorporation o Upon assessment of the documents to determine that they meet the requirements of the Act o Director SHALL issue a certificate of incorporation (ss. 8 and 12(1)) o S. 9 – the corporation comes into existence on the date shown in the certificate of incorporation
Section 104 provides that after certificate of incorporation, a meeting of directors shall be held
Normally, first meeting of directors will pass a set of general by-laws that deal with: o 1. Procedures at director’s meetings; o 2. Notice for and procedures with respect to shareholders meetings; o 3. Procedures for the allotment and issuance of shares; o 4. Procedures for the declaration and payment of dividends; and o 5. Procedures for the appointment of officers.
No shares will be actually issued until this point
Records must be maintained pursuant to s. 20
Directors must act as a group, no individual authority o Generally at the first meeting, officers are appointed to carry out specific tasks
Common for directors to pass resolution as to which bank will be used to deal with corporate finances and signing authorities
Directors normally have the power to borrow on behalf of the corporation – this can be delegated
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Limited Liability
Separate Corporate Personality
Perpetual Existence
Common Advantages:
1.
Provides limited liability for SH as against joint and several liability found in partnerships
2.
Provides the perpetual succession of a body corporate in contrast with nature of partnerships
3.
Ease of transfer of shares against inconvenience of terminating partnerships to permit changes
4.
Individual partners may bind the firm, but SH alone cannot obligate a body corporate
5.
SH can contract with or sue a body corp
6.
Facilities for a body corp to secure additional capital (share issues)
7.
Tax advantages – CCPC, etc
Generally difficult to pierce the corporate veil (disregard the legal entity of a corp)
Corp is treated as a separate legal person (s. 15) ( Salomon ) o Can acquire debts, enter into Ks, sue or be sued, etc
Once incorporated, separate legal status, property, rights and liabilities continue to exist until company is dissolved, even if SH sell shares, die or leave the company
SH can be director, officer and/or employee of a corp ( Lee )
Corp owns the assets, not the SH ( Macaura )
Recall Section 15 – Corps have the same capacities as legal persons
Section 45 – Shareholder Immunity
(1) SH of a corp are not, as SH liable for any liability, act, or default of the corp except under subsections
38(4), 118(4) or (5), 146(5) or 226(4) or (5) (exceptions discussed below)
Note: BCBCA s. 87 – Liability of SH
(1) No SH is personally liable for debts, obligations or acts of the company except provided in Part 2.1
(2) Not liable for more than the lesser of: unpaid portion of the issue price of shares and the unpaid portion of the amount actually agree to be paid for the shares
EXCEPTIONS:
Section 38(4) – where SH receives a payment from corp on a reduction of capital, SH may be required by creditor of corp to repay that amount
Section 118(4) and (5)(a) – directors who vote/consent to dividends, redemptions such that corp cannot pay liabilities, they become personally liable to reimburse corp for the amounts paid to SH – These sections allow director found liable to obtain court order compelling SH recipient to repay the amount received
Section 146(5) – SH may be liable as director where acting in place of director under USHA
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Section 226(4) and (5) – where corp is dissolved, creditor has action against corp before or within 2 years of dissolution, SH are liable to the extent of property distributed – these amounts (not exceeding such property) can be recovered from the SH recipients
NOTE: These sections allow recovery from SH, but never in the amount more than their capital investment plus any additional amounts received from corp on distribution of corp’s property to SHs
LIMITATIONS:
Sections 35 and 36 – Corp is prohibited from repurchasing or redeeming shares if the action would make the corp unable to pay creditors
Section 42 – Corp is prohibited from paying dividend if after paying is unable to pay creditors
Section 44 – Corp is prohibited from making loan, or giving financial assistance, to SH, directors or related corps if it would be unable to pay creditors
NOTE: These sections are intended to require a corp to preserve its capital and assets for the benefit of its creditors rather than distributing it to its SH
Section 251 makes it a strict liability offence for any person to contravene the CBCA
Salomon v. Salomon & Company Ltd (1897 HL) – Corp has separate legal entity
S sold sole proprietorship to his own corp; sons became SH of the new corp along with daughter and wife
S became largest SH and creditor of the corp
Hard times – default – receivership – Money could be left for S, but nothing for the other creditors
Issue Whether S was personally liable to pay creditor’s debts
Held: - not personally liable o Formal compliance of corp formation regs were followed – 7 SH, in any amount, so legitimate o Company is a different person at law – not an agent/trustee relationship with SH o SH are not personally liable to cover the debts of the company no matter what their capital investment was o Without fraud or dishonesty, the losses remain where they remain – creditors knew they were contracting with the corp and not S
Policy: o Potential for fraud on creditors
 Sale to corp could be used to defraud creditors, but here not the case as S was also willing to lend money to the corp o Affect on existing businesses
 Holding this arrangement invalid would effect many other sole SH corps
Takeaway: o Cited for prop that company has separate legal entity o SH can also be creditors of the corp; Sole-SH corps are perfectly legitimate
Lee v. Lee’s Air Farming Ltd (1961 PC) – Sole SH can be director, officer and employee
L is the sole SH of corp; also director and only employee (pilot) – received salary
L died carrying out business for the corp – wife made claim for compensation under WC leg.
Issue: whether L could be an employee while also the governing director?
Held: - L was an employee o Nothing to prevent L from acting in more than one capacity – not like Thorne (partnership) o Corp was separate person from L, so L could be an employee – WCB is available to him
Takeaway: o Even a sole SH can be an employee, director and officer of company
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o Company is a separate legal entity that acts through SH to the extent they have powers to authorize certain acts of the company
Macaura v. Northern Assurance Co Ltd (1925) – Corporation Owns the Assets, not the SH
M transferred interest in timber to a company called ICS for 27k plus 42k in shares
Insurance on the timber – it is destroyed – M claims on the policy – insurance refuses (insurable interest)
Held: o M could not claim on insurance because he did not have insurable interest, only corp had an ins interest in the timber because the company owned the timber o SH’s interest is in the distribution of profits by way of dividend, and proceeds at winding up
Takeaway: o Corp is the person that has an interest in its assets, not SH o Shares are essentially incorporeal “bundles of rights”
Note: Insurance law – overruled by Kosmopolous SCC – SH don’t own assets, but they do have ins int. o Corp veil not lifted there
Kosmopolous v. Constitution Insurance (SCC 1987)
“The most that can be said is that the courts’ policy is to lift the veil if they think that justice demands it and if they are not constrained by contrary binding authority. The results in individual cases may be commendable, but it smacks of palm-tree justice rather than the application of legal rules.”
Potential Problems with Separate Legal Entity:
SH may cause deliberate indebtedness to defraud creditors when going under
Corp can make payouts to SH even where insolvent (return capital/repurchase shares/dividends) o There are rules to deal with these – discussed later
Corp may contract with SH in an unfavourable way to other SH
Deception of 3Ps who contract with person without knowing of corp
**Oppression remedy addresses most of these concerns
Piercing the corporate veil only occurs where there would be some huge injustice in not doing so o Where corp is being used as a tool for fraud / intentional set up to deceive
In a case where a company has been used as an instrument of fraud or to effect a purpose the shareholder could not legally achieve personally, and where the company was really the “mere agent” or alter ego of the shareholder, the courts have been willing to impose liability on the controlling shareholder or otherwise disregard the corporate veil. ( Preeco )
Affliated Enterprises: o Courts are more willing to disregard corp entity where the effect is to link to a parent company with its subsidiary, or to other subsidiaries through a parent corp o Test: Whether the subsidiary was really just an agent of the parent corp ( Smith, Stone and Knight )
Big Bend Hotel Ltd v. Security Mutual Casualy Company (1980 BC) – Equity will no longer allow a wrongdoer to use a company as a shield for improper conduct or fraud
Sole SH (Kumar) bought shares of Big Bend – Insurer cancelled policy on hotel, and SH could not obtain other insurance – eventually got coverage from BC Hotels Association o Omitted previous claims on application form
Hotel burnt down – Big Bend suing for enforcement of policy – Insurer claims misrep
Issue: whether SH had to disclose preivious loss when Big Bend was a separate legal entity
Held: o Equity will not allow wrongdoer to use company to shield improper conduct or fraud o Kumar’s intent was to deceive or mislead the insurer
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 Generally separate legal existence is recognized, but this is an exceptional case
 Wrongdoer cannot hide behind corp to induce policy that never would have been granted
Gilford Motors v. Horne (1933) – company formed as device for deception
Application for injunction to stop H and company from soliciting customers from Gilford
H was managing director of G and gave covenant that he would not solicit clients for 5 years – fired from G
H incorporated and began soliciting clients through his corp – attempted to hide ownership in other SH
Held: o Company was formed as a device, a strategem in order to mask the carrying on of a business, in breach of contract, by Horne
 It was a channel through which H carried on business for himself
Takeaway: o If you can show that a corp is a clear deception to carry out the owner’s fraud, then it would be likely that the corp veil would be pierced
BG Preeco v. Bon Street Holdings (1989 BCCA) – affirms Salomon principle – limits lifting veil
Preeco owned land near Granville island and wanted to sell before expo 86 – Bon agreed to buy for 4.2M
Bon repudiated offer and then after closing makes new offer of 3.3M – tied up prop with initial offer
Before initial offer, Bon changed name back to registered numbered company, created a new “Bon Street” corp which allowed numbered co to use its name – Old co eventually renames to Bon Street Holdings (def) o Then new Bon makes offer for 4.2M and has no assets but makes deposit o Preeco sues old company for the diminution in sale price
Held: o Preeco was not deceived as to who they were dealing with, only deceived on how much assets avail o Old Bon committed fraud – deceived Preeco into thinking New Bon was Old Bob w/ assets;
 New Bon would be liable for 1.7M, but it has no assets to pay it o No disregarding the corp entity here – corp complied with corp law requirements, therefore it is an entity with separate legal personality – Salomon principle o Must show that the corp committed some fraud or improper conduct such that the corp is used in such a way that the SH could not have done on their own (like Gilford)
Note: Court did award damages against directors for the difference in deposit that would have been asked
Takeaway: o Represents a new hard line position – no expansion on lifting the veil
Smith, Stone and Knight Ltd v. Birmingham Corporation (1939 KB) – affiliated enterprises
SSK Ltd owned all shares of subsidiary; City expropriated the premises of subsidiary’s business o SSK sought compensation from city – challenged because subsidiary is separate legal entity
Held: o Exception to Salomon principle arises where corp is simply an agent of the SH
 Look to treatment of profits; appointment of officers; location of brain of corp; govern trading venture; control
Note: o Would likely be decided differently today
Alberta Gas Ethylene Co v. MNR (1989 FedTD, aff’d FedCA) – Cannot disregard to benefit of SH
AGE sought financing in USA for pipeline – insurance required domestic portion of investment o AGE incorporated subsidiary in Delaware for the purposes of the financing / insurance
Minister assessed AGE for the interest deductions they were making for the loan
Issue: whether subsidiary was a separate legal entity such that AGE could not claim interest deductions
Held: o Court did not ignore separate legal entity
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Note: o Likely due to the fact that the SH is the one looking to pierce the veil o Kosmopolous – person benefiting from separate entity cannot take advantage of disregarding it
Gregorio v. Intrans-Corp (1984 ONCA) – Alter Ego principle is to prevent conduct akin to fraud
G bought truck from IC that was defective – IC ordered truck through Paccar Canada, which was subsidiary of USA Paccar Inc – Paccar Canada ordered truck from Paccar USA
G claimed against Paccar Canada Inc for negligent manufacture of the truck (made by USA Paccar though)
Issue: Whether Paccar Canada was the same person as Paccar USA Inc
Held: o Corporate entity should not be disregarded o Generally, subsidiary (even if wholly owned), will not be found to be the alter ego of its parent unless the subsidiary is under the complete control of the parent and is nothing more than a conduit used by the parent to avoid liability o Alter Ego principle is applied to prevent conduct akin to fraud that would otherwise unjustly deprive claimants of their rights
Steven G. Meredith v. Her Majesty the Queen (2002 FCA) – Further limitation on Alter Ego principle
“Lifting the corporate veil is contrary to long-established principles of corporate law. Absent an allegation that the corporation constitutes a "sham" or a vehicle for wrongdoing on the part of putative shareholders, or statutory authorization to do so, a court must respect the legal relationships created by a taxpayer (see
Salomon v. Salomon & Co., [1897] A.C. 22; Kosmopoulos v. Constitution Insurance Co. of Canada, [1987]
1 S.C.R. 2).”
The FCA also found that the TCC had erred in finding that Meredith was not an employee of Stem, misapplying Wiebe Door in ignoring the separate legal identity of the company. Closely held as well as widely held corporations are separate legal entities from their shareholders.
It was irrelevant that Meredith was the sole shareholder and director. The legal relationships between
Meredith, Stem and the U.S. companies were bona fide, and must be respected.
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Section 10(1) – Name of Corporation
Ltd, Corp, Inc, etc must be displayed in the corporate name
Corp shall set out its name in legible characters in all contracts, invoices, negotiable instruments and orders for goods or services issued by the corp
Section 10(6) – Other Name
Subject to (5) and 12(1), Corp may conduct business under other name than its corp name, so long as other name does not contain ltd, corp, inc, etc o 12(1) – prohibits the use of a name that is prohibited or deceptively misdescriptive or that is reserved for another corp or intended cop under s. 11
H&D Hobby Distributing Ltd v. Svatos (1998 ABQB) – improper registration of name + improper conduct = liable
Act Requires corp that is using trade name that differs from corp name to register as such
HD was run by sole SH, met Svatos who ran business called Edmonton Hobby – all indications was a sole proprietorship – only cheques had reference to numbered AB company o Corp used trade name but didn’t register it as per Act requirements
Svatos (EH) owes 150k to HD – cannot pay the amount, so writes letter to HD proposing EH pay off as much as possible and then the rest after Chirstmas – signed “Edmonton Hobby, Svatos” o Svatos couldn’t pay and gave inventory to creditor to protect himself
Issue: whether HD can go after Svatos personally for the amount owed
Held: o Personal liability found here o Based on three factors:
 1. Failure to comply with s.10(5) – AB equivalent
 2. Letter agreement for further inventory – read as a personal guarantee
 3. Fraudulent preference – uses assets to favour one creditor over another
Takeaway: o Unlikely that veil would be lifted for just name registration issues, something more is required
Section 27 – Name to be displayed
Section 158 – L iability if a company’s name is not displayed
Director who knowingly allows, is liable to indemnify, purchasers for goods/services, supplier of goods/services, persons holding security of the company
Section 384 – Liability if extraprovincial company’s name is not displayed
Pretty much the same
Choice between several jurisdictions – rules are generally common between provinces
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Corps tend to set up in locality for convenience and access to legal expertise
1.
Name protection (only for registration really, there are IP concerns with name infringement)
2.
No restriction on carrying on an action
3.
Lawyers and SH in other provinces are familiar with it
4.
Administratively simple standard rules – less cumbersome than provincial statutes
1.
Lawyers in BC tend to be more familiar with it
2.
Easier to deal with local provincial govt – less relevant these days
3.
Cheaper – CBCA requires at least one extraprovincial registration
4.
There are some tax-related reasons to chose BC
5.
Level of SH voting approval varies a.
Under CBCA – majority for ordinary resolution; 2/3 for special resolution b.
Under BCBCA – majority for ordinary resolution; 3/4 for special resolution (much higher) c.
Most can be contracted out of anyways
Continuance to Another Jurisdiction:
More convenient than full transfer (open new corp; sell shares of old to new corp; wind up old corp)
Simple and convenient way of reincorporating
May result in significant change in rights of SH, thus approval from SH and directors is required
Continuance out of the CBCA into Another Jurisdiction:
1.
Obtain a resolution from the SH permitting the continuance (s. 188(1), (5))
2.
Obtain approval from the Director (s. 188(1))
3.
Register in the other jurisdiction making amendments to the incorporation docs to make them conform to the requirements of the new jurisdiction a.
Must satisfy name requirements
Continuance into the CBCA from Another Jurisdiction:
1.
Apply to Director for certificate of continuance (s. 187(1)) a.
By sending articles of continuance to Director along with notice of the registered office of the corp and a notice of the directors of the corp (s. 187(3))
187 Continuance – Import
(1) Body corp, if authorized by laws of incorp jurisdiction, may apply to Director with docs in s.
9 and 106
(2) Amendment of articles of incorporation
(3) Shall send articles of continuance to Director in accordance with s. 262
(4) On receipt of articles of continuance, Director SHALL issue certificate of continuance
(5) Corp becomes CBCA corp on date shown on certificate, articles of continuance are deemed to be articles of incorporation, and certificate of continuance is deemed to be certificate of incorporation
(6) Copy of certificate to be sent to originating jurisdiction
(7) All rights existing before the continuance, are maintained o Cannot run from obligations
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188
(8) Issued shares remain the same as they were before the corp continued
Continuance – Export
(1) Subject to (10), corp may apply to another jurisdiction for continuance to that jurisdiction if o (a) Corp is authorized by SH in accordance with this section to make application and o (b) Satisfies Director that its proposed continuance will not adversely affect creditors/SH
(3) Notice of a meeting of SH shall be sent to each SH in accordance with s. 135 o Shall state that dissenting SH is entitled to be paid FMV of their shares as per s. 190
(4) Every SH has the right to vote
(5) Authorized when SH vote it so on a special resolution
(6) directors of a corp may, if authorized by SH at the time of approving an application for continuance, abandon the application without further approval of the SH
(7) Director SHALL file notice and issue a certificate of discontinuance upon receipt of satisfactory notice of continuance from new jurisdiction
(8) Notice referred to in (7) is deemed to be the articles
(9) This Act ceases to apply to the corp on the date of the certificate
(10) Corp shall not be continued to a new jurisdiction unless those new laws provide in effect that o (a) property of the corp continues to be property of the corp o (b) liabilities continue to the new corp o (c) existing causes of action, claim or liability is unaffected o (d) civil, criminal or administrative action or preceeding pending may be continued o (e) conviction may be enforced
190(1)(d) Right to Dissent
SH may dissent if corp is subject to an order under para 192(4)(d) that affects the SH if the corp resolves to…be continued under s. 188
(3) – entitled to fair market value for shares o cannot pay FMV if would fail financial solvency test (s.190(26))
Agency disallows promoters to act as agents for corporations that do not exist yet
Often promoters enter into K’s before formation of a corp –promoter did not intend personal liability
Recall Ratification of a Contract can Only Occur if: o 1. The person purported to act on behalf of the party seeking to ratify o 2. The person seeking ratification must have been in existence and ascertainable at the time the other person purported to act on his/her behalf, and o 3. Person who seeks to ratify must have capacity to act both at the time the other person acted and at the time of ratification
Impossible for a corp to ratify a pre-incorporation contract
(1) Person who enters into k in name of corp before it exists is personally bound by the k and entitled to its benefits
(2) Corp may, within reasonable time of being formed, adopt written K made before it came into existence, by any action or conduct signifying its intention to be bound thereby, adopt a written k made before it came into existence, and on such an option: o (a) corp is bound by the k and entitled to benefits as if it were in existence when made o (b) person who purported to act for the corp ceases, except (3), to be liable/entitle to benefit
(3) Subject to (4), regardless of adoption of the k, party to the k may apply to a court for an order respecting the nature and extent of the obligations and liability under the k
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(4) If EXPRESSLY provided in the written k, person who purported to act in the name of a corp before it exists is not bound by the k to the benefits thereof
BCBCA Section 20 – Pre-Incorporation Contracts
(2)(a) facilitator is deemd to warrant that the corp will come into existence within reasonable time and adopt as per (3) the contract within a reasonable time after forming o (b) liable to other parties to the purported contract for damages for breach of that warranty and o (c) measure of damages – same as if corp had existed at formation; person had no authority; and corp refused to ratify
 Agency – breach of warranty of authority
(3) new company, may within reasonable time adopt the pre-incorporation contract by act/conduct
(4) new company bound by obligations and entitled to benefits – facilitator ceases to be bound/benefit
(5) facilitator may apply to court for an order of adoption
(6) overall ability to seek court determination of obligations/parties/etc
(8) facilitator can escape personal liability through express agreement that no personal liability exists
Landmark Inns of Canada Ltd v. Horeak (1982 SKQB)
H (optometrist) signed a lease for space in L’s mall – signed lease as chair of corp that did not yet exist
Offer to lease indicated that it was being made with a corp – H backed out of the deal after L spent money
H created a corp that adopted the K and then claimed that L could not sue H personally
Held: o Corp could not adopt K which was repudiated since K was already terminated o Section 14(2) could not relieve H from liability o To relieve from liability under s. 14(4), contract must contain something more than just the corporate name that is not yet in existence
 Must contain express provision that the person who enters into K in the name of a company before it exists, is not personally liable for the K o L can recover losses from H personally
Kelner v. Baxter (1866) – company cannot ratify K that was entered into pre-existence
Early cases based on ratification principles
Newborne v. Sensolid (Great Britain) Ltd (1953 All ER CA) – Rule of Construction Approach
Test – whether the promoted was intended, in the circumstances to be a party to the contract or not
Black v. Smallwood & Cooper (1966 Aus) – followed Newborne
Wickberg v. Shatsky (1969 BCSC) – BC BCA Principles
W hired as manager and his K was written on Corp letterhead and signed by S
S said not to use the “ltd” in the company name – business fails – bankrupt
W sued S personally for employment wages
Held: o Removal of Ltd was notice to W that he was not dealing with a corporation o Person signing for a non-existent company is not automatically personally liable o Here, W is entitled to nominal damages for breach of warranty – failure to connect damages
 If representation were correct, it would have been against the corp which had no money
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Majority of issues in this realm have been statutorily normalized within the CBCA and the BCBCA
Applies still where the objects of a corporation are restricted to particular purposes o No object required anymore o S. 6(1) articles shall set out (f) any restrictions that the corp will carry on
 Generally not exercised
S. 16 has basically abrogated the ultra vires findings
Section 15 – Capacity of a Corporation
(1) Capacity and rights, powers and privileges of any person, subject to this Act
(2) May carry on business anywhere in Canada
(3) May carry on business abroad
Section 16 – Powers of a Corporation
(1) By-laws do not have to be passed to confer powers on a corporation
(2) Corp shall not carry on any business that is restricted by its articles, or in manner restricted by articles
(3) No act of a corporation, is invalid by reason only that the act or transfer is contrary to its articles or Act
NOTE: pretty much abrogates the doctrine of ultra vires; (3) results in a complete fix for actions outside of the authority of the company; it’s not a blanket permission to disregard the Act, its just not automatically null
BCBCA Sections
30 – Capacity and powers of a company – company has the capacity and rights, powers, privileges of an individual of full capacity
33(1) – Restricted businesses and powers – company must not carry on any business that is restricted by memorandum of articles or in a manner inconsistent with those restrictions in memorandum
33(2) – no act is invalid merely because the act contravenes subsection (1)
Communities Economic Development Fund v. Canadian Pickles Corp (1991 SCC)
CEDF shares all held by provincial govt – so still corp, but not under the normal incorporation act
Purpose of fund was to develop funding for zones of AB underfunded
Loan made to CPC, but director personally guarantees the loan – CPC goes bankrupt
CPC director claims the loan was ultra vires the corp’s objects
Held: o This was not a remote or isolated community, so the loan was ultra vires and therefore a nullity
Takeaway: o Provisions of s. 16 were not in the special act incorporating the CEDF – ulta vires applied
Doctrines of constructive notice (abolished by s. 17) and corollary, indoor management rule, relate not to capacity, but to the authority of the human agents of the corporate principal
Recall Agency Principles o Express authority – written/oral agreement includes authority to do incidental tasks to the main task o Usual authority – acts that the principal has habitually accepted and ratified in the past
 Customary authority – regularly recognized within community for that particular agent type o Ostensible authority – apparent authority or agency by estoppel
 Where the agent has no actual authority but 3P reasonably believed agent had authority, as principal allowed agent to hold himself out, on which 3P relied.
 Recall Freeman & Lockyer – K was allowed to hold himself out as director
Constructive Notice:
Held that person dealing with a corp was deemed to be aware of the contents of docs filed in a public office
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Persons dealing with a corp, through its human agents, were deemed to be aware of any restrictions on human agents’ authority o Result was that where corp’s agent exceeds authority, corp would not be bound
Indoor Management Rule
Arose at essentially the same time
Persons contracting with a company and dealing in good faith may assume that acts within its constitution and powers have been properly and duly performed and are not bound to inquire whether acts of internal management have been regular o Does not preclude an argument that a 3P had actual notice of the restriction on agent’s authority, but it confines the application of the doctrine of constructive notice to restrictions on the corporate agent’s authority which are set out in the public docs o Allows 3Ps to assume that any action the corp could take privately to override those restrictions
NOTE: basically overridden by the CBCA
Section 116 – Validity of Acts of Diretors and Officers
Acts of directors and officers are valid notwithstanding irregularities in their election or appointment, or defect in their qualification
Section 17 – No Constructive Notice
No person is affected by or is deemed to have notice or knowledge of the contents of a doc concerning a corp by reason only that the doc has been filed by the Director or is available for inspection at an office of the corp
Section 18(1) Authority of Directors, Officers and Agents
No corp may assert against a 3P that o (a) articles, bylaws and any USHAs have not been complied with o (b) persons named in the most recent notice to Director under 106 are not the directors of the corp o (c) place named in notice under 19 is not registered office o (d) person held out by corp as director, officer or agent has not been duly appointed or has no authority to exercise the powers that are customary in the business of the corp or usual for a director, officer or agent o (e) Doc issued by any director, officer or agent with actual authority, is not valid or not genuine o (f) sale, lease or exchange of property was not authorized
(2) EXCEPTION – does not apply in respect of a person who has, or ought to have, knowledge of a situation described in (1) by virtue of their relationship to the corp
BCBCA Sections
421 – No constructive notice
143 – Validity of acts of directors and officers
146 – Persons may rely on authority of companies and their directors, officers and agents o (2) does not apply to people with actual knowledge by virtue of relationship to corp
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Shares are generally described as “Bundles of Rights” ( Sparling v. Caisse Depot et Placement SCC)
They are incorporeal property
Share is not a property right in the assets of the corp, it does not represent a property ownership interest in the corp itself o No legal/beneficial ownership of assets – may still have an insurable interest though (Kosmopolous)
Bundle of rights can be created in a variety of ways – subject to few restrictions only
Classes of Shares:
Each bundle of rights can be grouped together in a “class” of shares
Section 6(1)(c)(i); 24(4) allow for different classes of shares with different rights/restrictions o Rights/restrictions must be set out in articles where more than one class of shares
 Articles must set out rights, restrictions, and obligations – s. 6 o Where only one class – all three rights apply to every share – s. 24(3)
 Voting, dividend and rights on dissolution
Section 2(1) – Definitions
“Security” – share of any class or series of shares or debt obligation of a corporation and includes a certificate evidencing such a share or debt obligation
Section 49(1) – Rights of Holder
Every security holder is entitled at their option to a security certificate
Section 50(1) – Securities Records
Corp shall maintain a securities register in which it records the securities issued by it in registered form, showing with respect to each class or series of securities: o (a) names, alphabetically arranged, and latest known address of each SH o (b) number of securities held by each SH and o (c) date and particulars of the issue and transfer of each security
Subject to articles, bylaws or USHA, directors decide when to issue shares, to whom they are issued and for what consideration (s. 25(1)) o This duty CANNOT BE DELEGATED! (s. 115(3)
Limits can be placed on issuance of shares within the articles – rarely used (s. 6(1)(c))
Directors who vote for share issuance under s. 25 are jointly and severally liable to the corp to make good any amount which the consideration received is less than fair equivalent of the money that corp would have received if consideration was money on the date of resolution (s. 118(1)) o This is for when property or services are accepted as consideration
25
115
Issuing Shares
(1) Subject to articles, bylaws and USHA, and s. 28, shares may be issued at the discretion of the directors
(3) Share shall not be issued until consideration for the share is fully paid in money or property or past services that are not less in value than the fair equivalent of the money the corp would have received
(4) In determining if property/services are fair equivalent, directors may take into account reasonable charges and expenses of organization and reorganization of payments for the property and past services reasonably expected to benefit the corp
Limits on Delegation Authority
(1) Directors of a corp may appoint from their number a managing director who is a resident
Canadian or a committee of directors and delegate to them any powers of the directors
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(3)(c) Notwithstanding (1) No managing director and no committee of directors has authority to issue securities except as authorized by the directors
121(a) Officers
Subject to articles, bylaws or USHAs, directors may designate the offices of the corp, appoint as officers persons of full capacity, specify their duties and delegate to them powers to manage the business and affairs of the corp, except powers referred to in s. 115(3)
Classes of shares, rights, privileges and conditions must be set out in articles (s. 6(1)(c)(i))
Rights are not limited to the three main types, there’s infinite rights that can be assigned (tax planning)
The three main rights must appear in the corp share structure somewhere (s. 24(4)(b))
Three Main Rights:
1.
Right to vote on company matters
2.
Right to receive dividends when declared by directors
3.
On dissolution, right to receive property of the corp remaining after creditors and any other persons with claims against the corp are paid off
Section 24 – Shares
(3) Rights attached to shares o Where a corp has only one class of shares, the rights of all SH are equal in all respects and include: o (a) right to vote at any meeting of the SH of the corp o (b) right to receive any dividend declared by the corp; and o (c) Right to receive the remaining property of the corp on dissolution
(4) Rights to classes of shares o Articles may provide for more than one class of shares, if they so provide, o (a) the rights, privileges, restrictions and conditions attaching to the shares of the class shall be set out in the articles, and o (b) rights set out in (3) shall be attached to at least one class of shares, but all such rights are not required to be attached to one class
Must vote to elect directors of corp; approve changes to articles or certin major transactions
Special resolutions require 2/3 majority to pass – non-voting shares sometimes have voting rights o Fundamental changes (below)
Presumption of one share = one vote (s. 140(1))
Presumption that all shares within a class have equal rights ( Jacobsen; Bowater )
Section 140(1) – Right to Vote
Unless articles otherwise provide, each share entitles the SH to one vote at a meeting of SH
Section 146(1) – Unanimous Shareholder Agreement
A lawful written agreement, among all SH of a corp, and any others who are not SH, that restricts the powers of directors to manage or supervise the management of the business and affairs of the corp, is valid
Jacobsen v. United Canso (1989 ABQB) – Shares within a class must have the same rights
J was member of SH-committee – unhappy with directors appointing themselves as officers o Trying to win control of the board and get rid of old management – 10k SH and 12M shares issued
J’s committee represents 6% of shares – in conflict with Buckley fam – they vote together as a block
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Articles state “no SH can have more than 1000 votes no matter how many shares they own” – problem
Issue: the articles create differing rights within a class of shares – is this possible?
Held: o Max-votes rule was invalid – must be a fixed vote per share to be valid o It is clear that where there is more than one class of shares, a corp can differentiate between voting rights – also there is presumption under s. 140(1) o Compliance order under s. 247 – only takes effect moving forward, does not invalidate past acts
Bowater v Crain (ONCA) – Confirms common rights between same class shares
Original SH got 10 votes per share and then when they are transferred, new holders become single-vote SH
B knew about the step-down provision when he purchased the shares, which gave prior holder control
Held: o Applied 24(3) – rights of the SH are equal where onl one class; (4)(a) for multiple class rules o Rights for any SH within the same class are equal o B ends up with more than he bargained for – got the 10 votes when step-down provision struck out
Takeaway: o Articles provisions cannot offend SH rights!
McClurg (1990 SCC) – Classes must have some right that creates a distinction between them and other classes
To create a valid separate class of shares, there must be a distinction in some right between that class and other classes, need not be overly significant distinction
2 classes of common shares – class A and B – A voting and B non-voting (wives) – priority to As
CRA challenged that all common shares should have the same rights
Held: o Sufficient distinction here to allow the sprinkling dividend o Two classes can have the same rights, there simply has to be some right over which there is a distinction while the others can be the same
Dividends can be paid in cash, property and in shares of the corp (s. 43)
Declaring dividends is within the power of the directors, subject to USHA (s. 102)
Dividends in excess of profits are considered returns of capital
Dividends cannot be paid if would leave the company insolvent (s. 42) o Directors can be personally liable if they declare such dividends (s. 118) o They can subsequently go after SH for return of those payments
42 Dividends
Corp shall not declare or pay a dividend if there are reasonable grounds for believing that o (a) corp is, or will be, unable to pay its liabilities as they become due; or o (b) the realizable value of the corp’s assets would thereby be less than the aggregate of its liabilities and STATED CAPITAL of all classes
115(3)(d) Limit on Delegation
Directors cannot delegate the duty of declaring dividends (cannot delegate to officers s. 121(a))
118(2) Director’s Liabilities
Directors who vote for or consent to a resolution authorizing any of the following, are jointly and severally liable to restore to the corp any amounts distributed or paid and not otherwise recovered: o (a) purchase, redemption or other acquisition of shares contrary to s. 34/35/36 o (b) commission contrary to s. 41 o (c) a payment of a dividend contrary to section 42 o (d) payment of an indemnity contrary to section 124 or o (e) payment of a SH contrary to section 190 or 241
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123(4) Defence of Reasonable Diligence
Director is not liable under 118 or 119, and complied with 122(2), if director exercised care, diligence and skill that a reasonably prudent person would have exercised in comparable circs, including reliance on good faith on o (a) financial statements of the corp presented by officer or written auditor’s report OR o (b) report of a person whose profession lends credibility to a statement made by the professional
Stated Capital
Stated capital account is maintained for each class of shares issued (s. 26(1))
Simply a bookkeeping entry – does not fluctuate with market price of the shares
When shares are issued/redeemed, stated capital account is to be adjusted accordingly
Because shares are only issued once, their stated capital stays the same o It’s only where more shares are issued or some redemption/reduction occurs that the stated capital of the shares is changed
Treated as a liability on the balance sheet – ensures that dividends are not paid out of capital amount
Example: Yco
y1: 1,000,000 shares issued at $1/share = stated capital of $1 million
y5: 1,000,000 shares issued at $2/share = new stated capital is $3 million o Stated capital per share is 3M/2M = $1.50 / share
Y6: Bob buys shares at $5/share from the original holder of the shares o Stated capital remains $3M or $1.50/share o Market value has no bearing on stated capital o The original capital collected for the issued shares is all that is counted
Preferred Shares:
Preferred shares carry no voting rights except for special circs (fundamental changes)
Cumulative Preferred Shares: o Entitled to preferential cumulative dividend – is paid before dividends are paid to common SHs o If can’t pay preferred set rate, then it cumulates to the next year
Non-Cumulative Preferred Shares: o Also entitled to set preferential dividend, but it does not cumulate if it can’t be paid in a given year
Usually treated like debt – with preferred dividend approximating interest that would have been received
On dissolution, preferred SH are entitled to return of capital together with unpaid dividends before common
SH are entitled to receive remaining assets o Preferred SH not entitled to share in proceeds beyond their capital + dividend
Participating preferred shares – rights to dividends with common share holders after preferred dividend
Example s. 42 Application: Xco
Xco has authorized capital of ulimited common shares and 20M preferred shares
Stated Capital:
Issued 5M common shares for $1 per share = $5M
Issued 1M preferred shares for $3 per share = $3M
Total stated capital is $8M
Preferred Shares:
Preferential cumulative dividend of $0.15/share and no further dividends
Xco may redeem preferred shares for $3/share
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Xco has liabilities of $2M, and assets of $11M, can it pay a dividend of $0.25 per common share?
Assets: o 11,000,000 less 150,000 in preferential dividends = 10,850,000 o 10,850,000 less 1,250,000 in common dividend = 9,600,000
Liabilities: o 2,000,000 in liabilities plus 8,000,000 in stated capital = 10,000,000
Therefore: o Liabilities exceed assets by 400,000 – violates s. 42 o Would result in directors’ liability – s. 118(2)
 Ask for return from SH – s. 118(5); also contribution from other directors (3)
Assets are first used to pay creditors and any cumulative dividends that have not been paid
Preferred shares often recover any amounts before common shares
Voluntary dissolution – s. 211 o Director led; SH approved; notice to Director; debts paid, surplus distributed to SH
Involuntary dissolution o Fails to hold SH meetings; fails to file docs o Section 213, but not studied here
Section 211 – Proposing Liquidation and Dissolution
(1) Directors may propose, or SH entitled to vote at annual SH meetings may, as per 137, make a proposal for the voluntary liquidation and dissolution of a corp
(2) Notice of any meeting of SH at which voluntary liquidation and dissolution is to be proposed shall set out the terms thereof
(3) Corp may liquidate and dissolve by special resolution of the SH, or where more than one class of shares exist, by special resolution of the holders of each class, whether or not they have voting rights
(4) Statement of intent to dissolve shall be sent to Director
(5) On receipt of statement of intent to dissolve, Director SHAL issue certificate of intent to dissolve
(6) On issue of certificate, the corp shall cease to carry on business except to the extent necessary for liquidation, but corporate existence continues until Director issues certificate of dissolution
(7) After issued cert of intent to dissolve, corp shall o (a) immediately cause notice to each known creditor of the corp o (b) without delay take reasonable steps to give notice in each province where corp was carrying on business o (c) collect property, to dispose of properties that are not to be distributed in kind to SH, to discharge all obligations and do all other acts required to liquidate business, and o (d) after notice in (a) and (b), and obligations discharged, distribute remaining property amongst SH according to respective rights
Westfair Foods v. Watt (ABCA) – Leading case on just and equitable winding up; oppression also; dividend rights and rights to share on surplus sometimes interact between shares
Westfair is successful grocery store – two classes of shares: A - $2 dividend, non-cumulative and share equally with the common shares on winding up the corp; B – common shares, voting shares, share in surplus and receive dividend at director’s discretions
1994 – enormous surplus – new dividend policy made – first 2/share to A shares, and then remainder to common shares o All profits paid each year – profits to common shares – negative for A shares who would have had that money at the dissolution phase, but it is not being paid to common shares o With inflation, A shares actually decreasing in value – no growth o It was a single common shareholder that held all the common shares – getting all the profits!
Held:
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o There was no expectation that A shares would increase in value over life of the holding o Westfair directors had the right to arrange the dividend policy as they saw fit o A SHs just expected to receive 2/share per year as they are currently receiving
Note: o This was also heard under oppression remedy – see that section for outcome
Corp can repurchase its own shares as ong as it does not violate financial solvency test (s. 34(2)) o Same as dividend paying rules
Corp cannot hold shares in itself (s. 30(1) – so if it does not repurchase shares, it must cancel them, or it can restore the shares to the status of authorized but unissued shares
Corp may also purchase its own shares as a result of an express term for the repurchase of shares in articles o S. 36(1) – (2) – same test as dividend
S. 118(2) – directors can be personally liable to restore the corp any amounts paid contrary to the financial solvency test in s. 34(2) or s. 36(2) o SH who receive amounts paid in contrary to those provisions may be required to return it (118(5))
Section 2(1) – Definitions
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“director” – person occupying the position of director by whatever name called and “directors” and “board of directors” includes a single director
“Officer” – individual appointed as an officer under s. 121, the chairperson of the board of directors, the president, a VP, the secretary, the treasurer, the comptroller, the general counsel, the general manager, a managing director, of a corp, or any other individual who performs functions for a corp similar to those normally performed by an individual occupying any of those offices
Section 102 – Duty to Manage or Supervise Management
(1) Subject to and USHA, directors shall manage, or supervise the management of the business and affairs of the corp
Number of Directors
(2) Corp shall have one or more directors but a distributing corp shall have at least 3 directors, two of whom are not officers or employees of the corp or its affiliates
NOTE: Much more onerous process for amending articles than bylaws:
Section 173 – Amending Articles
(1) Subject to 176 and 177, articles of a corp may be amended by special resolution to: listed a-o
176(1) Class Vote – SH classes are entitled to vote separately for particular articles amendments o (5) right to vote applies to all SH whether or not they have voting rights o (6) each class or series must come to special resolution for it to pass
177(1) amendment to be sent to Director o (2) reductions in share capital cannot detriment creditors (s. 38(3) and (4))
Section 103 – Amending By-Laws
(1) Unless articles, bylaws or USHA otherwise provides, directors may, by resolution make, amend, or repeal any bylaws that regulate the business or affairs of the corp
(2) directors shall submit bylaw or amendment or repeal to the SH at next SH meeting, and SH may, by ordinary resolution , confirm, reject or amend the bylaw, amendment or repeal
105
106
Qualifications of Directors
(1) Disqualified if: (a) less than 18; (b) unsound mind; (c) not an individual; or (d) bankrupt
(2) Unless articles otherwise provide, director is not required to hold shares in corp
(3) At least 25% of directors must be resident Canadians, if less than four directors, at least one director must be resident Canadian o Recall: Section 2(1) – Resident Canadian – Candian citizen ordinarily resident in Canada or not ordinarily resident in Canada, but designated under Regulation 13 o Regulation 13:
 (a) full-time employees of Govt of Canada/Provinces, whos principle reason for living abroad is for employment
 (b) full-time employees who work abroad for a body corp which is 50% owned by resident Canadians, majority of directors are resident Canadian OR is a subsidiary of (i) or (ii)
 (c) full-time students fewer than 10 years abroad consecutively
 (d) full-time members of intnl association/organization of which Canada is a member
 (e) snow-birds – persons who were ordinarily resident when turned 60 gone for less than 10 consecutive years
Appointment of Directors
(1) When articles are sent, incorporators to send notice of directors to Director
(2) Original term is up until the first SH meeting
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108
109
6
(3) Subject to 107(b), SH shall vote by ordinary resolution at first SH meeting and each succeeding annual meeting where election is required, will elect directors for terms not exceeding 3 years o 107(b) – each entitled SH may case number of votes equal to total votes attached to shares, and may distribute votes among candidates if they wish
(4) Staggered directors terms are fine
(5) If no stated term, then presumed to be terminated at next annual SH meeting
(6) If directors not elected at a meeting of SH, the incumbent directors continue in office until successors
(7) If fails to elect number of directors required by articles, directors elected can exercise the powers of a quorum of directors
(8) If articles allow, directors may appoint one or more additional directors (up to 1/3 of number of elected directors) to hold office for term expiring at next annual meeting o CAN NOT DELEGATE (115(3)(b) and 121(a) for Officers)
(9) Elected director is not a director unless: o (a) was present at the meeting where election/appointment happened and did not refuse OR o (b) was not present and (i) consented previously/10days after in writing or (ii) acted as director pursuant to the election/appointment
Ceasing to Hold Office
(1) director ceases to hold office when: (a) dies/resigns; (b) removed by 109; or (c) disqualified
105(1)
(2) resignation is effective at time written resignation is sent to corp or time specified in the letter, the later
Removal of Directors
(1) Subject to 107(g), SH may by ordinary resolution at a special meeting remove any director o 107(g) – votes for removal must be greater than number of required directors + votes against
(2) Where a class as exclusive election rights, they can only remove the directors by ordinary resolution
(3) Vacancy may be filled at meeting of SH or may be filled under 111
(4) If all removed/resigned, manger/supervisor of management is deemed to be director
(5) Subsection (4) doesn’t apply to: (a) officer under control of SH or other person; (b) lawyer, notary, accountant or other professional who’s role is to provide professional service; (c) TiB, receiver, receiver-manager or secured creditor
Articles – voting requirements
(2) – Articles may set out any provisions permitted by this Act or by law to be set out in the bylaws
(3) – Subject to (4), if articles or USHA require a greater number of votes of directors or SH than that required by this Act, provisions of the articles/USHA prevail
(4) Articles may not require greater number of SH votes to remove a director than the number in
109
110(1) Director’s Attendance at Meet ings
Directors are entitled to receive notice and to attend and be heard at any SH meeting
111 Filing Vacancy
(1) Despite 114(3), but subject to (3) and (4), quorum of directors can fill vacancy unless vacancy is from an increase in number of director positions or failure to elect number of directors as per articles o CAN NOT DELEGATE (s. 115(3)(b))
(2) If no quorum or failure to elect exists, directors shall without delay call a special meeting of SH to fill vacancy, if they fail, SH can call the meeting
(3) If class holds exclusive rights to elect directors and vacancy occurs, o (a) subject to (4), remaining directors elected by the holders of that class may fill the vacancy except increase position/failure to elect OR o (b) if no remaining directors, any SH of that class may call meeting of class for to fill the vacancy
(4) Articles may provide that vacancies only be filled by SH votes/class vote
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113(1) N otice of Change of Director’s Address
Corp shall, within 15 days after; (a) change is made among its directors; or (b) receives notice of change of address of director; send notice to the Director setting out the change
114
(5) Director appointed/elected to fill vacancy holds office for the unexpired term of their predecessor
Meeting of Directors
(1) – Unless articles or bylaws, directors may meet at any place upon notice required by bylaws
(2) Subject to articles/bylaws, a majority of the number of directors or minimum number of directors required by articles constitutes a quorum at any meeting of directors – may exercise all directors powers
(3) Directors shall not conduct business unless o 25% of the directors present are resident Canadian, or if less than 4, at least one is resident
Canadian
(4) Exception to (3) where a resident Canadian director approves in writing or by other communication and requirement would have been met if that resident Canadian were present
(5) Notice of meeting of directors shall specify any matter referred to in 115(3), but unless bylaws otherwise provide, need not specify purpose of or the business to be transacted at meeting
(6) Director may waive notice in any manner; attendance constitutes waiver, except where attending to expressly object to transaction of business on grounds of improper meeting procedures
(8) Where corp has only one director , that director may constitute a meeting
(9) Subject to bylaws, director may (if directors consent) participate in a meeting of directors or of a committee by tele/comp/other communication – deemed present at the meeting
117
123
Directors Resolutions
(1) Written resolution signed by all directors entitled to vote is as valid as had been passed at meeting
(2) Copy of every resolution shall be kept with the director’s minutes
(3) Unless ballots used, minute entries that chairperson declared resolution carried/defeated, is proof of the fact without proof of number of votes recorded in favour or against (absent evidence to contrary)
Dissenting
(1) Director is deemed to consent unless (a) requests dissent entered into minutes; (b) sends written dissent to secretary of meeting before adjournment; (c) sends dissent by registered mail or delivers it to registered office immediately after the meeting is adjourned
(2) Director who votes for or consents to resolution is not entitled to dissent under (1)
(3) Absent director at a meeting where resolution was passed is deemed to have consented unless within 7 days after becoming aware of resolution, director o (a) causes dissent to be placed with minutes of meeting; or o (b) sends dissent by registered mail or delivers it to registered office of corp
Broad management power suggests that it operates as a residual power to the other specified powers
102 Duty to Manage or Supervise Management
(1) Subject to any USHA, directors shall manage, or supervise the management of the business and affairs
(2) One ore more directors; if distributing, at least 3 directors, 2 of which are not officers/employees
103 By-Laws
(1) Unless stated otherwise by articles, bylaws or USHA, directors may make resolution to amend, repeal or make any bylaws that regulate the business and affairs of the corp o CAN NOT DELEGATE (s. 115(3)(j) and 121(a) to Officers)
(2) Directors shall submit new/change/repealed bylaw at next SH meeting – SH may confirm, reject or
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amend the bylaw by ordinary resolution
(3) Effective as of the date of the resolution of directors until it is confirmed/rejected by SH, or ceases to be effective under (4); where confirmed, continues effect from that date onward
(4 ) If rejected by SH , of if directors don’t present it, the bylaw ceases to be effective and no subsequent make, amend or repeal can be passed by resolution of the directors having substantially the same purpose or effect until approved by SH
(5) SH that is entitled to vote at annual meeting of SH may, in accordance with 137, propose to make, amend or repeal a bylaw
104 Organizing Meeting
(1) After incorporated, meeting of directors shall be held to discuss: o (a) make bylaws; (b) adopt security certificates and corp records; (c) authorize issue of securities; (d) appoint officers; (e) appoint auditor to hold office until the first annual meeting of SH; (f) make banking arrangements; and (g) transact any other business
(3) Incorporator or director may call the meeting of directors by giving not less than 5 days notice by mail to each director, stating time and place of meeting
115 Delegation of Directors Authority
(1) Directors may appoint a managing director who is a resident Canadian or a committee of directors and delegate any powers of the directors
(3) No managing director and no committee of directors has authority to : o (a) Submit questions to SH that require their approval o (b) fill a vacancy among the directors/auditor, or appoint additional directors o (c) issue securities except as authorized by directors o (c.1) issue shares of a series under 27 except as authorized by directors o (d) declare dividends o (e) purchase, redeem or otherwise acquire shares issued by the corp o (g) approve management proxy circular referred to in Part XIII o (i) approve any financial statements referred to in s. 155; or o (j) adopt, amend or repeal bylaws.
121 Designating Officers
Subject to articles, bylaws or USHA, o (a) directors may designate offices of the corp, appoint as officers persons of full capacity, specify their duties and delegate to them powers to manage the business and affairs of corp,
EXCEPT powers to do anything referred to in s.115(3) o (b) director may be appointed to any office of the corp; and o (c) two or more offices of the corp may be held by the same person
125 Remuneration
Subject to articles, bylaws or any USHA, directors may fix the remuneration of any directors, officers or employees of the corp
133 Calling Annual and Special SH Meetings
(1) Directors shall call an annual meeting of SH (a) not later than 18 months after corp is formed; and
(b) subsequently, not later than 15 months after holding last preceding SH meeting, but no later than 6 months after end of corp’s preceding financial year
(2) Directors may call special SH meetings at any time
(3) Director may apply to court for an order extending time of annual meeting
189 Borrowing Powers
(1) Unless articles, bylaws or USHA states otherwise, directors may, without authorization from SH: o (a) borrow money on credit of the corp; o (b) issue, reissue, sell, pledge or hypothecate debt obligations of the corp o (c) give a guarantee on behalf of the corp to secure performance of an obligation of any person ; and o (d) mortgage, hypothecate, pledge or otherwise create a security interest in any property of the corp, owned or subsequently acquired, to secure obligation of the corp
(2) Not withstanding 115(3) and 121(a), unless articles, bylaws or USHA otherwise states, directors may delegate powers in (1) to managing director, committee of directors or officers, by ordinary
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resolution
Section 20 – Corporate Records
(1) Corp shall prepare and maintain at registered office, records containing (a) articles, bylaws and all amendments and any USHAs; (b) minutes of meetings and resolutions of SH; (c) copies of notices as required by 106 and 113; and (d) a securities register that complies with s. 50
(2) Also accounting records and minutes/resolutions of directors meetings must be kept
(4) Records from (2) are to be kept at registered office of the corp, or other place directors deem fit, and
SHALL at all reasonable times be open to inspection by directors
Problems generally arise where directors put their own interests ahead of the interests of the corp/SH/creditors/etc
Expected to act in the best interests of the corp – must look to the long term interests o BCE : Directors may consider interests of SH, employees, suppliers, creditors, consumers, governments and the environment in determing the best interests of the corp and fulfilling their fiduciary duty
Directors are considered the operating mind of the corp
Three classic breaches: o 1. Director/Officer transacting with the corp, is transacting on their own behalf o 2. Appropriation of business opportunity o 3. Competing with corporation (tends to overlap with 2)
Section 122(1) – Duty of Care of Directors and Officers
Every director and officer in exercising their powers and discharging duties shall o (a) act honestly and in good faith with a view to the best interests of the corporation; and
 Duty of loyalty (fiduciary) o (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circs
 Duty of care
(2) Every D/O must comply with this Act, regulations, articles, bylaws and any USHAs
(3) Subject to 146(5), no contractual provision, articles, bylaws or a resolution relieves a D/O from the duty to act in accordance with this Act or regs or relieves them from liability of a breach thereof
Note : BCBCA section 142 – essentially the same
1. Transacting with the Corporation
Common Law rule: strict rule against director contracting with the corporation
Section 120 – Disclosure of Interests – No ability to contract out of this
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(1) D/O shall disclose to the corp in writing or in minutes, the nature and extent of any interest they have in a material contract or material transaction, whether made or proposed, if the D/O o (a) is a party to the contract or transaction o (b) is a director or officer, of an individual acting in similar capacity of a party to k / transaction o (c) has a material interest in a party to the contract or transaction
(2) Time of Disclosure for Director – shall be made: o (a) at the meeting at which proposed k or transaction is first considered o (b) at the first meeting after becoming interested; (c) if becomes interested after contract or transaction is made, at the first meeting after that; (d) if individual interested in k/transaction later becomes a director, at first meeting after that
(3) Time of Disclosure for Officer who is not a director – shall be made: o (a) immediately after becoming aware that c/transaction is to be considered at a meeting o (b) if becomes interested after k/transaction made, immediately after that o (c) if interested individual later becomes officer, immediately after that
(5) Voting – director required to make a disclosure under (1) shall not vote on any resolution to approve the k or transaction unless the k or transaction o (a) relates to his/her remuneration as director, officer, employee or agent of corp or affiliate o (b) is for indemnity or insurance under s. 124; or o (c) is with an affiliate
(6) Provides for general disclosure of an interest in another company
(6.1) SH of the corp may examine the portions of any minutes that contain disclosures under this section o This would allow SH to determine if they had a cause of action against a conflict
(7) Avoidance standard – K/transaction is not invalid, and director is not liable for profits, if o (a) disclosure made in accordance with (1) – (6) o (b) directors approved the k/transaction; and o (c) k/transaction was reasonable and fair to the corp when it was approved
(7.1) Even if conditions in (7) are not met, D/O, acting honestly and in good faith, is not accountable for profits and k/transaction is not invalid if o (a) k/transaction is approved or confirmed by special resolution at a SH meeting o (b) disclosure of interest was made to SH in a manner sufficient to indicate its nature before the k or transaction was approved of confirmed; and o (c) k/transaction was reasonable and fair to the corp when approved/confirmed
(8) Court remedy – if D/O fails to comply with this section, a court may, on application by the corp or any
SH, set aside the k/transaction on any terms it sees fit, or require the D/O to account to corp for any profit, or both
Aberdeen Railway Co v. Blaikie Bros (1846) – K’s entered into in conflict are voidable
BB was a partnership that manufactured chairs – contracted with A to sell chairs to BB – One of the BBros was a director of A – so he’s transacting with a corp of which he’s a director
A backed out of the deal and BB tried to enforce it
Held: o BB could not enforce the contract – breach of director’s duty to A o Duty of agents(directors) are to act in the best interests of the corp
 Conflict of interest to contract with the corp on behalf of self o Each director gives full respect to knowledge and skill of another director
Takeaway: o K’s entered into in conflict are voidable – even if the K is fair on its face
Transvaal Lands Co v. New Belgium (Transvaal) Land and Development Co
3 directors of T; Young, Harvey and Samuel – who is also a director of NB
Sam suggested buying a company from NB – abstained from voting, but did not declare interest
H voted on the resolution, but he held an interest of NB as a trustee under his father’s will
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Held: o K is voidable, and T could recover their capital from the transaction o Harvey was in conflict with his fiduciary duty to T – articles required disclosure and no vote
Note: o Had Harvey/Sam complied with articles, there likely would have been a valid contract here o S. 122(3) would have limited ability to contract out of duties, but that wasn’t around then
2. Appropriation of Corporate Opportunities
Where D/O independently invests or takes an opportunity that the corp could have taken
Where an opportunity no longer belongs the corp, it may be fair game for the D/O ( Peso )
Leading case – Canadian Aero Services
Cook v. Deeks (JCPC 1916) – Must account for profits where stolen corporate opportunity
K with railway Toronto Construction Co. to build sections of track; Toronto owned by Cook, Hines and two
Deeks (25% each)
Deeks had relationship with source of contracts and decided to leave the corp at next opportunity
Cook brought action on behalf of Toronto Co against Deeks and Hines o Deeks/Hines had authority of the corp and took next opportunity of themselves, cut out Cook
Held: o Cook/Hines breached fiduciary obligations to the corp o Deliberate use of position as directors to exclude the corp, when primary duty was to the corp o After contract is complete, Cook/Hines must remit profits to Toronto Corp – then they can wind up
 They could also ratify the K into Toronto Corp without requisite authority
Regal v. Gulliver (HL) – Strict duty – question is whether D/O profited from transaction – account for profits
R owned cinema, directors wanted to sell cinema as par of a bigger business to get a better price – to do this they had to acquire two more cinemas to build a package deal
R incorporated a wholly owned subsidiary – R capitalized subsidiary with all of R’s capital o Subsidiary entered into K’s for cinema leases, but they either had to personally guarantee the Ks or inject more capital into the deals, so they put in their own money o Subsidiary was then 2K owned by R and 3K owned by directors of R who also owe duty to R
Deal went through – sold the package, HUGE GAINS – director’s contributions tripled in value o Was a good faith deal, but R shareholders didn’t get as good a deal as directors did
New owner brought action against directors
Held: o Share acquired by reason only that directors were directors of R o Strict fiduciary duty – must account for profits – liability arises from profit being made, not intentions of the directors
 No loss to R, but this is not the test, question is whether the directors profited?
Note: o The effect of this ruling was for the purchasers to actually get a refund on part of their purchase
Peso v. Cropper (BCCA 1966, aff’d SCC) – Other side of spectrum – allows directors to contract where no intent to defraud, and opportunity no longer belongs to the corp
P (BC corp) held number of silver claims in Yukon; C an original SH and became managing director
C was presented an offer that he brought to P – P’s board of directors turned it down for financials
6 weeks later, C (with others), formed new corp and acquired the offer – also became distributing corp
2 years later, P is bought out, and new owners go after C’s corp for the property
Held (unanimously) o Recognized Regal principles, but would not go so far as to apply them so strictly o C acted in good faith and at no time intended to defraud P
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o Offer was no longer P’s after they carefully considered it and rejected it
 Regal – objective to attain cinemas was maintained throughout dealings, here the objective was expressly rejected o C’s knowledge of the offer was related his role with P, but the actions taken were separate from the directorship duties under P
Canadian Aero Service Ltd. v. O’Malley (1974 SCC) – Principles of Regal confirmed
CAS topical graphing – providing foreign aid to Guiana – O’Malley and other were not properly elected directors, but they were senior officers in any case
O and other resigned while CAS was still pursuing the bid – they reincorporated and competed
Their new corp won the bid – CAS sued O and other for the profit from the contract
Held: o O and other owe and accounting of profits to CAS – breached their fiduciary duties o Title of O/D is irrelevant – if they had control in management decisions, fiduciary duty applies o They were in charge of preparing CAS’s bid, and then directly competed with it
 Resignation is insufficient to negate this duty – motivation for the resignation was to take the opportunity away from the corp o Principles taken from Regal – equitable principles that apply to corps
 Confirms that they govern the area of corp law
 Not exhaustive o Policy rationale
 Recognition of the degree of control D/O have over day-to-day operations of businesses
 Corps play an important and valuable roll in economy and society
 There must be some accountability o Deails of the contract awarded may have changed, but that would have been the deal for CAS o Peso – bona fide rejection of offer, here that is not the case
Note: o CAS doesn’t have to prove that it would have gotten the contract, rather that the fiduciaries have to answer to the breach according to their gain resulting from the breach
3. Director’s Duty of Care, Diligence and Skill and the Business Judgement Rule
Recall Section 122(1)(b) – D/O must exercise the care, diligence and skill of a reasonably prudent person in similar circumstances
Section 123(4) – Defence of Reasonable Diligence
Director is not liable under s 118 or 119 and had complied with duties under 122(2), if director exercised care, diligence and skill that a reasonably prudeent person would have exercised in comparable circs, including reliance in good faith on: o (a) financial statements represented by director or officer o (b) professional report by professional person
Section 123(5) – Defence of Good Faith Reliance on Financial Statements or Professional Advice
A director has complied with duties under s. 122(1) if director relied in good faith on o (a) financial statements of the corp represented by director of officer o (b) professional report from professional person
NOTE: defences do not cover interests of the Officers, only directors acting in good faith…
“REPAP” UPM-Kymmene Corp v. UPM-Kymene Miramichi Inc (2002 ONSC aff’d ONCA)
Repap was public company – too little revenue, shares trading at very low levels
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Berg became director and Chairman of the board of Repap - Berg’s counsel prepared employment k for generous salary and benefits to Berg o 4 new directors and 2 long-serving directors felt uneasy about the K and sought assistance from compensation consultant – compensation committee was to consider the K and report to board
1 of the long-standing directors resigned and the Chair of the committee resigned leaving memo
Berg received notices of resignation and memo’s of explanation from resingee – didn’t share with directors
Berg presented a “finalized draft” – committee recommended its adoption w/ no comp consultant report o Last long-standing director abstained from vote and resigned the next day
SH blow-back– Berg was not re-elected – so he sued for 27M on the agreement terms
Held: o Berg owed CL and stat fiduciary duties to Repap – act honestly and in good faith with a view to the best interest of the corp and to exercise the care diligence and skill that a reasonably prudent person would exercise in comparable circs
 Berg should have disclosed facts that were material to their judgement
 Where conflict – independent advisors and committees can be used as safeguards
 Berg breached in overseeing his contract without protecting Repap – Repap not involved in negotiating the terms of the contract
 Not fraud – but totally opposite that required of him as a fiduciary – disclosure, honesty, loyalty, candour and the duty to favour Repap’s interest over his own. o Other directors who approved the Agreement failed to act carefully, diligently and skilfully in the best interests of the corp.
 Did not inform themselves of the corp, the opinion of management or previous members
 Did not consider compensation consultant’s report in any meaningful way
 As new board, higher duty to educate themselves before making decisions
 Even the director who abstained and resigned did not satisfy duty – should have dissented o Business Judgement Rule:
 Protects decisions of directors where they are made reasonably
 Decision cannot be protected when it was made without understanding terms and meaning of that Agreement and situation of the company o Agreement was procedurally unfair in that there had been no arm’s length negotiations, inadequate information was given to the board, and it was approved with undue haste at the insistence of Berg o Substantially unfair in that it created an enormous liability for the company without bringing benefit o Remedy - Contract was set aside as per s. 120 and as per oppression remedy s 241(3)(h)
People’s Department Stores v. Wise (2004 SCC) – Duty is owed to more than just SH – longer term view
W is CBCA corp – 75% shares owned by W’s fam and rest are publically traded
W acquires all the shares of People’s corp – borrowed heavily to acquire – almost totally leveraged
Owes money to Mark’s and Spencer – plan was to amalgamate P and W, but M doesn’t want that to occur until W pays M for the loan – W and P are combined for purchasing power, but not as amalgamation
W’s fam made the decision without consulting directors of W – plan was to have W become heavily indebted to P – then Walmart came and crushed both companies
TiB for P is suing W fam personally – breach of fiduciary duties under s. 122(1)(a) and (b)
Held: o Wbros acted in good faith and honestly – decisions of inventory debts were to solve debt woes o Who is owed a duty under 122(1)?
 Does not provide that the duty is specifically owed to the corp – broader than that
 Directors to take a longer term view of what’s in the corp’s best interest – not just SH
 Look to creditors, community, environment etc
 Duty is to the corp – no one group should be favoured over the others o Standard:
 D/O are not in breach of CBCA duty if they act prudently and on a reasonably informed basis in comparable circs. Decisions must be reasonable business decisions in light of all cirs about which the D/O knew or ought o have known of
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o Causation:
 P must establish that D/O acted (i) in breach of duty of care; and (ii) in way that caused loss o Business Judgement Rule:
 Perfection is not demanded – courts are ill-suited and should be reluctant to second-guess application of business expertise, but they are capable of determining whether an appropriate degree of prudence and diligence was brought to bear in reaching what is claimed to be a reasonable business decision at the time it was made o Oppression claim would have been more appropriate
Notes: o Defence of 123(4) would be avail if they were acting as directors, but they decided w/out board
Takeaway: o Elevated standard for directors – duty owed to others as well as SH
4. Director’s Duties and The Oppression Remedy
NOTE: Covered more thoroughly in SH Remedies below
Introduction to the Oppression Remedy:
Removes the technicalities of proving that a person is a proper litigant before hearing merits of the case o Recall Cook – derivative action was brought because the majority of SH would not have allowed the suing of their own corp o The prima facie case requirement is not present in oppression remedies
Now common for one or more SH to bring oppression actions o Allege breach of fiduciary duy (122(1)(a)), breach of duty of care (122(1)(b); and oppression (241) o Repap goes through all of these duties of directors
Section 238 – Definition of Complainant
(d) any other person, in discretion of the court, is a proper person to make an application o Used for the oppression remedy
Section 241 – Application to Court Re Oppression
Broad powers of the court to rectify oppressive situations
See SH Remedies below for more information
SH Ratification of Breach of Fiduciary Duty
Recall s. 120(7.1) – Failure to disclose conflict of interest – SH can ratify the k/transaction with disclosure
Recall s. 122(3) - no k provision, articles, bylaws or resolution relieves D/O from a duty to act in accordance with this Act or regs
Section 242(2) – court can take a purported ratification into account in making order for oppression action, but does not bar any remedy, just to be used as an indicator of appropriate remedy in the circs.
Recall 42 – Dividends – corp shall not declare or pay dividend if there are reasonable grounds for believing that corp would be unable to pay liabilities or realizable value of assets would be less than aggregate of liabilities and stated capital
Recall 123(4) – Defence of Reasonable Diligence
Recall 122(2) – Duty of D/O to comply with Act
118 Directors’ Liability
(1) Directors who vote/consent resolution authorizing issue of share under s25 for consideration other than money are jointly and severally liable to make good any amount the consideration falls
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119 short of equivalent money owed for the shares
(2) Directors who vote/consent to authorizing any of the following are jointl and severally liable to restor amounts distributed, not otherwise recoverable o (a) purchase, redemption or other acquisition of shares contrary to 34/35/36 o (b) commission contrary to 41 o (c) payment of a dividend contrary to 42 o (d) payment of an indemnity contrary to 124 or o (e) payment of a SH contrary to 190 or 241
(3) Contribution can be sought from other directors that voted for/consented
(4) Recovery from SH who received the payments – director may apply for court order
(5) Court order may demand return of money, shares be returned, or any other remedy seen fit
(6) No liability under (1) where director can prove they did not know and could not reasonably have known that the share was issued for less than could have been received from the consideration given
(7) Limitation – 2 years from date of the resolution authorizing the action
Liability of Directors for Wages – SEE CASES BELOW
(1) Directors liable to employees for all debts not exceeding six months wages payable to each such employee for services performed for the corp
(2) Conditions precedent to liability under (1) – 6 month limit on claims window – see specifics
(3) Limitation – must be a director or within 2 years of being a director
(4) Amount recoverable is amount remaining unsatisfied after execution
(5) Subrogation – director is entitled to preference employee would have had as a creditor on bankruptcy
(6) Contribution can be sought from other directors
190(26) Limitation on Payment of Dissenting SH
Corp shall not make payment to dissenting SH under this section if there are reasonable grounds to believe o (a) corp is or would be unable to pay liabilities after payment; or o (b) realizable value of the corp’s assets would thereby be less than the aggregate of its liabilities
Note, no reference to stated capital in the second arm of the test
241 Oppression Application
See SH Remedies below
Barrette v. Crabtree Estate (1993 SCC) – s. 119 only includes actual wages for 6 months
Textile plant closes down – employees terminated without notice – sued for wrongful dismissal
Corp couldn’t pay, so action against directors for amount awarded for the lack of notice o Wages were paid, but this was for recovery of the award for wrongful dismissal
Held (unanimous) o Directors are not liable here under s. 119 because the award is not for wages o 119 is to protect employees in event of bankruptcy – ensures funds are used to pay employees
 Recognizes vulnerability of employees – only source of income – no decision making
 Departs from the distinct entity theory of corp law o Damages here were a result of failure to provide notice – debt of the corp
 119 specifically states it is for wages not exceeding 6 months – not captured o Employees left to claim in bankruptcy – likely will recover less than full award
Proulx v. Shehelian Goldfields (2001 ONCA) – Any debts for services of the employee to the corp
SG failed and ceased operations – sued for unpaid wages, vacation pay, expenses incurred, etc
Held: o No need to consider if amounts were considered wages
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o Sufficient that they were a debt for services that the employee performed o Claim for unreimbursed expenses is for services performed for the corp – its not wages, but is a debt in relation to the services none the less
R. v. Bata Industries Ltd – crim liability depends on responsibilities and actions of each party
D/Os charged with offences related to criminal offence – environmental standards offence
Stored chemical waste on site, once it was drummed, it just sat there – leaked into ground
Westin – director and then VP – both director/officer – main job was to stop economic loss o Extremely successful – cost cutting and reduction in middle management o Delegated environmental issues to DeBrown – no real assistance there though o Circular issued to Bata employees prepared by CEO – emphasis on environment
Held: o Company is liable – corp failed to take reasonable care to avoid committing offence
 Standard – level of due diligence that corp should have to put in place to establish a proper system to prevent commission of offence, and must ensure it operates effectively o Directors’ liability – dependent on roles and responsibilities
 Once actus reus proven, onus on D to show they acted with due diligence
 Directors can delegate, but they must also assess for effectiveness
 Director must act personally where receive actual notice of wrong o Westin – liable – delegation alone was insufficient
 Had full authority to determine the management of the site
 Received quotes for the clean up and did nothing with them
 If DeBrown wasn’t performing, it was on Westin to address this issue o Thomas Bat – CEO – not liable – advisory role – did what was expected of him o Marchant – liable – director that had been shown the drums and did essentially nothing
Sentencing o Fines imposed on corp and on directors personally (12k each) o Bata will not indemnify Merchant/Westin for their fines o During probation, environmental issues will be made mandatory agenda item
Note: they got indemnified by the corp anyways – discussed later
NOTE: LLP Partners may have more protection than directors of a corp here
Section 105(2) PA – provides that partners of an LLP are not subject to duties imposed on directors of a corporation from the CL or under s. 142 of the BCBCA o Effectively removes fiduciary duty and standard of care doesn’t it?
BC Employment Standards Act s. 96 – Corporate Officer’s Liability for Unpaid Wages
(1) D/O of a corp at the time wages of an employee of the corp were earned or should have been paid is personally liable for up to 2 months unpaid wages for each employee
(2) Despite (1), person who was a D/O of a corp is not personally liable for o (a) liability under 63, termination pay or payment for individual or group terminations, if the corp is in receivership
 63 provies for payments in lieu of notice based on length of service o (b) liability to an employee for wages if the corp is subject to action under 427 Bank Act or proceeding under the insolvency Act; o (c) vacation pay that becomes payable after the D/O ceases to hold office; or o (d) money that remains in the employee’s time bank after the D/O ceases to hold office
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(4) “director or officer of a corp” includes a director or officer of a corporation, firm, syndicate or association that the director treats as one employer under s. 95
Section 95 – May treat affiliates, parents, subsidiaries as single employer for the purposes of this act – if so, they are jointly and separately liable for payment in satisfaction of the amounts in 96
NOTE:
This leg can end up making D/O liable for wages of employees even where they wouldn’t be under CBCA o Where subsidiary goes bankrupt, employees can’t sue; but the act could say that parent/subsidiary is all one corp, so the employee could look to parent for recovery o Intrusion on federal corporate law?
Said v. Butt (1920 KB) – Director acting bona fide for corp within authority – no tort of inducing breach of k
Recall from Agency: undisclosed principal– generally agent who acts on behalf of undisclosed principal can effectively make a K between the principal and 3P, even though 3P doesn’t know of principal o Unless 3P can demonstrate that they intended to k with agent personally or never would have contracted with the principal
Held: o No enforceable contract because 3P would never have contracted with Said o Obiter - Tort claim considered as well against Butt – tort of inducing breach of K
 Butt had wide powers to act on behalf of corp – acted within those powers
 If this was deemed a tort of inducing a corp to breach K, then the director of any breached corp K would be liable in tort – ridiculous o Director acting bona fide on behalf of corp differs from stranger who wrongfully induces a breach
ADGA Systems v. Valcom Ltd – approved Said/Butt on tort issue – when director can be sued in tort
Approved Said v. Butt on tort of induced breach of K issue
ADGA and V are competitors both after a particular K – to bid must show at least 25 senior techs o ADGA had the K in the past with 45 techs – V poached ADGA’s employees
Allegation – V and directors (personally named) induced employees to breach contracts
Held: o No ruling, but principles set out o Policy:
 Directors cannot be attacked every time there’s conflict between corps – stifle business
 Sometimes its in the best interests for a corp to breach contract – directors have a duty to the corp, so they may have to breach to meet this duty o Person acting in bona fide duties on behalf of the court differs from a stranger who wrongfully induces the corp to breach contract – Said approved o Here, the three directors were not inducing ADGA to breach K, they were inducing employees of
AGDA to breach their Ks, so this is distinguishable from Said o Comes down to pleadings – here they would be sufficient that if proven, they would amount to a tort, but does not determine specifically that tortious action occurred here
Notes:
Berger and Willodale – successful tort action against president where employee slipped on ice – president was present at all times and could see the ice forming
London Drugs – Personal liability may exist even where there is also vicarious liability to the corp
Section 124 – Indemnification
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(1) Corp may indemnify D/O or other individual acting in that capacity, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgement, reasonably incurred by the individual in respect of any civil, criminal, admin, investigative or other proceeding in which individual is involved because of association with the corp
(2) May pay up front for legal costs or whatever other costs – it’s repaid if doesn’t meet (3)
(3) Limitation – corp may not indemnify unless individual o (a) acted honestly and in good faith with view to best interests of the corp and o (b) in the case of crim/admin action, the individual had reasonable grounds for believing that the individual’s conduct was lawful o NOTE: cannot be contracted out of this provision
(5) Right to Indemnity – if the case is won, or is not heard for any reason, still entitled to indemnity
(6) Insurance – corp may purchase and maintain insurance for benefit of individual referred to in (1) against liability incurred by that individual in (a) capacity as D/O of the corp or (b) capacity as D/O of other entity acting at corp’s request
(7) May apply to court for order approving indemenity
NOTE: (7) Protects Directors for personal liability of paying indemnity where not allowed s. 118(2)(d)
Consolidated Enfield Corp v. Blair (1995 SCC)
Two groups of SH for Enfield – Blair was president and SH of Enfield – was a major SH
Main opponent was Canadian Express – major SH from other block of shares
At present B was a nominee and his allies would keep him in control – 11 nominees – 6 B’s side and 5 CE’s o Surprise nomination at meeting made by CE – B lost majority of director nominations o Legal counsel advised there must only be 11 directors – B must declare results – advised in meeting that he could not declare the surprise nominee director – B ordered it so, maintained control, but immediately scheduled another meeting and added new nominee to the list so that it could be voted
Lawsuit is about the costs of legal services at this point – B seeking indemnity for them
Held: o B’s intentions were bona fide – he had the intent of having a properly elected board – which was his role as President, and which was in the best interest of the corporation
 Best interest of the corp – to have the integrity of its voting process honoured o Nothing he did was done dishonestly or in bad faith – asked for legal advice, received it, and made the determination based on that advice o Immediately after making decision, he announced the next vote which may result in him losing power to the surprise nominee – show of good faith
Notes: o No opinion on the legitimacy of the legal advice given, just a ruling that it was not made dishonestly o ONCA determined it to be the wrong advice – so under s. 124, would indemnification be allowed?
 Difficult to say its wrongful, but it was in fact wrong (ONCA), but he couldn’t have done anything but ask for legal advice – depends on arguments o By-laws in this case made the test more lenient than s. 124(5) (124(3)), but that section is not amendable by articles/contract/bylaws/USHA (apparently anyways)
Recall R. v. Bata Industries (above)
Directors convicted for contravention of environmental regulations; Bata prohibited from indemnifying guilty directors to ensure punishment to them specifically
Appeal : Using probation order gainst Bata was improper as a matter of criminal law – scope of probation order was exceeded – should be left to corp to determine indemnification – charge was against directors, so probation should not be prohibitive of Bata’s actions
Note : would they be barred under s. 124(3) from indemnification? Were directors acting honestly and in good faith with a view to the best interest of the corp? Also, directors open themselves to liability if they indemnify when they should not have
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SH have the role of providing capital while D/O carry on the management
SH rights attach to their shares, not liable for corp’s obligations/debts
SH do not take on management or decision making powers in everyday corp functions
Recall s. 102 – duty to manage or supervise management of business and affairs is responsibility of the directors
Automatic Self-Cleansing Filter Syndicate v. Cuninghame – SH cannot just vote on management decisions
SH owners and members of the corp and have contract as to how the corp will be run
Articles expressly gave power to directors to negotiate on behalf of company and to sell entire assets
One SH keen to find a buyer – found one, brought it back and received a 55% SH vote in favour
Directors refused to carry out sale – SH went to court
Held: o Majority of the SH cannot force directors to do something they believe not in best interests of the corp – SH could vote them out, but can’t override them o SH have agreed to what they’ve bargained for in the articles – amend articles with 75% o Majority cannot just take over management because they want to make decisions – that is a director’s role
Note: o SH have some role in management – oversight role
 SH approve bylaws; special resolutions; s. 189 – proposal to sell assets would require special resolution
20 Corporate Records
(1) Corp shall prepare and maintain records at registered office containing: o (a) articles, bylaws, amendments, and copy of any USHA; (b) minutes of meetings and resolutions of SH; (c) copies of notices 106 or 113; and (d) securities register complying with
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(2) Directors records from their meetings must be kept there
(4) Records are open to inspection by directors o No rights anywhere for SH to inspect director’s minutes o Not privileged, they just must be formally sought on preparation for litigation
21 Access to Corporate Records
(1) Subject to (1.1), SH and creditors and Director may examine all records described in 20(1)
(1.1) Person wishing to examine securities register of distributing corp must make request to corp, and get affidavit – on receipt of which corp will allow person access to the register
(2) SH of corp is entitled to one copy of articles and bylaws and any USHAs
Section 2(1) – definitions
“Ordinary resolution” – passed by majority of votes cast by SH
“Special resolution” – passed by majority not less than 2/3 of votes cast by SH
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Section 142 – Resolution in Lieu of Meeting
(1) Except where written statement submitted by director under 110(2), o (a) resolution in writing signed by all SH entitled to vote on that resolution at a meeting of SH is as valid as if it had been passed in the meeting and o (b) resolution in writing dealing with all matters required by the Act to be dealt with at a meeting o
SH, and signed by all SH entitled to vote, satisfies all requirements related to SH meetings
(2) Copy of every resolution shall be kept with meeting minutes of SH
(3) Evidence – unless ballot demanded, entry in the meeting minutes that chairperson declared resolution to be carried/defeated is, in absence of proof to the contrary, proof of fact without vote numbers
Recall 106 – Appointment of Directors
(1) Notice of directors sent with articles upon incorporation
(3) Subject to 107(b), SH of a corp shall, by ordinary resolution at first meeting of SH and each annual SH meeting where election required, elect directors to hold office for a term not more than 3 years o 107(b) SH may vote their shares as they please up to total number of votes attached to their shares
(4) Staggered terms are allowed
See details in Appointing Directors - above
Recall 109 – Removal of Directors
(1) Subject to 107(g), SH of a corp may by ordinary resolution at special meeting remove any director o 107(g) votes for must be greater than product of number of required directors and votes against
(2) Where class has exclusive right to elect – that class must vote to remove
(3) Vacancy created may be filled at the SH meeting – per 107(b)-(e)
Section 103 – Amendment of Bylaws
(1) Unless articles, bylaws or USHA otherwise provide, directors may, by resolution, make, amend, or repeal any bylaws that regulate business and affairs of the corp
(2) SH must approve at next meeting of SH by ordinary resolution – may confirm, reject or amend
(3) Effective date is the date directors resolve it until confirmed or rejected by SH or ceases under (4)
(4) If rejected by SH, or directors don’t submit it to SH, bylaw ceases to be effective and no subsequent resolution can be made by directors to make, amend or repeal bylaw having substantially the same propose or effect until confirmed by SH
(5) SH proposal – SH that is entitled to vote at annual meeting may in accordance with 137, make proposal to make, amend or repeal bylaw
155(1) Annual Financial Statements
Subject to 156, directors of a corp shall place before SH at every annual meeting: o (a) comparative financial statements as prescribed relating separately to
 (i) period from corp’s formation and ending not more than 6 months before annual meeting or if completed a financial year, the period from end of last completed financial year to not more than 6 months before annual meeting AND
 (ii) the immediately preceding financial year o (b) report of the auditor, if any; and o (c) any further info respecting financial position of the corp and the result of operations required by articles, bylaws or USHA at an annual meeting
159 Copies to SH
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(1) Corp shall, not less than 21 days before annual SH meeting or before signing of resolution under para 142(1)(b) in lie of annual meeting, send a copy of the docs referred to in 155 to each
SH, except to those who informed corp in writing that they do not want copies
(2) Offence – corp that without reasonable cause, fails to comply is guilty of an offence and liable on summary conviction to a fine not exceeding $5000
161 Qualification of Auditor
(1) Subject to (5), person is disqualified if not independent of the corp, affiliates or D/O of corp/affiliates
(2) Independence (a) is a question of fact; o (b) person deemed not to be independent if he or his business partner
 (i) is a business partner, director, officer or employee of the corp or affiliates…
 (ii) beneficially owns or controls, directly/indirectly, material interest in securities; or
 (iii) has been a receiver/receiver manager, liquidator or TiB of the corp/affiliates within two years of his proposed appointment as auditor of corp
162 Appointment of Auditor
(1) Subject to 163, SH of corp shall, by ordinary resolution, at first annual SH meeting, and at each subsequent annual meeting, appoint auditor to hold office until close of next meeting
(2) Auditor appointed under 104 is eligible under (1)
(3) If auditor is not appointed, incumbent auditor continues office until successor appointed
(4) Remuneration fixed by ordinary resolution of SH, if not, may be fixed by directors
163 Dispensing of Auditor
(1) SH of a non-distributing corp may resolve not to appoint auditor
(2) Such a resolution is only valid until next annual SH meeting
(3) Unanimous consent is required for resolution under (1), including SH not otherwise entitled to vote
169(1) Examination by Auditor
Auditor shall make examination necessary to enable report on financial statements required to be placed before SH, except statements in the period described by 155(1)(a)(ii) – previous financial year
132 Place of Meetings
(1) To be held at place within Canada as specified within the bylaws
(2) May meet outside Canada if place is specified in articles or all SH agree to meet at that place
(3) SH who attends meeting outside Canada is deemed to have accepted its location
(4)(5) Permits meetings by electronic means
133 Calling Annual Meetings
(1) directors of corp shall call annual meetings of SH (a) not later than 18 months after corp forms; and (b) subsequently, not later than 15 months from previous meeting and not more than 6m from corp year end
(2) Special meetings – directors may call special SH meetings at anytime
135 Notice of a Meeting
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(1) Notice of time and place of SH meeting shall be sent within prescribed period to (a) voting SH; (b) directors; (c) auditor of the corp o Reg 44 – prescribed time period is not less than 21 days and not more than 60 days before meeting.
(2) Shorter periods may be prescribed for non-distributing corps if specified in articles/bylaws
(5) Only four things are ordinary business, the rest are special business o Consideration of financial statements, auditor’s report, election of directors, and reappointment of incumbent auditor
(6) Special business SH meetings require notice that states (a) nature of that business with sufficient detail to permit SH to form reasoned judgement thereon; and (b) text of any special resolution to be submitted
136 Waiver of Notice
SH may waive notice in any manner, and attendance at the meeting is waiver of notice, except where attendance is for express purpose of objecting to transaction of business on grounds that meeting is unlawfully called
139 Quorums
(1) Unless bylaws state otherwise, quorum of SH if holders posses a majority of shares entitled to vote at the meeting or are represented by proxy
(2) Opening quorum is sufficient even if not present throughout the meeting
(4) Single SH meeting – that person present or in proxy constitutes a quorum
140 Right to Vote
(1) Unless articles provide otherwise, each share entitles the holder to one vote at SH meetings
(2) If body corp is a SH, corp shall recognize any individual authorized by resolution of the directors of that body corp to represent it at the meeting of SH
(3) Powers of representative; (4) joint shareholders
141 Voting Procedure
(1) Unless otherwise provided by bylaws, voting at SH meeting shall be by show of hands except where ballot is demanded by a SH or proxyholder
(2) Ballot – SH or proxy may demand a ballot either before or after any vote by show of hands
(3)(4) Electronic Voting – May be held in accordance with regulations for electronic voting
Reg 45 – outlines electronic voting requirements
142 Resolution in Lieu of Meeting
(1) Except where written statement is submitted by director under s110(2), o (a) resolution signed by all SH entitled to vote is valid as if passed at meeting and o (b) resolution in writing dealing with all matter required of SH and signed by all, satisfies all requirements of this Act relating to SH meetings
(2) Copy of every resolution shall be kept with meeting minutes
(3) Unless ballot demanded, chairperson’s declaration of a resolution to be carried, once entered into minutes, is proof of the fact without, absent evidence to the contrary
143 Requisition of Meeting by SH
(1) Holders of not less than 5% of issued voting shares may requisition the directors to call a SH meeting for purpose stated in the requisition
(2) Form may consist of more than on SH – shall state the business to be transacted at the meeting and shall be sent to each director and to the registered office of the corp
(3) Directors shall call meeting unless (a) out of scope 134(3); (b) directors have called a meeting and given notice under s. 135; or (c) out of scope 137(5)(b)to(e).
(4) If directors don’t do this within 21 days of receiving the requisition, any SH who signed can call meeting
(5) Meeting shall be called as soon as possible – while complying with meeting procedures above
(6) Corp shall reimburse SH for requisitioning, calling and holding meeting
144 Meeting Called by Court
(1) On application of director or voting SH or Director, court may order a meeting of corp if o (a) it is impracticable to call meeting within time/manner in which meets are to be called o (b) it is impracticable to conduct meeting in the manner required by this Act/bylaws; Or
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o (c) court thinks the meeting should be called, held and conducted within the time/manner it directs
(2) Court may vary the quorum required by bylaws or act
(3) Meetings held under this section are valid
NOTE: occurs where deadlock and corp is ungovernable – allows a single director/SH to have a court break the deadlock – may not actually work though – may refuse meeting for s. 137(5)
145 Court’s Review of Elections
(1) A corporation of a SH or director may apply to court to determine any controversy with respect to an election or appointment of director or auditory of the corp
(2) Powers of the court – may make order it thinks fit including, within limiting the generality of foregoing: o (a) order restraining director or auditor from acting pending determination o (b) order declaring result of disputed election or appointment o (c) order requiring a new election or appointment, with direction for management until then, and o (d) order determining voting rights of SH and persons claiming to own shares
1.
Amendment of Articles of Incorporation
2.
Continuation of a CBCA Corporation to Another Jurisdiction
3.
Extraordinary Sale, Lease or Exchange of All or Substantially All of a Corp’s Assets
4.
Voluntary Liquidation and Dissolution
Objective of Statutory Scheme:
Balance the right of the majority of SH to control over fundamental changes against the reasonable expectations of the minority that the corp they originally invested in will continue to be governed by the same rules and will continue to carry on the same or similar business to the one carried on when the SH purchased the shares o Allows SH to get out of the corp with the value they have obtained thus far
“Special Business” Notice
Notice under s. 135(6) is required o Notice of meeting of SH at which special business is to be transacted is to state:
 (a) nature of that business in sufficient detail to permit SH to form reasoned judgement
 (b) the text of any special resolution to be submitted to the meeting
If more than 50 SH, or the corp is a “distributing corp”, the mandatory proxy solicitation rules apply: o Section 149 – (1) mandatory solicitation of proxy; (2) exception for corps that are non distributing and have 50 or fewer shareholders entitled to vote
Generally amendment requires Special Resolution (173(1))
Special Notice of Amendment (175(1))
Generally, Special CLASS Vote is required (176(6)) – listed in 176(1)
Dissenting SH entitled to FMV of shares (190(3)) – subject to financial solvency test (190(26)) o Right to dissent found in 190(1)(a) and (b)
173 Amendment of Articles
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(1) Subject to 176 and 177, articles of corp may by special resolution be amended to: (listed) o (a)-(o) – things that can be changed in articles o (i, j, k, l) – ignore o (g) – Change in the designation of all or any of its shares, and add, change or remove any rights, privileges, restrictions and conditions, including rights to accrued dividends, in respect of all or any of its shares, whether issued or unissued
(2) Directors are allowed to discontinue process of amending articles, where reasons for amendment disappears (so long as authorized by the SH in the special resolution)
(3) Directors may change a numbered corp name to a verbal name without approval of SH
175 Special Notice of Proposal to Amend
(1) Subject to (2), director or voting SH, in accordance with 137, make proposal to amend articles
(2) Notice of SH meetings shall set out the proposed amendment, and where applicable, shall state that dissenting SH is entitled to be paid FMV of their shares in accordance with 190 o Failure to make that statement does not invalidate the notice
176 Class Vote
(1) SH are entitled to vote separately as a class on a proposal to amend articles where the change effects that class ( unless articles otherwise provide for (a)(b)(e) ), o (a) increase/decrease in number of shares issued o (b) effect an exchange, reclassification or cancellation of all or part of the shares of such class o (c) add, change or remove the rights, privileges, restrictions or conditions attached to the shares of such class… o (d) increase rights or privileges of any class of shares having rights or privileges equal or superior to the shares of such a class o (e) create a new class of shares equal or superior to the shares of such class o (f) make inferior class of shares equal or superior to the shares of such class o (g) exchange all or part of the shares of another class into shares of such class or o (h) constrain issue, transfer or ownership of shares of such class or change/remove such restraint
(5) Right to vote – SH has right to vote whether or not shares of a class have voting rights
(6) Separate resolutions – proposed amendment that attracts special class vote under (1), must be approved by special resolution of each class entitled to vote
177 (1) Delivery of Articles
After amendment adopted under 173, 174 or 176, articles of amendment shall be sent to Director
178 Certificate of Amendment
On receipt of articles of amendment, Director shall issue certificate of amendment
179 Effect of Certificate of Amendment
(1) Amendment effective on date shown in certificate of amendment and articles amended accordingly
(2) Rights preserved – amendments do not affect existing cause of action or claim or liability to prosecution in favour of or against the corp or its directors or officers, or any civil, criminal or administrative action or proceeding to which corp/D/O is a party
Requires special resolution to pass (s.188(5))
Process requires special notice to shareholders (s.188(3))
Every SH is entitled to vote, even if no voting rights (s. 188(4))
Section 188 – Continuance – Export
(1) Subject to (10), corp may apply to another jurisdiction for continuance to that jurisdiction if o (a) Corp is authorized by SH in accordance with this section to make application and o (b) Satisfies Director that its proposed continuance will not adversely affect creditors/SH
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(3) Notice of a meeting of SH shall be sent to each SH in accordance with s. 135 o Shall state that dissenting SH is entitled to be paid FMV of their shares as per s. 190
(4) Every SH has the right to vote
(5) Authorized when SH vote it so on a special resolution
(6) directors of a corp may, if authorized by SH at the time of approving an application for continuance, abandon the application without further approval of the SH
(7) Director SHALL file notice and issue a certificate of discontinuance upon receipt of satisfactory notice of continuance from new jurisdiction
(8) Notice referred to in (7) is deemed to be the articles
(9) This Act ceases to apply to the corp on the date of the certificate
(10) Corp shall not be continued to a new jurisdiction unless those new laws provide in effect that o (a) property of the corp continues to be property of the corp o (b) liabilities continue to the new corp o (c) existing causes of action, claim or liability is unaffected o (d) civil, criminal or administrative action or preceeding pending may be continued o (e) conviction may be enforced
Requires SH approval (s. 189(3))
Special notice must be delivered to SH (s. 189(4))
SH have power to authorize transaction, and to fix or authorize the directors to fix the terms and conditions of the transaction (s. 189(5))
Each share carries the right to vote (s. 189(6))
Class is entitled to vote separately if it is affected by transaction differently than another class (s. 189(7))
Approval is by special resolution (s. 189(8)
Right to dissent (s. 190(1)(e)) – FMV (s. 190(3)) – subject to financial solvency (190(26))
Section 189 – Extraordinary Sale, Lease or Exchange
(3) Sale, lease or exchange of all or substantially all the property of a corp other than the ordinary course of business of the corp requires approval of the SH in accordance with (4)-(8) o In tax law, “all or substantially all” means 90% or more
(4) Notice of Meeting – comply with section 135, to all SH and shall o (a) include summary of the agreement of sale, lease or exchange and o (b) state that dissenting SH is entitled to be paid FV for their shares in accordance with 190, but failure to make this statement doesn’t invalidate the sale, exchange or lease
(5) SH may authorize the sale, lease or exchange and may fix or authorize the directors to fix any of the terms and conditions
(6) Right to Vote – All shareholders have right to vote
(7) Class vote – Class entitled to vote separately ONLY if such class is affected by the sale, lease or exchange in a manner different from the shares of another class
(8) Special resolution required (2/3 vote)
Director or voting SH may propose liquidation and dissolution (211(1))
Special notice must be sent to each SH (211(2))
Must be approved by special CLASS resolution (211(3)
Dissent and appraisal remedy is not available for this type of fundamental change!
See section 211 for specific admin steps to dissolution
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Rebalancing of powers between directors and SH – encourages SH to take more control of corp
103(5) SH Proposal – By-Laws
SH entitled to vote at annual meetings, in accordance with 137, may make a proposal to make, amend or repeal a bylaw
137 Shareholder Proposals – Procedure
(1) Subject to (1.1) and (1.2), SH that are entitled to vote at annual meetings may o (a) submit notice of any matter that SH proposes to raise at the meeting (proposal) and o (b) discuss at the meeting any matter in respect of which SH would have been entitled to submit a proposal
(1.1) Eligibility – To be eligble, SH must have held prescribed number of shares for prescribed amount of time OR must have support of person who in aggregate meets the requirements o Reg 46 – 1% of outstanding voting shares or FMV of $2000; for 6 months before proposal
(1.2) Information – Proposal must be accompanied by (a) name, address of supporters; and (b) number of shares held by supporters, and date acquired
(1.4) proof may be requested that person meets (1.1) o Reg 47 – Corp may reuest proof within 14 days; SH provide proof within 21 days
(2) Information circular – Corp that solicits proxies shall set out the proposal in the management proxy circular required under 150
(3) Supporting statement for the proposal may be sent out with proxy circular o Reg 48 – 500 word limit
(4) Proposal may include nomination of director if signed by SH or SHs with aggregate 5% of voting shares of the corporation
(5) Corp can refuse to include proposal in management proxy circular for reasons: o (a) didn’t meet minimum number of days to notify corp of proposal
 Reg 49 – 90 days o (b) primary purpose of proposal is to enforce a personal claim, redress or grievance o (b.1) does not relate to business or affairs of the corp o (c) failed to present proposal at meeting that had been included in proxy circular
 Reg 50 – within two years o (d) substantially same as a proposal within prescribed time that received less than prescribed amount of support at the meeting
 Reg 51 – 3% at 1 st meeting; 6% at two meetings; 10% at three+ metings; 5 years o (e) rights of this section are so being abused to secure publicity
(5.1) if person fails to hold and maintain the requirements of (1.1) up to the day of the meeting, corp is not required to set out any proposal in the management proxy circular for prescribed time o Reg 52 – two years
(6) No corp or person acting on its behalf incurs any liability for circulating proposal
(7) Notice of refusal – notice is given to proposer if corp refuses to include a proposal in circular
(8) Proposer may apply to court for order after being refused to make proposal in (7)
(9) Corp may apply to court for order to omit the proposal from management proxy circular
(10) Director entitled to notice – applications under (8) and (9) shall give Director notice of the application and Director is entitled to appear and be heard
175(1) Proposal to Amend Articles
Subject to (2), director or voting SH may, in accordance with 137, make a proposal to amend articles
See fundamental changes for specifics; (2) – notice requirement
211(1) Proposing Liquidation and Dissolution
Directors or voting SH may, in accordance with 137, make a proposal for, the voluntary liquidation and dissolution of a corporation
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SH do not have to physically be at every meeting – they can send proxy-holders
Two main types of proxy solicitation rules o Those which apply to management and those that apply to dissenting SH
 Dissenting SH are those trying to make changes contrary to director’s wishes
Approach:
Generally:
Management must send proxies if it’s a distribution company or has more than 50 voting SH (149(2))
First:
Is there a solicitation being made? – look to s. 147 “solicitation” o If falls within s. 147(b) – then not a solicitation
Second:
If it is a solicitation, must provide dissident proxy circular or management proxy circular (150(1)) o Must comply with regulations (54-57, 63-64 and 67-69) o 154 – restraining order
147 Definitions - “Socliciation”
(a) Includes: o (i) request for proxy whether o not accompanied by or included in form of proxy o (ii) request to execute or not to execute a form of proxy or to revoke proxy o (iii) sending of a form of proxy or other communication to a SH under circs reasonably calculated to result in the procurement, withholding or revocation of proxy, and o (iv) sending of a form of proxy to a SH under s. 149
(b) Does not include: o (i) sending of a form of proxy in response to an unsolicited request made by SH o (ii) performance of admin acts or professional services on behalf of a person soliciting proxy o (iii) sending docs referred to in 153 o (iv) solicitation by person in respect of shares of which person is beneficial owner o (v) public announcement by SH of how SH intends to vote and reasons for it
 Reg 67 – Speech in public forum or press release, opinion, broadcast, etc o (vi) communication for purpose of obtaining the number of shares required for SH proposal under s. 137(1.1) – recall this was to make a proposal had to have 1% or $2000 o (vii) communication, other than solicitation on behalf of management, that is made to SH, in any circs that may be prescribed (descibred in Reg 68 )
148 Appointing Proxy Holder
(1) SH entitled to vote may appoint a proxyholder or one or more alternates, who do not have to be
SH, to attend and act at the meeting as authorized by proxy and with authority conferred by proxy
(2) Execution of proxy – proxy shall be executed by SH in writing
(3) Validity – proxy is valid only at meeting in respect of which it is given (or adjournments)
(4) Revocation – SH may revoke proxy o (a) by dpositing an instrument in writing executed by SH authorizing in writing
 (i) at registered office of the corp up to day before meeting, or
 (ii) with chairman of the meeting on day of meeting or o (b) in any other manner permitted by law
(5) Deposit of proxy – directors may specify in a notice calling meeting of SH a time not exceeding 48 hours before the meeting before which time proxies must be deposited with corp
149 Mandatory Solicitation
(1) Subject to (2), management of corp shall send form of proxy to each SH when sending notice of
SH meeting
(2) Exception – not required if it (a) is not a distributing corp and (b) has 50 or fewer voting SH
(3) Offence – if fail to comply without reasonable cause, corp is guilt of offence – summary conviction to a fine not exceeding $5000
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(4) D/O of corp who knowingly authorized, permitted or acquiesced in commission of offence is party to and guilty of offence – summary conviction – fine up to $5000 or prison up to 6 months, or both
150 Soliciting Proxies
(1) Person shall not solicit proxies unless o (a) where on behalf of management of a corp, management proxy circular OR o (b) a dissident’s proxy circular stating purpose of solicitation o is sent to the auditor, each SH whose proxy is solicited, directors and for (b) to the corp
(1.1) Exception – Solicitation can occure without dissident’s proxy circular if 15 or less SH
(1.2) Exception – Solicitation can occur without dissident’s proxy circular if the solicitation, in prescribed circs, is conveyed by public broadcast, speech or publication – Reg 69
(2) Copy of either solicitation must be sent to Director along with connected docs
(3) Offence – failure to comply – summary offence - $5000 and/or prison less than 6months
(4) D/O of corp who knowingly authorized, permitted or acquiesced in commission of offence is party to and guilty of offence – summary conviction – fine up to $5000 or prison up to 6 months, or both
151 Exemption by Director
(1) On application, Director may exempt person from any requirements in 149 and 150(1) – retroactive
(2) Director shall set out in a publication the particulars of the exemption and reasons
152 Attendance at Meeting
(1) person who solicits proxy or is appointed proxyholder shall attend meeting in person and comply with directions of the SH who appointed him/her
(2) Rights – proxyholder or alternate has same rights as SH to speak at meeting in respect of any matter, to vote (ballot or hands), except for where proxyholder has conflicting instructions from more than one SH
(4) Offence – proxyholder/alternate who without reasonable cause fails to comply with directions of
SH is guilty of summary offence - $5000/6months
154 Restraining Order
(1) If form of proxy, management proxy or dissident’s proxy contains an untrue statement of material fact or omits to state material fact required to make statement not misleading, an interested person or the Director may apply to court, and court may make any order it sees fit, including: o (a) order restraining solicitation, holding of meeting, implementing or acting on any resolution from the proxy o (b) order requiring correction of any form of proxy or proxy circular and further solicitation o (c) order adjourning the meeting
(2) Notice to Director – applicant shall give notice to Director of application and Director is entitled to appear and be heard
Brown v. Duby (1980 BCSC)
Same corp as Jacobson and Unite Canso (no SH could have more than 1000 votes – invalid because class members have the same rights) – distributing corp, majority SH are US residents
Application for interlocutory injunction restraining SH-committee (Jacobson) from continuing to solicit proxies (application under 154) o Dissident SH upset with management – have not been making much money o Brown (management) claims dissident committee not complying with proxy rules o First letter went to US SH only; second went to all SH – claim that these were unlawful
Held: o Second letter was fine – First communication was at issue
 Stated committee was established to oppose management - Intention to solicit proxies o Even though no proxy forms sent, it indicated it would send proxy forms, but asked SH to refrain from submitting management proxy until dissident proxy circular could be read as well o 147(a)(i) includes request for proxy whether or not accompanied by proxy; also satisfied (ii) o Should have complied with Canadian corp law – definitely complied with US law
Remedy:
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o Management seeking injunction from future communications with SH o Injunction shouldn’t be ordered unless clearly required to protect SH interests o Failure was one of provision of information that is required by law – no lack of discussion or campaigning on either side here – protect ability to speak and communicate
 Shutting up dissidents is not in best interests of SH o On balance of convenience, court did not grant injunction in this case
Notes: o Likely wouldn’t have counted as a solicitation in the new regime – given number of exemptions
 Likely reg 68 o Since this case there has been a large expansion in ability to communicate with SH without the expensive and time consuming proxy procedures
Recall Section 20(2) – Directors Records
Accounting records and minutes from directors meetings are to be kept at registered office
Also Recall (1) was for articles/bylaws/USHAs; SH minutes; securities register
Recall Section 21 – Access to Corporate Records
(1) SH and creditors can examine the records in 20(1); if distributing corp then any person w/ fee
(2) SH is etniteled to one copy of articles, bylaws and any USHAs o Note – SH do not have access to directors minutes under 20(2)
Recall Section 155 – Annual Financial Statement
(1) Subject to 156, directors shall place before SH at every annual meeting: o (a) comparative financial statements relating separately to 1 st period, or currently completed financial year and immediately preceding financial year o (b) report of auditor if any; and o (c) further information respecting financial position of the corp required by articles, bylaws/USHA
(2) Exception – may be omitted if reason for omission is given to SH in a note at meeting
Section 159 – Copies to SH
(1) Corp shall, at least 21 days before SH annual meeting, send copy of docs referred to in 155 to each SH, except for those who have informed corp that they don’t want the docs
(2) Offence – failure to comply without reasonable clause is a summary offence - $5000
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Governance of small corps is significantly different
There are various provisions that really only apply to closely held corps
132(2) – Place of SH Meeting
If not in Canada, all SH have to agree to have it elsewhere – this would never happen with large corp
139(4) – Single SH Meetings
Where single SH only, that SH constitutes a SH meeting
142(1) – Unanimous written resolution is as effective as a SH meeting
With millions of SH, that’s really not an option
163(3) – Dispensing of an auditor
Non distributing corps can dispense with auditor by unanimous SH consent
102(2) – Number of Required Directors
Non-distributing corp only requires one director; distributing, minimum of 3
117(1) – Unanimous Written Resolution of Directors
Unlikely in major companies – too many directors and there’s too much going on to satisfy duty o Repap – directors need to realize when they’re lacking information to make informed decision
114(8) – Single Director Meeting
Where only single director, that director constitutes a director’s meeting
SH can agree to vote shares together to form a pool of shares who vote together o Written agreement may be made to this effect ( 145.1
)
Agreement is binding on SH – remedy for breach depends on contract terms
Factional voting – ensures your pool of voters maintains power/control
Cannot be used to dictate what SH would do in management role! ( Ringuet ) o Referred to as “fettering the director’s discretion” o Based on director’s obligation to inform themselves and make best decision for corp
Section 145.1 – Vote Pooling Agreements
Written agreement between two or more SH may provide that in exercising voting rights the shares held by them shall be voted as provided in the agreement
Ringuet v. Bergeron (1960 SCC) – Limits on what SH can agree to in agreement – no director decisions
7 SHs each hold 350 shares – 3 of them are minority and work together to acquire 4
Together they have majority interest – make an agreement to vote together th – split between them
Make Ringuet president, Panget VP and Bergeon secretary/treasurer – R gets tie-breaker vote o Party that breaches k must forfeit shares to the others
Enter a second agreement with Jean – but first agreement was never abandoned o Try to get rid of B – meeting without B (no notice) – B voted out – Appoint R, P and J
B lawsuit against R and P – defence was that agreement fettered director’s discretion – invalid
Held: o Breach of agreement – shares forfeited to B – HE BECAME SOLE MAJORITY HOLDER!! o Defence failed – agreement to vote as a block of SH and agreement to vote as directors differ
 Agreement here only determined how they would vote as SH – so this is ok
 Breach resulted from R and P’s failure to honour agreement to vote B in
Dissent: o Rely on the fiduciary duties of directors
Notes: o Problem arises – once directors, they appear to have an agreement on appointment of officers – these would be directors’ decisions – so agreements to appoint officers would likely be invalid
 SCC said that wasn’t part of the agreement – just to vote B to the board – SH duty.
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Used primarily amongst small closely held corps
Also seen in parent corps that own 100% of the shares of a subsidiary ( 146(2) )
USHA is more than just a SH agreement – it is a fundamental change to the normal governance structure o Fettering director’s discretion is allowed in this context ( 146(6) )
Lawful written agreement of all SH of a corp (may included non-SH) – 146(1)
Must restrict all or part of the powers of the directors to manage affairs of the corp – 146(1) o Note, SH assume liabilities that would normally be associated to directors – 146(5) o May fetter the discretion of directors with a USHA – 146(6)
Section 2(1) – Definitions
“director” – person occupying the position of director by whatever name called
“Unanimous Shareholder Agreement” – an agreement described in 146(1) or declaration of a SH described in 146(2)
Section 20(1)(a) – USHAs must be available at the corporate registered office
Section 21(1) – SH, creditors, Director and any other person may examine docs in 20(1)
Section 146 – Unanimous Shareholder Agreement
(1) Lawful written agreement among all SH, or among all SH and another person, that restricts, in whole or in part, the powers of directors to manage, or supervise the management of, the business and affairs of the corp is valid
(2) Single SH – where SH owns all shares, he/she may make declaration that restricts powers of directors and that declaration is deemed to be a unanimous shareholders agreement
(3) Constructive party – Purchaser or transferee of shares is deemed party to USHA
(4) Notice – If notice is not given to purchaser/transferee of existence of USHA, purchaser/transferee may, no later than 30 days after becoming aware, rescind the transaction
(5) Rights of SH – Parties given power to manage or supervise management of business and affairs have all the rights, powers, duties and liabilities of a director (with respect to those powers restricted by USHA), including any defences available to the directors – and directors are relieved of those rights, powers, duties and liabilities, including those under 119 o Note: 119 is liability for wages section
(6) Discretion of SH – nothing in this section prevents SH from fettering their discretion when exercising powers of directors under a USHA
Recall Section 115(3) – Powers reserved for Director – Can not Delegate
With a USHA, even these core decisions can be taken from directors
SH step into role of directors for liability – recall section 42 – directors liable for shortfalls
Must always ask whether they are directors, or whether they are SH acting under the power of USHA
Duha Printers (Western) Ltd v. The Queen (SCC) – Principles for USHAs – constitutional/contractual hybrid
Complex tax question
Issue: what constituted control of the corp and whether there is a change for tax purposes?
Principles: o Distinction between ordinary SH ks and USHAs – has there been a transfer of director’s powers?
 If not, then it is not a USHA, it is just an SH k – no fettering of discretion o USHAs are corporate law hybrids – they are constitutional and contractual o Small companies often see corp as their own – they should be able to take direct control of it o USHA operates as a fundamental change in the balance of power and management of corp
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 Recognizes that underlying relationship amongst few SH is that they see themselves as managing the corp business and affairs – likens to partnership arrangement
 Contract that adjusts the constitutional nature of the corp
 Enforceable on same basis as articles and by-laws – enforceable against corp and officers
Held: o USHA took power to issue shares away from directors and transferred it to SH
 Yes this is a valid USHA, and yes that changed the control of the corp
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Where individual SH makes claim about individual rights as SH o They didn’t get a dividend or aren’t on the SH registry etc.
Usually just a mistake or some technical reasons
Often swept into “Oppression Remedy”
D not really need to know anything about this
Recall Cook and Deeds o Company was wrong – but SH had to bring action as a stand-in for the corp because corp wouldn’t sue itself – that’s a derivative action
Requires a prima facie case be proven before granted – leave of the court required
Use oppression remedy instead
Describes conduct by a more powerful corporate player against a weaker
“…conduct complained of should at the lowest involve a visible departure from the standards of fair dealing and a violation of the conditions of fair play on which every SH who entrusts his money to a company is entitled to rely.” – Elder v. Elder & Watson (1952)
CBCA – expands to acts or omissions which are “unfairly prejudicial to” or that “unfairly disregard the interests” of a SH, creditor, director or officer. – s. 241 o Must look to expectations of the parties – Ebrahemiem
Complainants – s. 241(1): o SH, former SH, D/O, former D/O, Director, or any other person deemed by court – s. 238 o Creditors have been held as valid complainants – Downtown Eatery; Sidaplex Plastics
 Also note, 142(2) – oppressive conduct includes against creditor even though not in defn o Persons who can show they were induced to become SH are included – Edson Packaging
Conduct that Constitutes Oppression: o Act or omission of corp/affilates; carrying of business or affairs of corp/affiliates; or through the exercise of directors’ powers – s. 241(2)
 Test for Oppression found in BCE
 1. Reasonable expectations breached?
 2. Oppressive, unfair prejudice or unfair disregard? o Indicators:
 Where there’s lack of commercial purpose to the action taken
 Lack of good faith – indicator, but not required for oppression action ( KeepRite )
 Discrimination between SH – particularly benefit to the majority
 Lack of disclosure
 Plan to eliminate a minority SH or isolated director ( Ferguson)
 Each step alone in a plan may not be oppressive, but together they can be
Powers/Remedies o Court can do almost anything – s. 241(3) – listed remedies
 Limited by financial solvency test – s. 241(6) for (3)(f or g) o Must not usurp function of directors or supplant control of majority – KeepRite o Remedy should aim to rectify oppression, not just punish oppressor - Naneff
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238 Definitions – Complainant
(a) SH, former SH of corp and affiliates
(b) director or officer or former D/O of corp or affiliates
(c) the Director; or
(d) any other person who, in discretion of a court is a proper person to make application
241 Oppression Application
(1) Complainant may apply to court for an order under this section
(2) Court may make order to rectify conduct that is oppressive or unfairly prejudicial or that unfairly disregards the interest of any SH, creditor, director or officer from: o (a) any act/omission of corp/affiliates; o (b) any carrying of business or affairs of the corp/affiliates; or o (c) any exercise of powers of the directors of the corp/affiliates
(3) Powers of the Court – court may make any interim or final order it thinks fit including: listed o (a) may restrain conduct complained of o (c) amend articles, bylaws or creating USHAs, o (d) exchange securities, o (e) replace directors o (f) direct corp or any person to purchase securities, o (g) direct corp or any person pay SH any monies paid for those securities o (h) set aside transaction/contract to which corp is a party o (i) produce financial statements, o (j) order of compensation for aggrieved person o (k) rectify register or other records under 243 o (l) an order liquidating and dissolving the corp o (m) order directing an investigation be made; and o (n) an order requiring trial of any issue – this is usually the case
(4) Duty of Director – directors must comply with orders made under this section, and they shall not allow further amendment to articles or bylaws without court’s consent
(5) Dissent Exclusion – SH is not entitled to dissent under 190 if an amendment to articles is effected o So no FMV for dissenting SH
(6) Financial Solvency – Corp shall not make payment to SH if that is the order made by the court under (3)(f or g) if there are reasonable grounds to believe that o (a) corp will be unable to pay its liabilities as they become due; OR o (b) realizable value of the corp’s assets would thereby be less than aggregate of liabilities
(7) Applicant may apply in alternative for an order under 214 (allows applicants the SH remedy)
242 Evidence of SH Approval Not Decisive
(1) Application shall not be stayed/dismissed by reason only that SHs have approved a breach, but evidence of that SH approval may taken into consideration in making orders under 214, 240 or 241
(2) Notice and approval - Application shall not be stayed, discontinued, settled or dismissed without approval of the court and if court determines that complainant will be substantially affected by it, court may order any party give notice to the complainant
248 Summary Application to Court
Applications under this Act can be made in summary manner
190 Right to Dissent
(1) SUBJECT TO 191 and 241 , SH may dissent if corp if the corp resolves to…listed o See 241(5) – right is excluded
(3) – Entitled to fair market value for shares o Note: cannot pay FMV if would fail financial solvency test (s.190(26))
Brant Investments v. KeepRight Inc (1991 ONCA) – Principles of the Oppression Remedy
ICG is sole SH of ICM; ICM is sole SH of EP and 65% SH of KeepRite – thus ICG controls the three
ICG decided to integrate assets and operations of its three subsidiaries – wanted KR to purchase ER/ICM
KR set up independe committee of directors to investigate fairness of proposed transaction o Recommended reductionin purchase from $24M to $20M – approved by full board of KR
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o In order to make the purchase, rights offering would have to be made
Minority dissented to resolution to increase authorized capital (amendment to articles) – oprresion action
Held: o 1. There is no fiduciary duty by majority SH to minority SH – oppression remedy makes broadening fiduciary scope unnecessary o 2. No obligation by complainant to demonstrate bad faith in oppression action
 Opression can occur without intent, dishonesty or disloyalty o 3. Section 241 should be exercised with care – minority SH must be protected from unfair treatment, but court must not usurp function of the board of directors to manage the company, nor should it eliminate/supplant the control by majority
 Board has valid decision-making power – not to second-guess where exercised fairly o 4. Former SH are still able to bring oppression action under 241
 Dissenting SH had their shares bought out under 190 and thus have no SH rights
Westfair Foods Ltd v. Watt (1991 ABCA) – Ordered shares be repurchased by corp
New divident policy tid not maintain fair balance between competing interests of common SH and class A
(preferred) SH
Recall – court held that Class A SH did not have reasonable expectation that corp would maintain a permanent policy for accumulating surplus
However, on Oppression:
Held: o In all the circs, there had been unfair disregard for Class A SH interests and ordered that the shares be purchased at price to be ascertained at subsequent hearing
Ferguson v. Imax (1983 ONCA) – Plan to squeeze out a SH/director may be oppressive in it’s entirety
Three couples incorporated; husbands received voting common shares, wives received non-voting B shares with a preference to a .05 per share dividend per year – after which, equal participation in dividends
Mrs. F was actively involved in business – received little or no remuneration – divorced o F was discharged by company – company only distributed the preferential dividend and held rest
Special resolution – class B shares would be converted to non-voting class A shares o F could not block resolution even though class B would have special class resolution vote
Held: o Resolution was the culminating event in a lengthy course of oppressive and unfairly prejudicial conduct o Company prohibited from implementing the resolution
Naneff v. Con-Crete Holdings Ltd (1995 ONCA) – Remedy should rectify oppression, not aim to punish
Family business owned by father NN – transferred equity to two sons A and B equally, retained voting o A and B were officers/directors – A got involved with woman that family didn’t like o A thrown out of home, removed as director and officer – income from business reduced drastically
At trial, actions found oppressive – remedy was for business to be publically sold
ONCA: o Agreed with oppression finding, but held that remedy granted was improper – it did not seek to rectify oppression, it just sought to punish NN – inappropriate – gave A more than he ever could have expected – wouldn’t have been able to sell the company even if he was still there o Correct remedy was to order NN and B to purchase A’s shares at FMV, without minority discount
Sidaplex-Plastic Suppliers Inc v. The Elta Group Inc (1998 ONCA) – Creditor is a valid claimant
Creditor was seeking oppression remedy
Small company, L was sole SH, director and officer; Sidaplex had judgement against EG – bank offered security to pay EG’s debt – defaulted on debt – non-intentional on the part of L
EG sold assets and paid off other debts, but didn’t pay Sidaplex – Sidaplex claims against L personally
Held: o Oppression order made against L
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o No bad faith on L’s part, circs amounted to unfair prejudice or unfair disregard for SPS’s interest o L was personally liable for the debt owed by EG to SPS
“REPAP” UPM-Kymmene Corp v. UPM-Kymene Miramichi Inc (2002 ONSC aff’d ONCA)
Recall: claims for breach of director’s duties and oppression claim by SH
Claim – interests of SH were unfairly disregarded as a consequence of the actions of Berg and the board of directors in approving the employment agreement for Berg
Held: o This action saddled Repap with a huge liability and no corresponding benefit to SH o Set aside the agreement – appropriate remedy
BCE Inc v. 1976 Debentureholders (2008 SCC) – LEADING CASE – Test for what constitutes oppression
Investors (led by Tearcher’s Pension Board) bid for 100% control of the shares of BCE o Purchase involved substantial borrowing and guarantee of BCE’s debt by subsidiary Bell Canada
97.3% of BCE’s SH approved plan – Bell Canada debenture holders opposed the transaction and applied for relief under s. 241 for oppression – trading value of their debentures would decline as result of the plan and they may lose their investment-grade status – held primarily by sophisticated financial bodies
BCE set up strategic oversight committee to determine which takeover bid would be accepted o SOC recommended Teacher’s bid – all bids had debt associated to them o Agreed on purchase price 40% higher than public price – debentures lost investment-grade and 20%
Held: o There was no oppression here o Directors may consider interests of SH, employees, suppliers, creditors, consumers, governments and the environment in determining the best interests of the corp and fulfilling their fiduciary duty o Courts should accord deference to the reasonable decisions of directors – business judgement
Test: o First, whether reasonable expectations have not been met (threshold)
 Regard to specific facts, relationships at issue and entire context, recognizing that there may be conflicting claims and expectations between stakeholders
 Commercial practice is significant in forming reasonable expectations
 Size, past practice, representations and agreements
 May be impossible to meet all expectations in business reality – duty to corp, not a group o Second, consider whether the conduct amounts to “oppression”, “unfair prejudice” or “unf air disregard”
 Oppression – coercive and abusive conduct, suggesting bad faith
 Unfair prejudice – less culpable state of mind, but unfair consequence
 Unfair disregard – ignoring an interest of a stakeholder, contrary to reasonable expectation
 Actual unlawfulness is not required – remedy focuses on fairness and equity
Applied: o Did debenture holders have reasonable expectation that investment grade would be maintained?
 They did not – sophisticated financial relationship – could have protected with contract
 No evidence that this could even have been achieved o Did they have reasonable expectation that directors would consider interests in maintaining value?
 In either case, directors did consider interests of the debenture holders
 Contractual terms of debentures would be honoured, but nothing more – that’s fine
Ratio: o In resolving conflict between groups of corp stakeholders, directors must act in a fair manner and in the best interets of the corp
 Here, best interest of the corp favoured acceptance of the offer
Notes: o Recall Westfair found oppression w/out reasonable expectation requirement
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If Corp, D/O, employee, agent, auditor, trustee, receiver, or liquidator of corp does anything in contravention of this Act, the corp’s articles, bylaws or USHA, a complainant or creditor may, in addition to other rights, apply to court for an order directing compliance with/restraining any such persons from acting in breach o Court may so order if it sees fit.
Where this Act states that an application can be made to the court, that application can be made in a summary manner, subject to any order respecting notice to interested parties or costs or order court sees fit
(1) If name of person is alleged to have been wrongly entered / retained / deleted or omitted from the registers or other corp records, the Corp, SH or any other aggrieved person may apply to court for order that records be rectified
(2) Notice to Director – Applicant under this section will give notice to Director – who can attend and be heard in person or by counsel
(3) Powers of the Court – may make any order including: o (a) order requiring register to be rectified o (b) order restraining corp from calling or holding SH meetings or paying dividends before rectification o (c) order determining the right of a party to have their name entered/retained/deleted/omitted from records; and o (d) order compensating a party who has incurred a loss
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