Table of Contents
1. AGENCY
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ELEMENTS OF THE AGENCY RELATIONSHIP
5
GORTON V. DOTY [1937]
5
UNDISCLOSED PRINCIPAL
5
FRIEDMANN EQUITY DEVELOPMENTS INC. V. FINAL NOTE LTD [2000]
5
DISTINCTION BETWEEN ACTUAL, APPARENT, AND OSTENSIBLE AUTHORITY
6
FREEMAN & LOCKYER V. BUCKHURST PARK PROPERTIES (MANGAL LTD.) [1964]
6
WATTEAU V. FENWICK [1893]
7
DISTINCTION BETWEEN AGENCY AND EMPLOYMENT: QUESTION OF VICARIOUS LIABILITY OF MASTER
(EMPLOYER) FOR THE TORTS OF ITS SERVANT (EMPLOYEE) DISTINGUISHED FROM AGENCY
7
671122 ONTARIO LTD. V. SAGAZ INDUSTRIES CANADA INC. [2001]
7
2. PARTNERSHIPS
8
NATURE AND EXISTENCE OF PARTNERSHIP RELATIONSHIP
KHAN V. MIAH [2000]
HURST V. BYRK [2002]
INDICA OF THE PARTNERSHIP RELATIONSHIP
PARTNERSHIP ACT, R.S.O. 1990 (SS. 1-3)
POOLEY V. DRIVER [1876]
A.E. LAPAGE LTD V. KAMEX DEVELOPMENTS LTD. (AND MARCH) [1977]
LEGAL NATURE OF THE PARTNERSHIP
RE THORNE AND NEW BRUNSWICK WORKMANS’ COMPENSATION BOARD
PARTNERSHIP ACT, R.S.O 1990 SS. 1, 2, 3 (PA)
RELATIONSHIP AND NATURE OF THE RELATIONSHIP BETWEEN THE PARTNERS
MEINHARD V. SALMON [1928]
OLSON V. GULLO [1994]
RELATIONSHIP OF THE PARTNERS TO THE OUTSIDE WORLD
STROTHER V. 3464920 CANADA INC. [2007] (BBCA AND SCC)
DISSOLUTION OF THE PARTNERSHIP
HURST V. BYRK, [2000]
PARTNERSHIP ACT, SS. 6, 7, 11, 13, 24, 28-30, 33-35
WRAPPING UP PARTNERSHIPS & LIMITED PARTNERSHIPS AND THE QUESTION OF CONTROL BY
LIMITED PARTNERSHIPS
HAUGHTON GRAPHIC LTD. V. ZIVOT [1986]
LIMITED PARTNERSHIP ACT, R.S.O. 1990, S.13(1)
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3. CORPORATIONS
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(A) GENERAL CONSIDERATIONS
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CONSTITUTIONAL CONSIDERATIONS OF CORPORATE LAW IN CANADA. CONCURRENT PROVINCIAL
AND FEDERAL POWER OF INCORPORATION. LIMITS OF PERMISSIBLE PROVINCIAL INTERFERENCE WITH
FEDERALLY-INCORPORATED CORPORATIONS
14
REFERENCE IN THE MATTER OF THE INCORPORATION OF COMPANIES IN CANADA [1913]
14
BONANZA GOLD MINING CO., LTD. V. THE KING [1916]
15
1
ABILITY BY INCORPORATING JURISDICTIONS TO GRANT EXTRATERRITORIAL CAPACITY TO ITS
CORPORATIONS
JOHN DEERE PLOW CO., LTD. V. WHARTON [1915]
APPLICATION OF THE CHARTER TO CORPORATIONS AND THE STANDING OF CORPORATIONS TO
CHALLENGE LEGISLATION ON THE BASIS OF THE CHARTER
CANADIAN EGG MARKETING AGENCY V. RICHARDSON [1998]
CONSTITUTION ACT, 1867, SS.91 (POGG), 91(15) AND 92(11)
CBCA, R.S.C. 1985 SS.3(4)-(5) AND 15(2)-(3)
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(B) THE PROCESS OF CREATION OF A CORPORATION AND ITS EFFECT
17
PRE-INCORPORATION CONTRACTS
KELNER V. BAXTER [1866]
SHERWOOD DESIGN SERVICES INC. V. 872935 ONTARIO LTD. [1998]
MECHANICS OF CREATING A CORPORATION; DATE ON WHICH A CORPORATION IS CREATED;
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(C) SHAREHOLDERS
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QUESTIONING THE VALIDITY OF INCORPORATION
18
C.P.W. VALVE AND INSTRUMENTS LTD. V. SCOTT
18
EFFECT OF INCORPORATION
18
SALOMON V. SALOMON CO.
18
BASIC CORPORATE STRUCTURE: DISTINCTION BETWEEN ARTICLES AND BYLAWS; THE DEATH OF THE
ULTRA VIRES DOCTRINE
19
ATTORNEY GENERAL OF BELIZE V. BELIZE TELECOM LTD.
19
CBCA SS.9, 14, 15-18, 102-3(1) ET (2), 104-106, 109, 115-116, 121, AND 256(2)
20
CORPORATE PURPOSE: THESIS
20
FORD V. DODGE
20
ANTI-THESIS
20
SHLENSKY V. WRIGLEY
20
CANADIAN SOLUTION
21
BCE INC. V. 1976 DEBENTUREHOLDERS [2008]
21
RECENT LEGISLATIVE DEVELOPMENTS IN BC AND NS
21
BC FINANCE STATUTES AMENDMENT ACT, 2012
21
NS COMMUNITY INTEREST COMPANIES ACT, 2012
21
SOURCES OF FINANCING AVAILABLE TO A CORPORATION. BASIC DISTINCTION: DEBT AND EQUITY.
WHAT IS A SHARE: THE BASIC NATURE OF A SHARE AND BASIC RIGHTS ON A SHAREHOLDER
21
SPARLING V. QUEBEC (CAISSE DE DÉPÔOT ET PLACEMENT DU QUÉBEC)
21
ATCO LTD. V. CALGARY POWER LTD.
22
BOWATER CANADIAN LIMITED V. R.L. CRAIN AND CRAISEC LTD.
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BASIC LIMITATION OF THE POWER OF A SHAREHOLDER
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KELLY V. ELECTRICAL CONSTRUCTION CO [1907]
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AUTOMATIC SELF-CLEANING FILTER SYNDICATE CO. LTD. V. CUNINGHAME [1906]
23
THE MECHANICS OF ISSUING SHARES AND WHAT ASSUMPTIONS CORPORATE LAW MAKES ABOUT THE
NATURE OF SHAREHOLDERS AND ARE THEY STILL VALID (THE CONTINUING VALIDITY OF THE
DISPERSED OWNERSHIP ASSUMPTION
24
CBCA SS.6(1)(C)-(D), 24, 25, 26, 30, 34, 49(8), 50, 118, 189
24
SHAREHOLDERS’ RIGHTS TO DIVIDENDS AND THEIR RIGHTS UPON LIQUIDATION
24
INTERNATIONAL POWER CO. V. MCMASTER UNIVERSITY [1946]
24
THE MECHANICS OF DIVIDEND DECLARATION AND DIVIDEND PAYMENT
24
R. V. MCCLURG [1990]
24
2
CBCA SS. 42, 45, 211(7)(D)
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SHAREHOLDERS – THE CORPORATE FRANCHISE (1) WHEN CAN SHAREHOLDERS VOTE (REGULAR AND
SPECIAL MEETINGS); ON WHAT CAN SHAREHOLDERS VOTE; AND THE PROCESS OF ORGANIZING
SHAREHOLDER VOTES – PROXY SOLICITATION
25
GOODWOOD INC. V. CATHAY FOREST PRODUCTS CORP [2012]
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GOODWOOD INC. V. CATHAY FOREST PRODUCTS CORP [2013] (COSTS)
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CBCA SS. 109, 133-135, 137, 139-143, 146, 173, 176, 183, 190, 210-211
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SHAREHOLDERS – THE CORPORATE FRANCHISE (2) OBLIGATIONS SHAREHOLDERS HAVE TO THE
CORPORATION AND TO OTHER SHAREHOLDERS; LIMITS ON THE RIGHT TO VOTE IN THE
ARTICLES/BYLAWS
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JACOBSEN V. UNITED CANSO OIL & GAS LTD. (ALBERTA QB)
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JACOBSEN V. UNITED CANSO OIL & GAS LTD. (NOVA SCOTIA SC)
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BOWATER CANADIAN LIMITED V. R.L. CRAIN AND CRAISEC LTD. (REPEAT)
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AND ON EXERCISE OF THE SHAREHOLDER FRANCHISE
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TELUS CORPORATION V. MASON CAPITAL MANAGEMENT LLC (BCCA)
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MANAGEMENT OF A CORPORATION
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INTRODUCTION TO THE STRUCTURE OF CORPORATE MANAGEMENT
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MERIDIAN GLOBAL FUNDS MANAGEMENT ASIA LTD V. SECURITIES COMMISSION
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DIRECTORS AND OFFICERS; CURRENT STRUCTURE AND MAKE-UP OF THE BOARD; AND THE EFFECT OF
IMPROPER APPOINTMENT OF DIRECTORS
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MORRIS V. KANSSEN [1946]
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CORPORATE CRIMINAL LIABILITY
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RHÔNE (THE) V. PETER A.B. WIDENER (THE)
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CBCA SS.102(1), 115, 116, 118, 119, 121, AND 122(1)(B), SEE ALSO CRIMINAL CODE SS.2
(DEFINITION OF ORGANIZATION, REPRESENTATIVE, AND SENIOR OFFICER), 22.2
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DIRECTORS’ DUTIES OF CARE
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PEOPLES DEPARTMENT STORES INC. (TRUSTEE OF) V. WISE
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FIDUCIARY DUTIES – INTRODUCTION – BASIC STATUTORY DUTY
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PEOPLES DEPARTMENT STORES INC. (TRUSTEE OF) V. WISE
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THE DUTY OF SUPERVISION
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IN RE CAREMARK INTERNATIONAL INC.
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CBCA, S.122(1)(A)
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MANAGER’S FIDUCIARY DUTIES I – CONFLICT OF INTEREST AND DUTY
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NORTH-WEST TRANSPORTATIONS CO. V. BEATTY [1887]
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AFFIRMING OR APPROVING INTERESTED TRANSACTIONS
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CBCA S.120
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MANAGER’S FIDUCIARY DUTIES II – CORPORATE OPPORTUNITY DOCTRINE
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REGAL (HASTINGS) LTD. V. GULLIVER [1942]
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PESO SILVER MINES LTD. V. CROPPER
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CAN. AERO V. O’MALLEY
34
BROZ V. CELLULAR INFORMATION SYSTEMS, INC.
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MANAGERS’ FIDUCIARY DUTIES III – CHANGE OF CONTROL TRANSACTIONS.
35
INTRODUCTION TO THE RISE OF TAKEOVERS; EARLY ATTEMPTS TO CONTROL THE PROCESS:
REVIEWING THE EXERCISE OF POWERS BY DIRECTORS FOR AN IMPROPER PURPOSE
35
HOGG V. CRAMPHORN LTD.
35
TECK CORP. V. MILLAR
36
THE NEW APPROACH
37
BCE INC. V. 1976 DEBENTUREHOLDERS [2008]
37
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MANAGERS’ FIDUCIARY DUTIES IV – CHANGE OF CONTROL TRANSACTIONS II; PROTECTING
DIRECTORS: D & O INSURANCE AND INDEMNIFICATION OF DIRECTORS
CYTRYNBAUM V. LOOK COMMUNICATIONS INC. [2013]
CBCA S.124
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REASONS FOR SETTING THE BASIC CORPORATE RISK ALLOCATION: VEIL-PIERCING
AND REVERSE VEIL-PIERCING
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LEE V. LEE’S AIR FARMING LTD.
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TRANSAMERICA LIFE INSURANCE CO. OF CANADA V. CANADA LIFE ASSURANCE CO.
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VTB CAPITAL PLC V. NUTRITEK INTERNATIONAL CO.
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THIRD PARTIES SUING DIRECTORS, EMPLOYEES, AND SHAREHOLDERS DIRECTLY OF A CORPORATION
FOR CONSEQUENCES OF THEIR INTERACTION WITH THE CORPORATION. SUING SHAREHOLDERS
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THE THIN CAPITALIZATION ARGUMENT
41
WALKOVSKY V. CARLTON
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PROBLEM OF SUING DIRECTORS FOR INDUCING THE BREACH OF CONTRACT INTO WHICH A
CORPORATION THEY ARE DIRECTORS OF AND THE SCOPE THE SAID V. BUTT DEFENCE
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SAID V. BUTT
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ADGA SYSTEMS INTERNATIONAL INC. V. VALCOM LTD.
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HOGARTH V. ROCKY MOUNTAIN SLATE INC.
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OTHER WAYS DIRECTORS CAN BE PERSONALLY LIABLE
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AIR CANADA V. M & L TRAVEL LTD
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SHAREHOLDERS SUING TO DIRECTLY ENFORCE RIGHTS THAT BELONG TO THE CORPORATION –
SHAREHOLDER’S INSURABLE INTEREST
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MACAURA V. NORTHERN ASSURANCE CO.
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KOSMOPOULOS V. CONSTITUTION INSURANCE CO. OF CANADA
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HERCULES MANAGEMENTS LTD. V. ERNST & YOUNG
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HOULE V. BANQUE CANADIENNE NATIONALE
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SMITH, STONE AND KNIGHT LTD. V. BIRMINGHAM CORP. [1939]
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REMEDIES
50
THE REPRESENTATIVE/DERIVATIVE ACTION
HERCULES MANAGEMENTS LTD. V. ERNST AND YOUNG
APPRAISAL REMEDY; AND INVESTIGATION
CBCA SS. 104, 162, 167, 190, 238-240
OPPRESSION REMEDY I – WHO IS ENTITLED TO SUE UNDER THE OPPRESSION REMEDY?
FIRST EDMONTON PLACE LTD. V. 315888 ALBERTA LTD. [1988]
DOWNTOWN EATERY (1993) LTD. V. ONTARIO [2001]
DISTINCTION BETWEEN THE OPPRESSION REMEDY AND THE DERIVATIVE ACTION
PASNAK V. CHURA [2003]
CBCA SS. 238, 241-242
OPPRESSION REMEDY II
BCE INC. V. 1976 DEBENTUREHOLDERS [2008]
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4
1. Agency
Elements of the Agency Relationship
Gorton v. Doty [1937]
Facts:
Teacher tells football coach that he can use her car to drive team to their game “as long as he was the
one driving.” Accident causes injury to one of the players, and player is now suing the teacher as the
principal of the coach, who was the agent.
Issue:
Was the coach acting as an agent of the teacher?
Reasoning:
Agency denotes the relationship where one person acts for another.
- The manifestation of consent by one person to another that the other shall act on his behalf
and subject to his control, and consent by the other so to act.
For this relationship to exist, a contract or compensation are not necessary
1. The appellant consented that the coach should act for her and in her behalf in driving the
car to and from the football game by volunteering her vehicle with the express stipulation
that he should drive it
2. The coach consented to so act for the appellant by his act driving the car
The relationship of principal and agent existed
Dissent:
There is insufficient evidence showing that the coach was (a) acting as an agent of the teacher, and
(b) acting within the scope of his authority
- Agency involves more than passive permission; requires request, instruction, or command
- This was nothing more than a kindly gesture and the statement that only the coach should
drive was not instruction, it was a mere precaution
Holding:
The relationship of principal and agent existed; the player can pursue the teacher for damages.
Undisclosed Principal
Friedmann Equity Developments Inc. v. Final Note Ltd [2000]
Facts:
FE is trying to sue the principals of FN (doctors) because FN doesn’t have enough money to pay back
the loan defaulted upon. The contract, though, was made under seal, which prevents action against
anyone but the signatories.
Issue:
Will FE be permitted to do away with the sealed K rule?
Reasoning: (SCC, Bastarache)
An undisclosed principal cannot be sued on a K executed by his or her agent when that K is executed
under seal (also does not need consideration)
- Courts should not interfere with established rules of law without clear evidence that it is
necessary to change the law to be in step with commercial reality and that a change in the
rule will not have unwarranted ramifications
In a simple K this would not be a problem, but here it was clearly under seal
Harmer v. Armstrong:
- In the case of a trust, the sealed K rule doesn’t apply because it involved a breach of trust;
was an equitable remedy as opposed to the CML sealed contract rule (doesn’t apply
here)
- Provides the means for beneficiaries to enforce those agreements entered into by their
trustees when they refuse to do so.
The sealed K rule applies to corporations equally as to individuals
5
- The application of the seal must be conscious and deliberate; must examine the
instrument/circumstances surrounding its creation to determine intention to
officially seal
No principled reason for getting rid of the sealed K rule; would create uncertainty in the law
Holding:
FE cannot sue the principals of FN because they were not parties disclosed on the K, which was
signed under seal.
Distinction between Actual, Apparent, and Ostensible Authority
Freeman & Lockyer v. Buckhurst Park Properties (Mangal Ltd.) [1964]
Facts:
K. represented to F. (contractors) that B. would hire and pay them for a surveying job. There was a
default, and F. is now seeking payment from B., who is saying that K. didn’t have authority and they
can’t be bound. B. says liability is K.’s not theirs.
Issue:
Did B. confer authority on K. to enter into contracts on their behalf?
Reasoning:
Actual Authority:
- Legal relationship between principal and agent created by a consensual agreement to
which they alone are parties
- If the agent enters into a K pursuant to the actual authority, contractual rights/liabilities
are created between the principal and the contractor
Apparent/Ostensible Authority:
- Legal relationship between the principal and the contractor created by a representation
made by the principal to the contractor intended to be, and actually, acted upon that the
agent has authority to enter into a K so as to render the principal liable to perform any
obligations imposed upon him by such a K.
* Capacity of a corporation is limited by its constitution
A corporation cannot do any act, or make any representation, except through its agent (Doctrine of
ultra vires)
In order to create an estoppel between the corporation and the contractor, the representation
must be made by some persons who have actual authority from the corporation to make such
representations
- Can be conferred by the constitution of the corp. namely the board of directors
Criteria to entitle a contractor to enforce a representation made by an agent:
1. Representation that the agent had authority to enter on behalf of the company into a K of
the kind sought to be enforced was made to the contractor
2. Representation was made by a person who had ‘actual’ authority to manage the business
of the company
3. The contractor was induced by representation to enter into the K, and that he relied on
that representation
4. That under its constitution the company was not deprived of the capacity either to enter
into a K of the kind sought to be enforced, or to delegate authority to enter into a K of that
kind to the agent
* The only ‘actual’ authority that matters is that of the person making the representation relied upon
(this is ostensible authority doctrine)
Application:
1. Board knew that K. had been acting as managing director, permitted him to do so, and by such
conduct represented that he had authority to enter into K’s.
2. The constitution of the corporation conferred full powers of management on the board (actual
authority)
3. F. was induced to believe that K. was authorized to enter into K’s on behalf of F., and relied
on those representations.
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4. The articles of the constitution do not deprive the company of capacity to delegate authority to K.
to enter into K’s on behalf of the company.
Holding:
K. had was legitimately delegated authority by B. to enter into K’s on their behalf. Therefore they are
liable. Ruled for F.
Watteau v. Fenwick [1893]
Facts:
W. suing for price of cigars sold to F. W. dealt with H. the entire time, when the business actually
belonged to F.
Issue:
Was H. acting within the authority of his agency?
Reasoning:
Once it is established that the defendant was the real principal and H. the agent, the principal
is liable for all the acts of the agent which are within the authority usually confided to an agent of
that character, notwithstanding limitations, as between the principal and the agent, put upon that
authority
- “holding out of authority” is not strictly necessary; otherwise undisclosed principals
wouldn’t exist
Holding:
The plaintiff can sue the defendant for price of the unpaid cigars.
Distinction between Agency and Employment: Question of Vicarious Liability of
master (employer) for the torts of its servant (employee) distinguished from agency
671122 Ontario Ltd. v. Sagaz Industries Canada Inc. [2001]
Facts:
O. suffered serious loss when it was replaced as supplier to Canadian Tire by S. This happened
because a bribe was paid by A. to CT. O. brings this action.
Issue:
Is S. vicariously liable for the tortious conduct of the consultant A.?
Reasoning: (SCC Major J.)
Agency does not create vicarious liability; requires a much stronger connection (one of
employment)
Criteria of an employee relationship:
1. Control over the worker
2. Ownership of the tools/equipment used
3. Chance of profit remains with the employer
4. Risk of loss remains with the employer
* Not an exhaustive list
Application:
- A. was in control of his job functions
- He worked on his own commission rates
- His chances of profit/risk of loss depended completely on his own initiative
Holding:
A. was an independent contractor and not an employee of S., therefore S. cannot be held vicariously
liable for A.’s actions.
7
2. Partnerships
Nature and Existence of Partnership Relationship
Khan v. Miah [2000]
Facts:
K. and M. were partners with the goal of running a restaurant. K. were the cooks and M. were the
financiers. The location/stock/other things were acquired but the relationship broke down before
the actual restaurant started business. Was there ever a partnership?
Issue:
Do parties to a joint venture become partners only when the actual trading commences?
Reasoning:
CA said that partnership only starts once the actual venture commences
- Impossibly narrow view of the enterprise
- The acquisition, conversion, fitting out of the location were all part of the joint
venture, were undertaken with a view of ultimate profit, and formed part of the business
which the parties were in the partnership for
The rule is that persons who agree to carry on business as a joint venture do not become
partners until they actually embark on the activity in question; obtaining the things necessary
for the carrying on of that business counts as embarking on the activity (starting the trading is
secondary)
Holding:
Trial judge’s orders restored. Ruled for M.
Hurst v. Byrk [2002]
Facts:
H. and defendants B. became partners in a firm of solicitors. All save H. served retirement notices,
sought early termination despite H.’s objections. H. then sought declaration that he was discharged
from contributing towards the partnership liabilities accruing after the early termination due to the
alleged ‘repudiation’ of the K through the early termination.
Issue:
Is the innocent partner discharged from further liability to contribute to the debts/obligations of the
partnership after a fundamental breach terminating the partnership?
Reasoning:
H. contends that by accepting his partners’ repudiatory breach, he was discharged from his
contractual obligation to contribute to the deficit.
- H.’s obligations are not contractual but equitable
- However much an individual partner may have been wronged by his fellow partners,
he remains jointly liable with them for the debts of the firm
- * His liability accrued before the breach occurred, and was in no way caused by his
partners’ breach; they accrued while he was still a partner, so he is equally responsible for
them
H. is entitled to damages based on the breach if he can show that damages occurred (which he can’t)
Partnerships are governed by equity not the CML; you can’t walk away from your partnership
obligations or unilaterally rescind the partnership even because of a material breach
Holding:
Ruled for B. H.’s obligations to the partnership remain after the dissolution.
Indica of the Partnership Relationship
Partnership Act, R.S.O. 1990 (ss. 1-3)
3. In determining whether a partnership does or does not exist, regard shall be had to the following
rules:
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3.1. Joint tenancy, tenancy in common, joint property, common property, or part ownership does not
of itself create a partnership as to anything so held or owned, whether the tenants or owners do or
do not share any profits made by the use thereof.
3.2. The sharing of gross returns does not of itself create a partnership, whether the persons sharing
such returns have or have not a joint or common right or interest in any property from which or from
the use of which the returns are derived.
3.3. The receipt by a person of a share of the profits of a business is proof, in the absence of evidence
to the contrary, that the person is a partner in the business, but the receipt of such a share or
payment, contingent on or varying with the profits of a business, does not of itself make him or her a
partner in the business, and in particular,
(a) the receipt by a person of a debt or other liquidated amount by instalments or otherwise out of
the accruing profits of a business does not of itself make him or her a partner in the business or liable
as such;
(b) a contract for the remuneration of a servant or agent or a person engaged in a business by a share
of the profits of the business does not of itself make the servant or agent a partner in the business or
liable as such;
(c) a person who,
(i) was married to a deceased partner immediately before the deceased partner died,
(ii) was living with a deceased partner in a conjugal relationship outside marriage
immediately before the deceased partner died, or
(iii) is a child of a deceased partner,
and who receives by way of annuity a portion of the profits made in the business in which
the deceased partner was a partner is not by reason only of such receipt a partner in the
business or liable as such;
(d) the advance of money by way of loan to a person engaged or about to engage in a business on a
contract with that person that the lender is to receive a rate of interest varying with the profits, or is
to receive a share of the profits arising from carrying on the business, does not of itself make the
lender a partner with the person or persons carrying on the business or liable as such, provided that
the contract is in writing and signed by or on behalf of all parties thereto;
(e) a person receiving by way of annuity or otherwise a portion of the profits of a business in
consideration of the sale by him or her of the goodwill of the business, is not by reason only of such
receipt a partner in the business or liable as such.
Pooley v. Driver [1876]
Facts:
Under a deed B. and H. agreed to enter into a trade partnership agreement. The defendant D. was to
provide financing for 500L as a “creditor” and would then share in the profits realized by the
partnership indefinitely. However, if it turned out that the profits of any years which had been paid
exceeded the total profits made from the business, the contributors were to pay back the excess,
never exceeding the amount they had contributed. B. and H. went bankrupt, P. is seeking to collect
against D. as a partner of B. and H.
Issue:
Despite being described in the deed as a quasi-creditor, is D. in fact a partner against which P. can
seek satisfaction of the partnership’s outstanding debts?
Reasoning:
State of the Law
As a general rule, a partnership involves a commercial business carried on with a view to profit and
for division of profits between the partners
- Generally, each partner contributes something, but it isn’t an absolute rule; there can be
silent partners (see Watteau v. Fenwick)
There is a prima facie presumption that a partnership exists where a person participates in
the profits of a joint endeavor
- Rebuttable where different circumstances exist
9
- Participating in the profits entails participation in the liabilities
* Participating in profits is a proper test for partnership where nothing exists to rebut it
Application
The intention on the face of the document was to extend to D. all the benefits of the partnership,
while protecting them from the liabilities
* The lending of a sum of money on a bona fide contract to receive a rate of interest varying
with the profits does not make the lender a partner; simple sharing of the profits in this way
does not a partner make. BUT:
- D. got ALL the benefits of the deed of partnership
- D. became entitled to shares of the capital, but ALSO entitled to compel the partners
to employ that capital in “the regular course of trade”
- There is a provision that if D. were to go bankrupt, the partnership would terminate (this
covenant is very strange for someone in the position of a lender, but not so strange for
someone acting as a partner)
Not only profit but control; not the position of an ordinary lender
Holding:
Ruled for P. The defendants, D., were acting as partners and are liable as such.
A.E. LaPage Ltd v. Kamex Developments Ltd. (and March) [1977]
Facts:
M. mistakenly put up an exclusive listing agreement with A., a real estate agent, then sold through
someone else. K. refusing to pay commission. Did M. have authority to do so, and was he a partner
signing on behalf of the partnership?
Issue:
Was M. a partner of K. and did he sign on behalf of the partnership?
Reasoning:
Keywords of definition of partnership in Partnerships Act are “persons carrying on a business in
common with a view to profit”
- Mere fact that property is owned in common and that profits are derived therefrom does
not of itself constitute the co-owners as partners
- Depends on whether the intention of the co-owners was to carry on a business or
simply provide for an agreement for the regulation of their rights and obligations as
co-owners of a property
Application
It is clear from the documents that the parties wanted to maintain their separate rights as coowners of the property
- No partnership existed, and therefore M.’s signature did not bind them
- M. was a co-owner not a partner
Did M. then incur personal liability thereby?
- No. M. signed as an agent to the knowledge of the employees of the respondent with whom
he dealt. He is not personally liable.
- M. was acting on behalf of K. as an agent, but outside of his authority; A. could have
sued M. for breach of warranty, but didn’t bring it up so they don’t get it
Holding:
There was no partnership. Ruled for K.
Legal Nature of the Partnership
Re Thorne and New Brunswick Workmans’ Compensation Board
Facts:
T. and another entered into oral agreement to carry on partnership of lumbering/sawmill business.
They filed all the proper stuff with the Board. T. suffered injuries in the course of his job. Applied for
compensation alleging he was a workman within the meaning of the Act, and entitled to benefits
thereunder.
Issue:
10
Was T., on the day of the accident, a workman employed by the partnership within the meaning of
the Workman’s Compensation Act, and so entitled to benefits?
Reasoning:
Under the Partnership Act, no person can enter into a contract with himself or be his own employer
- Partnerships regarded as having no legal existence distinct from the individuals
composing it, no person could be an employee of a firm to which he is a member
O. contends that partnerships should be regarded as legal entities distinct from their component
members, and therefore that the firm was capable of entering a K of employment with him
 The firm name (partnership name) is a mere expression, not a legal entity
Holding:
The firm is not a legal entity, and therefore T. cannot seek compensation as an employee.
Partnership Act, R.S.O 1990 ss. 1, 2, 3 (PA)
Relationship and nature of the relationship between the partners
Meinhard v. Salmon [1928]
Facts:
S. was manager and had lease of building for 20yrs with M. joint adventurer. Near the end of the
lease, S. organized to renew the lease to a company which he owned and controlled without telling M.
M. now seeking holding that the lease part of the partnership.
Issue:
Does M. have a right to half of the lease as was his interest in the joint venture with S.?
Reasoning: (Cardozo)
Joint adventurers, like partners, owe each other, while the enterprise continues, the duty of the
finest loyalty
S. excluded M. from any chance to enjoy the opportunity for benefit
- This is an Equity question
The exclusive managerial role held by S. charged him even more with a duty of disclosure
- S. obtained his opportunity for the venture while he was a partner, and was thus
bound not to separate his interest from M.’s
- There can be no abuse of special opportunities growing out of a special trust as
manager or agent
M.’s interest should be equal to his contribution to the joint adventure (1/2)
Dissent: (Andrews)
Fair dealing and honesty is required, but nothing more
When the partner takes no new lease but buys the reversion in good faith, there is no offshoot
of the original lease
- Must show Fraud, dishonesty, or unfairness
The new lease started after the end of the partnership, covered additional property, and had new
terms
- Was not a renewal; was the purchase of the reversion
M. had an equitable interest in the original lease, but it ended when the joint adventure did
Holding:
S. breached duty of honesty to his joint adventurer, M. owes him half the value of the lease.
Olson v. Gullo [1994]
Facts:
O. and G. were equal partners in the development of a tract of land. G. bought and sold for his own
profit a piece of the land owned by the partnership and made a bunch of money. O. suing for his
share.
JH:
Trial judge awarded O. disgorgement of entire profit made by G.
Issue:
Is the proper remedy disgorgement or half?
11
Reasoning:
No question that the parties were partners and G. purposefully tried to screw O.
G. must not be allowed to profit from his breach
- The proper remedy is to give 50% of the profits to O. not the entire amount
* This puts O. in the same position which he would have occupied if there had been no
wrongdoing (had G. not done the sale in secret)
- The remedy is in Equity; should not be penal in nature, which it would be if disgorgement
were ordered
* Fact that G. tried to hire a hit-man to kill O. doesn’t factor in (he was already convicted for
that)
Holding:
The proper remedy is 50% of the profits to O., not disgorgement (accounting of profits).
Relationship of the partners to the outside world
Strother v. 3464920 Canada Inc. [2007]
Facts:
S. was a rainmaker in tax law at Davis LLP. Manipulated Canadian tax credits to make big bucks,
finance movies, etc. Monarch (346…) was a client of S.’s, he was giving them tax advice, billing them
for his own work, giving the other lawyers at Davis side-work on the file. New tax ruling came out
with big implications for M. Instead of telling them, S. incorporates his own company (against the
instruction of the firm), and took all of M.’s business (made about 65M$). M. sues S. as well as Davis.
JH:
CA – Allowed appeal, ordered S. to disgorge to M. all benefits/profits received or receivable from S.’s
new company Sentinel. Also ordered Davis to disgorge profits it earned in the form of legal fees from
acting for Sentinel in breach of duty to M. from January 1, 1998 and return to M. all fees paid by it
from that date.
Issues:
Who is liable and for what?
Reasoning: (SCC Binnie J.)
Equitable remedies are always subject to the discretion of the court
Disgorgement can serve two different equitable purposes:
1. * Prophylactic Purpose: give to the person whose fiduciary duty was violated any
profits/benefits made through the breach
2. Restitutionary: Return to the beneficiary profits which were wrongly appropriated by the
fiduciary in breach of its duty
Relevant causation is the breach of fiduciary duty and the defendant’s gain (not the plaintiff’s loss)
Legal Fees Paid by Monarch to Davis
There must be a causal relationship between the fiduciary breach and the profits earned
- D. committed no breach of fiduciary duty to M. and is not responsible for S.’s breach.
There can be no equitable relief against D. here.
Legal Fees Paid by Sentinel to D.
CA ordered D. to disgorge profits earned from acting for Sentinel in breach of its duty to M.
- There was no conflict known to D. that prevented it from acting for both Sentinel and M.
- Therefore legal fees paid by Sentinel to D. cannot be said to be “in consequence” of
breaches of fiduciary duties owed by D. to M.
Profits Earned by S.
S. must account for profit earned from the personal financial opportunity he pursued in Sentinel in
breach of his fiduciary duty to M.
- Sentinel advanced S. 1M$ before he quit D.
- S. cannot be permitted to profit from the money made through his breach of fiduciary
duty to M.
Period for which S. has to disgorge
S. denied M. the opportunity to find other counsel and take advantage of the new tax ruling
Also failed to notify M. of the new tax ruling which came out October 6, 1998
12
- S. should disgorge all profits received during his time with D. between January 1998 and
March 1999 (when M. and S. severed links with D.)
Is D. liable for S.’s fiduciary breach? If so to what extent?
No only was D. unaware of S.’s financial interest, but D. ordered S. to not take any interests in
Sentinel; no reason for them to believe that he didn’t comply
BUT M. contends that D. is still statutorily liable under the BC Partnership Act:
11. A partner in a firm is liable jointly with the other partners for all debts and obligations of
the firm incurred while he or she is a partner…
12. If, by any wrongful act or omission of any partner acting in the ordinary course of the
business of the firm or with authority of his or her partners, loss or injury is caused to any
person who is not a partner in the firm or any penalty is incurred, the firm is liable for that
loss, injury or penalty to the same extent as the partner so acting or omitting to act.
An injury, even without loss, is sufficient
- Doesn’t say anywhere that prior knowledge of the delinquency is a condition precedent to
liability
Requires S.’s wrong to be so connected with the partnership business that it can be said that D.
introduced the risk of the wrong that befell M.
- CA said no
- SCC says Yes
Holding:
D. is vicariously liable for the profits that S. billed to M. directly, but nothing else. S. is liable for all the
profits he made in breach of the fiduciary duty owed to M.
Dissolution of the partnership
Hurst v. Byrk, [2000]
Facts:
H. and defendants B. became partners in a firm of solicitors. All save H. served retirement notices,
sought early termination despite H.’s objections. H. then sought declaration that he was discharged
from contributing towards the partnership liabilities accruing after the early termination due to the
alleged ‘repudiation’ of the K through the early termination.
Issue:
Is the innocent partner discharged from further liability to contribute to the debts/obligations of the
partnership after a fundamental breach terminating the partnership?
Reasoning:
H. contends that by accepting his partners’ repudiatory breach, he was discharged from his
contractual obligation to contribute to the deficit.
- H.’s obligations are not contractual by equitable
- However much an individual partner may have been wronged by his fellow partners,
he remains jointly liable with them for the debts of the firm
- His liability accrued before the breach occurred, and was in no way caused by his
partners’ breach; they accrued while he was still a partner, so he is equally
responsible for them
H. is entitled to damages based on the breach if he can show that damages occurred (which he can’t)
Partnerships are governed by equity not the CML; you can’t walk away from your partnership
obligations or unilaterally rescind the partnership even because of a material breach
Holding:
Ruled for B. H.’s obligations to the partnership remain after the dissolution.
13
Partnership Act, ss. 6, 7, 11, 13, 24, 28-30, 33-35
Wrapping up Partnerships & Limited Partnerships and the Question of Control by
Limited Partnerships
Haughton Graphic Ltd. v. Zivot [1986]
Facts:
H. suing Z. for the payment of an outstanding printing debt incurred by Z.’s magazine before going
under. Printcast (Ltd partnership), Lifestyle (General partner), and Z. and M. (limited partners). Z.
was known to suppliers as the president, used the title to introduce himself, used Printcast business
cards, etc.
Issue:
Can Z. be held liable as a general partner?
Reasoning:
Z.’s relationship with Printcast
Alberta Partnership Act:
63. A limited partner does not become liable as a general partner unless, in addition to
exercising his rights and powers as a limited partner, he takes part in the control of the
business.
* If a limited partner takes part in the control of the business, he becomes liable under the statute as a
general partner, which entails unlimited liability to the extent of his assets
Holding:
Z. took a direct role in controlling/managing Printcast, and is therefore a general partner according
to s.63, entailing unlimited liability towards creditors.
Limited Partnership Act, R.S.O. 1990, s.13(1)
3. Corporations
(A) General Considerations
Constitutional Considerations of Corporate Law in Canada. Concurrent Provincial and
Federal power of incorporation. Limits of permissible provincial interference with
federally-incorporated corporations
Reference in the Matter of the Incorporation of Companies in Canada [1913]
Facts:
Reference as to the nature and extent of the restrictions upon the power of provincial legislatures in
regard to the incorporation of companies.
Issue:
Can a provincially incorporated company operate within its charter outside the jurisdiction in which
it was incorporated?
Reasoning: (SCC Anglin J.)
Has to do with the division of powers between ss. 91/92 of the BNA
- s.92(11): gives prov power to incorporate companies with “provincial objects”
- s.91(15): gives fed exclusive power to incorporate banks
Clause at s.92 doesn’t negative the provincial power of incorporating other provincial corporations to
which it doesn’t apply
- Incorporation Federally falls under Peace Order and Good Government (POG)
- Incorporation can be done either fed/prov
14
Understood that incorporation of companies with fed objects is prohibited for the provs and vice
versa for fed
But nothing to suggest that a provincially incorporated company can’s seek the “Comity” of
another state/prov to enable it to operate within its borders
- Permission, registration, license giving right to operate
- A province can’t give a corporation powers outside of the province because it would be
ultra vires the legislatures power
A fed incorporated company is a domestic company in all parts of Canada; exercises its powers as of
right in all Canadian provinces
Holding:
Both Prov and Fed can incorporate.
Bonanza Gold Mining Co., Ltd. v. The King [1916]
Facts:
B. created as corporation with Letters Patent giving it same powers, etc. as natural person. B. signed
leases with the Crown for mines/mining rights. B. wants to expand, K. denies B.’s status as a
corporation, it being incorporated outside of Ontario and therefore operating outside of its area of
jurisdiction.
Issue:
Can a provincially incorporated company operate outside of the jurisdiction in which it was created?
Reasoning: (Viscount Haldane)
No words in Letters Patent limit the area of operation or prohibit the company from carrying out its
objects beyond the provincial borders
- Companies created by statue may very well be limited by the terms which serve to create
the company, but letters patent create natural persons with the freedoms of movement
inherent in such
- “The company derives its existence from the act of the Sovereign and not merely from the
words of a statute”
However, the prov doesn’t have the power to GIVE rights/powers outside of the jurisdiction
- However, the Co does have the power to ACCEPT extraterritorial powers from another
jurisdiction where they are offered/given
B. had the capacity to accept, and was given, the authority to carry out its mining operations in
Ontario
Holding:
Ruled for B.
Ability by incorporating jurisdictions to grant extraterritorial capacity to its
corporations
John Deere Plow Co., Ltd. v. Wharton [1915]
Facts:
J. sells machines to W. then W. refuses to pay because under BC legislation it isn’t officially a
corporation, even though fed incorporated.
Issue:
Can a prov legislation limit the powers of a federally incorporated company?
Reasoning: (Viscount Haldane)
Concerns provisions of the BC Companies Act that 1. Prohibit companies not incorporated in BC from
taking action in BC courts unless they have a license, 2. Impose penalties on companies operating
without license in BC
Was it within the Prov’s powers to legislate as to interfere with the carrying on of business of a fed
incorporated company?
- The provincial ability to incorporate cannot affect J., it being a company incorporated
under the Peace Order and Good Government of the fed powers
15
- Fed can confer power to trade everywhere in Canada, but not to infringe on prov rights
under s.92
The prov provisions compelling J. to get a prov license/register in the prov as a condition of
exercising its powers or suing in the courts are inoperative
 Prov cannot interfere with the status/corporate capacity of a Dominion company in so far as
powers conferred by the Parliament of Canada
Holding:
Provincial legislature cannot restrict fed company powers directly conferred upon it by the fed
government; it can, however, tax all companies equally through the vehicle of a license, just not in a
way that targets fed companies.
Application of the Charter to Corporations and the Standing of Corporations to
Challenge Legislation on the basis of the Charter
Canadian Egg Marketing Agency v. Richardson [1998]
Facts:
C. attacking R.’s right to challenge legislative provisions in question on the grounds that C. is a
corporation with monopoly over egg production in NWT and as a corporation cannot claim
constitutional rights under s.2(d) and s.6 of the Charter, which protect individuals only.
Issue:
Can a corporation claim Charter protection as an individual?
Reasoning: (SCC Iacobucci and Bastarache JJ)
Corporations can invoke the Charter under the Big M Drug Mart exception (corporation allowed to
invoke s.2(a) religious freedom in face of mandatory religious closure on Sundays)
- Time to expand the rule to allow corporations to invoke the Charter when they are
defendants in civil proceedings instigated by the state or a state organ pursuant to a
regulatory scheme
Generally a party seeking to invoke the Charter can be granted standing:
1. As of right
2. The Big M Drug Mart exception
3. Public interest standing
4. Under Residuary Discretion
Big M Drug Mart Exception
Created an exception that granted standing as of right to an accused charged under legislation
alleged to be unconstitutional; Big M extended this right to an accused whose own rights are not
in fact violated (corporation doesn’t have religious freedom), but who alleges that legislation
under which the accused is being prosecuted is unconstitutional
* Same principle applies here and gives standing as of right to R.
R. isn’t before the court voluntarily, it was forced there by a state organ, C.
- If the foundations of the remedies sought by C. is an unconstitutional law, it would be
ridiculous to bar R. from challenging them merely because R. is a corporation
Holding:
If a corporation is involuntarily brought before the court by a state agency pursuant to a regulatory
regime that the corporation believes is unconstitutional, then that corporation can invoke the
Charter as a defense under standing as of right. Ruled for R.
* Sidebar: For Big M exception to apply (give corporation recourse to Charter “as of right”):
1. Must be corporation
2. Must be defendant brought before court involuntarily
3. Plaintiff must be the state or a state agency
16
Constitution Act, 1867, ss.91 (POGG), 91(15) and 92(11)
CBCA, R.S.C. 1985 ss.3(4)-(5) and 15(2)-(3)
(B) The Process of Creation of a Corporation and its Effect
Pre-Incorporation Contracts
Kelner v. Baxter [1866]
Facts:
K. was wine merchant with property, it was suggested that a joint stock company be formed for
management of the property. Directors: B. (and others) and K. with K. as manager. Obtained
certificate of incorporation. Before Incorporation, sale of some goods by K. to defendants “on behalf
of the proposed Gravesend… Hotel.”
Issue:
Are the defendants personally liable where the company had not yet been incorporated?
Reasoning: (Erle C.J.)
If the company had been an existing company at the time of the sale, the persons who signed the
agreement would have signed as agents of the company; as there was no company existing at the
time, the agreement would be wholly inoperative unless it’s held binding on the defendants
personally
Where a K is signed by one who professes to be signing as an agent, but who has no
principal existing at the time, and the K would be inoperative unless binding upon the
person who signed it, he is bound thereby
Companies are not liable for obligations that arose before their creation
Holding:
The defendants are personally liable for the K that they signed; companies aren’t liable for
obligations arising before their creation.
Sherwood Design Services Inc. v. 872935 Ontario Ltd. [1998]
Facts:
O. entered into a pre-incorporation K of purchase/sale for assets of S. Law firm taking care of
transaction took a ‘shelf-company’ under name of Fuller, partner, to assign to O. The transaction
failed to close in time. The new directors of the company never signed any of the documents taking
control of the company, so partner, Fuller, remained sole director. Later, they passed the same shelfcompany off to a new client, without realizing the liabilities to S. that this legal person still had for the
past breach, which S. is suing for.
JH:
Trial judge found that corporation wasn’t bound, but that the individuals were.
Issue:
Can O. be held liable for a K entered into before incorporation?
Reasoning: (ONCA Borins J) DISSENTING
Obvious that S. doesn’t care about getting decision against individual respondents; no money. They
are directly going after the corporation in its new form, whether or not it has a new directorship
 Provisions of s. 21 of the OBCA: holds that persons who enter K’s on behalf of a corporation
before it comes into existence are personally bound by the K and entitled to the
benefits/consequences thereof
 However, a corporation can signify its intention to be bound by a pre-incorporation K
through an act or conduct (OBCA s.21(2))
In making the corporation available to the use of the respondents, Fuller was only acting as partner
in charge of the shelf companies, not on behalf of the corporation
 Therefore letter sent by the associate at the law firm did not constitute any action or
conduct of the corporation for the purposes of OBCA
17
o The action must be that of the corporation
General Principles
A company has no existence before its incorporation
 See Kelner v. Baxter
 A K made by promoters of a company before incorporation binds only the promoters;
after, a company by its unilateral act may take the benefit and assume the liabilities of
a K made in its name or on its behalf before incorporation
CBCA s.14 supports this
For action/conduct to show intention of corporation to adopt pre-incorporation K:
1. Must be performed by the corporation
2. Must be performed with the knowledge of the terms of the K
In entering into pre-incorporation K, S. took the risk that O. may not be incorporated
Holding:
[Appeal allowed by majority]
Mechanics of creating a corporation; date on which a corporation is created;
questioning the validity of incorporation
C.P.W. Valve and Instruments Ltd. v. Scott
Facts:
Involves a distributorship K between parties. Pre-incorporation K based on the fact that S. wasn’t
actually incorporated on the date the deal was to go through since the articles of incorporation
showed it had incorporated on June 15th, when it was actually back-dated, and was really registered
on the 16th, so C. refused the order, sued for breach.
Issue:
Does a corporation become a legal entity on the date listed on certificate of incorporation or the date
of registration?
Reasoning: MAJORITY (Clement J.)
Companies Act of Canada s.133:
 Also states that the date on the certificate is conclusive proof of legal capacity/existence
However, the existence of the company on the date listed is a presumption that is rebuttable
by proof that registrar had not in fact finished his duties
 In this case, the burden has been met; the registrar hadn’t finished his duties until the 16 th,
so that day is when S. became a company
Dissent: (ABCA McDermid J)
Alberta Corporations Act s.28:
 States that the date on the certificate is what counts
 If the certificate (charter of the company) bears a date earlier than that upon which
the Seal was affixed, then the company acquires status as of the earlier date
Therefore the company did have capacity to enter into K’s on the 15 th
Holding:
S.’s corporation didn’t become a legal entity until the 16 th; ruled for C.
Effect of incorporation
Salomon v. Salomon Co.
Facts:
A father decided to include his family members in his business by incorporating the buisness and
dividing the shares between them. However, he held almost all the shares for himself, giving one
share to each of the other 6 shareholders to give them a basic interest. Business went out the
window, creditors (S. Co.) going after S. personally saying the company wasn’t actually a company
Issue:
Was this a validly constituted corporation?
Reasoning: (Lord Halsbury)
18
Argued here that it can’t be a company simply having 6 minimal shareholders enabling the 7th to
carry on a corporation for the purpose of protecting himself from liability
Nothing in statute dictating the proportion of interest that each shareholder must have
 One share is enough to make someone a shareholder
 Absent fraud/misconduct, there’s nothing to limit him from doing this
Impossible to deny the validity of the transactions into which it has entered if it was validly
incorporated
Concurring: Lord MacNaghten
A company cannot lose its individuality by issuing the bulk of its capital to one person over the others
 Limiting personal liability is one of the main attractions of incorporation along with
borrowing money; the Co and the shareholders are separate legal entities
“The unsecured creditors of S. Co. may be entitled to sympathy, but they have only themselves to
blame for their misfortunes”
Holding:
S. had a legitimate company.
Basic Corporate Structure: distinction between articles and bylaws; the death of the
ultra vires doctrine
Attorney General of Belize v. Belize Telecom Ltd.
Facts:
Gov wanted to sell its financial interests in Belize Telecommunications Authority to the new
company, B. Articles of incorporation include a ‘Golden Share’ which can only be transferred to a
minister of the gov of Belize which confers no economic authority; just an instrument of control.
Article exists which gives special shareholder power to require company to redeem/extinguish the
special share. Articles protect the special shareholder on three levels: 1. Special rights to
appoint/remove directors 2. Restrictions on what majority of board can do without the special
shareholder’s consent 3. Restrictions on what shareholders in general meetings can do without
special shareholder’s consent (this case challenges #1). Holder of special share can only appoint
directors if it also holds 37.5% of C ordinary shares.
Issue:
What is the meaning of the articles?
Reasoning:
Only person who has power to remove directors is special shareholder with 37.5% of common
shares
 Because of default and seizure of assets, there was no such person in existence
 Nothing in articles dealing with situation of special share holder without enough common
shares
B. says that result is that directors are irremovable
A. says this is ridiculous
Court has no power to improve the document, just to determine what it means
 Intention of the parties
For a term to be implied in a K:
1. Must be reasonable/equitable
2. Must be necessary to give business efficacy to the K
3. Must be so obvious that it goes without saying
4. Must be capable of clear expression
5. Must not contradict any express terms
Application
Board constructed to reflect interests of the parties
 Political/Economic interest of gov, economic interest of ordinary shareholders
Problem is that articles don’t deal with a change in shareholding that results in board no
longer reflecting appropriate shareholder interests, without enabling this to be corrected
19

Terms must be read to mean that when the special share goes, the government appointed
directors go with it; so when the special share is redeemed, the gov official is out
 Also, upon redemption of the special share, the special C directors cease to hold office
Holding:
The company was part of a privatization scheme, and the intent of the parties would not seek to keep
the gov officials as perpetual directors.
CBCA ss.9, 14, 15-18, 102-3(1) et (2), 104-106, 109, 115-116, 121, and 256(2)
Corporate Purpose: Thesis
Ford v. Dodge
Facts:
This is argument between shareholders of Ford (D.) and director of Ford (F.). F. building up funds for
big expansion of the plant, and instead of giving dividends to shareholders, he gave employees big
wage increase. D. arguing that he is acting against the ‘corporate purpose’ (profit/wellbeing of
shareholders) by not paying dividends.
Issue:
Is F. acting against corporate purpose?
Reasoning:
1. The whole plan of expansion is part of a business plan carefully formulated to provide more profits
in the long run (no problem)
2. Raising employees wages in huge amount without paying dividends not so much
 Goes against the interests of the company as well as the shareholders
 Discretion of the directors will not be interfered with unless there has been bad faith, willful
neglect, or abuse of discretion
* However, the agents of a corporation cannot arbitrarily withhold profits earned by the
company or apply them to a use which is not authorized by the company’s charter
 Cannot devote to company’s purpose to public good on a whim; purpose of the company is
profit
[ all Ford had to do to win was convince the court that benefitting the public would benefit the
company; he was too big of a megalomaniac dick to phrase it properly at trial]
Holding:
Expansion project is ok, salary increases aren’t; directors had duty to distribute dividends to
stockholders.
Anti-Thesis
Shlensky v. Wrigley
Facts:
Shareholder is bringing action against director of Wrigley for not hosting night-games at Wrigley
baseball stadium. S. claims that night games would produce more profits, and that the only reason W.
doesn’t host them is because of a personal dislike for them. S. alleges this amounts to direction
against the corporate purpose à la Dodge v. Ford.
Issue:
Was W. acting negligently/mismanaging as a director by not having night games?
Reasoning:
S. alleges that the reason the Chicago Cubs aren’t making as much profit is because they aren’t having
night-games.
W. has admitted that he has not refused night games because of any interests in the economic
wellbeing of the company, but because of his concern for the neighborhood
20

Fraud, illegality, conflict of interest not the only bases for stockholder’s action against
director
 S. argues that this establishes arbitrary/capricious use of director’s discretion, which
under Dodge v. Ford is another actionable instance
Application
Clear that in Ford, court felt there must be fraud, etc. to ground an action against a director; made
clear when they refused to interfere with expansion
 Taking potential patrons of the stadium (neighbourhood) into consideration is a
logical business move
 Question is not whether it was right or wrong
Also no grounds to show that any damage has occurred to the company based on W.’s actions
Holding:
Burden of proof of S. hasn’t been met; there were business justifications for W.’s decision, and not
clear evidence of any detriment to the company resulting from them.
Canadian Solution
BCE Inc. v. 1976 Debentureholders [2008]
(See p37)
Recent Legislative developments in BC and NS
BC Finance Statutes Amendment Act, 2012
NS Community Interest Companies Act, 2012
(C) Shareholders
Sources of financing available to a corporation. Basic distinction: debt and equity.
What is a share: the basic nature of a share and basic rights on a shareholder
Sparling v. Quebec (Caisse de dépôt et placement du Québec)
Facts:
Q. is an agent of the Crown, therefore according to s.16 of the Interpretation Act, can put itself outside
the purview of the CBCA because of immunity provisions. Q. became an ‘insider’ of Domtar according
to CBCA s.122 (2),(4) by owning more than 10% (22.7%) of its common shares. According to that
article, Q. was supposed to submit an insider report, which it refused to do under immunity. Director
of Domtar, S., filed for motion for declaration that CBCA applies to Q.
Issue:
Does the CBCA apply to Q., a Crown agent?
Reasoning: (SCC La Forest J)
Normally, a Crown agent is exempt from the application of state legislation
 However, exception under the ‘Benefit/Burden Exception’ to Crown immunity (“waiver
exception”)
Q.: By purchasing shares, Q. did nothing but exercise a right conferred by the charter
* The issue is not whether the benefit and burden arise under the same statute, but whether there
exists a sufficient nexus between the benefit and burden.
 A share is not an isolated piece of property; it is a bundle of interrelated rights and
liabilities
 Statute, common sense, and common law indicate that this bundle can’t be
apportioned piecemeal at the whims of the Crown (taking only benefits not liabilities)
21
* The very act of purchasing is an implicit acceptance of the benefits AND liabilities
Holding:
There was a close nexus between the benefit/burden to trigger the exception to Crown immunity. By
buying the shares, the Crown implicitly agreed to be governed by the CBCA.
Atco Ltd. v. Calgary Power Ltd.
Facts:
A. owns majority shares of Canadian Utilities, which in turn owns all the shares of three Alberta
public utilities. A. attempted a takeover of C., which applied to Public Utilities Board of Alberta for
interim order restraining the takeover. Under the Public Utilities Board Act s.98, Board found A. to be
an ‘owner of a public utility’ for purposes of the Act, therefore subject to its jurisdiction.
Issue:
Does a parent company own the public utility of its subsidiary for the purposes of the Public Utilities
Board Act of Alberta?
Reasoning: (SCC Wilson J): DISSENTING
The public utility is the physical plant and associated services:
 Shareholders have no proprietary interests in the assets of the company in which they
hold shares; their interest is in the shares only
* Must distinguish between ‘Control’ as a corporate law term and ‘Control’ in its dictionary sense which
is what the legislator meant here; control of the physical assets
 The company continues to own, operate, manage and control its assets regardless of who
owns or controls it: Salomon v. Salomon and Co.
Application:
If the acceptance of A.’s offer gives it de facto control over the companies, it does not give the
shareholders ‘control’ over its public utility assets; companies retain this:
 Obligations of ‘owners’ more appropriately discharged by people having day to day control
of physical plant
The owners are the operating companies or public utility companies themselves
A. might obtain de facto control of the public utility companies, but it will not acquire de facto
control of the assets of Canadian Utilities and its subsidiaries
 * Shareholders do not own OR control the assets of the companies in which they hold shares
Bowater Canadian Limited v. R.L. Crain and Craisec Ltd.
Facts:
B. filed application challenging voting provisions in C.’s articles of incorporation; offended the CBCA.
Had ‘step down’ provision whereby the special common shares were worth 10 votes in the hands of
C. but only 1 vote in the hands of any potential transferee.
Issue:
Does the voting provision offend the CBCA and how can it be remedied?
Reasoning: (ONCA Houlden J)
The holders of special common shares share equally with other shareholders in winding-up of
corporation
All shareholders share equally in distribution of dividends
No express prohibition of this in CBCA s.24(4), but should be interpreted in accordance with general
principles of corporate law
 Rights which are attached to a class of shares must be provided equally to all shares of
that class; rights attach to the share and not the shareholder
The step down provision can be severed; so special common shares are worth 10 votes to whoever
gets them.
Holding:
The voting provision does offend the CBCA; however severable.
22
Basic Limitation of the power of a shareholder
Kelly v. Electrical Construction Co [1907]
Facts:
Action to set aside the election of the board of directors of E. K. was not allowed to use proxy votes
conferred upon them in the voting, and contend that they would have been elected had they not been
barred from using the proxies.
Issue:
Did this constitute an usurpation of office?
Reasoning:
The election of directors is a matter under control of a majority of shareholders
In respect of acts within the powers of the company, and thus capable of confirmation by the
majority of the shareholders, the Court will not interfere at the instance of individual shareholders
 Plaintiffs have to obtain the consent of the company to sue in the company’s name
By-law respecting proxies passed by BoD 1897:
 According to Companies Act s.47, directors have power to pass by-laws regulating proxy
votes, but for this By-Law to be valid, it had to be confirmed at the next general meeting
 This by-law was not confirmed, thus it ceased to have force
Annual Shareholders meeting 1905:
 Purported to pass a by-law of the exact same language
 Companies Act giving power to directors to pass by-laws concerning proxy votes
impliedly withholds it from general shareholders
Therefore, when the election of the directors happened, there was no by-law regulating proxies in
existence (BoD failed to do it, the shareholders can’t do it)
 Those proxy votes produced at the meeting were sufficient authorization, and should have
entitled those votes to count
 However, no reasonable certainty who they would have voted for
* The election should be set aside and a new vote had
Holding:
There should be a new vote for directors.
Automatic Self-Cleaning Filter Syndicate Co. Ltd. v. Cuninghame [1906]
Facts:
C. is a majority shareholder of A. and is trying to force the directors to effect a sale of all the assets of
the company which the directors don’t agree with.
Issue:
Can a simple majority of shareholders order the directors to effect a sale that they don’t agree with?
Reasoning: (Warrinton J)
Depends on the construction of the articles of incorporation
On the true construction of the articles the management of the business/control of the company are
vested in the directors
 To remove control of any particular transaction from them would require an alteration of
the articles, which would require a special resolution
 The special resolution article wouldn’t exist if they had wanted the possibility of compelling
the directors by simple majority
Directors can’t be bound by the simple majority vote
Reasoning: (Collins)
If the shareholders want to compel the directors it has to be done by extraordinary resolution, not
simple majority vote
 It is by consensus of all the individuals in the company that directors became agents and
hold their rights as agents; this is not a simple Principal-Agent relationship
Reasoning: (Cozens-Hardy)
Articles of association are a K between the members of the company
23

Once there is a stipulation for a ‘special resolution’ vote requirement, what right is there to
interfere with the K apart from in situations of misconduct on part of directors?
 Not a simple Principal-Agent relationship; directors are in position of managing
partners appointed to fill the post by a mutual agreement between the shareholders
Holding:
The shareholders can only bind the directors according to the articles of incorporation; in this case
by a special resolution.
The mechanics of issuing shares and what assumptions corporate law makes about
the nature of shareholders and are they still valid (the continuing validity of the
dispersed ownership assumption
CBCA ss.6(1)(c)-(d), 24, 25, 26, 30, 34, 49(8), 50, 118, 189
Shareholders’ rights to dividends and their rights upon liquidation
International Power Co. v. McMaster University [1946]
Facts:
A company, is being liquidated. I. is a substantial owner of common shares, and M. is a substantial
owner of preference shares. Dispute over rights upon liquidation of the different shareholders. Also
side dispute about difference in dividend distribution (common gets 10% while preferred get 7%).
Issue:
Are preferred share owners only entitled to their dividend plus repayment of their shares at par
upon liquidation, or are they entitled to equal sharing of surplus with holders of common shares?
Reasoning: (SCC Taschereau J.)
The decision must depend upon the true construction of the essential words of the letters patent +
by-laws of the company
 Under the Dominion Companies Act, preferred shareholders prima facie have all the rights
and liabilities of a common shareholder
 * Can be limited by the by-laws, but in the absence of anything to the contrary, then
preferred shareholders have equal right to surplus as common shareholders
After discharging the debts/liabilities and repaying to ordinary/preference holders the
capital paid on their shares, the surplus assets ought to be divided amongst all the
shareholders in proportion to the shares held
 The rights of all classes of shareholders are on a basis of equality, unless they have been
modified by the by-laws or the letters patent of the company
In this case, there is nothing in the articles to limit the preferred shareholders rights to share
equally in the liquidation
The right to dividend and the right to capital and surplus assets in the winding up are distinct
 Preferred shareholders dividend rights are defined in the articles, and they have no right to
equality in this since they K’d into it
Holding:
Common and preferred shareholders prima facie have equal rights unless modified by the by-laws or
articles of the company.
The Mechanics of dividend declaration and dividend payment
R. v. McClurg [1990]
Facts:
Articles of incorporation of M. are divided into A Common (husbands): voting only, B Common
(wives): participating where authorized by the directors, and C Preferred: preferred. The directors
have discretion in the articles to allocate dividends among classes of shares as they see fit. Crown
24
saying that dividends in past years should have been properly attributed to all the common shares
notwithstanding the discretionary provision; rights attach to the shares, not the people holding them.
Issue:
Is the discretionary dividend clause valid?
Reasoning: (Dickson CJ)
Decision to declare a dividend lies within the discretion of the directors, subject to any restrictions
included in the articles of incorporation
 The rights carried by all shares to receive a dividend declared by a company are equal
unless otherwise provided in the articles of incorporation
The presence of a discretionary dividend clause can only be interpreted as creating differences
between share classes; rebuts the equality presumption
 The fact that directors may consider the identity of shareholders doesn’t necessarily render
the declaration invalid on the basis of a conflict of duty/self-interest
 The limitation on the duty is based on a Fiduciary Duty owed by directors to the
corporation (Canadian Aero Service Ltd. v. O’Malley); no breach here
 Represents a legitimate exercise of the K rights between parties
Dissenting: (La Forest)
Directors do not have the power to discriminate between different classes of shares when
determining how a dividend should be distributed
All shares of a type must be treated equally
 Even when more than one class of shares is created, the directors are not free to
discriminate arbitrarily between the classes when awarding a dividend (just how
much each will get)
 Cites Jacobsen and Bowater as authority that even shareholders themselves may not agree
to circumvent the principle that rights attach to shares not the individuals
This discretionary dividend clause contravenes principle that directors can’t favour one class
at the expense of another
 Shareholders cannot agree to give directors discretion to interfere with their right to
dividends/return of capital by choosing to give another series priority
Holding:
The potential of each type of share to receive dividends in different amounts is sufficient to
differentiate the A/B/C shares. It is valid exercise of incorporation powers.
CBCA ss. 42, 45, 211(7)(d)
Shareholders – The Corporate franchise (1) When can shareholders vote (regular and
special meetings); on what can shareholders vote; and the process of organizing
shareholder votes – proxy solicitation
Goodwood Inc. v. Cathay Forest Products Corp [2012]
Facts:
G. is shareholder of C. applying for multiple orders against C. (i) order directing holding of
shareholder meeting; (ii) orders requiring C. to comply with provisions of CBCA; (iii) order
restraining C. from transacting certain types of business without court approval prior to constitution
of new BoD.
 Current BoD lacks Quorum of directors (4/7; only has 3) according to Company By-Law 1.
 By law s.10: no business can be transacted until quorum is met, majority are resident
Canadians
o CBCA 105(3): directors can’t transact business unless 25% of BoD are resident
Canadians
 Ontario Securities Act ss.77, 78: C. has failed to file financial statements for period after Sept.
30, 2010 = violation
 CBCA 133(1): BoD of C. required to hold annual general meeting no later than June 30, 2011;
failure = violation
25
Issues:
Does the shareholder have the rights to force the BoD’s position in this way?
Reasoning:
G. hired shareholder advisory firm VC&Co. to represent them
 Submitted outline of plan to reconstitute company’s BoD
 Wrote to C. about CBCA s.111(2)
o Failing quorum of BoD/failure of remaining BoD to call meeting, special meeting can
be called by any shareholder
o C. BoD refused; called it a bad-faith move
 Also requested pursuant to CBCA s.21 to see records of company and shareholders list
o BoD hasn’t complied
Mr. Chan (C. BoD) blames all problems on BoD members who left
Mr Miller (C. BoD) also divulged that business was still being carried out by them
 Also, ~900K$ frozen in C.’s Canadian account (no signatories; CFO terminated)
Analysis:
(i.a) Calling a shareholder meeting
CBCA s.144 authorizes the court to call a shareholder meeting where other means of calling it
are “impracticable”
 Courts have interpreted ‘impracticable’ narrowly, ordering shareholder meetings only in
exceptional circumstances
G. is entitled to call a shareholder meeting
1. Current directors have failed to do so, contravening CBCA s.111(2)
2. Shareholders have lodged requisition with the BoD under CBCA 143(1); it’s clear the BoD
has no intention of responding by calling a meeting
 Under CBCA 111(2) and 143(4) shareholders can call meeting where board refuses or
neglects to act
It is appropriate for the court to call the meeting in these ‘extraordinary’ circumstances
 C. lacks a BoD with authority to manage business affairs of C.
 Mr. Chan (C. BoD) called the request for meeting “bad-faith”; shows fundamental
misunderstanding of their duties; his comments raise concerns of past mismanagement
(i.b) Directions for conduct of the meeting
Meeting must be held in accordance with timetable accommodating C.’s shareholders time decide
who to vote for
 Proxies will go through Equity Financial Trust Company
 Distributing notice of meeting will be task of applicants (BoD not trustworthy)
 C. is entitled to have access to funds to retain counsel to provide advice in respect of ordered
shareholder meeting (can apply to have funds unfrozen)
(ii) Compliance Orders
CBCA s.247 allows shareholders to apply to the court for orders in situations where BoD “does not
comply with this act”; the court can make “any further order it sees fit”
 1. List of shareholders; 2. List of beneficial owners; 3. Name/contact of company’s share
transfer agent
 Applicant is entitled to all three
(iii) Restrictions on powers of current BoD
G. seeks to prevent C. BoD from transacting any business other than that necessary to convene the
meeting; specifically preventing them from spending money, entering K’s, hiring/terminating
employees, etc.
 Court must tailor remedy under CBCA s.247 to the specific issue
 Must be proportionate
G.’s orders should be granted pursuant to CBCA s.247
 Serious doubt that C. BoD will comply with ‘ordinary course of business’ stipulation
 Temporary receiver and manager should be named to deal in the meantime
Holding:
Yes to all three of G.’s requests.
26
Goodwood Inc. v. Cathay Forest Products Corp [2013] (Costs)
Facts:
Pursuant to earlier ruling against C., G. submitted request for costs:
 1. Printing notice of meeting/dissident’s proxy circular
 2. Fees of Court-appointed independent chair of shareholders’ meeting
 3. Fees/disbursements of VC&Co (shareholder advisory consultant)
 4. Legal fees (McCarthy’s)
Issue:
What fees is G. entitled to?
Reasoning:
At the meeting, C.’s shareholders voted overwhelmingly to elect the four new directors supported by
G.
CBCA s.143(6) deals with reimbursement of costs of the requisitioning shareholders:
 Any costs “reasonably incurred by them in requisitioning, calling and holding the
meeting”
 For meeting called by court, no specific provisions, however court reserves broad
jurisdiction to determine/award costs under the CBCA
 G. should recover costs similar to those he would be entitled to if he had called the meeting
himself (according to s.143(6))
1./2. Both recoverable as they represent costs incurred for ‘holding the meeting’ and ‘calling the
meeting’
3. Fixed fee of 400K$ with VC&Co
Different types of work performed
I.
Actual requisitioning
II.
Providing evidence
III.
Discussions with the court-appointed temporary receiver and manager
IV.
Providing strategic advice to G. and shareholders
V.
Providing strategic advice to G.’s proposed slate of directors
CBCA s.143(6) covers only those costs under first heading; the rest don’t fall under
“requisitioning, calling, holding the meeting”
4. G. is entitled to legal fees incurred with McCarthy’s on a straight time basis plus H.S.T. and
disbursements
 Fees incurred for calling/holding the meeting, including the application to court to secure
the meeting (falls under CBCA 143(6))
G. is not entitled, however, to ‘bonus’ paid to McCarthy’s subject to success
Holding:
C. must reimburse G. on the terms discussed above.
CBCA ss. 109, 133-135, 137, 139-143, 146, 173, 176, 183, 190, 210-211
Shareholders – The Corporate Franchise (2) Obligations shareholders have to the
corporation and to other shareholders; Limits on the right to vote in the
articles/bylaws
Jacobsen v. United Canso Oil & Gas Ltd. (Alberta QB)
Issue:
Does U.’s by-law 6 providing that no person can be entitled to vote more than 1000 shares no matter
how many shares are owned contravene the CBCA?
Reasoning:
Only one class of shares
27
Company first incorporated under Companies Act, got supplementary letters patent for new by-law
under Canada Corporations Act, then validly brought forward through articles of continuance for
CBCA
Argued that law establishes a presumption of equality 1 vote for 1 share that can’t be upset
 If this is to vary, then different share classes must be established
Analysis:
The provisions of the CBCA must be read as a whole, and not in isolation
 CBCA 134(1): unless the articles provide otherwise, each share of a company gives the
holder 1 vote.
 This must be read in relation to CBCA 24(3), which specifies that it is only when there
is more than one class of shares that different rights, etc. attaching to shares may arise
Holding:
By-law 6 contravenes the CBCA and is invalid.
Jacobsen v. United Canso Oil & Gas Ltd. (Nova Scotia SC)
Facts:
Trial judge wasn’t aware that U. was switched from Federal to Provincially incorporate company in
Nova Scotia. As such, U. would be under the Nova Scotia Companies Act, not the CBCA.
Issues:
Is by-law 6 still invalid?
Reasoning:
Independent scrutineers/independent chairman:
A shareholder cannot complain if the company and its directors act within the confines of those
internal regulations in the absence of fraud, illegality or oppressive conduct
 None of those elements are present here
Restraining the use of by-law 6:
Trial judge didn’t deal with question of voting restriction under NSCA, only CBCA
Not satisfied that it would be illegal under NSCA; it was approved by shareholders on a 1 for 1 sharevote basis
 For chairman to apply the by-law is not oppressive or unfairly prejudicial to the plaintiff
Trial decision only decided that by-law was invalid under CBCA, not NSCA; a trial regarding
the by-law’s validity under the NSCA must occur to determine that matter, not at this
summary hearing 4 days before the AGM
Holding:
The voting restriction should be applied in conformity with the articles of the corporation.
Bowater Canadian Limited v. R.L. Crain and Craisec Ltd. (Repeat)
(see p22)
And on exercise of the shareholder franchise
TELUS Corporation v. Mason Capital Management LLC (BCCA)
Facts:
Dispute over whether, and at what rate, non-voting shares of TELUS will be converted to common
shares. BoD of T. wants exchange at 1:1. M. opposes this because it has an interest in keeping the
value of common shares higher that that of nonvoting shares. Would require a 2/3 shareholder vote.
M. set about acquiring a whole bunch of shares by short-sales; ended up owning about 18.7% of the
common shares for voting, with only a 0.21% of the company’s capital. T. realized it wouldn’t be able
to get the majority needed, so cancelled the vote. They then changed the amendment so that it would
not require a special vote; only 50% + 1 for common voting shares, still 2/3 of non-voting shares
(clearly just a way to get around M.). T. takes position this does not amend the company’s articles.
CDS on behalf of M. challenges. CDS also brought it’s own changes forward under requisition of
shareholder meeting that T. brings action against asking for higher share exchange rate.
Issue:
28
Can CDS bring this action on behalf of M.? Does M. have the right to bring an action with only a
minimal economic interest in the Co.?
Reasoning:
TELUS argues only a shareholder can requisition a meeting; CDS isn’t a shareholder, therefore has no
standing in the matter
 If M. isn’t a party to the matter, they shouldn’t have named them in the action
Further, CDS has the right to requisition the meeting on behalf of M.
1. It must ensure that it is acting under instructions
2. Those instructions must come from persons who hold requisite number of shares to
requisition a meeting
There is nothing in the BCBCA s.167 that suggests that a requisitioning shareholder must be the
beneficial owner of shares or that he must disclose the name of the beneficial owner
 The Act should be read in its entire context in its ordinary sense
Resolutions brought by CDS
Trial judge also found resolutions put forward by CDS would amend Art. 27 of T.’s bylaws without
complying with the requirements set out in that provision
 The resolution would not “delete, amend, modify, or vary” existing provisions of Art.27
(which would require a 2/3 special vote) since no right to exchange exists
 The articles don’t suggest any ability to exchange non-voting shares for voting ones;
therefore no right is being altered by CDS’s proposed amendments
* Therefore, CDS’s resolutions valid
Empty Voting:
T. argues that M. shouldn’t be able to do this because while they hold huge amount of votes, very little
economic interest
 Despite its hedged position, M. does hold some economic interest in T.
 The lack of economic connection is no reason to deny the voting rights that it came by legally
Holding:
Ruled for M.; CDS can bring the action; M.’s voting rights stand despite hedged interests.
Management of a Corporation
Introduction to the Structure of Corporate Management
Meridian Global Funds Management Asia Ltd v. Securities Commission
Directors and Officers; current structure and make-up of the board; and the effect of
improper appointment of directors
Morris v. Kanssen [1946]
Facts:
A company was incorporated with the purpose of purchasing a movie theatre. K. and C. were sole
shareholders. They acquired the theatre. C. schemed with S. to get rid of K. C. and S. falsely claimed
that a meeting of directors was held where S. was fraudulently appointed director, and who then
requested K. resign from office of director. Later, no general meeting held in 1941, so both C. and S.
ceased to be directors according to company’s articles. In 1942, S. transferred shares to M. K. then
issued this action, for shares to be declared in only himself and C. as before.
Issue:
What happens to M.’s interests?
Reasoning: (Lord Simonds)
C., S., and K. all ceased to be directors in 1941
M. relies on s.143 of the Companies Act and Article 88:
29
“The acts of a director or manager shall be valid notwithstanding any defect that may afterwards be
discovered in his appointment or qualification”
 Can only be invoked where there is defect afterwards discovered in appointment or
qualification of a director
Vital distinction between (a) appointment where there is a defect, (b) no appointment at all
 (a) Some act is done which purports to be an appointment, but is inadequate because of
some defect
 (b) No defect because there is no act at all
Application:
The section does not cover a case in which there has been no genuine attempt to appoint at all
 Section cannot be utilized for the purpose of ignoring the substantive provisions relating to
appointment
 It is supposed to cure defects in appointment; here there has been a total lack of valid
appointment = in reality a fraudulent usurpation of authority
An ostensible agent cannot bind his principal to that which the principal cannot lawfully do
 Here M. was acting as director; he cannot presume in his own favour that things are rightly
done if inquiry that he ought to have made would tell him that they were wrongly done
Holding:
Appeal dismissed.
Corporate Criminal Liability
Rhône (The) v. Peter A.B. Widener (The)
CBCA ss.102(1), 115, 116, 118, 119, 121, and 122(1)(b), see also Criminal Code ss.2 (definition
of organization, representative, and senior officer), 22.2
Directors’ Duties of Care
Peoples Department Stores Inc. (Trustee of) v. Wise
Facts:
Wise acquired Peoples from Marks and Spencer. L.W., R.W. and H.W. (the “Wise brothers”) were
majority shareholders, officers and directors of Wise, and the only directors of Peoples. Because of
covenants imposed by M & S, Peoples could not be merged with Wise until the purchase price had
been paid. Almost from the outset, the joint operation of Wise and Peoples did not function
smoothly. Parallel bookkeeping, combined with shared warehousing arrangements, caused serious
problems for both companies. As a result, their inventory records were increasingly incorrect. The
situation, already unsustainable, was worsening. L.W. consulted the vice-president of administration
and finance of both Wise and Peoples in an attempt to find a solution. On his recommendation, the
Wise brothers agreed to implement a joint inventory procurement policy whereby the two firms
would divide responsibility for purchasing. Peoples would make all purchases from North American
suppliers and Wise would, in turn, make all purchases from overseas suppliers. Peoples would then
transfer to Wise what it had purchased for Wise, charging Wise accordingly, and vice versa. The new
policy was implemented on February 1, 1994. Before the end of the year, both Wise and Peoples
declared bankruptcy. Peoples’ trustee filed a petition against the Wise brothers. The trustee claimed
that they had favoured the interests of Wise over Peoples to the detriment of Peoples’ creditors, in
breach of their duties as directors under s. 122(1) of the Canada Business Corporations Act
(“CBCA”). Bank and M&S get paid off, but M&S’s seizable assets disappearing by Wise milking
Peoples’ assets; this is why unsecured creditors come in through trustees.
Issues:
Do the directors of a corporation owe creditors a fiduciary duty?
Reasoning: (Major and Deschamps JJ)
The creditors claimed that the inventory policy was detrimental to Peoples, because Peoples had
merchandise, while Wise controlled the cash.
30
Fiduciary Duty:
 The fiduciary duty is owed to the corporation and not to the creditors CBCA s.122(1)(a).
No fraud or dishonesty present. The decision to allocate the inventory in the particular
manner was not a situation where the directors profited or put themselves in conflict of
interest. Therefore, any liability would have to arise by virtue of the director’s breach of the
generalized duty of loyalty to the company; that is, the directors did not act in the company’s
best interests.
 The directors can take the creditors’ interests into account, but they do not have to
(permissive approach to the “entity model”).
 The court found, to the contrary, that the directors did act in Peoples’ best interests by trying
to create a more efficient (less costly) procedure for acquiring, storing, and sharing
merchandise between the two companies.
The creditors can sue personally under the ‘Oppression Remedy’ or ‘Duty of Care’ if the
directors acted in a way that affected their interests or expectations.
 Therefore, there is no need to extend the duty of loyalty to require that the directors account
specifically for the creditors’ interests when managing the corporation.
 The duty of the directors is to make the company a better company not necessarily
preferencing one group of stakeholders over another.
Duty of Care:
 Directors won’t be held to be in breach of the duty of care under s.122(1)(b) of the CBCA if
they act prudently and on a reasonably informed basis
 Reasonable in light of all circumstances, including prevailing socio-economic conditions,
about which they knew or ought to have known
 No breach here; implementation of new policy was business decision trying to correct
serious problem
Rationale:
The duty of loyalty does not extend to creditors. So long as the directors act in the best interests of
the corporation, even if creditors take a loss, the directors are not personally liable for their
decisions.
Holding:
No.
Fiduciary Duties – Introduction – Basic Statutory Duty
Peoples Department Stores Inc. (Trustee of) v. Wise
The duty of supervision
In re Caremark International Inc.
Facts:
Defendant corporation, Caremark International, Inc., provides health care services and products to
patients who are often referred to them by a physician. Since the business is reliant on referrals,
there is a temptation by companies such as Caremark to compensate physicians. A federal law, the
Anti-Referral Payments Law (”ARPL”) is in place to prevent such a system, and in 1991 the
Department of Health and Human Services began investigating potential ARPL violations. The
Department of Justice joined the investigation soon thereafter, and by 1992 Caremark instituted
several new policies and procedures in attempt to find any internal wrongdoings. But in 1994,
Caremark was indicted for violating the ARPL. Plaintiffs initiated this suit that year, alleging that the
Board of Directors did not exercise the appropriate attention to this problem.
Issues:
Did the Board exercise an appropriate level of attention to the possibility of ARPL violations?
Reasoning:
31
A breach of duty to exercise appropriate attention, as the court notes, is more difficult for Plaintiffs to
prove than a breach of the duty of loyalty.
 Most decisions that would come under this duty will resemble many decisions
shielded by the business judgment rule.
 There was no evidence that the directors knew that there were ARPL violations, and there
was no systemic or sustained failure to exercise oversight.
Rule to take away:
 Directors are potentially liable for a breach of duty to exercise appropriate attention
if they knew or should have known that employees were violating the law, declined to
make a good faith effort to prevent the violation, and the lack of action was the proximate
cause of damages.
Holding:
The terms of the settlement merely required Caremark to institute policies to further assist in
monitoring for violations, which they did. Therefore the settlement was approved.
CBCA, s.122(1)(a)
122. (1) Every director and officer of a corporation in exercising their powers and discharging their
duties shall
(a) act honestly and in good faith with a view to the best interests of the corporation;
Manager’s Fiduciary Duties I – Conflict of Interest and Duty
North-West Transportations Co. v. Beatty [1887]
Facts:
Plaintiff, B., is shareholder of N., defendants are the company and 5 shareholders who were directors
at the commencement of the action. Company passed by-law to purchase a new steamship through
the defendant J. B. claims that J., one of the shareholder/director/defendants, breached a fiduciary
duty to company through conflict of interest.
Issue:
Did defendant breach a fiduciary duty to the company through his conflict of interest?
Reasoning: (Privy Council)
Has been proven that the purchase of another steamer was essential to conduct of the company’s
business, and the steamer purchase through J. was suited to that purpose; price was fair/reasonable
Plaintiff argues resolution brought about by unfair/improper means:
 J. acquired a majority of the shares of the company then transferred the necessary amount to
become a director to his two buddies
o However no agreement between them about sale of steamer
o They both, however, thought it would be beneficial to the company
 Voting power of three was therefore such that they could command a majority at any
meeting of shareholders; so they used it to buy a new steamer from the director, J.
SCC ruled for B.; based their decision on the fiduciary character of J. as a director and breach of
fiduciary duty by having personal interest in transaction of Co
Privy Council:
 In form and content, by-law was adopted by majority of votes which must prevail
unless the adoption was brought about by unfair/improper means
 Constitution of company allowed J. to acquire this voting power; Charter itself recognized
this
 He had a perfect right to acquire further shares and to exercise his voting power as he
saw fit to elect directors with similar views as his
Acquisition of steamer was uninfluenced question of policy
Holding:
Defendant was acting within his rights in by-laws/articles in voting as he did. Appeal allowed.
32
Affirming or Approving Interested transactions
CBCA s.120
120. (1) A director or an officer of a corporation shall disclose to the corporation, in writing or by
requesting to have it entered in the minutes of meetings of directors or of meetings of committees of
directors, the nature and extent of any interest that he or she has in a material contract or material
transaction, whether made or proposed, with the corporation, if the director or officer
(a ) is a party to the contract or transaction;
(b ) is a director or an officer, or an individual acting in a similar capacity, of a party to the contract or
transaction; or
(c ) has a material interest in a party to the contract or transaction.
Manager’s Fiduciary Duties II – Corporate Opportunity Doctrine
Regal (Hastings) Ltd. v. Gulliver [1942]
Facts:
The parent corporation owned a theatre. The company sought to acquire the lease of two more
theatres, although it didn’t have enough capital to finance the transaction. The directors could have
guaranteed the leases; instead, they supplied the subsidiary corporation with the capital personally.
The parent corporation acquired the leases. When the parent corporation was sold, the directors
received a profit. The new directors, on behalf of the corporation, sought to recover the profit from
the former directors.
Issues:
Are the former directors liable to account for the profits?
Reasoning:
Directors and officers cannot make use of a corporate opportunity “by reason of and in the course
of” their position as directors.
 Per Lord Sankey, “at all material times, they [the defendants] were the directors and in a
fiduciary position, and they used and acted upon their exclusive knowledge acquired as
such directors. They framed resolutions by which they made a profit themselves. They
sought no authority from the company to do so, and by reason of their position … they are
liable to account to the company.”
Rationale:
“By reason of” is the knowledge element while “in the course of” is the time element of the rule.
Holding:
Yes.
Peso Silver Mines Ltd. v. Cropper
Facts:
Cropper was the director of the plaintiff company. He had years of business experience in the mining
industry. Dickson, a prospector, approached the company with an offer to acquire a mining claim.
The Board considered the offer (in good faith) but rejected it, because the Board only had a certain
amount of money to spend on speculative claims. Cropper, as an officer and director of the company,
received two to three offers a week. Sometime later, Dickson approached Cropper with the offer
personally. Cropper and Dickson formed a company to manage the claim.
 When the plaintiff company asked Cropper to disclose and turn over his interests in other
mining concerns, Cropper refused. He was fired. The plaintiff company asked Cropper to
turn over the shares in the new company.
Issues:
Is the plaintiff company entitled to the shares?
Reasoning:
33
The Court applied the rule in Regal (Hastings). To succeed, the plaintiff must show that the director
took a corporate opportunity “by reason of and in the course of” his employ as director. The
plaintiff need not prove bad faith.
 The Court distinguished Regal on the basis that Cropper did not rely on privileged or
confidential information. Dickson approached Cropper in his personal capacity, not in
his capacity as a director.
 Furthermore, enough time had passed between the rejection of the offer by the corporation
and Cropper’s acceptance (“forgot all about it”) – which evidenced the fact that that the
opportunity was no longer a “corporate opportunity”.1
Rationale:
The duty to avoid taking opportunities does not last indefinitely. After the proposition is
rejected by the company, a director can act on opportunity.
Holding:
No.
* SideBar: The conflict between Peso and Regal seems to be: the more involved you are as a
director, the less likely it is that you can take advantage of business opportunities in your
personal capacity. This seems antithetical to the rule in Regal.
 What happens if the directors or officers resign? Does the duty of loyalty end? The Court in
Canadian Aero held that the duty of loyalty persists.
Can. Aero v. O’Malley
Facts:
O’Malley and his co-defendants were exec officers of C. The defendant, while controlling C., met with
Guyanese officials to secure a mapping contract. Project funded by the Canadian government, which
solicited proposals from other companies. Canadian Aero bid on the deal. O’Malley and the others,
however, left C. to start their own company, Terra, which also bid. The Terra bid was accepted.
Issues:
Is O’Malley liable to cede the profits to Canadian Aero?
Reasoning: (SCC Laskin J)
O’Malley and his colleagues stood in a fiduciary relationship with Canadian Aero. The law would be
reduced to absurdity if directors could simply resign then take a deal from former Co. Canadian Aero
never abandoned its hope of getting the bid, which distinguished this case from Peso.
 The acquisition of knowledge about an opportunity while acting as a director is not
enough to impose an absolute prohibition. If the director can conform to the contextual
factors laid out, then the court can absolve the defendant of liability:
o The position or office held,
o The nature of the opportunity,
o Ripeness/timing,
o Knowledge possessed, and
o Status of the fiduciary relationship, among others.
Also, what distinguishes this case from Peso is that the defendants took advantage of the company’s
confidential information, which they gathered in the course of their position, to snatch the deal
 This was a case of flat out deception. The defendants used the confidential information
obtained in the course of their employ to create their own proposal.
Rationale:
When the directors of a company leave, their fiduciary duty does not expire at that moment.
Holding:
Yes.
What would have happened if Cropper had been offered the opportunity before the corporation?
Cropper is not under a duty to give the opportunity to the corporation. In such a case, there would
have been no problem. In this case, however, Cropper found out about the offer by virtue of his office.
Dickson went to the company first – and as such the company had the opportunity to act.
1
34
Broz v. Cellular Information Systems, Inc.
Facts:
Broz was President and sole stockholder of RFB Cellular. He was also a board member of Cellular
Information Systems (CIS), a competitor of RFB.
 RFB owned a license (“Michigan-4”) which allowed it to provide cell service to a portion of
rural Michigan. Mackinac Cellular Corp. owned its own license (“Michigan-2”) which was
immediately adjacent to Michigan-4.
 Mackinac wanted to sell Michigan-2, and Broz, after meeting with numerous CIS directors,
went ahead and purchased Michigan-2 for RFB.
Issue:
By purchasing the license for RFB, did Broz breach his fiduciary duties to CIS? More specifically, did
he usurp a corporate opportunity?
Reasoning: (Delaware)
A corporate opportunity exists where:
 (1) The corporation is financially able to undertake it;
 (2) It is in the line of the corporation’s business;
 (3) It is of practical advantage to it;
 (4) It is one in which the corporation has an interest or a reasonable expectancy; and
 (5) By embracing the opportunity, the self-interest of the officer or director will be
brought into conflict with that of the corporation.
Application:
 (1) CIS was not financially capable of exploiting the Michigan-2 opportunity – it had
just emerged from a length and contentious insolvency reorganization.
 (2) CIS had no interest or expectancy in the Michigan-2 opportunity – it was actually in
the process of divesting its cellular licenses.
 (3) There was no conflict – Broz communicated with a number of the directors prior to
moving forward.
Holding:
No.
Managers’ Fiduciary Duties III – Change of Control Transactions.
Introduction to the rise of takeovers; Early attempts to control the process: Reviewing
the exercise of powers by directors for an improper purpose
Hogg v. Cramphorn Ltd.
Facts:
H. made bid to buy all shares of the defendant company. Directors of C., for various reasons, didn’t
believe that it would be in best interests of either the company or its employees to make the sale,
moved to block the purchase. Made allotment of 5,707 preference shares with special 10 votes each
which were assigned to trust for benefit of the employees. The BoD made loan to trustees to enable it
to purchase the shares out of the Employee’s Pension Fund. Then advanced further 28,293$ to enable
trustees to purchase more preference shares. Thus, the BoD had enough votes to block H.’s takeover.
H. became co-owner of 50 ordinary shares, brought action.
Issues:
1. Was the BoD actions attaching 10 votes to each of the 5707 preference shares ultra vires?; 2. Was
allotment of those shares to trustees ultra vires?; 3. Was the company’s execution of the trust deed
ultra vires?
Reasoning:
Voting
 According to a collective reading of the company’s articles s.13/75, no more than one
vote can be attached to each share; could not have attached the special 10-vote privilege
to the 5707 shares = ultra vires BoD’s powers
 However, the allotment of new shares itself is perfectly fine
35
Allotment of shares to trustees/execution of trust
Allotment was made with primary objective of preventing H. from taking over
 Directors were using the utmost good faith/acting in what they considered best interests of
the company
However, Directors acted with primary purpose of ensuring their control of the company, and
manipulated the voting positions
 BoD is in fiduciary position when exercising its powers and cannot act in such a way as to
interfere with exercise by the majority of its constitutional rights
 Good Faith of BoD doesn’t factor in; a majority of shareholders in a GM is entitled to
pursue whatever course it wants whether stupid or not
Power to issue shares was a Fiduciary Power which the BoD exercised for an improper motive
 Had the majority of shareholders approved the issue of shares, it would be ok
 Therefore, this question should be put to the GM, minus the 5707 shares issued, to decided
whether the shareholders want to go along with BoD
The issue of the Trust and their subsequent purchases of shares are integrally connected to issue of
shares; if shares fail, so to does the trust
Holding:
10 vote provision is ultra vires; the question of share issuing to trustee will be remitted to GM of
company
* All the actions of the BoD ratified by shareholders at GM.
Teck Corp. v. Millar
Facts:
Afton mines is a junior mining company. It had acquired a stake in land that was rich in copper. It
wanted to develop the land, but lacked the capital, resources, and expertise. Afton’s directors,
including Millar, sought out a senior partner to help Afton with the project. Afton and the senior
company would conclude “the ultimate deal” where the senior would acquire shares in Afton in
exchange for technical assistance and financial capital.
Teck had shown an interest in doing the ultimate deal with Afton; however, Millar and the other
directors felt that Teck was not a suitable partner. Teck said screw you and acquired the majority of
the shares in Afton so that it could replace Millar and the other directors (by a special meeting of the
shareholders) and conclude the ultimate deal. Before the Board was dismissed, Millar concluded the
ultimate deal with Canex, thus diluting Teck’s majority interest in Afton.
Issues:
Were the directors’ defensive tactics disloyal?
Reasoning:
The directors are not agents of the shareholders.
 Shareholders do not have powers of management; they have powers to vote at shareholders
meetings, to remove directors, to pass amendments to corporate by-laws, etc.
 The court overrules Hogg v. Cramphorn to state that the directors can consider the
interests of the company as a whole, and not just the interests of the majority
shareholders.
Shareholders are not the owners of the corporation
 They are passive investors and the directors have to account for the interests of the other
stakeholders as well.
The directors cannot ignore the interests of shareholders, however.
 The directors would be acting in good faith even if they considered the interests of the
employees.
The Court applies a modified objective test to assess the fidelity of Millar’s actions.
 The directors must perceive a substantial risk of harm to the corporation to justify
their actions
 Must be acting in good faith
36

Must have reasonable grounds to believe that the takeover is not in the best interests
of the company
In this case, Millar was wary of Teck; he had misgivings about its financial capacity, its technical
expertise, managerial strength, and marketing experience.
Rationale:
The directors can use defensive tactics if they reasonably believe that the acquiring company would
substantially harm the corporation.
Holding:
No.
The New Approach
BCE Inc. v. 1976 Debentureholders [2008]
Facts:
Plan for leveraged buyout of all shares of BCE, which owns Bell Canada, valued at 52B$, but which
would seriously water-down the value of bonds (debt) held by debentureholders of Bell because of
the added risk from the extra debt being taken. B. said it would honour its K terms to D., but would
act in best interests of bthe company. D. brings action under oppression (CBCA s.241) and opposition
of court approval because of lack of fairness and reasonability (CBCA s.192).
Issues:
Is the deal void on oppression or fairness/unreasonability?
Reasoning: (SCC, by the court)
The Law
Directors of the corporation (appellants in B.) have (1) fiduciary duty to the company and (2) a DoC
 This case concerns the “fair treatment” component of the directors’ fiduciary duty
 It is clear that where the interests of the stakeholders/company conflict, the directors owe
the duty to the corporation (Peoples)
However, in considering what is in the best interests of the corporation, directors can look to the
interests of shareholders, employees, creditors, consumers, governments, etc.
 Business Judgment Rule: Courts must give deference to the business judgment of directors
so long as those decisions lie within a range of reasonable alternatives
Remedies available to shareholders:
1. CBCA s.239 Derivative Action
 Allows stakeholders to bring action on behalf of the Co. to enforce directors’ duty to the
corporation when directors are unwilling to do so
2. CBCA s.122(1)(b) Civil Action for breach of DoC
 Duty not solely owed to corporation (like in fiduciary), thus may be basis for liability to other
stakeholders (Peoples)
3. CBCA s.241 Oppression
 Focuses on harm to the legal and equitable interests of stakeholders affected by oppressive
acts of a corporation/its directors (available to a wide range of stakeholders)
(A) Oppression Remedy
Security holders of a corporation fall within the class who may bring a claim for oppression
 It is a broad equitable jurisdiction to enforce not just what is legal, but what is fair
Criteria:
1. A breach of a reasonable expectation
a. Some determining factors:
i. General commercial practice; nature of the corporation; past practice;
representations and agreements; nature of the corporation, relationship
between the parties; steps claimant could have taken to protect themself;
etc.
2. Amounting to oppression, unfair prejudice, or unfair disregard
37
Directors may find themselves in situations where it is impossible to please all stakeholders
 They must decide what is in the best interests of the corporation in the particular
situation it faces
Application
D. asserts that they had:
(A) A reasonable expectation that B. would protect their economic interests as security holders in
Bell Canada by maintaining the investment grade trading value of their debentures
 B. took 3 different bids, all involved serious debt.
 No reasonable expectation established here
(B) A reasonable expectation that the directors would consider their economic interests in
maintaining the trading value of the debentures
 Reasonable expectation established
 But directors fulfilled their duty to consider D.’s interests; made commitments to
honour K; just decided that while K terms would be honoured, no other commitments
could be made
 Criteria at (i) weigh against finding an expectation beyond the K interests
* No breach of reasonable expectation established
(B) The s.192 Approval Process
Is the arrangement, objectively viewed, fair and reasonable from the PoV of parties whose legal
rights are being arranged?
Difference between oppression and approval:
 O: onus is on claimant to establish oppression/unfairness
 A: onus is on corporation to establish that the arrangement is fair/reasonable
Seeks to ensure a fair balance between conflicting interests during major changes to corporate
structure
* Would only apply to stakeholders whose legal rights could potentially be affected
 So stakeholders with only an economic interest would not fit the glove
Criteria:
(corporation must satisfy the court that…)
1. Statutory procedures have been met
2. Application has been put forward in good faith; and
3. The arrangement is fair and reasonable (Business Judgment Test; as opposed to Business
Judgment Rule)
a. Valid business purpose
b. Resolves objections of those whose rights are being arranged in fair/balanced way
* Variety of factors can weigh in: necessity of arrangement to corporation’s continued
existence, approval of majority of shareholders/others entitled to vote, proportionality of
impact on affected group
Application
First and second criteria have been met
D. did not hold any legal powers only economic interests, therefore legal rights not affected,
and they don’t fall within an affected class contemplated by s.192
 98% of the shareholders voted in favour of the transaction
The approval of the deal goes through.
Holding:
Appeals allowed.
38
Managers’ Fiduciary Duties IV – Change of Control Transactions II; Protecting
Directors: D & O Insurance and Indemnification of directors
Cytrynbaum v. Look Communications Inc. [2013] ONCA
Facts:
C. were directors of L. who adopted a share plan (SARP) as incentive for officers/employees.
Contrary to the terms of the SARP, the BoD authorized payment of plan at almost twice the market
value per share (it was supposed to be at market value). Payments not disclosed to shareholders
until almost a year later. Foreseeing lawsuit, directors then authorized Co to pay 1.5M$ in legal
retainers for their legal fees, then resigned as directors. L. (on behalf of shareholders) commences
action seeking repayment of bonuses for breach of fiduciary duty, etc. Subject of this appeal is L.’s
refusal to pay advance funding 1.5M$ in legal fees. C. seeking declaration that L. has to pay.
Issue:
Is L. required to pay the advance legal fees of former directors?
Reasoning: (Sharpe ONCA)
The Law
In Canada, advance funding for legal costs for a Co’s directors requires court approval
according to CBCA s.124(4)
 Also, CBCA s.124(3)(a) requires that the directors acted “honestly and in good faith with a
view to the best interests of the corporation”
Directors benefit from a presumption of good faith which the party bringing the action can
rebut by establishing a strong prima facie case of bad faith
CBCA s.124(4) applies both to actions brought by the corporation and to derivative actions
Application
1. Advancement of legal fees requires court approval, which should be withheld if director has
not acted in good faith (CBCA s.124(3)-(4))
2. The strong prima facie test for rebuttal of the presumption of good faith of the directors strikes an
appropriate balance between encouraging responsible behavior and protecting the Co vs. Protecting
the directors
3. The trial judge did not err in finding a strong prima facie case of bad faith against the
directors
 The share valuation for the SARP plan was twice the actual market value, resulted in undue
profits for directors
 C. authorized payment of legal fees without proper legal advice and on their way out the
door
 Business Judgment Rule doesn’t protect them here; was not within a range of reasonable
alternatives, and was not taken with any legal advice
The retainer payments were part of a pattern of self-interested behavior that supports finding a
strong prima facie case of bad faith
Holding:
Appeals dismissed; C. is screwed.
CBCA s.124
Reasons for setting the basic corporate risk allocation: veil-piercing and
reverse veil-piercing
Lee v. Lee’s Air Farming Ltd.
Facts:
Lee was the director, sole shareholder, and employee of Lee’s Air Farming. He took out employment
insurance (as required by law) for the company. Lee died in a plane crash while doing business for
39
the company. The insurance company refused to pay the indemnity to Lee’s wife, explaining that Lee
was a director and not an employee.
Issues:
Can Lee be both a director and employee of a corporation?
Reasoning:
Again, what does it matter if Lee died, or someone else did.
 A person can have multiple offices; the corporation contracted with Lee to hire him as
an employee (they are separate: Peoples)
 It is up to the creditor, the insurance company, to determine the risk of Lee’s death.
In this case, Lee was a contractual employee of the corporation. He earned a living by piloting for the
business.
Once you have the Co it’s a separate legal personality
 Lee as director enters into K with Lee the worker
 From legal analysis, it’s correct; company is separate legal personality telling Lee the
person what to do
Rationale:
A person can hold multiple roles in a corporation.
Holding:
Yes. A person can have multiple offices/roles.
Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co.
Facts:
The plaintiff corporation sued the parent company (parent-co) of its co-contractor, as the subsidiary
(sub-co) did not have sufficient assets to pay its obligations. The plaintiff contended that the sub-co –
a mortgage broker -- should have done a risk assessment of its clients.
Issues:
Should the court allow the claim against parent-co?
Reasoning:
The court described the relationship between parent-co and sub-co as follows:
 sub-co had its own head office,
 it was managed independently of parent-co, parent-co dealt at arms-length with sub-co.
 Parent-co had not been involved in any dealings with the plaintiff, nor did the two parties
communicate with each other.
* The plaintiff is a sophisticated party that should have known that it was dealing with a subsidiary
corporation that might be under-funded.
 The plaintiff should not have considered parent-co to be an underwriter for its losses.
Applying Salomon, the parent-co and sub-co are distinct persons.
 Only where there is a compelling reason to break down the corporate veil will the courts do
so.
 The entities must act as a “single business entity” to merit piercing the veil in this
case. Otherwise, the risk is that the courts will engage in “palm tree justice”.
Under the common law, the corporate veil can be pierced when:
(1) Legislation allows it;
(2) The corporation completely dominates another Co. and uses it as a mere sham used to shield
fraudulent or improper conduct [this is problematic];
a. Almost have to show that the basic mechanics of running the dominated Co. have
been set aside
b. Conduct akin to fraud
(3) When the corporation is acting as an agent.
Rationale:
Without evidence of fraud, the court will not pierce the corporate veil and implead a parent Co.
Holding:
No.
40
VTB Capital PLC v. Nutritek International Co.
Facts:
V. entered deal through a Russian company RAP to buy six Russian dairy companies, for 225M$. RAP
was to get the loan from V. then buy the companies from Nutritek. Nutritek was owned by Marshall
Capital Holdings, which was owned/controlled by Konstantin Malofeev (M.). The companies ended
up being worth about 40M$, so V. was in essence an unsecured creditor when RAP went bankrupt. V.
trying to pierce the corporate veil to hold M. and MCH liable.
Issue:
Can V. hold M. and MCH liable for RAP’s defaulted debt?
Reasoning: (Lord Neuberger)
V. relied heavily upon false representations as to value of dairy companies when they approved the
loan to RAP.
 V. ignored warnings from risk department
 Failed to properly vet the borrower
Application
V. wants MCH and M. to be held jointly/severally liable with RAP for breaches of loan
agreements as if they were co-contractants
 Alleged that M. used RAP’s separate legal status to disguise the ownership ultimately
exercised over RAP by M. and MCH
Is piercing the corporate veil a real thing?
 Precise nature, basis, meaning of the principle is obscure
 Often accompanied by prejorative expressions (sham, mask, cloak, etc.) which risk allowing
moral indignation to win over legal principle
May be right to allow the veil to be pierced in some circumstances, but can’t be invoked merely
where there has been impropriety
 It is necessary to show control of the company and impropriety by the wrongdoer at
the time of the relevant transaction
Application of joint/several liability here goes against Salomon
 Company should be treated as being a person by the law in the same way as a human;
there were multiple levels of separation between him and the deal
 None of the actual K’ing parties intended to K with M., and he did not K with them
 M. never acted as if he was liable under the agreement
None of the facts involved RAP being used improperly; all of V.’s allegations are based on
misrepresentations of Nutritek which RAP had nothing to do with
Holding:
V.’s case fails; they cannot pierce the corporate veil to pursue M. or MCH
Third Parties suing directors, employees, and shareholders directly of a corporation
for consequences of their interaction with the corporation. Suing shareholders
The thin capitalization argument
Walkovsky v. Carlton
Facts:
Walkovsky was hit by a driver employed by Carlton’s company. Carlton structured the taxi company
so that it would be a conglomerate of smaller sibling corporations. Each corporation has two cabs
and the minimum amount of liability insurance. Walkovsky sued Carlton as the principal shareholder
arguing that the sibling corporation was a sham (suing C. would get more money in this scenario than
one of the under-capitalized cab companies).
Issues:
Is Carlton personally liable as a shareholder?
Reasoning:
The court rejects the plaintiff’s “enterprise theory” of liability.
41

The defendant is entitled to structure the company for tax advantages and to
minimize the risk of liability.
 The court also rejects the plaintiff’s “fraud theory” as the corporation was not set up
fraudulently. Had the legislation required that cab companies assume greater
insurance, it would have stated so.
Walkovsky should not be able to win the accident lottery by having access to deeper pockets.
Dissenting: Per Keating J
In this circumstance, legal personality is being abused.
 Carlton is using the right to incorporate as an abuse of rights.
 Carlton sets up a “flimsy corporation” to minimize liability.
 The firm was intentionally under-capitalized.
Cab driving involves more than an “ordinary” risk.
 Carlton anticipated the risk, which is why it under-capitalized. This shows concealment
and fraud.
Rationale:
The court was unwilling to disregard legal personality because the debtor was undercapitalized.
Holding:
No.
Problem of suing directors for inducing the breach of contract into which a
corporation they are directors of and the scope the Said v. Butt defence
London Drugs
Iacobucci: (majority)
 Corporation and employees are separate legal persons
 They each owe a duty of care to not commit tort against 3rd parties
 The employees breached this DoC
 Exception that allows them to have defence to it through exemption clause in the K
 The 3rd party consensually entered into agreement with a LL-Co, and shouldn’t be able to
avoid defence
La Forest: (minority)
 Hold on
 In order to hold them in negligence, have to find a DoC
 When employees are acting as the company, they don’t owe a DoC separate from the Co
*Majority reasoning allows obnoxious actions against employees where K is badly drafted
* First question is always: what is the interaction between the 3 rd party and the Co? K or Tort?
 If it’s K, then look for limitation of liability
Said v. Butt
Facts:
B. was chairman/managing director of a theatre which S. often frequented. There was a falling out
between parties, S. began to openly criticize B. There was a big opera opening, and S. tried to get
tickets, but was refused. Instead he bought them through a friend. B. wouldn’t have sold them to him
otherwise. At the theatre, B. spotted S. and had him escorted out, tried to return his money to him. S.
brings action for B. knowingly inducing the theatre company to breach a K.
Issue:
Can an agent be held liable for inducing his principle to breach a K?
Reasoning:
Defendants case rests solely on ground that B. procured the theatre to break its K with S.
Before S. can succeed at trial, he has to establish that he actually had a K with the theatre company
 Where a person is deceived as to the real person with whom he is K’ing and that deception
induces the K or renders its terms more beneficial for the deceiving party, the K cannot be
enforced against the deceived party
42
S. knew that B. wouldn’t sell him ticket, cannot constitute himself a contractor simply by going
through another person
 No K
If there were a K, could S. pursue B. (3rd party) for knowingly procuring a breach of his K with
theatre?
If it were so held, it follows that whenever a managing director/BoD/officer of a company
causes/procures a breach by that company of its K with 3 rd party, they could be liable to an action for
damages in Tort
 Not technically piercing the corporate veil; establishing independent actionable wrong
* An action of this kind has been recognized where the third party is a stranger
But the acts of a servant/agent are in law the acts of his employer
 It would be the master himself, by his agent, breaking the K, and such an action for the type
of dmgs sought must fail
 Would open the floodgates of litigation
If a servant acting bona fide within the scope of his authority procures or causes the breach of
a K between his employer and a 3rd party, he does not thereby become liable to an action of
tort at the suit of the person whose K was thereby broken
 Person who deals with Co cannot have available to them actions in breach of K against the Co
AND action in Tort against the individual directors
Holding:
Ruled for B.
ADGA Systems International Inc. v. Valcom Ltd.
Facts:
A. claims that V. raided its employees thus purposefully causing economic harm to A. The claim is by
A. against the director and two employees of V. for their personal involvement in the recruitment
program which induced breach of fiduciary duty.
Issues:
Can the individuals be sued for their actions, assuming those actions were genuinely directed to the
best interests of their corporate employer?
Reasoning:
According to Salomon, a company once incorporated must be treated as any other independent
person
1. Where the plaintiff relies upon establishing an independent cause of action against the
principals of the company, the corporate veil is not threatened and the Salomon principle
remains intact
 This difference was clearly established in Said v Butt
2. Provides an exception to the general rule that persons are responsible for their own conduct
 People who accept to deal with a limited company and accept the imposition of limited
liability will not be able to claim for breach of K against the company and tort against the
directors
3. Those harmed as strangers to the corporate body may look for liability to the persons who caused
the harm and those who have in some manner accepted limited liability in their dealings with the
company would be limited in recourse to the company
 In Canada, officers of the Co are responsible for their tortious conduct even though
that conduct was directed in a manner to the best interests of the Co, subject to the
exception in Said v Butt
An officer cannot claim the defence of Said v Butt if he isn’t acting bona fide in the interests of the Co
 They can be pursued in tort if their actions are themselves tortious or exhibit a
separate identity or interest from that of the Co
 Therefore, even in acting in the course of duty, an officer can be liable for tortious conduct
Holding:
Appeal allowed; A.’s case can continue
43
Hogarth v. Rocky Mountain Slate Inc.
Facts:
H. is pursuing R. and its directors personally for negligent misrepresentations made through 3
‘business plans’ concerning a slate mining opportunity.
Issues:
Was there negligent misrepresentation?
* Can the officers be held personally liable?
Reasoning: (O’Brien and Rowbotham)
Where the actions of a director are themselves tortious or exhibit a separate identity or interest from
that of the corporation so as to make the act/conduct their own, they may attract personal liability
 Simonson (S.) didn’t exhibit this level of separate identity
Concurring: (Slatter)
Causation for N-M against the company requires two elements
1. But for representations, H. wouldn’t have invested the $
2. Damage would not have resulted if the representations had been true
o Where investor suffers losses that are unrelated to the misrepresentation,
defendant is not responsible
Three N-M alleged:
1. Expertise of management team
 No N-M; plaintiffs were aware of the lack of experience of promoters
 Finding N-M in this case comes close to saying that directors are liable for ‘negligent
management
2. Involvement of mining engineer
 * YES N-M; but no sufficient causation
 No evidence that the lack of an engineer caused the quarry’s problems
3. Compliance with regulatory standards
 No N-M; rep was clearly directed towards the future, and M. was in compliance
Personal Liability
ScotiaMcLeod Inc v Peoples Jewellers: directors of a limited liability Co are not identified with the
company for purposes of legal liability
 * For liability to be extended to directors, their actions must exhibit a separate identity or
interest from that of the company so as to make the act their own
Hercules Managements: normal test for establishing a DoC applies to N-M cases (with some
modifications; fundamental concern that “indeterminate liability” not be allowed)
 Physical or economic damage? Reliance reasonably foreseeable? Intentional or nonintentional tort? Etc.
ADGA Systems v Valcom: voluntarily dealing with corporation vs. stranger
 Stranger should be able to pursue personally, volunteer should not
Cooper v Hobart: foreseeable and reasonable reliance?
* Independent factor runs through almost all of the jurisprudence
 Co. should be presumptively responsible for any misrepresentations; individual liability
secondary only
Application
* Cooper acknowledged that expectations of parties are legitimate considerations, in specific realm of
N-M, Hercules held the ‘nature of the relationship’, ‘reasonableness of the reliance on
representations’ were key
 It was reasonable for H. to rely on representations, but not to rely on S. as personal
guarantor
Cooper v. Hobart
1. Foreseeability/Proximity (reasonably foreseeable reliance)
a. Involves determining if proximity arises because defendant ought reasonably to
have foreseen that plaintiff would rely on representations made, and that
reliance was reasonable: Hercules
44
b.
Investors knew they were dealing with LLP; any reliance on personal liability of
S. was unreasonable: Hercules
2. Policy Considerations (at both stages)
a. Foreseeability Policy: Tort not sufficiently independent to engage S. personally;
reliance by the respondent on him personally was unreasonable
b. Residual Policy: Legitimacy of use of limited liability structure threatened
Holding:
Errors in conclusion that N-M were made. Also, Insufficient proximity to warrant personal liability:
policy considerations at both levels speak against it. Legitimate expectations of the parties don’t
support it; S.’s appeal allowed.
Other ways directors can be personally liable
Air Canada v. M & L Travel Ltd
Facts:
V. and M. incorporated ML to sell airline tickets, with A. being their biggest sponsor. M. set up a trust
account for the deposit of the airline ticket funds, which, minus commission, were supposed to all go
to A. ML also obtained an operating line of credit of 15K$ from the bank to finance the operation
which was seizable at any time by bank (demand loan). For unknown reason, trust account was
never used and all monies went into a general account. Falling out between V. and M. led to
conflicting stop-payment orders by the two, at which time they owed A. over 25K$. Faced with
conflicting orders, the bank refused further withdrawal attempts, withdrew their 15K$ from the
operating account. A. sued ML as well as M. and V. personally for the 25K$ owing.
JH:
Trial: success against ML but not M. or L.
CA: success against all of them
Issues:
1. Was the relationship between ML and A. one of trust?
2. Under what circumstances can directors be held personally liable for breach of trust by Co?
Reasoning: (SCC Iacobucci)
1. The intent of the agreement creates a constructive trust
 1. Certainty of intent
 2. Certainty of subject matter
 3. Certainty of object
There was clear language that the funds were to be held in trust; express prohibitions
restricting the use of the funds, etc.
2. No question that ML was in breach of trust; personal liability of directors is appropriate in this case
as well
Two general bases where personal liability of directors in equity for breach of trust will be
appropriate:
 1. As trustees de son tort
o They take on themselves to act as trustees and to possess and administer trust
property, and commits a breach of trust while so acting
 * 2. Knowingly assisted in a breach of trust
o Barnes v. Addy: strangers who “assist with knowledge in a dishonest and fraudulent
design on the part of the trustees” will be liable for breach of trust as constructive
trustees
(A) Knowledge:
 Requires actual knowledge, recklessness or willful blindness on part of stranger
(B) Nature of the Breach of Trust:
 1st Line of Authority: Barnes: requires (1) assistance by stranger of trustee, (2) with
knowledge, (3) dishonest/fraudulent design on part of trustee
45

* 2nd Line of Authority: A person who is the controlling/directing mind of a corporate
trustee can be liable for an innocent or negligent breach of trust if the person
knowingly assisted in the breach of trust
Therefore only required that the trustee breached in ‘dishonest and fraudulent way’, and that the
directors knew of the trust and assisted
Application
 ML placed monies it knew were not for general use in a general account and made
them subject to seizure; risk to the prejudice of A. the beneficiary that ML knew it had
no right to take = dishonest/fraudulent
 Clear that M. and V. participated in the breach of trust; directly caused by them acting in
their own interest to stop payment on cheques; precipitated the bank seizure; they knew
about the trust agreement as directors (even if no knowledge, was at least willful
blindness)
Holding:
Directors are personal liable for the breach of trust in this situation.
Shareholders suing to directly enforce rights that belong to the corporation –
shareholder’s insurable interest
Macaura v. Northern Assurance Co.
Facts:
M. felled a bunch of timber kept it on his land. Irish Canadian Saw Mills kept timber on his land, gave
him shares in the company to pay for the timber. M. took out insurance over the timber; he was only
shareholder, timber was pretty much only asset. Timber burned, N. refuses to pay.
Issue:
Can M. collect insurance over the company’s property?
Reasoning: (Lord Buckmaster)
No he cannot
The appellant could only insure as a creditor or as a shareholder
Creditor:
 Untenable position: would follow that any person would be at liberty to insure the furniture
of his debtor
Shareholder:
 No shareholder has any right to any item of property owned by the company; no
legal/equitable interests therein
 Entitled to share in profits/dissolution
Concurring: Lord Sumner
M. stood in no legal or equitable relation to the timer at all
 Makes no difference that he was company’s only shareholder and wood was only asset
Holding:
M. fails; appeal dismissed.
Kosmopoulos v. Constitution Insurance Co. of Canada
Facts:
Kosmopoulos purchased insurance for the property of his business. Kosmopoulos incorporated his
sole proprietorship on the advice of his lawyer. All of the documents, including the insurance papers,
referred to Kosmopoulos operating as Spring Leather Goods. After a fire damaged the premises,
Kosmopoulos tried to claim the insurance proceeds, but the insurance company refused payment.
The insurer claimed that the company needed to insure the premises. Kosmopoulos forgot the “little
details”. This often happens, especially in small family firms; should have sued the lawyer, but didn’t.
Issues:
Is Kosmopoulos entitled to claim the proceeds?
Reasoning: (SCC Wilson J)
46
Citing Salomon, a legal entity is distinct from its shareholders. The court will lift the corporate veil
when the company acts as a mere agent or puppet of the controlling shareholder.
 Those who have chosen the benefits of the corporate form have to assume some of the
risk.
This is not a corporate law problem – it is an insurance problem. The court held that Macaura did
not apply in this circumstance.
 Kosmopoulos had an insurable interest as the sole shareholder of the company. But for
the fire, he was the sole beneficiary of the assets of the company. He benefited from the
existence of the assets and was prejudiced by their destruction. Wagering was not an issue. It
might have been had there been more shareholders (say 2, 5, 10, etc.).
 The insurance company is raising a “technical objection” to deny insurance when
everyone knows that the corporation’s assets were meant to be the object of the
insurance.
 K. had “Some relation to or concern in” the subject matter of the Co’s property
The oppression remedy is always available if some of the shareholders insure the assets of the
corporation and the corporation’s assets are destroyed (when there are multiple shareholders).
Secured creditors might be able to access those funds.
Rationale:
Sole shareholders retain the benefits of the assets of the corporation and can insure those assets.
Holding:
Yes. The court did not have to pierce the corporate veil to issue the proceeds.
See also Lee’s Farming for another example of single shareholder skirting the rules
*Sidebar: This case problematizes the one-shareholder corporation. It conflates the interests of the
sole shareholder with the corporation, even though they are distinct legal entities.
Courts are reluctant to engage in piercing the corporate veil for 1-person corporation. It is not
enough that there is 1 person. The corporation has to be an instrument to further the interests of the
individual; a sham.
Hercules Managements Ltd. v. Ernst & Young
Facts:
- Co. had K with defendant auditors to prepare financial statements
- Financial statements were prepared negligently. Co. went bust.
- Ptf shareholders (who have a K with the co.) brought action in contract, and in tort for negligent
misrepresentation. The ptfs argued that, had the statements not been negligently prepared they
would have acted differently (i.e. they relied): they would not have bought additional shares;
they would have sold their existing shares; they would have taken a more active role in
supervising management.
- Court rejected contractual action.
Issue:
Do the auditors owe the ptf shareholders a duty of care: (i) the investment loss they incurred as
result of relying on the reports; (ii) the losses in the value of their existing shareholders that they
incurred as a result of reliance?
Reasoning: (SCC LaForest)
He’s trying to carry on, in Lord Atkins fashion, to create a test that can be applied to all difficult cases
of negligence.
2 part Anns test (Kamloops Test) to determine duty of care:
 Prima facie duty arises where:
o (1) sufficient relationship of proximity or neighbourhood such that in the reasonable
contemplation of the wrongdoer, carelessness on his part might cause damage to the
other.
o (2) Policy considerations which negative duty or limit its scope, the class of person to
whom it is owed or the damages to which a breach of it may give rise.
47

This general test should not be limited to cases of physical damage; applies to economic loss
cases also [trying to fashion general test!]
Step One  Proximity:
 There is proximity in negligent misrep cases where the plaintiff reasonably relies:
o (a) the dft ought reasonably to foresee that the ptf will rely on his or her
representation; and
o (b) reliance by the ptf would be reasonable in the circumstances. The combination of
these factors creates a special relationship.
Step Two  Policy Considerations:
 [1] Indeterminate liability might result b/c auditor’s statements are used by many people, and it
is almost always reasonably foreseeable that they would rely on them.
 [2] Deterrence of negligent conduct (i.e. concern that spectre of tort liability would be incentive
to produce accurate reports) is outweighed by limitless liability concerns.
 [3] Economic inefficiency b/c of costs expended to insulate from liability, litigate, etc.
* In most cases of negligent misrep involving auditors, the indeterminate liability concern will
negate the prima facie duty. However, there may be some cases where the indeterminate
liability concern doesn’t arise, and thus duty not negated:
o Where the dft knows the identity of the ptf or a class of ptfs and
o Where the dft’s statements are used for the specific purpose or transaction for
which they were made.
Application to facts of this case:
1. Was there proximity?
 No question that a prima facie duty of care was owed on the facts of this case. It is reasonably
foreseeable that shareholders would rely; in fact, it is a statutory requirement that audited
statements be put before the shareholders.
 Reliance was reasonable: [LaF outlines indicia of reasonable reliance and holds that the first four
inhere].
o (1) dft has direct or indirect financial interest in the transaction in respect of which the
rep was made;
o (2) professional, possession of special skill, judgment or knowledge;
o (3) advice or info provided in course of the dft’s business;
o (4) information given deliberately and not on a social occasion;
o (5) info or advice given in response to a specific enquiry or request.
2. Policy reasons to negate the duty?
 Knowledge of identity: Auditors knew the very identity of the ptf shareholders (they have been
their auditors for many years). No issue of indeterminate liability.
 * Were reports used for purpose of transaction for which prepared? NO. Audited statements are
made for the purposes of assisting ShareHolders (as a collective) in their task of overseeing
management. Auditors did not prepare the audit reports in order to assist H. or shareholders in
making personal investment decisions.
Foss v. Harbottle and derivative actions
 The proper way to have brought this claim would have been as a derivative action rather than a
series of individual actions
 Individual shareholders have no cause of action in law for any wrongs done to the
corporation, and if an action is to be brought in respect of such losses, it must be by the Co
itself (through directors) or by way of a derivative action
o As a derivative action for the shareholders as a cohesive body, the action is seen to
represent the corporation’s interest, not just the individual shareholders
 Shareholders cannot raise individual claims in respect of a wrong done to the corporation
o Only by establishing an independent actionable wrong can the individuals bring a claim
Held:
No. Negated by overriding policy considerations. But LaF tries to set out a general duty of care
approach.
48
Houle v. Banque Canadienne Nationale
Facts:
Houle brothers were shareholders in a family company that had dealt with bank for over fifty years.
The company had a credit line with bank, including a “demand loan” (bank has the right to recall with
no notice). Just 20 days after signing new trust deed, bank recalled the loan. They took possession
and liquidated Houle’s assets just three hours later. The problem was that Houles were in the process
of selling their company (estimated to get $1 million). After this liquidation, they were forced to sell
at only $300,000. Shareholder brothers now taking action against bank, claiming difference of
$700,000 they would have received had it not been for the bank’s recall, which they claimed was
made in bad faith. Note that it is the shareholders, not the company (which no longer exists) suing
the bank.
JH:
Finding that bank had acted unfairly, both trial and appeal courts “lifted the corporate veil” and
awarded Houles $250,000 (what they estimate difference to be). Bank appealed.
Issues:
What are the criteria for abuse of contractual rights? What is the foundation for liability for abuse of
contractual rights?
What are the rights of third parties in this context?
Legal Reasoning: (L’Heureux-Dubé J.)
Recalling the loan and reasonable delay:
 It is not contested by either party that the terms of the “demand loan” allowed the bank
to recall it on demand and realize its securities without notice.
In accordance with its rights, the bank did recall its loan and realize its securities. The question is
whether it abused its rights in so doing  abuse can arise when otherwise valid contractual
rights are not exercised in a reasonable fashion.
 Termination which occurs abruptly or brusquely, that is, without prior warning and
without giving a period of reasonable notice that will allow debtor to make
arrangements, may be abusive.
 The recalling of the loan was not in itself an abuse of the bank’s contractual rights – but
now must examine reasonableness of the delay  If the demand to repay is to have
any meaning, there must be a reasonable time given to respond to it. The purpose of
reasonable notice is to give debtor a change to make the repayment.
The bank was unjustified in acting the way it did
 Houles had been doing business with the bank for over fifty years, and had always
fulfilled its obligations (no reason to think they wouldn’t get it).
 It was so unexpected and so abrupt that the bank effectively prevented any chance
of the company meeting its obligation of repayment.
 While the bank had right  Not absolute, must be tempered by principle of reasonable
delay. Bank acted wrongfully and committed fault against Houle company.
* Rights of third parties:
 The problem in this case is that the respondents are not the company – they are the
shareholders. As such, they are not parties to the contract in question.
 Unlike lower courts, SCC refuses to “lift the corporate veil”  the bank must have
committed a fault directly against respondents (independent of contract) to be held
liable.
Where does SCC find liability? 
 Bank knew about the deal Houles were making to sell their company. In such
circumstances, there is a general legal obligation that a person not prejudice the parties
to a sale when it knows such a sale to be imminent. Should the sale fail to materialize
or the price decrease due to conduct which constitutes fault, liability can be
triggered under 1053 CCLC (now CCQ 1457)
There was a direct relationship between Bank’s fault and the damage caused to respondents.
They were under a legal obligation (independent of contract) to act reasonably towards them
so as not to prejudice their sale. Failure to do so resulted in their injury (lower sale).
49
Holding:
Bank’s recall constituted an abuse of their rights. Because they knew of the impending deal and the
effect that this would have on respondents, they were under a general duty to act reasonably towards
them and not prejudice the sale. Failure to do this triggers tort liability, but no K liability. Appeal
denied, CA ruling upheld.
Smith, Stone and Knight Ltd. v. Birmingham Corp. [1939]
Facts:
B. wanted to buy property owned by S. In the sale, S. claimed fees for compensation for disturbance
of the business which was carried on at one of the premises where a subsidiary company of S., W.
was established. B. claimed that W. had to, as a separate legal entity, make those claims itself.
Issue:
Can S. make the claim or must, in law, the claim be made by W. itself?
Reasoning:
This would pretty much allow a piercing of the corporate veil by S.
 S. caused W. to be registered, both had same directors who held shares in W. in trust for S.
 W. kept no books, all were kept by S.; S. had complete control over W.
 There was no tenancy agreement upon which W. occupied the building; they were there just
in name
 “Apart from the name, it was really as if the manager was managing a department of
the company”
B. argues Salomon (distinct legal entity)
 Owning all the shares in a Co doesn’t give the person control over the company or make its
property/legal rights theirs
But was the subsidiary carrying on the business as S.’s business or its own?
1. Were profits treated as the S.’s?
2. Were the persons conducting the business appointed by S.?
3. Was S. the head/brain of the trading venture?
4. Did the company govern make all the decisions?
5. Did S. make the profits by its own skill/direction?
6. Was S. in constant and effective control?
Yes to all these questions
Holding:
Found for S.; W. was in effect only an appendage of S.
* Sidebar: Corporation acting as an agent for the principal
Remedies
The Representative/Derivative Action
Hercules Managements Ltd. v. Ernst and Young
(See p46)
Foss v. Harbottle and derivative actions
 The proper way to have brought this claim would have been as a derivative action rather than a
series of individual actions
 Individual shareholders have no cause of action in law for any wrongs done to the
corporation, and if an action is to be brought in respect of such losses, it must be by the Co
itself (through directors) or by way of a derivative action
o As a derivative action for the shareholders as a cohesive body, the action is seen to
represent the corporation’s interest, not just the individual shareholders
50

Shareholders cannot raise individual claims in respect of a wrong done to the corporation
o Only by establishing an independent actionable wrong can the individuals bring a claim
*Sidebar:
Criteria to get right to Derivative action:
1. Ask management to solve the problem
2. Have to show that their refusal is tainted
3. Have to get a majority of the shareholders behind you
Appraisal Remedy; and Investigation
CBCA ss. 104, 162, 167, 190, 238-240
239. Derivative action
Oppression Remedy I – Who is entitled to sue under the oppression remedy?
CBCA 241(2). Oppression remedy
Key language: activity that is “oppressive or unfairly prejudicial to or that unfairly disregards
the interests of” (CBCA s.241)
 Any security holder (stakeholder), creditor, director or officer
238 who can take advantage
241(1)(2) when can the person have oppression remedy
241(3) what can the court do if it finds oppression?

First Edmonton Place Ltd. v. 315888 Alberta Ltd. [1988]
Facts:
FEP (landlord) transferred approximately $250,000 to the lawyers running the numbered company
as a leasehold improvement allowance and signing bonus. It also allowed the company to rent the
premises for a rent-free period. The company transferred the money to its directors and vacated the
premises after the rent-free period was up, in violation of the lease. The landlord is suing the
directors personally so that they can recover the bonuses.
Issues:
Is the landlord, as a creditor, entitled to file a derivative action or an action in oppression?
Reasoning:
The purpose of the remedial provisions is to ensure that the rights of creditors, minority
shareholders, and the public are protected within corporate law [stakeholder model]. The view that
the management of the company falls exclusively within the hands of the directors is no longer
current. The wrongdoers should not be able to prevent others from undoing the effect of the
wrongdoing.
1. Derivative Action
It is highly unlikely that a “toxic” board will bring an action against itself. The derivative action allows
a complainant shareholder to bring an action against the directors, on behalf of the corporation, with
leave of the court. The complainant must act in good faith and must demonstrate that the case is
“prima facie in the interests of the corporation” so as not to “harass” the directors (CBCA s.239).
2. Oppression Action
The provision gives the court the authority to remedy conduct that it considers to be oppressive with
remedies that are “just and equitable.” The remedy does not purport to deal with unpopular
decisions. It should not supplant the legitimate exercise of the Board’s power. The exercise of the
51
Board’s power must pass a threshold of oppressiveness (CBCA s.241).
The court will gauge the oppressiveness of conduct by looking at the “reasonable expectations” of the
injured party. The court will assess the following factors: (1) the protection of the underlying
expectation of a creditor in its arrangement with the Co; (2) extent to which the acts were
unforeseeable or the creditor could reasonably have protected itself; (3) the detriment to the
interests of the creditor
3. Application to the case
In this case, the landlord is not a “creditor” under the act because it does not hold a security (debt
obligation). However, the landlord does fall within the generalized category of “complainant” because
it is the proper person to make the application for a derivative action, but not the proper person to
make an oppression action:
1. There is no evidence that the directors used the corporation as a vehicle for committing a
fraud against the creditors (even though they may have perpetuated a fraud against the
corporation).
2. No breach of any underlying expectations (creditors did not have an expectation that the
signing bonus would remain with the corporation)
The “good faith” requirement is supposed to prevent private vendettas from being litigated. The
landlord is acting in good faith because it wants to ensure that the corporation has assets to fulfill the
breach of the lease claim (which the landlord will file/has filed).
The court also rejected the landlord’s oppression claim on the grounds that it did not affect the
interests of creditors. At the time that the landlord complained of the actions of the directors,
it did not owe the creditors a present obligation to pay the rent; the landlord had only a future
right to the rent. Creditor, when given its plain and ordinary meaning, does not apply in this
circumstance.
Rationale:
A landlord can file a derivative action on behalf of a corporation when the landlord seeks to recover
money used to satisfy rent and when the landlord is doing so in good faith.
Holding:
The landlord was the proper person to make a derivative claim and the court granted leave. The
landlord did not have a reasonable expectation that the corporate respondent would retain the
signing bonus and therefore it cannot sustain its claim for oppression.
*Sidebar:
“Underlying reasonable expectations” criteria carries through to cases afterwards: see BCE and
Downtown Eatery
* See also Peoples for secured vs. unsecured creditors in action
Downtown Eatery (1993) Ltd. v. Ontario [2001]
Facts:
The appellant is an employee who was wrongfully dismissed. The respondents are the directors of
the company he used to work for. He was fired from a managerial position at the respondents’
nightclub. He sued the respondents’ company that was responsible for paying him, B. Right before
the trial, respondents shuffled the corporate structure of their companies, and B. was left with no
money to pay A. A. now seeking to sue other companies of respondents under ‘common employer’
doctrine as well as under oppression remedy.
52
Issues:
Is the oppression remedy open to A.?
Reasoning: (ONCA)
A. is allowed to pursue the respondents’ other companies under the common employer doctrine
Oppression Remedy
s.245 of OBCA (s.241 CBCA) states that a “complainant” viable to bringing an action under oppression
remedy can be anyone deemed by the court to be a “proper person”
G. (defendants) testified that the reorganization of the companies was due to union activities not the
upcoming trial
 B. was company in charge of holding money for paying/managing employees under G.’s
companies
A. is seeking the oppression remedy absent bad faith to rescue himself from inability of B. to pay his
judgment, which resulted from G.’s decision to terminate B.’s business operations/suck all of its
funds
Trial judge failed to appreciate that oppressive conduct need not be undertaken with the intention of
harming the complainant
 As long as it’s established that a complainant has a reasonable expectation that a Co’s
affairs will be conducted with a view to protecting his interests, the conduct doesn’t
require intention to harm
o See the criteria of “protection of underlying expectations” enunciated in First
Edmonton Place
Restructuring B. right before trial effected a result that was unfairly prejudicial to, or that unfairly
disregarded the interests of, A.; there was nothing A. could have done to prevent this from occurring:
see again criteria in First Edmonton Place
Holding:
A. can recover the amounts owed to him from the defendant’s companies and the defendants
personally.
Distinction between the Oppression Remedy and the Derivative Action
Pasnak v. Chura [2003]
Facts:
P. and C. are directors of Fleetwood and indirectly shareholders in it through their respective
personal companies: P.=Double J., C.=Chura Holdings. They also share interests in a bunch of other
companies that they are directors/shareholders in. Falling out; P. wants to buy C.’s shares in
companies, but they can’t agree on price. P. thinks he should get the price as before the big drop in
share value due to mismanagement by C. of Fleetwood that amounts to cause of personal action in
oppression for P. through Double J. C. argues that these are claims that only the Co Fleetwood can
bring as a derivative action.
Issue:
Is this properly a derivative action or oppression case?
Reasoning: (BC Supreme Court)
Foss v. Harbottle
 A company and its shareholders are distinct entities; only the Co can sue for wrong done to it
Two different streams of jurisprudence on Derivative vs Oppression
* 1. C. argues the oppression remedy considered to be available to shareholder only if it is able
to demonstrate that it has suffered personal losses separate and distinct from those suffered
by the Co
 The only rights of the shareholder affected are his derivative or corporate rights
 Shareholder doesn’t suffer any personal loss when share price goes down
 The only injuries are the company’s and not his own, and can only be righted by the
company
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2. P. argues the courts have granted shareholders a remedy for oppression despite the fact their
losses appear to be only consequential/incidental to the company’s loss through their loss in share
value
 In most cases cited, oppression was only really recognized for wrongs to the company, and
the order was for oppressor to pay to the Co either directly or indirectly
Application
* An injury incidental to the injury of the Co is properly remedied through derivative action
* An injury separate and distinct from that of the Co and personal to the shareholder is
properly remedied by action in oppression
 It is possible that a director’s actions can constitute a breach of fiduciary duty where Co can
sue and the basis of an oppression action based on separate injuries personal to the
shareholder
Wherever P. cannot show a loss other than to his share value in Fleetwood equal to the loss of
share value experienced by C., he cannot bring oppression; they are properly actions that
must be brought by the Co or on its behalf as derivative
 Fleetwood is only Co that oppression is alleged in
 Even if oppression is found, share value of Fleetwood is nil so reduction of share price for
purchase by P. serves no purpose
o Cannot transfer the remedy to reduce share prices of other companies C. has
interests in; no oppression alleged in other companies, and they are separate legal
entities
Holding:
Ruled in favour of C.
CBCA ss. 238, 241-242
Oppression Remedy II
BCE Inc. v. 1976 Debentureholders [2008]
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