Business Associations Outline 2011 GIllen
Definitions:
Capital: funds provided by lenders and investors to the business to purchase things to run the business: assets of the business
Shares:
Directors of the company have the power to issue shares. On receiving shares, 3P becomes shareholder in the company.
Shares are bundles of rights – rights such as right to an interest in the distribution of profits by way of dividends, right to a share in
the distribution of proceeds on the winding up of the company (does not include a right to the assets of the company)
Company may have a set amount of “authorized shares” they are limited to issue – so directors are limited in their power to sell
shares up to the authorized number of shares. Directors would have to request to shareholders that their authority to issues shares
be extended of they want to sell more than the authorized numbers.
share has a value (ex. $1). This doesn’t mean that the share is worth $1 – it is a nominal value assigned to the share.
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Originally this meant that the SH was liable to pay at least the $1 per value and if the SH had not paid at least the $1, the SH
could be called on to pay the difference
When a share is issued as “fully paid” – this means that the shareholder paid the price for the share. I not fully paid, the company
would have a claim against the SH for the unpaid amount.
Debentures:
Document that provides evidence of a debt owed by the person who issues the debenture.
Used by companies to borrow money. 3P will lend money to the company.
Evidence of debt is usually the payment of interest on the debt, and the debt (or loan) is usually subject to specific terms set out in a
document (the indenture) that is incorporated by reference in the debenture.
Freely transferable by the debenture holder (different from shares – no right to vote in SH meeting)
Debenture can provide for security – so assets can be seized if the person defaults on paying interest or the face value of the
debenture (i.e. the amount that is due on the debenture)
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Security can be in the form of “floating charge:” Doesn’t specify security in any particular assets of the company, but
represents an amount that must be paid before other debts are paid on the assets (a charge) that are present at the time
of the default in payment on the debenture.
So: 3P will lend money to the company, and he can claim the benefit of the debenture if the company defaults (claim the security
interest that is on the debenture)
Liquidation: (aka winding-up, dissolution)
Company is brought to an end, and the assets and property of the company are redistributed
Compulsory liquidation if the company is insolvent: i.e. unable to pay its debts as they fall due
Purpose of liquidation where the company is insolvent is to collect in the company’s assets, determine the outstanding claims against
the company, and satisfy the claims in the priority order prescribed by law.
Liquidator determines the company’s title to property in its possession. Property held by the company in trust for 3Ps does not form
part of the company’s assets available to pay creditors.
Priority of claims for the company’s assets:
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Secured creditors are entitled to enforce their claims against the company’s assets to the extent that they are subject to a
valid security interest.
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Creditors with fixed security takes precedence over all claims; security by floating charges may be postponed to
the preferential creditors
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Then creditors without security over the assets have a claim.
Dissolution: Having wound-up the company’s affairs, the liquidator will call a final meeting of the creditors, send final accounts to the
Registrar, notify the court  company is then dissolved.
BUSINESS & THE STAKEHOLDERS IN A BUSINESS
“Business”: Involves the provision of goods or services
Must obtain funds to acquire assets (inventory, equipment, land, etc.)
Definition not constrained to for-profit activities and can extend to NFP activities and organizations (charities, gov’t
organizations, etc.)
Stakeholders: Anyone affected by conduct of business (investors, C’s, managers, Ee’s, customers, suppliers, competitors, local community,
etc.)
DIFFERENT FORMS OF ASSOCIATION
Agency:
1. A-P Relationship: Person carrying on business (P) gives another person (A) legal authority to conduct business on his behalf
2. A-3P & P-3P Relationships: Raises issues of relationship b/w P & A, P & 3P, A & 3P
Sole Proprietorship (SP):
1. Single equity investor (the SP) w/ ultimate management authority
2. SP can engage agents & hire Ee’s
3. C’s (who may impose management constraints): SP usually obtains some funds on credit, so normally one or more C’s
C’s have stake in business and may want to place constraints on how SP manages it
4. SP not a separate legal entity: SP owns assets of business and K’s personally w/ C’s, Ee’s, suppliers, and customers of business
If torts occur in operation of business, sole proprietor personally liable for damages
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5. Continued Existence: SP extinguished on death of SP (may continue for administering deceased’s estate, but only until assets
distributed)
Partnership:
1. More than One Investor: Each equity investor referred to as a partner
Normally, each partner has some say in how business is managed
2. Agents & Employees: Partners may conduct business through A’s or hire Ee’s
Partners may manage business directly or hire manager and/or management team
Agency relationships important b/c, unless otherwise provided, partners themselves are considered A’s for each other
3. Creditors: Partnership normally borrows funds, so usually one or more C
C’s have stake in business and may impose constraints on management of business
4. Partnership is Not a Separate Legal Entity: Partnership cannot enter into Ks w/ other persons, only partners can
Where torts arise, partners liable either directly for their part in commission of tort or vicariously
Assets of business are owned by partners
5. Continued Existence: Relationship b/w partners extinguished upon death or bankruptcy of any partner
Partnership may be reconstituted afterwards, and may be statutory or agreed-upon provisions for reconstitution or
continuation among remaining partners, but partnership that existed before ceases to exist
Limited Partnership:
1. Limited Partners w/ Limited Liability and One or More General Partners w/o Limited Liability: Partnership (one or more
equity investors) where amount of liability of some investors is limited to extent of their investment
General Partner: must have at least one partner whose liability is unlimited
2. Involvement of Limited Partners in Management: Limited partners may not have substantial stake in partnership business
Stake is limited b/c their liability is limited to the amt of their investment (personal assets not at risk)
If investment is small, then stake is small, so involvement in management of business may be less important to them
Normally, controls of limited partnerships on mgmt of business are less than controls partners in non-limited
partnerships have
Involvement of limited partners in business usually constrained
3. C’s, A’s, & Ee’s: Limited partnership similar to partnership in terms of having creditors, agents, and employees
4. Legal Status: Not a separate legal entity
K’s b/w limited partnership and others are, unless otherwise provided, K’s b/w others and all partners (limited and
unlimited)
Partners, both limited and unlimited, own assets of the limited partnership business
Limited Liability Partnership:
You are liablefor your own negligence, but your liability to fellow partners is limited to activities you were directly supervising
Still personally liable to firm (this not limited), but liability limited in that you are not responsible for fellow partner’s
mistakes
Recent creation that responds to concerns about increasing scope of liability in large partnerships, esp. professional ones
AB, ON, SK, BC, and QC have legislation permitting these partnerships
Model (other than BC) allows professional partnerships to form LLP’s where partners are not liable for acts of their fellow
partners or Ee’s unless they directly supervised the activity responsible for the loss
BC LLP is available on much broader basis than mere availability for professional partnerships
Otherwise, LLP’s function as normal partnerships (not a separate legal entity)
Corporations:
1. Separate Legal Entity: Unlike SP and partnerships, corp is recognized as a separate legal entity
Consequences: Corp K’s w/ others and is liable in event of breach of those K’s
Corp liable for torts arising from carrying on business conducted through corp
Corp owns assets of business, not equity investors
2. One or More Equity Investors: Interests of equity investors in for-profit corp’s divided into shares, making equity investors
shareholders
Shares = bundles of legal rights that investors can assert primarily against the corp
Shares do not give shareholders legal title to the assets of corp (corp owns assets)
3. Limited Liability of Equity Investors: Shareholder liability limited to amt of their investment (similar to position of limited
partners)
No constraint on extent to which shareholders can get involved in management of the business (unlike in limited
partnership)
4. Potential Perpetual Existence: B/c corp is separate legal entity, its existence can be perpetual
Shareholders can become bankrupt and die w/o affecting continued existence of corp
5. Management: Shareholders can be directly involved in management (esp. where few shareholders)
Where many shareholders, common to have management team w/ few or no shares in corp
Basic framework for management is that shareholders elect BOD
BOD’s appoint officers of corp who either manage corp or delegate management responsibilities to others they hire
6. C’s, A’s, & Ee’s:
(a) C’s: Corp can K w/ others, so can borrow from others and buy goods on credit (i.e. the corporation can have
creditors)
(b) A’s & Ee’s: Corp must act through humans acting as “directing mind” of corp or as A’s on behalf of corp
As separate legal entity, corp can hire Ee’s (done through A’s)
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Business Trusts:
1. Business Trust: Trust set up as form of association for carrying on business
2. Express Trust: One or more persons (settlors) who put title to property in trust in hands of one or more persons (trustees) w/
instructions that trustees hold that property for benefit of other persons (beneficiaries)
Settlors, trustees and beneficiaries can all be separate persons, or, settlors may be either trustees, beneficiaries or
both
Trust Instrument: Sets out details of operation of a trust (law flexible as to how the trust can operate)
Trust not a separate legal entity (trustees have title to assets and can transact wrt those assets on behalf of
beneficiaries)
3. The Business Trust Form of Association:
(a) Investors as Settlors and Beneficiaries : Equity investors can invest by settling funds on one or more trustees
charged w/ managing funds for beneficiaries (beneficiaries = the investors)
(b) Creating Equivalents to Shares, BOD, and Officers : Investor beneficial interests can be divided into units that
resemble shares
Trust instrument can provide for election of trustees by the beneficiary-investors; replicates corp BOD
Trustees can be given authority to delegate aspects of their management duties to others; allows them to
engage A’s and hire persons who can be given management duties similar to those given to officers of
corp’s
(c) Limited Liability: B/c trustees have authority to deal w/ assets, they normally liable wrt torts or K’s arising in
course of business
If investor-beneficiaries are not trustees, then protected against personal liability (similar to shareholder ltd
liability)
Since investors do not usually enter into K’s concerning conduct of business, they not liable as a party to
such K’s
Since trustees are carrying on business, they enter into K’s (personally or through A’s) and are liable for
torts committed in conduct of business (directly or vicariously)
Two main sources of liability risk for investors:
1. Implied right of trustees to be indemnified for their losses by beneficiaries in some situations
2. Possibility that trustees will be considered agents of the investors in some situations
Trustees can waive right to indemnification and likelihood of trustees being considered agents for investors
is small as long as they do not have significant control over business (means risk of personal liability of
investors should be small)
Co-operative Associations: Are corp’s; unique feature is that they typically distribute profits to members in form other than dividends
Tend to have members and any surplus in carrying on business returned to members via lower prices, reduced fees, or other
benefits
Societies or NFP Corporations: Persons taking on role similar to shareholders called “members”
Elect BOD or managers to manage, or supervise management, of NFP corp’s activities
BOD or executive committee can engage A’s and hire others to carry on business activities of corp
Members vote to amend articles, by-laws, or other constitutional documents of NFP corp
Members may receive benefits of activities performed by NFP corp
Usually used for charitable activities, but charities need not be NFP corp’s (could be organized as trusts or unincorporated
associations)
Unincorporated Associations:
1. More than One Person, NFP, Activity Carried on in Common: Persons carrying on business in common w/ view to profit =
partners
If persons act in common but not for profit (and do not form corp), then are members of “unincorporated
association”
2. No Corporation Formed: Three main ways to form new corp:
(i) Fulfil specific registration requirements under statute for incorporation
(ii) Specific statute of Parliament or a legislature forming the corporation
(iii) Granting of a charter from the Crown or letters patent issued by agent of the Crown (rarely used today)
Sometimes, persons act together in non-profit activity but do not form corp (members of unincorporated association)
3. Not a Separate Legal Entity: Similar to partnership b/c cannot enter into K’s w/ other persons (members enter into Ks w/
others)
Not responsible for tort committed in conduct of association’s activities b/c not separate legal entity
Members responsible (can be personally liable)
Members can be considered A’s for each other (can engage other agents and ee’s)
Joint Ventures:
1. Generally Involves Persons Combining Resources for a Common Objective; No Precise Legal Meaning; Not a Separate Legal
Entity
JV: Relationship where persons agree to combine skills/ppty/$/time/resources/knowledge/experience to pursue
common objctve
Typically, each member of JV has some control over management of joint activity and agrees to share in its profits and
losses
2. Structure of the Joint Venture: Can constitute partnership agreement
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Members of JV may be two corp’s carrying on JV through partnership or carrying on JV through corp w/ corporations
that are members of the JV being shareholders in the corp through which the JV business is being carried on
Terms of the JV agreement may be contained in shareholders’ agreement b/w members as shareholders in the JV
corp
Possible that no separate corp is formed and there simply a K arrangement not amounting to partnership
Franchises:
1. Nature of a Franchise: Arrangement where franchisor grants franchisee one or more rights (i.e. right to sell franchisor’s
products, use its business name, adopt its methods, or copy its symbols, trade-marks, or architecture) over a specified period of
time in a specified place
Franchise: Right to use business name (usually associated w/ particular way of carrying on business) or other licensed
rights
Franchisor often provides mkting support and training in franchisor’s method of carrying on business
In exchange, franchisee pays royalty or licensing fee to franchisor
2. Basic Elements: Franchises usually contain one or more of three basic elements:
(i) Provision of know-how by franchisor
(ii) Image recognition provided by franchisor’s marketing support
(iii) Benefits of joint purchasing power allowing for quantity discounts
3. Legal Nature: Key legal element is license to use name, trade-mark, etc. provided by franchisor to franchisee
Arrangement involves an exchange and, thus, a K (usually written but can be oral)
Franchises are governed by provincial law (prop + civ rights)
Franchise not a separate legal entity capable of K on its own behalf
Franchisor and franchisee may be SP, partnership, or corp (nearly always a corp)
Multiple Ks:
1. Business Activity Carried on Through a Series of Separate K Arrangements: Each K could have terms dealing w/ how
particular stage in production process is to be done w/ terms re breach of K
Every step could be done by separate persons acting independently subject to terms of separate K arrangements
2. High Transaction Costs (Negotiating, Monitoring, Enforcing): Very costly if must negotiate, monitor, and enforce each
separate K
More cost effective to have some form of organization or association to coordinate activities in less costly way
3. Forms of Business Associations as Means of Reducing These Costs: As organization grows in size and complexity, cost of
further organization might begin to outweigh cost of separate K’s (further efforts at formal organization may not be worthwhile)
Some Simple Accounting
Four commonly used financial statements are:
(i) The balance sheet;
(ii) The income statement (often called a “statement of profit and loss”);
(iii) The statement of retained earnings; and
(iv) The statement of changes in financial position (or, instead, a statement of sources and uses of funds).
The Balance Sheet:
Balance sheet shows the source of funds from the business and the use of the funds.
Left-right format: “Assets” of the business showing what was done/acquired with the funds are listed on the left side, and the
“liabilities and equity” showing the sources of funds on the right side.
 If the person accounts on the asset side for what was done with every penny of the funds received then the asset side and the
funds side should be equal (they should balance)
The Income Statement:
Shows the revenue of the business less the expenses of the business – shows how much revenue you have generated in a given
period.
Revenues could be from “sales” of goods or services, “royalties,” “licence fees,” “rental income,” etc. These are listed first and
totaled.
Then expenses are listed and totaled and the total expenses are deducted from the total revenues to arrive at a net income.
Assets, Liabilities and Equity
Assets: things acquired for the business that will have a continuing value to the business (usually beyond 1 year).
Liabilities and equity: Sources of funds.
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“Liabilities,” or “debt,” represent fixed obligations. Ex a loan from a bank usually involves an obligation to pay back the
fixed amount that was loaned with fixed periodic payments with an interest rate.
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Equity: Entitlement to the residual amounts. Persons who have advanced funds as an “equity” investment share in the
profits that are the residual amount of revenues left after payment of expenses including interest expense. If the business
is brought to an end and the assets are sold off the equity investors are also entitled to the amount left over after the
liabilities have been paid.
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Trade Credit, Accounts Payable and Accounts Receivable:
Trade Credit: Goods or services may be acquired for a business on credit (ie buy now and pay later). The payment will be a fixed
amount or a fixed amount plus a fixed rate of interest.
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This appears in the “liabilities” section of the balance sheet as “accounts payable” (ie an account that must be paid).
The business itself may sell goods or provide services and allow the buyer of the goods or services to pay for them later. Vendor will
have a contractual right to collect the amount – this is reflected on vendor’s balance sheet as an asset in an account referred to as
“accounts receivable (ie an amount the vendor is entitled to collect at some point).
AGENCY
 A person who affects the legal relations of the “principal” by entering into contractual relationships on behalf of the principal. P can be
vicariously liablef or tort’s committed by their A’s
Authority of Agent
1. Actual Authority:
As between P and A, the scope of A’s authority is his “actual authority”. When A with actual authority enters k with a 3P, this is
binding k between P and 3P. Can be expressed or implied.
Important because if agent is acting within its authority, he can be compensated by P for a loss or for expensess
1) Express Actual Authority: Granted in an oral or written statement. Can be inferred from the written or oral words expressing the
scope of the agent’s authority.
Implied actual authority: – authority that the principal and agent would have expected the agent to have in the circumstances.
2) Implied Actual Authority: Authotity that P and A would have expected A to have.
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What would the A and P have understood the relationship to be in the circumstances?
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1. Usual Authority:
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Determined by looking at what this particular agent has been allowed to do in the past.
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If principle has allowed the agent to do something in the past that is outside the express authority of the agent,
then the agent may have the usual authority to do these things.
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Policy: Unfair for principle to allow agent to do certain things on his behalf several times and then turn around
and say the agent will not be compensated for his acts because he did not have express authority.
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2. Customary Authority:
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Determined by looking at the kind of authority agents of that type normally have.
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If agents of his sort customarily have the authority on which he acted, and so the agent must be compensated
for his claim even though he did not receive express authority from the principal.
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If an express grant of authority from the principal is inconsistent with some aspect of the customary authority of
agents of that type, then the express authority overrides the customary authority.
3) Ostensible Authority: Even if not actual authority (i.e. P never expressly or impliedly gave A authority to act in the way A acted), A
can be said to have ostensible authority to act on P’s behalf.
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P is then liable to perform the obligations under the contract, and cannot say he is not bound by the contract despite no
actual authority.
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Elements:
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1) Representation: Alleged P must have made a representation to the 3P, or permitted a representation to the
3P that the alleged A had authority to act on behalf of the alleged P.
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Can be express or implied from words, conduct or the circumstances.
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If A acted like he had authority and P did not clarity this, P has made a representation.
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2) Reliance: 3P must reasonably rely on the representation to his detriment.
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Policy:
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Protects 3P reliance: Protection 3P who is lead to reasonably believe that the person acting as A has authority to
act as A.
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Least cost avidance: Puts obligation to avoid loss on person who can avoid it with least cost – Pcan oavoid loss at
least cost by : (i) Checking A’s trustworthiness before engaging the A, (ii) Monitoring A’s behaviour, and (iii)
Dismissing A who acts beyond his authority
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Duties of the Agent to the Principal
Agent owes certain fiduciary duties to the principal. Duties can be varied by express agreement or by implication from the
circumstances.
1. Duty to perform agency obligations: Perform tasks assigned by the terms of the agreement with the principal or according to the
principal’s instructions,
2. Duty to perform with reasonable care: Agent must perform tasks to the degree of skill and diligence which and agent in that
position would normally possess.
3. Duty not to delegate his responsibility to anyone else. Exceptions: if non-delegation is unreasonable in the circumstances.
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Principal chose that specific agent to perform their responsibilities, so they can’t pass on the duties to anybody else.
4. Duty to act in best interest of principle (duty of loyalty). This includes:
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a) Duty to avoid a conflict of interest: Agent must not put himself in a position where his duties to the principal conflicts
with his personal interest.
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Ex. A is a SH in a company, he wants the highest possible price. BUT if he is contracting for P, he should be
looking for P to pay the lowers possible price. This creates a conflict of interest.
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Remedy for a conflict of interest transaction: transaction is void and the agent must account to the principle for
any profits made in the transaction.
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b) Duty not to make secret profits
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Ex. A who gets some kickback from making the purchase from a particular supplier, but the principal suffers a
loss because the agent may not have obtained the lowers possible price
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Remedy: Agent must account for the amount of the benefit he received, must pay damages resulting from not
getting lowest priced goods.
5. Duty to keep proper accounts of transactions made on behalf of the principal.
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Consequences of not keeping proper accounts: If there are disputes in the evidence, the principal’s version of the story will
be favoured.
Duties of the Principal to the Agent
1) Requirement to pay remuneration to A when renumeratio has been agreed upon in express agreement, or where it is clear in the
circ’s that the A would not have agreed to act gratitiously.
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Agent must be performing the obligation required of the agreement (i.e. within the scope of A’s actual authority) to get the
remuneration.
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Commission only if the services were the effective cause of the sale, contract, etc.
2) Requirement to pay the agent’s expenses and to indemnify the agent against losses
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The agent must be acting within the scope of his actual authority (not ostensible)
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Expenses not incurred through the fault of the agent
Events of termination of agency relationship:
1. By act of the parties:
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Where grant of authority includes a date or circumstance in which agency is terminated
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Where the agency agreement does not provide for its termination it is unilaterally terminable on notice by either P or A (no
requirement for notice period – can be immediately terminated on notice
2. By operation of law:
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1) Either the principal or the agent become bankrupt.
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2) Frustration: Where the whole purpose of the agency relationship no longer exists, it is presumed to have come to an
end.
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3) Death of either agent or principle.
Breach of Warranty of Authority: 3P’s claim against A when no actual or ostensible authority
Claim by 3P against A which arises when A claims he had authority, when in fact he did not have either actual or ostensible authority.
Usually 2 claims: 3P claims against P that A had authority (either ostensible or actual). Also, 3P claims against A on the basis of a
breach of warranty or authority.
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If 3P’s claim that the agent had authority fails, 3P can argue that the agent’s representation as being an agent was false,
and the 3P relied on this.
A’s defence: The representation is true, he had AA  only use this response if it hasn’t been shown whether or not A had either OA
or AA
Elements:
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1) A represents that they have authority
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2) Representation is false
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3) Reliance: 3P acts on the representation to their detriment
Damages: Expectation damages  Put 3P in the position they would have been in had rep been true
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Ratification:
Where A beyond his authority, P may still accept what he’s done by “ratifying” the act of A (and P will still perform k with 3P)
P can ratify a k entered into by another person who did not have authority to act on P’s behalf when:
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1. The other person (A) purported to act on behalf of the person who seeks to ratify (p)
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2. The person who seeks to ratify was in existence and ascertainable at the the other person purported to act as agent
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Compnay not yet incorporated not in existence, so cannot ratify
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Ascertainable: 3P must also be able to ascertain who and where the principal is, or else it will be very difficult to
sue the principal if P ratifies the contract and the breaches it.
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3. P must have had the legal capacity to do the act both at the time that A acted and at the time of ratification.
Requirements for Ratification:
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1. Can be express, by conduct, or by acquiescence
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Express ratification  Oral or Written – expressly say you are accepting the k by ratification
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By conduct  If contract calls for P to provide services or deliver goods, if P begins to provide these services or delivers
these goods, it can be seen as ratification
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By acquiescence  If P waits awhile to see what happens over a period of time before performing the contract, this may
be automatic ratification. (cannot “wait and see” if k will benefit him)
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This prevents P from being able to formally ratify only if the contract is to his advantage.
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2. The person ratifying must do so based on knowledge of all the relevant facts
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P must know the contract’s key facts to be able to consent to it.
Consequences of ratification  Creates a normal agency relationship
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1. Ratification relates back to the time of offer and acceptance between A and the 3P – so any attempt by the 3P to revoke
his offer or acceptance will now be ineffective.
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Once ratified by P, the contract is considered to have been formed at the date of offer and acceptance between
A and the 3P.
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2. P can sue the 3P and can be sued by the 3P
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3. A is no longer liable for a breach of warranty of authority.
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No breach of warranty of authority
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4. A is no longer liable to P for exceeding her or his authority.
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If it turns out to be a bad contract and P has ratified, P cannot turn around and say A is liable for losses. A is
relieved of this lible.
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5. Principal’s duties: P will be liable to A for reasonable remuneration and to indemnity A for expenses reasonably incurred
by him in effecting K.
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P cannot say that A acted beyond his authority and now will not be remuneratd.
Policy reasons for Ratification
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1. Mutual benefit to P and 3P to the transaction, despite lack of authority by A
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At the time of offer and acceptance between A and 3P, 3P would have seen a benefit from the transaction to
himself. At the time of ratification by P, P would have seen a benefit from the transaction to himself.
Enforcement through courts facilitates these mutually beneficial transactions.
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2. Unjust enrichment of P at expense of A
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Were it not for ratification, P could benefit from A’s work if it goes well, but A would be responsible for the work
if it went badly because P would say he had no authority.
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Ratification protects against this by providing that the agent, upon ratification, is longer liable, and A is entitled
to renumeragion.
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3. Unjust enrichment of P at expense of 3P due to speculation by the principal
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Ratification by acquiescensec/conduct prevents the principal from simply waiting to find out what
happens/partially performing k and then if it doesn’t go in his favour, renegging on 3P.
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Principal in Existence and Ascertainable avoids speculation of waitng to see if k goes well, the incorporating if it is
beneficial.
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Principal Ascertainable - otherwise P could come forward and ratify the contract if it were beneficial but could
remain unascertainable if the contract turned out to be unfavourable to P.
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4. Unjust enrichment of 3P at expense of P  by speculation of the 3P
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3P can not go back and revoke his acceptance – principle that ratification does not relate back – cannot go back
and take back acceptance.
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5. Avoids litigation over the scope of authority; Cures minor defects in the grant of authority
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When P has ratified the k, P is bound to indemnify and is no longer entitled to compensation for losses on the
basis of exceeding authority – so claims for compensation avoided.
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Undisclosed Principal
Agent (who has AA authority) contract with 3P without disclosing that he is an agent in an agency relationship.
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P may have told A not to disclosre relationship
Even though 3P doesn’t know about P, the law still allows P to sue the 3P on the contract in some circumstances
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Usually comes up between P and 3P if 3P isn’t keeping up his end of the K and P comes after him, EXCEPT when the 3P
didn’t want to K with P (so can use that as a defence)
General Rule: Undisclosed P can disclose the agency relationship and sue the 3P on a contract entered into by A with 3P.
o
Generally P could disclose to the 3P that the contractual relationship was in fact between the P and the 3P, not the agent
and 3P, and then the P could sue the 3P for not completing k.
Exception: If the 3P was looking to the agent alone to perform the contract, and would not have entered the contract with the
principal.
Objective test to determine whether 3P was looking to agent alone to perform k:
o
1. The terms of the k require that only the agent perform the terms of the k agreed to by the agent

If the contract clearly requires that the specific agent must perform the k, P cannot sue the 3P
o
2. The circumstances show that the 3P clearly intended to contract with the agent alone (must be corroborating
evidence, such as previous relations. It is not enough to just say would’ve Ked with P)

1) Where the contract is for services of the agent – 3P wants personal services of the agent

2) Where there is some personal aspect to the K

3) Where the 3P wouldn’t have Ked with the P if P’s identity was known
Rights of 3P when an undisclosed agency is disclosed or is discovered by the 3P (Defenses)
o
1. On learning of the agency relationship, 3P can sue the P
o
2. 3P can still sue A as a party to the contract (can enforce the K against A)

3P can sue the A and say that he made a contract with him, and so A must complete the K
o
3. In an action by P against 3P, 3P can use any defence he would have used against A (ex: duress or misrepresentation), 3P
can set off any rights he had against A (ex: I already paid A $4000 of $10,000, so I only owe P $6000)
Policy Reasons for the law concerning undisclosed principals
o
1. Mutual Benefit  If 3P wasn’t looking particularly to A to perform the k, then the 3P still gets the expected benefit. But
where 3P is looking specifically to A to perform, would not benefit (so not enforced)
o
2. UE of 3P who claims K was undisclosed after P performs it

If 3P could avoid performing his part of the K after the undisclosed P had performed his part on the basis that the
agency relationship was undisclosed, then the 3P would be enriched at the P’s expense.

Ex. K for delivery of goods to 3P in exchange for payment. If P delivers the goods, it would be unjust if the 3P
could avoid having to pay by saying that his contract was with the agent.
o
3. Potential unjust enrichment of P who claims he was not a party to the K

3P can sue P on discovering the agency relationship.

Ex. K for delivery of goods where 3P delivers the goods. 3P delivers the goods to the agent, and then the agent
passes the goods to the undisclosed principal. If the goods are not paid and the 3P discovers that there was an
undisclosed principal who now possesses the goods, 3P can sue the P under the law of undisclosed principals.
Ratification vs undisclosed P: A has disclosed he is acting on P’s behalf
Ratification: Agent has purported to ack on P’s behalf – has made it clear he is agent.
Undisclosed P: A say that he is acting on behalf of himself, even though he fully intends to be acting for P
Application of Undisclosed Principal Q
A acts on behalf of P without disclosing to the 3P that he is an agent in an agency relationship  3P thinks he is contract with A,
rather than with P (but really is with P – so P can sue 3P for non-performance of K)
P will argue:
o
Yes A had actual authority and entered into the k on his behalf as an undisclosed p.
o
3P breached the terms of the k, and so P can sue the 3P for non-performance.
o
Argue that 3P wasn’t looking to agent to perform k, and 3P is still getting expected benefit from K even if P performs its =
mutual benefit, and k should be enforced.
o
Unjust Enrichment: Argue it would be UE if 3P could avoid performance of k (3P would benefit from k at expense of P – P
delivers goods, 3P doesn’t pay)
3P will argue:
o
1. He was looking to A alone to perform the K– so P cannot enforce K (test above)
o
2. OR on learning of agency relationship, 3P can sue P
o
3. 3P can still sue A as party to the contract even after learning about undisclosed principal (can we 3P made the k with A,
so A must complete k)
o
4. 3P can sue A for duress, misrepresentation (any defence), or set off any right against A (I already paid A $4000 of the
$10,000)
o
Unjust Enrichment: 3P can sue P on learning about agency relationship – if A doesn’t perform k, 3P must be able to sue P
(Otherwise P would get goods at expense of 3P)
8
Liability of principals for torts committed by the agents
An agent can affect legal relations of P (i.e. P will be liable) by committing torts while acting on P’s behalf
The legal test: P is liable for a tort committed by his agent if A committed the tort while acting within the scope of his actual or
apparent authority.
o
P will be liable as long as the agent is doing the kinds of tasks that he would normally do in the course of doing what he
has been authorized to do by p within the scope of the agent’s authority
Even if P has not authorized the particular tort, if he has put A in a place to do the class of acts, he is liable for the manner that A
conducted himself in doing the business which was in the scope of his authority (Lloyd)
P cannot simply say he did not authorize A to commit the tort. A need only be doing the things he would normally do in the courts of
doing wha he has been authorized to do by P.

Ex: Lloyd v Grace, Smith and Co (1912):

Clerk employed at a law firm defrauded a client of her sole remaining assets: mortgaged plf’s property
to a bank, kept mortgage using the funds to pay off personal debts. Client sued the parter of the law
firm. Held: Although P did not authorize cleark to commit fraud, P’s must be held liable for the fraud
of their A b/c fraud committed while doing the kinds of things in the scope of his authority (filling
mortgage papers)
Partnership: Patners are agents for each other and are liable for the torts of fellow partners. (Falconi)
o
The fact that the acts were for improper purposes with the intent to defraud does not take the acts themselves out of the
ordinary course of business of the firm if they are in the nature of acts normally performed by the law firm in carrying out
its usual business.

Ex: Earnest & Young v Falconi (1994)

Falconi (partner at firm) assisted a client in fraudulent bankruptcy and used facilities of law firm to
prepare mortgage documents. Other partner had no involvement. Held: Partner used the facilities of
the law firm to perform services normally carried out by law firm (such as the making of mortgage
documents), even if he did use them to commit fraud or other improper purposes, the law firm is
liable.
Usually VL, rather than liable through agency
Policy reasons for liability against P for the torts committed y A
o
1. Deterrence/Least Cost Avoidance: If particular activity can cause harm, then imposing cost of harm on that activity can
deter it

Imposing the loss of P gives him incentive to take steps to avoid the loss.

P might be more careful in choosing the agent in assessing his trustworthiness, more careful in monitoring A’s
activities, dismissing A if there are early signs he may commit fraud.

P might obtain insurance against liability for frauds committed by his agents. (Lloyd v Grace
o
2. Allocation of the loss to the activity causing the loss

Allocating the loss to the activity that causes loss increases in the price of the goods or services because of the
added costs of harm prevention and compensation for losses. The price of the activity will then more closely
reflect the full cost to society of the particular good or service

Ex. Lloyd v Grace, Smith and Co: Cost of law firm of monitoring clerk’s activities and compensating those who
suffer losses should be reflected in price of legal services.
o
3. Concern for compensation of the victim

P more likely to be able to pay than A
o
4. Other Concerns:

Lloyd v Grace: Court may have been influenced in part by the effect such as case might have on the accessibility
of legal services. It is considered important that people feel comfortable with seeking out legal advice, and if
compensation had not been given in that case, people might become reluctant to seek legal advice for fear of
being defrauded.
9
Agency Q for TORTS committed by the agent while acting on P’s behalf:
Application:
Does A have authority to act on behalf of P?
o
(1) Go through test for whether A had actual or ostensible authority to act on behalf of P
If so, was A acting within the scope of his authority?
o
(2) Yes actual authority: Was A doing the kinds of things that he would normally do in the course of what P has authorized
him to do when he committed the tort?

Was A doing the class of acts he has been authorized to do

Was A using facilities in the way normally used to carry out his authority?
Even if not acting within scope of authority, had P ratified his act?
Policy:
o
Who is in best position to have avoided the loss?
P will argue:
o
No actual or ostensible authority at all
o
If yes authority, not acting within the scope of his authority when he committed the tort
o
Policy: 3P was in the best position to avoid the loss (least cost avoidance)
A will argue:
o
Yes had authority, and yes doing the kinds of things he is authorized to do
o
P was in best position to avoid risk at least cost
o
P had ratified his act (by conduct or acquiescence), and so is liable
o
Policy: P should have monitored the agent more closely to see if he often acted recklessly/would commit fraud.
Person carrying on a business hires someone to work for her. Employee suffered a loss.
Was he acting as an agent, and thus is the principal vicariously liable for any losses he incurred?
Agent is sued, can he be compensated by the person carrying on the business? (only if acting within scope of authority)
Is principle liable to pay remuneration to the agent? (only if acting within scope of actual authority)
Is principal liable to indemnify the agent for expenses or losses incurred in carrying out agency tasks? (only if acting within scope of
actual authority AND the expense or loss but not have been due to the fault of the agent)
Law:
1) Agent: A person carrying on business (principal) may choose to give another person (agent) legal authority to conduct various
aspects of the business on his behalf. Agent can enter into contractual relationships with third parties on behalf of the principal. The
acts of the agent create a contractual relationship between the 3P and the principal, and thus bind the principal. Principal is
vicariously liable for the acts of his agent. Does not require consideration. Employees can be agents, but not necessarily.
2) Scope of authority: Extent that the agent can affect the legal relations of the principal depends on the agent’s authority or power
and whether the agent is acting within the scope of his authority. When agent is acting within the scope of his authority, he can be
compensated by P for a loss or for expenses. If acting beyond scope of his authority, he is responsible for any losses caused to the
principal.
3) Actual authority can be express or implied. Express actual authority can be expressed orally or in writing and can be inferred from
the written or oral words expressing the scope of the agent’s authority.
4) Actual authority can be implied from the circumstances, and A must be compensated for his claim even though no express
authority has been given. “Usual” implied authority is the authority the particular principal has given to the particular agent in the
past. “Customary” implied authority is the authority agents of that sort typically have. Authority can be implied by the relationship in
the circumstances, and agent must be compensated for his claim
5) Duties of agent to principal: Agent owes certain duties to his principal. So even if agent has actual authority, if he has breach a
duty owed to P, and is responsible for any losses caused to P. P can make an action for damages against an agent who fails to meet
his duty of care.
o
Duty to perform agency obligations assigned by the terms of the agreement or according to P’s instructions
o
Fiduciary duties (below)
o
Fiduciary duties can be overridden by express terms of contract (ex. can grant authority to delegate duties to others) OR if
the circumstances say it is reasonable to do so.
Application: Agency Q for liability between agent and principal:
Was the agent acting within the scope of his actual authority?
1) Does the agent have actual authority to act on behalf of P?
a. Express actual authority: Was the authority expressed orally or in writing, or can it be inferred from oral or written words
that express authority
i. Ex. did the person formally appoint the manager/employee to act in this way, or do any express act to give A
power?
b. Implied actual authority:
i. Usual authority: Look at what this particular agent has done in the past – if the principal allowed the agent, in
the past, to do something outside his express authority, then agent has usual (actual) authority to do this.
1. Or if P was aware that A was doing something and never said anything = yes implied authority to do
this.
ii. Customary authority: Look at the kind of authority agents of that type normally have – if agents of the same sort
customarily have authority to act the way this agent acted, agent must be compensated for his claim
10
1.
NOTE: any express grant of authority from principal that is inconsistent with some aspect of the
customary authority of agents of that type overrides the customary authority.
c. NOTE: If determined that A has authority to act as agent, must still determine if A was acting in the scope of the authority.
If yes actual authority, is P still not liable b/c A breached a contractual or fiduciary duty owed to P? P can make an action for damages for any
loss resulting from the agent’s failure to meet his duty of care.
1.
Duty to perform agency obligations: Perform tasks assigned by the terms of the agreement with the principal or according to the
principal’s instructions
2.
3.
Fiduciary duties: Presumed duties to act in best interest of P
4.
2. Duty not to delegate his responsibility to anyone else. Exceptions: if non-delegation is unreasonable in the circumstances.
o
Remedy: Damages for loss resulting from delegation/injunction against further delegation.
5.
3. Duty to avoid a conflict of interest: Agent must not put himself in a position where his duties to the principal conflicts with his
personal interest.
o
Ex. A is SH in a company for a product, he wants the highest possible price. BUT if he is contracting for his principal, to buy
the product, he should be looking for P to pay the lowers possible price. This creates a conflict of interest.
o
Remedy for a conflict of interest transaction: transaction is void and the agent must account to the principle for any
profits made in the transaction.
6.
4. Duty not to make secret profits (accounting): Ex. a purchasing agent who gets some kickback from making the purchase from a
particular supplier, but P suffers a loss because the agent may not have obtained the lowers possible price for the goods.
o
Remedy: Agent must account for the amount of the benefit he received, must pay damages resulting from not getting
lowest priced goods.
7.
5. Duty to keep proper accounts of transactions made on behalf of the principal.
o
Consequences of not keeping proper accounts: If there are disputes in the evidence, the principal’s version of the story will
be favoured.
Duty to perform with reasonable care: A must perform tasks to the degree of skill and diligence which and agent in that position
would normally possess
a. A is professional? A must act with the degree of skill of a reasonably competent lawyer.
b. Reasonable care to ensure that the contract is made property, that the transaction is fully accounted for, etc.
Is principal under duty to pay remuneration for or indemnify his agent’s actions?
P must pay remuneration when it has been agreed upon or;
If no express agreement, where it is clear in the circumstances that the agent would not have agreed to act gratuitously and would
reasonably expect to be paid
A must have been performing the tasks that fall within the scope of his actual authority to be remunerated.
Is principal under duty to indemnify his agent for losses or expenses incurred in carrying out agency tasks?
To be entitled to this indemnification the agent must have been acting within the scope of his or her actual authority and the expense
or loss must not have been due to the fault of the agent.
11
Agency Q for liability between P and 3P:
Contract between 3P and A. Contract breached – 3P wants damages.
o
Claim 1) Did the agent have authority to make a contract with a 3P on behalf of P, and thus P is liable for damages? Or, if this
doesn’t work,
o
Claim 2) Did the agent warrant he had authority but in fact did not, and thus breached a warranty of authority?
LAW:
This is a breach of contract. The 3P customer says he was in a contractual relationship with the principal, and so the principal is contractually
bound to deliver the goods/servicer/perform the contract or he must pay damages.
1) Agent: A person carrying on business (principal) may choose to give another person (agent) legal authority to conduct various aspects of
the business on his behalf. Agent can enter into contractual relationships with third parties on behalf of the principal. The acts of the agent
create a contractual relationship between the 3P and the principal, and thus bind the principal. Principal is vicariously liable for the acts of his
agent.
Scope of authority:
Extent that the agent can affect the legal relations of the principal depends on the agent’s authority or power and whether the agent is acting
within the scope of his authority. When agent is acting within the scope of his authority, he can be compensated by P for a loss or for
expenses. If acting beyond scope of his authority, he is responsible for any losses caused to the principal.
Actual authority can be express or implied.
Express actual authority can be expressed orally or in writing and can be inferred from the written or oral words expressing the scope of the
agent’s authority.
Actual authority can be implied from the circumstances, and A must be compensated for his claim even though no express authority has been
given. “Usual” implied authority is the authority the particular principal has given to the particular agent in the past. “Customary” implied
authority is the authority agents of that sort typically have. Authority can be implied by the relationship in the circumstances, and agent must
be compensated for his claim
Liability to perform a contract:
If A has actual authority to enter into a contract with a 3P on P’s behalf, and it is clear that the agent is acting as an agent for P, then the
contract is binding between the P and the 3P and the contract can be enforced between them.
Ostensible Authority (apparent authority) to act on behalf of another:
Even if not actual authority, A can be said to have ostensible authority to act on P’s behalf. P is then liable to perform the obligations under
the contract, and cannot say he is not bound by the contract despite no actual authority.
1) Representation: Alleged P must have made a representation to the 3P, or permitted a representation to the 3P that the alleged A had
authority to act on behalf of the alleged P.
o
Can be express or implied from words, conduct or the circumstances.
o
If A acted like he had authority and P did not clarity this, P has made a representation.
2) Reliance: 3P must reasonably rely on the representation to his detriment.
Breach of Warranty of Authority
If agent warranted he had authority, but in fact did not have actual OR ostensible authority, the 3P can make a claim against the agent for
breach of warranty of authority. Damages = expectation measure of damages. Elements:
1. A represents he had authority
2. Representation is false
3. Reliance: 3P acts on the representation to his detriment.
Ratification
When agent has no authority for his acts: he will argue there was ratification
When agent acts beyond his authority, P can accept what he has done by “ratifying” A’s act (P will perform the contract that A entered into on
his behalf)
Ratification creates a normal agency relationship
o
So agent is no longer liable for breach of warranty of authority and no longer liable to P for exceeding his authority: Principal and
3P are in a contract that relates back to the time of the offer and acceptance between A and 3P.
o
P is liable to A for remuneration and indemnification for expenses reasonably incurred by A in contract formation.
Agent or P can argue that the 3P cannot revoke his acceptance of the contract even though A did not have authority, b/c P ratified A’s act, and
ratification reltes back to the time of offer and acceptance.
Application: Agency Q for liability between P and 3P
Was the agent acting within the scope of his authority? And thus P is liable?
1) Does the agent have actual authority to act on behalf of P?
3P and A will argue that the agent had authority to contract on behalf of P, so they are in a contractual relationship and P is bound to perform
or pay damages.
Principal will argue that the alleged agent did not have authority, OR even if he was an agent with some authority, he did not have actual
authority because he acted beyond the scope of his authority and thus P is not liable
a.
Express actual authority: Was the authority expressed orally or in writing, or can it be inferred from oral or written words that
express authority
i. Ex. did the person formally appoint the manager/employee to act in this way, or do any express act to give A power?
b. Implied actual authority:
i. Usual authority: Look at what this particular agent has done in the past – if the principal allowed the agent, in the past,
to do something outside his express authority, then agent has usual (actual) authority to do this.
1. Or if P was aware that A was doing something and never said anything = yes implied authority to do this.
ii. Customary authority: Look at the kind of authority agents of that type normally have – if agents of the same sort
customarily have authority to act the way this agent acted, agent must be compensated for his claim
1. NOTE: any express grant of authority from principal that is inconsistent with some aspect of the customary
authority of agents of that type overrides the customary authority.
12
c.
NOTE: If determined that A has authority to act as agent, must still determine if A was acting in the scope of the authority.
NOTE: Agent will argue he DID have actual authority, so P is liable (not him!)
If no actual authority, did agent have ostensible authority to act on behalf of P, and so P is still liable?
a.
Representation: P made or permitted a representation to the 3P that the alleged A had authority to act on behalf of the alleged P.
b. Can be express or implied from words, conduct or the circumstances.
i. Ex. Agent inferred that he had control, said he was agent.
ii. Ex. Agent is acting like he has authority and P knows this but does nothing to stop it = yes representation he has
authoirty
c.
Reliance: 3P must reasonably rely on the representation to his detriment.
i. Ex. 3P ordered the goods or services from the agent, entered the contract. Now he would have to pay more.
ii. Ex. 3P invested money with agent.
d. Reliance must be reasonable (least cost avoidance): Balance 3Ps detrimental reliance against the P being unfairly surprised at
being bound by a contract where he did not reasonably expect to be bound.
i. If P could have reasonably taken steps to avoid potential reliance (avoid it looking like A had authority) = no unfair
surprise
1. P could have checked A’s trustworthiness before engaging the agent, monitoring the agent once he is
engaged, dismissing an agent who acts beyond his authority in the past.
2. P normally in best position to control sale of goods/services
3. P could have taken steps to notify 3Ps of limits of agent’s authority
ii. BUT if 3P could have avoided the loss, maybe P not liable
1. 3P could have avoided the loss by calling the principal to make sure the agent was really an agent.
2. 3P could have looked at company books (if possible) to see if agent has been ratified, or whether he actually
had authority.
3. Purpose of agency: Not fair for P to have to contact 3Ps when the purpose of agency is to have A act on
behalf of P.
NOTE: 3P and Agent will argue he DID have ostensible authority, no unfair surprise.
P will argue no ostensible authority: Reliance not reasonable, 3P could have avoided the loss
Breach of Warranty of Authority?
If no actual or ostensible authority is found, did alleged agent warrant that he had authority, and thus is liable for breach of warranty of authority b/c 3P
relied on this representation to his detriment?
1) A represented that he had authority to act on P’s behalf
2) Representation was false
3) Reliance: 3P acted on this representation to his detriment
A will argue Ratification:
Agent will argue even though he had no authority to act, P ratified the contract. There is a valid contract between P and the 3P, and thus is
A is not liable to 3P breach of warranty of authority or to P for exceeding authority b/c his act was ratified.
o
P must indemnify/remunerate the agent for expenses reasonably incurred in effecting the contract. P can sue 3P and b sued by
3P.
COULD there have been ratification: A will argue that all elements are present:
o
1) The person purported to act on behalf of person who seeks to ratify (principal)

Ex. Agent says he was an agent for the principal
o
2) The person who seeks to ratify was in existence and was ascertainable at the time the other person purported to act on his
behalf

Ex. corporation must already have been incorporated – was it registered? Was partnership registered? Then it is
ascertainable in the registry.

Ex. If there is a store with an address – the P is ascertainable.
o
3) The person who seeks to raify must have had the legal capacity to do the act both at the time the other person acted and the
time of ratification (ex no mental incapacity)
WAS there ratification: Can be express, by conduct, by acquiescence:
o
Ratification can be express – orally or in writing (Saying I am accepting the k, or I refuse to cancel this contract)
o
Ratification can be by P’s conduct (P performs terms of contract)

A and 3P formed contract where P must provide services, and P begins to provide the services, this is ratification.
o
Ratification can be by acquiescence: If P waits and sees what will happen before performing k, this is automatic ratification (so P
can’t wait to ratify only if the k is to his advantage)
Person ratifying must do so based on knowledge of all relevant facts of the contract (must know all aspects of the k to consent to the deal)
Consequences if ratification: Ratification relates back to the time of offer and acceptance between A and the 3P. So even if P didn’t say the
k was ratified until later, 3P cannot revoke performance b/c ratification relates back to the time the contract was mae.
Policy that ratification must be upheld:
o
Mutual benefit, unjust enrichment of P at A’s expense or of P at 3P’s expense, or of 3P at P’s expense (by speculation: 3P could
wait and see if contract is advantageous, and if not, revoke acceptance of k. Ratification means 3P can’t wait and see b/c contract
is binding on formation).
2)
THEN: If principal has lost money and had to compensate the 3P, go back to #1: Agent could have breached his fiduciary duty to P by acting outside the
scope of his authority, and thus must pay him back.
13
SOLE PROPRIETORSHIP:
 An individual carrying on a commercial activity on its own, where that individual has ultimate control over decision making (although he may
be restricted in this capacity by loan requirements, this is a trade-off for the ability to access funds)
-
-
-
-
-
-
-
Four Reasons to Choose SP:
o
1. Ease of Formation: No need to raise capital through equity, or even register the business
o
2. Ease of Dissolution
o
3. Tax Reasons:

(i) Business losses can be deducted against other forms of income

(ii) No double taxation
o
4. Default Choice: People do not think about it, they merely start and that is the kind of business they are in
Structure: Sole proprietor owns the assets of the business and is the ultimate decision-maker
o
Management structure can become very complex in practice despite simple legal structure: Sole prop. business an be large
and SP can hire several managers to manage various aspects of the business. Each manager would be given authority to
engage others to assist them in their required work
Formation of sole proprietorship:
o
No requirement to register a sole proprietorship business. One simply starts carrying out a business to form SP. May be
required to register a business name.
Legal Status and Liability of the SP:
o
Sole proprietorship is not a legally recognized separate entity. The business is not treated in law as separate from the sole
proprietor.
Consequence of not being separate legal entity:
o
Losses of SP are those of the individual, in either a business or personal capacity
o
Sole proprietor directly owns all the business assets (all assets of the SP are the personal assets of the individual)
o
Legal implications: Unlimited personal liability:

K’s entered into by the SP: SP will be the contracting party, and so the SP will be directly liable for the
performance of the k

SP will be personally liable in tort for torts committed in carrying on the business either because SP was directly
involved in the tort or vicariously liablef for the agents and employees who committed the tort while carrying
on the business.

No distinction between personal and business assets:Persons can satisfy their claims out assets of the business
and also out of the SP’s personal assets.
 Vice Versa: Persons who obtain judgments against the SP outside the business can satisfy those
judgments out the SP’s personal and business assets.

If SP defaults on a personal loan the lender can get SP’s personal assets, and also her business assets.
Source of funds:  NOTE: CONSIDER: Securities regulation issue? If funds from anywhere other than own investment, must consider
SECURITIES (bank may have securities interes in the loan)
o
Investment by the sole proprietor  SP has only 1 equity investor
o
Loans: Funds borrowed from one or more lenders- usually there is one lender: the bank
o
“Trade credit:” Buying goods or engaging services necessary to carry out the business on credit – buy now so you have the
goods, but don’t have to pay immediately

Sole proprietor buys goods to be used or sold in the business, or engages services (e.g. legal services, accounting
sevices) necessary to carrying on the business. The suppliers of these goods and services provide the goods and
services on credit (i.e. buy now and pay later).
Management
o
Sole proprietor has the ultimate control over business decisions
o
May also delegate some of his authority to employees or agents
o
Constraints to sole prop’s control: Lenders who have advanced significant funds will put restrictions on the business that
control the degree of risk to which the loans will be exposed.

SP will have little downside risk because business doess poorly he will have lost the investoment, but if business
does well he can repay the lender the fixed amount and pocket the remainder (little downside risk, high
potential gain), so might invest in risk business.

Bank will protect itself from sole prop. from making risky decisions but putting restrictions on the ability to go
into further debt by restricting amount they lend and SP’s ability to make risky business ventures.
o
Trade off: Sole prop’s loss of control due to lender’s restrictions is a trade off for obtaining the necessary funds and
keeping the interest rates down on the borrowed funds.
Dissolution:
o
When the sole proprietor stops carrying on the business, it is dissolved
o
No requirement to register the SP (other than possibly the business name), so no need to register the dissolution.
o
Only one equity investor and one owner of the assets, so no difficulty with how assets and payment of debt are distributed
to investors.

Sole proprietor must eventually pay off the debts (or go bankrupt), but once the assets are sold and the debts
are paid off the sole prop keeps everything that remains.
Suing a SP:
o
Under the Rule 7 of the Rules of Court, a SP can be sued in the name of the business, as if it were an individual.
14
-
Why Choose (Reasons for) SP:
o
1. Non-Tax Considerations:

(i) Ease of Formation: No formal process, just start running business

(ii) Ease of Dissolution: Merely stop carrying on business
o
2. Tax Considerations:

(i) Profits taxed directly in hands of sole proprietor: Businesses generally incur losses in start up phase, so can
deduct losses from the business against income from other sources such as personal income. , and thus pay les
ttax.

(ii) Advantage of SP over Corp:

Corp treated as separate person , so SH cannot deduct losses from corp from personal income – these
are the corporation’s losses. Corp also cannot apply losses against other income of shareholders b/c
shareholder income is not corp’s.

Corp can carry forward losses and apply against future income. General principle to pay tax later
rather than sooner b/c you can earn income on amounts not paid, If SP, sole proprietor can use
business losses immediately against other income. If corp, business losses cannot be used against
person’s income immediately. Person carrying on business through corp has to wait for business to
turn profit. But, roughly 70% of all new businesses fail w/in five years
o
Vere SP can use businesses losses immediately against other income.

Corp Prone to Double Taxation: If corp profitable, it taxed in hands of corp as separate taxpayer and
then again as dividend in hands of shareholder

(iii) Corp may be advantageous for small business: Claim small business deduction and lower its tax rate

Not complete exemption from paying higher tax rate since difference b/w reduced rate and higher
rate will have to be paid when profits are distributed as dividends
NAMING and SP: BC Partnership Act
The Business Name Registration Requirement:
- Sole proprietor can carry on a business in his own name without needing to register the name (Ex. Jones’ Shoes)
- Name must be registered if one uses a name other than one’s own name, or a name indicating a plurality of persons.
o
Ex. “Eclectic Collection”, “Jones and others”
-  S. 88 of the Partnership Act sets out the requirements to register the business name:
o
Elements required to register the business name under S. 88:
o
If one,

1.Is in the business of trading, manufacturing or mining;

2. Is not in partnership; and

3. The business name is not the sole proprietor’s own name or the business name consists of a phrase
indicating a plurality of persons,
o
then the name must be filed with the registrar.
- S. 89 Partnership Act: When a name cannot be registered:
o
The Registrar is not the register the name if it resembles the name of a corporation in BC or if it is likely to confuse or
mislead unless:

1. The corporation consents in writing, or

2. The business name was used before the corporation first used its name
- S. 90 Partnership Act: Register must maintain a register showing the business names on the left side with the names of the persons
associated with the business on the right side (name of sole prop)
- NOTE: Register is given authority only to refuse registration where the business name conflicts with the name of a registered
corporation in BC, so it is possible to have 2 identical business names on the register when neither businseeses are corporations
(creates confusion). Corporation subject to S. 88 because corp is a “person.”
Reasons for SP to Register:
- S. 5 Offence Act: Fine for not registering of up to $2000.
o
Costs about $25 to register – Inexpensive to register, so SP’s who are unsure whether they fall within S. 88 should register
to avoid a fine
- 1. Identifying the sole proprietor for credit check purposes:
o
Importnant to identify who is behind the SP business when not apparent in business name.Useful to a person who is
considering supplying goods or services to the business on credit to determine the creditworthiness of the SP.
- 2. Identifying the SP for the purpose of starting an action (know who to sue):
o
Allows a person who wishes to pursue a legal claim arising from dealings with the business to determine who to sue.

Note: Not technically necessary b/c Rule 7 of Rules of Court allow for the sole prop to be sued in the name of the
business and for service to be effected by leaving a true copy of the relevant document at the place of business
with a person who appears to manage or control the business.
- 3. Avoid Deception of a name indicating a plurality of persons:
o
Avoids deceiving people if the name suggests a partnership where in fact there is only 1 person behind the business.
- 4. Avoid passing off claims – avoid using a name that has already been used before
o
Registration requirement allows persons to avoid passing off claims because they have the same business name as another
bsiness. SP could check the register to see if anyone has registered a similar name.
15
QUESTION: 3P SUES BUSINESS IN CONTRACT OR TORT– WHAT CAN THEY CLAIM
- A sole proprietorship not a separate legal entity, and as the sole equity investor, the sole proprietor is personally liable in contract and
tort for the activities of the sole proprietor business
- This means that the sole proprietor can be liable not only to the extent of her business assets, but also her personal assets as well 
can be personally liable. Since there is no separate legal entity, the “business” itself cannot own assets and thus liability will not be
limited to the business.
- There is no limited liability in a sole proprietorship.
- Insurance: If sole proprietor can be insured against the extent that her personal assets can be seized  SP should be insured, and then
3P cannot go after her personal assets
- Who to sue: If the business is not in the sole proprietor’s name, the third party can check the registry to see the name of the sole
proprietor next to the business name. Then you can serve the notice of civil claim at the place of business by putting it in the hands of
someone who appears to be in control of the business (Rule 20-1 Rules of Court)
- 3P will argue:
o
If the business assets do not cover the extent of my claim, you are also personally liable to repay me
o
If you defaulted on a loan, you must repay me and you are liable to the extent of your personal and your business assets
o
I obtained a security on my loan
- Sole Proprietor will argue:
o
I am insured, my liability is limited to the extent I am insured
o
You could have checked the registry to see that I am not a partnership and thus you would not that I don’t have as many
assets.
Does the sole proprietorship need to be registered? (not expensive – so should anyways to avoid fine)
Sole Proprietorship can be formed by simply starting to carry on the business
Can carry on business in his own name without needing to register, but name must be registered if it uses a name other than one’s
own name/multiple names
S. 88 PA: Requirements to register business:
o
Elements required to register the business name under S. 88:
o
If one,

1.Is in the business of trading, manufacturing or mining;
 Trading: buying/selling goods, also has been interpreted to mean anything to earn a living
 Manufacturing: Making products and goods
 Mining: Extraction of ore from the earth

2. Is not in partnership; and
 Partnership registration in a different section of PA

3. The business name is not the sole proprietor’s own name or the business name consists of a phrase
indicating a plurality of persons,
o
then the name must be filed with the registrar.
o
Ex. “Eclectic collections” must be registered, Jones and others must be registered.
- Name cannot be registered y the Registrar if it resembles the name of a corporation or is likely to confuse or mislead unless (S. 89
Partnership Act)
o
(1) The corporation consents in writing or
o
(2) The business name was used before the corporation first used its name)
o
So can have 2 identical business names on the register if businesses are not a corporation
- Reasons to register:
o
Avoid loss: Cost of registration is small ($25) , so sole prop’s who are unsure whether they fall within the phrase should
register to avoid a fine

S. 5 Offence Act: Fine for failure to register up to $2000
o
Creditors/3P will be able to identify who runs the business by looking at register:

S. 90 Partnership Act: Register must maintain a register showing the business names on the left side with the
names of the persons associated with the business on the right side (name of sole prop)

Sole Prop can be identified by credit check purposes (see whether the person behind business is creditworthy to
decide whether to supply goods or services to the business)

Sole prop can be identified to start an action against them
o
Avoid registration of a name if it indicates there are multiple people (know it’s not partnership)
o
Avoid receiving claims b/c they have the same business name as another business.
PARTNERSHIPS
 Two or more persons carrying on a business in common with a view for profit (2 or more equity investors). Regulated by the BC Partnership
Act, the default K that can be modified by the partners by express agreement or by inference from the course of dealings.
Usually one will want to make the claim that the existing relationship is a partnership in order to increase the pool from which to
claim from.
Also might want to claim that one person’s claim should be subordinated to another’s (i.e. s. 4(c)(iv) or (iv).
To establish the existence of a partnership, START WITH S. 2 BCPA
16
Why Partnership?
Easy to form/form by default – 2 or more persons carrying on business with a view for profit
Very flexibl form of business associaton: Corporaitons require compliance with mandatory statutory requirements that impose
constraints on business, making partnership preferred form of association.
Professionals – initially unable to carry on business through corporation
Joint Ventures – 2 corporations may organize their joint venture as partnership
Tax reasons – Income Tax Act only looks at partnership income to determine the partner’s share, then can apply partnership losses
against other sources of income – partnership gains or losses are attributed to the individual partners, who can include the gain or
loss in their individual tax return and deduct losses from other sources.
Disadvantages:
o
Partners personally liable in contracts entered into and torts committed in respect to carrying on partnership business. LL
available for corporate forms of association.
Legal Status: Not a separate legal entity: (Re: Thorne v NB) Consequences:
- 1) Each partner is liable to the full extent of his personal assets for debts and other liabilities of the partnership business  personal
assets can be taken to repay business debts – assets not limited to the investments in the business
o
Actions against a partnership for claims arising out of the conduct of the partnership business may be commenced and
defended in the partnership name pursuant to Rule 7 of the B.C. Rules of Court.
- Cannot be an employee of the partnership business (Re Thorne)
- Cannot be a creditor of the partnership (except in very particular circumstances outlined in Partnership Act - S. 4).
o
Partners CAN enter into a separate agreement and put in some of their money as a loan and not an equity investor.
- Partnership cannot own property – it is the partners who own property.
- Partners are taxed individually on their share of the partnership income (even though income of business is calculated for the entire
partnership firm)
- Can sue in name of the partnership firm, but this is to make it easier – still not a separate legal entity.
Registration Requirement of Partnerships – and consequences of failing to register
- Partnerships are formed by virtue of there being more than one person engaged in a business venture, i.e. no official registration
required.
- Must register partnership to comply with PA.
- S. 81: Partnerships must register its name with the Registrar (s. 81) and the name of the operating partners (s. 90) within 3 months of
formation (s. 82)
- Index: Registrar keeps an index that shows the name of the partnerships registered and beside them the names of the persons who are
partners in the particular firm. (S. 90 PA)
o
This provides a place for 3Ps to check to see who is a partner in the firm
- Must register changes in membership of firm or changes in firm’s name (s. 83)
- Retiring partners must indicate this in the registration (s. 84(2)) lest they continue to be held liable after their retirement
- Failure to file Registration Statement or Registration Statement for Changes:
o
Offence under the Offence Act with a potential fine of up to $2,000.
o
Failure to register also makes partners jointly and severally liable for the debts of the firm rather than just jointly liable. (S.
87)
o
Failure to register change in partnership means that that the retiring partner will be deemed to continue to be a partner
and therefore will be still be liable for to debts of the partnership after retirement (S. 84(2))
- Partners have Joint Liability when registered: -- S. 53 Law and Equity Act and S 7 Rules remove absolute bar.
o
Jointly liable – S. 11 PA – Partners are jointly liable for all debts and obligation incurred by the firm

 If you sue the firm’s name, you are suing all partners jointly as a group.

Each partner liable up to the full amount of the entire debt – can join partners in 1 action.

3P can proceed against any 1 partner and that partner will be liable for full amount of debt. But if proceeds only
against 1, barred from proceeding against others, even if unable to collect
o
If not registered, they are jointly and severally liable
o
BUT – S. 53 Law and Equity Act: Today: no more absolute bar

Proceeding against one partner who is jointly liable doesn’t bar you from proceeding against other parties.

S. 53(3): When one jointly liable person has been sued and has satisfied the full amount of the debt, the person
is entitled to demand and recover contribution from the other jointly liable persons
o
Rule 7 of Supreme Court Rules of Court:

A person can sue a partnership in the name of the firm - and all partners sued

Service should be effected by leaving a copy of the document either with a person known to be a partner at the
time liability arose, or with a person who appears manage or be in control at a place of business of the
partnership firm.
o
 Practical effect: Joint liability not a major concern: S. 53 Law and Equity Act and a court order under Rule 7 remove the
bar against subsequent proceedings against other partners if a plaintiff only served/sued one or some of the partners – so
if unable to collect against one partner, CAN sue others.
17
Funding:
- Usually source of funding is some trade credit and a bank loan (bank, or other lenders) – similar to funding of a sole proprietorship.
- Partners are equity investors in the partnership:
o
Investments usually cash contributions
o
Could also be investments in the form of property to be used in the partnership business, or services, or any combination
of cash, property or services.
- Partners typically share profits in proportion to their relative contributions, but they can agree on different shares if they wish.
o
S. 27(a): Where the partners say nothing about their contributions or their shares the presumption is that they share
equally in the capital, profits and losses.
- Securities legislation: It is possible that a partnership interest or loans to the partnership may be considered a “security” under
provincial securities legislation and thus be subject to provincial securities legislation – i.e. a prospectus would be required to sell
these “securities” unless prospectus exemption was available.
Partnership Agreement  Partnership is Governed by Partnership Agreement:
- Partnership Act provides a set of default rules/terms that will govern the relationship between partners to the extent that they have
not explicitly or implicitly agreed otherwise (S. 21-34)
- No express partnership agreement  default PA will apply, unless varied by inference from course of dealings.
- S. 21: Partners rights can be varied by the consent of all the partners and the consent may be either express or inferred from a course
of dealing.
- S. 21-34 acts as a Partnerrship SKF: This facilitates the formation of partnerships and reduces transaction costs
- Default Rules Based on Assumption of equality between partners
o
Assumption partners are equal with respect to their capital contributions, rights to participate in management of the
business and share in the profits of the business  but not always true (different contributions of capital, skill,
investments), so partners often agree on sharing profits in an unequal manner consistent with their contributions of
capital/services
- Express written agreement will override the default rules – so write comprehensive agreement
o
When default rules are inconsistent with what the partners want, can override with written agreement.
o
Expressly writing a comprehensive written partnership agreement saves confusion
o
Must make terms as clear as possible – so modify terms so they exactly express partner’s needs, ensure they are protected
- If partners missed something in the agreement but want a term about it: Partnership Precedents – pre-made partnership agreements
that show problems that have come up in the past with partnerships.
Default Provisions: Partnership Act
1) Partnership Property – property acquired for firm purposes or bought with firm money must be used for partnership purposes in
accordance with the PA.
- S. 6: Partnership Property means property brought into the partnership, property acquired on account of the firm or property acquired
for the purposes of and in the course of the partnership business.
- S. 23(1): partnership property must be held and applied for the purposes of the partnership in accordance with the partnership
agreement.
- S. 23(2): Land held in the name of an individual partner or one or more partners is held in trust for the partnership.
- S. 24: property bought with money belonging to the firm is deemed to be partnership property.
2) S 27: Capital, Profits, Losses, Management, Admission of New Partners and Record Keeping
- S. 27: Provisions concerning day-to-day running of the partnership business  Equality between partners subject to any express or
implied agreement.
- s. 27(a) – Partners share equally in capital, profits and losses
o
Partners typically share profits in proportion to their relative contributions, but they can agree on different shares if they
wish.
- s. 27(b) – The firm must indemnify every partner for payments/liabilities in the ordinary and proper conduct of the business or for the
preservation of the business or property of the firm.
- s. 27(c) – A partner who makes an advance of capital over and above the contribution of capital he agreed to make is entitled to receive
a payment of interest at a fair rate.
- s. 27(d) – A partner is not entitled to interest on the capital subscribed by the partner (i.e. the return on contributed capital is in the
form of profits and not payment of interest).
- s. 27(e) – Every partner may take part in the management of the business.
o
So if only one partner is to take part in management, must modify this.
- s. 27(f) – Partners are not entitled to remuneration for working in the partnership business.
o
Partner can’t be paid for managing the partnership business.
- s. 27(g) – No new partner can be admitted to the partnership without the consent of each of the partners.
- s. 27(h) – Decisions on ordinary business matters are to be decided by a majority of the partners. However, no change in the nature of
the partnership business is permitted without the consent of all existing partners.
o
So only need majority to manage day to day business
o
But need consent of all partners to make change in the nature of the partnership.
- s. 27(i) – Partnership books are to be kept at the principal place of business of the partnership and every partner may have access to
the books to inspect them or copy them.
- Can be overridden: S. 27 says “subject to any express agreement”
18
3) Removal of Partners
- S. 28: Default rule is that a partner cannot be removed from a partnership without that partner’s consent.
o
No majority of the partners can expel any partner unless this power has been granted by express agreement between
partners, and the power is exercised in good faith. The default rule can only be altered by express agreement NOT by
implication
o
S. 28: A majority of partners cannot expel any partner – no partner can be removed unless they consent to it (unless
changed in express agreement).
4) Fiduciary Duties
- BCPA: Partners are treated as agents for each other in the carrying on of the business – trust relationship
- PA S. 22: Partners owe fiduciary obligations to each other: “a partner must act with the utmost fairness and good faith towards the
other members of the firm in the business of the firm.”
- Specific fiduciary duties:
o
S. 31 partners are bound to render accounts and full information of all things affecting the partnership to any partner.
(Similar to agents’ duty to keep proper records)

Partners must disclose all information relevant to partners.

Partner must disclose his earnings from his other business to his partner (McKnight v Hutchinson)
o
S. 32: partners must account for any benefits derived without the consent of the other partners from transactions
concerning the partnership or from the use of partnership property (Rochwerg v Truster)

1. ‘any transaction concerning the partnership’ or
 ie: company’s shares constitute compensatory benefits that “affect” the partnership – so must disclose
these benefits

2. from ‘any use of the partnership property, name or business connection
 R became director of new company only b/c of his previous role at other company

If partner makes a profit from a transaction concerning partnership, but account for this.

CAN keep profits from other partners, but only if the other partners consent to this.
o
S. 33: partners must account for profits made from engaging in competing businesses (i.e. they must turn over such
profits to the partnership firm).
- Duty of loyalty, upmost good faith, avoidance of conflict of interest (Rockwerg v Truster)
- No written partnership agreement: Obligations and rights governed by PA apply, so fiduciary duty applies.
- Can make specific provision that override these fiduciary duties (Mcknight v Hutchinson)

McKnight: M learning H received earnings from part ownership is a private company. H had become director of
3 companies before forming partnership and had received honoraria and earned shares for these companies.
Companies then became clients of law firm partnership.

Partnership agreement provided that partners can conduct and receive remuneration from another business,
other than law, as long as these activates don’t compromise the practice of law within the current partnership.

Held: H should have given notice of the honorarium and activities on behalf of the companies involving given
legal advice to director b/c H’s connection may have given rise to conflict of interest  still had duty to disclose
this remuneration from another business.
o
Partnership agreement can provide that partners can conduct and receive remuneration from another business (McKnight)
o
But, if the circumstances do not fit the exception that has been provided for in the partnership agreement, the default
provisions of the PA apply and the partner will still have fiduciary obligations.
5) Assignment of Partnership Interests
- S. 34: A partnership interest can be assigned to an assignee. Partner can sell or assign his interest without co-partner’s consent. . The
assignee of a partner is entitled to a share of the profits, and a share of partnership assets on dissolution.
- Partner cannot assign his right to manage or administer the partnership business, right to consent to decisions.  Cannot assign
obligations under the kt (only his rights)
o
S. 34 does not result in the assignee becoming a partner
- “Unless otherwise specified:” subject to partnership agreement – can make provision to assign more or less.
What’s not included in BCPA that you might want to address: (Law Society of BC checklist)
Provisions for indemnification
o
Indemnification for if third party sues one partner for 100% of compensation (so each partner pays equal share)
o
Indemnification of retired partner (not liable after retirement – must be provided for in agreement (S. 19(3))
Provision for financial statements
Provision for outside auditing
Arbitration clause for the settling of disputes
Provision addressing the share of assets upon dissolution
Who signs cheques
Who the banker will be
- How often meetings will be
19
Dissolution:
- Partnership can be terminated by the act of the partners: (3 ways)
o
1) Set a fixed term to the partnership under S. 35(a). At the expiry of the fixed term the partnership will be dissolved unless
the partners agree otherwise.
o
2) If partnership was formed for a particular venture, partners can agree that the partnership be dissolved at the end of a
particular venture for which the partnership was created (s. 35(b)).

Ex. Venture to fix apt building and sell it, then partnership is over.
o
3) Notice of intention to dissolve: S. 29, S. 35(c): partnership is terminable on notice that it is terminated – is terminated
on that date notice is given.
o
4) Court order: When partner applies and it is just and equitable to do so.
- By operation of law (default terms in k)
- S. 36(1): Automatic dissolution on the death, bankruptcy or dissolution (i.e. corporation dissolves) of a partner
Formation: Is this a partnership? Does a partnership exist between the parties?
- Does a partnership exist between parties? Partnership Act S. 2-4
o
Default terms of PA only apply if it’s a partnership
o
Agents – so if they are partners, will be liable in contract tort to a 3P if the contract or tort arose out of the conduct of the
business
- Formation of Partnership: No formal steps required to create a general partnership – no need to register documents, just need to start
carrying on a business in common.
- Good idea to write up and sign a partnership agreement even though not required.
- Registration requirement to create general partnership, but can existing even without complying. Failure to register does not mean
partnership does not exists, but potential consequences for failing to register (i.e. a fine)
Formation of partnership: Section 2 Partnership Act – 4 elements of a partnership
S. 2: “Partnership is the relation which subsists between persons carrying on business in common with a view of profit.”
There are four key elements to this:
1) Persons
- More than 1 – must be at least 2 “persons”
- S. 29 BC Interpretation Act: Can be a corporation, partnership or party
- Corporations can be partners if they carry on business in common, a partnership can be a partner in another partnership.
- S. 3 PA: Corporation cannot be a partnership, but can be partners.
o
S. 3 sets out various ways corporations might be formed, and states that these corporations, however formed, are not
partnerships:
o
A company or association incorporated under the BC Business Corporations Act or under any other statute, letters patent
or Royal Charter, or registered as an extra-provincial corporation under the BCBCA is not a partnership.
2) Carrying on business (usually easy to prove)
- Ordinary meaning of business, not BCPA definition
- “Business:” a trade, a profession, a person’s usual occupation; buying and selling, trade; a commercial firm; a shop.”
- Carrying on a business involves: (i) the occupation of time, attention and labour; (ii) the incurring of liabilities to other persons; and
(iii) the purpose of a livelihood or profit. (Backman – Gordon v The Queen)
- Partnership may be formed for a single transaction – not necessary to show that the partners carried on a business for a long period of
time to be a partnership (Backman)
- Not necessary to show that parties held meetings, entered into new transactions, or made decisions (Blackman)
- Business may be established under PA where the sole business activity is the passive receipt of rent (Blackman)  business can be
passive business.
- Parties who did not manage the business, but hired a management company to manage property = may not be partnership
(Backman).
3) In common  most difficult element to prove
- See Backman considerations (and others) for whether business was carried on “in common”
- Persons must be carrying on the business together in some way.
- Authority of any partner to bind the partnership is relevant, but the fact that 1 single partner managed the partnership does not mean
the business was not carried on in common (Blackman)
- Agreement between parties to not be considered partners is not determinative (Pooley, Peyton)
o
A written contract stating that a partnership is not intended is NOT conclusive that parties are not partners if contract
contemplates, on a whole an associate of 2 or more persons carrying on business in common for profit (Pooley)
o
Look at factors pointing to and against co-ownership in agreement to determine partnership.
- Even if intention of parties to avoid liability for any loss is clear, and they orally deny partnership (and say their interest in the profits
are loans), may still be partners. (Pooley)
- Agency relationship: Partners are agents for each other
o
If business being carried out on behalf of another person, this is a factor pointing towards partnership (Backman).
Section 4 Partnership Act  What is carrying on a business “in common” (** Applies in context of 3Ps)
Note: “of itself” in all sections:
- Leaves open the possibility of establishing a partnership if one can show there is something more to the relationship
20
Section 4(a): Common ownership of property does not “of itself” create a partnership
- Ability of co-owners to deal with individual property interests is inconsistent with rights of partners, whose property is owned jointly as
a business asset (AE Lepage v Kamex)
o
Group of investors who bought land are co-owners, not partners. Members treated their interests separately rather than
as partnership for tax reasons, made individual decisions on the deductions of capital cost allowances.
- If the only relationship between persons is co-ownership of a property, then the common ownership “of itself” does not create a
partnership.
- Where co-owners share profits and perhaps have some involvement in the management of the property there is a greater potential for
the relationship to be considered one of partnership.
o
Ex: Co-owners rent out empty space in their building, share equally in the rental profits and join in the management of the
building (heating, lighting, repairs, etc.).
- Co-ownership versus Partnership has significantly different implications:
o
Co-ownership:

Not agents for each other;

Can deal with their own interests in the property (transfer, give away) without consent of the other co-owners.
o
Partnership:

Agents;

Unless agreed otherwise a partner cannot transfer his or her interest in the partnership without the consent of
the other partners.

Partner cannot deal with an interest the property itself since the partners hold the property jointly as an asset
of the business itself.
Section 4(b): Sharing of gross returns (revenues before deductions) does not of itself create partnership
o
Ex: Play company and theatre house split the profits from ticket sales, but use proceeds (“gross returns” from
performance) to pay for maintenance of theatre and to pay actors respectively – businesses run separately, not carrying on
business in common.
Section 4(c) Opening Words: Sharing of profits in business is proof of partnership in the absence of evidence to the contrary
- Sharing in profits raises rebuttable presumption that share in the profits is proof of partnership is the absense of evidence to the
contrary (Cox v Hickman)
o
Key factor = sharing profits
o
Creates rebuttable presumption of partnership.
o
CONTROL of business is strong factor to rebut presumption (Cox)
Rest of S. 4(c): Receipt of a payment or share of the profits that varies with the amount of profits does not of itself make a person receiving
such an amount a partner.
- Even though payment is contingent of company’s profits, if doing business separately they are not carrying on business in common.
o
Ex: Management contract where 3P manages corporation. Contract provides incentive to 3P to do well by providing a share
in profits that varies with amount of corporation’s profits (3% of profits of $1million, 5% of profits of $2million).
Section 4(c)(i): Payment of a liquidated sum (i.e. a fixed or predetermined amount) out of a share of the profits of a business does not of itself
make a person who is owed the liquidated sum a partner.
- Person who receives payment of a debt or other liquidated amount (redistribution of assets) by instalments or out of a share of the
profits is not a partner b/c of this.
- Court be straight loan payback: Person receives share of profits that is limited to repayment of the principal amount of the loan, plus
interest (Canadian Commercial Bank)
o
Ex: Debtor unable to pay creditor b/c company having hard time), but company likely to rebound. By suing, debtor would
claim bankruptcy and the creditor may end up receiving significantly less than full payment. Creditor agrees with debtor to
take 10% of profits until the debt is paid off. This agreement doesn’t mean creditor is “carrying the debtor’s business in
common with the debtor”
- Creditor agrees to defer from being repaid, but when the company starts making profits, he will be repaid in the form of making a share
of the profits
Section 4(c)(ii) Contract for the remuneration of an employee or agent of a person engaged in business by share of business profits does not
of itself make the person a partner.
o
Ex: Articling student receives Christmas bonus that is set at a percentage of the profits of the firm during the year. Firm is
negligent; client sues firm. Articling student not liable for loss as a partner in the firm – student not “carrying on the law
firm business in common” with the partners.
- “Not of itself make a partner:” if associate has contractual right to remuneration by share of profits, but also is involved in management
decisions of firm, might be considered partner even though never formally made partner.
- Court more likely to say associate is “partner” if 3P makes claim for damages, rather than associate claims he is a partner:
Section 4(c)(iii) Spouse or child of a deceased partner who receives an annuity (income/pension) based on share of profits is not a partner of
the deceased’s partner’s business merely because of the receipt of profits.
- But, where spouse or child did have some involvement in the business, could be considered a partner if there is something more than
just an annuity out of profits to suggest this.
21
Section 4(c)(iv)
- A loan to a person engaged or about to engage in business where the loan contract (written, signed) states that the lender will receive
an interest rate that varies with the profits OR a share of the business profits, does not of itself make the lender a partner with the
person carrying on the business.
- 6 elements must be met to apply to S. 4(c)(iv):
o
(i) An advance of money by way of a loan;
o
(ii) to a person engaged in business or about to engage in a business;
o
(iii) on a contract between that person and the lender;
o
(iv) where the contract is in writing;
o
(v) the contract is signed by or on behalf of all parties to it; and
o
(vi) under the contract the lender is to receive a rate of interest varying with the profits or a share of the profits from the
business
o
does not of itself not make the lender a partner with the person carrying on the business.
- Repayment of a loan out of share in the profits only for the principal amount plus interest falls under S. 4(c)(i), not (iv) (Canadian
Commercial Bank).
- S. 4(c)(iv) allows investor to share in upside gain of company by sharing in profits, while also having downside risk protection b/c not
personally liable for debts of the business  this will induce investors to invest, b/c they get a higher interest rate than a fixed rate
without risk.
o
Example: Partnership trying to raise funds for business in financial difficulties. (Peyton)
o
Can’t get anyone to become a new partner: won’t become equity investor b/c if insolvency, investment will be lost and
partner will be personally liable. Don’t want to take unlimited personal liability in firm with financial difficulty.
o
Bank/lender will not give loan for usual fixed return: large downside risk if bankrupt by losing investment and being left
with nothing b/c business has no assets, and no upside gain b/c only will get fixed return in company does well
o
So, offer potential upside gain to lenders of a share in the profits, but no personal liability  limited downside risk, greater
potential upside gain.
- Allows business to recover after going through financial difficulty by providing a mechanism to obtain funding by making investors more
willing to invest – not partners, but still share in profits
o
Controversial provision: Possible for person to be pure “equity” investor, and still be treated as a “lender” and thus
entitled to share in remaining assets of firm upon insolvency with other creditors, Unjust enrichment when lender gets all
the benefits of partnership (i.e. share in profits) but bears none of the risk (i.e. no personal liability)
Section 4(c)(v) – A person (vendor) receiving payment for goodwill out of the profits of the business is not a partner merely because of the
receipt of a share of the profits
- Goodwill of a business: Total value of business beyond its individual assets to include reputation with clients, excellent marketing and
organization of how business is run which will generate increased future revenues, potential for growth. “Goodwill” of company =
difference between market value of assets and sum of the fair value.
- Business owner may sell his business for more than the market value of individual assets for a price that reflects company’s fair value by
including “goodwill”
- Purchaser reluctant to pay goodwill b/c difficult to assess its value, so vendor proposes he pay the break-up value of assets in business
now, and then pay the vendor the additional amount for goodwill out of the subsequent profits of the business.
o
Allows business owner to convince purchaser he believes goodwill value will accrue, b/c vendor only receives payments
when profits are made.
4) With a view of profit (profit = revenue – expenses)
- Profits don’t actually have to be made for partnership to exist, but intention to make profit must exist  Could incur losses and still be
partnership as long as view for profit
- Profit need not be overriding intention – ancillary profit-making purpose is sufficient (Blackman)
- Tax motivation for forming partnership should not normally allow parties to avoid liabilities to 3Ps who rely on them as partners, but
other policy reasons can override this (AE Lepage v Kamex)
- Can’t just buy and sell property without operating a business or attempting to produce a profit (Backman).
NOTE: Section 16:
s. 16: Person who represents himself to be partner (orally, in writing, or by conduct), or who knowingly allows himself to
be represented as a partner, will be liable to anyone who has given credit on the faith of the representation
Person need not know of particular representation to particular person who advances credit – will still be liable if he had
represented himself as a parter
All person has to do is allow himself to be represented as a partner
Whether partnership exists involves a WEIGHING OF FACTORS:
- Existence of partnership under PA involves a weighing of the relevant factors in the context of the surrounding circumstances – not a
mechanical application of a checklist (lBackman v Canada)
- Weigh factors that point towards partnership vs. factors that are inconsistent with partnership (Pooley)
- Policty to try to save a business from bankruptcy can override any factors pointing against partnership. Court promotes methods to
keep business running and to encourage lenders to invest in these businesses by allowing them to not be partners. (Peyton)
Factors to consider:
 Backman considerations: Partner or co-owner? – factors for “in common” (not partnership)
22
Whether the parties held themselves out to third parties as partners
Just because management done by one partner, still can be “in common”
Contribution of skill, knowledge or assets to a common undertaking
Joint property interest in the subject matter of the adventure = likely partnership
Filing of income tax returns as a partnership, financial statements and joint bank accounts
Cox Considerations: Creditor or partner? (not partnership)
- Control over business is important factor in determining partnership
- Creditors ability to elect trustees, inspect books, make rules for conduct of business points to partnership (b/c more control over
business)
- No partnership b/c creditors not acting as agents for one another, did not hold themselves out as being in business together
Pooley Considerations: Lender under S. 4(c)(iv) or partner?
Compare the relationship with a typical partnership relationship: Look at factors that make the arrangement appear similar to what
is commonly understood as a partnership v. factors which are dissimilar:
Agreement by parties to not be considered partners is not determinative of whether they are partners
Terminating a loan agreement when a lender goes bankrupt is very unusual for a loan agreement but quite common for partnership.
Term of loan agreement coinciding wit term of the partnership agreement was very unusual for a loan agreement but would not be
unusual if the arrangement really was one of partnership.
Peyton considerations (partners or lenders?)
Factors that pointed AWAY from partnership:
Securities and assets invested in business remained with individual, rather than becoming partnership property:
o
Normally contributions by partners are all mingled as part of partnership property
Rare of some partners to provide other partners a security interest for their contribution.
Business property remained with individuals: Partnership rule is that once partnership property is contributed it becomes the
property of the partnership
Factors pointing TO partnership:
40% share of the profits (presumption of partnership b/c share of profits)
Lenders/trustees advised of conduct of business and were to be consulted on important matters
Lenders could inspect the books of company = control
Lenders could veto business they thought to be highly speculative = management
Company assigned their interest in the firm to lenders as trustees.
The partners’ right to draw funds from the firm was fixed.
Lenders had an option to join the firm and receive a 50% interest.
Cases on Existence of Partnership:
Backman v Canada:
- Investors bought land and constructed apartments, lost money. Wanted to be declared partners so that they could take tax advantage.
- Held: no partnership – no view for profit – Texas apartment just bought and sold, but never operated and never produced a profit. Management company
managed business, didn’t manage property themselves.
- Court concluded the property and investment were “window dressing” in an attempt to make it appear to be a partnership for tax purposes, but no real
expectation of view for profit.
AE Lepage v Kamex Developments (1977) S. 4(a) issue: tenancy in common, or partnership:
- Investors formed a syndicated and bought land. Agreed to not having an exclusive listing (which would require paying realtor commission even if he
doesn’t sell property), but 1 member granted an exclusive listing to AE Lepage Ltd. Different agent sold property, AE Lepage claimed commission and
that syndicate members are partners an that 1 member’s acts of having exclusive listing binds them all (so must all pay him).
- Held: Syndicate was a co-ownership, not partnership S. 4(c)(i): The ability of the co-owners to deal with individual property is inconsistent with the rights
of partners. Members treated their interests separately rather than as a partnership for tax purposes, and made individual decisions on the deduction
of capital cost allowance.
o
Policy: Close to the line – parties should not normally be able to avoid liabilities to 3Ps who rely on them as partners by choosing to not be
partners for tax purposes. But other policy consistent with finding of no partnership (No UE, no reliance, unable to avoid risk b/c no
control)
Cox v Hickman (1870) Creditor or partnership – Cox decision codified in S. 4(c) PA
- Iron business in financial trouble, unable to pay creditors on time. Rather than force bankruptcy, creditors agreed to arrangement where Smith & Sons
would assign business assets to trustees to run the business and pay off creditors (creditors paid by share of profits), and then return the remaining
assets to Smith & Sons.
- Creditors had power to access business books, elect and replace trustees, make rules for conduct of business (although not conduct business
themselves). Company goes insolvent, claim that creditors are partners and are liable to pay of debts to suppliers.
- Held: Creditors not partners
- No direct reliance but possible indirect reliance, no UE, no better position to assess risk but creditors had somewhat more control. Promoting
arrangements support finding no partnership.
o
 Weight factors: promoting arrangements overrides other policy concerns.
Pooley v Driver (1876) lender or partnership – similar provisions to S. 4(c)(iv) PA
Facts: B and H enter partnership agreement. Capital divided into 60 parts – divided to B and H as compensation for work in the business, and remainder
allocated to lenders who advanced funds by loans. Each part worth share in profits.
o
3P advanced funds on a loan agreement to B and H that incorporated all the terms of the partnership agreement, and also said that on
liquidation the loan would be repaid out of the business assets remaining once other creditors were paid.
o
Pooley not paid by supplier of goods, sued the 3Ps as liable as partner when the partnership went into liquidation to pay bills that had been
23
-
endorsed by the partnership. 3P says he is not liable under S. 4(c)(iv)
Held: 3Ps were partners, not lenders.
o
Indirect reliance, yes UE (would be supplying goods without payment), lenders able to avoid risk at least cost. Law wouldn’t want to support
this arrangement  all factors point to partnership, BUT good policy to try to save a business from bankruptcy.
Martin v Peyton (1927, N.Y.) lenders or partnership
Example of a situation where S. 4(c)(iv) PA used to allow the financing of a business that is experience temporary financial difficulties – lenders not
partners.
Facts: Partnership facing financial difficulties. Lender loaned $500,000 in bonds to firm which they used to secure a bank loan. Lender asked by firm to
lend more and to become a partner, but declined bc high chance business would not recover and lender would be liable. Agreement for lender
(trustee) to give loan in securities in return for 40% share in profits (huge return possible with 40% shares to make up for risk of investing in business in
financial difficulty)
Held: Provisions of agreement do not constitute partnership
o
 all factors point to partnership, BUT good policy to try to save a business from bankruptcy.
Policy for the law of Partnership relating to 3Ps – Policy reasons for finding Partnership
1. Reliance:
- i) Direct Reliance: Reliance on a known participant in the business: 3Ps dealing with a business reasonably rely in the assumption that
the persons who manage the business are jointly liable as agents for others involved in managing the business, to satisfy their
obligation (assumes they are partners
- ii) Reliance on a person not known to the 3P: 3P who advances credit relies on assumption that if business goes bankrupt, either there
are equity investors (partners) with enough assets to repay debts, or someone with substantial assets who is unknown for the debts
will repay. Reliance defeated if company has no assets to repay loans b/c nobody is personally liable, and there are no funds in
business provided by anyone other than lenders for fixed rate returns.
- If member does not hold himself out as having authority, and 3P did not rely on member as being partner = likely not partners (AE
Lepage v Kamex)
- Dormant partners (not involved in management) may be liable to 3P claimants due to indirect reliance from creditors – 3Ps not aware
of partner’s existence, but observes substantial assets in the business and reasonably assumed that there were equity investors to
be personally liable for debts – surprised to find that firm is 100% debt financed (Cox v Hickman).
o
No direct reliance b/c 3P does not know creditor, but indirect reliance, so party should be liable.
- Checking the registry: Reliance not reasonable of creditor could have checked the registry to see that the party is not a partner
- Peyton: No direct reliance b/c involvement in financing only, so unknown to third parties. But indirect reliance
2. Unjust enrichment
- Person who receives a share of the business profits should be a partner, b/c person sharing in the profits of the business gets the
benefit of the credit advanced, so should also have to bear risk of personal liability.
- Person who receives a benefit should also have to bear the burden: ex if you receive goods delivered to you, should bear risk. If you
provide goods, you should receive payment.
- Court will find partnership if 3P is unjustly enriched by finding of no partnership – ex. 3P would be unjustly enriched by receiving
commission when he was not responsible for selling the property, so no partnership. (AE Lepage v Kamex)
- Pooley: By sharing profits, 3P would benefit from the advance of goods on credit at the expense of the person who paid for the goods
and services (Pooly) if the goods were not paid for.
- Peyton: UE b/c lender receives share in profits at the expense of those supplying goods and services.
3. Least Cost Avoidance:
- Who can most afford to suffer loss, 3P or supposed partner?
- Person involved in business and sharing in its profits are more often able to predict and control business failure due to his
involvement with the business – so he can bear risk at least cost
o
Vs. 3P: no incentive to monitor business b/c small investment, no control of business
- Putting risk on partner lowers overall cost of credit– partner has an interest in monitoring the business b/c of their investment anyways,
so will charge less to bear risk than creditor would.
- AE Lepage: Syndicate members had very little control over management of property.
- Cox v Hickman: Creditors in no better position to assess risk than suppliers, but had some control over business under trust agreement
(could elect trustees, access books etc)
- Pooley: Lenders were advancing substantial sums to the business, so in best position to assume risk – could determine potential for
profits and loss, aware of capital structure, could conrol changes in partnership agreement.
- Peyton: Lenders had ability to assess ad control for risk b/c put substantial amount of assets into business that could be lost, so should
have made careful assessment of risk involved (BUT no partnership.
- Peyton: Able to control risk b/c agreement stated that they must be advised of business conduct, had right to inspect books, could
veto business speculative business and remove partners
Other Policy Concerns – may conflict with above
- Distributional Concerns, concerns arising in particular circumstances.
- Promoting arrangement: Cox: No creditors would have entered into similar arrangements if this case had been decided the other way,
and so more businesses would be broken up o bankruptcy.
o
Creditors would refuse to make arrangements with trustees to run business b/c want to avoid risk of being liable on
insolvency.
o
If law would NOT want to support this type of arrangement, court will find partnership (Pooley).
- Policy of saving business from bankruptcy important, so court will try to promote methods of keeping a business running (such as S.
4(c)(iv) arrangement to allow business to recover (Peyton)
24
- Need to find partnership b/c otherwise one would effectively have a partnership but be able to get around the laws of partnership
(Pooley)
- Agency relationship: Test for partnership is whether persons conducting business does so on behalf of others. No partnership is
creditors are not acting as agents for one another and do not hold themselves out as being in business together (Cox v Hickman)
- CONTROL over business is important factor (Cox v Hickman)
Note: S. 16 may show the existence of partnership: If person represents himself as a partner to 3P who advances credit based on this, court
will find that a partnership exists and person will be liable (even if not really a partner). (See below for S. 16)
S. 5: Subordination of Lenders for a Share of the Profits:
- S. 5PA: If
o
(i) a person to whom money is advanced by way of a loan on contract as mentioned in s. 4; or
o
(ii) a buyer of goodwill in consideration of a share of the profits;
- either
o
(i) becomes insolvent; (ii) enters into an arrangement to pay creditors < 100 cents on the dollar; or (iii) dies in insolvent
circumstances;
o
Then the lender, or seller of goodwill, is not entitled to recover anything in respect of the loan or share of the profits until
the claim of the other creditors of the borrower or buyer for valuable consideration in money or money’s worth have been
satisfied
- When a lender of a loan under S. 4(c)(iv) (share in profits) or a person receiving goodwill payments under S.4(c)(v) makes a claim for
recovery upon borrower’s insolvency, lender’s claims are subordinate to those of the secured and unsecured creditors.
Policy: One who shares in the profits should share in the risks. Lenders benefitting form share in the profits, should have to share the
risk with other SH.
- S. 5 applies whether or not loan agreement is in writing (Re Fort). If loan agreement is oral, loan will still be considered a contract as
per S. 4(c)(iv) and S. 5 will still apply.
o
Under S. 5, lender can still be made subordinate to other lenders as if he were a S. 4(c)(iv) lender despite oral agreement
(so would not benefit fro S. 4(c)(iv)
- Where lender’s receipt of a share of the profits is limited to repayment of the principal amount of the loan plus interest (i.e. fixed rate
return), this falls under S. 4(c)(i)  and so S. 5 does not apply. (Canadian Commercial Bank)
S. 5 does not apply if the lender has registered a security interest for the debt in the personal property registry to the extent of the
security interest. This would make him a secured creditor like any other, and he will rank ahead of unsecured creditors to the extent
of his security interest and NOT be subordinate to other lenders. (Suckloff v. Rushforth)
o
Remaining amount that is not covered by security interest will be subordinate to other creditors (S. 5 applies).
Liability of Partners to Third Parties in Contract and Tort: Areas of Liability:
- Partners can become liable for contracts entered into by co-partners in connection with the partnership business, and for torts
committed in the conduct of the partnership business.
TIMELINE:
- BEFORE the partner was in the partnership, nobody relied on him, and he is not liable for debts incurred during this period (S. 19(1))
- BUT once he is a partner he is liable in contract and in tort – liable if acting with actual authority or ostensible authority.
- AFTER he has retired, he is still liable for debts that he incurred while he was a partner incurred by the partnership (S. 19(2))
o
Could still be liable for debts incurred by others AFTER he retired if no notice of retirement given. (S. 39 and 85)
1. NO Liability
- S. 9: If no ostensible authority because partner’s act is not connected with firm’s ordinary business, firm not liable UNLESS partucilar
partner had actal authoirty
o
When a partner pledges credit of the firm for a purpose apparently not connected with the firm’s ordinary course of
business, then the firm is not bound unless he person was specially authorized by the other partners to do so.
o
3P has no reason to rely on representation that the partner has authority
- S. 10: If 3Ps had notice of a restriction on the partner’s authority, partner’s actions that contravene the restrictions do not bind the firm.
o
S. 10 only applies if 3P has been given notice of the partner’s lack actual authority, even if 3P “knows” the partner has no
authority. Partner must give notice of his lack of authority in an area.
-  Other partners can avoid liability if liable partner acts with no actual or ostensible authority (S. 9), or by notifying 3Ps of the
restriction on their authority (S. 10), or if 3Ps know the person has no authority (or his reliance was not reasonable) (S. 7)
2. Liability BEFORE a person is a partner: Liability of New Partners
- S. 19(1): New partner who joins an existing partnership is not liable to creditors for debts of the partnership that arose before the
person joined the firm.
o
Not liable for anything done before person becomes a partner
25
3. Liability WHILE a person is a partner
A) Liability in Contract: Section 7-11
S. 7: Apparent Authority  S 7 covers partners’ liability for ostensible authority
- S. 7(2): The acts of every partner who does an act for “carrying on in the usual way business of the kind carried on by the firm” of
which he is a member binds the firm and his partners unless:
o
(i) The partner had no authority to act for the firm in the particular matter; AND
o
(ii) The 3P either knew the person dealt with had no authority or did not know or believe the person he dealt with to be a
partner
- Firm is bound by partner’s acts if partner had actual authority and he was “carrying on business in the usual way, ” ALSO bound by
ostensible authority where the partner reasonably appears to have authority to bind its co-partners b/c he is “carrying on business in
the usual way” of the firm.
o
If partner is acting in a way where he appears to have authority, 3P may rely on this.
- Even if partner is not carrying on the usual business, if he is acting in a way that a business of that sort would act while carrying on
business, and appears to have authority to do this, he has ostensible authority (Parkins)
o
3P would reasonably rely on the apparent authority of a partner to bind other partners
- BUT: If partner is carrying out business in a way that inconsistent with or different than the usual practice, 3P’s reliance is not
reasonable and 3P should make inquiries to confirm that the partner has authority.
- Parkins v Garett: Section 7 Example:
o
Partners in garage that repairs cars and sells cars on the side. Company sees Parkins working at garage and buys a car from
him. Later discovered Parkins had no title to the car, and car was seized. Company sued – Parkins had no assets. Could
company go after other partner?
o
Held: Garrett is liable to repay company for the car. Parkins is a partner and was “carrying on in the usual way business of
this kind is carried on”. Even though it is not usually a business that sells cars, he was acting in a way that a business that
did sell cars normally did = ostensible authority
S. 8: Actual Authority of Agent or Partner  S 8 covers liability for actual + ostensible authority
- When an act is done in the firm’s name or in a way that shown an intent to bind the firm by someone authorized to do so (a partner or
agent with actual or ostensible authority) the firm is bound whether the person is a partner or not.
- An (i) act or instrument; (ii) relating to the business of the firm; (iii) done or executed in the firm name, or in any manner showing an
intent to bind the firm; (iv) by any person authorized to do so (whether a partner or not) is binding on the firm and all the partners.
S. 11: Joint Liability for Debts of Partnership
- Partners are jointly liable for all debts and obligations of the firm while they are partners
- After partner’s death, his estate is also severally liable subject to prior payments of his separate debts. (so can make action against
deceased partner’s estate without barring actions against other partners)
B) Liability in Tort:
- S. 12: Firm is liable for wrongful acts or omissions where a partner:
o
(i) acted with the authority of co-partners; or
o
(ii) acted in the ordinary course of business of the firm.
- Even if the partner’s activities are done for improper purposes, and fraud itself is not in the firm’s ordinary course of business, if the
actions themselves are in the nature of acts normally performed in carrying outs its usual business, the actions will be considered to
be “acted in the ordinary course of business of the firm” and the entire firm is liable. (Ernest & Young v. Falconi)
o
It is sufficient if partner uses the facilities of the firm to perform services normally performed by a law firm to carry out
transactions that caused the loss to make the firm liable.

Partner guilty of assisting persons in making fraudulent dispositions of property. Fraudulent transactions done
using law firm’s resources to prepare mortgage documents = services normally performed by law firm in real
estate practice. Held that partner’s activities were of the nature of the normal legal services carried out by the
firm, used firm’s letterhead and facilities and support staff firm is liable.
- S. 14: Liability under s.12 is joint and several – 3P can go after partner A, and if unable to collect, can sue partner B and there is no bar.
4. Liability when someone HOLDS THEMSELVES OUT as a partner or ALLOWS THEMSELVES to be held out as a partner
- S. 8: Act is done or instrument is executed in firm’s name or showing an intention to be bound by someone authorized to do so,
whether partner or not, the firm is bound  ostensible authority
- S. 16(1): Person who represents himself as a partner (orally, in writing or by conduct), or who knowingly allows himself to be
represented as a partner will be liable as a partner to 3Ps who has given credit based on this representation.
o
Applies even if not partnership: if 3P advances credit of the faith that a person is a partner, the person is liable to the
creditor.
o
Representation can be made by another party, and the person needn’t know of the particular representation made to
the particular creditor, but as long as the person allows himself to be represented as a partner at all he is liable (S. 16(2)).
5. Liability for FAILURE TO REGISTER with Partnership Act:
- Offence under the Offence Act with a potential fine of up to $2,000.
26
6. Liability after RETIREMENT from a partnership: Liabiliy of New Retired Partners.
- S. 19(2): A partner who retires from a firm does not cease to be a party to the contracts entered into upon joining partnership just
because he or she has left the partnership  still liable for debts incurred by the partnership while he was a partner
- S. 19(3): Retired partner may be discharged from his liabilities upon agreement by the firm.
o
If a creditor agrees to relieve a retiring partner for further liability (agreement made when contract was created and debt is
entered into), this agreement is binding (subject to normal rules of contract law).
o
Ex. Large partnership seeking loan arranges with lender as part of loan agreement that retiring partners will be relieved of
liability. Consideration for this agreement is the payment terms for the loan
- S. 39(1): Retired partner can still be liable for debts incurred by partnership after his retirement: If a person deals with the firm after a
change, they are entitled to treat all the apparent members of the old firm as still being members until they have (actual) notice of a
change
o
If retired partner has not given notice of retirement, still liable
o
May be indemnified for any liabilities incurred after retirement – this must be provided for in agreement.
Indemnification
- Joint liability: A partner who is found liable is liable for the full amount – a tort victim or persons contracting with the partnership
business can claim full compensation from any one, more than one, or all of the partners, even if the plf only ever dealt with one of
the partners.
- Partner who pays entire claim can then seek indemnification from the other partners so that all partners pay an equal amount of the
total of the claim.
o
A partner who is required to satisfy such an obligation (by compensating the plf entirely on his own) may seek contribution
or indemnification from his fellow partners according to the terms of their partnership agreement
- Partner’s right to seek indemnification is separate and independent from the third party’s claim against him – plf’s claim doesn’t depend
on partner being indemnified.
- Must set out indemnification rights in partnership agreement
Retirement of Partners
S. 19(2): A partner who retires from a firm does not cease to be liable for debts incurred before his retirement.
Applies to debts incurred while he was a partner
After partner’s retirement, partner can still be laible:
1) Yes 3P prior dealings with firm:
Section 39(1): Persons dealing with a firm after the retirement of a partner, can treat all “apparent” members of the
old firm as still being partners until they have been given actual notice of the change in the partnership (notice that a
particular partner is no longer a partner).
Persons who have had prior dealings with the firm must be given actual notice of the change in
partnership, or else retiree will still be liable. (Tower Cabinet)
Apparent partner: Retiree only liable after retirement if he was an apparent partners: May be apparent due to:
His notoriety in the town as a partner,
His name being on the firm’s letterhead or door sign,
Due to a particular 3Ps dealings with the firm.
It must be apparent to those who have dealings with the firm, not the community in general. (Tower
Cabinet)
2) No prior dealings with firm:
Section 39(2): If a person has not had prior dealings with the firm, the partner can give notice in the Gazette of the
change and that is sufficient notice.
3) Defence of retiring partner:
Section 39(3): If retiring partner can prove the person dealing with the firm (3P) didn’t know that he was ever a
partner, then the retiring partner will not be liable to the 3P for debts arising after his retirement.
S. 84(b): If one fails to file a new registration statement on the retirement of a partner, the person will continue to be
considered a partner.
This is separate from requirement to give notice – you can file in registry and still be liable for not putting an ad in
Gazette/for not giving actual notice, and vice versa.
Policy: After a partner retires, 3Ps who advanced credit to this partner may have relied on him as partner to be liable for his debts.
Concern that 3Ps will continue to deal with firm under belief that retired partner is still a partner and therefore 3P might be mislead as to
credit worthiness of partnership. 3P can continue to rely until they have abeen given notice. BUT no reliance if never knew if he was a
partner, so notice in the Gazette is sufficient.
27
Steps for Retired Partners to take to Protect Themselves:
- Onus is on retiring partner to take steps to protect against potential reliance on him still being a partner
- 1) Provide actual notice to all those with whom the firm has had prior dealings (S. 39(1))
o
(1) Determining firm’s current creditors by examining existing accounts payable and loans will help identify 3Ps, but there
may be persons who have dealt with the firm previously and are no longer creditors.
o
(2) Thus it would be prudent to check accounts payable in previous years, and for prior lenders.
o
(3) If it has been several years since the person dealt with the firm, it is arguably reasonable that the 3P should have
checked the registry himself to determine who is still a partner
- 2) Put a notice of the retirement in the Gazette if no prior dealings with person (S. 39(2))
- 3) File a revised registration statement removing the name of the retired partner from the list of partners in the firm (S. 84(b))
- 4) S. 19(3): A retiring partner may be discharged from his liabilities upon agreement by the firm.
o
Partner should obtain this agreement as part of the contract under which credit was advanced at the time the debt was
entered into  So partner should make agreement before retirement
- 5) Make S. 29 and S. 84(b) part of the partnership agreement – filing in registry and giving notice are required for partnership under
the agreement – retiring partner must take these steps.
- 6) Indemnification: Partnership agreement could also provide that the remaining partners indemnify a retiring partner for postretirement debts of the firm.
o
So not responsible for debts of firm, and remaining partners will indemnify retired partner for while he was working.
o
If one or more remaining partners has assets, this provision will provide some protection for retiree. However if none of
the remaining partners had assets, this provision would not be helpful.
Partnership Problem: Business bankrupt, creditor/supplier/investor wants to recover the amount owed to him, but company doesn’t have enough
assets to pay off all liabilities:
Priority of Creditor Problem AND Existence of Partnership Problem:
NOTE: Priority of Creditor problem: Creditor would want to find that there is a partnership so that partner has unlimited liability to the extent of his
personal assets, so first go through steps to see if there is a partnership. If this doesn’t work (i.e. if S. 4(c)(iv) or (v) applies and the person is NOT a
partner – try to apply S. 5 so that creditor’s claim will be subordinate.
A: Identify issues:
Can creditor recover the full amount owed to him? And if not, can he do anything to increase the amount he recovers?
Can’t recover full amount from the business (this would be set out in the facts – bankrupt)
1) Could possibly recover full amount by successfully arguing that another third party is a partner, and thus is personally liable to repay the
debts of the partnership – want to increase the pool from which they can make a claim by finding partnership
2) If unsuccessful, creditor could argue that the other party’s interest is subordinate to his own as per S. 5 PA, which would allow the creditor
to recover more.
Issue 1: Partnership
1) Explain why it would be benefit creditor for party to be made a partner – he would be liable to the extent of his personal assets, not just
business assets, it would increase the pool from which party can make a claim against.
a.
S. 11: Partners are jointly liable for all debts and obligations of the partnership firm – sue firm’s name, will sue all partner’s jointly.
b. S. 7: Apparent authority: A partner is an agent of the firm for the purposes of business of the partnership
c.
S. 7(2): The acts of any partner who does an act for “carrying on in the usual way business of the kind carried on by the firm” binds
all partners
i. Unless partner had no authority to act AND the 3P knew he had no authority or did not know he was a partner.
d. In this case, X party did X act, and act was “carrying on business in the usually kind carried on by firm”. So this case fits S. 7(2), and
thus the firm would be bound by X party’s act and all partners would be liable.
2) Does partnership exist: Creditor would allege that another party is a partner by going through S. 2 of PA – meet all elements of partnership,
described as per Backman
a.
Two or more persons
i. More than 1, Can be corporation (S. 29 Interpretation Act)
b. Carrying on business
i. (i) the occupation of time, attention and labour; (ii) the incurring of liabilities to other persons; and (iii) the purpose of
a livelihood or profit. (Backman)
ii. Can be single transaction, no meetings required, no decisions must have been made – can be passive receipt of business
(i.e. rent)(Backman)
c.
In common
i. Does party take part in management of business?
1. Authority relevant, but still partnership if 1 party manages business (Backman)
ii. Does party have control over the business?
iii. Partnership Agreement stating parties are not partners is not determinative (Pooley, Peyton)
iv. Agency relationship: Partners are agents for each other
1. Was the business being carried out on behalf of another person? If so, this is a factor pointing towards
partnership (Backman).
v. *Section 4 PA : Even if not involved in management/no control, does the party share in the profits?  Presumption of
partnership in the absense of evidence to the contrary. (see notes)
1. S. 4(c) not determinative. Share in profits is only a presumption of partnership only – use as a guide.
2. But must be “something more” than share in profits under 6 exceptions to find partnershi – ex. also engaged
in management
3. S. 4(c)(iv): Break down section into parts
28
S. 4(c)  other party will argue the share in the profits was a loan (S. 4(c)(i) or (iv) exception. Is the loan agreement
written and signed? (then (iv))For a fixed rate of principal amount plus interest? (then (i))
1. Yes share in profits, but S. 4(c)(iv) says share In profits is not itself partnership if it meets these criteria – go
through definition
d. With a view for profit
i. Need not actually make profits, but must be intent to make profits.
ii. Ancillary profit-making purpose ok (Backman)
iii. Tax motivation for forming partnership likely not upheld (AE Lepage)
e. Weigh factors that point to and away from partners: Existence of partnership involves a weighing of the relevant factors in the
cotext of the surrounding circumstances (Backman)
i. Compare the relationship with a typical partnership relations (Pooley)
ii. Look at factors that point towards partnership
iii. Look at factors that point away from partnership
1. Backman Considerations: Partner or co-owner? (NOT partners)
a.
Do not incur losses, hold themselves out as partners, do not manage business (but joint property)
2. AE Lepage: Tenancy in common or partners? (NOT partners)
a.
Deal with property interests separately
3. Cox Considerations: Creditor or Partner? (NOT partners)
a.
CONTROL – elect trustees, inspect books, make rules
b. But not acting as agents for each other
4. Pooley Considerations: S. 4(c)(iv) lender or Partner? (YES partners)
a.
Agreement not determinative.
b. Control – ability of lenders to enforce terms of k
5. Peyton considerations: S.. 4(c)(iv) lender or Partner? (NOT partners)
a.
Securities and assets remain with individual
b. Policy to uphold arrangement to save business form bankruptcy
f.
Policy:
g.
Reliance:
i. Direct reliance: Did creditor rely on the other party to be a partner? Look at context – party engaged in management,
appeared to have authority = yes reasonable to think he would be jointly liable
1. But, creditor should have checked the registry to see if the party was registered as a partner – reliance not
reasonable
ii. Party held himself out to have authority – yes reliance
iii. Indirect reliance: 3P reasonably assumed there would be equity investors personallyliable for debts (Cox)
h. Unjust Enrichment:
i. Was one party enriched at the expense of the other – if so, court will find partnership (AE Lepage)
ii. Company supplied inventor, sold products and was enriched by this at the expense of suppliers = points to partnership
(Peyton)
1. BUT if no profits, no enrichment.
i.
Least Cost Avoidance:
i. Which party is in the best position to bear risk and avoid the loss?
ii. Persons involved in business and sharing in profits in best position to predict and control business failure - Likely already
assessed risk when deciding to invest.
iii. Invested substantial funds – can determine potential losses/gains (Pooley)
iv. Inexpensive and easy to check registry to find if someone is partner
j.
Promoting Arrangement: Want to uphold this type of arrangement to avoid businesses from being forced into bankruptcy (Cox)
k.
Do NOT what to promote this type of arrangemnt to get around rules of partnership (Pooley)
l.
S. 16: If party represents himself as partner to 3P who advances credit – could show existence of partnership
m. Conclusion: Come to a conclusion: Other party will likely be found liable as a partner.
If this isn’t successful, creditor could try to increase the amount he can recover by arguing that the other party’s claims are subordinate to his
own as per S. 5.
a.
(1) Is the party a lender as per S. 4(c)(iv) or a seller of goodwill as per S. 4(c)(v)?
b. (2) Has borrower/lender of goodwill become (i) insolvent, or (ii), or (iii) died?
c.
Then lender’s claims will be subordinate to other creditors, so creditor will have a better chance at recovering his loss.
i. When a lender of a loan under S. 4(c)(iv) (share in profits) or a person receiving goodwill payments under S.4(c)(v)
makes a claim for recovery upon borrower’s insolvency, lender’s claims are subordinate to those of the secured and
unsecured creditors.
d. Written K: S. 5 applies whether or not loan agreement is in writing (Re Fort)
i. If loan meets are requirements of S. 4(c)(iv) but is not written, still can fall under S. 5
e. S. 4(c)(iv) doesn’t apply to fixed payments of principal amount plus interest – this falls within S. 4(c)(i) and is not caught by S. 5
(Canadian Commercial Bank)
f.
Security interest: If lender has registered a security interest, his claim will have priority over unsecured creditors to the extent of
the security interest.
i. Lender will be rank with other secured creditors to the extent of the security interest
ii. Remaining amount will be subordinate to other creditors (Suckloff v Rushforth)
vi.
3)
29
Protection of Retired Partners
Retirement of Partners
Issue: After a partner retires, 3Ps who advanced credit to this partner may have relied on him as still being a partner (while 3P continues to
deal with the firm), and as being liable for his debts  3P alleges retired partners liable as a partner to repay him.
Summary ANSWER:
1. Establish whether debt was incurred while retired partner was still a partner, or after his retirement.
2. After retirement: Retired partner can still be liable after this retirement under S. 39 for failing to give notice of his retirement, and also
under S. 84(b) for failing to file his retirement with the registry – outline sections
3. Establish whether third party had prior dealings with the firm:
Yes prior dealings: S. S. 39(1): 3P can treat apparent partners as partners until they have had actual notice
o
a) Was the partner an “apparent partner:” Retiree will only be liable of he was an apparent partner after his retirement – go
through Tower Cabinet

Ex. Was the partner’s name on store front? Did the partner used to be at the store, and now is never there?
o
b) Did the partner give “actual notice” to third party of his retirement
No prior dealings: S. 39(2): Partner must have given notice in the Gazette to avoid liability
4. Defence: Did the third party know that the partner was ever a partner? S. 39(3): If retiring partner can prove 3P didn’t know he was ever a
partner or knows he’s not a partner – not liable
o
3P will make “apparent partner” argument
o
Partner will say reliance not reasonable b/c 3P never new he was a a partner
5. Retiring partner can be liable as a partner if he failed to file a registration statement on his retirement (S. 84(b)).
6. Reliance argument:
o
3P will argue he relied on partner as being personally liable for debts
o
If 3P hasn’t dealt with firm for many years, could be unreasonable to rely on partner as “apparent partner” without checking the
registry himself
7. Least cost avoidance argument:
o
3P will argue he shouldn’t have to check registry every time he deals with a firm
8. Partnership agreement:
o
Establish whether the partnership agreement has made any provisions to indemnify retired partners, or to make it a requirement
to file in registry or give notice of retirement.
If debt was incurred while retired partner was still a partner:
S. 19(2): A partner who retires from a firm does not cease to be liable for debts incurred before his retirement  Still liable for debts
incurred by partnership while he was a partner
BUT S. 19(3): retired partner may be discharged from his liabilities upon agreement by the firm
o
If a creditor agrees to relieve a retiring partner for further liability this agreement is binding (subject to normal rules of contract
law).
o
Agreement should be made when contract was created and debt was entered into – so before retirement o partner
o
Ex. Large partnership seeking loan arranges with lender as part of loan agreement that retiring partners will be relieved of liability.
Consideration for this agreement is the payment terms for the loan
If debt was incurred after retired partner has left partnership:
PA says a retiring partner can also be liable for debts of the partnerships that arise after the partner has left the partnership under S. 39(1), S.
39(2), and S 84(b)
1) Did the third party have prior dealings with the firm?
Yes prior dealings with firm: Section 39(1): If a person deals with a firm after the retirement of a partner, he can treat all “apparent”
members of the old firm as still being partners until they have actual notice of the change in the partnership (notice that a particular partner
is no longer a partner).
o
Persons who have had prior dealings with the firm must be given actual notice of the change in partnership, or else retiree will still
be liable. (Tower Cabinet v Ingramt)
o
Must be “apparent partner”: Retiree is only liable after retirement if he was an apparent partners: May be apparent due to:

Notoriety of the person as a partner in the town or region,

His name being on the firm’s letterhead or door sign,

Due to a particular 3Ps prior dealings with the firm.

It must be apparent to those who have dealings with the firm, not the community in general. (Tower Cabinet)
No prior dealings with firm: Section 39(2): If a person has not had prior dealings with the firm, the partner can give notice in the Gazette of
the change and that is sufficient notice.
Defence of retiring partner: Section 39(3): If retiring partner can prove the person dealing with the firm (3P) didn’t know that he was ever a
partner (or knows now that he is not a partner) then the retiring partner will not be liable to the 3P for debts arising after his retirement.
o
Partner will say that the 3P only dealt with firm after he was gone, and so never knew he had been a partner.
o
3P will argue that even though they never had dealings, he was an apparent partner – notoriety in town, name on door etc.
2) Did the retired partner file registration statement on his retirement?  Separate cause for liaiblity
If retired partner has not filed his retirement with registry, will still be liable as a partner EVEN IF he gave actual notice/put an ad in the
Gazette.
S. 84(b): If one fails to file a new registration statement on the retirement of a partner, the person will continue to be considered a partner. –
“deemed to continue to be a partner”
3) Policy arguments to make retired partner liable as a partner (policy for S. 39 and S. 84(b):
1) Reliance: 3P will argue that he relied on particular partner as being a partner, and this reliance is reasonable b/c he never received
notice/retirement wasn’t filed in registrar.
2) Partner will argue 3P did not rely b/c no knowledge:
o
No reliance if 3P had no knowledge retiring partner was a partner (or knew the person was not a partner) – no reliance, so not
reasonable for retiree to be liable to the 3P after his retirement (S. 39(3)).
30
-
3) Partner will argue 3P reliance as “apparent partner” not reasonable b/c its been too long:
o
If it has been several years since the 3P dealt with the firm, it is arguably reasonable that 3P should have checked the registry
himself to determine if partner is still a partner  further back in time, the less likely retired partner is an “apparent partner”
3) Least cost avoidance: Less costly for retiring partner no notify persons who had prior dealings with them than to make 3P check the
registry or the Gazette every time he dealt with a firm
4) Look at partnership agreement:
Are there provisions in the partnership agreement that partner is not liable after his retirement?
Are there provisions for indemnification?
*** Did the retired partner take steps to protect himself from liability? (above)
Policy reasons for S. 39 and S. 84(b): Reliance
LIMITED PARTNERSHIP
 A limited partnership consists of one or more general partners and one or more limited partners (s. 50). The liability of limited partners is
limited to the amount the limited partner contributes or agrees to contribute to the limited partnership (ss.57, 63). The liability of the general
partners is not limited.
- Benefit to investors who don’t want personal liability, benefit to creditors who will charge higher rates of interest to compensate for the
greater risk of loss caused by LP arrangement.
- Partners will only have limited liability if rules to protect 3P reliance (risk of being deceived to extent of liability) are followed –
cautionary suffix, LP can’t manage business, etc.
Why choose LP?
- 1) Combines tax advantages of partnership with limited liability of the corporate form
o
Losses (which likely accrue at start up of operations) flow to individual partners and can be deducted from gains of other
sources. ALSO limited liability.
- 2) Greater degree of flexibility than a company – default provisions can be altered
- 3) Ideal for silent partners who don’t want to take part in management, but can benefit from LL and still hold a share in the business
Nature of LP: Requirements
- 1 or more limited partner and one or more general partner (S. 50)
o
Liability of LP is limited to the amount of their contribution or alleged contribution to the LP (S. 57, 63))
o
Liability of GP is not limited: can be personally liable
- Formed by filing a certificate (S.51)
o
Certificate must be filed. If certificate is not filed, no limited partnership is formed, no matter how clear the intention or
how much the situation suggests a limited partnership would be appropriate (no LP even if a LP might make the most
sense, the partners believe they are limited partners, even if the partnership agreement says that some of the partners
have limited liability, even if the words “LP” appear in name)
- Cautionary Suffix required: Must signal LP by cautionary suffix in partnership name.
- LP’s cannot take part in management of the business, or will be liable as a GP
Provisions of BCPA that protect 3Ps from being deceived into thinking that partners do not have limited liability
o
Risk that 3Ps can be deceived by undisclosed limited liability – would otherwise charge higher explicit or implicit rates of
interest to reflect their greater risk for loss if they knew.
- LP formed by filing a certificate  LP must be registered (S. 51)
o
If certificate is not filed, no limited partnership is formed, no matter how clear the intention: no LP even if a LP might
make the most sense, partners believe they are limited partners, partnership agreement says that some of the partners
have limited liability, or the words “LP” appear in name.
- Certificate must state who the general partners are (S. 51 (2))
o
Allows 3Ps to creditworthiness of general partners who don’t have limited liability
- Certificate must state the contribution provided, or to be provided, by each LP S. (51 (2))
o
Allows 3P creditors to determine the amount of capital in the firm, and thus the amount of a cushion there is in terms of
the value of the assets of the business over the liabilities of the business.
o
BUT knowing the contributed capital at the onset of the business may not help the 3Ps because it says nothing about the
net capital of the business after it has been in operation for a while. I
- Cautionary Suffix: Name of LP must include the words “limited partnership” at the end – if not, no LL for partnership. S. 53 (1)
o
Signal to 3Ps that there are limited partners.
- Name of limited partner CANNOT appear in name of limited partnership firm (unless it is the surname a GP). If so, liable as GP S. 53 (2)
- LPs cannot provide services to the partnership business S. 55(1)
o
May look to 3Ps like he is carrying on business in common like a general partner
- LPs not to take part in the management of the business. If so, liable as GP S. 64
o
May deceive 3Ps into believing limited partner is general partner.
- No return of capital to LP is permitted if, after the return of capital, the partnership would be insolvent S. 59(2)
o
LPs have better knowledge of when the business is sinking and might try to withdraw their funds from the business when
they see an inevitable insolvency
31
ISSUE: Can LP be made liable as a GP? – Is an officer of corporation who invests and becomes LP liable as GP?
On insolvency, limited partners are only liable to the extent of his contributions in the business
If business assets are not enough to repay 3P creditor, creditor would try to increase the pool of available assets by arguing that the limited
partner should be liable as a general partner.
1) Does a limited partnership exist in the first place:
Unlike a general partnership, limited partnership must be registered in order to exist at all. If rules are not followed, no LP.
S. 51 PA: Certificate must be filed. If certificate is not filed, no limited partnership is formed, no matter how clear the intention to form a LP.
S. 53: Name: Name must have cautionary suffix (S. 53(1)) or limited partnership doesn’t exist at all. LP’s name must not appear in business
name, or that LP will be treated as GP (S. 53(2))
2) Was the LP taking part in the management, thus making him a GP?
S. 64 PA: LPs not to take part in the management of the business. If so, liable as GP
 If LP is also an officer of the General Partner, can be liable as a GP if their activities as an officer of the GP can be construed as “taking
part in the management of the business”
If LP takes part in management, he is liable even if there is no reliance by 3Ps that the LP would be personally liable  i (Haughton Graphic v.
Zivot)
o
Haughton: General partner of Magazine LP hired president and officer of publishing network to take part in running the Magazine,
but only in their capacity as officers of the GP. 3P printing company hired to do printing for Magazine. 3Ps did not rely on Z or M as
general partners of the publishing network, but Z and M still liable as GPs because they “took part in the control” of the business.
If LP is managing the business acting in his capacity as officer of the corporate GP ONLY and not his capacity as a limited partner, LP can
contact out of personal liability incurred for managing the business in capacity as officer, but cannot contract out of liability if managing in
capactity as a LP. (Nordile Holdings Ltd. v. Breckenridge, 1992, BCBCA)
o
Contract must state that LPs will not be personally liable for a claim if acting as officers as the corporate GP
o
NOTE: This is very risky, may be found liable as LP.

Nordile: A and B are shareholders, directors and officers in company who is GP for LP company. LP company bought
property, contract for purchase and sale stated that the limited partners will not be personally liable for a claim on the
assets in the business if acting as officers for GP.

Held: LPs not liable under S. 64: A and B took part in management of the business in their capacities as officers of the
GP corporation, but not in their capacities as limited partners.
Policy: Person with LL who also wanting to manage business risks deceiving 3Ps – court will find liability if 3P has reasonably relied.
 SO: LP who is also an officer to GP will NOT be liable for managing business if:
o
1) They are acting solely in their capacity as officer to the corporate GP, and
o
2) They have contracted out of personal liability
 LP WILL be liable if they take part in management in their capacity as LP, even if no reliance by 3Ps.
Relationships Among the Partners in a LP
Separation of Ownership and Control Between GP and LP  How can LP be protected from being taken advantage of by GPs who control the
business?
Major contributors of the capital to business are LPs (so they are “owners”), but they do not control the business b/c of their
constraints on their ability to manage.
o
Many investors in LP with small stakes – little incentive to monitor management
o
S. 64 PA prevents LP from management b/c want to avoid losing LL status.
Risk that LPs will be taken advantage of by GPs who control business – may shirk and divert assets.
1) LPs Must include express provisions in their partnership agreements that ensure that GPs can only act within certain boundaries.
Ex: LPs could include:
o
Disclosure requirements to help LPs assess the performance of managers,
o
Provisions that facilitate removal of managers where performance is poor,
o
Provisions protecting LPs when managers divert business assets to themselves
2) PA controls are very limited. Limited provisions exist to protect LPs:
o
GPs cannot make it impossible to carry on business (S. 56)
o
1) S. 56: GPs can’t do any of the following: Need written consent of all the limited partners to vary provision

(a) GPs cannot do an act which makes it impossible to carry on the business

(b) Cannot consent to a judgment against the limited partnership;

(c) Cannot possess limited partnership property, or to dispose of any rights in limited partnership property, for
other than a partnership purpose;

(d) Cannot admit a person as a general partner or to admit a person as a limited partner, unless the right to do
so is given in the certificate
o
2) LP as right to inspect books and obtain some disclosure

S. 58(1)(a): Right to inspect the limited partnership books (default right)

S. 58(1)(b): Right to disclosure of information concerning the business (default right – can be explicitly or
implicitly waived or modified by agreement)

“Right to be given, on demand, true and full information of all the things affecting the limited partnership and to
be given a formal account of partnership affairs when the circumstances render it just and reasonable”

Disclosure allows limited partners in assessing the management of the business

If LP interests are sold to members of the investing public, then the GP is obliged under the Securities Act to
provide disclosure on the sale of the limited partnership interest
o
3) Right to obtain disollutionof partnership by court order if just and equitable

58(1)(c): LP has the same right as GP to obtain a dissolution and winding up of the limited partnership by court
32
order where it is just and equitable for partnership to be dissolved
If the GP conducting the business in a way that was oppressive t the limited partners, the LP could apply to have
the partnership dissolved – mandatory right
o
4) GP cannot admit new partners, but this default provision is usually modified

SS. 56(d): GP has no authority to admit a person as a GP or LP unless the right to do so has been given in the
limited partnership certificate.

Admission of new partners normally allowed to facilitate future financing, BUT right must be set out in
partnership agreement, and new partner must be registered.

S. 51(4)(c): A right to admit additional LPs must be set out in the LP certificate.

S. 65: An additional LP is not to be admitted to a limited partnership except in accordance with the partnership
agreement and by entry in the register of limited partners that must be kept pursuant to s. 54(2).
NOTE: Default provision may be implicitly waived – so careful that LP’s actions do not waive rights

-
Other Significant aspects of LP & GP relationship
S. 61: LPs share in the profits and in any return of capital in proportion to their contributions unless the limited partnership
agreement provides otherwise.
Assignment of LP Interests:
o
Restriction on LP’s ability to sell or give away interest
o
S. 66: A limited partner must not assign his interest, in whole or in part, in the limited partnership UNLESS:

(a) all the LPs and GPs consent or the partnership agreement permits it, AND

(b) the assignment is consistent with terms of the partnership agreement’s terms (as per s. 51(4)(b))
o
S. 51(4)(b): Where assignment is permitted in the partnership agreement, the certificate must set out provisions
concerning the right to make such as assignment and the terms and conditions of the assignment.

Assignment of LP interests is usually allowed without obtaining consent of all partners – but this requires
express agreement that is set out in limited partnership certificate under S. 51(4)(b).
LIMITED LIABILITY PARTNERSHIPS
 A limited liability partnership structure shields an individual partner from personal liability for the debts of the partnership or for
negligence and wrongdoing of other partners to the extent of the partner’s share in the partnership’s assets. However, individual partners
continue to incur personal liability for their own negligence or wrongful acts (BC) and those they directly supervise or control.
Origins of LLPs:
- Professionals historically subject to express or implied restrictions for carrying on business through corporation - so cannot have limited
liability.
o
Couldn’t form LPs b/c this would prevent them from taking part in management of business
- Difficult for professionals to get adequate insurance coverage due to increased professional liability claims and large awards given –
couldn’t get insurance to cover all the risk.
- Problem: Professionals exposed to personal liability, unable to protect themselves through limited liability forms of association.
- Several US states adopted LLP statutes which allowed for creation of limited liability partnerships where partners were given partial
liability protection, but professional firms were still able to organize as partnerships.
- Canada ha adopted LLP forms in Ontario, Alberta, Saskatchewan and Quebec
LLP Structure – Ontario and Alberta (Ontario Limited Liability Partnership Act)
Limited liability shield:
o
Not liable for the malpractice of partners or employees unless directly supervising the activity.
o
Not liable to indemnify their fellow partners who have been found liable for malpractice.
o
Partners ARE personally liable for the debts of the firm arising from contract
Business Name Registration:
o
LLP registered business name MUST contain the words “Limited Liability Partnership”, “LLP” or their French equivalents.
No other name can be used to carry on the business.
33
LLPs In British Columbia 2004 Partnership Amendment Act added Part 6 to PA (S. 94-129), which allows for LLPs:
Full Shield Liability:
o
1. Not liable for malpractice of partners or employees unless you were directly supervising the activity
o
2. Partners not liable to indemnify fellow partners who have been found liable of malpractice
o
3. Not personally liable for an obligation of the partnership generally – any debt, loam, liability incurred by the
partnership (S. 104(1))

On insolvency, LLP will only be liable to the extent of his contribution to the business
o
4. Not personally liable for an obligation under an agreement between the partnership and another person – not
personally liable for negligence of fellow partners (S. 104(1))
Yes personally liable where:
o
1) LLP’s own negligent or wrongful act or omission, or
o
2) When he knew of a fellow partner’s negligent act or omission and did not take actions that a reasonable person would
take to prevent it (S. 104(2)).
Full Shield Liability Protection is subject to Partnership Agreement S. 104: “Except as provided in a partnership agreement”
o
BC Partners can opt out of the full shield liability protection and choose to adopt limited liability protection (usually for tax
purposes – treated different if full or limited shield liability)
o
Partners can enter into personal guarantees with particular creditors, which would effectively waive their limited liability
with respect to those creditors.
Registration Necessary – LLP MUST be registered to receive full shield liability
o
S. 104: liability shied only applies if the partner is “a partner in an LLP, ” and “LLP” is defined as a “partnership registered
as a LLP under this Part (S. 94)”
o
If not registered, the partners will be treated as partners in a general partnership and will be personally liable for debts of
partnership.
Cautionary Suffix: Business name must contain words “Limited Liability Partnership” or “LLP”
o
LLP must use cautionary suffix “LLP”, “limited liability partnership”, or French equivalent as part of its business name (S.
100)
Registration of Extra-Provincial or Foreign Limited Liability Partnerships
o
Any LLP created outside of BC that carries on business in BC must register in BC as an extra-provincial LLP, or will be liable
as though they were in a general partnership (S. 114)
o
Must have a place to be served notice if sued
Limited liability partnership vs. Limited partnership and general partnership (BC)
LLP Full shield liability protection in BC:
o
Same protection from liability as limited partners in a LP (liability limited to extent of their contribution in the partnership
assets), AND
o
LLP partners can take part in the management of the partnership business without becoming personally liable for
partnership debts.
Vs. LP: Liability is limited to the extent of their share in the partnership assets, but will be treated as a GP and lose their limited
liability if they participate in the management of the business.
o
= Limited liability advantage, but can’t take part in management (no control)
Vs. GP: partners are liable for all the debts of the partnership, whether the debts arise pursuant to a contract or due to the
commission of a tort by a fellow partner, BUT yes involved in management.
o
= Yes take part in management, but personal liability
ISSUE: CAN LLP be made liable as GP? (Note: BC vs Ontario act – full vs. limited/partial liability shied)
If fellow LLP partner is liable for own act or omission, will be personally liable, and will claim that other LLP partners should also be
liable for their negligence either b/c LLP never existed at all, or LLP was directly supervising, knew of the negligent act.
On insolvency, LLPs are only liable to the extent of his contributions in the business. If business assets are not enough to repay 3P
creditor, creditor would try to increase the pool of available assets by arguing that the limited partner should be liable as a general
partner.
1) Does a LLP exist in the first place: If not, partners are personally liable for liabilities – seen as general partnership
Unlike a general partnership, limited liabilities partnership must be registered in order to exist at all. If rules are not followed, no LLP.
LLP must REGISTER as a LLP to receive full shield liability (S. 104)
Cautionary suffix “LLP” must be in business name (S. 100)
Extra provincial or foreign LLP must register in BC if carrying on business in BC, or will be treated as GP (S. 114)
2) Can fellow partner/employee say that partner is liable for his negligent act? Or liable to indemnify?
Not liable for malpractice of partners or employees unless you were directly supervising the activity
o
Fellow partner argues: Partner was directly supervising activity – so yes liable
Not liable to indemnify fellow partners who have been found liable of malpractice
o
Fellow partner argues: This is subject to PA  Perhaps partner waived limited liability
Not personally liable for an obligation under an agreement between the partnership and another person – not personally liable for
negligence of fellow partners (S. 104(1))
o
Fellow partner argues: Yes personally liable when he knew of a fellow partner’s negligent act or omission and did not
take action that a reasonable person would take to prevent it (S. 104(2))
3) Can LLP be liable to a creditor or third party?
34
-
Not personally liable for an obligation of the partnership generally – any debt, liability incurred by the partnership, including debts
arising from contract (bank loans, trade credit) (S. 104(1))
BUT: S. 104: “Except as provided in a partnership agreement” – perhaps partner waived his right to limited liability
Personal Guarantees with creditors: If LLP made personal guarantees with particular creditors, this would waive their limited
liability with respect to those creditors.
STILL personally liable LLP’s own negligent or wrongful act or omissions
CORPORATIONS
Companies where the equity is divided into shares held by shareholders
History of the Corporation in England
-
-
16th century: companies were formed for foreign trade - Crown charters provided companies with monopolies on trade in certain areas, but
not to govern the rights of individuals.
Voyages ran on joint stock basis: Persons could make investments which would be used by company to buy goods for the voyage, company
would go to distant land to trade goods. Company would return to England and sell exchanged goods, and the profits from the sale of goods
received were then distributed to the persons who had made investments.
Joint stock companies: Very large partnerships: people would invest in a company, who would use funds to buy goods for voyages to trade
goods in other lands. Return and sell goods, profits would be disturbed to investors)
17th/18th C: companies were being formed by separate statutes created by Parliament (rather than by general statutes of incorporation).
Bubble Act  Made joint stock companies illegal which likely delayed the development of corporate law from its enactment in 1720 to its
repeal in 1825.  Partnerships with freely transferrable interests prohibited

Only remaining way to form companies was to get a Crown charter or to have a company formed by a separate
statute. Both methods were very difficult.
o
Bubble Act: Made joint stock companies illegal – prohibited partnerships with freely transferrable share (i.e. partnership interests).
o
South Sea Company was formed by separate statute. Plan was that now the investors who had been returned funds from their
investments in joint stock companies (b/c these companies were wound up) would invest in South Sea Company, thus driving up
the price of shares due to increased demand. BUT instead, joint stock company investors who had bought their shares on credit
now had to pay off companies’ liabilities, so sold their shares in South Sea Company.
o
Repealed in 1925, but doubts remained as to the common law validity of unincorporated joint stock companies.
1844: Joint Stock Company Act
o
Companies now formed by fulfilling requirements of Act – incorporation by registration rather than though a separate Act from
Parliament = formation of companies now very easy
1856: Joint Stock Company and Limited Liability Acts consolidated - Public opinion in favour of limited liability
History of Canadian Corporate Law
Earliest corporate forms were the result of granting Crown charters
o
Hudson Bay Company conducted business in North America
o
Charters granted in colonies to banks for projects such as roads, canals, railways.
1850: Canada enacted a general incorporation statute for mining, shipbuilding, manufacturing, mechanical or chemical concerns.
o
Limited liability
o
Separate entity with succession and capable of suing and being sued.
1864: United Provinces Act – Grant of Letters Patent
o
Grant of a letters patent on application to Governor in Council. One had to give public notice of an intention to incorporate and
satisfy the appropriate authority that the corporation name wasn’t already taken by another known corporation.
Memorandum of Association and Letters Patent
o
MOAs became the general statute of incorporation for certain provinces.
o
etc = statute left the MOA document quite open to include what the company wished.
Companies set up under MOA statute with MOA document seen as separate legal entities in 1897
1975: Canadian Business Corporations Act adopted
o
Adopted totally or with some minor changes by various provinces – seen as modern and effective corporate statute.
o
BC did not adopt CBCA style.
BC Corporate Law History
1859: England’s statutes for joint stock companies extended to BC colony
1855-1897, other forms of companies legislation were tried
1987: BC returned to statute modeled on England’s Joint Stock Companies Act 1862 – MOAs are the basic documents governing
corporations.
2003: Business Corporations Act – replaces the MOA with an “incorporation agreement” and a “notice of articles” as the main
incorporating documents – but still modeled on MoA.
3 ways to form a corporation in Canada: Summary. MoA vs. Articles
1. Crown Charter – get a charter from the Crown – possible, but unlikely today.
2. Special statute of incorporation – ex. municipalities, hospitals, universities, stock exchanges incorporated this way.
3. General statute of incorporation – Canada Corporations Act, CBCA all provinces have one. Also Bank Act
o
BC’s statute modeled on memorandum of association

General statute of incorporation (BCBCA) done in the style of MoA.

BC does not use terms “MoA”, but initially was an MoA jurisdiction and is still modeled on this.
35

o
o
o
o
MoA constitutes the contract for the members (shareholders). Company formed by filing MoA in appropriate
form

Has the name of the business, lists the objects of the business.

Incorporation as of right – when MoA is filed in proper form, registrar must register.

MOA document is simple – sets out names of initial members for shares, name of company, business of
company. Members can draft own terms and set out rules for holding meetings, transferring shares, restrictions
on powers etc = statute left the MOA document quite open to include what the company wished.
Most other provinces are CBCA jurisdictions (Ontario, Alberta, Saskatchewan) – have statutes almost identical to CBCA

Articles of association list specifics.

Incorporation as of right – when articles filed in proper form, registrar must register.

Incorporate federally: incorporate under CBCA using CBCA form

Incorporate under most other provincial statues: also CBCA orm b/c almost identical to CBCA.
Nova Scotia uses MoA.
Letters Patent still exists in PEI – must obtain permission for incorporation, registrar has authority.

Letters patent form detailed with specific provisions on conduct of company’s affiars
 We learn about CBCA here rather than BCBCA.

BC is unique, so CBCA travels better to other parts of Canada.
THE CONSTITUTIONAL PROCESS
Both the federal and provincial governments have the power to incorporate companies
o
Provincial power  s. 92(11): The incorporation of companies with provincial objects

To operate in a province other than the one they’re incorporated in, a provincial company will have to get extraprovincial registration.

See ‘Scope of Provincial Power’ below
o
Federal  s. 91: Power to make laws In relation to all matters not coming within the Classes of Subjects by this Act
assigned exclusively to the Legislature of the Provinces -- residual power of POGG

Provincial gov’t only can make laws for incorporation of companies with “provincial objects,” so federal gov’t, by
virtue of its residual power, has power to make laws for the incorporation of companies with objects other than
“provincial objects”
Scope of Provincial Power (Bonanza Creek Gold Mining v The King, 1916)
Province can incorporate a company with provincial objects.
Province can confer powers to companies to carry on business within AND outside the province, but cannot confer on a company the
right to operate in another jurisdiction.
Right to operate and carry on business in another jurisdiction must be granted by the other jurisdiction.
Scope of Federal Power
Broad residual power to incorporate companies with something other than a provincial object (Citizens Insurance Co. v. Parsons
(1881)
Also specific power to regulate in area of banking and specific power for “Incorporation of Banks”
Federal government’s residual power allows them to give federally incorporated companies the power and right to operate
throughout the country on in 1 jurisdiction only (Colonial Building and Investment Association)
Danger that federal government’s broad residual power would override provincial powers.
1) Federally incorporated companies have the power and the right to carry on business throughout the country, and provincial
legislation cannot hinder that right ( John Deere Plow decisions (1914))
2) A province cannot prevent a federally incorporated company from carrying on business in the province.
o
John Deere Plow: BC legislation that allows the Registrar to refuse an extra-provincial licence on basis that there is already a
company with same or similar name incorporated or registered in the Province is invalid because its application would
prevent the federal company from registering to carry on business. – and this is contrary to federal gov’t constitutional
right to carry on business.
o
Legislation preventing a company from maintaining an action in the province unless it had a license to operate in the
province could not apply to federally incorporated companies (because this hinders the right to carry on business) (Great
West Saddlery Co. Ltd. v. The King (1921))

Ability to maintain an action is necessary to enforce contracts and is essential to the ability to carry o business in
the province.
3) However, federal companies are still subject to provincial laws as long as these laws are not designed to just prevent federal
companies from operating in the province.
Initially Broad Application of Federal power for incorporation:
o
AG Can v. AG Man (1929) - Court held that a federally incorporated company could not be refused a licence due to noncompliance with provincial legislation that said no feds are allowed to operate here (statute said that company needed
provincial license to sell shares)

Federal company must be able to sell shares – preventing this will prevent them from carrying on business, so
provincial legislation preventing selling shares does not apply to federal company.

Illustrates potential broad application of John Deere Plow decisions
Later Retrenchment of Potential Scope of Federal Power (qualification of power)
36
o
o
o
o
o
o
Narrowing of where Court would find that legislation prevented a federally incorporated company from carrying on
business:

Alberta statute that prohibited the sale of securities except through a licenced broker could be applied to a
federally incorporated company. (Lymburn v. Mayland (1932)

Feds said that this legislation prevented them from selling shares, and thus could not apply to them – court
rejected this

Requiring a company to sell shares through a licenced broker did not prevent the company from selling shares
and thus raising the necessary funds to carry on business. Thus it would not prevent a federally incorporated
company from carrying on business in the province.
Federal incorporation does not confer a general immunity from provincial regulatory laws – Still must adhere to
provincial legislation that does NOT prevent them from carrying on a business

Requirement to obtain a license did not prevent carrying on business (John Deere Plow)
Legislation that applies to all corporations, not just federally incorporated companies, will be upheld as valid because it
restricts all companies wherever incorporated.

Federal company incorporated for the purpose of holding land would be unable to successfully attack the
application of provincial legislation that prohibited corporations, wherever incorporated, from owning land
(Great West Saddlery Co. Ltd).

If all companies are prevented from carrying on business in that province, federal government cannot attack
the legislation as invalid. (Canadian Indemnity Co. v. AG BC (1977))

Otherwise, any company would be able to incorporate federally and circumvent provincial legislation that
prohibits all incorporation of companies.
Provincial insider trading legislation that was identical to federal Act under which the federally incorporated company
was incorporated applies to that federal company – federal legislation can’t be said to “occupy the field” if it does not
conflict with the provincial legislation (Multiple Access v. McCutcheon)
Provincial legislation requiring a federal company to register its corporate name, and any names under which it carries on
business, is valid (Reference Re the Constitution Act (1991))

Provincial name registration requirements applies to federal companies too
 Provincial legislation imposing penalties for failing to comply with requirement to obtain an extra-provincial license
before commencing carrying on business in the province can validly be applied to a federally incorporated company (Re
Royalite Oil Co)

Extra-provincial registration requirements can apply to federally incorporated company, and penalties for
failure to do so can apply - this does not prevent them from carrying on business.
Implications of the Constitutional Position: Important points
1) Both provinces and federal gov’t can pass valid legislation for the incorporation of companies
o
Corporation is governed by the law under which it was incorporated (most provinces/Canada = CBCA form, BC = BCBCA
modeled on MoA
2) Corporation incorporated under a provincial statute can carry on business anywhere in the world as long as the other
provinces/countries permit it to do so – and they typically do.
o
Usually required to register extra-provincial registration.
3) A federally incorporated company can operate throughout the country or in one province only, or in more than one province
4) Since federally incorporated company can operation in 1 province only, one can chose to incorporate under either a federal statute
(CBCA) or under provincial statute of incorporation and still carry on business anywhere  Choice among 14 possible jurisdictions of
incorporation in Canada, and any jurisdiction will work.
o
Choice of where to incorporate raises possibility of competition for incorporations, and the fees that goes with them,
between the various possible jurisdictions of incorporation.
5) Province cannot prevent a federally incorporated company from carrying on business in that province
a. Ex. Cannot refuse to grant an extra-provincial licence if another company has the same name
6) BUT federally incorporated company still must adhere to provinicial legislation that does NOT prevent them from carrying on a
business.
7) Province can validly enact provincial legislation that requires a federally incorporated company to obtain a licence to carry on
business in the province, and can impose a fine on a federally incorporated company for carrying on business in the provinces without
obtaining such a licence.
o
Federally incorporated company must obtain at least one extra-provincial registration in order to carry on business in
Canada and will have to get an extra-provincial registration in each province in which it intends to carry on business.
o
Provincially incorporated company can carry on business in the province in which it is incorporated without an extraprovincial registration, but it requires an extra-provincial registration to carry on business in provinces other than the one
in which it was incorporated.
o
 Federally incorporated company requires one more extra-provincial registration than provincially incorporated
company (and added cost)
8) Federal incorporation provides a protection of the corporate name - A provincial registrar cannot refuse the extra-provincial
registration of a federally incorporated company, which protects the right to have the federally incorporated company registered to
carry on business in any province at a later time.
o
But federally incorporated company can be sued for passing off if it carries on business in a province where there is an
existing business carried on by someone else under the same name as the federal company.
37
Extra-Provincial Registration (aka Foreign Corporation Registration):
In order to carry on a business in a jurisdiction under which a company is not incorporated, many jurisdictions require the company
to first register in that jurisdiction.
o
Provincially incorporated company can carry on business in Yukon as long as Yukon permitted it to do so and company had
a licence from Yukon gov’t to carry on business there.
o
To operate in a province, federal company must be registered federally and must also register in the province (extraprovincial registration)
Purpose: Protects 3Ps by providing a person on whom, and a place where, documents may be served for commencing a lawsuit. Also
allows a person sued by a corporation to have a person on whom, and a place where, documents related to that lawsuit can be
served on the corporation by the defendant.
Name approval process avoids confusion: Req’t of extra-provincial registration to allow registrar to refuse the registration of a
PROVINCIAL foreign corporation if its name is same or confusingly similar to that of a local or foreign corporation already registered in
that jurisdiction.
o
BUT name protection for federally incorporated company – cannot refuse to register.
Enforcement of registration requirement:
o
Fines against the foreign corporation and its agents,
o
Prohibition against a provincial foreign corporation maintaining a suit in the jurisdiction,

Federally incorporated company can still maintain action if not registered
o
Prohibition against the foreign corporation holding an interest in the land in the jurisdiction.
Extra-Provincial Registration under the BC Business Corporations Act (BCBA)
1.: A foreign entity must register as an extra-provincial company in accordance with this Act within 2 months after the foreign entity
begins to carry on business in BC (S. 375 BCBCA)
o
Who: S. 1(1): A foreign entity is either a foreign corporation or a limited liability company

Any corporation not incorporated in BC.

1) Foreign corporation: Corporation that is not incorporated in BC

Corporation that has issued shares, is not a co-operative association, is not incorporated under BCBCA
by virtue of a continuance or an amalgamation.

2) Limited Liability Companies: Companies that can apply losses to SH income for tax purposes (primarily in USA)
2. Carry on a Business: Subject to subsection (3), a foreign entity is deemed to carry on business in British Columbia if: (one must
apply)
o
(a) its name, or any name under which it carries on business (i.e. DBA), is listed in a telephone directory

(i) for any part of BC, and

(ii) in which an address or telephone number in BC is given for the foreign entity,
o
(b) its name, or any name under which it carries on business, appears in an advertisement where a BC address or
telephone number is given for the foreign entity,
o
(c) it has, in British Columbia,

(i) a resident agent, or

(ii) a warehouse, office or place of business, or
o
*(d) it otherwise carries on business in British Columbia.

 VERY open ended meaning to be determined by a court if necessary: still open for the court to say you are
“carrying on business” even if you don’t meet statute requirements.
3. Narrow Exceptions to “carrying on business”. (S. 375(3)(d))
o
Depends on the degree of presence of the corporation in the province.
o
Simply shipping goods into the province is NOT carrying on business

Requiring registration would greatly restrict access to goods produced outside BC b/c difficult to force foreign
entities to register if they only make occasional deliveries – they wouldn’t bother to register if they only ship
here a few times a year, so wouldn’t ship to BC
o
The more a foreign entity’s business becomes connected to the jurisdiction the more likely it will be considered to be
“carrying on a business”

Frequent visits by salespersons of the foreign corporation to sell substantial quantities of goods likely “carrying
on business”
4. Registration Requirement  Foreign entity deemed to be “carrying on business in BC”, must register. Must: (S. 376)
o
Reserve the name of the foreign entity, file a registration statement (with name, place for service)
o
Appoint one or more attorneys who can be either an individual or a company (S. 386)

Attorney authorized to accept service on behalf of the company in legal proceedings by or against it in BC and to
receive notices to the company (S. 388)
o
File notices of any changes (changes of attorneys for services, corporate name, amalgamations (S. 381, 382))
o
File annual reports updating its filed information (S. 380)
5. Penalty: S 426(1)(b): It is an offence to not comply with S. 375 (offence to not comply with extra-provincial registration.
o
S. 428(3): Foreign entity liable to a fine in a prescribed amount ($100) for each day that the offence under S. 426(1)(b)
continues  $100 fine per day every day the foreign entity carries on business in BC without registering extra-provincially.
NOTE: Other jurisdictions – requirements vary province to province, but generally pay on fairly closely to the BC requirements.
38
THE INCORPORATION PROCESS
1) Who may incorporate under CBCA:
One or more individuals, or bodies corporate may incorporate a corporation under the CBCA (s.5) by:
S. 5: Who can Incorporate
o
One or more individuals, who cannot be under 18 or of unsound mind or bankrupt (5(1)), or
o
One or more bodies corporate (5(2))  Any corporation, wherever in the world – so doesn’t need to be incorporated
under CBCA, but can be incorporated anywhere
Documents must be filed/steps that must be taken to incorporate under CBCA:
1. Must file a notice of the registered office (S. 19);
S. 7: Individual/body corporate must deliver Articles of Incorporation  Comply with S 19
o
Send them to the Director (defined in s. 2(1))
o
Include those documents required by s. 19(2): Notice of the registered office of the corporation (as per form 3) shall be
sent
o
NOTE: Registered office necessary to provide a place to have documents sent.
2. File a notice of directors of the corporation (ss. 7, 106, and Form 6);
S. 106(1): Notice of the directors of the corporation sent to Director (as per form 6)
S. 7: Articles must be sent to the Director, along with documents required by S. 19 and 106.
“Director” is not director of any particular corporation- he is the administrator of the CBCA
3. File Articles of Incorporation (signed by the incorporators)(s. 6, Form 1)
Incorporators must sign articles of incorporation and comply with S. 7.
Articles: Primary constitutional document of the corporation – must file articles of incorporation that people would be able to look at
o
Articles that have to be signed by Director must follow Form 1
o
Provisions in articles can normally only be amended by a supermajority vote of the SH in the corporation  difficult to
change.
o
Articles must comply with s. 6 and Articles must set out (S. 6 CBCA):

i) The corporate name;

ii) Any restriction of the business of the corporation – usually none are put in.

iii) The classes of shares and any maximum number of shares that the corporation is authorized to issue;

Common to put an authorized limit on shares. Directors can issue a certain number of shares, then
past this they must go back to shareholders and ask.

Usually this is left blank (directors can issue as many as they want)

iv) Rights, privileges, restrictions and conditions attaching to each class of shares if there’s more than one classes
of shares;

Class of shares: Generally, all shares are equal (so only 1 class). But if more than 1 class, then must set
out rights for each class

v) The province in Canada where the registered office of the Corporation will be situated

vi) Restrictions on the issue or transfer of ownership of shares

e) Number of directors the corporation is to have, or the minimum and maximum number of directors the
corporation is to have;

f) Any restrictions on the business of the corporation;

General tendency not to put in restrictions because it is hard to change in the articles. Usually this
would be put in the by-laws instead.
4. Paying the prescribed fee (Reg. s. 97 and Schedule 5); and
5
Naming: If the corporation is to have a name other than a numbered name, filing a NUANS Name Status Report: Newly Updated
Automated Name Search name search report: Database containing list of names of corporations incorporated in Canada, business
names registered in Canada, registered trade names.
o
Assists director to determine if a proposed name is the same or confusingly similar to others.
Numbered name: Director gives the corporation the next number in sequence together with “Canada Ltd.”  If you want to
incorporate quickly, get a numbered name company. Then you don’t have to incorporate the name because this has already been
done.
39
Naming Process:
1) Numbered name: best method for incorporating quickly, because no need to go through incorporation process
o
S. 11(2): Numbered Name: Name can be ‘(assigned #) Canada Ltd.’

If not taking a numbered name, must file a NUANS name search report
2) Company must file a UANS same status report to allows the director to determine whether the proposed name is the same or
confusingl similar to others.
o
S. 12(1): Corporation cannot have a name that is the same as or confusingly similar to the name of another corporation or
business.

Confusion could occur where consumers might mistakenly associate a particular good with the wrong name, or
look up wrong information on the registry
3) Directors will determine whether the name is otherwise prohibited for being prohibited under regulations, or misdescriptive:
o
S. 12(1): Corporation cannot carry on business under a name that is prohibited or deceptively misdescriptive.
o
Powers of director: Director can refuse to register a name that is prohibited or deceptively misdescriptive
o
S. 12(2): Director can order the corporation change its name if it is prohibited or deceptively misdescriptive

Note: Changing the corporate name will require an amendment as per s. 6(1)(a)
o
Prohibited names:

Prohibited words:

Reg 23: Obscene names

Reg 21: Names like RCMP, Air Canada, Parliament Hill, etc.

Reg 22: Names that suggest the corporation carries on business under government authority, or is
affiliated with the gov’t (unless the gov’t has consented)

Too general, names: Reg 24

ex. “shoe store Ltd.

Name that just describes a characteristic of the individual (Jim Smith Ltd)

Name that just describes a quality of the goods or service (Running Shoes Ltd)

Primarily geographic name (Canada Ltd)

Confusion with other names: Reg 18

Create confusion with other corporate names, business names, trade names

NUANS name search helps identify names that may be confusingly similar to proposed corporate
name.

Misdescriptive Names: Reg 35

Name misdescribes the business, goods or services to be provided in association with the name, the
conditions under which the goods or services are produced or supplied, or the place of origin of the
goods or services.
4) Essential elements of most corporate names:
o
(1) Descriptive part, (2) distinctive part, (3) suffix (ltd. inc.)
o
Ex. Kwitfit Shoemakers Ltd.
o
Descriptive part suggests the business of the company
o
May be sufficiently distinct without descriptive part if distinctive phrase is sufficiently unique
5) S. 11(1): Names can be reserved 90 days ahead. Can also reserve a numbered name and later apply for a name change to a nonnumbered name.
6) Doing Business As (DBA) Names:
o
Corporation that uses a business name other than its own corporate name must register than business name (b/c a
corporation is “person” who uses his business name other than his own name under S. 88 of PA)
o
Corporation’s other name referred to as “doing business names” – must be registered
2) Once requirements fulfilled: Issuance of a Certificate of Incorporation:
S. 8(1): On receipt of the documents, if the documents meet the requirements of the Act, including the name, the Director shall (i.e. MUST)
issue a certificate of incorporation
NOTE: Director has to issue certificate (vs this used to be a right for grant of Crown Charter)
S. 9: The corporation comes into existence on the date show on the certificate of incorporation
S. 19(1): A corporation must have a registered office in a province in Canada
3) Post-Incorporation steps under the CBCA: After issuance of certificate of Incorporation:
Once a CBCA Corporation has been incorporated, a meeting of the directors of the corporation should be held where post-incorporation
resolutions should be passed:
S. 104: Organization Meeting, s. 104: After the issuance of the certificate of incorporation, the directors SHALL hold a meeting
where they (as a group – no power to act individually yet until they decide to) may:
o
1. Make by-laws

Sets out rules and procedures for annual and any other SH meetings, director’s meetings (who will chair
meetings, how votes will occur, how to make motions)

Set out rules for particular matters at subsequent directors’ meeting, such as procedures for the allotment of
shares, the declaration and payment of dividends, the appointment of officers.
o
2. Adopt forms of security certificates and corporate records
40
o
o
o
o
o
o

Security certificate: Certificates for shares and debentures.
3. Authorize the issuance of shares

No shares have been issued prior to this meeting (company incorporated w/o SH), but SH required because SH
meetings must be called annually; SH must appoint directors after the directors’ first term has expired.

Directors have power to allot shares to persons they intend to become shareholders of the corporation, and
issue these shares to those persons
4. Appoint and auditor to act as auditor until the first meeting of Shareholders (if corporation distributes shares to the
public)

Not necessary if closely held corporation
5. Make banking arrangements and who will have signing authority for the account

When shares are issued money will be received that should be deposited in bank account.

Corporation will incur expenses once it starts operating, and will need to deposit and withdraw money and
cheques froma bank account to carry on the business.
Adopt form of record keeping for records of Corporation

S. 20: Corporation must maintain certain records
Appoint officers to carry out the specific tasks required to carry on the corporation business

Pass resolution appointing persons as designated officers

Delegate particular tasks to particular officers (i.e. grant the appointed officer authority to carry on tasks on
behalf of the corporation)

Not necessary if corporations do not issues their shares to the public
Transact any other business

May want to delegate the power to borrow on behalf of the corporation

May want to pass by-laws restricting either the power of directors to borrow, or set out procedures
for the person who has the power to borrow to do so.

May adopt a corporate seal to be used in executing certain documents binding the corporation (although seal is
no longer specifically required – S. 23)
NOTE: Fees of Incorporation Do NOT arise with SP or P’ship
Fee for the incorporation itself (few hundred dollars).
Legal fees associated with incorporation process ($100s or $1000s depending on complexity and whether a shareholders’ agreement
is needed.)
After incorporation, fee to update register annually to file annual reports.
Costs for maintaining certain corporate records (keeping minutes, corporate documents, records) and filing an additional tax return
Choice between the CBCA and the BCBCA (Which jurisdiction to incorporate?)
Can incorporate under federal or provincial legislation and still operate throughout the country
Choice of which statute in a particular jurisdiction is better – BCBCA and CBCA similar, but some differences:
Why the CBCA (Federal)
1. Name Protection
o
Provincial registrar cannot refuse extra-provincial registration of a CBCA corporation, even if the corporation has a similar
name to a registered corporation already in the province – this would prevent “carrying on business”
o
Federally incorporate company’s name can’t be refused for being similar to provincial registrar.
2. No restriction on maintaining an action (concern re: uncertainty regarding “carrying on a business”)
o
A federal corporation carrying on business in BC cannot be prevented form taking an action in BC even If they are not
registered in BC (Great West Saddlery)
o
But other jurisdictions still maintain that you cannot maintain an action unless you are registered in the province.
3. Lawyers and shareholders in other provinces are familiar with CBCA
a. CBCA copied in Newfoundland, NB, QB, Ont, MB, Alb, Sask, Nunavut, NWT, Yukon
Why the BCBCA (BC Provincial)
1. Lawyers in BC are more familiar with it
2. Easier to deal with Victoria than Ottawa (know the people, no 3 hr time zone difference for calls to Ontario)
3. Cheaper (CBCA has one more extra-provincial registration than incorporation in BC does)
Reasons to Incorporate: 7 advantages of corporation (and why this is not always advantage):
1. Limited liability for its shareholders (vs. joint and several liability of partners)
o
Not a benefit where the SH must provide a personal guarantee to the creditor to secure a loan required to provide a
significant portion of the capital to the business – this reverses the limited liability obtained from incorporating.
o
Courts can still pierce corporate veil and make SH personally liable for tort claims.
o
Would buy insurance anyways: Want to protect yourself from tort, so even if you have LL you would buy insurance.
2. Perpetual succession of a body corporate (vs. tenure of partnerships).
o
Perpetual existence of corporation – if one SH leaves corporation and sells shares, all the assets remain because they are
owned by the corporation, not the SH.
o
Not advantage over S/P or partnership bc anticipated problems for succession can be dealt with in the initial contract:
p’ship agreement can allow succession for remaining partners without having to renegotiate entire agreement.
3. Allows for ease of transfer of shares (vs. difficulty of terminating partnership to permit changes in personnel)
41
o
o
4.
5.
6.
7.
Shares are freely transferrable unless there is an express restriction on the transfer of shares
BUT securities law often put restrictions on initial distribution and subsequent transfer of shares in CHCs that are the same
restrictions as in partnerships.
Shareholders alone cannot bind the corporation
o
Individual partners may bind the firm but a shareholder alone cannot obligate the body corporate – does not have this
power.
o
BUT in CHCs, individual shareholders usually are officers of the corporation and have been delegated power to bind the
corporation in certain ways. Corporation also vicariously liable for torts committed by its officers, agents, employees.
Shareholder can contract with or sue a body corporate; (vs. partner cannot sue or contract with his firm
o
Corporation is a separate entity from the shareholders, so a shareholder can enter a contract with corporation to simplify
things
o
BUT partnership can achieve similar results by forming a separate contract with fellow partners
Facilities for a body corporate to secure additional capital are not possessed by a partnership.
o
Corporation has shares and debentures that it can sell to raise additional capital.
o
BUT partnerships can also raise additional equity capital by having existing partners invest additional sums, or admit new
partners. Partners could break investment interests into units and allocate rights to distribute on a per unit basis which
closely resemble shares
o
Debentures: Anyone can produce such a document, not just corporations.
o
Sale of shares and debantures always constrained by securities legislation
Tax advantages may accrue to the sole proprietor or small partnership which converts to the corporate form.
o
* Tax reason is key reason to incorporate
o
Income Tax Act provides “Small business deduction:” Private (shares not sold broadly to investing public) Canadiancontrolled corporations carrying on “active business” can get a reduced tax rate. This is tax deferral – so additional full
corporate rate is charged when income is ultimately distributed to individual SH’s – but advantage because corporate tax
rate is lower than personal tax rate, so keeping the income in the corporation (by not paying a divdend) allows for deferral
of tax until income is distributed and SH and will accrue interest on deferred payment.
o
Lifetime capital gains exception from gains in shares up to $750,000 for Canadian controlled private corporations. Must
not pay taxes on gains up to $750,000.

BUT only a benefit if business makes a profit at the start-up phase (which is often not the case). If losses, no
income to benefit from the deduction, and no capital gain. Often incur losses at start up phase, and unable to
pass of losses through to the SH to be applied against other sources of income b/c separate legal entity.
Changing the Jurisdiction: Reincorporation/Continuance
Once incorporated, corporation may change the statute under which it incorporated.
Reincorporation: The process of changing the statute of incorporation to that of another statute in a different jurisdiction.
Process:
Step 1) Incorporate a new corporation under the statute in the destination jurisdiction.
o
Step 2) New corporation issues shares to the shareholders of the original jurisdiction corporation in exchange for the
shares of the original jurisdiction corporation  New jurisdiction corporation will own all the shares of the original
jurisdiction corporation
o
Step 3) Wind up original corporation: Original corporation’s assets transferred to new jurisdiction corporation (who is now
the sole shareholder of the old corporation), and the old corporation can be dissolved.
Continuance: Provisions in the CBCA to facilitate reincorporation.
Continuance OUT of the CBCA: S. 188: Export continuance
o
1. Obtain a special resolution from the shareholders permitting the continuance (CBCA s.188(1), 188(5))

Since continuance can affect the rights of SHs, must give their approval – rights may not be the same under new
statute, so requiring approval provides SH protection against adverse changes to their rights.
o
2. Obtain approval from the Director (CBCA S. 188(1))

Protection to SH’s rights –majority SH may benefit from continuance in the other jurisdiction but minority SH do
not, but majority SH have enough of a majority to pass a resolution to chnge.
o
3. Register in the other jurisdiction making amendments to the incorporation documents to make them conform to the
requirements of the new jurisdiction (also satisfy the name requirements for registration).

New documents for incorporation may be different (ex. articles vs. MoA), provisions may not be compatible with
requirements in the statute of the new jurisdiction – must be changed to make them compatible.
Continuance INTO the CBCA: s. 187 – An “Import” Continuance
o
Similar procedure required by most provincial statutes of incorporation
o
1. Obtain resolution from SH permitting corporation to be continued under CBCA
o
2. Obtain approval from the registrar who administered the statute in original jurisdiction
o
3. Corporation seeking to be continued under the CBCA applies to the Director for a certificate of continuance (s. 187(1)) by
sending the Director articles of continuance, a notice of the registered office of the corporation, and a notice of the
directors of the corporation (s. 187(3)).

Important so that you can sue and have a place of service.
42
LEGAL STATUS OF CORPORATIONS – Separate Legal Personality
 Corporations are separate persons (Solomon v Solomon). Separate from the SH, directors, officers.
Implications of the Legal Nature of Corporations:
1. Companies are separate legal entities from the individuals that own them (SH)
- Corporations are separate persons (Solomon v Solomon). Separate from the SH, the directors, the officers.
o
S operated business as a SP, rule that he needed a minimum 7 SH to incorporate, so gave 1 share to each member of this
family and kept all the rest. S loaned money to company, took security interest on debentures. Bankruptcy. HL: Company
not an agent for S – this would defeat purpose of LL.
2. Companies can have one or more SH (Solomon)
- SH with only 1 share is still a true shareholder. De facto 1-person corporation is legitimate.
- CBCA S. 5: Company can be incorporated with only 1 SH (no more minimum requirement)
3. A SH can also be a creditor of the corporation (secured or unsecured) (Salomon)
- SH can enter a contract to loan money to company and can take a security interest on the debentures.
- SH who is also a creditor can rank equally with other creditors for the amount of debt, and ahead of other creditors to the extent of any
security held for the debt.
4. A SH can be a director, an officer or an employee of the company (Lee v. Lee’s Air Farming Ltd.)
- Even a sole SH of a company can be an employee, director and/or officer of the company
- Company is a separate person that acts through its shareholders or directors to the extent they have powers to authorize or manage
the company.
o
SH (Lee) is not employing himself b/c company is a separate legal person than himself, so Lee is employed by company. Lee
is entitled to worker’s comp because he is employee of corporation.
5. The corporation owns the assets (not the shareholders) (MaCaura v. Northern Assurance Co)
- SH have shares which are “bundles of rights” - i.e. contractual claims against the company respecting the rights given in the shares that
they hold (share of dividends, share of liquidation), but they do not own the assets and do not have a share of the assets.
- SH cannot claim insurance on destroyed assets bc his interest is only in the distribution of profits, not the assets.
- Macaura: Macaura transferred property interest in timber to company in exchange for shares. Fire destroyed all timber, M makes claim
on insurance. Held: No insurable interest – timber owned by company, not M, and thus no insurable interest in it. M could not insure
assets he did not own.
o
NOTE: Now, a SH has an insurable interest if SH’s rights negatively affected, but still not ownership of assets.
4. Corporate statutes grant corporations the same rights (and obligations) as natural persons under Canadian law
- Corporations can acquire assets, go into debt, enter into contract, sue or be sued, be found guilty of crimes, own property.
Policy Concerns for de facto 1-person corporation:
1. Potential Fraud on Creditors:
SP might sell his assets to a company in an attempt to avoid creditors’ claims on his personal assets on bankruptcy
But unlikely when value of business is low, and when SP is willing to loan money to business (Solomon)
2. Creditors may be deceived
- Creditors who have dealt with business as SP may not know it has incorporated and is now separate person
- Creditor deceived by balance sheet that company appears to have assets (bc excessive value paid for business).
- But creditors can check the minutes/records/articles and see the company’s financial situation
3. Affect on existing business
- Court upheld validity of corporation with nominal SH bc of affect it might have on other businesses if held to be invalid.
Potential Problems with notion of limited liability + corporation’s separate personality
- 1. Shareholders may cause the company to become indebted to them when the company is or is likely to be insolvent by becoming
creditors themselves
o
SH can sell their shares for debentures and become creditors, so on bankruptcy will get share of assets.
- 2. Company may make payouts to shareholders when it is insolvent (by repurchasing shares form SH or distributing a dividend)
o
On bankruptcy, few assets left to give to creditors bc distributed most assets to its SH prior to bankruptcy
- 3. Company can enter into contracts with its SH that are unfavorable to other SH or creditors
- 4. Thin capitalization: Persons might set up a company up with very little and thus defeat the interests of creditors who act in reliance
on the presence of some minimum adequate amount of capital
o
Creditors could do background check to discover that this is “shell company”, and not invest
o
BUT 3P tort claimants who seek compensation and who never had an opportunity to choose how whether to deal with the
company by checking on the capitalization ahead of time.
- 5. 3Ps may be deceived into thinking they are dealing with a SH or p’ship when they are in fact contracting with a corporation where SH
have LL
- 6. Persons may incorporate a company to avoid personal obligations or restrictions
o
Company is separte person, so not breach of k to carry on the particular forbidden business
43
PRE-INCORPORATION CONTRACTS
Contract entered into by promoters before a company has actually incorporated
o
Promoter who will manage company enters into a contract with a third party client on company’s behalf (ex. to sell
inventory to company) before company is incorporated.
o
Problem: No authority to act as agent for company because corporation must be in existence to grant this authority.
NOTE: CBCA will normally apply. Nova Scotia and PEI still employ common law, oral contract employs CL.
General CL Position on Pre-Incorporation contracts (overridden):
- A company cannot ratify a contract that a promoter purported to enter into on behalf of the corporation before the corporation came
into existence (Kelner v. Baxter, 1866)
o
Principal Is not in existence when the promotor purported to act, and as such, does not have capacity to act at the time the
agent act  Thus k will not be enforceable, company not liable to 3P.
- Promoters can be liable on pre-incorporation contracts, BUT only if it can be said that it was intended in the circumstances that the
promoter himself be a party to the contract (Kelner)
o
If promoter purports to enter into a k on behalf of an unincorporated entity, k can be upheld as a valid contract between
the 3P and the promoter  promoter liable.
o
CL position is rule of construction approach: Promoter will be a party to the K only if the promoter intended to be a
party to the K. If it was intended to be a contract with the company, then the promoter cannot later enforce the k in his
own name.

Fact that the promoter agent signed the contract on behalf of the company does not automatically mean the
agent is bound – must look at intention, not just the nature of the contract itself (Black v Smallwood & Cooper)
o
Not the Rule Of Law approach where promoters are automatically parties to the k and thus liable on the preincorporation k. (Wickberg v. Shatsky, 1969, BC)
Promoters can be liable for breach of warranty of authority when he purports to act on behalf of a corporation before it came into
existence, even if he clearly did not intend to be a party to the contract (Black v. Smallwood & Cooper)
o
Promoter liable for warranting that the company was in existence and that they had authority to act on behalf of the
company: Liable for representing the existence of the company and that they could sign on its behalf, when they knew this
was false.
o
However, the damages are likely to be nil – if warranty turns out toe be true, corporation is now bankrupt, and the 3P only
has an action against a bankrupt corporation and will gain nothing even if he succeeds. (Wickberg v. Shatsky)

Note that Wickberg would not have been rewarded under the provisions for directors’ liability for wages (under
CBCA s. 119)
Problems with CL position:
1) Risk for both promoter and 3P that there would be no enforceable contract – unjust enrichment and party’s reliance defeated
when 1 performs a contract they believe is enforceable but later cannot enforce against other party – 1 party bears entire loss.
2) Unnecessary costs of both parties needing to take precautions to ensure that the corporation has been incorporated before
entering the k. Better if the risk were imposed on 1 party – usually promoter, who more likely knows if company is incorporated
without having to check with lawyers.
1. CBCA s. 14:Modifies the Common Law:
14(1): Promoter personally bound by pre-incorporaiton k: Unless the k expressly provides otherwise (S. 14(4)), a person who enters
into a contract in the name of or on behalf of a pre-existing corporation is personally bound by the contract and is entitled to the
benefits of he contract
o
Refers to WRITTEN contracts

Oral contacts: CL applies  Promoter must have INTENDED to be a party to the k to be liable.
o
Personal liability if person enters into a pre-incorporation K in the name of a company before it comes into existence –
whether or not he intended to be a party to the contract.
o
S. 14(1) codifies Rule of Law approach: Liable if you purport to act on behalf of the company
o
BUT can be protected by 14(4) – parties may alter agreement so promoter not liable.
14(2): Corporation may adopt a pre-incorporation contract after it comes into existence within a reasonable amount of time – and
will be liable under k.
o
Corp then bound by and entitled to the benefits of the k, and promoter is no longer liable or entitled to the benefits of the
k.
o
Any action or conduct signifying its intention to be bound by the k constitutes “adoption”
o
A corporation cannot adopt a K that has already been repudiated because there is nothing there to adopt (Landmark
Inns. v. Horeak, 1982)

Landmark Inns:Contract with shopping mall owner to lease store. Store not incorporated at formation of k. Store
found other premises, promoter refused to pay lease.

Held: Promoter repudiated K when he refused to pay lease so he could not later decide that his company wanted
to adopt the K. Court could not apply S. 14(3) and apportion liability between corporation and promoter – no k
exists.
o
Once the corporation adopts the K, the promoter is no longer liable
14(3): Court can apportion liability between a corporation and a promoter
44
o
On insolvency, court can apportion liability between corporation and the promoter so that the 3P can still get his claim – promoter can be made personally liable to repay debts even though company had adopted pre-incorporation k under S.
14(2).
o
Will not apportion when 3P is not mislead as to the fact that they’re contracting with the corporation – BUT if 3P knows
he is dealing with the corporation, he has accepted the risk of corporation becoming insolvent and promoter will not be
liable (Bank of Nova Scotia)

Bank of Nova Scotia v Williams: Plf loaned money to plumbing business before incorporation. Company
incorporated, plf received promissory note for repayment. Company bankruptcy, plf sues for loan.

Corporation insolvent, so plf claims that company adopted k by writing promissory note, so court should now
find director liable under S. 14(3) to repay her debt.

Held: Plf knew contract was with company, not the director, and so took the risk that company would have no
assets – NOT entitled to director’s assets.
o
BUT Court might apportion liability if the promoter had the corporation adopt a K on the eve of bankruptcy in attempt to
avoid liability. (Bank of Nova Scotia)
14(4): Parties can enter an express written agreement to alter the promoter’s liability (and entitlement to benefits) under the
contract – agree that promoter not bound.
o
Altering S. 14(1) requires express provision

Simply having the name of the corporation on the K is not express enough of an agreement that promoter is not
bound (Landmark Inns)
When the CBCA Provisions Apply:
1. Constitutional problems: Contract occurred before incorporating under CBCA, so not yet a federally incorporated incorporation. S. 14
deals with k’s, and laws dealing with k’s falls into “property and civil rights” power – issue of whether CBCA provisions are invalid for
falling within provincial power.
o
Feds would argue that regulation of pre-incorp k’s is a necessary ancillary power to fed’s residual power to incorporate
companies with objects other than provincial objects.
2. “Written Contract:” S. 14 refers to written k’s, so does not apply to oral ks.
o
Common law applies to oral contract.
3. Jurisdictional or “Conflict of laws” issue:
o
Assuming CBCA is constitutionally valid, BCBCA has a provision that also deals with pre-incorporation issues. Two valid
statutes could lead to conflicting results, and CBCA will be paramount.
o
If pre-incorp K is in a province where CL would normally apply, the CBCA provisions should be paramount
o
BUT what if everything to do with K was BC (company operates in BC, business all conducted in BC), but company
incorporated under Sask statute – conflict of laws problem for which provision will apply (BC or Sask)

Could be that both parties knew k was incorporated in Sask, so Sask laws apply

Could also argue that everything about K is BC, so BC laws apply
45
BCBCA S. 20: Statutory Breach of Warranty of Authority
S. 20(2): When promoter purports to enter a k on behalf of the company he is deemed to have warranted that the company will
come into existence and adopt the contract – so if this doesn’t happen, promoter has breached the warranty and is liable for
damages.
o
S. 20(2) does not make promoter liable ok k itself bur rather promoter is personally liable for breach of warranty of
authority.

Leaves open possibility that promoter could be liable on k, but only if the promoter was in fact intended to be a
party to that k.
o
Not exclusive to written k – S. 20(2) just says “contract”
S. 20(2)(c) Sets the measure of damages for breach of warranty of authority as the same as if:
o
(i) The company existed when the purported K was entered into
o
(ii) The person who entered into the K in the name of the company had no authority to do so, and
o
(iii) The company refused to ratify the purported K

So: If the 3P is dealing with a corporation, 3P MUST check the creditworthiness of the corporation. If
corporation bankrupt, 3P will get only nominal damages.

If warranty had been true and company existed and went bankrupt the 3P would only get nominal
damages b/c corp has no assets.

If promoter IS liable under S. 20(2), promoter is personally liable – fully liable
S. 20(3): Corporation can adopt by act or conduct a pre-incorporation contract within reasonable amount of time after
incorporation.
(4): On adoption of the pre-incorp k  company bound by k.
o
(a) New company will be bound by k and entitled to benefits, and
o
(b) Promoter (aka facilitator) ceases to be liable for breach of warranty of authority
20(4): On adoption of a pre-incorporation contract under (3)
o
(a) The new company is bound by and entitled to the benefits of the pre-incorporation K as if the new company had
existed at the time of the pre-incorporation contract and had been a party to it, and
o
(b) The facilitator ceases, except as provided by (6) and (7), to be liable under (2) in respect of the pre-incorporation
contract
20(5): If the new company does not adopt the pre-incorporation K, any party to the k may apply to the court for an order directing
the new company to restore to the applicant any benefit received by the company under the K.
o
Addresses the problem of unjust enrichment of company at expense of 3P or promoter.
Joint liability: 20(6): Whether or not the new company adopts the pre-incorporation contract under (3), the new company, facilitator,
or any party to the pre-incorporation K may apply to the court for an order to:
o
(a) Make the promoter and the company jointly liable, or,
o
(b) Apportioning liability between the new company and the facilitator
20(8): A facilitator is not liable under (2) in respect of the pre-incorporation K if the parties to the K have expressly so agreed in
writing.
Other than S. 20(2) making promoter liable for breach of warranty of authority, and S. 20(5), BCBCA appears to map on to S. 14 CBCA.
Other ways to enforce Pre-incorp Ks at CL
Creative uses of the CL provides ways to avoid the CL pre-incor k problems discussed above.
1. Contract was assigned to the corporation by the promoter, and thus is enforceable (as opposed to ratification by the company)
2. Promoter is treated as trustee of a chose in action for the corporation, putting the promoter under a fiduciary duty to enforce the
k and allow an order permitting company to sue in the name of the promoter as trustee.
o
Promoter entered the k has a trustee for the beneficiary company. If promoter doesn’t sue as trustee, company can step
into the shoes as trustee and sue without needing to ratify k.
3. Restitutionary principle: Court rules that although no valid k with corp, there was a “quasi-k” or unjust enrichment allowing for a
restitutionary remedy.
4. Infer a second K from couse of dealings: Court will infer that part performance of pre-incorp k was really performance of another k
between the 3P and the corporation that is inferred from parties’ behaviour of acting like a second k exists.
5. Promoter is agent of 3P with authority to make an offer to the corporation on the same terms as those made between the 3P and
the promoter.
o
Purported ratification or adoption by company is the acceptance of an offer conveyed by the promoter as agent for the 3P.
6. Original K becomes binding on a future event (incorporation of the company). Contract is conditional - will take effect on
company’s incorporation.
Practical Notes:
Even with statutory provisions, promoters and 3Ps must be aware of risks associated with pre-incorp ks:
1. Should pay for corporate search if any money is involved at all
2. Promoters should never enter into ks on behalf of a corporation that has a provision such as CBCA S. 14 b/c there is a risk of
personal liability – should wait for incorporation.
o
Quick to have a company incorporated, and can speed up process by incorporating under a numbered name. Then enter k
on behalf of numbered name, and change name later (k will still be valid after name change)
o
Promoter should check the corporate registry to confirm the company’s corporate status: check for a certificate of
46
-
incorporation, and that the corporation is in good standing.
3. 3Ps acting in any significant transaction should check registry to confirm certificate of incorporation has been issued that that the
corporation is in good standing.
 EXAM: Pre-Incorporation problem
Issue: Promoter entered into k on behalf of the corporation with 3P (supplier, lender) before incorporation. Breach of k/insolvency, 3P wants to
be repaid, but k not enforceable. OR 1 party fails to fulfill obligations under the k and 1st party seeks damages. Can the party sue?
A) Which statute of incorporation applies? CBCA? BCBCA? Common law?
- Even if contract is incorporated under CBCA, if everything about the K is BC (operates in BC, does business in BC), could also argue that
parties intended to incorporation in BC, so BCBCA applies.
- Raise issues: “Substantial connection” test – if company has substantial connection, must register in that province.
- Conflict of laws issue: Is S. 14 valid? If valid, CBCA would trump BCBCA due to Paramountcy, so no “conflict of laws”.
- Address Constitutional issue: Possible problem that CBCA S. 14 falls under P+CR jurisdiction bc it deals with contract. Deals with
companies before they are in existence. May be fed’s ancillary power to incorporating companies, and thus is valid.
- Say: assuming CBCA applies, this is result. THEN assuming BCBCA applies, this is result.
CBCA incorporated company:
3P can argue that the contract must be enforceable - it is a contract between the 3P and the company (entered into on behalf of the agent)
 But company would say no b/c they were not yet incorporated and so k cannot be ratified
 3P: if the contract was not entered into with the company (b/c not incorporated when made), then S. 14(1) CBCA: the contract was entered
into with the person who purported to act on behalf of the company, and so the 3P can sue the promoter. Promoter is liable as a party to the k.
 BUT contract must be WRITTEN – so look at facts
- yes written: S. 14(1): Promoter is liable. Not written: CL realm: argue that some other documentary evidence is really the written k, and
try to enforce this under S 14(1)
 Promoter would argue that he is not liable, the company is liable: S 14(2): The company adopted the contract once it became incorporated,
and now the corporation is bound.
- 3P would also argue the company is bound: company is more likely to be able to pay damages to a 3P, more able to carry out the
contract
- Adoption can be by action or conduct: so even if not express, still bound
-  Company would say no it never adopted the contract – and if it did show conduct that it was bound, this was not within a reasonable
time
o
OR if company DOES want to have adopted k – would say it DID adopt k.
 BUT S. 14(2) will not relieve promoter of liability when the contract had already been repudiated (nothing to adopt, b/c contract no longer
exists)!
3P/promoter/company would try to spread around who must pay (so they can get more damages or pay less damages by arguing S. 14(3) CBCA.
-  3P would try to sue promoter if the corporation is insolvent to try to get his claim – but if 3P knew that they were dealing with the
claim, it can be found that they accepted the risk.
- BUT S. 14(3) will not always apply if 3P was aware they were dealing with the corporation – court may find that the 3P accepted the risk
of solvency (Nova Scotia)
- But if promoter had the corporation adopt the contract on the eve of its bankruptcy, court may apportion liability
 Company/promoter would argue that the are NOT bound because terms of the contract expressly provide this (S. 14(d) – express terms that
he is not to be bound.)
- BUT must be sufficiently express terms: simply having name of the company on the contract is not sufficient to relieve promoter of
liability.
BCBCA Incorporated company:
 BCBCA: S. 20(2): 3P will argue that promoter is liable under S. 20(2) for breach of warranty:
- Company was not yet incorporated, promoter purported to enter into a contract in the name of or on behalf of the company
- Contract can be oral or written (vs. CBCA – must be written)
-  Promoter liable to the other parties (the 3P or the company) for damages for a breach of warranty.
- S. 20(2)(c): Measure of damages is the same as if the company had been incorporated and the promoter had not had authority to enter
into the k on the company’s behalf  promoter is fully liable.
 Promoter (and 3P) will argue that the company adopted the contract after it became incorporated, and so the promoter is not liable (S.
20(3))
Company can adopt the k by any act or conduct signaling its intention to be bound
S 20(4): By adopting the contract, the company is bound and is entitled to the benefits of the contract and the promoter will no
longer be liable under the contract.
 If promoter/3P fails in the argument that the adopted the k (not in reasonable amount of time, did not do an act or conduct that showed
intention to be bound),  promoter may apply to the court for an order directing the company to give back any benefit to the 3P. (S. 20(5))
So 3P will get back any losses that the company incurred through the contract with the promoter
 Promoter will argue he is not liable b/c express terms of the pre-incorporation contract stated that he would not be liable (S. 20(8): - must be
in writing
 Joint liability: S. 20(6): court can apportion liability between promoter and company.
COMMON LAW: overridden unless k is CBCA and is oral, incorporated in NS or PEI
 Promoter can be liable only if he intended to be a party to the k.
 3P will argue that even if promoter didn’t intend to be party to the k, he can still be liable for breach of warranty of authority for warranting
that the company was in existence and that they had authority to act on behalf of the company
47
LIABILITY: Disregarding the Corporate Entity (aka Piercing the Corporate Veil)
Exceptions to Salomon Principle: Disregarding the Corporate Entity
Salomon cited for proposition that a corp is a separate legal entity. It is a separate person from its SH, so shareholders have limited
liability.
- Exception: courts have occasionally disregarded the concept of the corporation as a separate legal entity to assign liability to individual
shareholders, directors or officers of a corporation.
- These exceptions frequently argued, but rarely succeed to cause courts to pierce corporate veil.
- Situations where corp pierced follow no consistent principle: “veil pierced where it would be too flagrantly opposed to justice to apply
the principles of Salomon. (Madam Justice Wilson - Kosmopoulos, 1987)
- Three approaches to determine how court will rule (despite no consistent principle):
o
1. Look at legal rhetoric: Specific language for reasons courts have given to pierce corporate veil
o
2. Look at specific cases where courts have disregarded corporate entity – does this apply here?
o
3. Look at policy reasons: When do benefits from LL arise?
Legal Rhetoric and its Basis in the Solomon Case: Reasons courts have given for disregarding the separate corporate personality:
1) Agency:
Corporation is really an agent for the SH, so debts incurred by corp are really the debts of the SH as principal. SH liable for the
tortuous acts of the corporation when acting in the scope of its authority.
o
Salomon: TJ said that the corp is simply S agent, and S personally liable to creditors as principal bc corporation acting within
its authority on behalf of S.
2) Alter ego: Corp is one and the same with SH
Court uses language of “alter ego, puppet” and say that corp is one and the same with SH to avoid agent/principal language.
3) SH/Directors themselves disregard the corporate entity:
Courts refer to the failure of SH to observe corporate formalities required to maintain the separate identity of the corp  since SH
did not treat corporation as a separate entity, so they too will disregard the corporate entity
Court will look at whether SH themselves treated corp as separate by looking to whether SH kept separate accounting records for the
corp, maintained required corporate records, held corporate meetings, made corporate filings
4) Promoters of corporation use corporation to engage in conduct akin to fraud:
Corp does not fit elements of CL fraud, but use of corp is described by courts as “conduct akin to fraud”
o
Gilford Motors v Home: Former employer who had entered non-competition agreement as part of employment k used
corporation to compete and thus breach the k. Held to be “conduct akin to fraud,” and corp disregarded separate person
so the employer was liable for breaching employment k.
5) Affiliated Enterprises as agents of the corporation:
Courts more willing to disregard corp entity when doing so will link a parent company with its subsidiary company or link 2
subsidiaries of the same company – i.e. parent company owns at least 50% of subsidiary’s shares so has power to elect directors
Not two separate corporate entities, but rather subsidiary company is an agent for the parent company. This allows an action to be
brought by/against the parent company on subsidiary’s behalf. (Smith, Stone and Knight)

Stone, Smith and Knight: SSK Ltd owned all the shares of the subsidiary that is being expropriated by city. SSK
brings claim for compensation. City challenges SSK’s right to seek compensation bc subsidiary is separate legal
entity from SSK Ltd, so it must be subsidiary that sues.

Held: Parent company is proper claimant – court disregards separate corporate entity, parent
company is same legal person as subsidiary.
6 Tests: Determine whether subsidiary was just an agent of the corporation, thus disregarding the separate legal personality of
subsidiary: (Smith, Stone, Knight)
o
1. Were the profits treated as profits of the parent company?

Ex Subsidiary’s sole source of income comes from dividends of the parent company
o
2. Were the persons conducting the business appointed by the parent company?

If same persons (same SH – and Sh appoints directors), then yes
o
3. Was the parent company the head and brain of the trading venture (made key decisions)?

If same directors, then yes b/c same people making decisions.
o
4.Did the parent company govern the trading venture, decide what should be done and what capital should be embarked
on the venture (i.e. make financial decisions)?

If parent company makes all the decisions for subsidiary company – yes if same people
o
5. Did the parent company make profits by its skill and direction (i.e. look a director)?

Yes if same people
o
6. Was the parent company in effectual and constant control?

If same directors, then yes same control.
o
If 6 criteria met, then subsidiary is an agent for parent corporation
BUT courts have said it is not enough to fulfill 6 Smith Stone and Knight tests, there must also be some other conduct that suggests
the alter ego principle be applied (e.g. conduct akin to fraud) (Gregorio)
o
If 6 tests satisfied, must then look at the purpose and context in which the subsidiary corp is being disregarded. In
certain circumstances, consequences will be drawn despite the legal existence of separate subsidiary corporations
o
Ex. Purpose of ignoring separate entity is to avoid paying taxes to subsidiary is NOT sufficient for court to disregard
48
-
separate entity, even if 6 tests satisfied (Alberta Gas)

Alberta Gas Ethylene Co. v. M.N.R. (1990, Fed CA): AGEC incorporates subsidiary in the US to take advantage of
lower interest rates of incorporating companies. Subsidiary transfers loan to AGEC, and AGEC pays on it at the
same rate subsidiary pays to US insurance companies. Minister of Revenue assesses AGEC for withholding taxes
on interest payments made to ASCO as non-resident. AGEC claims it doesn’t have to pay subsidiary taxes
because it doesn’t exist – they are not separate entities, rather they are the same company and making
payments to themselves, thus needn’t pay subsidiary taxes.

Held: Court did NOT disregard the separate corporate entity, even though 6 tests satisfied. Look at
purpose and context: trying to disregard corporate entity to avoid taxes = NOT sufficient to ignore
separate corporate entity.
Alter ego argument usually restricted to situations where conduct akin to fraud is involved (Gregorio v. Intrans-Corp)

Gregorio v. Intrans-Corp: Plf buys defective truck from parent company, who had ordered the truck from
subsidiary company manufacturers. Subsidiary claims that parent company is responsible for faulty
manufacturing (and thus liable for negligence) b/c they are the same legal person.

Held: Subsidiary IS separate corporate entity (and thus cannot avoid liability) – not wholly controlled by parent.
o
Subsidiary (even wholly owned) will generally not be found to be the alter ego of its parent unless the subsidiary is under
the complete control of the parent and is nothing more than a conduit used by the parent to avoid liability.
o
The alter ego principle is applied to prevent conduct akin to fraud that would otherwise unjustly deprive claimants of their
rights.
Policy reasons behind Court’s decision to pierce the corporate veil:
Situations where courts are more inclined to disregard the corporate entity – specific cases
1) Gap filling and implied contractual terms:
Court will disregard the corporate entity to prevent an outcome from occurring that the parties would have made a term to prevent
had they turned their mind to the possibility of the event occurring.
Court might imply a provision restricting a person’s ability to use the corporation to avoid obligations under the agreement.
o
Ex. Person starts up a new company to avoid a non-competition clause. Court will fill a gap in k and imply provision in the
employment contract that the person restricted by non-competition clause cannot circumvent clause by starting up new
company. (GMC)
Court will not allow someone to use a separate company’s separate legal status to do things they had contracted not to do/avoid
obligations of k, so will disregard corporate entity to make person liable for breach of k.
o
Ex. SH start up company B and make loan to company A to avoid clause in k with company At hat SH cannot give loans to
company until other loans repaid. Court will disregard corporate entity and find that the loan really was a loan by that
company A’s own SH (Saskatchewan)
Transaction Costs:
o
Gap filling greatly lowers transaction costs that would arise if companies had to try and predict all the creative ways a
corporation could be used to get out of an obligation.
o
Had the court not pierced the corporate veil, lawyers would have to write much more extensive clauses to cover all
possible means by which a separate corporation might be used to avoid the contract (Saskatchewan)
Usually will arise when person avoiding obligations under k is engaging in “conduct akin to fraud” (GMC).

Gilford Motor Company v Horne: Manager of GMC (H) resigned. Non-competition clause in employment k said H
couldn’t engage in a competing business for 5 years after resignation. H tried to avoid clause by setting up a
company with shares equally divided between his wife and an employee, and then carrying on the same
business as GMC through new company.

Held: Company a sham designed by H to avoid his obligations under k (“conduct akin to fraud”). Court treated H
ad company as same person  H HAD violated the non-competition clause by engaging in a competing business.

Had the parties to the first employment clause turned their minds to the possibility of forming a new
company to get out of non-competition clause, they would have made a clause preventing them.
Court filled in gap for this clause by disregarding corporate entity.

Court disregarded corporate entity bc company being used to engage in “conduct akin to fraud” –
Breach of k not fraud, but conduct doesn’t have to amount to CL fraud - can be something less than
fraud but “akin” to it.

Saskatchewan Economic Development Corp.n v Patterson-Boyd Mfg Corp: PBM receives loan from SECDO
pursuant to a contract to PMG shareholders were parties. K prohibited PBM from taking out a loan from its own
SH’s until loan to SEDCO had been paid off.

PMG short funds, bank reduced their line of credit. SH incorporated a new company and deposit
funds in it, and the new company made a loan to PBM. PBM issues a debenture to the new company
that gives them a first encumbrance on the PMB’s inventory.

Held: PMB shareholders were using new company to do things they had contracted not to do under
the terms of their agreement: the loan by the new company was really a loan by PBM’s own SH’s =
breach of k.
49
2) Corporations formed to avoid statutory requirements: Statutory Gap Filling
Someone may try to use a corporation to avoid a statutory requirement
Court will not allow someone to use the corporation to do what the legislation prohibits, so will disregard the corporate entity saying
that had the legislature put their mind to that tactic, they would have legislated against it by putting a provision in the statute that
prevented the use of a corporation to avoid the statutory obligation or restriction.
o
Ex. Court refused to let a corporation’s subsidiary company apply for a license that the corporation itself was not eligible
for. (British Merchandise Transport)

British Merchandise Transport Co. Ltd. v. British Transport Commission: Legislation permitted one licence per
person. Petitioner had one licence, formed a subsidiary corporation, who then applied for a licence.

Held: Licence refused – subsidiary company used as device to do what the legislation prohibited. Subsidiary
company NOT a separate company from the parent company, so could not have 2 licenses.
Avoids transactions costs: If legislature required to anticipate all situations where a corporation could be used to avoid statutory
requirements, this would make legislative drafting very costly.
Tax Avoidance Cases
o
Court willing to disregard the corporate entity where the only purpose of forming a corporation was to avoid taxes.
o
Income Tax Act is an example of how detailed one has to be to anticipate all contingencies: very detailed with many
provisions to deal with affiliated corporations being used to avoid ITA.

In tax situation, court is more willing to disregard the corporate entity to fill gaps in a statute.
3) Affiliated Companies
Court generally much more willing to disregard corporate entity between affiliated corp’s
Apply Smith, Stone, Knight test (above)
Court will consider (1) preserving benefits to society from LL and (2) whether piercing veil exposes individual persons to personal
liability in making decision to pierce corporate veil.
Willing to pierce corporate veil to get to assets of parent company, but not assets of individual SH (Terminal Cabs)
o
No loss of benefits of limited liability when veil is pierced and a parent company is held liable for subsidiary. (Terminal
Cabs)

Piercing veil will expose assets of parent company to liability, but SH not personally liable, so still no need for SH
to check or monitor the wealth of fellow SH’s.
Unwilling to pierce corp veil if doing so exposes assets of an individual SH (Walovsky).
o
Removes benefits of LL when individual person is carrying on a business. Disregarding the corporate entity will result in the
individual being held personally liable to compensate subsidiary.
When a corporation is a dummy for its individual SH who are carrying on business in personal capacities for personal, rather than
corporate ends, court will disregard corporate entity an SH will be held personally liable (Terminal Cabs).

Mangen v Terminal Cabs Ltd

Terminal Cabs is parent company of 4 subsidiary cab companies. Terminal owned 60% of subsidiaries’
shares (40% owned by shareholders). Plf injured in accident due to subsidiary cab driver’s negligence
Held: Court DID pierce corporate veil and hold Terminal Cabs liable to compensate plf.

Walkovsky v Carlson:

C has a taxicab business with 10 separate cab companies where each company has just 2 cabs with
minimum insurance coverage. Pedestrian struck by taxicab company owner, assets of the cab
company + insurance not enough to compensate injuries. Held: Court refused to disregard the
corporate entity and make C personally liable.
4) To avoid misrepresentations that corp’s equity investors have unlimited personal liability:
If persons dealing with the corporation are deceived into thinking their contract was with some person other than the corporation (ex
equity investor with unlimited personal liability vs. LL), court will disregard corporate veil to hold SH personally liable.
o
Ex. person carrying on business as SP switches to corporate form without notifying 3Ps with past dealings - On
bankruptcy, 3P surprised they are not being paid bc they didn’t know they were supplying goods to LL corporation
(Salomon).
o
Had 3P known of LL, would have refused to do business or charged a premium to address risk.
Reduces screening costs to make equity investors personally liable for misrepresenting the extent of their liabilities. 3Ps can avoid
incurring costs to determine if investors have LL before dealing with them
Failure to use cautionary suffix: (Misrep for name requirement): Courts have pierced corporate veil and made SH personally liable
for failing to comply with name requirements –misrepresentation to 3Ps about extent of liability (no suffix makes it appear they are
not LL)
o
S. 10(5) CBCA: Corporation must put the corporate name, and cautionary suffix (Ltd) on every order form, contract, invoice
of corporation. Failure to comply is offence under CBCA S. 251.
o
If SH does not put corporate suffix on receipt, and holds himself out as SP by personally interacting with 3Ps  this is
misrep that business is not a corporation and court will disregard separate entity to hold SH personally liable (Chiang v
Heppner).
o
If 3P had not been made aware of the incorporation of the business, court may disregard corporate entity and hold
business person personally liable (Gelhorn Motors)

NOTE: Also dealt with by Partnership Act: must give notice to 3Ps
50
-
-
Even if 3P assumed he WAS dealing with LL corporation, (and thus no reliance) but business not actually incorporated, person
involved in business will be held personally liable b/c he could have avoided the error at least cost to ensure he was property
registered (Tato Enterprises)
o
3P’s failure to make any inquiries into whether business is actually incorporated (so no reliance on business being
incorporated) will not prevent court from piercing corporate veil and holding SH liable if the business name is misleading
and inquiries would be difficult (Roydent Dental).
o
Person who owns the business (SH) has personal knowledge of company, has best access to info to ensure that they have
the correct corporate name and that the business has followed all corporate formalities, not up to 3Ps  SO SH personally
liable. (Tato; Roydent Dental)

NOTE: If business not incorporated, could also argue that president is liable under S. 14(1) CBCA: Person who
purports to enter into written k on behalf of pre-incorporated k will be bound by k.
Misrepresentation cases:
o
Gelhorn Motors Ltd v Yee:

Past 3P dealings, SP incorporated. 3P sues Yee for unpaid amounts. Yee says 3P can only sue company bc k was
with company, not Yee. 3P asks court to disregard separate corporate entity between corporation and SH.

Held: 3P had not been made aware of incorporation, and Yee is personally liable. Because suppliers had not
been made aware of the fact that the business had been incorporated, court disregarded the corporate entity.
o
Chiang V Heppner:

Person gets watch fixed at store. Watch repair store is corporation, but name on receipt did not say “Ltd” and
owner held herself out to be a SP by dealing with 3P on a personal basis. Held: Plf could not have been aware of
LL, and storeowner is personally liable to cover watch damage. Reasonable for plf to expect that the shop would
have insurance to over damages to watches in the store.
o
Tato Enterprises Ltd v Rode

President of business signed k as a company (signed “Scott Bradley Ltd), but company didn’t actually exist (no
registered corporation). Payment not made, supplier sued. Held: Manager personally liable to pay money owed
on k to the plf.

Even though plf assumed it was dealing with a LL corporation president personally liable bc could have mistake
with k at least cost.

NOTE: could make president likable under S. 14(1) CBCA – president purported to act on behalf of
company by signing k on behalf of company.
o
Roydent Dental Products Inc v Inter-dent Supply Co of Canada

SH owned 100% of shares. Company did not have cautionary suffix in correct form (“Dental Supply Co. of
Canada”). K for sale of goods unpaid. Plf had not made inquiries into whether def was incorporated or not (it was
not). BUT Court found business’s sole shareholder personally liable bc SH had failed to register the business
name.

3P failed to make inquiries, so no reliance that business was incorporated. BUT business name was misleading
(looked liked corporate entity with “company”), and inquiries would have been difficult since the business name
was not registered.
5) Court uses misrep to effect compensation on tort claims when company unable to fully compensate.
Although tort claimants not misled (never dealt with company), court will use rhetoric to suggest that some kind of
misrepresentation did occur to make SH personally liable when the company does not have enough assets to compensate the 3P.
Court wants to ensure compensation of tort victim if company doesn’t have enough assets to fully compensate (distributive justice).
Disregarding separate entity and making SH, directors, employees, or officers personally liable will achieve compensation of tort
victim.
o
Ex. Failure to follow statutory requirements of using full company name in all corporate documents is a misrep, and
business owner personally liable against injured 3P.

Wolfe v. Moir: Court allowed injured roller-skater to personally sue company’s owner because
ticket/building sign evinced a SP name rather than the company name in order to get adequate
compensation. Business failed to follow corporate requirements of using proper business name in ads,
and court held this failure to comply with statutory requirements was a misrep by owners, thus he is
liable.
Prudent for business owner to ensure that all corporate formalities have been followed (proper use of cautionary suffix, proper
name displayed, fully fulfilled registration requirements) to ensure that the court will not use a failure to do so as a method to
disregard the corporate entity.
o
NOTE: In CBCA, mere fact of not displaying your corporate name will not necessarily mean the court will pierce the
corporate veil – but Court has imposed this in certain circumstances in order to compensate the victim.
Incentive costs and efficiency: Exposing SH to liability gives SH incentive to use care and take steps to avoid the loss (get insurance,
ensure management is not taking risks)
51
Other Ways of Disregarding the Corporate Entity
Ways to make SH, directors, or any other “separate persons” apart from the company itself liable for “corporate wrongdoings”
If there is an alternative way to disregarding corporate entity, best to use it.
a) Tort action against directors, officers, or employees
Instead of (or in addition to) suing corporation in tort, 3P may sue the individuals who committed the tort directly – sue the SH,
director, officer, and no need to disregard corporate entity.
Usually, Corp liable for torts committed by individuals acting in the scope of their authority as agents for the corporation.
 General Rule: Agents (director/officer/ee) can be personally liable for their tortuous acts, even if at law their act is also the act of
the corporation (as principal).
o
Court will find that the person who committed the tort is personally liable on his own for failing to fulfill his duty of care
(Berger v Willowdale)

Berger v Willowdale:

Employee failed to clear ice in front of store, president failed to ensure job was done. Employee plf
slipped, injured. Plf precluded by legislation from bringing action in tort against other employee’s.

Held: President not an “employee”, thus not included in legislation that says employees cannot be
held personally liable in a tort action against the company = officers can be personally liable for torts.
No disregarding corporate entity, but president liable on his own for failing to fulfill duty of care (to
ensure ice was clear)
Said v Butt Exception: Directors or officers of corp cannot be personally liable for torts committed when they were acting bona fide
within scope of their authority as agents for the c0rp (i.e acting in good faith in carrying out his duties for the company)
o
Only liable for “independent torts” that are independent of their duties in carrying on the business - agent is acting
outside scope of authority.
o
*COURT WILL ASK: was tort an independent tort (and so SH can be held liable)? Or was SH acting bona fide within scope of
authority? (thus protected from liability)?

Said v Butt:

S banned from theatre. S got 3P to buy ticket for him (S was undisclosed principal), but theatre
manager wouldn’t let him in after disclosing agency relationship. S brought tort action against
manager – said he had a contract with the theatre, and they were breaching the k by not letting him
in.

NOTE: Undisclosed Principal: Theatre would not have entered k had they known S’s identity, so S is not
undisclosed P and no breach of k bc k never existed between S and theatre.
Officers/directors of corp will be relieved from liability for their tortuous acts when they are acting under the compulsion of a duty of
the corporation (McFadden)

Broad interpretation of Said v Butt.
o
BUT if acting outside the scope of his authority (i.e. not as part of his duty to corporation), the agent will be personally
liable and the corporation will not be liable.

McFadden v 481782 Ontario Ltd:

Ee sued company owners for dismissing him after company went bankrupt. Dismissed ee to avoid
paying out losses to ee (which would be huge expense to company)

Held: Here, owners personally liable for the tort of inducing breach of contract. Owners were not
acting scope of their authority, and thus are not justified for a breach of contract and are personally
liable.
TODAY: Said v Butt is an exception that ONLY applies to cases involving the tort of inducing breach of contract – NOT personally
liable for inducing breach of k if acting in good faith. (ADGA)
o
Directors/officers will NOT personally liable for inducing a breach of k. Cannot be held liable for breaching k when their
failure to breach the k would have resulted in a breach of their fiduciary duty to the company to avoid paying out huge
losses on insolvency.
o
ADGA rejects broader proposition that as long as director/officer is acting bona fide within scope of authority he is not
liable.

ADGA Systems International Ltd v Valcom Ltd

Company, its director and its senior employees sued for the tort of inducing breach of contract. Held:
Court refused to find manager liable for tort of inducing breach of k.

Rationale: In tort of inducing breach of k, plf would have claim for damages against corp for breach of k, and also
claim for damages against directors, officers, or Ee’s who induced the breach of k. Problem for how to
compensate, for having to decide who is responsible for decision to breach k would arise in every case.
 NOW: If agent (director, manager, employee) has committed a tort which acting bona fide within scope of his authority, will still
be liable for tortuous act UNLESS tort is the tort of inducing breach of k.
b) Use of Corporate Oppression Action
Possible to make director or officer directly liable for tort on basis of oppressive application
CBCA S. 241 – apply to court for order for relief on basis the corporation has acted in a way that is oppressive or unfairly prejudicial
to, or that unfairly disregarded the interests of the complainant.

PCM Construction Control: Successfully sued corporation, but corporation has no funds. How to get to money? It was
the director who was responsible for loss.
52

Held: dismissal oppressive, disregarded interests of ee. Ee can be complainant. Can sue director for oppressive action.
Statutory Provisions that Disregard the Separate Corporate Personality
CBCA s. 118: Although corp is separate person from directors, directors and SH of CBCA corp can be held personally liable under S.
118 for certain corporate acts.
o
S. 118(1): Directors can be liable for issuing shares without receiving full payment of the shares.
o
S. 118(2) Directors can be liable for purchasing, redeeming, acquiring shares, paying dividends, providing financial
assistance to SH, etc, if certain tests of insolvency are not satisfied.

Liable for buying shares/paying dividends if corp is insolvent
o
S. 118(4): SH can be liable to indemnify a director who has been held liable under S. 118(2) when the SH ha received funds
paid out pursuant to resolution of directors contrary to S. 118(2).
o
Defence to liability: S. 123: Director exercised diligence and care.
Unpaid Wages:
o
CBCA S. 119: Directors liable for up to 6 months of employee’s unpaid wages.
o
B.C. Employment Standards Act s. 96: Directors liable for up to 2 months of employee unpaid wages.
o
S. 119 and S. 96 override director’s argument that he is not liable because employee’s contract is with the corporation, and
so employee could only sue corp. Director jointly liable to employee for unpaid wages (personally liable).
General Theory for the Disregard of the Corporate Entity: Benefits of Limited Liability
Courts will weigh the benefits of LL to the corporation against the costs determine whether to pierce the corporate veil.
When the cost of unsatisfied compensation/transaction/gathering costs is greater than the benefits of LL, court more likely to pierce
corporate veil.
Benefits if LL: SH will never be personally liable, so no need to incur valuation costs of other SH, or to monitor wealth of other SH to
ensure they have funds to indemnify them. LL lowers monitoring and valuation costs of transactions to corporation, which reduces
overall prices of goods and services to society as a whole.
Benefits of piercing corporate veil:
1. Avoid Costs of Transacting Around Avoidance of Obligations (voluntary claimants)
o
Piercing corporate veil by gap filling in contracts avoids transaction costs of entering k if parties had to negotiate terms to
address every means of using the corp to avoid k obligations and statutory duties.
o
By disregarding corporate entity, no need to put in all these extra provisions, and corp/gov’t will avoid costs.
2. Avoid costs of Gathering Information (voluntary claimants)
o
Misrepresentation cases: Promoters made liable because they can avoid confusion and misresps about whether company
is incorporated at least cost.
o
SP or p’ship: SP must ensure they have notified outsiders that they are now LL, and if not, court will hold them personally
liable.
o
Avoids 3P having to check every time he deals with a company for whether SP has become incorporated or whether
company is properly registered.
3. Compensation of involuntary claimants:
o
Tort claims may lead to insufficient compensation where the corporation does not have sufficient assets to fully
compensation the plaintiff.
o
1. More Likely to Disregard in One-Person or Few Shareholder Companies

Few benefits to LL when there are few SH, so more likely to disregard the corporate entity when only 1 or few SH
(cost imposed by LL outweighs benefits)

Valuation costs and monitoring costs increase with number of SH, so few benefits if few SH
o
2. More Likely to Disregard Where it Leads to Claim Against Limited Liability Parent Co. Rather than Individual
Shareholders

More likely to pierce between affiliated corp, b/c this does not make any individual SH personally liable.

Since no personal liability, SH not have to monitor wealth of other SH to ensure that they have sufficient funds to
indemnify them if they are held personally liable.

Benefits of LL thus not lost by disregarding corporate entity between affiliated corp.

Individual SH still not liable, so no individual SH lose the benefit of diversification.
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EXAM: PIERCING THE CORPORATE VEIL QUESTION
Salomon cited for proposition that a corp is a separate legal entity. It is a separate person from its SH, so shareholders have limited
liability.
Exception: courts have occasionally disregarded the concept of the corporation as a separate legal entity to assign liability to
individual shareholders, directors or officers of a corporation. NOTE: Frequently argued, rarely succeed
WHY: If company does not have sufficient assets to compensate 3P, 3P will look for compensation from director/officer/SH
WHY: SH way WANT to disregard corporate vail to get around paying taxes/obligations under a k/avoid a statute
- Situations where corp pierced follow no consistent principle: “veil pierced where it would be too flagrantly opposed to justice to apply
the principles of Salomon. (Kosmopoulos, 1987)
- 1) Establish cause of action: Breach of k against the company if k with company. BUT company doesn’t have sufficient funds if insolvent.
o
SH will argue they did not breach k because the k was with company, not with them. Separate legal entity (Salomon)
2) Uphill battle to disregard corporate entity: FIRST try to find separate tort against director/SH:
o
Better to go directly after director first by finding an “independent claim” against them to find them personally liabe.
o
Find some recognized cause of action in a tort claim (negligence, etc) OR look for a breach of trust claim, or liable for
breaching S. 118 or ESA.
Tort claimants: Tort against Director/officer/SH  Direct claim against SH best if possible
o
Agent will be liable for own torts even if acting in BF scope of authority, UNELESS tort of inducing breach of k (the not
personally liable)
o
If agent has committed tort, even if BF within scope of authority, will be liable.

Must find an “independent tort” that is independent of SH’s contractual duty (b/c not suing as agent of corp, but
as separate act – Said v Butt).

Ex. tort of negligence, breach of fiduciary duty, failure to fulfill DOC (Berger)
o
Only it is the tort of inducing breach of k – Said v Butt exception applies, and director cannot be held liable (ADGA)
3) Can apply to court for oppressive remedy (S. 241) – was director oppressive or unfairly prejudicial to plf?
o
Dismissal was oppressive because it disregarded interests of employee. Employee can be complainant. Can sue director for
oppressive action.
- 4) Try to disregard separate corporate entity to bring action against SH, director, affiliated company
- 5) STATUTE: CBCA S. 118 if director sold shares without receiving payment or if insolvement. SH liable to indemnify
o
CBCA S.119 or ESA to repay lost wages
- 6) Legal Rhetoric used by court:
o
1) Courts hve held that corporation is an “alter ego, puppet, sham or cloak” of SH – corp is agent of SH, so SH is liable as
principle.
o
2) If SH/Director failed to observe corporportae formailites, court will disregard corp entity
o
3) Conduct akin to fraud: Did corp engage in activity “akin to fraud” ex. enter a non-comp clause to avoid obligations under
k (Gilford Motors) – then court will disregard separate entity.
- 7) Is it an affiliated enterprise: Smith, Stone and Knight: Court will apply 6 tests for whether company is affiliated enterprise:
o
Court more willing to disregard corp entity to link parent company to subsidiary
o
6 tests met – BUT not enough to fulfill Smotn, Stone and Knight tests, must be some other conduct that suggests the alter
ego principle may apply (Gregoria)
o
Alter ego arguments usually restricted to sit’ns where there is conduct aking to fraud. Gregorio) Purpose of ignoring
separate entity to pay taxes is NOT sufficient reason to disregard corporate entity (Alberta Gas).

3P must look for conduct akin to fraud – attempt to get out of k, avoid obligation, avoid k.

Subsidiary (even wholly owned) will generally not be found to be the alter ego of its parent unless the
subsidiary is under the complete control of the parent and is nothing more than a conduit used by the parent to
avoid liability.

The alter ego principle is applied to prevent conduct akin to fraud that would otherwise unjustly deprive
claimants of their rights.
o
IS OWNER CORP OR INDIVIDUAL: Court more willing to disregard corporate entity between affiliated corp’s to get to assets
of another corporation than to get to the assets of an individual SH

No loss of benefits of limited liability when veil is pierced and a parent company is held liable for subsidiary.
(Terminal Cabs)

Piercing veil will expose assets of parent company to liability, but SH not personally liable, so still no
need for SH to check or monitor the wealth of fellow SH’s = no effect on cost to society.
o
Unwilling to pierce corp veil if doing so exposes assets of an individual SH (Walovsky).

Removes benefits of LL when individual person is carrying on a business. Disregarding the corporate
entity will result in the individual being held personally liable to compensate subsidiary.
- 8) Policy reason to disregard corporate entity:
o
1) Gap filling: Court will disregard to prevent outcome from occurring that parties would have made a term to prevent had
they turned their minds to it = Court willing to pierce corp veil b/c reduces cost of k = reduces cost to SOCIETY

Court will not allow someone to use a separate company’s separate legal status to do things they had contracted
not to do/avoid obligations of k
 Is person trying to avoid non-competition clause in k by setting up sham company?
 Is person engaging in conduct aking to fraud?
o
2) Corporation formed to avoid statutory requirements?
54

Ex. law that limits 1 licence per person circumvented by setting up 2nd company.

Ex. attempt to avoid Income Tax Act
o
3) To avoid misrepresentation that corp’s equity investors have LL (policy to reduce costs)

Is it a SP who switched to corporate form without notifying 3Ps

Failure to use cautionary suffix?
 S. 10(5) CBCA, cautionary suffix on receipt, doesn’t matter if no reliance
 Also consider PA for this argument

Business not actually incorporated (not registered) at time of k, so no LL
 Even if 3P failed to make inquiries, court may disregard corp entity (least cost avoidance)
 NOTE: Pre-incorp k apply
- 9) Tort claimants: Court will disregard corp entity to effect compensation on injured 3P
o
1) Court will use misrep to effect compensation – Although tort claimants not misled (never dealt with company), court
will use rhetoric to suggest that some kind of misrepresentation did occur to make SH personally liable when the
company does not have enough assets to compensate the 3P.

Ex. failure to follow statutory req’t of posting full company name on buildling (Wolfe)
10) Do benefits of LL outweigh costs of LL? If so, court more likely to pierce corporate veil.
o
Benefits of LL: valuation costa and monitoring costs reduced
o
Benefits of piercing corp veil:

Avoid transaction costs of making obligation avoidance clauses

Avoids costs of gathering info (misrep cases)

Compensation of tort claimants – Few SH, subsidiary co rather than indidividual SH
11) Conclusion. Very rare for court to disregard separate entity, but likely the have a good case here.
SHARES
Equity finance:
Corps use equity finance and debt finance to raise funds to acquire assets used in carrying on business
Debt finance for corp comes in the form of trade credit or bank loans
Equity interests in corp’s referred to as shares.
o
Equity investors in corp hold shares
Nature of Shares:
Bundle of Rights:
Shares are not a right in assets of corp, not a proportionate ownership interest in the corp. Corp owns assets, SH own a bundle
of rights.
Shares are “bundles of rights” (McCaura) or, a “bundle of interrelated rights and liabilities” (Sparling v Caisse de Depot et
Placement)– these are drawn from the rights and obligations provided for in the statute and the articles
Virtually Infinite Variety of Bundles of Rights: Bundles of rights are subject to few restrictions and can be virtually infinite
Creation of a new class of shares: To create a new class of shares, the articles must be amended – this requires a resolution to be passed
by the shareholders.
S. 24: If there is more than 1 class of shares, the articles must set out the rights of each class.
Prospectus required to be issued when a new class of shares is to be distributed. Shares a securities, and thus require a prospectus for
distribution.
Classes of Shares: Different groups of rights bundles
CBCA allows different classes of shares w/ different rights and restrictions (CBCA, s. 6(1)(c)(i), 24(4))
Where more than one class of shares, rights and restrictions must be set out in articles:
Three Main Rights that Must Appear Somewhere: (S. 24(3))
1. Voting: Right to vote on company matters requiring shareholder voting (eg election of directors, voting on fundamental
changes such as an amalgamation)
2. Dividend: Right to receive shares in the distribution of dividends when declared by the directors, subject to the rights of
classes of shares with a preference with respect to dividends Pro-rata right to dividends.
3. Proceeds on dissolution: On dissolution of corp, right to share in the net assets after payment of liabilities (after creditors and
other persons with claims against the corporation are paid off) Pro-rata right to shares.
Three rights must exist somewhere in company share structure (S. 24(4))
If Only One Class of Shares: each share presumed to carry these 3 rights, even if company’s incorporating documents do not set
this out (S. 24(3))
S. 24(3): If one class, presumed to be equal in all respects and to contain each right specified in S. 24(3)
Need not set out rights in articles – presumed to contain voting, dividend and liquidation rights.
If more than One Class of Shares: Each right must appear somewhere in rights attached to various shares
Rights must be set out in articles: Articles must set out classes of shares, and the rights, privileges and restrictions
attached to each class (CBCA S. 6(1)(c)).
Presumption of Equality of Shares: Shares equal in all respects unless otherwise indicated
CBCA s. 24(3): Where only one class of shares, the rights of the shareholders are equal in all respects and include rights to
voting, dividends, and proceeds on dissolution
Shares in same class presumed equal in all respects unless otherwise indicated (Jacobsen)
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Differences between classes (or series) of shares allowed: Primary means to make distinctions between shares is to create
different classes – and shares can have different rights if they are in different classes.
CBCA, s. 24(4): Articles may provide for more than one class of shares and rights, privileges, restrictions, and
conditions attaching to shares of each class must be set out in articles
Three basic rights must appear somewhere in various classes of shares, but need not all appear in any one
class.
Presumption: Shares w/in same class have equal rights (subject to series rights)
Sufficient Distinction between Classes: Share must have at least one right that differs from other classes (McClurg)
Different classes of shares can share certain rights (can overlap), but must be some distinction in at least one right to
make a separate class (McClurg)
Distinction to create separate class can be very slight
McClurg: Directors having a right to allocate dividends to Class A or B (which would arguably give them
different rights if directors allocate dividends to Class A only) was held to be enough to create a separate
right.
Share Certificates: Each SH entitled to share certificate
Piece of paper evidencing rights to share. CBCA provides what must be put on the share certificate.
CBCA, s. 49(1): Each shareholder is entitled to share certificate or written acknowledgement of right to certificate on request.
CBCA, s. 49(13): Certificate must either show on its face the rights, restrictions, and conditions on share or a statement of right
of shareholder to have copy of rights, privileges, restrictions, and conditions of share provided to them upon request
Shareholder Register: Corp will keep SH register in which it records names/addersses of SH, # shares held by each, date of issue
CBCA, s. 50: Corp must maintain register where names and addresses of shareholders, number of shares held by each
shareholder, and date of particulars of issue and transfer of each share is recorded
CBCA, s. 20: Register must be kept at registered office of corp or at separate records office of corp
Shares must be issued in registered form
S. 49(7): Registered form is required for share certificate: Name of person who owns shares must appear on face of
share certificate. This person is registered owner of shares regardless of who bears the certificate.
PROCESS to transfer: When shareholder sells in registered form, purchaser can submit share certificate and required form of
transfer in which vendor authorizes secretary of company to record transfer in corp’s shareholder registry
Transfer agent records transfer, showing purchaser as registered shareholder and destroys existing share
certificate, replacing it w/ new certificate w/ name of purchaser on its face
Tends to be process in closely-held corp’s that have not sold broadly to public
Problems: Process of cancelling and issuing new certificates every time there a share is transferred or traded can be
very expensive if traded frequently.
Current State of Transfer of Shares:
CBCA deal with problems with the transfer of shares by by making securities negotiable instruments (S. 48(3)).
Large volume of paper work was reduced substantially by brokers who kept inventories of securities of many different
companies, and could make a bookkeeping entry showing that the new client was a beneficial owner of securities that
were held in the broker’s inventory instead of obtaining a certificate and having to send it in for cancellation.
Security depository institutions simplify security transfers: depository keeps an inventory of certificates for
securities of frequently traded shares, and performs the clearing functions for netting out transactions
between brokers
Today: The registered owner of most securities of publicly held corporations is a depository institution. This
has greatly simplified the transfer of securities (by avoiding physical transfer of certificates), but has
complicated the task of communicating with security holders. Security registrar doesn’t show the names of
the beneficial owners on the securities, and tracing this person requires tracing through the depository
institution to find the holder’s brokers.
FREQUENTLY USED TYPES OF SHARES – COMMON TYPES OF EQUITY SECURITIES
Overview: CBCA only makes reference to shares; does not designate different types of shares
Typical for CBCA corp’s to have both common shares and preferred shares
Common Shares – Three Rights attached to each share:
1. Voting: Right to vote on company matters requiring shareholder voting – usually one vote per share.
2. Dividend: Right to receive dividends, when declared, on pro rata basis (subject to any preferred dividend rights)
3. Liquidation: Right to pro rata share of proceeds on dissolution of corp, net of payments to C’s or other claims against corp and
net of claims of classes of shares w/ preferred claims to proceeds on dissolution
Preferred Shares:
Shares have a preference of some kind over some right – usually a preference with respect to dividends or to proceeds of a
distribution on liquidation (or more commonly, to both).
Preferred right to dividends: When directors of corp declare dividend, preferred shares get paid specified amount on
each share before any dividends can be paid on common shares (or any share w/ subordinate right to dividends)
Preferred rights to proceeds on dissolution: Preferred share gets specified amount on liquidation before any
proceeds can be distributed to common shareholders (or any share w/ subordinate right to proceeds on dissolution)
Preferred shares do not normally carry a voting right other than the voting rights specifically provided by the corporate statute,
but sometimes given voting rights in particular situations – ex where dividends haven’t been declared for several years.
Presumption with respect to Dividends Beyond Preferred Amount:
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Shares are presumed to have equal rights unless incorporating documents clearly specify otherwise
If preferred right to dividends: presumption that the preferred share dividend right is limited to the preferred
amount: no right to share in any dividends beyond fixed amount of preferred dividend unless expressly provided for
(International Power Co.)
Not entitled to share in any further dividend amount declared past amount fixed in articles.
For preferred shares to share in amts beyond fixed dividend, class share specifications must make this clear
Presumption with respect to Proceeds on Dissolution Beyond Preferred Amount:
Preferred shares presumed to have a right to share in the proceeds on dissolution beyond the preferred amount
[International Power v. McMaster University (1946 SCC)]
Therefore if one does not want the preferred shares to share beyond the preferred amount then that must be
specifically set out in articles
Typical Preferred Share Features:
Cumulative v. Non-cumulative: Presumption of cumulative if not specified in articles (Webb v Earl)
Cumulative: Any dividend unpaid in any given year accumulates and is to be paid in subsequent year
If in 1 year company doesn’t declare dividend, and preferred SH has cumulative right to $5/share
dividend before common shares, then in year 2 SH will be entitled to $10/share dividend.
Non-Cumulative: Any dividend not paid in any given year does not carry forward (not very common)
Participating v. Non-Participating: Presumption of non-participatory shares if not indicated
Participating right: Preferred SH can participate in the distribution of dividends beyond the preferred share
dividend right.
Non-participating right: Shareholders cannot participate in distribution of dividends beyond preferred
dividend right. If after distribution there is remainder, remaining amounts are shared only between
common shares bc preferred shares limited to fixed amount.
Convertible: Allows shares to be converted into common shares at predetermined conversion ratio.
Preferred shareholder can surrender predetermined number of preferred shares for predetermined
number of common shares
Retractable/Non-Retractable: Gives shareholders right to sell shares back to corp at predetermined price
Usually, SH doesn’t have right to sell its shares back to the company after having bought them. Retraction
right is when company has promised to buy back shares as one of SH rights.
Must be set in articles.
Redeemable: Company has option to buy back shares from shareholder at predetermined price (even if SH doesn’t
want to sell it back)
Allows company to refinance at future time at predetermined price to repurchase of preferred shares
Predetermined price usually set at premium to price for which shares issued
Other Frequently Used Types of Shares
1. Non-Voting Common Shares: (Uncommon common shares)
Same pro rata right to dividends and proceeds as common shares but no voting right
Allows a controlling group to raise capital by selling shares and not lose control of their company.
Popular with investors who only want to own a small % of shares so would not benefit from their small voting right
o
Investors can sell voting shares at a premium and replace them with non-voting shares, and thus make a profit.
Investor protection concerns: 2 ways to create class of non-voting common shares:
o
1. Dual class recapitalization (not permitted):

New voting shares issued to certain preferred persons (insiders), and existing common shares were altered by
amendments in the articles to remove their voting rights.

This requires special resolution of SH to change common share rights, but often persons receiving new voting
rights held enough shares to secure resolution
o
Problems with recapitalization:

Argued that non-voting common shares inefficient bc those who controlled the management (those who could
vote) did not have the residual corresponding claims to dividends and share in proceeds, so would not have
sufficient incentive to act in interests of SH.

Counter argument: Non-voting shares gave managers incentive to develop specific skills such as firm
specific human capital. Also important for managers who value control (ex family business)

Distributional effects: Investors might have bought shares expecting that management would then lose some
control, only to later have this loss of control removed through dual class recapitalization .

This concern led to rule prohibiting non-voting common shares.
o
2. Dual Class Share Issuance (yes permitted):

New class of shares without voting rights is created and sold to the public.

Existing common shareholders retain their voting rights.

Permitted, because no threat for distributional effects. Investors can choose to sell their voting shares, and
voting rights not unilaterally amended by SH.
2. Special voting shares and subordinate voting shares:
More than one vote per share; normally same dividend right and right on dissolution as common shares.
Shareholder has significantly more voting rights – ex special voting share carries 10 votes per share while subordinate voting shares
have 1 vote per share.
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Means to maintain control within a given group of shareholders.
o
Company will sell shares to public that include subordinate voting rights, but voting rights are essentially meaningless for
subordinate voting shares because there is a class that has special voting shares.
Special voting shares used if family wants to keep control of company and still sell shares.
Dividends
Board will declare they will issue a dividend, this will be distributed to Shareholders according to their share rights. Dividends are
considered debt of company when declared, so SH can sue for that amount.
S. 43 CBCA: Dividend may be paid in money (cash dividend), or property (specie dividend), or fully paid shares of the corporation
(stock dividend)
o
S. 43 expressly allows all 3 forms of dividends.
1. Cash: Most common form of dividend. Dividends distributed by way of making a cash payment to shareholders.
2. Dividends in specie: Payment of a dividend with something other than cash
o
Rare to use inventory or some other asset of the corporation as dividends
o
Common dividend in specie is paid with shares of another corporation that the corporation paying the dividend owns.
3. Stock Dividends: Dividend of more shares in the same company that is paying the dividend.
o
Directors say they can’t afford to pay dividends. Company distributes stock dividends to SH – for every 100 shares that the
SH owns, they will be issued 10 new shares for free.
o
SH have more shares carrying residual rights to proceeds from the same assets.
Power to distribute dividends is power of directors
o
No power to given allocated to SH or directors, so falls under residual management power of directors in S. 102; and
reinforced by S. 115(3)(d)
o
S. 102: general power of directors to manage
o
S. 115(3)(d): declaration of dividends is a power the directors cannot delegate
o
Director’s power subject to unanimous SH agreement providing otherwise.
Not obliged to declare dividends: Declaring decisions in a management decision of directors to declare dividends when they think it
is appropriate to do so.
o
But the decision to declare or not to declare dividends must be exercised in a way that is consistent with the fiduciary
duties of the directors - i.e. (1) in the best interest of the corp (Dodge v Ford Motor Co) and (2) not in a way that is
oppressive to one or more SH (Fergusson v Imax)

If retention of earning is for the purpose of making greater profit for the company, then this is acting in the best
interest of the company and a failure to pay dividends is acceptable (Dodge v Ford)

Dodge: Ford retained substantial earnings but refused to declare dividends b/c company wanted to
use funds for plant society to benefit society – not to earn profits for corp. This is contrary to Ford’s
best interest.

SH cannot use his position as of influence to ensure that dividends are not paid to other SH who relies on
dividends as their only form of payment (bc did not get salary from company as well). This is oppression.
(Fergusson v Imax)
Dividends Become Debt of Corp Once Declared: SH can sue to be paid amount of dividend declared. SH becomes creditor once
dividend is declared, and so is not subordinate to other creditors upon bankruptcy.
Can Only be Paid out of Profits: Includes any accumulated but undistributed profits from previous years (retained earnings)
o
Payments in excess of profits are returns of capital, not dividends.
o
If equity (amount invested by SH) minus the contribution of the SH and other liabilities is the retained earnings – this is
what dividends are paid out of (so if no retained earnings/equity, no payment of dividends).
Cannot be paid if payment would leave company insolvent (Directors will be liable for doing so):
o
Dividends must not be declared or paid if corporation is insolvent at the time or if there is reasonable ground that if they
were paid, corporation would become insolvent (S.42) Direcctors will be personally liable to restore to the corporation the
amount of dividends paid (S. 118)

Dividends can only be paid out of profits, so if no profits, cannot pay dividends.
o
 Two tests for whether directors are able to issue a dividend: Insolvency test

1) Company is unable to pay its liabilities as they come due – unable to pay its current obligations

2) Company’s assets are less than its labilities and stated capital of the shares:

Add up all the assets and subtract the liabilities. If the amount is less than $0, then the company is
insolvent – cannot pay a dividend if this amount is less than $0.
o
S. 42: Dividend must not be paid if:

(i) Corporation is, or would be after the payment of the dividend, unable to pay its liabilities as they come due; or

(ii) The realizable value of the corporation’s assets would, after the payment, be less than the aggregate value of
its liabilities and stated capital of all classes.
o
S. 118(2)(c): Directors will be personally liable if they vote for or consent to authorization of paying dividends when there
reasonable grounds to believe that corp is insolvent or would become insolvent on payment of dividend.

Directors can be personally liable to restore to the corporation amounts of dividends paid when the
corporation’s assets are less than its liabilities and stated capital of the shares of all classes.
o
S. 118(5)): SH receiving such a dividend can be ordered to repay the amount to the directors.
Process for distribution of dividends: Record Date and Ex Dividend Date
o
Dividend will be paid” to the SH whose name appear on the shareholder registrar as of the record date (i.e. the “SH on
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record”).

Shares may be traded and a few days may pass between trade and date that the trde is recorded.
o
Directors can set record date to determine which shareholders are entitled to receive dividends on a fixed date that
dividends are distributed [s. 134(1)]
o
If no record date set, then the record date is the close of business on the day on which the directors pass the resolution
declaring the dividend [s. 134(3)]
o
Company will prepare a list of SH of record on that date.
o
Persons whoss names are recorded on the register on the record date will be entitled to receive the dividend.
o
Publicly traded shares go ex dividend on a date a few days ahead of the record date to allow the transaction complete by
delivering share certificates and allowing the SH to become registered.

Shares traded after the ex dividend date will not receive a dividend.
S. 51: Only registered SH have rights  only persons with rights to dividends are those whose makes that appear on shareholders of
record.
SH will only have right to dividend if they are on the record.
Voting
Most important shareholder right in “bundle of rights” - Shareholders w/ voting right can vote to elect directors
Directors elected via ordinary resolution (S. 2(1)): Resolution passed by majority of votes cast by shareholders (50% + 1)
Special resolution: (S. 2(1)) SH must approve change to articles of incorp or major corp transactions (amalgamations, continuances,
dissolutions, etc.) by special resolution: Resolution requires 2/3 of votes cast by SH who voted in respect to the resolution.
Corps often have classes of shares that do not have voting rights (non-voting common shares, preferred shares)
Class Voting Rights: Non-voting class of shares given voting rights in certain circumstances: usually change in the articles, some
other decision that would have an affect on the rights of that class.
Presumption of Equality and Distribution of Voting Rights:
(i) Presumption of One Share, One Vote: (S. 140(1))
S. 140(1): Unless articles otherwise provide, each share of corp entitles holder to one vote at shareholder meetings.
Articles can provide otherwise and rebut presumption (ex describe class as having “no vote”)
(ii) Voting Restrictions and Equal Treatment:
One class of shares holds shares equally in all respects – cannot make distinctions on the basis of the characteristic of
the person that holds the shares (Jacobsen)
i.e. in Jacobsen, particular shareholder held more than 1,000 shares, or in Bushell where proposed
resolution was to remove shareholder from position as director
Jacobson: One class of shares, bylaws say SH can’t vote more than 1000 votes. Held: Bylaw
invalid – shares must be 1 vote per share, can’t distinguish SH for having more than 1000 chases.
Bushell v Faith: 3 SH wth equally number shares, 2 want to get rid of F. Directors can be removed
by ordinary resolution. Vote 2-1, BUT articles of association say that on a vote to remove a
director, that director gets 3 votes per share, so F won vote.
TODAY: This provision would be invalid SH in the same class must all have the same
rights.
Within given class of shares, shares must have equal rights (subject to separate series rights) (Bowater)
Separate classes of shares may have separate rights: Articles may provide that a given class has 10 votes
per shares and another class has 1 vote per share, but all shares in the same class must be equal.
Possible that all shareholders of class must be treated equally (Bowater)
Bowater: Arrangement where company issued special voting shares (10 votes per share), but if
SH from company sells or transfers these shares they become common shares (1 vote per share).
Thus company won’t lose voting power when sells shares. Held: Invalid arrangement because is
some shares sold, shares in same class don’t have equal voting rights.
Rights on Dissolution:
S. 24(4): At least one class of shares mst have rights to receive proceeds on dissolution of the corp
Presumption of equality of shares means all shares are entitled to share pro rata in the net proceeds on dissolution unless any special
entitlements to share in the net proceeds are spelled out in the articles.
Preferred shares often have preference regarding receiving net proceeds on dissolution – usually a right to be paid a fixed amount per
share, and then will participate ratably with the common shares in any amount remaining after the payout of their preferred shares on
dissolution.
PRE-EMPTIVE RIGHTS
Pre-Emptive Right: Gives existing shareholders of a class of shares right to purchase any newly issued shares of that class on pro rata basis
(according to number of shares owed by that SH)
Purpose: Allows shareholders to maintain proportionate interest in shares of given class – ensures that a new issuance of shares will not
dilute the interest of existing SH, espec with voting rights.
S. 28: Pre-emptive right if articles so provide (optional right) BUT if provided, CBCA S. 28 requires the right of the existing SH to share in the
newly issued shares on a pro-rata basis
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ISSUING AND PAYING FOR SHARES
Power of Directors to issue shares:
CBCA, s. 25(1): Subject to articles, bylaws, or any unanimous shareholder agreement, directors decide when to issue shares,
who to issue them to, and for what consideration
CBCA, s. 115(3): Directors cannot delegate this power
Scope of Power: Authorized Limit and No Authorized Limit:
Directors can only issue shares of the classes or series provided for in the articles. Articles may limit the scope of the power of
the directors by setting a maximum nuber of shares of any particulr class that the directors are authorized to issue (authorized
amount)
S. 6(1)(c): Corp can set out an authorized amount but CBCA also allows articles not to set out any authorized limit
Once authorized limit is exhausted, must amend the articles in increase authorized limit (by unanimous approval by
SH) in order to issue more shares.
If directors want to raise more funds and create new shares – SH must approve
Directors may only issue shares in series if they have been given authority to do so in the articles.
Subscriptions and Allotment:
(i) Subscriptions for Shares: Application to purchas shares when corp proposes to issue shares
Problems when subscriptions to purchase shares made before corp was incorporated: Subscription is normally an
offer to buy shares (which corp can then accept), but corp cannot validly accept until corp is incorporated.
SH can w/draw his offer before acceptance by corp and since it merely an offer, corp once incorporated is
not bound to accept the offer (Canadian Tractor Co.)
BUT where subscription was in the MoA or the letter patent of a corp, the corp cannot withdraw
its acceptance after being incorporated.
Pre-incorp subscription issue has dealt with by: (i) treating subscription as continuing offer, or (ii) regarding
shareholder’s conduct after incorporation as constituting a new offer
(ii) Allotment: If a particular issue of shares is oversubscribed, the directors will have to decide which subscriptions to accept –
this decision of which persons will be issued shares is the “allocation” of shares.
Consideration for Issue of Shares:
CBCA, s 25: Directors can issue shares for whatever consideration directors determine (money, property, past services)
Watered Stock Problem: Tendency to issue shares in return for assets that were significantly overvalued (i.e. via goodwill)
Promoters bought assets and conveyed assets to company with a face value of $ 1million, but assets recorded in
company books as having been issued for a value of $4 million (bc goodwill accounted for in value). Creditors
deceived by inflated figures for assets and capital on balance sheet if goodwill value not met.
C’s could be successful in claim that shareholders should contribute difference b/w actual value of assets conveyed to
corp in return for shares and amount at which shares allegedly sold for and so recorded on balance sheet
Prohibition Against Watered Stock:
CBCA, s. 25(3): Share shall not be issued until consideration for share is fully paid in money or property or past
services that are not less in value than fair equivalent of money that corp would have received if shares had been
issued for money
Before shares can be issued, money must be fully received (this ensures the assets are worth the value on
balance sheet).
If shares are issued in exchange for property, directors should get professional opinion on value of
property to ensure that the property/services are actually worth the amount recorded on balance sheet.
Remedies for Watered Stock:
1. Directors liable for issuing a share for consideration that is less than the money value the corp would have
received for share to make up difference between consideration received for share and true value.
CBCA, s. 118(1): Directors of corp who vote for or consent to resolution authorizing issue of share under s.
25 for consideration other than money are jointly and severally liable to corp to make good any amt by
which consideration received is less than fair equivalent of the money that the corp would have received if
share had been issued for money on date of resolution
Defence for Directors - s. 118(6): If they did not know and could not reasonably have known that share was
issued for consideration less than fair equivalent of the money that corp would have received if share had
been issued for money
2. Directors subject to Penal Sanction:
CBCA, s. 251: Directors may be liable for having breached provision of act
3. Actions Against Shareholders:
Actions are available against shareholders who contributed money, ppty, or services for amount less than
the recorded price of shares
Creditors may make such a claim in oppression application
Non-Reliance Defence: CBCA does not expressly provide for such a defence
Argument: If C became C before alleged watering of stock, then C could not have relied, and allowing him to succeed
in action against directors or shareholders would give C windfall
Shares must be Fully Paid:
CBCA, s. 25(3): Shares must be fully paid for (cannot issues shares and then take down payment on shares)
CBCA, s. 25(5): Promissory note or promise to pay is not considered property for which shares may be issued
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 Directors must ensure that shares are fully paid for before they are issued to avoid any potential liability.
Assessable vs. Non-Assessable: Shares must be non-assessable (s. 25(2))
Directors cannot make assessments on existing shares, determine they are worth more than their current face value, and
deceive investors who thought their liability was limited to the amount the paid for the shares.
REDEMPTION AND REPURCHASE OF SHARES
S. 34(3): Corp can repurchase its own shares as long as it doesn’t violate financial insolvency test: Can repurchase unless:
(i) Corp is, or would after payment be, unable to pay its liabilities as they come due is or would be insolvent, or
(ii) Realizable value of corp’s assets would after payment be less than aggregate value of its liabilities and stated capital of all
classes  Value of cor’s assets cannot be less than the value of its liabilities.
S. 30(1): CBCA corp not permitted to hold shares in itself (cannot hold its own shares)
If corp repurchases own shares it must cancel them or, where there is a limit on # of authorized shares, restore them to status of
authorized but unissued
CBCA, s. 36(1): Corp can repurchase its own shares as result of express term for repurchase in its articles (redemption right on particular
share class).
CBCA, s. 36(2): Corp may not redeem shares if (would be insolvent, value of assets would be too low).
(i) Corp is, or would after payment be, unable to pay its liabilities as they come due, or
(ii) Realizable value of corp’s assets would, after pymnt, be < liabilities + amt needed to pay prior claims of other share classes on
dissolution
CBCA, s. 118(2): Directors can be personally liable to restore to corp any amounts paid contrary to financial solvency tests in s. 34(2) or s.
36(2)
CBCA, 2. 118(5): Shareholders who receive amounts paid contrary to these provisions may be required to return the amounts to directors
Summary:
Corp can repurchase shares if doing so would not lead to insolvency (must have enough funds), but corp cannot hold its own
shares so after repurchase, it must cancel the shares or restore them to unauthorized status. (S. 34(3), S. 30(1)).
Cop can repurchase shares through its right of redemption (S. 36(1)), but can only exercise right of redemption if doing so would
not lead to insolvency (S. 36(2)).
If a director repurchases or redeems shares when corp is insolvent/this causes insolvency, director is personally liable to repay
corp, and SH who sold the share may be liable to return the amount paid to the director (S. 118).
SERIES OF SHARES, PAR VALUE, AND THE STATED CAPITAL ACCOUNT
Series: S. 27: Directors have power to issue shares in series if articles so permit - D can issue more shares of a given class but with
variations on some of the rights attached to the share
Each series of given class can have separate rights and restrictions that may be more appropriate for marketing the shares at the
particular time chosen
Diirector has power to issue shares with a variance on some rights attached to them.
Purpose: When financing is needed quickly, and existing shares do not fit with what should be sold at the particular time, giving
directors authority to issue shares in a series gives them scope to adjust share rights to meet prevailing market conditions
without having to go through SH.
To raise funds for company, directors have the power to issue more shares of an existing class of shares (S. 25)
To create a new class of shares with different characteristics. , SH resolution is required to amend articles – so
directors need SH approval to create new class of shares - slow.
Bowater: Shares within a class of shares must be equal subject to any series rights.
Protection to existing SH: S. 27: No series in class can be given any priority over any other series in class wrt dividends or
proceeds on liquidation
Existing SH will not lose priority over dividends/liquidation when new series is created
Par Value concept removed: S. 24(1): Directors can only issue shares without par value. Directors must assign a stated value for the
shares for the purposes of the capital amounts.
Par value of share originally the minimum amount the SH was required to contribute to the company. If shares sold at a price
less than the par value, the SH could be liable to contribute the difference between the par value and the price paid.
Purpose: Par value concept provides ready source of finance to company to call on those SH who had paid less than par value for
their shares to pay the difference. Also gives creditors a basis for assessing the capital amount they could access to cover the
credit they extended.
Problem: Par value really didn’t show how much the share was worth.
1) Figure Became Meaningless: Ooregum held that it is fraudulent to sell a share for less than its par value and then
later tell SH he must pay the par value. Result: companies set par value below the price at which the SH were
expected to sell the share. Par value figure thus bore no relation to the amount of capital (shares really sold for more
than par value) and didn’t help to assess the value of the equity in the company.
2) Contributed Surplus Deceiving: Equity of the company was recorded as the par value x number of shares, plus a
separate account called “contributed surplus” which showed the difference between the actual price and the par
value. Creditors deceived into thinking the corp had a surplus b/c it appears that the contributed surplus had extra
funds, but really the value of assets could be less than its liabilities.
3) Deceiving to Investors: Investors assumed the par value represented the worth of the share, but really just a
nominal value assigned to share with no relation to its worth. Share could be worth nothing.
Stated Capital Account: CBCA, s. 26(1): SCA must be made and maintained for each class or series of shares issued
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SCA consists of the total amount for which shares or class of series have been issued
Nature: Stated capital is a bookkeeping entry that records the amount of funds raised through the sale of shares of each class or series (it
is not cash).
Funds received to company appear as asset on balance sheet at time they were brought in. Funds might initially be cash raised
from sale of shares, but then cash will be spent on other assets used to run business
Assets may really be worth more/less depending whether business does well.
Stated capital account simply records amount raised through sale of shares of each class or series
Amount recorded is not affected by changes in value of assets
Accounting for Changes to the Stated Capital Account: If more shares of class or series are issued, applicable SCA must be adjusted to
reflect increase in total amount of funds raised by sale of shares of that class or series
If shares repurchased or redeemed, must adjust SCA to reflect reduced total amount of funds raised by issue of shares of that
class or series
S. 39: On a redemption or purchase of shares, the reduction in value in the SCA is the number of shares of the account before
the redemption times the number of shares purchased or redeemed.
Shareholder Approval of Reduction of Stated Capital: Shareholders may approve reduction in SCA (i.e. desire to distribute capital to
shareholders)
CBCA, s. 38(1): Return of capital must be approved by shareholders via special resolution
CBCA, s. 38(3): Return of capital cannot be made if:
(i) Corp is, or after the reduction would be, unable to pay its liabilities as they become due, or
(ii) Realizable value of corp’s assets would be less than aggregate of its liabilities
Rationale: Return of capital has effect on success of business and can have tax consequences for individual shareholders
Paying shareholders as result of distribution of capital to shareholders reduces funds available in corp to pay amounts
due to creditors.
CORPORATE DEBT FINANCE
Common Types of Corporate Debt Finance:
Typical types of debt finance used by corp’s include trade credit (recorded on the balance sheet as “accounts payable”), short-term and
long-term bank loans, commercial paper (usually recorded on the balance sheet as “notes payable”) and bonds or debentures.
1. Trade credit:
- Credit given by supplies of goods and services to the corp (the good or service is provided, but payment can be made later)
2. Bank Loans: Contractual agreement – written k called “loan agreement”, ex between corporation and bank.
Terms can vary widely, but there are common types of loan agreements and common terms. 2 general types:
(i) Short term bank loans: Line of Credit: Bank provides line of credit to finance short-term fluctuations in firm’s cash requirements.
Interest can be charged on the amount of the outstanding loan at any given time.
Revolving Line of Credit: Allows borrower to borrow up to specified limit as necessary and pays it down as cash becomes
available .
Normally used to finance day-to-day cash inflows and outflows of the business
Especially useful for seasonal businesses – can draw on the bank to cover expenses during busy season, and pay it
down when accounts receivable are paid.
(ii) Long term bank loan: Ter Loan: Bank provides terms loans for longer periods of time (i.e. 5 to 10 years), Principal amount not due until
the end of term, and interest is paid on the principal at regular intervals.
May instead require loan to be retired through series of instalments
Common to match terms of loan to lifespan of particular asset or groups of assets (may reduce potential risks)
Bank loans usually have terms intended to provide protection to bank:
Concerned that borrower has enough money to cover both interest and principal on the loan, or that borrower may
engage in very risky businesses that could lead to bank not being repaid in business fails.
Borrower, esp. a corp. with limited liability, might be willing to take the risk since they will get the upside gain if the
business does well (paying a fixe rate of interest and principal, and keeping gains) but have limited downside risk if it
does not (because LL).
Ratio tests control the risk for the lender and give the bank the opportunity to demand payment and invoke remedies when the
risk of bankruptcy significantly increases.
Bank can restrict the kinds of business borrower can engage in to reduce risk (i.e. cannot engage in risk business)
Bank might restrict way borrower manages business
Might require borrower to maintain minimum working capital ratio to ensure borrower has enough funds to pay
expenses as they come due and also pay interest on the loan (e.g. cash, accounts receivable and inventory must be at
least twice the sum of liabilities that must be paid in the near term)
Acceleration Clause: If borrower defaults on an obligation, (failure to pay interest or principal or comply with ratio test) bank
can require all amts become due immediately.
Bank might require borrower to grant banks security interest over certain assets of borrower
If borrower does not pay, bank can seize assets/collateral to which SI applies
Common that if there a SI, right to seize the assets would arise if there an event of default (failure to pay principal or
interest, failure to comply w/ ratio requirements, or conduct of business restricted under loan agreement)
3. Commercial Paper, Bonds, & Debentures
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Corps often obtain debt finance by selling notes/commercial papers (short term funds), and through sale of bonds and debentures (long
term).
(i) Commercial papers: Corps often raise short term funds by selling notes/CPs: Promissory notes sold that constitute promises to pay a
specified amount of money at specified future date. Purchaser usually pays an amount (ex $99,000) that is less than the amount the CP
promises to pay back ($100,000). When purchaser repaid, gets back original amount plus difference that is effectively interest on the
amount paid for the CP.
Usually time to maturity is short (30, 60, or 90 days) usually obtained from a number of investors rather than bank
Promise can be to pay fixed amount or to pay fixed amount + interest
Investors pay money to corp in return for promise to receive fixed amt at later date
Sale of CP by corp is like getting short-term bank loan, but loan comes from investors who buy the paper
Notes are usually in large denominations ($50,000 or $100,000)
Buyers usually are institutions (banks, insurance companies, pension funds) or other commercial corp’s that use CP as place to
store funds that may be needed in near future
Storing funds in cash or bank account will often not generate same rate of return as commercial paper
CP can be convenient place to store needed funds b/c it can usually be sold quickly
(ii) Bonds/Debentures: Evidences of indebtedness. B/D entitles the holder to a payment of a specified amount at specified date in the
future (typically 10 years from date it is issued), and a payment of interest at a specified rate at regular intervals.
Large amount of debt finance may be divided into bonds or debentures that each have the same face value. These are sold to
the public.
Holder of B/D usually entitled to be paid interest at a specified per annum rate normally with payments of interest made every
six months.
Do not generally carry right to vote at company meetings (may be given voting rights at company meetings in specific instances
of default)
Sale is like getting long term bank loan, but loan comes from persons who buy the bonds, not a bank
Bonds often sold to institutional investors (banks, pension funds, etc.)
No legal distinction b/w bond and debenture
Bond usually means payment obligations are secured by borrower assets (secured debenture)
Debenture usually means payment obligations not secured by borrower assets (unsecured debenture)
Must look at substance of K regardless of what name has been used to describe the obligation
Subject to contractual terms set out in agreement (a K) called an indenture
Terms: Virtually infinite variety of K terms, usually quite similar to those found in bank loans
Can provide for SI in assets of corp
Usually outline further controls on debt finance, a series of events of default (non-payment of interest or principal,
failure to meet specified accounting ratios), and rights of bondholders upon event of default (acceleration clause,
right to appoint receiver or receiver manager, appoint more directors to BOD, or to seize assets of corp, etc.)
B/D may include special features (i.e. right to convert bond into other securities of the corp)
May be Sold as Income Bonds: Participation right where bond shares in corp profits beyond pymnt of
interest on the bonds
May be sold w/ warrants: Allow bondholder to buy shares of corp at specified price w/in specified time
ENFORCEMENT
Problems ith/ Enforcing Terms of Indenture Where Large number of Bondholders:
1. Small-Stake Problem: Not worthwhile for any one bondholder to enforce terms of indenture b/c of relatively small-stake each
has. Cost of enforcement is greater than the benefit they receive
2. Free-Rider Problem: Bondholders prefer to have another incur enforcement cost, receiving its benefit at no cost to
themselves .
Result: Common for bond issuers to appoint trustee to act on behalf of B/D holder and enforce terms of the indenture on their behalf (can
sue on behalf of all B/D holders).
Otherwise, investors would not buy B/D because they would worry that the terms of indenture would not be enforced.
Problems with appointment of trustees for debenture holders:
1. Conflict of Interest: Trustees chosen by issuer might act in issuer’s interest rather than bondholder’s interest, esp. where
trustee has close connection to issuer
2. Competence: Issuer might want to give appearance of likely enforcement by appointing trustee, while at same time limiting
likelihood of enforcement by appointing persons who would not really be competent at enforcement of terms of indenture
3. Constraints on Trustee Enforcement Powers: Issuer might constrain steps that trustee could take in seeking to enforce the
indenture
CBCA rules that govern trsutees: S. 83-91:
Qualification (s. 84): Trustees must be incorporated, and subject to controls, under statutes governing incorporation of trust
companies (Trustt must be a licensed trust company)
Conflict of Interest (s. 83): Trustees cannot have conflict of interest w/ issuer
Access to List of Debenture Holders (s. 85): Trustees must be permitted to list of debenture holders for purpose of
communicating w/ them for purpose of voting or other matters relating to enforcement
Power to Demand Evidence of Compliance (s. 86-88): Trustees have power to demand evidence of compliance w/ terms of
indenture
Must Give Notice of Default (s. 90): Trustees must give debenture holders notice of default by corp
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Duty of Loyalty and DOC (s. 91): Trustees must act honestly and in good faith for interests of debt holders and w/ care, skill, and
diligence of reasonably prudent trustee
SECURITIES REGULATION: Prospectus requirements to distribute shares to public
SOURCES OF SECURITIES LAW
Securities Law in Corp and Securities Statutes:
General statute of incorp contains provision concerning requirement to provide prospectus for public offering of securities
Also provisions on continuous disclosure (i.e. financial disclosure and proxy circulars)
Securities Acts focus on regulation of the distribution of securities, securities trading, including provisions on registration of
persons engaging in securities business, market manipulation, takeover bid legislation, and insider trading
BC Securities Commission has the power to directly pass subordinate legislation regarding securities.
Sources of Securities Regulation in Canada:
1. Provincial Securities Acts: Matter of provincial jurisdiction: each province and territory has securities regulation statute
2. Securities Regulations: Securities Acts grant power to Lieutenant Governor in Council to create subordinate legislation called
regulations Subordinate legislation known as “rules” in many provinces. Reg’s and rules give provincial securities administrators
wide discretionary power.
3. Securities Commissions: Securities Acts gives commissions power to create rules, which are also a form of subordinate
legislation. Secrities Acts give broad discretionary power to Securities Commissions. Issue policy statements that are not law,
but are useful to assess how securities commissions are incluned to exercise their discretion.
National Co-Operation and Canadian Securities Administrators (CSAs)
CSAs try to achieve consistent rule-making in all provinces by having CSA staff draft rules which can be adopted by provincial
securities administrators across the country. Rules called “National Instruments” and policy statements called “National Policy
Statements” when they are adopted by every jurisdiction.
Multilateral Instruments: Instrument only adopted by some jurisdiction, and are brought into effect by the regulators of the
agreeing jurisdictions.
Companion Policies: Policy statements that accompany NI’s (b/c NI’s often leave discretion to PSA’s)
Stock Exchange Regulation:
Stock exchange regulation will apply to an issuer of securities (e.g. a corporation) when the issuer becomes listed on the stock
exchange.
The issuer becomes subject to regulation by the stock exchange by entering into a contract with the stock exchange usually
referred to as the “listing agreement”.
DISTRIBUTION OF SECURITIES TO THE PUBLIC
Prospectus Requirement: Prospectus required for any sale of a newly issued security (newly issued shares)
 EXAM: If funds for your company come from anywhere other than your own savings, this is a securities law issue, and a prospectus may
be required in order to distribute the security (i.e. the shares, bonds, debentures, any other investment scheme).
Offence to distribute a security without a prospectus. K will be invalid. BUT many exceptions.
Very time consuming and expensive to file a prospectus: must file prospectus wit securities regulator and be approved before
you ca lawfully sell your securities under the Act.
Prospectus required where there a distribution of a security (i.e. any sale of newly issued securities) (BC Securities Act S. 61)
Securities Acts prohibit the distribution of securities unless one has received a preliminary prospectus nd a prospectus.
Security: Broadly defined: Any investment where somebody invests and expects a return. (includes shares, bonds, warrants, rights, other
instruments or transactions with similar investment character)
Main test of whether something is a “security” is whether there is (i) a transaction or scheme by which a person invests; (ii) in a
common enterprise; and (iii) in circumstances where a person is led to expect profits from the undeniably significant efforts of a
promoter or third party. = broad
When a sale of interest in land had qualities similar to the sale of shares, it was held to the sale of one acre lots were
securities (SEC v WJ Howey CO)
Distribution: Broadly defined and includes a trade in a security of an issuer tthat has not been previously issued
Trade: Broadly defined and includes any sale or disposition of a security for valuable consideration
Scope of Prospectus Requirement: Any offering of securities not previously issued will require a prospectus, even if they not being offered
to public  overly broad requirement.
Exemptions from Prospectus Requirement: (As per National Instrument 45-106)
Most securities act begin with this overly broad definition of distribution, then provide specific exemptions from prospectus requirement.
Primary basis for granting exemptions is that the particular purchaser of the securities does not need the investor protection provided by
providing a prospectus.
1. Small Business Exemptions: Financing would be impossible for small businesses given cost of preparing prospectus
Private Issuer Exemption for small businesses: Private issues is an issuer of securities which:
(i) Are subject to restrictions on transfer,
(ii) Has fewer than 50 shareholders (other than Ee’s or former Ee’s), and
(iii) Has only distributed securities in reliance on private issuer exemptions
Private issuer can sell securities w/o providing prospectus to:
(i) Director, officer, Ee, founder, or control person
(ii) Spouse, parent, grandparent, sibling, or child of director, EO, founder, or control person of issuer
(iii) Parent, grandparent, sibling, or child of spouse of director, executive officer, founder, or control person
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(iv) Close personal friend of director, executive officer, founder, or control person of issuer
(v) Close business associate of director, executive officer, founder, or control person of issuer
(vi) Spouse, parent, grandparent, brother, sister, or child of selling security holder of issuer
(vii) Security holder of issuer
(viii) Accredited investor
Institutions (banks, insurance companies, etc.) , gov’t’s (i.e. federal and prov)
I.E. small businesses don’t need a prospectus to take out a bank loan.
Persons w/ significant wealth such as corporations, partnerships, or individuals (net assets > $5,000,000 or
annual NI before taxes > $200K)
Can be no commission on finder’s fee paid to director, officer, founder, or control person of issuer
(ix) Person of which majority of voting securities are beneficially owned by any of persons above described, or persons
of which majority of directors are persons above described
(x) Trust or estate where all beneficiaries or majority of trustees/executors are persons described in (a) to (h)
(xi) Person that is not the public
Purchaser must purchase as principal (i.e. not on behalf of other investor who might need prospectus
protection)
2. Exemptions for Issuers w/ Publicly Traded Securities
Private Placement: Method for issuers already distributing securities under prospectus to raise further funds
Distribution w/o filing prospectus by distributing shares to persons who do not need protection that prospectus is
intended to provide (accredited investors)
These persons assumed not to need protection of prospectus b/c they either sophisticated investors or would have
access to advice from investment advisors
Prospectus Distribution Process:
If it intended for offering to be made to public (other than under exemption or private placement), then prospectus required
Required items of disclosure include disclosure of all material information that would likely affect the investor’s decision on
whether or not to acquire the security, such as: expected proceeds of issue, intended use of proceeds of issue, description of
rights of securities, nature of issuer’s business, backgrounds of directors, etc.
1. Issuer prepares and files a prelim prospectus with the securities regulators in jurisdiction where securities will be sold
2. SR’s examine prospectus to see if it complies w/ requirements of Act and Rules or Regulations and look for gaps in disclosure
3. SR’s issue comment letter indicating problems or concerns they have w/ the preliminary prospectus
4. When issuer responds to concerns to satisfaction of SR’s, regulator indicates it is ready to receive the final prospectus.
5.Issue files final prospecus, and once the regulator has given a recipt for the final prospectus, issuer can sell securities
In the waiting period between the receipt for the preliminary prospectus and the receipt for the final prospectus, restrictions on maketing
the securities: issuer cannot sell securities, and can only disclose the nature of the issuer’s business, the price of the security and where the
security can be acquired (no other solicitation)
Distributions of Securities in Multiple Jurisdictions: NI that addresses this – same procedure in all prov’s except Ontario
Passport system: File prelim prospectus in “principal jurisdiction,” who then issues a receipt for the preliminary prospectus on
behalf of all the co-operating jurisdictions (all except Ontario) and then vets the prospectus and ultimately issues a receipt for
the final prospectus on behalf of all the co-operating jurisdictions.
Stock Exchange Listing:
Issuer of securities can make public offering without listing securities on an exchange (not common in recent years)
Toronto Stock Exchange: In addition to its main board, also operates Venture Exchange, whose listing requirements are easier to meet
than for TSX
CONTINUOUS DISCLOSURE
Prov. securities acts require “reporting issuers” (all issuers selling securities pursuant to a prospectus) to keep information about the issuer
up to date through continuous disclosure.
Disclosure includes annual audited financial statements, quarterly financial statements, an annual information form that updates
information about the business, “management discussion and ana analysis” providing a narrative discussion of financial statements and
results of business operations on annual and quarterly basis, insider trading reports showing trades made by directors officers and major
SH, and timely disclosure of impotant changes concering the issuer asap by way of press release.
Must submit financial statement every 3 months
Disclosure done electronically: Must file all information on an electronic database called “SEDAR” (System for Electronic Data Analysis and
Retrieval). The insider trading reports must be filed on an electronic database called “SEDI” (System for Electronic Data on Insider trading).
Insider Trading Reports: Must disclose trades made by directors and senior officers of issuer, and entities affiliated with the issuer, within
10 day of trade.
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REGULATING INSIDER TRADING
Insiders, including D/O’s of corporations with publicly traded shares, can trade their shares as long as they don’t have access to important
information that investors of the public do not have access to (NOT prohibited if info they have access to has been disclosed so that the
investing public has access to the info).
Prohibition of insider trading is to prevent trading by persons who have access to information that others do not have.
Insiders prohibited from trading when they have access to important or material information that other members of the investing
public do not have access to.
Who: Insiders include broad range of persons who “may” obtain information that members of the investing public do not have access to.
List of persons subject to prohibition:
Directors, officers, and Ee’s of issuer, directors, officers, and Ee’s of affiliated corp’s, persons providing professional or business
services to issuer, persons proposing to do a takeover, merger, or other business combination w/ the issuer, persons formerly in
any relationship previously described, and persons who directly or indirectly have received a tip from any person just described
 any persons who might become aware of info not publicly disclosed.
When prohibition applies:
Prohibition applies when persons in a “special relationship” with the issuer of securities trades the the issuer’s securities when
that person has knowledge of material information, and that material information has not generally been disclosed.
Insiders Prohibited from:
1. Trading with knowledge of material information (i.e. info that would significantly affect the market price or value of the
securities of the issuer) that has not not generally disclosed to the public
2. Informing others of material information not generally disclosed to the public
Sanctions:
1. Criminal: Possible imprisonment and fine of up to three times profit made or loss avoided
2. Civil:
(i) Action by person who traded w/ person in special relationship for any loss incurred as a result of the trade
(ii) Action by issuer for accounting to issuer by director or officer of issuer who has benefited from insider trading or
informing
3. Administrative: Cease trade order, denial of exemptions, prohibition against person acting as director or officer of reporting
issuer (most common)
TAKEOVER BID REGULATION
Takeover bid = attempt to acquire sufficient shares of corp to control its management.
Acquire shares with voting rights, then will be able to vote out all the officers and managers and take control over the company.
In publicly traded corp’s with widely held shares, possible to control appointment of directors with 20% of shares
Rules for takeover bids dealt with in Provincial securities legislation
Takeover Bid Rules: An offer for securities that would result in offeror owning, directly or indirectly, 20% or more of equity securities of
any class of securities of issuer is a takeover bid If an offer to acquire shares would result in the person owning 20% or more of any class
of shares, the person must make an offer for those securties to ALL the SH of that class and the offer must comply with takeover bid
rules.
Rules:
(i) Bidder must offer the same price to all holders of securities of the class of securities sought under the bid, and must keep the
offer open for minimum of 35 days
(ii) The security holders who tender under the bid can withdraw the securities they have tendered at any time during the bid
process.
(iii) If bidder makes bid for less than all shares of the particular class, then shares must be taken up on pro rata basis (rather than
first come first serve).
(iv) Bidder must provide takeover bid circular to all offeree security holders that complies w/ required form and sets out info
that would assist offeree’s to assess whether or not to tender their shares under the bid
(v) Directors of the issuer whose securities are subject to the bid must also provide a directors’ circular setting out info on the
bid that would be relevant to offeree shareholders in assessing whether to tender their shares under the bid
(vi) Directors must recommend either acceptance or rejection of bid and give reasons
(vii) Consideration paid must be same for all offeree’s tendering under the bid
Poison Pill Plans: Issuing rights to existing shareholders to buy additional shares of the corporation at a price significantly below market
price of the shares, but these rights only apply if a person acquires a certain percentage of the voting shares (usually 20% or more). These
rights are also conditional on the SH not owning 20% of the voting shares (so won’t apply to takeover bidder).
Consequence: Bidder trying to take over the corporation through takeover bid will have the “hard to swallow” consequence that
their interest (that they paid full price for) will be diluted by the issuance of many new shares at a very low price to other SH
exercising their rights under the rights plan. Person doing the takeover wouldn’t be able to exercise any rights because of the
condition that rights cannot be exercised by anyone holding 20% or more of shares.
Securities regulators can control poison pill plans through “cease trade order” if in the public interest to do so. Order prevents the
operation of a rights plan by preventing the rights from being exercised. Anyone who exercises the right, and their issuer, is contravening
the right and could be fined or go to jail.
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Canadian Securities Administrators have issued a policy statement indicating they oppose poison pill plans when used to block
takeovers, but will accept the use of these plans as long as they are used to promote an auction for the shares of the
corporation (i.e. to get other persons to make competing bids for the shares).
NOTE: Securities triggers
10% of all voting rights: A party with 10% of the voting rights is automatically is a “special relationship” with the company, and must issue
a press release
20% of shares: Party who offers to buy 20% of shares is subject to takeover bid regulation
So shareholders may want to avoid having 10% or 20% of shares
CORPORATE OBJECTS AND POWERS AND RESTRICTIONS ON MANAGEMENT AUTHORITY
Doctrines developed to restrict the business a corporation may engage in under a contract and to address the enforcement of contract
that were subject to claims that the persons acting on behalf of the company having ostensible authority to enter the contact.
Agency
Actual Authority: Directors/officers are agents of the corporation.
Decisions of directors treated as decisions of the corporation itself (and limits on capacity of corporation also limit the capacity
of directors to make corporate decisions)
Officers are agents of the corporation, and agency principle apply: the scope of their authority is found in the constating
documents of the corporation (articles, bylaws), SH resolutions, directors resolutions, employment contracts, and through usual
and customary authority.
Ostensible authority: Officers have ostensible authority (authority 3P’s reasonably rely on in circumstances they encounter A)
Scope of Authority Limited to Capacity of the Corp:
Authority of an agent cannot extend to doing things on behalf of P that P could not do. Director or officer of corporation cannot
enter into K on behalf of corp that corp could not enter into
Ultra Vires K’s: Corp may not be able to enter into a K where it has no capacity to enter into the K.
If UVD applies, and the corporation’s objects and powers are interpreted to reflect the capacity of the corporation,
then acts that are contrary to these would be invalid and void.
Ex. a contract entered into by a corp after a resolution of directors, or an k entered into be an agent who had
ostensible authority to do that act would be void if not expressly provided for in objects or powers.
However, S. 16(3) overrides the CL UVD
CBCA: Agents have capacity to enter into contracts if they have actual or ostensible authority to do so, even if not set out in
contasting documents.
ULTRA VIRES DOCTRINE (UVD)
Overview: Corporate statutes in Canada set out “objects” in its MoA or articles that set out the kinds of businesses that the corporation
would engage in, and “powers” identifying how the corporation could carry on its business in pursuing its objects. This would help assess
risk of the company.
UVD: Corporation is restricted to carrying on the activities that are expressly provided for in the objects and powers set out in the
articles. If a contract is entered into where the acts involved under a k are contrary or beyond the confines of the objects and powers set
out in the articles, the contract is void (never existed), and neither party to the k can enforce it (Ashbury Railway Carriage)
Even if articles were modified by special resolution of SH, if the contract was contrary to objects at the time entered into, k void
(Ashbury)
Court refused to uphold contract to borrow a loan, stating that the borrowing power in the object clause to borrow
funds to pursue objects is not to be read independently (i.e. to borrow funds for any purpose). Court would not raise
a mere power to the status of an object, and k void (Re Introductions Ltd)
Justifications for Ultra Vires Doctrine:
1. Investor and creditor protection against changes in risk:
Protects creditors from changes in risk associated with their investment - If company could start carrying on
businesses other than those listed in its objects in MOA, might be exposed to much riskier types of businesses
2. Constraining Quasi-Public Corp’s to their Quasi-Public Purposes:
Concern that money raised for a public purpose (i.e. to build roads, railways) might be diverted to other activities
.UVD protects against misuse of corp funds since uses outside of objects of corp are void.
3. Controlling Against Risk of Bankruptcy for Some Types of Corp’s:
Objects clauses protects against bankruptcy resulting from risky uses of corporate funds, and this protects the entire
economy who would otherwise suffer a loss form bankruptcy of banks and insurance companies.
Problems w/ Ultra Vires Doctrine:
Unjust enrichment to corp: Hardship for third parties who relied on the corp having authority to enter into the contract and who
performed the k, and then fout out the k is void.
3P Unjust Enrichment: Corp’s might find K’s entered into not enforceable and had performed or begun to perform the K, and 3P
enriched at corp’s expense.
Consequently both parties had to take precautions to reduce risk, and the cost of this would be absorbed in the cost of goods
and services.
3Ps had to either charge a premium for the risk that the corporation did not have authority or it had to check into the
capacity of the corporation.
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Persons acting on corp’s behalf also had to check into the capacity of the corporation.
Practical Response to UVD:
Lawyers hired to draft extensive objects clauses giving corporations the capacity to do virtually anything they could think of:
gave corporation extensive powers to carry out those objects and added that the corporation had any incidental or ancillary
powers to effect the objects of the corporation.
Courts would give very broad interpretations to corporate objects and powers to avoid saying an act was ultra vires.
BUT: UVD continued to cause problems. Cost to obtain lawyers’ opinions on the objects clauses could be very expensive because
they could involve reading through many pages of objects and powers, Still occasions where courts would find obligations
entered into on behalf of corp to be ultra vires the corp, so still necessary for company and 3P to check object clauses before
entering k. (Re Introductions Ltd.)
Statutory Response:
Statutes of incorporations give the corporation the powers of a natural person: business that the corp can carry on could still be
restricted in the articles, but the legislation provided that an act would not be invalid merely for being contrary to the articles or
the Act.
S. 15(1): Corp has capacity, rights, powers, and privileges of a natural person
S. 16(2): Corp shall not carry on business or exercise any power restricted by its articles from carrying on or exercising, nor shall
corp exercise any of its powers in manner contrary to its articles
 CBCA incorporated companies still can have restrictions imposed on them in the articles – can still validly restrict
acts that the corporation is not permitted to engage in (S. 16(2)).
S. 16(3): No act of corp, including transfer of property to or by corp, is invalid only b/c it is contrary to its articles or this Act
 Rejection of UVD: K will not be void merely because the act or obligation is not provided for in the articles.
Protection to SH/creditors  Restrictions on directors’ authority to act on behalf of the corporation:
CBCA gives corp broad capacity, but allows restrictions to be put in the articles that constrain the authority/power of the person
acting on behalf the corporation (director, officer). CBCA restricts the authority agents of the corp to act within scope of its
authority.
By acting contrary to the articles, directors and officers would be acting beyond their authority (even if not ultra vires because
not beyond the capacity of the corporation).
If directors or officers of CBCA corp cause corp to engage in restricted activity, SH can take remedial action by:
Exercising voting rights to remove directors; elect new ones who could replace officers acting beyond restrictions
Seeking restraining order against the director to stop further transgressions (S. 247)
Application for oppressive remedy to address acts of director that are contrary to articles.
Investors/creditors/SH protected from changes in business risk by:
o
SH can restrict corporation’s business and take action against directors/officers who cause the corporation to deviate from
this.
o
Liquid market (shares can be traded easily), so SH can control change in risk of corporation by making a portfolio
adjustment (sell some shares in risky business and substitute with other less risky investments)
o
Creditors can get protection by being investors in a liquid market for bonds/debentures of the corporation
Ultra Vires Doctrine and Crown Charter or Letters Patent Companies:
UV doctrine does not apply to crown charter or letters patent companies: they are separate legal entities with powers of natural
person, so objects and powers set out operate in the same way as the restrictions on business and powers under the CBCA.
Constructive Notice Doctrine (CND) and Indoor Management Rule (IMD)
Constructive Notice Doctrine:
CND deems persons dealing with a corporation to have knowledge of the publicly available documents of the corporation.
Where a person acting on behalf of the corporation doesn’t have actual authority to engage in the particular act, and this limit is expressed
in a publicly available document (articles), the 3P dealing with the corp is deemed to know this limie on authority.
3P cannot make ostensible authority claim – cannot say he reasonably relied because he is deemd to know the person acting on behalf of
the corp had no authority.
Additional risk for 3P: had to check filed documents to ensure there were not restrictions on powers of d/o’s before entering a contract
with them.
Indoor Management Rule (IMR):
IMD restricted the CND to publicly available documents of the corp: No CND if documents that contained constraints on exercise of corp
powers not publicly available.
3P not deemed to know of any indoor/in-house restrictions on authority of directors or officers
Thus where a particular step had to be done to approve a particular transaction (i.e. a restriction), such as getting SH
approval, the 3P dealing with the corporation, unable to get the documents to confirm whether that step had been
taken, was entitled to assume that that step had been taken.
Result: 3P could establish reliance element of apparent authority claim unless 3P, in some way, knew agent did not have
authority
Effective limitation on risks of CND for letters patent companies because the letters patent was the only publicly filed document,
and restrictions were found in the bylaws which were not publicly filed.
Legislative Modifications:
CND: CBCA did away with CND – no person is deemed to have notice of publicly filed documents  restores notmal agency rules so it is
again possible to establish ostensible authority with respect to corporations
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CBCA S. 17: No person is affected by or is deemed to have notice or knowledge of the contents of a document concerning a
corporation by reason only that the document has been filed by the Director or is available for inspection at an office of the
corporation
CBCA restores the normal agency rules concerning ostensible authority with respect to corporations.
Indoor Management Rule: Once CND removed, no need for an exception to it so seemingly no need for IMR
CBCA has its own IMD  S. 18: Fact that articles were not complied with is NOT a defence by the corpration against 3P to void a
k.
S. 18: Corp cannot assert against person dealing with the corp that:
(i) Corp’s articles, bylaws, or any unanimous SH agreement have not been complied with
(ii) That place identified as registered office of corp in most recent notice of registered office sent to Director is not
registered office of corp
Qualification: Corp still can make such an assertion where person has, or ought to have, knowledge of a constraint by virtue of
that person’s relationship with the corporation
 Outcome of CBCA modifications for a claim for k is void/ostensible authority:
EXAM: 3P relied on director having authority – CAN rely on ostensible authority, but Corp can has defence
1) S. 17: 3P CAN claim that he reasonably relied on D/O having authority to act for the corp, even if D/O did not have authority
and this limit to authority was listed in the articles.
D/O had OSTENSIBLE authority to act for the corp: Represented that he had authority through his conduct, 3P relied
on this, and thus corporation is bound.
2) If a 3P dealing with the corp claims that the persons acting on behalf of corp had authority to act on behalf of corp (i.e. makes
ostensible authority claim), corp cannot respond merely by asserting that the purported agent’s act were contrary to the articles
and thus the k is voidd  corp cannot rely on UVD to invalidate k. (S. 18)
3) BUT corp can assert that the person KNEW or ought to have known of the purported agent’s constraint on authority due to
their relationship with the corp (ex director of corp would be deemed to know contents of articles due to their status as
director, so director cannot enter k then claim he did not know it was contrary to objects of corp)
If 3P knew of the constraint, cannot make claim for obstenstible authority (can’t say he relied)
Constitutional Issue: CND developed by courts enforce contracts where an apparent authority action was brought. This is part of P + CR
and under provincial jurisdiction via s. 92(13) of CA.
Question then whether Parliament has ancillary power to enact such a provision in legislation that in P+S is about incorp of
companies w/ objects other than prov ones
EXTENT TO WHICH ULTRA VIRES DOCTRINE AND CONSTRUCTIVE NOTICE DOCTRINE STILL APPLY
Statutes that eliminate the UVD and CND only do so for corp’s incorporated under those particular statutes.
Doctrines do not apply to CBCA incorporated corporations, but still apply to companies incorporated outside of Canada or incorporated in
other statutes. .
When dealing with any corp, ask: Under which statute was the company incorporated?
Corporations formed under special acts do not contain provisions that alter the UVD or CND, and thus the doctrines
may still apply.
If incorporated under statute, then what jurisdiction was the statute enacted?
Foreign corporations incorporated in CL jurisdictions have often followed the Asbury Railway case where UVD and
CND still apply
Does that jurisdiction have an UV or CND? If so, does particular statute under which corp incorporated alter those doctrines?
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DIRECTORS AND OFFICERS
CBCA Rules: Role of Directors:
Directors, not shareholders, manage or supervise management of the corporation
S. 102: Subject to any unanimous SH agreement, Directors shall manage or supervise management of business and affairs of corp
S. 121: Directors have power to appoint officers and delegate powers to them
Officers conduct day-to-day management of corp
SH’s voting right thus significant: power to elect directors is the primary means SH can exercise some control over way in which corp is
managed. They can change the managemtn of the corp by voiting the replace the directors of the corp.
SH can acquire sufficient shares to have sufficient voting rights to influence outcome of election of directors, and then change
the management of the corp by voting to replace the directors of the corp where corp not being effectively managed.
Potential for replacement gives existing directors and managers incentive to act in the best interest of shareholders.
Qualification Requirement for Directors
Legal Status, Age, Mental Competence, and Financial Status
S. 105: Directors must be:
(i) Natural persons (must be individuals, not corp’s)
(ii) 18 years of age or older; and
(iii) Not adjudicated to be mentall uincompetents or bankrupt (must not be bankrupt because CBC imposes liabilities
on directors in some circ’s (S. 118, 119)).
Share Qualification: Directors do not need to own shares of the corporation (but articles may provide for share qualification req’t)
S. 105(2): Share qualification requirement (owning shares in corp) to be a director is optional
Number of Directors:
Minimum of 1 director for a corp that does not publicly distribute shares (private corp)
Minimum 3 directors for corp with publicly distributed shares (distributed corp) (CBCA, s. 102(2))
No maximum number of directors
Articles of any corp can provide for fixed number of directors or can set out min and max number of directors
Residency Requirements:
S. 105(3): At least 25% of directors must be “resident Canadians”
Where corp has less than four directors, at least one must be a resident Canadian
S. 2(1): Resident Canadian: Citizens of Canada ordinarily resident in Canada, landed immigrants (except those eligible for
Canadian citizenship who have chosen not to apply for it), and certain citizens of Canada ordinarily resident abroad
Rationale: Cdn residents will be more responsive to Cdn national interests in conducting corp’s business
However, CBCA does not impose duty on directors to take Canadian national interests into account
Common practice to appoint nominee Canadian directors, but strip away their powers using a USA. Directors then
have no powers and no ability to influence the decisions of the corporation taking account of Canadian national
interests.
Electing Directors:
No SH when corporation first formed because directors have not yet distributed shares.
First directors: Notice of first directors of corp must be sent to Director to form corp (document required to form the
corporation) S. 106(1)
First directors hold office until 1st annual meeting of corp S. 106(2)
First annual meeting must be within 18 months of corp’s incorporation S. 133(1)
Subsequent directors: Directors must be elected at the first annual meeting of SH and at every annual meeting thereafter by
ordinary resolution. (S 106(3)) – mandatory provision (SH must elect directors)
Ordinary Resolution (s. 2(1)): resolution passed by majority of votes cast by shareholders voting on the resolution
Term of Office:
Unless otherwise specified term runs from the time of the annual meeting where director was elected and ends at the ensuing
annual meeting of shareholders (S. 106(3))
Articles can provide that directors can be elected for a term up to three years (CBCA, s. 106(3), (5))
No limit on the number of times director can be re-elected
If shareholders fail to elect directors at meeting where directors should be elected, incumbent directors remain in office until
successors chosen (S. 106(6))
Staggered Boards: S. 106(4): Articles can provide that not all directors t be elected at same shareholder meeting
Director can have terms up to 3 years if the articles so provide, so 1/3 of directors can be elected each year
Application to Court re Controversies: S. 145: Corp, shareholder, or director can apply to court to resolve any controversy re
election or appointment of director. Court can make any order it thinks fit – including restraining the person from serving, or
ordering a new election.
Ceasing to Hold Office: S. 108: Director ceases to hold office during his term if he dies, resigns, becomes disqualified, or is removed by
shareholder resolution.
Removing Directors: S. 109(1): Director can be removed by ordinary shareholder resolution
S. 6(4): Articles cannot require majority higher than ordinary resolution for removal of director
NOTE: Can’t provide that special resolution is required to remove SH.
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This can be avoided: Articles can set out a special class of voting shares with multiple votes per share in
specified circumstances – such as electing to remove a director (as log as this is a separate class from
ordinary voting shares. (Bushell v Faith).
Filling Vacancies:
S. 111(1): Directors have power to fill vacancies on BOD (arising perhaps b/c D died, resigned, or was disqualified to act)
But, cannot fill vacancy that arises because of an increase in the number or minimum number of directors required by articles,
or from a failure of shareholders to elect the number or minimum number of directors required by articles.
S. 109: Shareholders can remove director by ordinary resolution
S. 109(3): Vacancy resulting from removal of director may be filled at same SH meeting approving the removal;
Ifa director is removed by a resolution of the SH, the SH can replace that director at the same meeting.
If they do not then the directors can fill the vacancy (S. 109(3))
Authority and Powers of Directors
Note: Default powers = subject to the articles, by-laws or unanimous shareholder’s agreement (USA)
Management Power (Supervision of Management):
Directors have power to manage the corporation. This power operates through their residual power. If the power is not
allocated elsewhere to either the directors or the SH, it is probably a part of the director’s management power.
S. 102: Directors have authority to manage corp (broad residual power)
Several management powers of directors that presumably fall within S. 102 are reinforce in S. 115(3), which restricts the
authority of directors to delegate this power. This implicitly suggests that these powers are powers of directors.
CBCA, s. 115(3): Restricts authority of directors to delegate powers. Powers include:
(a) Submission to shareholders of any question or matter requiring approval of shareholders
(b) Fil a vacancy among directors or in the office of auditor, or appoint additional directors
(d) Declaration of dividends
(e) Purchase, redemption, or other acquisition of shares issued by corp
(g) Approval of management proxy circular
(h) Approval of takeover bid by corp or directors’ circular prepared in connection w/ takeover bid
(i) Approval of any financial statement put before shareholders
Other powers: CBCA also specifically allocates several powers to directors:
Power to adopt, amend, or repeal bylaws:
Bylaws contain information on the day-to-day management of the corporation – more detail because easier to amend than
articles (which require SH approval, thus are kept relatively simple)
S. 103: Directors have power to adopt, amend, or repeal bylaws, subject to articles, bylaws, and USA
Qualification: Any change directors make in bylaws must be put before shareholders at next annual shareholders meeting
Change effective until next SH meeting and thereafter only if approved by SH or approved as amended
Power to Borrow:
S. 189(1): Directors have power to borrow subject to articles, bylaws, or unanimous shareholder agreement
S. 189(2): Directors can delegate borrowing power to director, committee of directors, or officer, subject to any restrictions in
articles, bylaws, or unanimous shareholder agreement
Power to Issue Shares:
S. 25: Directors have power to issue shares subject to a/b/USA– cannot delegate this
Directors decide when to issue shares, who to issue them to, for what consderation
Scope: Can only issue shares/class of shares provided for in the articles (may be authorized limit)
S. 27: Directors have power to issue shares in series if that power is given to them in the articles
Directors can issue more shares of a given class with variations on some of he rights attached to the share, but no
series in a given class can have prioroity over other series wrt dividends/liquidation rights
Appointment of Additional Directors:
S. 106(8): If articles so provide, directors can appoint one or more additional directors
Appoint of additional directors limited to 1/3 of directors elected at previous annual shareholder meeting
Filling Vacancy on BOD:
S. 111: Directors have power to fill vacancy on BOD arising due to death or resignation of director
Cannot fill vacancies arising from increase in number or minimum number of directors required by articles
S. 109(3): Directors have power to fill vacancy created by removal of director at SH mtg if that mtg does not replace the director
Filling Vacancy in Position of Auditor:
Where auditor is appointed, it normally done at annual shareholders meeting
S. 166(3): If auditor resigns during year directors given power in s. 166(1) to replace auditor unless articles of corp require that
vacancy in position of auditor can only be filled by shareholder vote
Calling Shareholder Meeting: – mandatory power (not default)
S. 133: Directors of corp must call annual or special SH meetings. Power to send notice of mtg and determine agenda of mtgs.
Significant power for directors b/c it allows them to exert considerable control over governance of the corp
Shareholders might requisition a meeting in certain circumstances, but calling shareholder meetings is primarily director power
Power to Appointment Officers, delegate power to officers, determine compensatio of D/O’s
S. 121: Directors designate offices of the corporation, appoint officers, and delegate powers subject to a/b/USA
Power to decide what will be the titles of officers (president, VP, etc), and power to appoint these officers.
Power to delegate power to the officers.
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S. 125: Directors of corp have power to determine remuneration for directors, officers, and ee’s of corp subject to a/b/USA.
Obvious potential for COI for directors to determine their own compensation, but CBCA still allows them to do so
because corporations that publicly distribute securities will still be subject to securities regulatory requirements.
Scope of Directors’ Power to Delegate their Powers – cannot delegate ALL powers
Following principles come from American cases. Cases attempt to strike balance between allowing directors to
delegate power but still retain scope for SH to retain control over management of the corporation.
US cases relevant in CBCA jurisdictions: relevant where corporate statutes do not address scope of delegation
S. 115(3): These powers of directors cannot be delegated to management
Cannot delegate ALL powers of directors to management, and effectively close out shareholders (Hayes v Canada Atlantic)
Cannot delegate all of director’s power to a new management, in lieu of having SH formally appoint management
Directors can delegate certain managerial duties, but cannot delegate these duties and powers indefinitely through the management
contract (Sherman v Indian Mutual)
Contrary to public policy for director to delegate powers to management for too long a period in k and take powers from SH for
too long (Sherman v Indiana Mutual)
BOD may delegate their authority to act, (can delegate their management authority) but BOD cannot completely delegate their function to
govern - Corp’s affairs must be managed by duly elected board (Kennerson)
It is a matter of degree to determine whether a management k will be invalid - If K attempts to delegate substantially all corp powers,
then it has gone too far (Kennerson)
Consider the length of delegation, the extent of the powers delegated, etc (Kennerson)
Hayes v. Canada-Atlantic & Plant S.S. Co.
Letters patent permitted directors to appoint executive committee (consisting of two directors and a president) with full powers of
the BOD. Executive committee took over management and effectively froze out the SH with the majority of shares by removing him
as officer giving the committee a salary (and ensuring no remuneration for SH), ensuring there would be no SH meetings unless called
by the president. Held that this was invalid – cannot take away all powers of the directors.
o
NOTE: Today, SH would claim oppression remedy.
Sherman & Ellis v. Indiana Mutual Casualty
20 year contract for executive management of company provided by management firm. Company terminated k, firm sought damages
from breach of contract. Company challenged validity of k. Held: Contract invalid, contrary to public policy because delegated power
to management for too long.
Kennerson v. Burbank Amusement Co.
Employment k gave employee full management powers of company for 5 years. Held: K void because it confers upon the employee
the practical control and management of substantially all corporate powers.
Qualification to Sherman: Management contracts not illegal – problems are of degree – can delegate some powers, not all.
Removal of Officers  Power of SH constrained by long term k’s
SH’s ability to remove officers is key to ability of SH to exert control over the corp. If SH could replace directors but not the officers, their
ability to exert control over the management of the corp would be limited.
Constraint on removal of officers: Often offered long-term K’s, and breaching these k’s by removing officers could involve actions for
wrongful dismissal with significant costs in damages.
Courts unwilling to allow SH’s to have better control over management by breaching long-term officer contracts without paying
damages by saying ks are contrary to public policy for interfering with SH control over management.
Court’s general approach is to uphold long-term employment k’s as valid. Management can be removed and k’s can be breached, but
company must award damages for premature termination.
Company can remove a person from their office, but if this is contrary to provisions of the terms of their employment k, then company
must pay damages (Paramount Publix)
A person can be removed from their particular office or agency without consequence, but if they are dismissed entirely, this is a
breach of the employment contract and damages must be paid (Paramount Publix)
Constructive Dismissal: An officer who is removed from office, but not dismissed from employment, can still be entitled to damages for
breach of k where his job duties are altered such that he can no longer carry out his duties under the k, or where the the k provided that
he would be employed at that particular office. (Champagne)
If K requires a continuance of existing state of circumstances in control of the contracting party, then there is an implied obligation on
the contracting party, not to do anything of his own motion to put end to that state of circumstances (Shindler)
Shindler v Northern Raincoat: SH resolution approved removal of person from his position as director. S sued because this
meant he lost his position as managing director. Articles stated that appointment of managing director is contingent on the
person being a director. Held: Damages awarded for wrongful dismissal – S unable to remain management director because SH
breached obligation to put an end to circumstances required to allow him to retain this position.
Policy for upholding long-term K’s:
Benefit of long term k’s:
Reduced overall compensation levels: Officers willing to accept less compensation in return for job security of longterm k.
Incentive for officers to invest in and develop firm specific human capital in the corp - it takes time and effort to
develop knowledge of business, customers, internal procedures, and this knowledge is not trasferrable to another job
yet is important to effective management, so would be reluctant to acquire this knowledge if their time with the corp
was tenuous. This knowledge very important to effective management of the corp.
Tendency of courts to uphold long-term employment K’s
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1. Employee Reliance: Ee reasonably expects to be either employed for term of K or adequately compensated for
early dismissal
2. Company Unjustly Enriched: Employee has accepted lower compensation for job security
3. Incentive to Invest in Firm Specific Human Capital Courts leave it to corp to set compensation that makes this
trade-off creating incentive for Ee’s to develop firm specific human capital and retaining potential for takeover
Trade-Off Between Replacement of Management and Job Security:
Company wants to retain potential for a takeover if management does poorly. Wants to promote ability of a SH to make a
takeover bid and be able to elect new BOD and replace management if management doing poorly. If doing so requires paying
huge damage awards, then deters takeover of corp and subsequent replacement of management.
Golden Parachutes: Management can be removed, but will receive lucrative compensation.
Liquidated damages term in employment K for corp executives that give them lucrative compensation if they dismissed
Tin Parachutes: Less lucrative K’s that have replaced golden parachutes and which have been upheld by courts.
Advantages Reduces management’s incentive to resist takeover bids – can be replaced if performing poorly, will not resist
because of large compensation. Also allows mgmt to signal to mkt that they will perform in SH’ interests (credible b/c signals
that if they do poorly, can be replaced)
Excessive Parachute Provisions: If info on these K’s is available to market and investors can properly assess their effect, then they would
presumably reduce price of shares where parachute provisions so generous they serve to discourage takeovers
Could make it difficult for corp to raise capital required to carry on business
Directors’ Meetings (CBCA)
Controlled mostly by corporate bylaws – CBCA does not provide much for detail concerning meetings of directors. Details left to
bylaws of corporation
CBCA doesn’t say how often meetings have to be held, but the failure to hold a meeting for a long time could constitute a breach of
the Directors’ DOC (s. 122(1)(b) – above)
Place: S. 114(1): Directors may meet at any place and on such notice as the bylaws require, unless articles or bylaws provide
otherwise - Default term
Quorum: S. 114(2): A quorum of directors (i.e. minimum numbe necessary to conduct business) may exercise all the powers of the
directors, and a quorum is the majority of the directors or a majority of the minimum number of required directors.
o
S. 114(2): Quorum is a majority of the board or a majority of the minimum number of directors in the articles – Default
provision
o
S. 114(3): Mandatory provision: at least ¼ directors present must be resident Canadians, and if less than 4 directors, 1
must be resident Canadian.
Notice: S. 114(5): A notice of a meeting of directors must set out any matters to be dealt with in 115(3) (submitting matters for
approval, filling a vacancy, etc), but need not set out the purpose of the meeting.
o
S. 114(6): A director may waive a notice of a meeting of directors in any matter

Attendance of director at a meeting of directors is a waiver of notice of the meeting, unless director attends
meeting for the express purpose of objecting to the transaction of business at the meeting on grounds that the
meeting was not lawfully called (ex b/c meeting deals with business not provided for in S. 114(5) and notice not
given)
Meeting by conference call: S. 114(9): A director can participate at a meeting via electronic communication – will be deemed to be
present at meeting
One director meeting: S. 114(8): Where a corporation has only one director, he/she may constitute a meeting
Resolution in lieu of meeting: S. 117: Not necessary to hold a meeting of directors where all directs sign a written resolution in lieu of
meeting – usually in closely held corporations.
o
Resolution can be written and circulated among directors
Number of meetings annually: CBCA does not prescribe frequency of meetings, but failure to hold meeting can give rise to liability
for breach of duty of care under S 122(1)(b)
HOW BOARDS OF PUBLIC CORPORATIONS OPERATE (STUDY)
Legal notion of function of directors: Legal structure of corporation suggests BOD has unlimited control over corp and are the apex of
the corporate heirarchy: Directors manage or supervise management, appoint president, determine remuneration, set corporate
strategy, hire and monitor senior officers, etc (Myles Mace)
Reality: Studies in 1970s and 1980 found this was untrue. (Conference Board of Canada)
Directors do not really manage corporation, it is the management (officers) who control the board: set corporate strategy and
oversee management, controls who will be hired as senior officer and president.
o
BOD rubber stamds management decisions. Board hesitant to fire top management, BOD don’t really make decisions but
just give stamp of approval, don’t really appoint president (this is done by outgoing president, BOD always approve).
Suggestions for alternate functions the BOD may fulfill:
o
BOD should be doing what they can realistically do – select, fire, monitor the president. To do this, BOD must be controlled
by non-management outsiders, and auditing committee should be entirely made up of outside directors who have sole
control over proxy solicitation process. Majority of directors must be independent. (Eisenberg)
o
Saucier Report: on corporate governance: Suggests there are 6 core functions of BOD: (this is consistent with legal model)
1. Choosing and appointing CEO
2. Setting board parameters w/in which management team operates (strategic planning, etc)
3. Coaching CEO and management team
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4. Monitoring and assessing performance of CEO
5. Setting CEO’s compensation and approving compensation of senior management
6. Providing assurance to shareholders and stakeholders about integrity of corp’s reported financial performance
Board Structure Requirements Under CBCA: Outside/Independent officers
S. 102(2): Public corporation must have at least 3 directors, and at least 2 of these directors must not be officers or employees of the
incorporation or any of its affiliates.
Mandatory requirement - rationale that officers and employees are not independent, and independent directors must be on
board.
Need not be majority of independent directors – if more than 3 directors, only 2 must be independent.
Outside directors do not include employees or officers or their affiliates, but do include person who may have had some
business relationship with the corp and who may not be independent since their engagement with the firm depends on their
cooperation with management (retired officers, lawyers from firm representing corp, etc.)
Private corporation can have 1 director
S. 171(1): Distributing corporation shall have auditing committee of at lest 3 directors of corporation, and two of these must be nonofficers or employees.
Outside Director Requirements under the CBCA
Independent directors: Not connected to company in a way that would affect their decisions (i.e. no officers or employees of the
corporation)
Studies on the effectiveness of outside directors indicate that outside directors tend to rubber stamp management decisions, or an
outside director who is the CEO of another corporation will make a mutual understanding between the outside director of corp A
(who is also CEO of corp B) to not rock to boat on corp A as long as the CEO of corp A (who is director of corp B) will not rock to boat
at corp B.
Advantages of outside directors:
o
Assurance of independent monitoring of management should increase the value of shares, because this signals that the
BOD will replace weak managers
o
This would be in best interests of promoters b/c it would facilitate raising of capital by more easily firing managers that do
poorly
Issue: Should CBCA require majority independent BOD? Some on-independent persons can be useful:
o
Firm’s accountants, lawyers, bankers useful as directors on BOD to provide useful advice or info on corporate affairs, but
not seen as “independent” bc corp is their client.

If BOD required majority indep directors, and these persons were excluded as independent, BOD would have to
significantly increase in zie to have these people on the Board, and this may become unwieldy and not function
effectively.
o
Outside directors need information and expert advice to make good decisions. Expensive for BOD to engage separate
expert advice and independently acquire information about company.
o
Compensation concerns: BOD may have incentive to approve practices that increase stock prices if BOD compensated by
stock options, and this may misinform public about true financial situation of company.
Companies must adhere to securities regulation requirements for disclosure of independent directors on BOD whenever company
issues public securities:
Securities Regulatory Corporate Governance Requirements for Public Corp’s: Disclosure of Independent Directors
Corp Governance Disclosure Requirements Under Securities Regulation: NI 58-101
Any time corporation distributes public securities, or solicits a proxy to elect directors – corporation must also provide
disclosure on the corporation’s governance: must disclose identity of directors who are independent and not independent.
Not required to have independent BOD, but must disclose to investors aspects of corporate governance including who
is independent
Independent: Director is not independent if he has relationship w/ corp that could in view of issuer’s BOD be reasonably
expected to interfere with exercise of member’s independent judgment
Not independent if has been an employee or officer in last 3 years, or your partner has been
Not independent if you a lawyer whose law firm is employed by corporation
Corp governance disclosure must also note if majority of board of directors is independent, and if not, indicate how board
facilitates independent judgment in carrying out its responsibilities
Must disclose attendance records of each director for all board meetings in the year, including written mandate of board, code
of ethics for management, must describe process that BOD determines compensation for directors and officers (i.e. determined
by board or with independent compensation committee).
Corp Governance Guidelines Issued by Canadian Securities Administrators: NI 58-201
Guidelines for good corporate governance that are not prescriptive, but CSA’s encourage issuers to consider guidelines in
developing their own corp governance practices
(i) Composition of Board and Meetings of Independent Board Members:
BOD should consist of majority of independent directors; chair of BOD should be independent director
Independent directors should hold regularly scheduled meetings at which non-independent directors and members of
management are not in attendance
(ii) Board Mandate: BOD’s should adopt written mandate acknowledging its duty to corporation, including creating culture of
integrity throughout corporation.
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Mandate should identify risks ob business and ensure there is a system to manage risks, set out expectations and
responsibilities of directors, adopt strategic planning processes, address communication policies and develop
corporation’s approach to corporate governance.
(iii) Orientation and Continuing Education: BOD should ensure all new directors receive comprehensive orientation, understand
nature and operation of corp’s business, and provide continuing education for all directors
(iv) Code of Business Conduct and Ethics:
Board should adopt written code of business conduct and ethics with written standards reasonably designed to
promote integrity and deter wrongdoing (proper use of corp’s assets, confidentiality, fair dealing rules)
BOD should monitor compliance w/ code and must publicly disclose material departures
(v) Nominating Committee: Board should appoint nominating committee composed entirely of independent directors
S. 115(1): Directors may appoint a committee of directors, and delegate a power to these directors
Nominating committee should consider competencies and skills BOD as a whole, director, and each new nominee
should possess
(vi) Compensation Committee: BOD should appoint compensation committee entirely of independent directors, and should:
(vii) Regular Board Assessments: Each director’s effectiveness and contribution is assessed and mandate of board is reviewed
(viii) Enforcement: Policy not intended to be prescriptive
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SHAREHOLDER VOTING RIGHTS
CBCA a division of powers:
SH are given series of specific powers,
Directors are given series of specific powers (power to appoint officers, borrowing powers, power to initiate bylaw changes)
AND residual power to manage or supervise management of corp
Division of powers includes mandatory aspects, but also default:
Mandatory: Power of SH to elect directors, approve changes in articles and approve amendments or bylaws.
Default provisions:
Specific powers allocated to directors can be reallocated to SH by articles, bylaws or unanimous shareholder
agreement.
S. 102: Management, or supervision of management, by directors can only be reallocated by unanimous shareholder
agreement
SH do NOT have power to manage (no power to override/control director’s management decision)
1) Power to Manage: Directors have power to manage corp, not shareholders (s. 102)
Shareholders cannot dictate to directors what directors are to do and how to exercise their management powers (Automatic
Self-Cleansing Filter Syndicate)
Automatic Self-Cleansing Filter Syndicate: Even though 55% of SH voted to sell the assets of the corp, the
directors did not think this was in the best interests of the company. Court held that directors were not
obliged to sell assets – directors have power to manage, and this includes power to sell assets.
Directors are not agents of the shareholders; they are agents of the corporation. Shareholders do not have an overriding power
over directors (cannot override director’s decisions)
2) Shareholder Powers in Case of Deadlock: In the case of deadlock on BOD where nothing can be done by BOD, shareholders have the
power appoint new directors at extraordinary meetings to ensure the continued viability of the corporation. (Potter)
Shareholders normally have power to appoint directors through resolution of SH (S. 106(3)) so Potter jurisprudence unclear on
whether SH would be given the power to exercise a management function in the case of director deadlock.
Barron v. Potter [1914] 1 Ch. 895
Two directors in company, and two directors required for a quorum. Tie caused standstill. Held: SH could appoint new
directors by resolution at an extraordinary meeting since “for practical purposes there was no board at all,” and SH
election of directors was required to avoid the ongoing deadlock.
Shareholder Powers Under CBCA:
Shareholder powers exercised through voting at SH meeting by shareholders with general right to vote – vote on resolution of SH
Share with non-voting shares do not have right to vote on these matters (Exception: class voting rights)
Power to elect directors S. 106(3) – mandatory provision
Power to elect directors at annual SH meeting – important for SH to exert control over who manages corp, allows management
to be changed through a takeover bid
Power to remove directors S. 109
Power to remove directors by ordinary resolution
S. 109(3): SH can faill vacancy resulting from removal at same meeting where removal was approved
Power to amend the articles to increase or decrease the number of directors, or min/max number of directors by ordinary
resolution (S. 112)
Power to amend bylaws S. 103 - default provision
Directors have right to initiate bylaw changes (S. 103), but these amendments must be ratified by shareholders at the next SH
annual meeting. SH have the power to confirm, reject or amend bylaw amendments made by directors, or repeal by ordinary
resolution.
SH can make proposals for changes in bylaws (S. 137)
Power to approve fundamental changes by special resolution S. 173  Power to amend the articles
Special Resolution S. 2(1): Requires 2/3 of votes cast in respect of particular resolution at shareholders meeting
NOTE: S. 173 applies to voting shares
S. 173(1): Amendments of Articles: Articles of corporation may be amended by special resolution to:
(a) change the corporate name name;
(b) change the province in which its registered office is situated;
(c) add, change or remove any restriction on the business or businesses that the corporation may carry on;
(d) change any maximum number of shares that the corporation is authorized to issue;
(e) create new classes of shares;
(f) reduce or increase its stated capital, if its stated capital is set out in the articles;
(g) change the designation of existing shares
(h) change the shares of any class into a different number of shares of the same class
(i) divide a class of shares, whether issued or unissued, into series and fix the number of shares in each series and the
rights, privileges, restrictions and conditions thereof;
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(j) authorize the directors to divide any class of unissued shares into series and fix the number of shares in each series
and the rights, privileges, restrictions and conditions thereof;
(k) authorize the directors to change the rights, privileges, restrictions and conditions attached to unissued shares of
any series;
(l) revoke, diminish or enlarge any authority conferred under paragraphs (j) and (k);
(m) increase or decrease the number of directors or the minimum or maximum number of directors
(n) add, change or remove restrictions on the issue, transfer or ownership of shares; or
(o) add, change or remove any other provision that is permitted by this Act to be set out in the articles.
NOTE: S. 173 is subject to S. 176 If amendment in articles would prejudice SH rights of a certain class, these SH might have a
class voting right and a special resolution of that class may be required.
Other Fundamental Changes Requiring Special Resolutions:
S. 183: To approve amalgamation of the corp (joining two separate corps into a separate third corporation)
S. 189(3): Sale or lease of all or substantially all of corp’s assets
S. 188: Continuance of corp under laws of another jurisdiction
S. 211: Liquidation and dissolution of corp
CLASS VOTING RIGHTS AND FUNDAMENTAL CHANGES  SH HAS CLASS VOTING RIGHT TO APPROVE FUNDAMENTAL CHANGES TO THEIR SHARES
Class voting right: Mandatory right: Even if share class lacks general voting right, class might have right to vote in certain situations where
rights of class would be prejudicially affected by the change
Protect shareholders against (1) changes in their share rights without their approval and (2) against creation of rights for other classes of
shares that would prejudice their rights
S 176(1): When a class of shares would be affected by an amendment in the articles in a way that triggers S. 176 (i.e. in any of the ways
described under S. 176), that class must approve the change by class voting right before it can be passed.
S. 176(1): Each class that is affected must pass special resolution for amendment to be approved.
Right to vote as a class means that the class must approve the proposed change by special resolution of that class alone
Protects minority interests of class by requiring class approve change by special resolution (s. 2(1))
S. 176: Situations When Class Voting is Required:
(a) To increase or decrease any authorized limit on class of shares
(b) Where there is an exchange, reclassification, or cancellation of shares
(c) To add, change, or remove rights, privileges, or restrictions on a class of shares
(d) To increase rights or privileges of any class of shares having equal or superior rights to shares of such class
(e) To create new class of shares equal or superior to particular class
Ex. to make common shares rank equally with preferred shares in respect to dividends
(f) To make inferior class of shares equal or superior to a particular class
S. 176(4): Series Vote: If series of shares within a class is affected by a resolution in some manner different from other series of class, then
the series of the class will have a right to vote separately as a series
Series of shares adversely affected differently than other shares in that class votes separately as a series
Other Aspects of Class or Series Voting Rights:
Vote whether or not they otherwise carry a right to vote S. 176(5):
S. 175(5): Class shares with a right to vote as a class carry the right to vote whether or not class otherwise carries right
to vote.
I.E. These shares have a class voting right under S. 176 even though they otherwise do not have a right to vote
Separate resolutions required S. 176(6)
Separate class resolution required to amend articles, and resolution must be special resolution of class
Class voting in fundamental changes
Class voting rights often (but don’t always) arise in fundamental changes to articles as well
S.. 183(4): Amalgamation – if amalgamation would affect a class in a way that would triggers S. 176
S.. 189(7): Sale, lease, or exchange of all or substantially all assets of the corp – if it affects a class re S. 176
S.. 211(3): Liquidation and dissolution – dissolution ALWAYS must be approved by each class, regardless of whether
S. 176 is triggered
Must be class vote on continuance to extent any change would occur in relative rights of classes of shares
SIGNIFICANCE OF VOTING RIGHTS
Rational Shareholder Apathy: Problem in widely-held corp’s; shareholders have small stakes, making it not worthwhile to monitor mgmt.
Shareholders might also be tempted to free-ride on monitoring efforts of other shareholders. If all shareholders behave as such, then there
no monitoring and no informed and carefully considered exercise of voting rights.
If SH don’t like the way management is being carried out, may be easier to sell their shares that exercise voting rights.
Why Shareholder Voting Matters:
1. Shareholder Monitoring: Many corps have substantial control blocks where control block holder will have greater stake and
thus greater interest in monitoring management.
Blocks sell at premium to other shares and, where large block trades occur, often followed by changes in senior mgmt
of corp
Control blocks encourage SH to monitor management.
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2. Market for Corporate Control: Shares can be taken up in takeover bid allowing bidder to acquire sufficient shares to take
control of corp. By distributing voting shares to public, promoters expose themselves to risk of a takeover and this gives them
incentive to manage effectively to avoid a takeover.
Knowing that poor mgmt will lead to takeover and replacement of mgmt, investors likely willing to pay more for
shares – possibility of takeover gives assurance that management will manage effectively
3. Transaction Cost Theories: Transaction costs often incurred when entering into transaction (i.e. investor incurs cost of
assessing value of securities before investing in them)
In purchase of shares, investor might incur cost assessing share value. Extra cost can be compensated for when SH
ends up with the best value for their shares.
But when management is poor, the gain is removed.
right is mechanism for protecting against such post-transaction opportunism
 EXAM: SH or directors did a certain act/authorized something/passed a resolution for something. Is this a valid exercise of their power
(i.e. does it need to be complied with?) Is this a power of SH or power of directors?
1) In order to be enforced, whatever the action was must have been within the power of the SH or directors.
2) Determine why this would be a power of the directors or the SH:
o
Powers of directors and SH set out in CBCA: See if this power is specifically delegated in CBCA
o
If not, it is likely part of S. 102 management power of directors – residual power. A power fits into S. 102 if it is not an
enumerated power anywhere else.
o
Go through other possible powers: Say here are the powers other than management powers that have been specifically
allocated to SH, here are the powers allocated to directors. None of these apply here, so this appears to fall under S. 102.
o
This is reinforced by the fact that S. 115 prevents the directors from delegating this power. The inability to delegate this
power implies that directors must have this power to begin with.
3) If power is not mandatory, but default, directors may have delegated a power to the SH (or to officers/ managers) through the
articles, bylaws, or unanimous shareholder agreement (or through USA only if directors delegated a S. 102 power)
4) Is this a power of directors that directors are forbidden to delegate? This is not a valid power if it has been delegated..
5) Directors may delegate their power to manage, but they cannot delegate away all their powers to manage.
6 Is this a case of BOD deadlock? Then SH can appoint a director to ensure the continued viability of the company (Barron v Potter)
7) SH cannot force a director to act a certain way through resolution of SH if this is not a power of SH
o
May look like Automatic Syndicate case: English case, but many Canadian cases have been held along the same lines:
Shareholders cannot dictate to directors what directors are to do and how to exercise their management powers – cannot
impinge on or overrides director’s management decisions.
8) S. 137: SH can make proposal for changes in bylaws – but this is only to request that the shareholders can do something, and is not
an order to directors that they must be able to do this.
9) S. 146: SH can revoke director’s power to manage bu USA – see “re-allocation of power test” below)  Likely only in CHC
 EXAM: FUNDAMENTAL CHANGES AND CLASS VOTING RIGHTS
ISSUE: Company wants to create new class of shares, wants to make a fundamental change to articles or to company. Is this possible? What
resolution of the SH is required to create a new class of shares? What other rights might some SH be able to exercise?
1) Creation of a new class must be provided for in the articles – SH have the power to amend the articles (S. 173)
2) Shareholders must approve the creation of a new class because SH have power to amend the articles.
4) Determine whether fundamental change falls under S. 173, or elsewhere (amalgamation, sale, liquidation)
o
S. 173: Amending articles requires a special resolution of SH to

(e) create a new class of shares.
o
 Explain how the fundamental change falls under that provision.
5) Determine WHICH shareholders are required to make amendment: Ordinary resolution of voting shares? Special resolution of
voting shares? Special resolution of a class or series of a class of shares?
o
S. 173: Requires special resolution of all SH with voting rights
6) S. 176: Non-voting shares may have voting right of the class of shares is affected in a way triggered by S. 176.
o
If triggered, class voting right: class of shares must approve change by special resolution (S. 2(1): 2/3 votes of the votes
cast)
o
S. 176(e): Class voting right required to create new class of shares equal or superior to particular class
o
 Explain why that specific class would be affected in a way that triggers S. 176: how they will be prejudicially affected,
now the other class will have superior voting rights, etc.
o
S. 176(5): Even though class normally has non-voting rights, will have special voting rights in this case.
o
S. 176(1): Each class that is affected must pass special resolution for amendment to be approved.
o
 Explain how each class is affected. Even if one class approves amendment by special resolution, amendment will not
pass if not every affected class approves by 2/3 votes.
7)  Explain why a class would not qualify under S. 176 or S. 173 (would not be subordinate to other classes due to change so do not
qualify under S. 176, also do not have voting shares so do not qualify under S. 173)
8) Amalgamation (S. 183), sale or lease of substantially all of corp’s assets (S. 189(3)), and continuance of corp (S. 188) require vote by
special resolution of all voting shares, and may require special resolution by class voting right if S. 176 triggered
9) Liquidation or dissolution of corporation (S. 211) requires vote by special resolution of all voting shares AND by non-voting shares.
***Thus to amend articles: Voting shares must pass special resolution (S. 173), AND any class affected as per S. 176 must pass a
separate special resolution.
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10) Other rights of shareholders:
o
Management may be required to solicit proxies for the meeting
o
Shareholder proposal
o
Appraisal right – right to force the corporation to pay SH a fair value for your shares.
o
Dissent right – SH must dissent before a meeting (vote against by proxy).
SHAREHOLDER MEETINGS
SH meetings provide SH an opportunity to exercise voting rights.
Basics of SH meetings
Annual meetings: S. 133(1): Directors shall call an annual meeting of the SHs
o
Call meeting within 18 months of incorporation, annually thereater
o
Annually: between 6 and 15 months after the preceding meeting
Special Meetings S. 133(2): Directors can call a special meeting of the SHs at any time (aka extraordinary meetings in MoA)
Ordinary business: Election of directors (106(3)), appointment of auditors (162(1)), consideration of financial statements, auditor’s
report  these matters exhaust list of ordinary business
o
These matters requires an ordinary resolution (although this can be changed by USA or articles)
o
S. 2(1): Ordinary Resolution: requires a majority of the votes by SH who voted in respect of the resolution
Special business: S. 135(5): Other business (other than ordinary business) called special business
o
Special business requires a special resolution (S. 2(1))
o
Requires notice of special business (s. 135(6))
Place: S. 132(1): Meetings are to be held in Canada at a place designated by directors unless it is designated by the by-laws.
o
S. 132(2): Meetings can be held outside of Canada if such is specified in the articles, or if all the SHs entitled to vote at the
meeting agree that it will be at that place.
Quorum: S. 139(1): A quorum at SH meeting is a majority of shares entitled to vote at the meeting either preset or represented by
proxy, unless the bylaws otherwise provide
o
Default – this can be changed in articles, and you might want to do this if public company - very hard to get the quorum,
even by proxy  hard to get a majority to come vote.
o
S. 139(2): A quorum need only be present to start the meeting. It need not continue throughout the meeting.
o
S. 139(3): If a quorum is not present at the beginning, the meeting may be adjourned but no other business may be
transacted.
Notice: S. 135(1), S. 44 Regulations: Notice period of at least 21 days but not more than 60 days in advance of meeting
o
S. 134: Record date may also be set not more than 60 days ahead of meeting

Record date: Must send notice to SH about the meeting who are on the SH register – record date is that you will
send notice to people on the SH record as of this date
o
S. 135(6): Notice of special business shall state exact nature of the business in enough detail to allow a SH to make a
reasoned judgment on whether to vote for or against the resolution
S. 141(1): Voting is done by show of hands, except where a ballot is demanded
o
S. 141(2): SH can demand a ballot either before or after the show of hands
S. 20(1)(b): Minutes of the meeting must be kept
Shareholder Communication per Securities Regulation
Canadian Depository for Securities: Common to use depository institutions and other nominee ownership of securities in public
corporations to simplify SH communication. One nominee owner. When public shares issued, 1 share certificate is made in the name
of Cdn Depository for Securities who keeps the bookkeeping, and holds shares in trust for beneficial owners.
S. 51 CBCA: Corporation may treat the registered owner as the person exclusively entitled to vote  potential problem: “registered
owner” exclusively can vote – companies can treat Canadian Depository for Securities as the only person who can vote for shares,
receive dividends, etc.
o
BUT Canadian depository for securities are trustees known as “bare trustees” – must exercise their duties in fiduciary
manner, also they are an agent: they must vote in the way that the beneficial owner tells them to vote.
Canadian Securities Administrators National Instrument 54-101: Canadian securities regulators have recognized that the Canadian
Depository saves costs – but hard to communicate with bookkeeper to figure out who is the beneficial owners
o
NI requires a record date to be set at least 30 days and not more than 60 days ahead of meeting
o
25 days ahead of record date, corp must request depositories to provide list of intermediaries or nominees
o
At least 20 days before record date, corp must request names of beneficial owners of shares from intermediaries or
nominees
o
Intermediaries or nominees are to respond to request w/in 3 days
o
Intermediary can send info to corp that allows corp to communicate directly w/ beneficial owner if beneficial owner has
not objected
o
Where beneficial owner objects, materials can be sent by corp to intermediary to be forwarded to beneficial owner
Conduct of Meetings
Normal Meeting Process:
(i) The designated person takes the chair.
(ii) The chair receives the report of the scrutineers on proof of notice of the meeting and on the presence of a quorum.
(iii) Motion is typically requested to dispense with the reading of the minutes of the last annual meeting. Motion for approval of
the minutes of the last annual meeting is then requested.
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(iv) Annual report then presented with the president’s remarks; auditor’s report is read out. Then SH vote on a motion for the
approval of the financial statements.
(v) Then election of directors.
Slate is proposed by management ahead of time, and there are usually no additional nominations (in which case a
motion for approval of the slate is then voted on).
If additional nominations, then ballots distributed where the shareholders or proxyholders can mark in the nominees
in favour of whom they wish to vote their shares and noting the number of shares they are voting in favour of the
listed directors
(vi) Then motion for the appointment of auditors (who are normally the previous year’s auditors) and the meeting may then
approve a motion concerning the remuneration of the auditors.
Voting:
s. 141(1): Provides for voting done by show of hands unless poll is demanded
s. 141(2): Poll can be demanded before or after vote by show of hands
Minutes: s. 20(1)(b): Minutes of shareholder meetings must be kept (signed by chair of meeting)
Chair of Meeting:
WHO: Usually the bylaws provide that the chair of the BOD or the president of the company will be the chair at the SHs meeting.
DUTIES of Chair:
Chair of meeting must act in good faith and impartial manner (Wall)
Chair’s actions not automatically invalid just bc he has a conflict of interest: Just because the chair has an
interest in the result doesn’t mean his decisions about the result are not bona fide. (Blair v. Consolidated
Enfield)
Must allow shareholders to speak to matters before the meeting (Wall)
Chair need only allow a reasonable time for reasonable arguments and can put down minority bent on obstructing
business of mtg (Wall)
Chair can put an end to arguments to speed up meeting
Chair is not required to go behind legal title per the shareholder register and assess dispute between the beneficial
and legal owner (Marshall)
Chair would not have legal training or time to consider such dispute
Time to settle disputes would disrupt the meeting
Would be uncertainty at outset as to who could vote at meeting (chaos would otherwise result)
Meetings called by SH: Shareholder Requisitioned Meetings:
Normally directors call annual SH meetings (s. 133(1))
CBCA provides that SH holding more than 5% of the voting shares can requisition (request) directions to call a SH meeting (SH requisition
meeting)
S. 143: Holders of 5% or more of the shares carrying a right to vote at the meeting sought to be held may requisition the directors to call a
meeting of SH for the purposes stated in the requisition
Could be a group of shareholders that together own 5% of shares.
SH must:
1) Prepare a document setting out the purpose of the meeting;
2) Sign the document; and
3) Send the document to each director and to the registered office of the corporation.
Directors must then call the meeting unless
They have already set a record date for notice of a meeting
They have given notice for a meeting, or
Purpose of the meeting is one for which the directors could refuse a shareholder proposal under s. 137(5)(b) to (e)
Directors MUST call meeting within 21 days or receiving requisition. If not, any SH who signed the requisition may call the meeting
Cost to SH of requisitioning the meeting are incurred by the corporation.
Meetings by Order of Court
Application may be made by directors, shareholders, or the Director under the CBCA
S. 144(1): Court can order shareholder meeting if:
a) It is it is impracticable to call the meeting within the time or in the manner in which those meetings are to be called
b) It is impracticable to conduct the meeting in the manner required by this Act or the by-laws; or
c) for any reason the court sees fit
Court may order meeting to be called and held and conducted in such manner as court directs (including varying quorum for meeting)
Powers of Shareholders at Court Ordered Meetings: (Beinvenue)
In calling a meeting,court cannot give the SH powers beyond the powers they would hold at a normally called meeting
Widely Held Corp’s: Court can order meeting if it is in the best interests of the company to do so, and make orders to ensure that the
meeting is conducted fairly (such as appoint an independent chair).
Versus Closely-held corporations: In Canada, court refuses to call a court ordered meeting for a CHC even if there is a dispute
– court will not step in to resolve a dispute in a CHC
Intervention on Basis of Fault: Court may intervene if clear breaches of law and need for court ordered meeting to prevent further
breaches - court will order a meeting where there is illegal activity and the meeting is required to prevent breach of law, or when a SH is
not being impartial.
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Deadlock: Company cannot use the deadlock of a quorum as an excuse to prevent a majority SH from exercising his rights to remove a
director. In this case, court will vary the quorum.
Intervening in Battles for Control: Court will not favour controlling shareholder over non-controlling shareholder. Court will not vary a
quorum for the sole purpose of putting one party in control of the company’s affairs.
Court will not vary a quorum where it would have effect of locking one party into the company (i.e. leave on eparty in a very
poor bargaining position where he may not be able to get any return)
Proxy Solicitation
 Proxy solicitation: Attempt to persuade other SHs to vote a certain way on a specific matter of corporate governance
Widely held corp’s have problems of rational SH apathy and separation of ownership and control because there are so many SH (small
stakes, freerider problem).
CBCA addresses this through the mandatory solicitation of proxies, proxy circulars, financial disclosure, audit committees, SH proposals
and SH voting rights.
Definitions:
Proxy is a form signed by a shareholder that appoints a proxyholder (S. 147)
Proxyholder is a person appointed to act on behalf of shareholder (S. 147)
Shareholder entitled to vote at meeting of shareholders is entitled to appoint a proxyholder (S. 148)
Rights of Proxyholder:
Proxyholder is entitled to vote at a meeting of SH on behalf of that SH who appointed him (S. 148)
Proxyholder has same as the SH subject to the authority granted by the SH (s. 148)
Agency: Proxyholder is agent for SH – so his authority is subject to authority granted by that SH.
Proxyholder may be constrained on a vote by a show of hands when he holds proxies requiring voting in favour of a resolution while
holding other proxies requiring a vote against the same resolution (CBCA s. 152(2))
But proxyholder can then demand a poll.
Who Must Solicit Proxies:
Management must solicit proxies (i.e. send a form of proxy) to each SH entitled to vote (s. 149(1))
Unless: (a) not a “distributing corporation” AND (b) has company has 50 or fewer shareholders entitled to vote at the meeting
(see s. 149(2))
“Distributing corporation:” distributes securities broadly by way of a prospectus under provincial securities laws (see
s. 2(1) and Reg. s. 2).
Failure to solicit proxies is an offence (CBCA s. 149(3) & (4))
Solicitation of proxies could be enforced through the compliance order provision in CBCA s. 247.
Form of Proxy – Regulations S. 54 Forms must:
1) Have clear indication that someone other than a designated person can be appointed (CBCA Reg. s. 54)
Someone other than designated person who was designated by management can be chosen as proxyholder
Form has designated person’s name, also has blank spot to put in the other proxyholder’s name who SH wants
2) Have person soliciting proxies state who is soliciting (CBCA Reg. s. 54(1)).
3) Allow voting for or against resolutions or a bold-face indication of how the proxyholder will vote the shares (CBCA Reg. 54(5)
& (6)).
Form must give opportunity to vote either way
4) Providing a means by which the SH can vote in favour of or withhold voting with respect to the appointment of an auditor or
the election of directors (CBCA Reg. 54(7)),
Cannot vote against director: can only vote for director, or withhold vote; same for auditor
National Instrument 51.012 incorporated by reference into CBCA – all rules for form of proxy are now in this national instrument.
Proxy Circulars:
 Every time a SH vote/meeting is going to occur (or any other “solicitation”), management must provide a proxy circular to SH containing
information about the matter for which the proxy is soliticted (who can vote at meeting, business of the meeting, any proposal that will be
made, etc).
 A person who solitics proxies (attempts to persuade other SH) must send out a proxy circular.
Who: Anyone who “solicits” proxies must send out a proxy circular (CBCA s. 150)
o
Management must solicit proxies, and so management must also provide a proxy circular
Definition: Document that contains sufficient information to allow a shareholder to make a decision on each matter of business for
which the proxy is solicited.
o
Statutory forms set out certain required information, and require disclosure of any other information necessary to allow
the shareholder to make a reasoned decision on matters before the shareholders’ meeting (CBCA s. 150 and Regs. 35 and
38)
If proxy circular contains wrong information or omits a material fact, court may make an order it sees fit to remedy the situation
(such as restrain the solicitation, adjourn the meeting, or order a correction to the circular, or declaring that a resolution passed at
the meeting is void (S. 154)
Meaning of Solicitation: s. 147:
Includes request to execute (or not execute) a form of proxy or to revoke a proxy, and sending of a form of proxy or other
communication to a shareholder under circumstances calculated to result in the procurement, w/holding, or revocation of a proxy –
broad definition
Does not include any public announcement – SH can publicly announce how they will vote and give intended reasons or their vote
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without triggering the proxy solicitation requirements.
SH can communicate with other SH without triggering the proxy solicitation requirement if the communication is not made “under
circumstances reasonably calculated to result in the procurement of a proxy”
Shareholder Proposals
 SH entitled to put proposals before a meeting of SH to the SHand, and to put a supporting statement on the mgt proxy circular (i.e. can
solicit proxies but not have to solicit their own proxy circular)
Corp statutes give SH rights to vote over matters such as election of directors and fundamental changes (amendments to articles or
bylaws), but management can still limit the influence of shareholders and retain control over the meeting if it is able to control the agenda.
Solution: S. 137: Shareholders entitled to put proposals before the meeting and to put a supporting statement on the management proxy
circular
This allows SH to put their own resolution before the other shareholders at low cost
Gives shareholder a much cheaper way to get a proposal before the other shareholders than having to issue his own proxy
circular by instead submitting a proposal on the management proxy circular.
S. 137(1)(a) A registered shareholder or beneficial owner of shares is entitled to submit a proposal.
Shareholder or group of shareholders is entitled to submit proposal if they (i) have at least 1% of voting shares or (ii) value of
shares held has market value of at least $2,000, and (iii) shares have been held for at least 6 months
Proposal is to be set out in the management proxy circular - s. 137(2)
Shareholder can include a supporting statement of up to 500 words - s. 137(3) and Reg. 48
Shareholders with more than 5% of the shares of the class entitled to vote can nominate directors - s. 137(4)
SH can propose their own slate of directors before meeting
Proposal requirements: S. 137(5)
(a) Proposal must be submitted at least 90 days ahead (reg 49);
(b) Must not be for the primary purpose of redressing a personal grievance;
(c) Must not be a proposal that does not relate in a significant way to the affairs of the corporation
(d) Must not have been a similar proposal in the past two years that did not get a specified minimum support
(e) Must not be for the purpose of securing publicity
Purpose can be political statement as long as the proposal relates to the affairs of the corporation.
Refusal of proposal:
If corporation refuses the proposal it must give notice of its refusal (s. 137(7))
SH can apply to court for a consideration of whether the proposal was properly refused (s. 137(8))
Corporation can apply to court to determine whether the proposal can be properly refused (s. 137(9))
Disclosure: Financial disclosure, access to records, and other forms of disclosure:
NI 52-108: Reporting issuer auditor must be public accounting firm w/ written agreement w/ Canadian Public Accountability
Board
Auditor must be in compliance w/ any restrictions or sanctions imposed by Cdn. Publi Accountability Board
NI 52-109: Annual and interim financial statements must be certified by CFO and CEO of reporting issuer
Financial Disclosure
 In addition to proxy circular, SH must be provided with financial disclosure to assess the performance of corporate management:
S. 155: Directors of the corporation must put before the shareholders comparative annual financial statements
S. 158 - financial statements must be formally approved by the directors
o
Financial statements must include a balance sheet, income statement, statement of retained earnings (showing increases
to and decreases in retained earnings) and a statement of changes in financial position
o
Statements must be prepared according to “Generally Accepted Accounting Principles” following CICA guidelines
Auditor (regarding Financial Disclosure):
Distributing corporation must appoint an auditor (CBCA s. 162, 163)
o
Non-distributing corporation can dispense with the appointment of an auditor (CBCA s. 162, 163)
Auditor of the corporation must make an examination as necessary to report on the annual financial statements in accordance with
the guidelines in the CICA Handbook (S. 169)
Report of the auditors is to be put before the shareholders (s. 155)
Distributing corporation must have an audit committee consisting of at least 3 directors a majority of whom are not officers or
employees of the corporation (S. 171)
o
Audit committee must review financial statements before they are approved by directors (S. 171(3))
o
Auditor entitled to notice of and to be present at every meeting of the audit committee (s. 171(4))
Auditor must not have a conflict of interest with the corporation (S. 161)
o
A person is not independent if the person (or his partner) is a business partner, director, officer or employee of the
corporation, beneficially owns the corporation, has an interest in securities of the corporation within 2 years of appoint of
auditor.
NI 52-109: The auditor of “reporting issuer” must be a public accounting firm that has entered into a written agreement with the
Canadian Public Accountability Board
o
Auditor must be in compliance with any restrictions or sanctions imposed by the CPA Board
NI52-109 requires annual and interim financial statements to be certified by the chief financial officer and chief executive officer of
the reporting issuer
Access to Records
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 SH given access to certain records of the corporation
S. 20(1): Corporation required to prepare and maintain, at its registered office or at records office designated by the directors:
o
(a) the articles and by-laws and all amendments to the articles and by-laws,
o
(b) a copy of any unanimous shareholder agreement, the minutes of meetings and resolutions of shareholders,
o
(c) copies of the notice of directors and changes in the directors and their addresses, and a securities register
s. 20(2): Corporation must prepare and maintain accounting records and minutes of directors’ meetings
S. 21(1): Non-distributing corporations: shareholders and creditors and the Director can have access to the corporation’s records
(other than the records of the directors’ meetings and the accounting records)
o
Where corporation is distributing, any person can have access to the records of the corporation (other than the records of
the directors’ meetings and the accounting records) (S. 21(1))
Securities Law Requirements – continuous disclosure
Where a corporation has distributed securities under a prospectus, corporation becomes “reporting issuer” and is subject to
securities regulation continuous disclosure requirements including financial disclosure, information circulars for security holder
meetings, annual information forms, insider trade reports, timely disclosure
Access to List of Shareholders
 Can request list of SH to use for a purpose relating to the affairs of the corporation. Important for engaging in proxy solicitation,
requisitioning a meeting, making a takeover bid
Who can request: Any person with respect to a “distributing corporation” can request a list of SH of the corporation (S. 21(3))
o
Non-distributing corporation: SH and creditors can have a list provided
How to request list: S. 21(3): List can be requested by (i) paying a reasonable fee (set by the corporation), (ii) sending an affidavit with
name and address indicating that the list will not be used for a purpose other than (S. 21(9)):
o
(a) an effort to influence the voting of shares of the corporation;
o
(b) an offer to acquire shares of the corporation; or
o
(c) any other matter relating to the affairs of the corporation.
Obligation on the Corporation: S. 21(3): Corporation must provide the list within ten days and it must be made up to within 10 days
prior to the receipt of the affidavit
Use of request that corp provides a list of SH: Corporation may take steps in response to knowing something is up b/c of request.
Access to Shareholder Register
 SHs or creditors of a non-distributing corp, and anyone in a distributing corp, can inspect the SH register for a corporate purpose
Corporation is required to keep a shareholder register with the names and addresses of the shareholders (s. 20(1)(d))
Right to inspect the list of shareholders at the records office of the corporation during usual business hours (S. 21(1))
Person seeking access to the list must provide an affidavit that is the same affidavit required for a request to have the corporation
prepare a list of shareholders (S. 21(1.1))
S. 21(1) allows shareholders or creditors of a non-distributing corporation and any person in case of distributing corporation to
inspect the shareholder register during usual business hours
Corporate Purposes
Person seeking access to SH list must have a corporate purpose
Mere statement that one has a proper purpose is not sufficient to constitute a “corporate purpose”
Proper purpose for access to SH list is one connected with a genuine economic interest of the company (State Ex Rel Pillsbury)
Access to the list to impose political views on the corporation is not a proper purpose for access to SH list. Desire to communicate
wit SH is NOT per se a proper purpose.
Constraints on Inspection
Court will intervene where the right of inspection is unreasonably refused (Cooper v. Premier Trust Co., 1945)
When someone is seeking list of shareholders, corp knows something is up
o
The person interested in shareholder list is likely interested in some form of control battle (proxy contest or takeover bid)
o
Corp often tries to resist attempts to gain access to shareholder list – Court will not allow this
 EXAM: Shareholder wants company to do a certain act (ex. stop producing toxic substance). Wants to communicate with other SH about
why he wants company to do this. How can he do this?
Steps for a SH to communicate with other SH:
* SH do not have power to manage – this is director’s power (S. 102) SH cannot override director’s power. SH can amend the articles
by unanimous SH agreement, so would want to persuade other SH to vote for the amendment.
1) Management proxy circular (S. 137) – but SH won’t do this if he doesn’t want management to see what he’s trying to do
2) Must know who are the other SH. Must either request a list under S. 21(3), or go look at the SH list (during normal business hours)
3) Prove that the reason you want to see list is for a purpose that relates to company’s affairs.
o
May be some resistance form company if you ask for a list of SH. When a person asks for a list of SH, must sign an affidavit
stating that you are using it for purposes only that relate to the company’s affairs.
4) Obtain list of SH (company is obligated to provide list (S. 21(3)). Sending letters to other SH would constitute “soliciting” under S.
147, and anyone who solicits must submit a proxy circular (S. 150).
o
S. 149: Unless this is a non-distributing corporation, or has less than 50 SH.
o
Or SH could argue this is not solicitation: SH can communicate with other SH without triggering the proxy solicitation
requirement if the communication is not made “under circ’s reasonably calculated to result in the procurement of a proxy”
5) If SH sends out the letter without a proxy circular when it would be required, company can go to court to seek an injunction
preventing to SH from soliciting until he obtains a proxy circular. This is a lengthy process and it is likely that management will
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communicate their views to the other SH first, which would disadvantage the SH how wants to pursuade their voites.
6) SH can submit a SH proposal 90 days before mtg, must prove that it is for a purpose that meets the requirements under S. 137.
o
Registered or beneficial SH can make SH proposal
o
Must prove that it relates to company
CLOSELY-HELD CORPORATIONS
Widely held corporations generally publically held – have distributed shares by way of a prospectus.
Closely held corporations generally privately held – have not distributed shares widely.
Many mechanisms in statutes that address the potential for separation of control and ownership in WHC (mandatory solicitation of
proxies, proxy circulars, financial disclosure, audit committees, SH proposals, etc) do not make sense in CHCs
CBCA and other statute address differences in CHC’s by making modifications that apply only to CHC’s
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Nature/Characteristics of Closely-Held Corp:
1. Relatively few shareholders
2. Shareholders are generally active in mgmt of business
3. No established market for shares of the corp, and
4. Usually a restriction on transfer of shares
Reasons for Different Treatment:
1. Large Stakes = SH should have more decision making power in day-to-day decisions
Shareholders in closely-held corp’s tend to have substantial investments in corp and thus greater incentive to be
involved in monitoring mgmt of corp (usually by being personally involved in mgmt)
2. Separation of Ownership and Control Problem not as Severe:
Fewer SH with bigger stakes in corp, = problems of shareholder apathy and free-riding not as significant
Less need for mandatory proxy solicitation and proxy circulars
Shareholders likely to inform themselves and exercise their voting rights
Less need for mandatory financial disclosure and appointment of auditor b/c shareholders more willing and capable
to inform themselves wrt condition of company
3. Desire to Control Who One is in Business With = need for share transfer decisions:
W/o established market for shares, shareholder’s investment difficult to liquidate
Do not want to be stuck in business with others who they do not trust or believe cannot do a good job
Tend to want control over who they in business w/ and want to put in share transfer provisions
Statutory Definition of CHC
Original CBCA approach was functional approach: Overall question of whether the costs of particular mandatory provisions outweigh the
benefits. This led to different tests for financial disclosure, audit committees, proxy solicitation, etc.
Amendments in 2001 move away from functional approach to more global definition
Global definition of CHC: Whether the corporation is a “distributing corporation” – CHC is NOT a distributing corporation
“Distributing corporation:” corporation that has made a distribution of its shares under a prospectus or similar disclosure
document pursuant to provincial securities laws (CBCA s. 2(1)). Aka “public corporation”.
Statutory Modifications for CHCs
1. Waiver of Notice to Meetings
o
S. 136: Corporation won’t have to provide notice to shareholders for a SH if the shareholder has waived her or his right to
notice of shareholder meetings – normally, there is a 21 day notice period

S. 136 NOT limited to closely-held corporations, but waiver more likely and useful to CHCs to allow for the calling
of shareholder meetings without usual notice requirement
2. One Shareholder Meetings
o
S. 139(4) - allows for shareholder meetings in one-shareholders corporations (so clearly CHCs) by expressly recognizing one
shareholder meetings.
3. Unanimous Consent in Writing to Resolutions in Lieu of Meeting
o
S. 142 - SH resolutions can be in writing in lieu of holding a meeting
o
Resolution in writing must be unanimous – not ordinary or special resolution
o
Common to have usual annual meeting business of CHC done by circulating a resolution which all shareholders sign.

Write a resolution, circulate it and have SH sign it – when they all sign, resolution is passed
4. Dispensing with an Auditor
o
Distributing corporations must have an auditor. CHC can dispense of this with a resolution
o
S. 163 - allows corporation to dispense with the requirement of appointing an auditor where the corporation is not a
distributing corporation
o
Expensive to have an audit, so would waive this if you could
5. No Requirement for an Audit Committee
o
s. 171 - no requirement for an audit committee where the corporation is not a distributing corporation
6. No Management Proxy Solicitation Requirement
o
S. 149 - Mandatory solicitation of proxies by management is not required where the corporation is not a distributing
corporation and 50 or fewer shareholders
Shareholder Agreements – method to constrain SH voting
SH agreement is a voting agreement amount SH that constrains voting. Useful in CHC context (although any SH can do this).
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SH can enter into agreement as to how they will vote their shares, and this is not contrary to public policy (Ringuet v Bergeron)
Ringuet v Bergero: Provision in SH agreement that all SH’s had to vote for R has director (had to vote a certain way).
Other SH didn’t want R as director and so voted R out. R sued SH’s. Held: SH breached k. Not contrary to public policy
to agree on how SH will vote their shares.
S. 145.1: Shareholders can enter into agreement as to how they will vote their shares
Can make provisions stating that SH must vote a certain way, and it is a breach of k if they fail to do so.
Need not be unanimous
Agreement can allow SH to increase collective voting power and exercise control over corp, whether closely or widely held
In CHC, voting agreement can be used to make sure certain persons continue to be elected director in the corp or otherwise involved in
the management.
Can assign rights on shares (or just voting rights) to trustee as trust indenture that sets out way trustee is to vote the shares
Using Voting Agreements to Constrain Directors Powers:
SH can constrain how they will vote their shares as shareholders – agreements that constrain voting are valid
BUT it is contrary to public policy for directors to constrain how they would vote as directors
Directors have fiduciary duty to vote in the manner that is in the best interest of the corporation, and so cannot bind
directors in advance by agreeing to vote a certain way that may later end up not being in the company’s best
interests. (Bergeron)
Problem: SH could agree to vote their shares and make each other the directors, BUT as directors, cannot agree how they will
vote on appointing officers or other management decisions = SH who become directors unable to make SH agreements
regarding management decisions.
Constraining Directors’ Powers Under the CBCA: Unanimous Shareholder Agreements
CBCA, s. 102 and 146: Management powers of directors can be reallocated to shareholders under unanimous shareholder
agreement (so SH will then have management powers, and can thus enter SH agreement on how to vote on management
decicsions – solves above problem)
S. 102: Directors shall manage the corp subject to any unanimous shareholder agreement
SH can make a USA stating that management powers be taken from directors and put into the hands of the SH.
S. 146: USA can restrict, in whole or in part, powers of directors to manage or supervise mgmt of business of corp
SH can make a director vote a certain way under S. 146
For shareholder to reallocate powers of directors it must be unanimous (only likely to be practical in context of closely-held
corp)
Unanimous shareholder agreement can provide that certain mgmt decisions normally made by directors be made by
shareholders, and how shares are to be voted on particular management issue
Ex. Common provision in USA of a CHC: Shareholders, and not the directors, will decide who the officers of the
corporation are to be. Shares will be voted so that X will be president, Y will be VP.
Specific management powers such as declaration of dividends or issuance of shares could be reallocated to shareholders
EXAM: Re-allocation of powers: How can SH ensure that X will become director, or some other management power How can SH ensure that
they will have control over the declaration of dividends (or some other power)
EXAM  Approach to reallocating powers from directors to shareholders:
If SH’s want to have a certain power – ex to vote on who the president is, but are restricted by the fact that SH can’t agree on
how directors will vote – follow approach to remove this power from directors and put it in the hands of the SH.
(i) Identify the power that is to be reallocated to the shareholders
Identify all the possible powers of SH/directors – to which power does this act apply
Identify specific power: Ex. Jones will be appointed as an officer. The power is the power to appoint officers.
(ii) Determine the provision under which such a power is provided in the Act (e.g. borrowing power is under s. 189(1) and (2);
power to appoint officers is under s. 121, and so on)
Ex Borrowing power S. 189(1)(2),
Dividends – noytexplicitly allocated to either SH or to directors, so likely residual management powers S. 102. This is
buttressed by S. 115(3) that directors may not delegate their power to dividends.
(iii) See what methods can be used to reallocate the power  S. 146: SH can revoke director’s power to manage
S. 121 says that the power can be reallocated in the articles, by-laws or a unanimous shareholder agreement;
S. 102 says only by unanimous shareholder agreement
(iv) Assess which of these documents would be the most appropriate document for reallocating the power (in a closely-held
corporation this will normally be a unanimous shareholder agreement)
Usually this will be by USA  BUT, if SH do not all vote unanimously, cannot get USA to reallocate the power
Could put in articles – but articles difficult to amend because requires resolution of SH. Also there is a fee to add
something to the articles.
But if SH want this to be very difficult to amend later, amending articles is good option
Amend bylaws: No fee to amend by-laws. BUT tricky for SH to amend bylaws – normally this is power of directors
(although this power can be taken away form them)
Can remove the power from the directors to amend bylaws and put it in the hands of the SH.
This requires special resolution (so OK if you can’t get USA, if you can get 2/3 of votes)
(v) Once power reallocated to SH in the appropriate document, determine what SH want to agree to vote on the matter and put
the terms of that agreement in the shareholders’ agreement (S. 145.1)
What USA will state: Agreement must say that Shareholders, and not the directors, will decide who the officers of the
corporation are to be. Shares will be voted so that X will be president, Y will be VP.
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USA must (1) clearly express that the specific management power is being taken away from the directors and put in
the hands of the SH, an d(2) that SH will vote as per X.
NOTE: If impossible to obtain USA because some SH opposed, can amend bylaws and articles to take a power away from the
directors – this requires special resolution.
Share Transfer Provisions
 Provisions in CBCA that put restrictions on transfer of shares to protect SH’s interests and facilitate transfer of shares
Reasons For Share Transfer Provisions:
1. Control Transfer of shares in order to:
o
(i) avoid undesirable business associates; and
o
(ii) preserve relative interests - if SH has 25% voting rights, wants to keep this.
2. Allow Transfers so that SH have some kind of market for their shares (will be able to sell shares if they want to get out of the
business)
o
Allows SH to transfer their shares if they want to retire, invest somewhere else
3. Allow Forced Buyouts (forced buyout of shares) – allows SH to be forced out to resolve a deadlock, or to get rid of a person who
others can no longer deal with, without forcing dissolution of the company.
4. Allow Buyout of Shares on the Occurrence of Particular Events
o
EX death of shareholder or divorce (can avoid having executor spouse who inherited business/received shares in division of
property become a business associate)

Can make provision to force a transfer in this case, or provide a option for other SH to buy shares of deceased SH
o
Ex Bankruptcy of shareholder – since don’t want to share liabilities (e.g. on personal guarantees to bank) with someone
who cannot contribute to the payment of those liabilities
o
SH can make provisions that either forces a transfer in these circumstances or provides an option to the remaining
shareholders to buy out the shares
5. Provide a Mechanism for Establishing a Fair Price (otherwise anyone wanting to sell out might have to settle for a really low price o
their shares.)
Validity:
Although there is a presumption that shares are freely transferable, the transfer of shares can be restricted by express restriction. Share
transfer restrictions are generally valid w/ possible exception of absolute restriction on transfer (Edmonton Country Club)
Types of Share Transfer Provisions
1. Restrictions on Share Transfers
o
 Starting point is that shares are freely transferrable, but you can put restrictions on transfers of the shares.
a. Absolute restrictions on SH transfer does not allow transfer of any kind
o
Adv: avoids undesirable business associates, preserves relative interests of SH in the business, prevents SH from “squeezing
out” another SH (forcing to accept a low price for his shares)
o
Disadv: Not able to deal with deadlocks, can’t get money out of business if SH want to do something with it other - SH
would have to force a dissolution to get to their money.
b. Consent share transfer provisions allow shares to be transferred on the consent of certain persons (usually BOD – which usually
consists of shareholders of corporation)
o
Adv: Shareholders can sell their shares and get out of business, can avoid introduction of undesirable business associates
b/c shares will only be transferred to outsiders on consent. Preserves relative interests of SH (b/c SH could refuse to
consent to transfer that doesn’t preserve their interest)
o
Disadv: Not effective with deadlock bc SH not willing to consent, weak in providing SH with a market for shares (b/c
consent required to sell)
c. Shot Gun transfer restrictions – clause where a person who receives an offer can either accept the offer or impose the same offer
on the initial offered.
o
Adv: sets fair price on shares – initial offeror will set fair price knowing that his own shares could be purchased by the
offeree at this same price
o
Disadv: Where initial offeror doesn’t have the money to pay fair price if offer is imposed on him, he may have to sell at a
lower price.
o
Ex. 2 SH; A and B. A goes to B, says he will pay B $20 per share for all his shares. B can turn around ad say that he will then
buy all A’s shares for $20 per share.
d. First Option provision – SH arranges for an offer from a 3P that is then put before the other shareholders who have a right to buy
the shares on the same terms as those put to the 3P (i.e. right o ffirst refusal)
o
Adv: Keeps out non-desirable 3Ps
o
Common provision: allows transfers to deal with the controlling of transfers and to provide a fair price.
o
Shareholder gets any other person to buy his shares. Then bring this deal to your fellow SH. Fellow SH have a right to buy
these shares within a period of time (ex 60 days) – if they pay you the equivalent, you don’t sell to 3P
o
Deals with relaive interests – if ABCD partners and A is selling shares, BCD can each buy 1/3 of the shares and preserve
their relative interests with respect to each other.
2. Other Share Transfer Provisions
a. Forced Buyout provisions SH agreement allows SH to force a SH out: can remove another SH when they no longer get along
o
Problem: usually get an appraised value for the shares. Guesstimate to figure out price, this is expensive. First option
provision and shotgun find another way to set a fair price.
o
Forced buyout – use an appraisal to find fair price.
b. Event Options – provision for the acquisition of a SH’s share upon occurrence of certain events that can lead to another person
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having control over the shares
o
Event could lead to a 3P who the other SHs don’rtwant to do business with (bankruptcy of SH, divorce/death of SH)
c. Price Determination of value of shares – SH agreement provides for a means to determine a value for the shares for event options
or forced buyouts. Valuation technique can involve arbitration or agreed upon valuators.
Corporate Governance: Fiduciary Duties of Directors and Officers
BACKGROUND: CONTENT AND ORIGINS OF FIDUCIARY DUTIES IN CBCA
Origins in trust law and agency law – same duties as agency
Assumed Duties: (Default Terms)
1. CL Duty of Loyalty: Act in best interests of person one acting on behalf of
2. DOC: Act with reasonable degree of care in carrying out duties on behalf of others.
Could be modified in declaration of trust or grant of authority to agent
Origins of Corporate Law Fiduciary Duties on Common Law:
Early corp statutes in England and Cda did not set out fiduciary duties for directors and officers of companies, but they still owed
fiduciary duties to the company.
Directors are “ operating mind” of company acting on the company’s behalf. This is fiduciary relationship. Officers acted as
agents on behalf of company in managing assets of company, and fiduciary duties applied to officers in agency context
Default Nature of Common Law Fiduciary Duties of Directors and Officers:
Fiduciary Duties: Default rules that could be varied – fiduciary duties were default rules that could be varied in articles
Articles could provide that K’s entered into by corp in which director or officer had conflict of interest were not invalid if director
or officer disclosed conflict and refrained from voting on matter .
Codification in CBCA and Statutory Override of Default Nature of Common Law Fiduciary Duties:
CBCA overrides CL default fiduciary duties: Duties cannot be modified - MANDATORY
 S.122 (1): Every director and officer of corp in exercising their powers and discharging their duties shall:
(a) Act honestly and in good faith with a view for the best interests of corp (duty of loyalty – i.e. no conflict of
interest), and
(b) Exercise care, diligence, and skill that reasonably prudent person would exercise in comparable circumstances
(DOC)
Key distinction from CL is that S. 122(3) provides that fiduciary duties of directors and officers under s. 122(1) cannot be
waived or varied by provisions in K’s, articles or bylaws, or by resolution of shareholders
Fiduciary Duties of Directors and Officers
1. Duty of Care:
CL - Lenient standard, virtually impossible to find party liable for breach of DOC.
Codification in CBCA: More strict DOC owed by agents and officers.
Income Tax Act Cases: Suggest a fairly high SOC for directors and officers. ITA worded the same as S. 122(1)(b) CBCA. Higher
standard of care owed in tax cases also applies to general corporate law fiduciary duty contexts.
Competence expected of a CBCA director is that of a reasonably prudent person with the knowledge and experience
of the particular director. Not enough for director to say he did his best – must be what a reasonably person person
with knowledge and experience would have done. (Soper)
Standard for inside directors may be higher thank for outside directors (Soper)
Non-Income Tax Act Situations: DOC extends to the creditors, not just the corporation.
Objective standard: Facts on the circ’s surrounding the actions of the director or officer are important
D/O’s decision must be a reasonable business decision in light of all the circ’s about which the d/o knew or ought to
have known.
Causation: For plf to succeed in challenging business decision, must establish that the d/o acted (i) in breach of DOC,
and (ii) in a way that caused injury to the plf
Business judgment rule: Perfection is not demanded
Courts should not second-guess the business expertise of corporate decision-making, but will determine
whether an appropriate degree of prudence and diligence was bought to bear in making what is claimed to
be a reasonable business decision at the time it was made.
D/O’s will not be in breach of S. 122(1)(b) and will beprotected by “business judgment rule” only if they
acted honestly, prudently, in good faith, and on reasonable grounds.
Directors have duty to proceed cautiously (espec on non-urgent matter) and to educate themselves thoroughly by
obtaining views of management and of experts (UPM Kymmene Inc)
Duty of Diligence, Reasonable Reliance on Officials, and Due Diligence in Complying w/ Obligations Under Statute:
Director must be attentive at procedures at meetings, because his silence while attending and his absent = deemed consent to
any resolution
S. 123(1): Director who is present at meeting is deemed to have consented to any resolution passed or action taken at
the meeting unless a dissent is entered into the minutes or a written dissent it sent immediately after the meeting is
adjourned
S. 123(3): Director who is not present at a meeting when a resolution is passed is deemed to have consented unless
within 7 days after becoming aware of the resolution, the directors sends a dissent.
Duties imposed on directors: Liable for issuing unpaid shares/declaring dividends on insolvency
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Director can be liable under CBCA for issuing shares that have not been fully paid for, (S. 118) declaring a dividend or
repurchasing shares when the corporation is insolvent (S. 118), liable for unpaid wages owed to employees (S. 119).
-
Defence:
S. 123(4) if director has exercised care, diligence and skill that a reasonably prudent person would have exercised in
comparable circs, director will not be liable under S. 118 or S. 119.
S.123(5): Director who relied in good faith on financial statements of the corporation represented to him by an
officer of the corp or in a written report of the auditor fairly to reflect the financial condition of the corp, or relied on
a report made by a person whose profession lends credibility to a statement made by a professional person, that
person has complied with his S. 122(1) duties and will not be liable.
Indemnification and Insurance:
S. 124(1): Corporation may indemnify a director or officer or a former d/o who acted at the corp’s request as a d/o, against al
charges and expenses reasonably incurred by d/o for any civil, criminal, admin or other proceeding in which d/o was involved
because of his association with the corporation.
Indemnification of corp can only indemnify d/o with approval of the court, and then only for all costs of the actions,
and does not include an amount paid to settle and action or satisfy a judgment.
Limits to indemnification: S 124(3) Corp will not indemnify if d/o did not act honestly and in good faith with a view to the best
interests of the corp, or in the case of a criminal or administrative action enforced by monetary penalty, d/o did not have
reasonable grounds for believing his conduct was lawful.
S. 124(6) allows corp to take out insurance to controls d/o’s exposure to liability.
But right to indemnification insurance does nothing if corp is insolvent, and some liability not covered.  many corporations
have established trust funds to compensate d/o’s when subject to liabilities for which they can’t be indemnified.
Effects of Expanding Scope of DOC:
Corp’s usually provide insurance (S. 124(6)) or create trust funds to protect directors and officers  there has been no
significant increase in the amount of damages paid. Costs go to consumers in the form of higher prices for goods.
Protection of SH/Creditors by expanding DOC, but this comes a tthe cost of increased prices in goods and services.
2. Conflicts of Interest:
CL Rule: Contract is voidable if a director has a COI. Strict rule. Did not matter how fair transaction was, or that the director with a conflict
of interest was just one of many directors who had approved transaction, or that te director had notified other directors of his COI and had
abstained from voting
Avoiding CL Rule:
1) Ratification: COI transaction not be void or voidable if ratified by the shareholders
Director or officer with the conflict could vote his or her shares in the ratification vote
2) Conflict of Interest Transaction Provisions in Company’s Articles:
Common to alter the strict CL COI and fiduciary rules with provisions in the articles of the company (BUT cannot eliminate
fiduciary duties)
Provisions allowed COI transactions where procedural safeguards were followed (e.g. disclosure of the interest and interested
persons not voting to approve the transaction)
Articles stated that even if there were conflict of interest, the transaction was ok.
 Statutory Test for COI: S. 120 Mandatory provision – if transaction has disclosure and is reas and fair = k NOT void
S. 120: Abrogates CL rule and substitutes a procedural safeguard with the added requirement that the transaction be fair and
reasonable. Mandatory rule – cannot be varied:
S. 120(7): Transaction is NOT voidable if there is:
(a) Disclosure of the conflict of interest
(b) Approval by directors of SH (with the interested director not voting) and,
(c) The transaction is reasonable and fair
If S. 120 met, the k or transaction is NOT void or voidable, and the d/o is not accountable to the corporation or its SH for any
profit made on the k or transaction (CBCA S. 120(7)).
Failure to comply with S. 120, corporation or its SH can apply to court to set aside the k or transaction, or require the d/o to
account for any profit or gain made on the k or transaction.
(a) Disclosure: D/O must disclose COI transactions – is a party to the k, has a material interest in the transaction
S. 120(1): Directors or officers must make disclosure with respect to a material contract or transaction (or proposed k) if the
d/o:
(a) is a party to the k or transaction,
(b) is a director or officer of (or acts in capacity for) a party to a k or transaction, or
(c) has a “material interest” in a party to the k or transaction
Disclosure for particular transactions must be made at earliest opportunity (S. 120(2))
General disclosure of a COI can be made where a d/o acts as a d/o for another party or has a material interest in another party.
(S. 120(6))
Can make general disclosure that d/o is a d/o of a major supplier rather than repeat the disclosure each time a k or
transaction is entered into.
Must disclose COI transactions that would not normally require the approval of directors of SH (S 120(4)).
SH may examine disclosures made by directors (S. 120(6.1))
Material: if it I smaterial to their (the other d’s) judgment that they should know not merely that he has an interest, he must see
to it that they are informed.
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(b) Abstention from voting by interested directors: COI transaction can be approved by the directors if the interested directors does not
vote (S. 120(5)).
Req’t not to vote doesn’t apply where transaction relates primary to the director’s remuneration or is for indemnity or
insurance, or is a k with an affiliated entity (S. 120(5)(a-c)
-
(c) Reasonable and Fair to the Corporation:
Regardless of whether transaction is approved by directors or SH after the required disclosure has been made, the transaction
must also be “reasonable and fair to the corporation” when approved. Transaction must be an arms length bargain – would be
approved by an independent BOD acting in good faith and best interests of the corp
SH approval even where disclosure was not made: If SH approve transaction by special resolution, contract is valid despite
D/O’s failure to disclose a COI
S. 120(7.1): Even if disclosure requirements of S. 120 are not met, a k or transaction not invalid and director not
accountable if SH’s approve or confirm the k or transaction by special resolution at a SH meeting upon sufficient
disclosure to indicate the nature of the conflict of interest as as long as the transaction was reasonable and fair the
corp when approve
Only those not interested can vote, SH must approve voting. (Securities administrators will apply their powers unless these steps are
followed)  National instrument 61
Securities laws contain requirements for particular types of COI transactions for public corp’s.
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3. Corporate Opportunities: (Re COI)
Definition: Opportunity that arises in the course of executing the duties of the D/O. D/O may be tempted to pursue the opportunity
themselves rather than have the corporation pursue the opportunity (and thus not have share the profits with other SH)  D/O will be
liable for taking a Corporate Opportunity (this is COI)
Approach of the Courts: Strict rule in early cases: If the opportunity was a corporate opportunity in that it arose in the course of or
executing of the duties of the d/o, the court would not inquire whether the D/O had decided in good faith that the corp should not/is not
able to take the opportunity. D/O cannot take a corporate opportunity that results in profit to himself. (Regal Hastings Ltd v Gulliver)
Current approach: relaxation of strict rule by SCC: SCC set out a broad fairness rule allowing for the consideration of a wide variety factors
in the specific context
Test for whether D/O took a corporate opportunity: Must assess each case on its facts and apply a broad fairness standard:
General standards of loyalty, good faith, and avoidance of a conflict of interest must be tested in each case by
many factors such as position or office held, nature of the corporate opportunity, its specificness, d/o’s relation to it,
the amount of knowledge possessed, the circ in which it was obtained, the factor of time in the fiduciary duty.
God faith decision not to pursue an opportunity can be considered in whether d/o is liable for profits (Peso Silver)
4. Best Interests of Corp: (re COI)
 Directors’ exercise of their powers must be made in good faith and must be in the best interests of the corporation
Proper Purpose Test: BOD must act within the scope of the powers allocated to them (because agents must act within the scope of
their authority).
o
To determine scope of director’s power: If the purpose for which the directors actually used their power was different from
the purpose for which the power was given, then the d/o were said to have acted for an improper purpose.
o
Problem with this test – purposes for power rarely ever set out, and so court would have to infer purpose for which power
was given.
o
Solution:
 Best interests of the corporation: Whether director acting in good faith in best interests of corp
o
Approach in many Canada jurisdictions has been to ask whether the directors acted in good faith in the best interests of
the corporation, without assessing whether they acted for a proper purpose.
o
Duty to act in good faith in best interest of the corporation (i.e. duty of loyalty) applies to many contexts – ex duty not to
engage in transactions where one’s personal interest conflicts with corporation.

Ex. bids/takeover context
o
Best interests approach in takeover bid context:

COI for D/O’s to engage in tactics to resist a take over bid to protect their own positions in the corporation.

Where a corporation is faced with takeover bid, directors must exercise their powers in accordance with their
duty to act bona fide and in the best interests of the corp even though they may find themselves in a conflict of
interest situation.

Directors’ actions in response to takeover bid were reasonable in relation to the threat posed, and were directed
to benefit the corp and its SH as a whole, and not for an improper purpose such as entrenchment of the directors.
o
Burden of Proof: Directors have the initial onus to show that their response was reasonable in relation to the treat posed –
must show their response was “in the range of reasonableness” (Schneider Corp)
Canadian Securities Laws and Corporate Fiduciary Duties
1. Duty of Care:
Ontario Securities Commission willing to use its administrative powers in response to concerns about the exercise of due care by directors
and officers
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Directors not obliged to give continuous attention to the company’s affairs, but their duties are awakened when information and events
that require further investigation occur
SOC encourages responsibility - Directors have personal knowledge and background, held to a higher standards. When director is lawyer,
held to a higher standard for dealing with legal matters
Director may rely on management to honestly perform their duties (in absence grounds for suspicion). Directors entitled to rely on
professional outside advisors including legal counsel.
2. Conflict of Interest
OSC passed rule concerning steps to be followed in various transactions of sort that often involve COI’s either between directors or officers
and shareholders, or between majority shareholders and minority shareholders
Issuer Bids:
Bid by an issuer for its own securities (corp makes bid for its own securities) – given management’s inside position, may have
better info about the value of issue that SH
Disclosure req’ts for issuer bids, and “formal valuation” of the issuer must be done and disclosed to offeree SH.
Insider Bids:
Bid by a person or company that controls more than 10% of the voting securities of the issuer, a bid by director or senior officer
of tie issuer.
Disclosure required for insider bids, offeree SH must be given a formal valuation prepared by a valuator.
Related Party Transactions:
Transactions where person with direct or indirect control over a corporation may be able to case the corporation to enter into
transaction that are favourable to their interests but unfavourable to the corporation.
Ex. transactions where an issuer purchases an asset for a related party for valuable consideration.
Disclosure requirement and formal valuationfor related party transactions with the valuator chosen, and valuation must be
supervised by BOD.
Business Combinations:
Ex. amalgamation of issuer, amendment to the terms of a class of equity securities, or any other transaction of an issuer where
the interest of a holder of an equity security of the issuer may be terminated without the holders consent.
Requirements for disclosure, formal valuation, minority approval requirements.
Takeover Bid Defence:
Takeover bid – interests of directors and SH can diverge. Commission will use enforcement powers to address takeover defences
that are abusive of SH rights.
Ex defense that uses poison rights which would impose a cost on the bidder that would prevent completion of a bid – regulators
could impose a cease trade order on the right.
Will take action where defensive tactics will deny or limit SH ability to respond to takeover bid.
SHAREHOLDER REMEDIES
How SH/stakeholders address breaches of their rights or breaches by directors and officers of their fiduciary duties
The Derivative Action:
One or more SH may obtain leave from a court to sue on behalf of the corporation if certain requirements are met.
Basis for granting leave: Complainant can apply to court to bring an action on behalf of the corporation, or to intervene in any action
in which the corporation is a party for the purpose of prosecuting, defending, or discontinuing an action.
If S. 239 requirements are met, court has discretion to grant leave for SH to sue on the corporation’s behalf, and SH will begin the
normal process of brining an action – i.e. file a notice of claim, etc.
S. 239 CBA: Court may only grant leave if:
o
(1) Complainant has given notice at least 14 days before bringing the action to the directors of the corporation of the
intent to apply tot court under S. 239, and the directors have not brought, defended or discontinued the action;

SH must give notice to directors of intention to apply for leave to bring an action
o
(2) Complainant is acting in good faith

This controls for unmerited or vexatious claims that override the director’s authority
o
(3) It appears to be in the interests of the corporation that the action is brought, prosecuted, defended or discontinued

Ex. if directors breaching their fiduciary duties to act in best interest of corp, would be in best interest of corp to
bring an action to stop this.
S. 239 test provides a basis to assess whether it is appropriate to override the usual authority of directors, and whether the corp
should proceed with a lawsuit.
Costs: SH apathy problem: Concern that SH will not bring an action because the cost to the SH will outweigh any benefit obtained by
winning the action (b/c of their small stake)
o
Cost of action: Court can order that the corporation pay reasonable legal fees of the complainant (S. 240(d) CBCA).

This helps complainant share costs of action with other SH who may benefit form the ultimate payment of an
award of damages to the corporation.
o
Court can also order corporation to pay complainant’s interim costs, legal fees and disbursements, although complainant
may be held accountable for these interim costs of final disposition (S. 242(4) CBCA)
o
Complainant not required to give security for costs in connection with the application for leave or action brought (S.
242(3)).

Security for costs: Court may order that the plf deposit funds in court as security for costs of the def that they
may later have to pay (b/c rule is that loser pays costs of other party). This could deter SH
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Settlements:
o
S. 242(2): Application for leave or an action brought pursuant to such leave cannot be stayed, discontinued, settled or
dismissed for want of prosecution w/o the approval of the court.
o
Concern that corporation might try to avoid action by making a settlement that is favourable to the individual litigant but
does not benefit the other SH.  Corp cannot settle transaction without approval of the court
Ratification: S. 242(1): A case will not be stayed or dismissed because the act complained of has been ratified by the SH. BUT the
court will take this ratification into account in making an order.
Range of possible Court orders: S 240: Court may at any time make any order it thinks fit, including an order authorizing the
complainant to control the conduct of the action, order giving direction for the conduct of the action
Court Interpretation of CBCA Derivative Action Provision
Lenient interpretation of the leave requirement of reasonable notice, good faith, and whether the action is in the interests of the
company = permissive approach to derivative action provision.
The Oppression Remedy:
Best approach for minority SH to take action against abuse by majority SH
o
Derivative action: no remedy, but only right to apply for hearing. Here, Court has broad power to grant remedies.
o
Broader grounds for complaint than D.A. – Oppressive application provides remedies where there is no breach of law (i.e.
breach of fiduciary duty), and even when parties were acting within their powers as officers, directors, or SH, as long as the
acts were oppressive or unfairly prejudicial.
Who can apply: A complainant can make an application for a remedy under the oppression application provision (S. 241 CBCA)
o
Complainant S. 238: Present or former registered or beneficial owner of a security of the corporation (i.e. shares, debt
obligation), a director or officer or former director or officer of the corporation, the Director or a person the court
considers to be a “proper person” to bring an action

Broad: Any person considered “proper person” by the Court – can be anyone
o
NOTE: Even if you are a complainant, must be able to show that the oppressive act was oppressive to you in your capacity
as security holder, creditor, d/o in order to obtain a remedy.
Security S. 2(1): Share of any class or series of shares, or a debt obligation of a corporation and includes a certificate evidencing such
a share or debt obligation
Grounds for remedy: Corp did an act, or d’s used their power, in a way that is unfairly prejudicial to SH, creditor, or d/o
o
S. 241: Court will grant remedy for the action complained of if the court is satisfied that:

(a) An act or omission of the corporation or any of its affiliates effects a result,

(b) The business or affairs of the corp’n or any of its affiliates are or have been carried on or conducted in a
manner, or

(c) The powers of the directors of the corp’n are or have been exercised in a manner
o
That is oppressive or unfairly prejudicial to or that unfairly disregard the interests of any security holder, creditor,
director or officer, the court may make an order to rectify the matter complained of.
Remedies S. 241(3): Court has power to make any interim or final order it thinks fit  any remedy it sees fit (broad)
o
CBCA gives list of possible remedies:  go beyond types of remedies court would normally possess

(a) order restraining the conduct complained of

(b) order for appointment of a receiver;

(c) order to regulate the affairs of the corporation by requiring amendments to articles or by-laws;

(d) to require the issuance or exchange of securities;

(e) appointing directors in place of or in addition to existing directors;

(f) order to buy the securities of a securities holder;

(g) order to compensate an aggrieved person

(h) varying or setting aside a contract or transaction to which the corp’n is a party;

(l) for liquidation and dissovign the corporation
Costs, Settlements and Ratifications: - same as for Derivative Actions
Notes on Judicial Interpretation of Oppression Remedy:
o
Applications can be made by complainants in publicly-held corp’s (although primarily deals with problems faced by
minority SH is CHC)
o
Applications can be made by shareholders w/ significant or majority stake in the corp
o
Applications by C’s and other non-shareholder complainants are allowed
o
Acts complained of need not be result of actions taken in bad faith
o
Acts complained of need not be intended to be oppressive, unfairly prejudicial to, or in unfair disregard of any security
holder, C, director, or officer
o
Oppressive application possible even though there is a SH agreement on that matter – powers exercised pursuant to the
agreement must be exercised in a manner that is not oppressive or unfairly prejudicial.
o
Expectation Principle (Gap Filling): Court looks to what parties would reasonably have expected in the circumstances

Question Is: If the parties had turned their minds to the particular circumstances, what would they have
provided for?
NOTE: Derivative action vs. Oppressive remedy: Oppressive remedy preferable (above).
o
Generally courts allow claims under the oppressive remedy when the claim would normally fall within the scope of D.A –
lenient to allow complaints to be made under oppressive remedy provision whether it is D.A or not.
o
Oppressive remedy is must faster and cheaper: Application made to chambers, remedy is immediate. D.A: involves full trial.
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EXAM: REMEDIES for CHC:
 Diligenti problem: Minority SH in CHC: 4 SH’s. SH x has been removed from his position as director, and other SH’s have voted to increase
their salaries and not that of SH x (i.e. SH is frozen out) What remedies does SH x have?
1) See whether SH x are acting within their powers as SH or directors
o
Yes have power to elect and remove directors by ordinary resolution
o
Yes have power to determine directors fees
2) Determine the claim:
a. Directors and officers have a fiduciary duty to act in the best interests of the corporation, duty of care to act to the
standard of a reasonably prudent person with the knowledge and experience of the particular director, must not be in
Conflict of Interest, etc.
b. Duty not to make a corporate opportunity
c. Duty to act within the scope of director’s authority – i.e. duty to act in best interests of the corporation

DOC applies to directors and officers as it does to agency
d. Breach of director’s fiduciary duty to act in best interests of company
o
Note: Defenses S. 123(4) that director DID exercise reasonable care and rely in good faith on financial statements.

SH will argue they did NOT breach their fiduciary duty
3) SH x would likely succeed in action that increase in fees is not in best interest of corp
o
But this will not solve the problem – will need to keep constant watch of other SH
4) SH x can pursue a derivative action alleging that the SH’s acts were not in the best interest of the company to which the directors
owed their fiduciary duties. Would have to give notice to directors, must be in good faith.
o
BUT other SH’s will argue that it was in the best interest of the corporation to remove SH x becaue there was an ongoing
dispute that may have caused problems with management of the corporation.
o
If derivative action can be made, courts have held that oppressive remedy can also apply
5) Best solution: SH x would apply to court under oppressive remedy
o
Even if an action seems like it would fall under Derivative Action application, courts will generally allow claims to be made
under oppressive application.
o
By being removed as director, other SH siphon off the profits to themselves by increasing their salaries and not paying out
dividends to SH’s (which is SH x’s only way of making a profit). Requirements for S. 241:
o
1) Does party meet definition of complainant (S. 238) – can be any proper person, so likely yes
o
2) S. 241 Does oppression/prejudice result from (a) an act or omission of the corporation, (b) how the business of the
corporation was carried out, or (c) the manner in which the directors exercised their power?
o
3) Was the result of this act oppressive or unfairly prejudicial, or did it unfairly disregard interests of a security holder,
creditor, director of officer? (Must be one of these people)

Must be oppressive in complainant’s capacity as SH, not in general
o
4) What was the reasonable expectation of the complainant? Was this fulfilled?

Expectation principal: If the parties had turned their minds to the particular circ, what would they have provided
for?

Opp remedy may operate to fill gaps in SH agreement to resolve unfairness.

Ex. Diligenti’s reasonable expectation would be to continue being a director and to be involved in management.
This was not fulfilled = yes oppressive.
6) SH could make application to have corporation wound up
o
This may force other Sh’s into negotiating a reasonable resolution
o
But if negotiation not possible and company wound up, this is not what any SH wants – this is likely bc SH will not negotiate
and will hold out for most favourable outcome
6) How could these problems have been avoided in the first place?
o
SH should have made a SH agreement that addressed this.
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