TABLE OF CONTENTS

Varieties of Business Organizations 2History of Partnership and Corporate Law 3

a) Constitutional and jurisdictional framework 3b) Agency principles 6

Partnerships 7a) The creation and legal nature of partnerships 7b) Partnership management 9

Corporations 11a) Corporate personality and limited liability 11b) Corporate personality disregarded (piercing the corporate veil) 14c) Articles of incorporation and bylaws 16

Corporate Finance 18Corporate Governance Principles 20

a) Theories of corporate governance 20b) The problem of corporate social responsibility 22

Directors and Officers 25Directors’ Duty 28

a) Fiduciary Duty 28b) Duty of Care 31

The problem of control transactions and the response of the Delaware Courts 35 a) Hostile takeovers and defensive tactics 35b) Directors’ duties in control transactions (Delaware Law) 36

Canadian law regarding control transactions 39a) Directors’ duties in control transactions (Canadian Law) 39b) Canadian securities regulation 41

Shareholders’ Rights and Remedies 45a) Shareholders’ rights 45b) Shareholders’ remedies 49

Controlling shareholders and closely-held corporations 51a) powers and duties of controlling shareholders 51b) Closely-held corporations 56

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VARIETIES OF BUSINESS ORGANIZATIONS

Business organizations are entities or relationships recognized by law to facilitate business activity. They are often granted special privileges that ordinary people/organizations don’t have. They are subject to specific legal rules, and the most prominent form of business organization in Canada is the corporation.

Varieties of Business OrganizationSole Proprietorship

The absence of a business organization – no legal distinction between the business and individual. One owner, all ultimate decisions.Forming a Sole Proprietorship s.88 BC PA: you must file a registration statement if you are using a business name.Advantages/Disadvantages Easy to start/dissolve, low costs, minimal legal requirements. Unincorporated owner fully liable for debts and obligations. Unlimited Liability. Anything beyond inconsequential business activity should not be conducted as a sole proprietorship.

Partnerships s.2 BC PA: partnership is the relation which subsists between persons carrying on business in common with a view of profit.

o No business OR not in common OR no profit Not P. A sole proprietorship with more than one person and slightly more complex internal governance structures.Taxation Partnership income is taxed as individual income, pro rata. Partners can use partnership losses to offset other sources of individual income – “flow through” for tax purposes (no double

taxation).Partnership Status s.4 BC PA: sets forth rules for determining the existence of partnership status.

o (a) joint ownership does not create partnership.o (b) sharing gross returns does not create partnership.o (c) if you share profits from a business, the law will deem you a partner unless there is evidence to the contrary.

Forming a Partnership Partnership status can arise spontaneously. s.81: you must file a name registration statement with the registrar and pay $70. Failing to register will not negate the existence of a partnership.Advantages/Disadvantages Easy to create, modest fees and legal requirements. Combine talents/resources. Flow-through taxation. s.7: Unlimited Liability for all partnership debts and obligations, including the acts of other partners. s.34(1): you cannot assign the management rights of your partner (but you can assign the economic interests). s.29: unless otherwise agreed to in P agreement, any partner can unilaterally terminate the partnership.

Limited Partnerships Part 3 of the BC PA provides for the formation of limited partnerships, which is a business organization in which passive

partners have limited liability (only liable up to the capital they put into the partnership). Some partners have general unlimited liability, other partners have protected limited liability. Limited partner: passive investors, may not participate in management, limited liability, “give capital, step back”. General partner: actively manage the partnership, unlimited liability, often a limited liability entity.

Limited Liability Partnerships Part 6 of the BC PA provides for the formation of limited liability partnerships, where all partners have limited liability. Primarily intended for professional service firms (e.g. law firms). s.104(1): partners are generally shielded from the liabilities of partnerships. s.104(2): exception for acts and omissions in which a partner is complicit.

Business CorporationsCorporations are a legal entity with a personality distinct from its owners but has many of the same rights and duties that natural people have. Shareholders are separate from the corporation. Can sue and be sued, enter contracts, hold property. Shareholders have limited liability – not responsible for the debts and obligations of the corporation. Corporations have perpetual existence – don’t die, which avoids succession problems.

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Corporations are taxed separately from, and in addition to, their shareholders. Federally, there is a system to get around double taxation. In effect, you are given credit for taxes the corporation has already paid, which you don’t have to pay again individually.

Forming a Corporation Corporations can be formed under federal (CBCA) or provincial (BC BCA for BC corporations) law. Incorporation involves filing administrative paperwork and paying a moderate fee. Federal Corporation:

o CBCA s.5: file articles of incorporation and pay $250, the Director then certifies the incorporation. BC Provincial Law:

o BC BCA s.10: the incorporator(s) must enter an incorporation agreement – this is to agree to take shares in the corporation.

o The incorporator(s) then files in the application a “notice of articles”, which must also be signed.o Fee of $350, and the registrar certifies incorporation.

Advantages/Disadvantages Limited liability. Entity shielding: corporate assets are shielded from shareholders’ liability – only the shares of the individual can be sought out. Relatively easy to sell and transfer stock; perpetual existence. More complicated and expensive government formation process. Registration requirements to do business outside the corporation’s home province. Corporate formalities (specific protocols) must be complied with. Why do some avoid incorporation?Some types of professionals are not allowed in certain provinces to conduct business in incorporated form. Some owners also envisage short term business relationships. Short partnerships are formed between corporations, and corporate status already protects adequately from unlimited liability. Unincorporated forms of business may offer better tax advantages. Many small business persons may not realize how easy and inexpensive incorporation is, and its associated advantages.(FYI ONLY)

Limited Liability CompaniesLLCs exist in the USA, but not Canada. They combine the limited liability of a corporation and the tax treatment of a partnership. Since Canada has an integrated corporate tax system (shareholders receive a dividend gross-up and tax credit), there is less need for LLCs. LLCs also offer the benefit of greater structural flexibility.

Unlimited Liability CompaniesCertain provinces (including BC) offer investors the ULC form. A ULC combines the share structure of a corporation with the unlimited liability and tax treatment of a general partnership. ULCs were created to facilitate investment in Canada by US firms, because they allowed US firms to avoid double taxation and offset Canadian taxes. The benefits of ULCs have been limited by recent changes to the US-Canada tax treaty. Basically: when the ULC earns profits, it must pay Canadian income tax then when it passes the profits to the US, the taxes have already been accounted for and US investors don’t have to pay again.

Community Contribution CompaniesBC law provides for community contribution companies (referred to as benefit corporations in other jurisdictions). Community contribution companies are intended to bridge the gap between for-profit and not-for-profit enterprises. Community contribution companies must have a community purpose and are limited in their ability to pay dividends and distribute assets. Rarely used in practice.

HISTORY OF PARTNERSHIP AND CORPORATE LAWA. CONSTITUTIONAL AND JURISDICTIONAL FRAMEWORKMost of this is not examinable and is sick law nerd FYI / the things that interest him.

Partnership LawRoots in Roman Law (societas), which is the antecedent to modern partnership. Had legal relationships that were similar to modern day partnerships. Developed in common law during the 17th and 18th centuries, especially in England. Highly influenced by agency law, which is an area of law that is not as important anymore. Many business enterprises in 19th C Britain (railroads, textile manufacturers, etc.) were partnerships. English partnership law was consolidated in the Partnership Act, 1890 (rendered all existing case law be consolidated into statute). The Canadian provinces have essentially copied the Partnership Act, 1890 of England. With the rise of corporations in the late 19 th C, partnership became less important.

CorporationsRoots in roman law (various organizations, including collegia, corpora, and universitates). In medieval and early modern Europe, corporations

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were granted as a means of forming guilds, religious organizations, etc.

The first English business corporations were trade monopolies created by royal charter. For example:

o The company or Merchant Adventurers to New Lands. A royally chartered English company which had a monopoly over what is Russia today.

o The Governor and Company of Merchants to London Trading with the East Indies. British East India company.

o The Governor and Company of Adventurers of England Trading into Hudson’s Bay. Hudson’s Bay company.

o The first true antecedents were joint stock companies like the three above. These royally chartered joint stock company were for-profit companies, chartered, and given monopoly over trade and exploration. They had private investors who wanted to make profit, but the reason the companies were formed were to advance the colonial interests of the English power.

The shareholders of these companies were typically aristocrats and wealthy merchants (before you needed special connections to the economic/political elite). As the use of chartered companies expanded, a market for company shares developed. The notorious “south sea company bubble” resulted in the passage of the Bubble Act in 1720, which prohibited joint stock companies and effectively halted corporate law development in Britain for over a century. (SSC explored Caribbean; high pressure to join, stock price went up. SSC did not actually do anything, but it created a huge economic bubble where everyone was speculating on the price of shares going up. Stock price collapsed, and it was an enormous problem for English economy). The UK government adopted the Joint Stock Companies Act in 1844 which allowed general incorporation by public registration (rebooted corporate law system by allowing companies again). These companies did not necessarily have limited liability. The UK adopted the Limited Liability Act in 1855, which granted all company shareholders limited liability.

Corporations in the USAIn early (1800s) American history, many states chartered corporations to complete infrastructure projects (e.g. bridges, toll roads, etc.). Used these in a similar way to English joint stock corporations to provide a public good (with private investment). During the 19 th C, American corporate law developed at a similar pace and in a similar fashion as English corporate law. Americans adopted the corporate form with more enthusiasm than the British, however. By the time of the Civil War, there were at least 22,000 American corporations – and incorporation rates increased dramatically in the postwar period.

Corporations in CanadaRecall that the exploration of British North America was conducted under the auspices of the HBC. In early colonial Canada, corporations could be formed by special provincial or British parliamentary act. A Canadian provincial act of 1850 allowed general business incorporation. The constitutional nature of corporations would change with confederation in 1867.

Corporations under the Constitution Act, 1867Under the Constitution Act 1867, the authority to create corporations is shared by the federal government and the provinces. Under s9(11), the provinces have exclusive legislative authority to make laws in relation to “the incorporation of companies with provincial objects” (constitution gives provinces explicit power to do this). Under s91, Parliament has authority over all subjects in relation to all “matters not coming within the classes of subjects by this act assigned exclusively to the legislatures of the provinces”. The parliament of Canada has no express authority to create corporations (if the provinces have the power to incorporate companies with provincial objects, and the federal government has POGG powers… that opens up the argument that the federal government can form corporations that have other than provincial objects).

Development of Canadian Corporate LawDespite this constitutional ambiguity, the Federal Government adopted the Canada Joint Stock Companies Letters Patent Act 1869. In The Citizens Insurance Company of Canada and The Queen Insurance Company v Parsons 1881, privy council affirmed that the incorporation of companies for objects other than provincial falls within the general powers of the Parliament of Canada. In Bonanza Creek 1916, Privy council held that provincial corporations could do business outside their province of incorporation, so long as they obtained a license from any other province in which they sought to do business. These decisions created overlapping powers of federal and provincial incorporation. Federal and provincial corporate laws generally provided for one of two methods of incorporating a business: Letters patent of Memorandum of association. Canadian corporate law did not change very much for most of the 20th C.

Canada Business Corporations ActFollowing a specifically-commissioned study, the federal government adopted the CBCA in 1975. Before 1975, Canadian corporate law was much closer to English corporate law. After 1975 became closer to US law. The CBCA represented a modernization of Canadian corporate law. The letters patent system was replaced by registering articles of incorporation. Most of the provinces have adopted acts very similar to the CBCA. Represented a shift toward American corporate law.

Canadian Corporate Law TodayCorporations can be formed under federal or provincial law. For most purposes, the powers of federal and provincial corporations are equal in

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scope. Very large corporations tend to be organized under federal law. BC law is a little more advantageous (relatively attractive jurisdiction for big companies to incorporate under, big mining, forestry, telecom companies incorporate here – even companies from Ontario, BC has certain advantages we will touch on in the future). But, most Canadian provinces use acts that are very similar to the federal act. Though, the BC act is substantially different from the federal act.

Corporate Law in the USUnlike in Canada, there is no federal corporation law in the US. In the late 19th C, American corporations were generally formed in the same state in which they were physically based. The “great merger movement” of 1895-1904 created intense pressure for states to remove antitrust restrictions to facilitate industrial combinations among corporations. Due to economic and demographic and technological changes, and a variety of other reasons, it became very advantageous for dispersed companies to merge into giant companies. US economy went from lots of small companies, to very few large companies.

The state of NJ amended its corporation act to facilitate combinations and attract corporations. State legislation at the time was very hostile to large companies and people were fearful of the sudden rise of giant companies. NJ took an entrepreneurial route, and relaxed their corporate laws to let these giant companies form. Got rid of antitrust and antimonopoly restrictions, and this was attractive to large companies – which resulted in a flight to incorporate in NJ. NJ were able to generate tax revenue – franchise tax, a relatively small tax on an ongoing basis. NJ quickly became the dominant state for large corporations.

The Rise of DelawareSeveral other states attempted to emulate NJ’s success. Delaware copied NJ’s corporation act in 1899. NJ remained the dominant corporate jurisdiction, however. In 1913, outgoing governor Woodrow Wilson encouraged the NJ legislature to pass seven antitrust laws (the “seven sisters”). In 1912, there was a 3-way election. Roosevelt exposed Wilson. Wilson won the election, but this experience of criticism over NJ policy meant that on his way out from NJ statehouse to become president… he pressured the NJ legislature to amend corporate law and added new restrictions. NJ corporations immediately decamped from Delaware, the closest state with the most similar corporation laws.

Delaware AscendantSince then, it has been very active in evolving its business law to be as favorable as possible. Delaware consolidated its leading position by ensuring its corporation law was pro-business, and more specifically, pro management.

Corporate law scholars have debated whether state competition resulted in a race to the bottom, or a race to the top.

Race to the bottom thesis: Delaware law allows managers to exploit shareholders. By granting such significant discretion and latitude to managers … this allows them to appropriate value from shareholders.

o Many critics have argued that Delaware has attracted corporations by favoring managers over shareholders.o Logic of the argument:

Managers generally choose the state of incorporation. If Delaware allows managers to exploit shareholders, managers will choose to incorporate in Delaware, boosting the

state’s tax revenues. In addition, Delaware imposes no substantive regulation of environmental, labor, or consumer protection issues.

Race to the top thesis: Delaware law is economically efficient and benefits shareholders. “No, law is economically efficient, and therefore beneficial”.

o Other scholars have argued that Delaware law is efficient.o Logic of the argument:

Investors will demand a discount if corporate law allows managers to behave opportunistically. This has two implications.

Corporations will raise less money in public offerings and Depressed share prices will attract buyout offers.

If state law is efficient, on the other hand, stock prices will increase, reducing the corporation’s effective cost of capital.

Thus, managers have strong incentives to select jurisdictions that maximize shareholder value.

Empirical EvidenceRTTB v RTTT question is a major issue in corporate law scholarship. The empirical evidence does not support the RTTB thesis. In general, Delaware corporations do not have lower stock prices than corporations in other states (RTTB predicts stock price will drop). Corporations that reincorporate in Delaware do not experience reductions in share price. There is no evidence of private investors buying Delaware corporations and then reincorporating in other states.

Why no Federal Corporate Law in the US5

Interestingly, although securities law in the US was federalized in the 1930s, corporate law never was. There was actually a major political movement to federalize corporate law in the early 20th C. This movement was driven by two opposing political factions – populists who wanted to tightly restrict corporations and progressives who wanted to regulate them. These two groups were never able to agree on federal legislation.

Why no Jurisdictional Competition in Canada?As in the US, businesspeople are free to incorporate in a number of different Canadian jurisdictions (P and F). However, intense interjurisdictional competition in corporate law never emerged in Canada. Scholars have proposed explanations: Inability for provincial governments to realize minimum efficient scale. Policy preference for uniformity. Overlapping provincial securities law. Absence of independent provincial appellate judges. Protectionist legal policies.

The Great Merger MovementEach of the foregoing explanations has played a role. However, my own explanation emphasizes the great merger movement. The merger movement occurred about 10 years later in Canada than in the US. Unlike American state law, Canadian corporate law was relatively permissive regarding corporate combinations. Combinations could simply use federal corporate law without any need for reform. There was no call for provincial competition and an interjurisdictional “race” never occurred.

B. AGENCY PRINCIPLESLegal Definition: “agency is the relationship that exists between two persons when one, called the agent, is considered in law to represent the other, called the principal, in such a way as to be able to affect the principal’s legal position by the making of contracts or the disposition of property”. Agency law lies at the foundation of partnership and corporate law; concerns legal relationship between principal and agent. The agency relationship gives rise to fiduciary duties, special duties of care and loyalty owed by an agent. Deep roots in CL. Examples: attorney/client, trustee/beneficiary, literal agent (sports, talent, etc.). Partners are considered agents of each other. One of the most important principal-agent relationships is the fiduciary duty owed by corporate directors.

WHEN DOES AN AGENCY RELATIONSHIP ARISE?Whether the parties characterize their relationship as an agency relationship is irrelevant for legal purposes.Whether an agency relationship exists will often determine whether the principal is legally responsible for the acts of the agent.

Important factors are: (1) consent, (2) authority, (3) control.

(1) ConsentThe principal and agent must both consent; there are three forms:

Express: explicit agreement to act as principal and agent. Implied: agency relationship implied by parties’ conduct. Ratified: agency established by principal’s ratification of the agent’s actions.

Agency by EstoppelIn certain circumstances, a principal can be estopped from disclaiming (refusing to acknowledge) an agency relationship, even where no actual agency relationship exists. Requirements:

Representation by the principal. Reliance by a third party. Alteration of a third party’s position.

(2) AuthorityEven where an agency relationship exists, the principal is only responsible for the agent’s authorized acts; there are three types:

Actual authority (express or implied):o When an agent actually has authority to act on behalf of a principal.o There are two varieties of actual authority – express and implied.

Express authority is explicit direction to perform an act or task. Implied authority covers acts that are not spelled out but are usual or customary in performing the

agent’s specific duties. Apparent authority:

o Similar concept to agency by estoppel. Arises when a third party relies on the principal’s representations. Presumed authority:

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o Authority created by operation of law.

(3) ControlControl is the least important factor, because where consent and authority exist, a court will generally find sufficient control. There are narrow legal situations where a principal truly lacks control, thus negating an agency relationship (e.g. a trustee acting for a minor).

FIDUCIARY DUTIES Agents often, though not necessarily, owe fiduciary duties to their principals. Fiduciary duties constitute a legal obligation to protect the interests of another. The types of agency relationships in which fiduciary duties are most likely to arise are those characterized by relative

vulnerability of the principal:o Attorney (A) and client (P).o Trustee (A) and beneficiary (P).o Directors (A) and shareholders (P).

The concept of fiduciary duty is fundamental to corporate law.

Duty of Loyalty A fiduciary must not let his or her own interests conflict with the interests of the principal (i.e. avoid self-dealing or

conflicts of interest). Lawyers and many other professions follow ethical rules designed to avoid or minimize conflicts of interest.Example: a broker must disclose his interest in a transaction, or, an investment advisor must not use confidential info without consent. AGENCY AND PARTNERSHIP Partnership can be conceived as a special variety of agency. In a partnership, the partners are often deemed agents, both for each other and for the partnership. This means that partners are responsible for each others’ acts relating to the business of the partnership. The authority of a partner to act on behalf of the partnership is subject to the standard principles of agency law. Thus, a partner’s authority may be either actual (express or implied) authority, or apparent authority.

Tortious Conduct by Partners Under general agency law, a principal is liable for any tortious acts committed by his or her authorized agent. Similarly, partners are liable for tortious acts committed by their partners, so long as the offending partner:

o 1) was acting in the ordinary course of the partner’s business, oro 2) otherwise had the partners’ authority.

Fiduciary Duties of PartnersUnder general legal principles, partners are fiduciaries to each other. This has a number of implications: Partners must disclose to each other personal business interests. Partners may not accept special business deals that benefit them personally (without disclosing to the other partners). Partners may not use confidential partnership information for personal benefit. Partners may not compete with the partnership.

PARTNERSHIPSA. THE CREATION AND LEGAL NATURE OF PARTNERSHIPS

Partnership ActIn BC, the statutory rules governing partnerships are set forth in the PA. Like each provincial partnership act, the BC PA serves as a restatement and modification of the English law of partnership. Partnership is a very “old school” area of the CL, so it has not changed that much. Big innovations in the 20th C was the development of limited partnerships, and LLPs.

BC PA: s.2: “partnership is the relation which subsists between persons carrying on business in common with a view of profit”. s.3: “the relation between members of a company … is not a partnership”. (co-incorporators are not partners). s.4(a): “joint tenancy, tenancy in common, joint property, common property, or part ownership does not of itself create a

partnership as to any property that is so held or owned, whether the tenants or owners do or do not share any profits made by the use of the property”.

s.4(c)(ii): “a contract for the remuneration of an employee or agent of a person engaged in a business by a share of the profits of the business does not of itself make the employee or agent a partner in the business or liable as a partner”.

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(specifically excludes remuneration of an employee by a share of business profits from definition of partnership).Forming a PartnershipPartnership status does not require any specific filing or agreement. Since no specific act is necessary to create a partnership, businesspeople can enter partnerships unknowingly (courts will deem a partnership, while individuals are completely oblivious).

Partnerships and Corporations Pursuant to s.3 of the BC PA, corporations are not partnerships. Since partnerships have unlimited liability, this is another potential benefit of incorporation. Corporations can serve as the

general partner of a limited partnership, for example. Pursuant to s.4 of the BC PA, “the receipt by a person of a share of the profits of a business is proof in the absence of evidence

to the contrary that he or she is a partner in the business”.o Exceptions: shared ownership or property, profit sharing by employees, passive investments.

The general principle:o Active investment will indicate partnership.o Passive investment will indicate absence of partnership.

This principle also informs the legal structure of limited partnerships. The corporate form provides great immunity – but you must follow corporate formalities.

AE LePage v Kamex

(broker sues because they claim they are owed a commission)

Kamex (D) was created by an agreement to hold a property in trust for 4 co owners (agreement to manage property). Shared profits and losses, right of first refusal (one CO can purchase another CO’s share). P signs contract with one of the COs stating that P is their exclusive real estate agent. This CO told P that he was a partner. Other COs sell through another agent. P sues for breach of contract.

Intention of parties and totality of circumstances must be considered to determine the existence of a partnership.

Must look at the totality of the circumstances (intention of parties is part of this) fact intensive inquiry.

Issue: were the co-owners in a partnership? If yes they are jointly liable. If no LePage only has recourse against individual.

COs intended to keep their interests in the property separate for tax purposes (as part of agreement). If the parties have divisible interests in the property, they are COs. If there are restrictions on their ability to dispose of their interest in the property, then it suggests partnership. Partnership interests are indivisible, first right of refusal is incompatible, not a partnership.Held: not a partnership, LePage cannot collect against all the supposed partners.

Reasons A partnership is a relation with a common view to profit. But we also know that joint ownership does not necessarily create a

partnership. Statute does not get us to conclusion. Court goes to case law, which helps flesh out the issue. Thrush: whether people are partners depends on the intentions of the co-owners. Armstrong: intent to treat interests as separate, which is similar here. Freedom to transfer ownership interest indicates not in a

partnership. Restrictions to do so indicate partnership. All co-owners had the ability to sell their interest to third parties, which suggests they were not partners. Court says if look at documents of relations, looks like they intended to keep ownership separate for tax purposes. Rights of first refusal is “not inconsistent” with separate ownership.

Cam disagrees with this decision and says it looks more like a partnership. Court focuses on intent of the parties, but the partnership act says nothing about partnership. Cam questions the court’s focus on intent, and sees no good policy reason why the stated intent of the parties (not even their true intent) should determine the rights of the parties.

Volzke Construction v Westlock Foods

Shopping center co-owners B and W (defendant) build expansion on the mall. There is a contract between B and the plaintiff for the plaintiff’s construction of the expansion. Plaintiff doesn’t get paid for work, sues defendant (W), arguing that W is liable as the partner of B.

CAM PROVIDES THIS CASE AS A COUNTERPOINT TO AeLEPAGE

Look at parties’ actions and intentions to determine if partnership exists.

Court must look at the actions and intentions of the parties to determine if there is a partnership.

There can be a partnership without equal control of the business.

Issues: 1. Were B and W partners in the operation of the shopping center?

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2. Is control central to a partnership?

Evidence supports inference that B and W were partners. Spoke of each other as partners. Had joint bank account (cheques printed in both their names, doesn’t matter that W had no signing authority on account). Co-signed financing loan together. Prospective tenants were referred to B by W. Profit and costs were shared in proportion to their respective interests. W had right to be consulted about new tenants.Held: yes, B and W were partners, therefore W can be held liable.

Reasons Control over business is not necessary to be deemed a partner (s2 of PA says nothing about control). Material facts: shred profits, referred to each other as partners, W sent tenants to B, did financing together, cheques indicates

joint account. Cam provides this case as a counterpoint to AeLePage.

o Specific facts are different, but overall pattern is analogous.o One person trying to sue another, claiming party to a relationship. Cases come out in opposite directions.

Court states directly you don’t need control to be a partner.o It does not mean that any involvement in a business is not pertinent to the question of partnership.o Don’t confuse involvement with control.o Can have a situation where an alleged partner has no control over partnership, but has significant involvement – and

still be deemed a partner.Thorne v NB (Workman’s

Compensation)

Two partners began a business together. One was injured while working and applied for worker’s compensation.

A partnership is not a separate legal entity.

Partners cannot be employees of their own firm because that would mean they are both employee and employer.

Issue: was P an employee of the partnership, and therefore entitled to worker’s compensation?

A partnership is a relationship, not an entity. Partnerships are not separate legal entities. In other words, partners are legally the same with the partnership. Therefore, you can’t be an employee of a partnership, and be a partner.

Cam says the logic of this case is impeccable. However, he questions the substance of the decision and its subsequent policy implications. Cam assigned the case to show that under the CL, a partnership is not a distinct legal entity. At English AND Canadian CL, a partnership, unlike a corporation, is not a distinct entity that has a legal personality separate from its owners. Legal references to partnerships as firms is for convenience only. Absence of a legal personality can cause legal and practical difficulties for partnerships (e.g. partnership becomes insolvent, and then you have multiple people trying to collect assets).

PartnershipsThe BC PA makes certain important modifications to the CL nature of partnerships. s.34: A partner may assign his or her economic interest in a partnership. s.36: A partnership of more than two partners is not automatically dissolved on the death, bankruptcy, or dissolution of a

partner. s.42: A partner may demand the application of partnership assets toward paying debts and liabilities upon dissolution.

Partnership Taxation A partnership is a “conduit” or “pass through” entity for tax purposes.

o Partnerships are invisible for tax law.o Individual partners are taxed on the partnership profits attributed to them as individuals, but the partnership is not

taxed as a separate entity. However, the partnership’s tax residence is determined separately from its partners.

American Partnership Law Although American partnership law is similar to Canadian law, partnerships are clearly separate entities under American law. The Uniform Partnership Act, uniform legislation adopted in most states (including Delaware), states clearly that “a

partnership is an entity distinct from its partners”. This has implications for the identification and disposition of partnership assets. This matters, because in the US, partnerships have legal personality – can be sued in their own name, etc.

B. PARTNERSHIP MANAGEMENT9

The BC PA sets out the principles by which partnerships are governed, many of these principles and rules are informed by the fiduciary relationship of the partners to each other. Partners have the legal ability to customize their relationship.

s.19 Liability of Partnerso Partners are generally liable for partnership debts and obligations.o Partners not liable for obligations incurred before becoming a partner or after the partner ceasing to be a partner.o A retiring partner may be absolved of liabilities with consent of other partners AND creditors.

s.21 Variation of Rights and Duties by Consento Partners can modify their respective rights and duties through consent (express or implied) of the other partners.

s.27 Rights and Duties of Partnerso Sets for the general rights and duties (equality in profits, losses, management).

s.28 Majority Cannot Expel Partnero Unless express agreement that allows this (and done under good faith), majority cannot expel any partner.

s.29 Ending the Partnershipo May unilaterally do this by giving notice to all other partners.

s.31 Partners Must Render Accountso Straightforward obligation to share partnership information.

s.34 Assignmento Can assign partnership interest, but assignee only receives economic rights, not management rights.

s.35 Dissolutiono Subject to any prior agreements, a partnership dissolves on (1) expiration of a specified term, (2) termination of a

specified adventure or undertaking, (3) a decision of one or more partners. s.36 Dissolution

o (1) death, bankruptcy, or dissolution of a partner dissolves a partnership of two partners.o (2) if a partner’s interest is charged, the other partner(s) may dissolve the partnership or expel the debtor partner (if

more than two).Limited Partnerships

Limited partnerships are a special statutory form of partnership, which did not exist at CL. Limited partnership provisions are contained in part 3 of the BC PA. s.50(2) A limited partnership is a business partnership consisting of at least one general partner and at least one limited partner.

o General Partner: unlimited liability.o Limited Partner: s.57 limited to the amount of the limited partner’s investment, and cannot participate in

management (if they do, they are deemed GPs).

Forming a Limited PartnershipUnlike a general partnership (which can be formed without any affirmative act), forming a limited partnership requires filing an information certificate with the provincial registrar (s.51). Partnerships that fail to file this certificate may be deemed general partnerships. s.62(1): a limited partner is not entitled to the return of their contribution unless:

o (a) the partnership is solvent.o (b) the consent of all the partners is obtained (or all partners given 6 months written notice).o (c) the certificate is cancelled or amended to reflect the withdrawal or reduction.

s.62(4): if a limited partner rightly demands return of their contribution, but the partnership is insolvent, the limited partner can demand the winding up and dissolution of the partnership.

Use of Limited PartnershipsLimited partnerships are far superior to general partnerships for investors who do not want or need to take an active role in the management. In the business world, limited partnerships are particularly popular as investment vehicles. Despite the rule that limited partners cannot be involved in management, fairly strict limits on the management discretion of the GP can be worked into the partnership agreement. Limited partnerships are also pass-through entities for tax purposes.

Limited Liability PartnershipsLimited liability partnerships are another type of statutory partnership. LLP provisions are contained in part 6 of the BC PA. In a LLP, each partner has limited liability, except with respect to negligent or wrongful acts or omissions committed by the partner with his or her knowledge.

Haughton Graphic v Zivot

Zivot promoted Printcast as a LP to

Liability of limited partner arises if they participate in managing the business.

If a limited partner takes part in managing the business, they become liable as a

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launch magazine. Zivot incorporated Lifestyle Magazine to be the GP of printcast. Zivot controls Lifestyle as the sole limited partner. Marshall added as limited partner. Actors: Printcast (the LP), Lifestype (the GP), Zivot and Marshall (two of the limited partners). Zivot represented himself as the president of Printcast. Marshall played the role of vice president of Printcast. A deal was struck to print magazines with P, P provided magazines, then Printcast went into bankruptcy, leaving P unpaid for what it printed.

general partner. Creditor does not need to have relied on someone being a general partner when entering a contract for liability to arise.

Issue: Can P sue D (Z and M) for the money owed by the limited partnership? AKA: are they personally liable?

D’s argue they cannot be personally liable because they did not take part in the control of the business. But, Z acted in a managerial way. M, under Z, made many managerial decisions on behalf of Printcast. Z and M were in complete control. If a limited partner takes part in the control of the business, they come liable under the statute as a general partner (thus, unlimited liability to the extent of his assets). It is simply a question of whether or not the limited partner took part in the control of the business and this question becomes a largely quantitative matter.Held: Zivot is personally liable, liability is not limited.

Nordile Holdings v Breckenridge

(D is LP of ARP. ARP goes default on mortgage to P)

Nordile was the vendor of land purchased by Arman Rental Properties (a limited partnership). Purchase price to be paid in two mortgages, first to CMCH, second to Nordile. ARP defaulted, CMCH foreclosed in 1985. ARP and Arbutus (the general partner of the limited partnership) were the mortgagors for the second mortgage to Nordile. A judgment at trial was made for Nordile to be paid, but Nordile was not paid in full. Nordile claims a right to recover the rest of the judgment from Breckenridge pursuant to the partnership act.

Liability of general partners depends on the nature of their participating / acting in what capacity.

Basically, look at the factual circumstances to determine in what capacity the alleged managers are acting in.

s.64 Partnership Act: if a limited partner takes part in managing a business, then they are liable as a general partner.

Issue: Can the limited partners be held personally liable as general partners? Is D, as a limited partner of ARP, shielded from liability?

The defendants managed as officers and directors, but not in their capacity as limited partners. Even though the defendants managed the company, it was “solely in their capacities as directors and officers of the general partner”. Judge says this is sufficient to exclude liability under s.64 of the PA. Held: appeal dismissed.

Reasons The court holds that Breckenridge and Rebiffe did not participate in the management of ARP LP, despite their roles as officers

and directors of the general partner entity. Essentially, the opposite outcome of Haughton. The court emphasizes the clear disclosure and agreement as to Breckenridge and Rebiff’s status as limited partners. Despite dicta in Haughton, notice to third parties does not seem to matter for purposes of determining whether a partner is a

general or limited partner. Bottom line: an uncertain, fact-dependent area of law. Nordile distinguished with Haughton A pleading error of “solely as directors”, and the limited partner had entered into an express agreement that said Nordile could

not sue the limited partners.

Cam says to determine whether a partnership exists, a court will look to the definition of a partnership as set forth in the Partnership Act in consideration of the “totality of the circumstances”. This is a fact intensive inquiry. The determination of whether a partner is a general or limited partner turns on whether they are involved in management. This analysis is also fact-intensive (and legally uncertain). Clients who desire limited partnership status should be careful to avoid any direct management of the partnership.

CORPORATIONSA. CORPORATE PERSONALITY AND LIMITED LIABILITY

Perhaps the fundamental characteristic of a corporation is its distinct legal personality. Combined with limited liability, this means the obligations of the corporation are not the obligations of its shareholders, or even a single controlling shareholder. This has often given rise to legal questions as to whether a dominant shareholder can be held liable for the obligations of his or her corporation.

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Interpretation Act21(1) words establishing a corporation shall be construed:

a) Vesting power to sue and be sued, contract, perpetual succession, acquire and hold propertyb) Can use English or French formc) Members bound by acts of corporationd) Limited liability for those who don’t act wrongfully or negligently

Salomon v Salomon & Co.

Mr. Salomon was a leather shoe manufacturer. He formed the company Salomon & co where his wife and 5 children held one share each in the company, because the Companies Act required 7 shareholders. Mr. Salomon was also managing director of the company. Salomon overvalued the company at 39k, paid (10k debentures, 20k in shares, and 9k in cash). Salomon held 20,001 shares, and his family held the remaining 6 shares. The leather business went bad, Salomon had to sell his debenture, company placed in insolvent liquidation.

General rule that a company is an artificial person, separate and distinct from its directors and shareholders, and neither the directors nor shareholders are personally liable for the defaults of the company.

Corporate personality.Limited liability.

Issue: is Salomon personally liable, because his company is an “alias” for himself?

3-2 overturned the court of appeal’s decision. There was no fraud as the company was a genuine creation from the Companies Act. The company is at law a different person altogether from the subscriber, and though it may be that after incorporation the business is the same as it was before, and the same persons are managers, and the same hands receive profits, the company is not at law the agent of the subscribers. Nor are the subscribers, as members liable, in any shape or form except to the extent and in the manner provided by the act.Held: Salomon is not liable.

Logical / Following Principles: Salomon’s personal liability changed from unlimited to limited liability. If the company failed, Salomon would have no

personal liability for the debts of the company, but whatever assets were left would be claimed by him to pay off the company’s debt to him.

Twin Pillars of Modern Company Law: Corporate personality: the corporation is a legal entity distinct from its members, capable of enjoying rights and of being

subject to duties which are not the same as those enjoyed or borne by its members. Limited liability: as a logical consequence, its members are not liable for the company’s debts, thus insulating against liability

for corporate debts and obligations. Legal consequence of incorporation: perpetual succession and existence, limited liability, property distinguished from its

members, right to sue and be sued, transferable shares.

Cam says this case was unfair to the unsecured creditors. According to the facts, Salomon sold his business to his company for 39k. The purchase price was paid in 20k shares, 1k cash, and 10k secured debentures. The real value of the shares was necessarily equal to the value of the business, since Salomon essentially owned 100% of the business before and after the transaction. The payment of the cash was irrelevant, as Salomon was basically paying himself. The secured debentures disadvantaged unsecured creditors. If the value of the shares equaled the value of the business, the second debentures were granted without consideration.

Limited Liability and Creditor ProtectionAlthough limited liability is not intrinsic to the corporate form (many early corporation statutes did not provide for limited liability), it is today nearly universal for corporations. Limited liability is justified in that it encourages investment in business ventures. This justification is particularly strong with respect to large corporations owned by anonymous shareholders – facilitates the pooling and deployment of investing capital. Limited liability may encourage socially harmful risk taking, however. s.87(1) BC BCA: no shareholder of a company is personally liable for debts, obligations, defaults, acts of company. s.45(1) CBCA: shareholders of a corporation are not, as shareholders, liable for liability, act, default of the corporation.

Exceptions to Limited LiabilityAccording to Halpern, Trebilcock and Turnbull, limited liability is the most efficient regime for large corporations with many shareholders. They identify three exceptions where unlimited liability may be more efficient:Misrepresentation Personal liability should attach to misrepresentations made to creditors. This is already the state of the law under basic notions

of fraud. Also, a slightly different issue than limited versus unlimited liability. Involuntary Creditors Involuntary creditors are the class of creditors who do not make a voluntary decision to extend credit to a corporation.

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Since involuntary creditors have no way of negotiating their relationship with the corporation ex ante (based on forecasts rather than results), limited liability may encourage companies to impose costly risks on third parties.

Employees Employees can be thought of as a special class of involuntary creditor. They enjoy protections under bankruptcy law and the

Wage Earner Protection Program. Also, corporate directors can be held liable for six months’ unpaid wages (CBCA s.119).

Alternative Sources of Creditor ProtectionIn the real world, voluntary creditors are able to protect themselves from limited liability through private contracting. Sophisticated creditors routinely demand (and receive) robust protections from corporate borrowers (security interests, personal guarantees, restrictive covenants, equity convertibility, higher interest rates). Cautionary Suffixes

o Requiring words like “corporation”, “incorporated”, “limited” warns creditors they are dealing with a limited liability entity.

Capital Maintenance Requirementso The CBCA prohibits corporations from purchasing or redeeming shares if the corporation is insolvent or if doing so

would cause it to become insolvent (ss.34-36).o The BC BCA contains similar restrictions (ss.77-79).

Publicityo Most corporation statutes require corporations to file and/or maintain corporate and financial records (CBCA ss.19,

20), which provides creditors with minimal information about the corporation.o Listed companies are subject to much more significant disclosure requirements under securities laws.

Director and Officer Liabilityo Some statutes impose liability on the directors and officers of corporations. o This makes sense, as the directors and officers are responsible for corporate decisions. o However, it can also have the negative effect of reducing the supply of qualified directors and officers. o Under Canadian law, liability can be: failure to deduct and remit taxes, unpaid wages, occupational health and safety

offenses, environmental offenses, personal torts. Oppression Remedies

o s.241 of the CBCA (s.227 BC BCA) provides courts with broad powers to rectify any act or omission “that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of any security holder, creditor, director, or officer”.

o Canadian courts have affirmed this provision allows creditors to bring oppression claims, most notable in Re BCE Inc.

Duties in the Vicinity of Insolvencyo American courts have held that the duties of directors shift to protecting the interests of creditors when a corporation

nears insolvency. o This was affirmed by the Delaware Chancery Court in Credit Lyonnais Bank v Pathe. The status of this in Canada is

unclear. Piercing the Corporate Veil

o This is the disregarding of the separate legal existence of the corporation and holding shareholders directly liable. o Very rare, and reserved for the most egregiously abusive cases.

Mesheau v Campbell

Plaintiff sued his employer for damages within 6 months of wrongful dismissal. The action was not defended. The plaintiff provided his claim and obtained a judgment execution which was returned unsatisfied. The defendants were, at all material times, directors of the employer.

Directors cannot be held personally liable for damages owed to employees as a result of wrongful dismissal actions.

The language of s.119 does not include other debts owed to an employee, even if related to his or her employment (wrongful termination, human rights claim, etc.).

Issue: are directors liable to employees for unsatisfied judgment debts against a corporation on a claim for wrongful dismissal?

s.119 CBCA imposes liability on directors for up to 6 months’ unpaid wages.

Debts were incurred at the time of termination, and not during the time the employees served the corporation. This was therefore not a debt for services performed for the corporation, and not collectable from the directors. The plaintiff’s cause of action arose after employment was terminated.

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Director’s Liability for Unpaid Wages Directors’ liability for unpaid wages is a historical feature of corporate law. Many American states – including Delaware – no longer impose liability for unpaid wages. The possibility of significant director liability in the case of bankruptcy seems strange from the American perspective. Note that Canadian insolvency law also provides special protections to employees. There are credible policy arguments for and against imposing liability on directors for unpaid wages. Arguments for:

o Leaving employees out in the cold is unfair.o Directors are in the best position to ensure employees get paid.o Directors and shareholders are (sometimes) the same parties.

Arguments against:o Employees are in a better position than involuntary creditors.o Subjecting directors to significant liability can itself be unfair.o Subjecting directors to liability reduces the supply of qualified directors, raises the cost of D&O insurance, etc.

Director’s Liability A growing number of Canadian statutes impose liability on corporate directors. By threatening directors with the risk of liability, these statutes aim to influence decisions by corporate management. They also have the side effects of reducing the number of qualified individuals who are willing to serve on corporate boards

and increasing the cost of insurance.

B. CORPORATE PERSONALITY DISREGARDED (Piercing the Corporate Veil)Piercing the corporate veil refers to disregarding the corporate entity and holding shareholders directly liable (successful piercing will be the opposite of Salomon). It is a dramatic exception to the legal principles of separate corporate personality and limited liability. Although veil piercing is often litigated, it is rarely granted by the courts. Imposition of liability upon the shareholders of a corporation for the obligations of a corporation. Non-recognition of the separate personality of a corporation where the correct construction of a statutory or other legal

standard so requires.

Thompson J: “the separate personality of a corporation will not be upheld where it would produce results flagrantly opposed to justice”.

Clarkson Co. v Zhelka

(Selkirk went bankrupt, defaulted on debts. Trustee in bankruptcy (Clarkson) represents creditors, suing Zhelka).

Selkirk incorporated and controlled several companies, one of which called Industrial. Industrial bought land, paying with two other companies that Selkirk owned. Industrial transferred the land to Zhelka (Selkirk’s sister) in exchange for a 120k promissory note. Zhelka mortgaged the land to Gelberg; Gelberg later foreclosed on the land. Selkirk was later found bankrupt, and Clarkson was appointed as the trustee in bankruptcy. Clarkson sought a declaration that the land was held by

Piercing the corporate veil is very difficult. Courts will disregard corporate personality only if to rule otherwise would be “flagrantly opposed to justice”.

Treating a corporation in an informal way is not enough to convince the court to pierce the corporate veil.

Court won’t pierce veil even in a situation where it seems like an individual may be using corporations in a shady way - what matters is the relationship between the shareholders and the creditors.

Issue: was Industrial a mere agent and alter ego of Selkirk, directed by Selkirk to prejudice and confuse his creditors? Are the corporate assets available to Selkirk’s personal creditors through piercing?

Clarkson argues the manner Selkirk did business was blurring boundaries between himself and his shell game of companies in a fraudulent manner. Court cites Salomon, which suggests the plaintiffs have a tough argument to make. Court admits that court should, and will pierce the corporate veil in situations “flagrantly opposed

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Zhelka or Industrial as a trustee for Selkirk.

to justice”. The court seems to accept Selkirk is up to sketchy business. The most important things cited by the court: no evidence Selkirk formed Industrial when he was insolvent/to defraud creditors. No evidence Selkirk and Industrial were mixing assets (this would be an argument in favor). No evidence creditors relied on access to this parcel of property (did not represent to creditors that credit was backed by his land). Even though Selkirk was a sketchy person, he did not do anything sketchy in terms of dealing with the creditors. Held: no judgment for the plaintiff.

Reasons Follows the principle of Salomon that a controlling share interest does not itself establish liability. Generally, courts will disregard separate corporate personality only if to rule otherwise would be flagrantly opposed to justice.

We can look at court’s analysis to see how it would be defined. Thompson J relied on the facts that: Selkirk did not form the companies while he was insolvent, there is no evidence Selkirk’s assets passed to the companies, there

is no evidence that Selkirk’s creditors relied on the availability of the company’s assets.Main difference between Salomon and Clarkson In Salomon, the creditors were of the company – trying to get at the assets of the shareholder. In Clarkson, the creditors were of the shareholder, trying to get at the assets of the company.

Entity Shielding Limited liability is not just about shielding shareholders from corporate liabilities. It can be equally important to shield the corporation from shareholders’ liabilities. Transamerica Life Insurance v Canada

Life Assurance

(TA is insurance company, gave crap mortgages, TA lost money. TA claims CLM had underwriter responsibility, CLA is involved because they are parent).

TA entered a contract with Canada Life Assurance, who was a subsidiary owned by Canada Life. In the contract, Canada Life Mortgage agreed to arrange 54 mortgage loans, many of which fell into default. TA claimed against Canada Life Mortgage on grounds that it failed to perform underwriting obligations in arranging mortgages (due diligence, risk assessments, etc.). TA also claimed against the parent company: veil piercing + knowing assistance in breach of trust.

Court will disregard separate legal personality of a corporate entity if:1. Complete domination.

a. More than ownership, subsidiary does not function independently.2. Conduct akin to fraud.

a. That would unjustly deprive claimants of their rights.

Issue: is there a basis for piercing the corporate veil and holding Canada Life liable for the acts of its wholly owned subsidiary, CLMS? When may a parent be found liable for accessory breach of trust connected by subsidiary?

While CLM is wholly owned by CL and its board of directors overlaps, it still has an independent management and conducts business as separate and distinct from that of its parent (no evidence it’s a puppet). No evidence CL is involved in fraud. The officers and employees of CL were not involved in the dealings between CLMS and TA. Held: parent company is not liable because the parent was not in complete control of the subsidiary, it was an agent. No complete control and no evidence of shielding = no piercing.

Reasons Relationship between parent company and subsidiary: subsidiary had own head office, managed independently, parent

company dealt at arms-length. Parent not involved in dealings with the plaintiff, nor did the two parties communicate together. Plaintiff is a sophisticated party that should have known it was dealing with a subsidiary corporation that may be under-funded.

The plaintiff should not have considered parent company to be an underwriter for its losses. Applying Salomon, parent and subsidiary are distinct persons. Court states an aversion to “palm tree justice”, which is this derogatory allusion to a supposed practice of ancient kingdoms in

the Middle East where an oracle/wise man under a palm tree would give advice under a palm tree.o PTJ is an idea of totally ad hoc / discretionary justice where the decision maker does not apply rule of law and applies

what they think is fair (Cam has something to say about this below).

Common law jurisdictions do not have statutory provisions that provide for the piercing of the corporate veil. Rather, under the common law the corporate veil can be pierced when:

1. Where the court is construing a statute, contract, or other document.2. Where the court is satisfied that the company is a “mere façade” concealing true facts – to enable incorporators to advance

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their own interests. 3. Where it can be established that the corporation is an authorized agent of incorporators and controllers.

a. Relationship not enough, only agent. Subsidiary will not be found to be an alter ego unless:i. Subsidiary under complete control of parent (complete domination).

ii. Subsidiary is no more than a conduit to avoid liability.iii. Conduct is akin to fraud.

What is the purpose of the courts, if not to provide relief that is just and equitable?The rule of law has a value in and of itself, and it is a social value for courts to be bound by transparent legal concepts. In terms of business and economics, we need to provide certainty in business. It would severely undermine business confidence if courts are empowered to do whatever they think is fair in a given situation. People who start companies need to know what the rules are, and having certainty in the rules, to have a fair shot at operating a successful business. If we didn’t have bounds on judicial discretion on these types of cases, we would have business problems. Cam says he thinks that a bad rule is better than no rule at all. A rule that people can rely on is very important, particularly in the commercial world. There is important social value in understanding the rules of the game and knowing that courts will respect those rules. Cam says this differentiates countries with/without strong rule of law.

Lynch v Segal

Deadbeat dad set up corporation to disguise his assets and get out of paying child support and alimony.

This is an entity shielding case, Lynch suing Segal (shareholder) for company’s assets.

A more flexible approach for veil piercing will be applied in situations where justice and fairness require it (e.g. non-commercial contexts).

Veil piercing is more likely in highly sympathetic, non-commercial factual circumstances.

Issue: when is it appropriate the pierce the corporate veil in family law situations?

More flexible in family law, stricter in commercial context. Here, the corporations are completely controlled by one spouse, for that spouse’s benefit, and no third parties are involved. In appropriate cases, piercing the veil of one spouse’s business enterprises may be an essential mechanism for ensuring that the other spouse and children of the marriage receive the financial support to which, by law, they are entitled.Held: judgment for Lynch.

Reasons The Salomon principle is not absolute, courts will not respect corporate personality where it would yield a result too flagrantly

opposed to justice. A more flexible approach is appropriate in the family law context.

o Commercial actors are expected to be more sophisticated.o Families however, are not sophisticated and dependent.

Segal used his corporations specifically to shield his assets from his wife and children. No third parties had any interest in the corporations, which Segal controlled completely.

Walkovsky v Carlton

Carlton organized his taxi business as 10 separate corporations, each owning 2 taxi cabs (fleet of 20). Each corporation carried the minimum required insurance of 10k/taxi. One of the taxis negligently injured a pedestrian, who sues.

FYI ONLY – MOST FAMOUS US VEIL PIERCING CASE

Cam shows this as a contrast to Lynch and to reinforce the idea that courts are very reluctant to pierce the veil.

Issue: can the veil be pierced?

Plaintiff has a very sympathetic case, and it really seems like the defendant is going out his way to avoid paying money. Court nonetheless declines to pierce, saying Carlton followed the rules and played by the books.Held: veil not pierced, judgment for Carlton.

C. ARTICLES OF INCORPORATION AND BY-LAWS

Registration ss.375-378 of the BC BCA set forth the registration for extra-provincial corporations in BC. Registration provides basic information so that the government and third parties can identify the corporation, serve process,

etc.16

The policy choice of allowing extra-provincial corporations is largely discretionary and based on comity between the provinces (aka: not constitutionally required). Generally, provinces want to encourage out of province investment.

Articles of Incorporation Articles of incorporation are the fundamental organizational document of an organization, set by the initial incorporator(s) that

are required to form the corporation. s.5 CBCA: one or more individuals or corporations can form a corporation by signing and delivering AoI’s. s.6(1) CBCA: the articles set forth any special features, rights, and restrictions with respect to the corporation’s shares.

o Also required to set forth: corporate name, location of registered office, authorized shares, restrictions on share numbers, number of directors.

s.6(2) CBCA: may also set forth any special provisions that may be included in the corporation’s by-laws.

Certificate of Incorporation s.8 CBCA: once the articles of incorporation have been properly registered, the Director provides a certificate of incorporation.

o This is proof that the corporation exists (valid corporate status). Important, because any time corporations are involved in any material transaction, there is a contractual requirement that corporation(s) party to transactions deliver these certificates to prove they are a corporation.

Amending Articles of Incorporation s.173 CBCA: the articles of incorporation may be amended by a special resolution (2/3) of shareholders.

o A special resolution means a resolution passed by a majority of not less than two thirds of the votes cast by shareholders who voted in respect of that resolution or signed by all the shareholders entitled to vote on that resolution.

ContinuanceA process by which a corporation formed under the law of one jurisdiction is reorganized under the law of another. This is a fairly simple administrative process that requires a special resolution.

By-Laws Main rules and regulations of a corporation, whereas articles are more for formation. By-laws are subject to (and cannot

contradict) the articles of incorporation. s.103 CBCA: Federal corporations are also governed according to their by-laws. s.103(2) CBCA: by-laws (including initial by-laws) are created and amended by the board of directors subject to shareholder

approval. s.103(5) CBCA: shareholders may also propose to create, amend, or repeal any by-laws. s.104(1)(a) CBCA: the initial by-laws are adopted at the corporation’s organizational meeting. If you want to change:

o Board of directors votes first.o Once BOD makes a change, the change is effective immediately.o Next shareholder meeting, the change is approved or rejected.

Forming a Corporation in BCThe incorporation process under BC law is more complicated. To form a corporation, one or more persons must sign an incorporation agreement and file an incorporation agreement, which includes a “notice of articles” (BC BCA ss.10, 11). Incorporation agreement: to subscribe for shares in the company. Requirement to be signed by the incorporators. Not clear

what the purpose of this requirement is – seems to be a historical holdover from English law. Incorporation application: filed. The incorporation application is filed with the registrar and must contain a notice of articles,

which is a list and must contain a notice of articles, which is a list of basic information contained in the articles. Must include:o Names and mailing addresses of incorporators (under incorporator agreement), reserved name of the company, notice

of articles. Corporate name: the company’s name must be reserved in advance (BC BCA s.22). Like under the CBCA, the name must not

be confusingly similar to an existing company name and must provide notice that the company is a limited liability entity. Notice of articles: the notice of articles … provides notice of the company’s articles. Per s.11, the notice of articles must set

forth:o Reserved name of the company, names and addresses of the directors, registered office of the company, authorized

share structure, special rights and restrictions on shares. Articles: the rules and regulations of the company; constitute the governing document of the company.

o The articles of the company contain (s.12): name of the company, rules of company conduct, any restrictions on business activities, special rights and restrictions on shares.

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o The company may adopt Table 1 (with or without alteration), which is a model set of articles. o To become effective, the articles must be signed by the incorporators.

Certificate of Incorporation: per s.13, a company is incorporated upon filing of the incorporation application (or upon a later date if specified). Once incorporated, the registrar must furnish a certificate of incorporation.

Table 1Serves as default articles if the incorporators do not draft their own articles. This can be a convenient option if the incorporators are only forming a basic company and/or wish to avoid the time, complexity, and legal fees involved in drafting custom articles. Larger companies typically use custom articles.

Private versus Public Corporations Privately-held corporations are simply corporations the securities of which are not traded on an open market. The securities of publicly-traded corporations, on the other hand, are traded on an open market. So far, this course has primarily addressed/assumed privately-held corporations. Although federal and provincial corporation statutes reference the private/public distinction, the majority of the legal regulation

of publicly-traded securities is contained in the provincial securities laws. Unless noted, this course does not specifically focus on securities law.

Pre-Incorporation ContractsThe problems that can occur before forming corporations. The law about what happens when someone enters into a contract on behalf of a corporation that has not yet been formed. Incorporators may enter into contracts on behalf of a corporation before the corporation comes into existence. Legitimate reasons for this (starting business, need to line up suppliers, financing, customers, etc., before you can form the corporate entity). These pre-incorporation contracts have been a perennial source of litigation. Statutory reforms have clarified the common law and provided greater protection to incorporators (s.14 CBCA).

S14(1): if you sign a contract on behalf of a company that is not yet formed, you are on the hook. Can’t claim to be shielded by the corporation. (2): However, once you formed a corporation, the corporation can adopt the contract and you are completely free and clear. Allows corporation to come in and step into the shoes of the human being who signed the contract, who is now off the hook.(3): Essentially, any party to a pre-incorporation contract can apply to a court for an order specifying who is or is not bound to the contract. (4): You can sign a pre-incorporation contract on behalf of a corporation, and you can put a disclaimer that says you are not to be held personally liable because you are signing it for a corporation that is yet to be formed. Putting in this disclaimer will protect you. Shows if they assent to disclaimer that the other party is intending to do business with the company to be formed, not you.

CORPORATE FINANCE

Corporate securities simply refers to negotiable investment instruments. Stocks and bonds are the most common forms of security. Can also be equity (stocks). Debt (bonds), derivatives (value determined by another security), hybrid (combined).

Securities Regulation Sold in public markets (stocks and bonds of publicly traded companies), are regulated by securities laws. All corporations, including private corporations, have securities. Cam says securities regulation is like market regulation; not really corporate law.

Equity vs. DebtEquity refers to residual ownership of a firm. Holders provide capital in exchange for right to share in corporation’s profits and residual assets. Entitled to what is left over after all claimants are paid in full – “residual interest”. Fundamental characteristics:

o Unlimited potential return – no theoretical limit on how large or profitable the company can become.o Subordination to creditors – lenders, creditors, anyone the company owes money to must be paid first.

Higher risk, higher potential return.18

Debt refers to borrowed money to be paid back in the future. Lender paid a premium (interest) as compensation for their loan. If a firm has limited assets, debtholders must be paid back before equity holders. Fundamental characteristics:

o Fixed return – fixed limit on how much you get back, maximum is principle + interest.o Priority over equity holders – get paid first.

Lower risk, lower return.

Forms of Equity FinancingAt a basic level, equity securities represent ownership of the corporation. Founders of a business usually receive equity in exchange for their contributions of capital, assets (e.g. intellectual property), and/or personal effort. Additional capital is often solicited from outside investors. This equity can take a variety of forms.Common Stock Most basic form of equity security. Includes:

o Per share voting rights (1 vote per share).o Common dividends (given at discretion of board of directors).o Share in residual assets (pro rata).

Very small and very large companies have common stock. If you buy stock on a public stock exchange, it is generally common stock. Common stock can also be issued without voting rights.Preferred Stock Senior to common stock, but subordinate to debt. Entitled to:

o Preferred dividends (guaranteed fixed dividends, whereas common are paid from time to time).o Liquidation preference.o Redemption (can demand company give money back at any time).

Preferred stock generally does not grant the right to vote in general elections.Options, Rights, Warrants Companies often grant options (or rights/warrants) to purchase their stock in the future. An option is a right to purchase stock at a specified price on or after a specified date. Options can be used by corporations for a variety of purposes, including to raise capital, protect incumbent shareholders from

dilution, or incentivize employees.

Forms of Debt FinancingDebt financing (credit) plays an important role in most businesses. Debt financing can include trade credit, personal loans, bank loans, commercial paper, and bonds. Many small businesses eventually take out a fixed or revolving bank loan. Larger businesses can sell bonds to specialized investors or the public. Debtholders generally do not have voting rights. Bonds, Debentures, and Notes Bonds, debentures, and notes are all generic terms for longer-maturity debt securities. Effectively synonymous, though certain terms can have specific connotations (“bonds” can imply the existence of a security,

“notes” suggests shorter term securities). Bonds, debentures, and notes can have a wide variety of interest and repayment terms and may be sold to private investors or

traded on public securities markets. Special Features of Debt Securities Bonds, debentures, and notes can be issued with a variety of special rights.

o Convertibility: debt that can be converted into equity at the option of the holder (e.g. when company is very successful).

o Special voting rights.o Restrictive covenants.

Other things being equal, the more protection (greater the number of rights) a debtholder gets, the lower their return.

Security Banks will be granted a security interest, which is a specific right to collect on some assets of a company. If debtor corporation becomes insolvent, creditors have no legal recourse to equity holders’ assets (so creditors protect

themselves by taking a security interest in the borrower’s assets. A legally recognized priority claim on specific assets.

Covenants Loan agreements almost universally include covenants restricting the borrower’s business and financial activities.

o Limits on issuing additional debt.19

o On purchasing or selling capital assets.o Restrictions on dividends.o Requirements to maintain specified financial levels.o Prohibitions on changes of control or other major corporate transactions.

Violations of any constitute a default and trigger immediate acceleration (bank can immediately declare the entirety of the loan to be due right away).

Although loan agreements grant lenders significant control, specific breaches are often waived in practice. As long as the company is viable, it is generally in all parties’ interests to maximize the value of the firm. Similarly, lenders will allow a control transaction as long as it results in a repayment or refinancing.

Hybrid Securities In certain situations, characterizing corporate investments as either debt or equity can be advantageous from an accounting, tax,

or legal perspective. This has led to the creation of hybrid securities, which combine features of both debt and equity. Companies are very creative in structuring investments to look like debt, equity, or both – depending on what would be

advantageous in a given business situation.

Startup FinancingInnovative businesses with significant growth ambitions can often obtain outside financing from specialized venture capital investors. The venture capital market is a mature market with fairly standardized methods of obtaining and structuring investments.

Angel Investors Angels are wealthy individuals who take a personal interest in the company’s business potential. Angels stand to make huge profits as early investors if business is successful. Even wealthy individuals can rarely bankroll a growing company, however, leading many startups to seek funding from a

professional venture capital firm. Common and important in Vancouver because there is little venture capital in Vancouver, despite a vibrant tech scene.

Venture Capital Venture capital firms provide more than just money – they also provide valuable advice and experience, often taking a

management role in the companies they invest in. Venture capital firms tend to be centered in specific geographic markets (e.g. bay area) and often prefer to invest in local

startups. Hands-on nature of venture capital investment gives rise to complex businesses and economic issues, which are addressed

through sophisticated legal and investment structures. Financing:

o Often take their investment in the form of convertible preferred stock.o Common features of venture capital include:

Convertibility, liquidation preference, redemption rights, voting rights (shareholder agreement).

Special Contractual RightsIn addition to the rights embedded in their securities, venture capital firms often obtain special rights contained in a “shareholder agreement” (or various other agreements) with the founding shareholders. These rights can include: Guaranteed board representation, special veto powers, right of first refusal, tag-along rights, drag-along rights.

ControlControl of the corporation can be a sensitive issue in the venture capital context. Understandably, the founders often wish to retain control of the company they created. Venture capital firms often don’t want the founders to have control of the company. Often, the founders and the venture capital firm agree on roughly equal board representation, with independent directors jointly selected by the founders and venture capital firm. Since this method of negotiated director selection is not provided for by most corporate statutes, the parties establish the board composition through the shareholder agreement.

Incentive Equity The founders and incumbent employees of the firm will typically have received “incentive equity” prior to a venture capital

investment (if not, venture capital investors will require that their ordinary equity be exchanged for incentive equity) that vests over a period of time.

Incentive equity can take the form of vesting restricted stock or vesting stock options. Incentive equity vests over time – if the employee leaves the company, he or she forfeits her unvested equity. The purpose of incentive equity is to ensure that the principals and employees:

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o 1) stay with the company, ando 2) are properly motivated to ensure the company is economically successful

The details of a company’s vesting arrangement are subject to negotiation between the founders and the venture capital firm.

The Venture Capital MarketVenture capital firms tend to be concentrated in urban geographic areas with lots of technology companies. The bay area is (by far) the world’s largest venture capital market. Seattle is in the top 10. Vancouver has a dynamic tech sector, but isn’t on the map in terms of venture capital.

Venture Capital in VancouverAlthough there are some large venture capital firms in the Vancouver area (Chrysalix Venture Capital, Vanedge Capital, Yaletown Partners), the overall market is relatively small. Beyond the commodity / natural resource sectors, Vancouver has never been a financial center. Growth firms in British Columbia receive significant amounts of out-of-province capital. Lack of venture capital remains an impediment to growth, however.

Government-Sponsored Venture CapitalThe Canadian government has encouraged provincial venture capital funds, often sponsored by union pension plans. These funds’ investment decisions can be influenced by political factors, reducing their economic benefits. British Columbia recently created the BC Tech Fund, a $100 million venture capital fund managed by Kensington Capital Partners. This does not solve the problem of a lack of private funding.

Encouraging Venture CapitalEncouraging venture capital may be an issue of encouraging the tech sector itself. There have traditionally been better economic opportunities in the U.S., in terms of both salaries and investment returns. On the other hand, Canada has favorable economic policies.

o Liberal immigration, relatively favorable tax, flexible labor market, liberal trade, good government. Until recently, UNC has been slow to promote entrepreneurship.

CORPORATE GOVERNANCE PRINCIPLESA. THEORIES OF CORPORATE GOVERNANCE

CORPORATE MANAGEMENTCorporations are owned by their shareholders. Corporations are not directly managed by shareholders, however. Generally, shareholders elect a board of directors, which manages (or supervise the management of) the corporation. In large corporations, the board of directors often hires professional managers (chief executive/financial officer, etc.) to run the firm.

Duty to Manage or Supervise ManagementCBCA s.102(1): subject to any unanimous shareholder agreement, the directors shall manage, or supervise the management of, the business and affairs of a corporation. Assigns firm management to the directors. Contemplates delegation of management to professional executives. Directors’ duties can be circumvented with a “unanimous shareholder agreement”. The BC BCA contains similar provisions (ss. 136/7), but requires that any transfer of the directors’ duties be included in the

articles.

Corporate Governance One of the fundamental theoretical problems of corporate governance is the separation of ownership and control. With respect to large corporations, the people who control the business are generally not the same as the people who own it. Managers are hired to run the corporation on behalf of the shareholders – they are the shareholders’ agents. As with many agency relationships, there can be a misalignment of economic incentives between principal and agent.

SEPARATION OF OWNERSHIP AND CONTROLManagement and Control of the Corporation Classic work articulates separation of ownership and control: The Modern Corporation and Private Property, by Adolf Berle

and Gardiner Means. Berle and Means argued that with the rise of large, publicly-held corporations, shareholders exerted little control over

corporate management. 21

This resulted in management entrenchment – by which professional managers could dominate corporations in which they held very little in the way of share ownership. Idea is that it dulls incentives to assume responsibility for controlling affairs of a corporation.

Agency Costs This separation of ownership and control results in “agency costs”. Agency costs arise from the simple fact that the economic interest of principals and their agents are rarely identical. Agents, including corporate managers, are often tempted to engage in economic behavior that benefits themselves, but not their

principals. The costs resulting from this problem:

o 1) the losses suffered by principals as a result of agency opportunism, oro 2) the costs of investing in safeguards to prevent these losses (are referred to as agency costs).

Divergent Interests Generally, the interests of the shareholders are in maximizing corporate returns. Managers can have other interests:

o Job security, high salary and perks, prestige and recognition, “empire building”, idiosyncratic interests. These divergent interests can (and often do) result in managers failing to maximize shareholders’ interests. Mediating the conflicts of interest between management and shareholders is probably the single most important issue in

corporate law.

Ownership Structure The conflict of interest between management and shareholders is much less significant with respect to closely-held

corporations. Canadian corporations have tended to be controlled by dominant shareholders, reducing the principal-agent conflict.

THE ROLE OF FINANCIAL MARKETS Corporate law plays an important role in mediating conflicts of interest between management and shareholders. Financial markets (i.e. the public securities markets) also play an important role. Law and markets interact in shaping corporate governance norms. If the managers of a corporation fail to maximize firm value, the share price of a corporation will decrease. A depressed share price makes the corporation attractive to outside buyers, who can purchase its shares at a discount, replace

the incumbent management, and reap a profit. Although the incumbent management can refuse to agree to an acquisition, it may not be able to stop a tender offer. Indeed, so called “hostile takeovers” are some of the most complex, interesting, and dramatic occurrences in corporate law. The fear of takeovers plays an important role in disciplining corporate management and reducing agency costs. In the scholarly literature, the possibility of acquiring a corporation and replacing management is sometimes referred to as “the

market for corporate control”.

Shareholder Activism Hostile takeovers have become less common for a number of reasons.

o Improved corporate governance.o Increased institutional shareholding.o The rise of activist scholars.

The threat of “hostile action” by shareholders seems to be an increasingly effective means of disciplining management. Takeover defenses have become increasingly likely to increase shareholder value.

Automatic Self-Cleansing v Cunningham

Articles of association provided: “management of business and control of company shall be vested in the directors … subject to extraordinary resolution of a vote of ¾ of the shareholders”. Major shareholder wanted to sell assets, a resolution approving sale was passed by a simple majority and directors asked to carry

Corporations are managed by their directors, not shareholder vote.

Shareholders are bound by the incorporating documents.

Directors are responsible for deciding what is in the best interests of the corporation. They are agents for ALL shareholders, not just the majority.

Corporations can customize their governance arrangements through the articles of incorporation, a unanimous shareholder agreement.

Issue: are directors bound to do what shareholders tell them to do?

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on transaction. Directors decided sale terms were not in benefit of company, and refused to sell.

The articles stated that shareholders could only override directors by special resolution (3/4 vote), and the vote in this case was by simple majority. Majority cannot impose that obligation on the directors. Articles gave directors power to make decisions, and unless special resolution was made, it would be impossible for a mere majority to override them. Clause 96 and 97 define powers of the directors. Directors have absolute power to all things other than those that are expressly required to be done by the company, only subject to a special resolution. It was by consensus of all the individuals in the company that the directors became agents and held their rights as agents. Not fair to say that a majority meeting alters the mandate of them as agent.Held: no.

B. THE PROBLEM OF CORPORATE SOCIAL RESPONSIBILITY

Directors’ Fiduciary DutiesCBCA s.122(1): every director and officer of a corporation, in exercising their powers and discharging their duties, shall:

a) act honestly and in good faith with a view to the best interests of the corporation, and b) exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances.

This section requires that corporate directors and officers act in good faith with a view to the best interests of the corporation. Ambiguity is a core problem in corporate law (i.e. what is the “best interest of the corporation”?).

CORPORATE GOALS In theory, a corporation can be formed to pursue any legal objective. In reality, most corporations are formed to earn profit. For this reason, much of corporate law is concerned with maximizing shareholder value. Within legal scholarship, an alternative school of thought takes a much broader view of corporate social responsibilities.

o Rather than focusing only on returns to shareholders, this school of thought also emphasizes the interests of workers, consumers, local communities, the environment, and broader socioeconomic interests.

The extent to which corporate managers should consider these broader interests is a subject of debate in corporate law scholarship.

Dodge v Ford Motor Company

Ford, as CEO and majority shareholder, announced a plan to stop paying out special dividends to shareholders, and instead reinvest the money to employ more workers and factories. This would allow him to cut costs of making cars and make them more affordable. Minority shareholders, including Dodge, sued to stop Ford’s plans. Dodge argued that company was to maximize shareholder profits, not to help the community by making affordable cars or employ more workers.

The primary duty of management is to maximize shareholder wealth.

Altruistic ends can be pursued, but to the extent that it benefits shareholders.

Issue: 1. Can shareholders sue to prevent a corporation from engaging in activities that

do not maximize profits? (yes).2. Are courts competent enough to second guess business decisions? (no).

A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end and does not extend to a change in the end itself. It is not within the powers of a board of directors to shape and conduct the affairs of a corporation for the incidental benefit of shareholders and for the primary purpose of benefiting others.Held: Ford has to distribute dividends to shareholders.

Reasons The court seemed to rely on the testimony of Henry Ford that benefitting the public was an express corporate policy. Note that the Dodge brothers were not only investors in Ford Motor, but also future competitors. Despite this case, the modern rule is that corporations are under no general obligation to distribute dividends. “business corporations are organized primarily for shareholder profit, and directors’ discretion should be employed to that

end”.Parke v Daily News

DN sold their newspaper to AN. DN

Corporate payments must be reasonably incidental to benefitting the corporation.

The court will uphold the validity of such payments only if:23

decided it would use the balance of the sale price to pay the staff and pensioners of the newspapers. DN told its shareholders after the fact, and told them to disburse the remaining funds accordingly.

Transaction reasonably incidental to the carrying on of the company’s business. Bona fide transaction. Done for the benefit and to promote prosperity of the company. Onus of upholding validity of such payments is with the person asserting it.

Issue: must shareholders accept and make “gratuitous” payments to employees?

The payments were gratuitous because the business was being sold. Quoting prior cases at length, the court laid out a somewhat convoluted test for the validity of corporate payments. 1) A company’s funds cannot be applied in making ex gratia payments as such. 2) The court will inquire into the motive behind any such payment. 3) The court will uphold such payments only if the transaction is reasonably incidental to carrying on the company’s business. 4) The onus of justifying such payment lies on the directors. Held: DN motivated by motives not recognized by law, therefore not allowed to give funds from shareholders to employees.

Peoples Department Stores Inc. v WiseDefendants were sued for favoring shareholders over creditors.SCC held that directors’ fiduciary duties are to the corporation itself, not specific stakeholders.Ultimately, the court ruled in favor of the defendant directors. However, the holding suggested a possible expansion of directors’ fiduciary duties to corporate stakeholders.

Re BCE Inc.

Plan for leveraged buyout (52B) of all shares of BCE, which owns Bell Canada. 97.93% of shareholders approved, but was opposed by a group of financial and other institutions that held debentures. Deal would seriously water down the value of debt by debenture holders of Bell because of the added risk from extra debt being taken. Debenture holders sought relief under the oppression remedy under s241 of the CBCA. Also alleged arrangement was not fair and reasonable.

TO WHOM ARE DIRECTORS’ DUTIES OWED? The corporation.

The duty of directors to act in the best interest of the corporation includes a duty to treat individual stakeholders affected by corporate actions equitably and fairly.

2-pronged inquiry to determine whether conduct was oppressive:1. Does the evidence support the claimant having a reasonable expectation that

their interests would be protected by the company? If yes,2. Does the evidence establish that the reasonable expectation was violated by

conduct that was oppressive, unfairly prejudicial to, or that unfairly disregarded a relevant interest?

Issue: is the deal void for oppression or unfairness/unreasonability?

If there is a conflict between interests of corporation and share/stakeholders, Peoples says that the director’s duty is to the corporation. However, in deciding what is best for the corporation, directors can look to the interests of shareholders and so on. Courts should give deference if directors do “business judgment rule”, which is giving deference to a business decision, so long as it lies within a range of reasonable alternatives. Oppression remedy recognizes that a corporation encompasses many interests. But a director owes their duty to the corporation, not to stakeholders. Stakeholders’ reasonable expectation is simply that directors act in the best interests of the corporation. Applied: directors considered interests of debenture holders – while contractual terms of debentures would be honored, no further commitments could be made. This fulfilled their duty and did not amount to unfair disregard. BCE, facing certain takeover, acted reasonably to create a competitive bidding process which was successful. Held: debenture holders failed to establish oppression. LBO was within a range of reasonable choices.

Reasons Oppression is fact specific, different contexts, conduct, and relationships will result in different outcomes. Stakeholders enter relationships with corporations on the basis of understandings that expectations upon which they are entitled

to rely, as long as they’re reasonable. Directors only owe a FD to the company, therefore the reasonable expectation of a stakeholder is simply that the directors

act in the company’s best interests. (Therefore, can’t have reasonable expectation of special treatment).

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This case addresses the fundamental issue of “to whom directors’ duties are owed”. The SCC says this is to the corporation, and in fulfilling this duty, directors may be required to consider corporate stakeholders other than shareholders.

The directors of BCE fulfilled their duties by considering the impact of each takeover bid on the debenture holders. Cam says Re BCE Inc and previous Canadian cases have been criticized for failing to provide a clear standard of behavior for

directors to follow. What are the “interests of the corporation”? What does “viewed as a good corporate citizen mean”? The SCC emphasizes context, but what contextual factors might require the directors to consider the interests of third parties? Why should creditors or other stakeholders expect anything more than their contractual right?

PROFIT MAXIMIZATION JUSTIFICATIONRichard Posner, Economic Analysis of Law: it is not realistic to subordinate profit maximization. It causes the problems of: sub-optimization in multiple domains, standards are hard to determine, costs of social justice borne mostly by consumers in the forms of higher prices and taxes, exercise of social responsibility reduces ability of shareholders to do this themselves.Hansmann and Kraakman, The End of History for Corporate Law: shareholders alone are the parties to whom corporate managers should be accountable Non-shareholder interests can be given substantial protection by contract and regulation. Kent Greenfield, Reclaiming Corporate Law in a New Gilded Age: adjusting corporate governance to account for non-shareholder stakeholders depends on whether it is more efficient to regulate corporations form the outside or the inside. It would be inefficient and foolish as a matter of public policy to leave corporate law as an untapped resource to give non-shareholders more protections.

Social Benefits of Profit Maximization Generally, profitable business activity increases social welfare by providing consumers with goods and services that they value

– in functioning markets, the profits of a corporation are a proxy for the social welfare it produces. Businesses have secondary benefits such as creating jobs, generating tax revenue, etc. Firms that do not maximize profits underperform and eventually go out of business. Business corporations are not the optimal providers of philanthropy – it is more efficient for corporations to maximize profits,

allowing shareholders to make their own decisions as to how to allocate philanthropic giving. Moreover, different people may disagree over what constitutes legitimate philanthropy.

The Role of Corporate Law This is not to say that corporations should be free to engage in any profitable activities. In circumstances of market failure, many business activities impose harmful costs on society (i.e. environmental pollution). However, it is generally more effective to impose legal restraints on such activity directly (through environmental law, for

example) and encourage corporations to maximize profits within the established regulatory framework.

BENEFIT CORPORATIONS (C3’s) While business corporations are dedicated to earning profits, non-profit corporations are dedicated to charitable objectives. In recent years, a new form of corporation has emerged that combines these two goals. “Benefit corporations” (different jurisdictions use different terminology) are for-profit corporations that are expressly

permitted to pursue other social goals. Under the BC BCA, benefit corporations are referred to as “community contribution companies”.

Community Purposes BC BCA s.51.92: under BC law, a C3 must have, as one or more of its corporate objectives, “community purposes”. s.51.91: community purposes are defined as purposes beneficial to society at large, or to a segment of society that is broader

than the members of the corporation itself. s.51.93: the officers and directors of a C3 must act in furtherance of its community purposes.

Restrictions on Business and Financial Activities s.51.94: unlike standard corporations, a C3 may not declare a dividend without the approval of its shareholder. s.51.95: immediately prior to dissolution, a C3 must distribute its assets to “qualified entities” (defined as charitable or

cooperative organizations). s.51.96: C3s must provide annual community contribution reports to their shareholders that disclose the financial activities of

the company and describe its benefit to society.

Governance of Benefit Corporations Investors contribute to benefit corporations in order to benefit society (or certain members of society), while also earning a

financial return. The same conflicts of interest between management and shareholders that can exist in a business corporation can also exist in a

benefit corporation. The officers and directors of a benefit corporation may be tempted to divert corporate resources to purposes other than the

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corporation’s economic of charitable goals. Thus, many corporate governance principles that apply to business corporations also apply to benefit corporations.

DIRECTORS AND OFFICERS

The Role of Directors in Corporate Governance CBCA s.102(1): The board of directors is responsible for managing or supervising the management of a corporation. In large corporations, directors are generally responsible for supervising professional managers. As the nexus between ownership and management, the board plays a key role in corporate governance.

o The board is independent of management. Doesn’t take an active role in the management of the business.

By-Laws 103(1): the board of directors may create, amend, or repeal the bylaws of a corporation. 103(2): the shareholders must approve such creation, amendment, or repeal at the next shareholder meeting. 103(3): once created by the board of directors, any bylaw is effective until approved (or not) by the shareholders at the next

meeting. 103(5): shareholders may also propose bylaws directly at shareholder meetings.If board wants to pass a bylaw pass resolution among themselves run it by shareholders if ratified, bylaw is effective and continues as approved. If not ratified, bylaw is effective until disapproval.

Qualification of Directorss.105 sets forth the qualifications of corporate directors. Must be a natural person, at least 18, of sound mind, and not have the status of bankrupt.No requirement to hold shares of the corporation, and at least ¼ or more of the directors must be resident Canadians.

Election of Directors Pursuant to s.106, directors are appointed upon the formation of the corporation and then elected at each annual meeting of

shareholders (with certain exceptions). Directors may be elected for a term of up to three years, and need not serve identical terms – this practice is referred to as

“staggered terms”. Staggered terms are sometimes used as a means of discouraging takeovers.

Cumulative Voting Pursuant to s.107, the articles of incorporation may provide for “cumulative voting” for the board of directors. With cumulative voting, each shareholder receives a number of votes equal to the number of shares they hold multiplied by the

number of directors to be elected. Rather than electing directors as a slate, each director is elected separately. Shareholders may distribute their votes however they see fit, including cumulating all of their votes for one or more individual

directors. This process provides greater opportunity for minority shareholders to achieve board representation.

Removing Directors at Special Meetings Pursuant to s.109(1), the shareholders may remove directors by ordinary resolution at a special meeting. Recall that shareholders can requisition a special meeting pursuant to s.143.

Meetings of Directors Pursuant to s.114, unless the articles of bylaws otherwise provide, the directors may meet at any place and on such notice as

the bylaws require. A quorum need be present for the board of directors to conduct business. A quorum is represented by a majority of the number of directors or minimum number of directors required by the articles of

incorporation. Directors may participate in meetings electronically of telephonically.

Decisions by Directors s.115: subject to a number of restrictions, the board of directors may delegate its functions to a management director or

management committee. s.117(1): the board of directors may act by unanimous resolution in lieu of a meeting.

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DIRECTORS’ FIDUCIARY DUTIESs.112(1): every director and officer of a corporation, in exercising their powers and discharging their duties, shall: Act honestly and in good faith with a view to the best interests of the corporation, and Exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances.

Bushell v Faith(voting structure between siblings was set

up to give extra voting power to the director being voted out)

Company owned by 3 siblings, Bushell, Faith, and Bayne. 300 shares split equally among them. Bayne and Bushell vote Faith out as a director, but the corporation’s articles state that where there is a resolution to remove a director, the director’s shares carry the right to three votes per share on a poll of that resolution. The vote was 2:1 against Faith, but the polled shares was 300:200 in favor of Faith, defeating the resolution.

A company’s articles prevail.

It is justified to allow private parties to customize their business relationships.

Issue: whether a special voting article was valid or overridden by s184(1) of the Companies Act, which states that a company may by ordinary resolution remove a director, notwithstanding anything in the articles.

While the legislation states that a director may be removed by ordinary resolution (i.e. simple majority vote of members), the voting powers attached to any class of shares depends on the way the articles define the classes. If parliament had intended to take away the ability to give special rights when having to remove a director to ensure that each share would be equal to one vote, they would have explicitly set that out in the statute.Held: articles prevail, Faith remains on the board and is not ousted.

Reasons On the one hand, the HOL ruling seems technically correct as a matter of statutory construction. On the other hand, it frustrates the meaning of s184. As a policy matter, it seems justified to allow private parties to customize their business relationships. Such customization may be less justified in the context of a public company, in which shareholders have no meaningful

opportunity to negotiate terms. The correctness of the decision probably depends on the private nature of the company. It seems justified to allow private parties to customize their business relationships. Such customization may be less justified, however, in the context of a public company, in which shareholders have no

meaningful opportunity to negotiate terms. UNANIMOUS SHAREHOLDER AGREEMENTS

Bushell addresses the extent to which members of a corporation can customize their relationships through corporate organizational documents.

Another means of customizing corporate governance is through a unanimous shareholder agreement. Shareholder agreements for private corporations are very common in American practice. Limited liability companies are even more common. CBCA s.146: provides for the use of unanimous shareholder agreements. A unanimous shareholder agreement directly limits the discretion and/or powers of the board of directors. To be effective, a unanimous shareholder agreement must be signed by all the shareholders. s.146(3): however, a unanimous shareholder agreement may bind new shareholders who acquire shares after the agreement is

signed. s.146(4): if notice is not given to an outside purchaser or transferee or the existence of a unanimous shareholder agreement, the

purchaser or transferee may rescind the transfer within 30 days of learning of the existence of the unanimous shareholder agreement.

Bury v Bell Gouinlock Ltd.

Bury was a shareholder and employee of Bell. Bury left and started working for a different broker. Shareholders of Bell had a shareholder agreement that required shareholders who left to resell their shares to the company on terms spelled out in the agreement.

Courts can amend a unanimous shareholder agreement if it is oppressive.

Issue: can a shareholder obtain an oppression remedy against enforcement of a valid shareholder agreement?

Oppression remedy should be considered broadly. Here, Bury doesn’t want to invalidate the agreement, but finds the extension from the company paying for his shares over 6 months to 12 months unfair or oppressive. In the securities business, you cannot hold shares for two companies. Paying Bury back over 12 months instead of 6 months extends the time he cannot be employed. Extending the repayment period is oppressive to Bury.

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Held: judgment for Bury.

Reasons Addresses whether a shareholder can obtain an oppression remedy against the enforcement of a valid shareholder agreement. The court holds the oppression remedy should be interpreted broadly. The court assumes the corporation’s delay in purchasing the employee’s shares was intended to punish the employee, but the

corporation may have been intending to enforce a non-competition provision. The text presents 3 arguments re Bury:

o The court overstepped the acceptable limits of judicial intervention by effectively remaking a contract freely entered into by two consenting and fully informed parties.

o There are good economic reasons for a contractual provision that allows the employer to inflict a hardship on departing employees.

o The court reached a right result.

POWERS OF OFFICERS Pursuant to s.121, the directors may appoint officers of the corporation. Directors may serve as officers. A single individual may hold multiple offices. As a practical matter, the officers (rather than the board of directors) run the corporation. Sometimes, the directors and officers are the same individuals. When there is overlap between the officers and the board of directors, it is difficult for the board to objectively monitor

management. In recent years, there has been increasing emphasis on board independence.

Powers of Officers As the officers (e.g. CEO) generally run the corporation, officers are often at the center of corporate disputes. These disputes can be between management and shareholders (principal-agent) or between management and third parties

(contracting).

Agency Redux Since corporations are artificial entities, they cannot take actions on their own. Corporations are dependent on agents to act on their behalf. The authority of officers and other agents to bind a corporation is a rich source of litigation.Ultra Vires Legal doctrine: no corporation can act beyond its legal authority, as specified in its organizational documents. This is an archaic doctrine – it has been significantly limited, if not eliminated, in recent decades.

AgencySince corporations are artificial entities, they cannot take any actions on their own. Corporations are dependent on agents (officers, employees, other representatives) to act on their behalf. The authority of officers and other agents to bind a corporation is a rich source of litigation.

INDOOR MANAGEMENT RULEThe IMR is a formalization of the modern principle that outsiders to a corporation are not bound by its internal documents. 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.

s.18: No corporation may assert against a person dealing with the corporation thato the articles, by-laws, or any unanimous shareholder agreement have not been complied with,o a person held out by a corporation as a director, officer, agent, or mandatary of the corporation has not been duly

appointed or does not have proper authority, oro a document issued by any director, officer, agent, or mandatary of a corporation is not valid or genuine.

Sherwood Design Services v 87935 Ontario Ltd.

(seller screwed over, 3P nothing to do with it)

PURPOSE AND MEANING OF IMR

A party dealing with the corporation is entitled to adopt the terms of the letter at face value because the solicitor held out authority as an agent of the corporation and he had the authority to speak for his clients.

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KMP sign agreement to buy assets of Sherwood “in trust for a corporation to be incorporated”. Purchase price 300k, and K, M, and P signed promissory note in amount of 45k if deal does not close. No reference to a company to be incorporated in the promissory note. KMP hired a law firm to help with the deal, Ontario was incorporated to purchase Sherwood’s assets. Solicitor for purchasers sent letter saying that Ontario was assigned as the corporation by the law firm as the corporation which will complete the asset purchase. Letter contained unsigned copies of defendant director’s resolution adopting the asset purchase agreement. Transaction didn’t go through. Ontario assigned to different clients of the law firm for a different real estate deal. That deal went through and the corporation then had assets able to answer any liability the earlier transaction may have attracted.

Despite the IMR, general agency principles still apply to the acts of corporate agents.

Issue: what is the meaning and purpose of the indoor management rule?1. Can Ontario validly adopt the purchase agreement?2. Did the lawyer’s correspondence constitute valid adoption of the purchase

agreement?

The law firm assigned the numbered company to another client. Is it fair for that client to be liable? Abella; decided on the rules of pre-incorporation contracts, Ontario had ratified contract and was therefore liable. Carthy; agreed but made comments on IMR: the vendor was a person dealing with the corporation when it received the letter from Nichols, and it now purports to have acquired rights from the corporation. The company cannot dispute the authority of the solicitor to write the letter of January 11 and is bound by whatever legal implication arises from the words “has been assigned by Miller Thompson as the corporation that will complete the asset purchase from Sherwood”. Dissent Borins: disagreement hinges on whether the sellers actually had “dealings” with the numbered company. Argued the sellers should have been on notice that the numbered company had not adopted the purchase agreement (due to the unsigned documents).

Cam says that this case is ultimately about legal incompetence. The lawyer had implied and apparent authority and messed up.

DIRECTORS’ DUTYCanadian corporate law requires directors and officers of a corporation to abide by two duties: 1) a duty of care, and 2) a duty of loyalty.

Duty of Care Analysis:1. Is there evidence of fraud, illegality, or conflict of interest?

a. Yes Duty of Loyalty analysis applies.b. No 2.

2. Did the directors make a careful, informed business decision?a. Yes BJR applies.b. No directors may be held liable unless an exculpatory provision is available.

A. THE FIDUCIARY DUTY

Directors’ and Officers’ Duty of LoyaltyCBCA s.122(1)(a): every director and officer of a corporation, in exercising their powers and discharging their duties, shall … act honestly and in good faith with a view to the best interests of the corporation. Significantly, the fundamental duty is owed “to the best interests of the corporation”, not necessarily shareholders (or other

groups).

To Whom the Duty is Owed “the best interests of the corporation” is not a precise standard. In practice, fiduciary duties are usually owed to the shareholders of the corporation. Some scholars have argued for a broader conception of directors’ fiduciary duties. Two SCC cases have expanded the range of interests to which the directors’ fiduciary duties are owed (Peoples, Re BCE).

Interested Transactions Directors are under a serious obligation to put interests of corporation before their own. The duty of loyalty is a duty of honesty and good faith. Directors must place the interests of the corporation before their own.

o This means directors may not engage in self-interested transactions (absent full disclosure and approval by disinterested directors).

Goes to the heart of the conflict of interest between management and shareholders. Examples of interested transactions:

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o Sale of assets by a director to the corporation at above-market value, purchase of assets by a director from the corporation at below-market value, contract with a corporation in which a director has an interest.

Disclosure of Interest If directors follow their duty to disclose may validly enter self-interested transactions. Directors and officers must disclose to the corporation any self-interested transaction. CBCA s.120(1): “a director or an officer of a corporation shall disclose to the corporation, in writing or by requesting to have it

entered in the minutes of meetings of directors or of meetings of committees of directors, the nature and extent of any interest that he or she has in a material contract or material transaction, whether made or proposed, with the corporation, if the director or officer: (this is getting at equity interest / if a director is a shareholder)

o (a) is a party to the contract or transaction.o (b) is a director or an officer, or an individual acting in a similar capacity, of a party to the contract or transaction, oro (c) has a material interest in a party to the contract or transaction.

s.127: if you make these disclosures, the non-interested directors can approve it.

Votings.120(5): “a director required to make a disclosure under subsection (1) shall not vote on any resolution to approve the contract or transaction unless the contract or transaction:

(a) relates primarily to his or her remuneration as a director, officer, employee, agent or mandatary of the corporation or an affiliate

(b) is for indemnity or insurance under s.124, or (c) is with an affiliate

Generally, directors can’t vote in self-interested transactions.

SHAREHOLDER CONFIRMATIONPer s120(7.1): “even if disclosure standards are not met, the shareholders of a corporation can ratify an interested transaction if the director/officer acted “honestly and in good faith”, and The contract or transaction is approved or confirmed by special resolution at a meeting of the shareholders. Disclosure of the interest was made prior to the shareholder vote, and The contract or transaction was reasonable and fair to the corporation.This provision allows for ex post (based on actual results) shareholder ratification of transactions with directors or officers. If something goes wrong and the director fails to properly disclose a transaction that they are self-interested in and the

company consummates the transaction, the shareholders can ratify that transaction after the fact.

Corporate Opportunities Shareholders are generally harmed when directors and officers pursue corporate economic opportunities in their personal

capacity. Yet another form of agency cost; taking an opportunity the corporation could have pursued for itself. The common law standard was to severely limit usurpation of corporate opportunities.

Regal (Hastings) v Gulliver(directors put own money in subsidiary, sell

it, make big profit)

Regal owned a cinema in Hastings. They took out leases on two more through a new subsidiary to make the whole lot an attractive sale package. The landlord wanted them to give personal guarantees, but they did not want to do that. Instead, the landlord said they could up share capital to 5000. Regal put in 2000, but could not afford more. Four directors each put in 500, the chairman got outside subscribers to put in 500 and the board asked the company solicitor to put in the last 500. They sold the business and made a profit (3) per share. The buyers brought an action against the directors, saying that this profit was in

Directors are liable for any profits made by virtue of their position, regardless of their motivations and regardless of the surrounding circumstances.

Directors / officers may not appropriate corporate opportunities.

Issue: are the directors liable for the profits they make?

Killowen: the liability arises from the mere fact that a profit is made; shares were acquired by the directors in the course of their job. The directors, standing in a fiduciary relationship to Regal in regard to the exercise of their powers as directors are accountable for the profits which they have made out of them. Porter: even though this is an unexpected windfall, the principle that a person occupying a fiduciary relationship shall not make a profit by reason thereof is so important that the possible consequence in this case is an immaterial consideration. Sankey: even though only way to finance matter was to participate themselves, they were at all times directors in a fiduciary position, made profits, sought no authority from company, and made large profits for themselves which they should be liable for.Macmillan: two conditions: 1) directors acted in the course of their management and use of special knowledge as directors, 2) resulted in profit. Both satisfied.

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breach of their fiduciary duty to the company. They had not gained full informed consent from the shareholders.

Dissent Wright: says appeal should be allowed. Would be foolish to let such an opportunity to pass. Not “completely barred”, as they could obtain shareholder consent, but failing that let the opportunity pass. Held: directors are liable.

Comments Key insight: if the parent company bought shares in the subsidiary, then that profit would have gone to the shareholders. But

because the directors bought the shares, they got the profit instead. Traditional rule of equity: fiduciary cannot profit from their position. Credible argument: this was in the best interest of the company, because the directors argued that if they didn’t step in with

their own money, there would have been no deal and the shareholders would have been worse off. HOL acknowledges that as a court, they have very limited resources in terms of uncovering the truth (directors will always say

they act in the best interests of the corporation). Cam says the outcome unfair, but he is sympathetic to the HOL’s intention and logic to remove any temptation for directors to

act in self-interested ways. Reasons Sets forth the traditional rule against directors’ appropriation of corporate opportunities. Directors are liable for any profits made by virtue of their position, regardless of their motivations and regardless of the

surrounding circumstances. The only way directors can escape liability is disclosure to, and consent by, the shareholders. Note that this case resulted in a windfall for the purchaser – do you agree? What is the logic of the traditional rule? Traditional rule against directors profiting from their positions is to minimize the economic incentives to act in a way that is

adverse to shareholder interests.

Canadian Aero Services v O’Malley

O’Malley and Zarzycki were senior officers of CAS. While acting on behalf of CAS in Guyana to investigate a business opportunity in topographical mapping, which the Canadian government was considering funding. Z prepared a detailed proposal which was provided to the Guyanese officials to be used as the basis for obtaining external aid from the Canadian government. Z, Canada and Guyana agreed in principal on the terms of funding the project and the process for receiving bids from companies. Z and O incorporate a new corporation, Terra, and shortly after resigned from their positions with CAS. When the list of bidders was finalized both CAS and Terra were invited to make bids. Terra was successful in obtaining the contract and CAS sued Z and O for breach of fiduciary duty.

If a person, who owes a fiduciary duty, is associated with a maturing business opportunity, he is precluded from so acting on it after his resignation (without the corporation’s approval), where the resignation may fairly be said to have been prompted by a wish to acquire for himself the opportunity sought by the company.

Reinforces and reaffirms Regal.

Issues:1. Did Z or O owe a duty?2. Was there a breach in acting through Terra?3. Is there liability?

ONSC and ONCA said Z and O had no fiduciary obligations to CAS. SCC overturns, anyone in a supervisory or controlling role of a company has a fiduciary duty towards the company which includes the duties of “loyalty, good faith, and avoidance of a conflict of duty and self-interest”. Absent consent, director or senior officer like Z or O cannot do what they did. Strict application is simply recognition of the degree of control which their positions give them in corporate operations – which rises above daily accountability to owning shareholders. Distinguishes Peso because this case is about bringing to fruition a business deal which was captured by former officers who had been in charge of the matter for the company.Held: yes to all 3.

Reasons Context: Peso Silver Mines v Cropper had weakened the strict rule against appropriation of corporate opportunities.

o Director who participated in an investment group which had previously been offered to the corporation was not in breach of fiduciary duty because he was not approached in his capacity as a director, but as an individual member of the public.

Canadian Aero distinguishes Peso. Upholds the traditional standard of Regal that directors/officers may not appropriate corporate opportunities. The fact that the defendants were not technically directors is irrelevant – officers have the same fiduciary duties. The officers cannot escape liability by resigning. Difficult opinion to parse – does not lay out any clear rule, but instead states that the standard of liability “must be tested in

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each case by many factors which it would be reckless to attempt to enumerate exhaustively”.

POLICY CONSIDERATIONS What is the policy rationale for preventing fiduciaries from pursuing corporate opportunities?

o The directors will always argue that they are acting in the best interests of the company, and not in a self-interested way.

o You can’t make a policy argument that this is inefficient because it would result in missing opportunities. Imagine a corporation cannot pursue an opportunity, but one of the corporation’s directors can pursue the opportunity on his

own account without harming the corporation in any way. Does the traditional rule against opportunism make sense in this scenario?

o No, but the logic (to kill any temptation) is necessary. Does it matter if the corporation is publicly or privately held?

o Private: strict rule can frustrate wealth enhancement.o Public: strict rule absolutely makes sense.

COMPETITION The law imposes significant restrictions on interested transactions and appropriation of corporate opportunities. Strangely, the common law did not prohibit a director from serving on the boards of two competing corporations. This permissive rule was expressed in the English case London Mashonaland v New Mashonaland.

o F: director was on the board of two companies, got sued. Court held you can be the director of two companies.

Cranewood Financial Corp v Norisawa

Facts don’t matter. K lived in Canada, was friends and business partners with N. K on behalf of N was managing assets, including a hotel in Banff and investments in tourism, telecom, biotech, etc. Essentially, a complicated business relationship that soured. N accused K, the director of all the companies, of starting his own company to compete with the pre-existing companies.

MODERN TEST FOR COMPETITION IN CANADIAN JURISDICTIONS

A determination of whether there has been a breach of fiduciary duty comes down to two questions:

1. Was there actual or potential conflict of interest? OR2. Was the opportunity acquired by the director by virtue of his or her

position?

If either of these prongs are satisfied, then the director will be liable for competition.

B. THE DUTY OF CARE

Ultra Vires Ultra Vires is a legal doctrine that no corporation may act beyond its legal authority, as specified in its organizational

documents. This is an archaic doctrine – it has been significantly limited, if not limited, in recent decades. According to the SCC, the doctrine of Ultra Vires has been abolished by statute for corporations incorporated under the

business corporations legislation of most Canadian jurisdictions. However, the doctrine of ultra vires remains relevant to special organizations. A “special” corporation is a corporation created by special legislative act – a “general” corporation is a corporation created

through the use of a general incorporation process.

Directors’ and Officers’ Duty of Care CBCA s122(1)(b): “every director and officer of a corporation in exercising their powers and discharging their duties shall …

exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances”. Equivalent provision in BC BCA s142(1)(b). Similar to the general tort standard.

Safe Harbor Pursuant to CBCA ss 123(4) and 123(5), directors may rely on (a) financial statements or (b) other representations (i.e. reports)

made by qualified professionals. Reliance must be in good faith.

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City Equitable Fire Insurance Co. Ltd.

A company that was being wound up showed a deficit of 1.2 million during a time the company was making large profits. The losses were from bad investments and diversion of funds by the managing director (‘a daring and unprincipled scoundrel’) into a company which he was interested in. Managing director was jailed for fraud. Liquidator brings an action against directors and auditors, alleging negligence and breach of duty.

UK COMPANY LAW CASE concerning directors’ duties.

Three propositions that make up the duty of care:1. Director need not exhibit, in the performance of his duties, a greater

degree of skill than may be reasonably expected from a person of his knowledge and experience.

a. Objective/subjective: means that someone with little business knowledge can be appointed and would have no obligation to acquire skills to perform the job without breaching DOC.

2. A director is not bound to give continuous attention to the affairs of his company.

3. A director is justified in trusting officials to perform their duties honestly (so long as there are no grounds for suspicion).

Issue: did the directors and auditors breach a duty of care?

The position of a director varies depending on the type and size of the company. The larger and more important the business carried on, the more must be delegated to managers and staff. In order to ascertain the duties that a person on the board undertakes to perform, you must consider how work is distributed, assuming it is not inconsistent with express provisions of the articles of association. In discharging the duties of his position, the direct must act honestly and also exercise some degree of skill and diligence (not clear what “degree of skill and diligence” means).The court lists the care a director is bound by: (see 3 points above). Court finds that the directors breached this minimal duty. However, provision of article 150 of the company’s articles of association: “the directors are not to be answerable for insufficiency or deficiency of any security or for any other loss, misfortune, or damage which may happen in the execution of their respective offices or trusts or in relation thereto – unless the same shall happen by or through their own willful neglect or default respectively”.Held: some of the directors and the auditor were guilty of negligence, but were protected by article 150, which required willful misconduct.

Reasons Traditional common-law duty of care standard:

o Applicable duty is based on the director’s subjective knowledge and experience.o A director is not bound to give continuous attention to the affairs of the company.o In the absence of grounds for suspicion, a director is justified in trusting corporate officers to perform their duties

honestly. The directors failed even this minimal duty, but were protected by an exculpatory provision in the company’s articles of

association. Note, this would be invalidated in Canada under s.122(3).

Note on Statutory Reform and Judicial Interpretation of the Statutory Duties of Care No Canadian statute requires directors attend meetings. But the CBCA, OBCA, BCBCA draw distinction between director who attends a meeting and one who does not:

o A director who is present at a meeting of directors or committee of directors is deemed to have consented to a resolution passed or action taken at the meeting unless his or her dissent is entered in the minutes or sends it within 7 days of becoming aware.

The statute is broader than Romer J’s points in City Equitable.o CBCA only requires good faith reliance.o Romer requires reasonable or non-negligent reliance.o CBCA does not allow for reliance on officials (only on financial statements or reports).

BUSINESS JUDGMENT RULE American (Delaware) rule. When there is no evidence of fraud, illegality, or conflict of interest with respect to a given corporate action, the directors are

presumed to have acted in good faith and on a reasonable basis. Policy reflects the reluctance of courts to second-guess business decisions. In the US, the rule shifts the onus to the plaintiff and off the shoulders of directors to demonstrate evidence of fraud, illegality,

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or conflict of interest. In Canada: initial onus is always on the plaintiff.

Peoples Department Stores

Wise brothers owned Wise Stores. Marks and Spencer owned Peoples and sold it to Wise. To protect M&S interests, contract forbade Wise from merging with Peoples until Wise paid full purchase price. Two companies had to be run separately, which caused problems. Directors of Wise cut costs by making Peoples purchase all the merchandise for both corporations and would transfer it to Wise on credit. Wise was always in debt, owing excess of 4 million. Peoples went into bankruptcy, and trustee in bankruptcy (creditors of Peoples) is seeking to include the director’s personal assets as a result of breach of duty of care.

FIDUCIARY DUTYFD not only owed to shareholders, but to the corporation, and that potentially includes a whole range of stakeholder constituencies. 122(1)(b) is objective, and stricter than the CL standard.

BUSINESS JUDGMENT RULECourts will not second guess directors’ business decisions and judgment. Must look at their actions through this heightened standard and see if it was a reasonable decision.

SAFE HARBORTo receive the protection of 123(4)(b), the person making the statement must be a qualified “professional” (accountant, lawyer, engineer, appraiser, etc.).

Issue: did the Wise brothers breach their duty of loyalty (122(1)(a)) and their duty of care (122(1)(b))? This case looks more at DOC.

Previously at CL, SOC was relaxed/subjective (avoid gross negligence, judged according to personal skills, etc.). Dickerson Report precedes CBCA and introduces objective standard (“reasonably prudent person”). s.122(1)(b) introduces a contextual element into statutory SOC, becomes stricter than CL; 1) objective standard which emphasizes primary facts and permits prevailing socio-economic conditions to be taken into consideration, 2) duty owed to company, and not to be confused with creditors. SOC: “in comparable circumstances” meant an objective standard was required. DOC satisfied: if directors and officers act prudently and on a reasonably informed basis to make a reasonable business decision.Court then affirms business judgment rule in Canada with an approach of enforcement of the DOC that respects the fact that directors and officers have business expertise the courts do not. BJR: because of risky hindsight bias, courts give deference to business decisions (high stakes, considerable time pressure, lack of information). Application: The implementation of the new policy was a reasonable business decision that was made with a view to rectifying a serious and urgent business problem. Peoples was already losing millions under M&S, so for Wise and Peoples to succeed, Peoples’ performance needed to improve dramatically. Context: highly competitive retail market, especially when Walmart arrived. There was no economic incentive for the Wise brothers to jeopardize Peoples

in interest of Wise – had every incentive (because of tax problems with Peoples) to cut losses.

Court disagreed with idea that Wise relied in good faith on judgment of Clement.

o Title of VP finance insufficient to be a person whose profession lends credibility to a statement made by him.

o Wise cannot invoke defense of 123(4), but may rely on the others raised

Held: the directors cannot be held liable for a breach of their duty of care in respect to the creditors of Peoples.

Smith v Van Gorkom

VG was Chairman of Transunion. Transunion had tax credits and deductions but did not have enough income to make use of these, so BOD considered selling to purchaser who could take advantage of these. CFO of Transunion reported to BOD

Duty of care and business judgment rule depend on informed, educated decision-making with an emphasis on the process taken by the directors.

Strongly implies independent fairness opinions as part of decision-making procedure.

Issue: was the DOC breached, and if so, is the BOD protected by the BJR?

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a rough estimation to sell the company at 50-60 per share. VG approached Pritzker, and Pritzker agreed to buy at 55 per share, but the market value was only 37.25. Only two of senior management supported this, but VG took it to BOD. VG gave a 20 min presentation without explaining how share price was valued at 55, copies of the drafted agreement arrived too late to study. Transunion attorney advised BOD they might be sued if they turned down Pritzker’s offer. After 2 hours, they approved the proposed agreement.

Court of Chancery previously ruled decision fell within BJR. The determination of whether a business judgment is an informed turns on whether the directors have informed themselves “prior to making a business decision of all material information reasonably available to them”. A director’s duty to exercise an informed business judgment is in the nature of the DOC. SOC: act in an informed and deliberate manner in determining whether to approve an agreement of merger before submitting proposals. Did they make an informed business judgment? No. Did not adequately inform of VG’s role in forcing sale of company and choosing share price. Uninformed to intrinsic value of company. Negligent in approving sale of company upon 2 hours consideration, no prior notice. BOD relied on 20 min presentation, no documentation to support share price. Directors were duty bound to make reasonable inquiry of VG, and if they had done so, the inadequacy of the proposal would have been apparent.

ReasonsBJR: Determination of whether decision was informed depends on whether directors have actually informed themselves prior to

making the decision of all material information reasonably available to them. Duty to inform oneself is derived from FD. Fulfilment of FD requires not just absence of bad faith, but a positive obligation to protect corporation’s financial interests. If they did so, they would notice the inadequacy of VG’s proposal. Price difference between offer and market price of share: In the absence of other sound valuation information, the markup alone does not provide an adequate basis on which to assess

the fairness of an offering price. Price of selling majority stake does not equal price of selling minority interest, because need to account for the control

premium. Didn’t ask CFO to carry out valuation study or review. Accepted VG’s representation about price, which was basically just his intuition directors allowed to rely on an official’s

opinion as long as it’s reached on a reasonable basis.Collective expertise of directors: Unfounded reliance on both the markup and the market test as the basis for accepting the proposal undermined the argument

about expertise and sophistication leading them to an informed and reasonable decision.Reliance on legal advice: Meant only to convey that directors may be sued for rejecting any offer and does not connote judgment about the chance such a

claim would be successful or whether it meant they should go ahead.

Cam’s ThoughtsContext: under prior Delaware law, the BJR provided broad protection against director liability. Essentially, the old law offered protection if you acted in good faith. In applying the BJR in this case, the DSC heightened the requirement that directors act on adequate information (good faith no longer enough). No protection for directors who make an “unintelligent or unadvised judgment”. Dramatically narrowed the BJR. The court found that directors did not adequately inform themselves of the economics of the transaction. In particular, the court emphasized the failure to obtain an outside fairness opinion. This holding strongly emphasizes the decision-making process.

Following the court’s decision, the case settled for 23.5 million. This decision sent shockwaves through the American corporate bar. Daniel Fischel (leading American corporate law scholar) has called it “one of the worst decisions in the history of corporate law” (going from 38 per share to 55 is like Christmas for shareholders, unimaginable directors would say no). The holding strongly suggests directors should establish and follow careful procedures. Essentially mandates fairness opinions in public M&A transactions. Many business and legal commentators feared it would reduce the supply of qualified directors. Soon after the decision, the Delaware legislature (was scared directors would leave) passed an amendment to the General Corporation Law allowing any corporation to limit director liability for breaches of the DOC. No equivalent provision in the CBCA (though corporations may indemnify directors). This decision makes corporate directors in America more risk averse.

UPM-Kymmene Corp v UPM-Kymenne Miramichi

BOD of Repap approved compensation agreement for a proposed chairman, Berg.

Requires that directors’ decisions be adequately informed.

Directors are protected only to the extent that their actions actually evince their business judgment. Board entitled and encouraged to retain advisors but this does not relieve them

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BOD relied on compensation committee, which relied on compensation consultant who didn’t know the agreement was opposed by a number of other parties. Agreement to give very generous salary/bonus structure/provision that would bankrupt Repap approved without further investigation by BOD.

of the obligation to exercise reasonable diligence. Directors must oversee the advice and inform themselves of material information.

BJR can’t apply where board acts on the unfounded advice of a committee. Reliance on an expert’s opinion is insufficient to escape liability – the reliance

has to be based on reasonable judgment.

Issue: did directors breach their duty of care in approving the agreement?

DOC requires that where directors make decisions that affect shareholders, decisions must be made on an informed and reasoned basis. Retaining advisors does not relieve directors of the obligation to exercise reasonable diligence. Business judgment rule protects from those that second guess business decisions. Courts look to see if a reasonable, not perfect, decision was made. The principle of deference presupposes directors are scrupulous in their deliberations and demonstrate diligence.

Repap didn’t require nor could they afford Berg. With little effort, board could have learned this and everything they needed to make a reasonable, informed decision. Business judgment rule cannot apply where BOD acts on the advice of a director’s committee that makes an uninformed recommendation. They were required to review the consultant opinion carefully and evaluate it thoughtfully. In the space of 30 mins, the BOD approved an agreement that would compensate someone random too generously.

Reasons Canadian expression of the BJR. Very similar to the Delaware rule. The principle of deference presupposes that directors are scrupulous in their deliberations and demonstrate diligence in arriving

at decisions. Sets a fairly high bar. Cam says it seems to defeat the point of having a committee.

THE PROBLEM OF CONTROL TRANSACTIONS AND THE RESPONSE OF THE DELAWARE COURTS

A. HOSTILE TAKEOVERS AND DEFENSIVE TACTICS

Hostile takeovers are rare nowadays. Corporate governance has improved, lessening the arbitrage opportunity of hostile takeovers. Companies have also developed defensive tactics, which are legal and/or business strategies that are used to defend against HTs.

Hostile Takeover Acquisition of a corporation without the consent of incumbent management. This is in contrast to typical acquisition, in which target management cooperates. Hostile takeovers are among the most contentious of all corporate transactions. They often severely test directors’ fiduciary duties. Three Methods:

o Proxy Contest: hostile acquirer solicits proxies from other shareholders to depose the BOD. (like a campaign to vote out incumbent BOD, if you can show why they are bad and get shareholders to vote)

o Tender Offer: hostile acquirer issues a blanket offer to purchase the shares of other shareholders, like a mass public offer.

(make a public announcement – structured offer for a substantial portion of the shares of the company that is issued to all shareholders)

o Direct Acquisition: hostile acquirer simply obtains a controlling block of shares on the open market. (but most companies have a poison pill to counteract this)

Even if management opposes the transaction, each of these methods effectively circumvents the board.

Market for Corporate Control If management is subpar, the target corporation’s stock price will underperform (market price reflects sub-optimal

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management). An enterprising investor can acquire the corporation and then replace or improve management and reap the gains in the form of

stock appreciation. Since the incumbent managers will likely lose their positions, they have powerful incentives to oppose a hostile transaction. This creates a conflict of interest between shareholders and management.

DEFENSIVE TACTICS Depending on how a takeover is structured, management may:

o Deploy non-voting stock (a pre-emptive deterrent).o A staggered board (need to wait X years to call a meeting and vote).o Poison pill, “shareholder rights plan”.

Mechanical device which, in response to acquisition of a certain amount of stock by a hostile offeror, causes the issuance of discounted stock to all other shareholders, thereby diluting the acquirer and their plans.

Deploying these tactics implicates the directors’ FD. If defensive tactics are self-interested transactions, why are they allowed? The reality is that not all hostile takeovers benefit incumbent shareholders. The law allows incumbent directors considerable discretion in defending against hostile takeovers. Disputes regarding directors’ FD in the takeover context are thus among the most difficult (and interesting) in all of corporate

law.

Poison Pill One of the most well-known and effective takeover defenses is adoption of a “shareholder rights plan”, or poison pill. The poison pill defense was developed by Martin Lipton of the firm Wachtell, Lipton, Rosen & Kantz in the 1980s. In general, poison pills grant existing shareholders rights to additional stock, triggered by any shareholder crossing a specified

ownership threshold. Poison pills are most effective against tender offers and direct acquisitions.

Policy For / Against Poison Pills? Like all takeover defenses, the poison pill defense implicates management’s FD. Managers often defend poison pills by arguing that they can deter coercive offers. Critics of poison pills argue that they entrench management and reduce shareholder value. The empirical evidence seems to indicate acquisitions increase shareholder value, while poison pills decrease it.

Teck Corp v Millar(small mining corp frustrated a hostile

takeover by entering into a lock-up agreement with alternate bidder)

Afton is a junior mining company run by Millar, courted by 2 larger mining companies (Canex and Teck). A favored C, but not ready for a deal. A needed operating funds, sold non-controlling shared to C for 3/share, despite T offered 4 then increased to 6. T buys controlling share of A’s stock on public market. Meanwhile, A+C’s subsidiary (P) began discussing an ultimate deal where P would be issued 70% of new stock. T got mad and told M not to sell, tried to requisition shareholder meeting, sent a letter stating T could get a better offer, and that M couldn’t sell without seeking T’s permission as majority shareholder. Ultimate deal between A+P signed, and T launched action.

Directors are allowed to issue shares in order to defeat a takeover bid, so long as their purpose for doing so is not improper.

If directors act in good faith towards the best interest of the corporation and have a reasonable basis for believing they are, it’s okay. Directors are entitled to take into account factors other than price being offered

by the bidders.

Issue: whether directors have the authority to issue new shares in a corporation in order to defeat a takeover.

In order to find out whether there is improper purpose, court can look to the reasonably held, good faith belief of directors, as established by their reputation, experience, and policies of the bidder, not just the asking price.

A’s directors genuinely believed C was a better partner. Frustrating Teck’s intended acquisition was not the ultimate purpose, it was rather an effect of the decision the directors made in exercising their best judgment.

B. DIRECTORS’ DUTIES IN CONTROL TRANSACTIONS (DELAWARE LAW)37

Delaware Takeover JurisprudenceDelaware is probably the world’s most important corporate law jurisdiction. Intense takeover activity in the 80s/90s involving Delaware corporations led to a number of high-profile corporate law decisions which was influential to other countries, including Canada. Therefore, Delaware law provides important context.

ContextTeck Corp established the legal standard for reviewing takeover defenses in Canada. Teck created a higher standard than the BJR, and held that if directors employ defensive tactics, they must act in good faith and have reasonable grounds to believe a takeover will cause substantial harm to the interests of the corporation. Under Delaware law: takeover defenses were evaluated according to the BJR, but this changed beginning with Unocal.

Unocal Corp v Mesa Petroleum Co.(USA)

Mesa held 13% of Unocal stock and made a 2-step takeover bid to Unocal shareholders. (Shareholders that went with step 1 would get 54/share. Shareholders that did not, in step 2, would get securities worth less than 54/share so that Mesa could get control of all outside shares – squeezing out for junk bonds).Unocal directors had a meeting, with presentation about legal options and inadequacy of Mesa bid. After outside directors met, they advised board to reject bid and take defensive measures. Defensive measure was a buy back proposal of 72/share, more than Mesa bid, financed by taking a 60 million debt. Mesa tried to stop proposal with this action – tried to argue being excluded for an invalid purpose.

The business judgment rule does not necessarily apply in the takeover context.

In defending against a takeover, the following conditions must be satisfied for the directors to receive the protection of the BJR:

1. Reasonable grounds for believing there is a danger to corporate policy and effectiveness exists

a. Satisfied by good faith and reasonable investigation.2. Actions must not be draconian.

a. Can’t just erect insurmountable obstacles.3. Actions must be proportionate.

a. To the threat that is reasonably identified.Issue:

1. Did the board have the power/duty to refuse a takeover threat?2. If so, was it entitled to the BJR?

Powers of the board: Board of directors has broad authority to deal in its own stock. A Delaware corporation may deal selectively with its stockholders, provided the directors have not acted out of a sole or primarily purpose to entrench themselves in office. Board’s power derives from its fundamental duty and obligation to protect the corporate enterprise, which includes stockholders, from harm reasonably perceived, irrespective of its source. Pending takeover bid: when board addresses pending takeover bid, must determine whether offer is in best interests of corporation and shareholders. Decisions given same deference as BJR. Enhanced duty which calls for judicial examination at the threshold before the protections of the business judgment rule may be conferred. Directors must show, in the face of a conflict of interest, that they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed because of another person’s stock ownership (satisfied by good faith and reasonable investigation). Here, the board acted through majority of outside independent directors. No evidence directors: were trying to perpetuate themselves, in fiduciary breach, were overreaching, lacked good faith, were uninformed.Held: reverse Chancery Court’s decision to uphold injunction.

Reasons Threat posed here was a two-tier coercive tender coupled with threat of greenmail (selling back shares more expensive). Value of Unocal was more than the offered 54, and Mesa wanted to squeeze out shareholders with junk bonds worth less than

54. Unocal employed a selective exchange offer: 1) defeat Mesa’s offer of 54, 2) for those who didn’t want to buy, were provided

with stocks worth 72. The court cites statute and finds the corporation is going to be governed by the BOD. The BOD calls the shots, and it’s within

their power to resist an offer if they deem it to be a threat to the future business of their company. When a BOD refuses a takeover, there is an inherent conflict of interest. Court goes over conditions to meet BJR (above). Board’s decision to offer fair value of corporation is reasonable and consistent with directors’ duty to ensure minority

stockholders receive equal value for their shares. No evidence the directors: were trying to perpetuate themselves, in fiduciary breach, were overreaching, lacked good faith,

were uninformed.

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Teck Corp compared to Unocal: Teck requires that directors must have reasonable grounds to believe a takeover will cause substantial harm to the corporation. Unocal requires similar reasonable grounds for rejecting a takeover, but also requires that directors’ actions are proportionate

and not draconian.

Revlon modifies Unocal in some respects. Revlon is another foundational takeover case, which purports to adapt the Unocal standards to the auction context. Sets forth what are referred to as “Revlon Duties”:

o The duty of the board of directors to maximize the price received by shareholders in a corporate auction. Effectively heightens judicial review of director actions during an auction.

Revlon v MacAndrews & Forbes Holdings Inc.

Pantry pride wants to buy out Revlon, unable to reach agreement, so begin hostile takeover. Revlon sets up poison pill and stock repurchase plan to stop Pantry Pride. After Pantry Pride keeps raising its price, Revlon directors went to Forstmann and made a deal for them to buy out Revlon as a white knight. Deal with Forstmann included a lock-up option (guarantee Forstmann one of Revlon’s core business divisions if someone else bought 40% stock) and a no-shop option (prevented Revlon from negotiating with a rival bidder. Pantry Pride sued.

Once it is inevitable a corporation will be sold, the directors’ job is to be an auctioneer and to drive the price as high as possible.

On the other hand, when the sale is not inevitable, the standard under Unocal means the directors are still expected to resist any legitimate threats to the corporation’s existence.

Issue: did the directors breach their fiduciary duty by signing with Forstmann because it hurt shareholders by preventing them from accepting a higher offer?

Trial court found directors breached duty of loyalty (worried about own interests as opposed to maximizing shareholder value). Now at appeal.DSC Affirmed: BJR does not apply to a decision to implement anti-takeover measures if the directors are only doing it to preserve their jobs. Unocal: to benefit from BJR, directors must demonstrate they were responding to a legitimate threat to corporate policy and effectiveness and that its actions were reasonable in relation to the threat posed. Directors acted reasonably when they set up the poison pill.

However, once it became inevitable that the corporation was going to get sold to someone, the directors were obligated to maximize the corporation’s immediate value for the benefit of the shareholders. Instead, they stopped a bidding contest, which made the sale price lower. If their white knight offered a more favorable price, could have been ok. Here, the principal benefit was going to the directors, who avoided personal liability to a class of creditors to whom the board owed no further duty to.Held: Revlon directors breached their duty of care by entering a series of transactions with Forstmann that had the effect of thwarting Pantry Pride’s efforts to acquire Revlon.

Reasons Under Unocal, the BOD may consider a variety of corporate interests. Once the sale of the corporation becomes inevitable, however, the directors’ duties shift to maximizing shareholder value. Since the Revlon board prioritized the interests of noteholders, the BJR does not apply. To whom are the directors’ interests owed?

o Unocal: valid concerns include: inadequacy of the price offered, nature and timing of the offer, questions of illegality, impact on constituencies other than shareholders (creditors, customers, employees, community), the risk of non-consummation, quality of securities offered in exchange.

“You can consider non-shareholder constituencies”o Revlon: “a board may have regard for various constituencies in discharging its responsibilities, provided there are

rationally related benefits accruing to the stockholders”. “You can consider customers’ interests, BUT ONLY IF it is connected to the shareholder interests”

Cam says this narrows the scope of the duty to shareholders. Paramount Communications Inc. v QVC

Network Inc.

Paramount wanted to be taken over by Viacom, and negotiated some deal protection measures (no-shop, 100m termination fee, discounted purchase price for 20% stock to Viacom if Paramount

Revlon duties are triggered by a break-up OR a change of control. Duties are not limited to situations where the company is being liquidated.

Any sale of the company triggers Revlon duties. Logic: when selling a public company and taking it private, you are depriving the

shareholders from ever receiving a control premium again in the company.

Obligation is to seek the best value reasonably available to shareholders.

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took another offer). QVC also wanted to buy Paramount and offered 1B more than Viacom. Paramount’s directors voted to not accept QVC offer. QVC sued and argued under Revlon that the directors were under obligation to get best possible price. Paramount argued they weren’t up for sale as they were only selling part (not all) of the company, therefore Revlon didn’t apply.

Issue: are Revlon duties triggered when a company is being broken up?

Trial court found for QVC. Paramount appealed.DSC affirmed: DSC found sale amounted to a sale of control because the control of Paramount would move from public to Viacom’s owner. When there is a sale of control, transaction should have enhanced scrutiny and consider Revlon duties. Deal with Viacom failed the Revlon duties. Paramount’s directors failed to give enough attention to the ways the Viacom deal would affect the ability for them to get best possible price. Result of sale to Viacom would be unreasonable because they could have had 1B more. Paramount didn’t have a controlling shareholder. When it merged into Viacom, the paramount shareholders traded their stock for Viacom stock. Since more than 50% of Viacom was owned by one person, the Paramount shareholders basically lost their voting rights. Held: Revlon duties are triggered any time a company is sold.

Reasons Paramount communications entered a merger agreement with Viacom, QVC made a higher priced offer. In resisting the QVC

offer, the Paramount BOD cited their contractual obligations under the merger agreement. BOD tried to argue that Revlon did not apply because the company wasn’t being broken up.

Court holds that Revlon duties are triggered upon a change of control or a break-up of the corporation, basically, any time a company is being sold.

The merger agreement was unreasonable in that it prevented the BOD from considering a superior deal. The BOD cannot contract away their fiduciary duties in a merger agreement. Requirement of a market check to help you intelligently figure out if you can get a higher price from someone else (Cam says

the most effective market check is putting a company up for auction). Ultimately, Viacom acquired Paramount at a significantly higher price – indicating that the initial deal failed to maximize

shareholder value.

CANADIAN LAW REGARDING CONTROL TRANSACTIONSA. DIRECTORS’ DUTIES IN CONTROL TRANSACTIONS (CANADIAN LAW)

Canadian Takeover Jurisprudence In recent years, Canadian courts have developed their own takeover jurisprudence. This jurisprudence is influenced by, but distinct from, Delaware takeover jurisprudence. Slightly more permissive standard of review.

o Deference a court will grant to a BOD that is opposing a contested takeover is greater than in Delaware. Greater latitude to consider non-shareholder interests.

o “best interests of the corporation viewed as a good corporate citizen”.

Pente Investment Management Ltd. v Schneider Corp.

(CANADA)

Schneider corp was dominated by the Schneider family through a dual-class share structure. Schneider corp adopted a coattails provision allowing the Schneider family to effectively veto any takeover offer. Maple Leaf Foods made an offer for Schneider corp, which was rejected in favor of a competing offer from Smithfield Foods. Despite Maple Leaf Foods’ willingness to increase its offer, the Schneider family entered a lock-up agreement with Smithfield Foods. Minority shareholders and Maple Leaf Foods both sued to enjoin the

No requirement to hold an “auction” when selling a company. “best value reasonably available to shareholders in the circumstances”

Standard of review: BJR applies to a control transaction if the directors successfully avoid a conflict of interest and use informed, reasonable judgment. A decision recommended by a special committee of independent directors is

entitled to the BJR, but it must be in good faith and reasonable.

Use of a truly independent committee resolves the conflict of interest problem.

Issue: is the board of directors acting in the best interests of the corporation?

Did the directors act in the best interest of the corporation? Teck: must act on informed and reasoned basis; directors are not SH agents, they have absolute power to manage affairs of corporation, even if they contravene SH wishes. Special committee acted in good faith, as they acted honestly. Decision was informed, they were aware that Maple Leaf would have made better offers, but family would not have accepted. Should members of sr. management been permitted with a significant role in sale

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Smithfield Foods transaction. negotiations? While Dodds had a potential conflict of interest, this had to be balanced against the benefits to be obtained. Dodds was a director in the other company and part of the family, but he was not on the special independent committee that reviewed the offer. No conflict, since Maple Leaf promised to treat him generously if there was a successful bid. Special committee. Created to protect those the oppression remedy is designed to protect – part of process to obtain the best transaction available. Was there a duty to conduct an auction of the shares? Revlon: if a company is up for sale, directors must conduct an auction of the shares. Court says this is not the law in Ontario. Paramount: when there is a bid for change of control, obligation to seek best value reasonably available to shareholders. Here, only a single offer was made, and the family did not want to sell controlling interest. Family did a market canvas to judge adequacy, does not mean it would agree to sell. Market canvas is not an auction. Making high bids was a risk Maple Leaf chose to assume. Held: yes, it got the best offer it could in this given situation.

Reasons Common shares can vote, Class A can’t. Most of the equity is in the Class A shares. If common shares are given exclusive

offer, Class A shared can be converted to common shares. No Auction Required One argument is that BOD failed to meet FD because they didn’t hold an auction between Maple and Smith. But Revlon is not

the law in Ontario, and only says you have to maximize shareholder value. Distinguishes Revlon, though ask whether Revlon requires a corporate auction. Following Paramount, the applicable standard is:

o “the best value reasonably available to shareholders in the circumstances” (yet, the court also states the board of directors is not beholden to the shareholders alone).

Where are FDs owed? During a sale, the directors’ FDs are owed to the company, not necessarily to any particular group of shareholders.BJR The BJR applies to a control transaction if the directors successfully avoid a conflict of interest. Requires procedural steps to sanitize the decision. In this case, a decision recommended by a special committee of independent directors is entitled to the BJR.Board of Directors vs. Shareholders It is important to note that the board of directors acted upon the recommendation of the special committee. The special committee was constrained by the position of the Schneider family – since the Schneider family could veto a deal

with Maple Leaf Foods, the special committee could still be acting in the shareholders’ interests by accepting the Smithfield foods deal.

The board of directors was not acting under the domination of the Schneider family, and the Schneider family owed no specific duty to the other shareholders.

Cam says it was reasonable that the BOD took the lower offer by locking up with Smithfield. This is because the family could veto any deal, so given that the BODs hands were tied, they fulfilled their FD because taking the Smithfield deal was the highest deal they could take, given this specific context.

Re BCE Inc.

Leveraged buyout of BCE Inc by Ontario Teachers’ Pension Plan and its private equity partners. Leverage in the deal (taking in more debt) would have reduced the value of 1976 debentures. Debenture holders sued to block the transaction as oppressive under CBCA s.241.

Affirms Peoples: directors’ fiduciary duty is owed to the corporation, and not any particular constituency.

Thereby rejecting a Revlon duty to maximize shareholder value in control transactions.

Issue: was the duty of loyalty breached?

Directors must look to what is in the best interests of the corporation, and it may also be appropriate to consider the impact of corporate decisions on shareholders. The best interests of the corporation arguably favored acceptance of the offer at the time. Bell Canada needed to undertake significant changes to continue being successful, and that privatization would help achieve long term goals and bring in equity from sophisticated investors motivated to improve corporation’s performance. Held: no. The corporation is entitled to maximize shareholder profit, as long as they do not treat other stakeholders unfairly. In terms of oppression remedy: debenture holders failed to establish a reasonable

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expectation that the directors would protect either the investment grade rating, or the market value of the debentures.

Reasons SCC conflates fiduciary duties and the oppression remedy.Cam says one of the problems is what the substance of the standard actually becomes. If someone is protected by oppression remedy, they are protected by their reasonable expectations. Different groups have different interests, and BOD has to figure out how to mediate between these different interests. The way they frame it is: look, it doesn’t matter who you’re talking about. The reasonable expectation is that the BOD acts in the best interest of the corporation. Because they conflate this with the FD analysis, they have to balance the different interests of stakeholders. So, how do we know it upsets the reasonable expectations? If your RE is that the BOD will act in the interest of the corporation, how do we know what the REs are? Well, “it’s that you are acting in the interest of the reasonable expectations”. Very circular logic. To whom are directors’ fiduciary duties owed in a control transaction?

o Delaware cases say (strongly imply) that duties are owed to shareholders.o Court says duties are not necessarily owed to shareholders, but rather to “the corporation”.o Following Peoples, directors may consider a variety of shareholder interests.o Directors’ discretion in balancing interests is subject to the business judgment rule.o Court also implies that directors may be required to consider stakeholder interests.

Stakeholders Must directors consider stakeholders or not? “Directors, acting in the best interests of the corporation, may be obliged to consider the impact of their decisions on corporate

stakeholders, such as the debenture holders in these appeals”. When are the directors obliged? The court does not say.

Reasonable Expectations The oppression remedy is predicated on reasonable expectations. The court holds it was not reasonable for the debenture holders to expect more than their contractual rights. The board of directors did consider the debenture holders, but reasonably decided to pursue the best deal for shareholders. When should debtholders ever reasonably expect to get more than they bargained for? The court states that the oppression remedy protects the “reasonable expectations of stakeholders”. The court goes on to say: “the reasonable expectation of stakeholders is simply that directors act in the best interests of the

corporation”. However, acting in the best interests of the corporation requires considering the interests of stakeholders. How do we know if/when the directors’ balancing of stakeholder interests upsets reasonable expectations? This is a meaningless standard.

Cam says he doesn’t know why debt holders should be entitled to more than what is beyond their contractual rights. Implication is that BOD has to, in any significant decision-making process in the sale of a company, have to invest in properly documenting this consideration process, even if it doesn’t have any teeth. Requiring the BOD to go through consideration process is redundant if there is no substantive process behind it. The bad effects of this case are not that far reaching, to be honest.

Problems that EmergeThe board must act in the best interests of the corporation, subject to the business judgment rule. The practical requirements of this obligation are unclear.

Cam says that under the BCE doctrine, you could make the argument that the workers need to be advantaged, or the shareholders should be. Cam also says that after BCE was decided, a lot of cases were applying this doctrine in the provincial courts. None of them have ever cited other than in the shareholder interests. 100% of the time in the interest of shareholders. The reality is that there are no economic incentives to look out for anyone but shareholder groups. Very difficult for a BOD to systematically make decisions that disadvantage shareholders, and not be kicked off the board.

B. CANADIAN SECURITIES REGULATION

Securities Regulation in the Takeover ContextThe Canadian securities regulators have a great deal of influence over substantive corporate law. Each province in Canada has a securities commission, which is a regulatory body tasked with regulating financial markets and protecting public actors. Corporate

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law is more about relationships within / internal to the corporation. The mandate of the securities regulators is much more about protecting public investors who buy securities in the public market. This extends to the takeover context. Positions taken by securities regulators are not always consistent with positions taken by the SCC.

Public Interest The securities regulators of each province have effective jurisdiction over any company that issues securities to provincial

residents.o The reality is that every single securities jurisdiction over every publicly traded company in Canada (because shares

are sold everywhere). The system is integrated, rather than 10 independent systems. Each provincial securities regulator has the power to make orders “in the public interest”, which gives a lot of discretion to

regulate takeover bids. This power allows the provincial securities regulators to effectively enjoin takeovers that are not “in the public interest”.

National Policy 62-202 Announcement of Canadian securities policy through a joint document issued by all securities commissions together.

o Primary goals are to protect interests of shareholders, maximize their choices, and provide a regulatory framework where takeovers are done in an open and even handed environment.

Privileges shareholder choice and value.o Says nothing about corporate stakeholders other than shareholders.

No specific rules, just a set of guidelines (though NI 62-104 governs takeover bids by laying out specific rules that apply to the bidder).

o Advantages: allows case-by-case flexibility to assess issues.o Disadvantage: not clear, can’t predict what is okay.

Shareholder approval of a given transaction allays regulatory concerns. Specifically refers to the following defensive tactics:

o Issuing shares or options (poison pill).o Selling or purchasing material assets.o Any other transactions outside the ordinary course of business.

As a general matter, the securities regulators will not issue advisory decisions. Economic assumptions that animate this policy.

o Canadian securities regulators take a more shareholder-centric view of corporate law and defensive tactics than the SCC. Maximizing shareholders’ interest is more economically efficient.

Cam says it’s weird how the SCC issues reference opinions (like pre-judgments of law outside the context of an actual dispute) in response to people asking: “if it’s okay to do X”. He says this doesn’t exist in the US. In Canada, there is no Federal security law. In 2011 the Federal government was planning on adopting a Federal securities law to nationalize it and to get rid of this weird provincial system. It was submitted as a reference to the SCC. The SCC said it was unconstitutional. Just recently, there was another reference opinion in the SCC which was asking if they could have blessing, from a constitutional standpoint, for a proposal to combine a joint effort of the securities regulatory authority together with the Federal government to create a bizarre multi-tiered body with representatives of the cabinet and provinces to coordinate securities law (but QC doesn’t want to be in it), and it’s all complicated. BUT that is deemed constitutional and received a blessing last week.

Cam says there is a disconnect between Securities Commission and SCC because the SCC is filled with academics / judges, but not experts in corporate law. Therefore, having different perspectives on the realities and practicalities of corporate law. The Commission’s employees are practitioners etc. who have extensive experience. Cam says Canadian corporate jurisprudence… “is what it is…”.

Re Chapters Inc.

Trilogy approached Chapters to negotiate friendly takeover. Board of chapter declined and adopted poison pill with a “permitted bid” clause that required such bids to be open for 45 days. Chapters looked for a white knight and found Future Shop. Board of Chapters preferred FS bid, publicly recommending it to shareholders and indicating it will waive the pill in favor of the FS bid.

Directors cannot maintain a poison pill indefinitely.

Poison pill can only be maintained if there is a “reasonable possibility” of achieving a superior offer.Shareholders must ultimately decide the fate of competing takeover bids – directors CANNOT “just say no”.

Issue: can a board of directors maintain a poison pill indefinitely?

Jorex: poison pill must eventually be removed. Regal: pill should go if there is a real and substantial possibility that the board can increase shareholder choice/value. Royal factors:

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Whether shareholder approval of the rights plan was obtained. When the plan was adopted. Whether there is broad shareholder support for the continued operation of the

plan. Size and complexity of target company. Other defensive tactics, if any, implemented by

o The number of potential, viable offerorso Steps taken by target company to find an alternative bid or transactiono Likelihood that the target company will be able to find a better bido Nature of the bid (is it coercive or unfair to shareholders of target

company)o Length of time since bid was announced and madeo Likelihood the bid will not be extended if the rights plan is not

terminatedPill was adopted subsequent to the Rights Plan and the meeting expressing intent for friendly merger by Trilogy. Shareholders approving a pill does not mean they want to keep it indefinitely. No evidence SHs wanted pill to continue. Evidence SHs wanted to be free to tender the offer. Chapters is not large and complex. Chapters employed a number of defensive tactics after Trilogy made a bid. The longer a bid is open, the more market risk accrues. Unlikely to be another bidder outside of Chapters and Indigo. Above market premium offer by Trilogy is good for the SHs. The evidence demonstrated that the maintenance of the pill was the obstacle that prevented Trilogy from increasing its offer. Held: no reasonable possibility Chapters board could increase shareholder choice or value by keeping the pill. Does not allow a board of directors to maintain a poison pill indefinitely.

Cam’s ThoughtsCam says this case shows us that under Canadian securities regulation, a BOD cannot indefinitely maintain a poison pill in the face of a viable offer without making some effort to raise a higher offer for shareholders. Can’t just be obstinate and block a deal without making an effort to get a higher deal – aka: can’t “just say no”.

Court holds the pill can’t stand. Keeping the pill alive is preventing Trilogy from enhancing their offer, even though they stated their intent to allow Trilogy to maximize their offer. Cam says that the Indigo deal was attractive, but Chapters was trying to do a Hail Mary deal with their white knight, Future Shop. The reason that Chapters was pursuing a white knight and didn’t want to get bought out by Indigo was because there was underlying drama where the CEOs of both companies had a past history and strongly disliked each other, so this was a “battle of egos” situation.

Ontario Securities Commission case. As per 62-202, sets forth a skeptical position regarding takeover defenses. Does not allow a board of directors to maintain a poison pill indefinitely. Poison pills must be used as an instrument to

maximize shareholder value, and can’t be a roadblock to this. Shareholders themselves must ultimately decide the fate of competing takeover bids – directors cannot “just say so”.

o “Just say no” is a legal doctrine that comes from Delaware doctrine. This defense is what Chapters says you can’t do. Aka: you can’t set up a poison pill and just say no, under Canadian jurisprudence.

Directors may maintain a poison pill as long as there is a “reasonable possibility” of achieving a superior offer. In evaluating a board of directors’ decision to maintain a poison pill, a variety of factual considerations may be relevant. In evaluating a BOD’s decision to maintain a poison pill, a variety of factual considerations may be relevant. In this case, there was no reasonable possibility that maintaining the poison pill would increase shareholder choice and value.

Overlap with Corporate Law Following National Policy 62-202, the commission frames its decisions in terms of shareholder choice and value. No mention of other relevant interests. Is this consistent with CBCA s.102(1)?

o No, the CBCA provides that directors owe their duties and interests to the corporation. Is this consistent with jurisprudence of the SCC?

o Cam says it is arguably inconsistent with s102(1), and DEFINITELY inconsistent with the SCC.Cam says there is a stark discrepancy from what the Securities Commissions are requiring and what the SCC is requiring. Remember, Chapters was decided in 2001. At the time this was decided, the inconsistency was not a big deal. Neither Peoples or BCE were decided, so the discrepancy was not yet apparent / had not come into existence. Now, post BCE we see a gap between

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jurisprudence of the Securities Commission and the SCC.

Re Neo Material Technologies Inc.

Neo had a poison pill with a permitted bid feature in place. Pala, Neo’s largest shareholder, made a partial bid through a numbered company to acquire more shares (20%) in Neo that it didn’t have, and their bid was designed to comply with the permitted bid feature of the pill. Neo responded by adopting a second poison pill which was identical to the first, except the definition of permitted bid was amended to require the offer be made to all of Neo’s shareholders. Pala responded by lowering the shares sought to 12% and making its offer conditional on the first pill being waived and the second pill withdrawn. Neo declined. Pala lowered percentage of shares sought to 10%, but raised the price it would pay. Neo shareholders approve second pill with an 81% vote.

IN TERMS OF EXAM: reconsider Neo if you encounter some highly unusual factual circumstance, which might suggest the BOD should be freer in taking a just say no approach.

Generally, you can’t just say no, but you CAN just say no if you are in a crazy factual circumstance.

Directors CAN “just say no”. Allows the BOD to refuse a tender offer without making any effort to solicit an alternate bid.

Issue: should the pill go?

Commission must balance the rights of the shareholders of the target to tender their shares, against the duties of the target board to maximize shareholder value. Decided it was not in the public interest to set aside second poison pill because Neo’s shareholders were informed about what they were voting for (against Pala’s offer) and were in overwhelming majority. No evidence Neo’s board did not act in the best interest of the shareholders. Neo board discharged its FD by hiring a special independent committee and retaining independent advisors to assess Pala’s offer.Neo board concluded that: Current economic circumstances are once in a lifetime and depressed market

shares greatly. Neo has little debt, strong cash reserves, and solid business relationships so is

well positioned to survive economic downturn and come out stronger and more valuable.

Inappropriate time for Neo’s shareholders to change effective control to one shareholder.

A bid by Pala is not advantageous at this time.Held: avoiding an auction at this time was in the long-term best interest of the corporation and of the shareholders as a whole. There is no evidence this decision was made in any manner other than in furtherance of the board’s fiduciary obligations to the corporation.

Reasons Ontario Securities Commission case, departs from Chapters. Same tribunal, but 8 years later in a post BCE world. This case shows how things have changed, even within the jurisprudence

of the OSC. Allows the BOD to refuse a tender offer without making any effort to solicit an alternative bid. In other words, allows the board to “just say no”. Note, however, that the Neo shareholders overwhelmingly approved the second poison pill in direct response to the hostile

offer. The OSC acknowledges that prior decisions do not allow a board of directors to “just say no”. However, the commission effectively allows the Neo board to do just that. The decision may be fact specific: financial crisis, overwhelming shareholder support for poison pill, procedurally rigorous

decision making process. Cam pays attention to the fact that the BOD formed an independent committee, and says this is the “gold standard” in ensuring

procedural fairness.

Validity of the “just say no” defense The textbook is critical of Neo, characterizing it as inconsistent with Chapters.Cam says he disagrees with the textbook, he says it is the right outcome and that the legal analysis is correct. Because of the unusual factual circumstances, he says the BOD was legitimately protecting shareholders. One can argue that the board was legitimately protecting shareholders, and that the case is limited to its facts. A few years later, Neo was sold to Molycorp, for more than 6 times Pala’s offer.Cam says this is an example of where BOD did a great job for the shareholders, and took a long-term view. Cam takes the point that, from a doctrinal perspective, it seems incoherent for the OSC to say “can’t just say no”, then “just say no”. But if you read the opinion, it makes sense.

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Cam says the outcome makes sense, because of the highly unusual facts. The BOD, when implementing a poison pill, says they need to stop this offer because the offer is too low. Bidder says: “premium is high, how are we bidding too low”? BOD then says: “(always says that) bids are undervaluing”. Cam says you need to always think the market is undervaluing a given company. He thinks the securities markets are efficient at valuing companies, but markets aren’t perfect, and can go wrong. Financial crisis was a systematic failure of the markets to accurately price the value of corporate shares. This is the one example where the BOD can legitimately say the market is undervaluing the company, and actually be right. Cam says he thinks the bidder was acting opportunistically to buy the company really cheap, and that the BOD was protecting its shareholders (becomes evident later on).

Re Baffinland Iron Mines Corp.

Nunavut and Arcelor made offers to Baffinland. Management of Baffin preferred Arcelor and entered a support agreement which required Baffin to keep the poison pill in place until just prior to the expiry of Arcelor’s bid. Contrary to Neo, the commission cease traded the Baffin poison pill. Reasons were similar to Chapters: pill was there for too long, sufficient time to find competing offer, no shareholders expressed desire to keep pill in place, Nunavut’s impediment to raising offer was the pill, favoring Arcelor would place Nunavut at risk for keeping offer open for long.

A poison pill will be cease traded where it is unlikely to achieve any further benefits for shareholders.

No one test / consideration should be the determinative “holy grail” when it comes to deciding if a poison pill should be cease traded.

Affirms Chapters.

The decision to maintain a poison pill is not subject to the BJR OR discharging FDs properly.

Issue: should the pill have been cease traded?

It is generally time for a poison pill to go when the rights plan has served its purpose by facilitating an auction, encouraging competing bids, or otherwise maximizing shareholder value. A poison pill will be cease traded where it is unlikely to achieve any further benefits for shareholders. Held: No real and substantial possibility that Baffin will increase its shareholder choice by keeping the pill in place. Poison pill cease traded.

Reasons Ontario Securities Commission case. Seems to repudiate Neo, the OSC says they were wrong and backpedals. The commission holds that it is generally time for a poison pill to be retired when it has served its purpose by facilitating an

auction, or otherwise maximizing shareholder value. If the poison pill has served its purpose (as stated in the articles), then it can be retired. In this case, the purpose was to give board/shareholders time to consider and to allow other offers to be tendered. Neo does not mean the BOD can “just say no”. The decision to maintain a poison pill is not subject to the business judgment rule.Securities Regulation and “Stakeholder” Interests Do Canadian securities regulations extend to non-shareholder interests? National Policy 62-202: “the primary objective of the takeover bid provisions of Canadian securities legislation is the

protection of the bona fide interests of the shareholders of the target company”. Chapters: proper focus is on shareholder choice and shareholder value.

o Affirms this statement by 62-202. Neo: follows BCE, thus potentially allows directors to consider non-shareholder interests.

o Throws a monkey wrench, follows BCE logic regarding FDs. Opens up, for a moment in time, where it looked like OSC was going down the same path as the SCC and reinterpreting its mandate to include non-shareholder interests.

Baffinland: again, focuses on shareholder choice.

CAN THESE CASES BE RECONCILED?This line of cases is inconsistent, likely due to the different facts, the different compositions of the deciding panels, and decisions by other securities commissions. Chapters: a poison pill can only be used to generate strategic alternatives to a hostile offer – the board cannot “just say no”. Neo: allows the board to block a takeover offer, even in the absence of a strategic alternative.

o But this is probably confined to its specific facts (depressed stock market, specific shareholder approval, etc.). Baffinland: the board cannot “just say no”.

o Arguably stricter than the Delaware jurisprudence.

Cam Factoid: the securities commission in Ontario is decided in panels. Out of 16 members, 2-3 commissioners form a panel and decide a given case. Even though we talk about the OSC generally, you can have dozens of cases decided by completely different

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individuals with different ideas, different levels of expertise, who have different ideas of things. The panel for Baffin was different from the one for Neo.

Today’s lecture was basically a tour through recent takeover jurisprudence in the Securities Commission. We focused on OSC because it is the most important one, but the jurisprudence is similar in other Securities Commissions. This gives you a sense of the substance of jurisprudence in Securities Commission decisions, but also note how (important) it is different from the jurisprudence of the SCC.

SHAREHOLDERS’ RIGHTS AND REMEDIESA. SHAREHOLDERS’ RIGHTS

Voting Voting is the primary means by which shareholders affect corporate governance. Per CBCA s.140(1): “unless the articles otherwise provide, each share of a corporation entitles the holder thereof to

one vote at a meeting of shareholders”.o Implies that corporations can issue non-voting or restricted voting shares.

Per s.102(1), the board of directors supervises the business and affairs of a corporation – shareholders do not have a direct voice in most business transactions.

Resolution in Lieu of a Meeting Generally, shareholders vote at shareholder meetings (e.g. annual meetings). Not all shareholder decisions require a physical (or electronic) meeting. Pursuant to CBCA s. 142(1), the shareholders may act by unanimous written resolution. This is an important practical measure for smaller corporations.

Fundamental Changes In addition to electing the board of directors and amending the by-laws, shareholder approval (by supermajority vote)

is required for a number of “fundamental changes”.o The CBCA has this concept of fundamental changes. Some of the things they vote on: BOD, amending

bylaws, but there are so FCs they have to vote on (below). The most important of these are:

o Amending the articles of incorporation.o Approving an amalgamation.o Approving a corporate continuation (reincorporation).

Moving from one jurisdiction to another.o Approving the sale, lease, or exchange of substantially all of the corporation’s assets.

Amending the Articles of Incorporation Pursuant to CBCA s.173, a special resolution of shareholders is required to amend the articles of incorporation.

o If want to amend articles need 2/3 vote (supermajority). Typically, the BOD will propose amendments and the shareholders will vote at a general meeting (or sign a

unanimous resolution in lieu of a meeting).

Amalgamation (merger in USA) In order to amalgamate, the BOD of each constituent corporation must approve an amalgamation agreement that sets

forth the terms of the amalgamation s.182(1). A statutory process for combining two companies into one. Once the amalgamation agreement has been signed, the shareholders of each constituent corporation must approve the

amalgamation by special resolution s.183(5). Even non-voting shares have the right to vote to approve an amalgamation s.183(3). Each class of shares is entitled to a separate vote if the amalgamation includes a provision that would entitle the class

to a separate vote under s.176 (i.e. a provision that would change the rights of that specific class. Pursuant to an amalgamation, both corporations come together and can, and do, restructure the shares of each

company. All have to be supermajority.

Continuation A continuation (referred to as reincorporation in the US) is the reorganization of a corporation in another jurisdiction

or under another corporate act.

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Articles of continuation (documents that reincorporate) can include amendments to the articles of incorporation.o You can continue in another jurisdiction, and can amend your articles in a potentially substantial way.

Continuance requires the approval of both the original jurisdiction and the new jurisdiction. To be effective, the shareholders of the corporation must approve the continuation by special resolution s.188(5). Even non-voting shares have the right to vote to approve a continuation s183(3).

Sale, Lease, or Exchange of Substantially All Assets The sale, lease, or exchange of substantially all of the assets of a corporation requires a special resolution of

shareholders s.189(8). As with other fundamental changes, even non-voting shares have the right to vote to approve an extraordinary sale,

lease, or exchange s.189(6). Any class of shares that is affected differently by the sale, lease, or exchange is entitled to a separate vote thereon

s.189(7). o This, in an asset sale context, is not typical. In an asset sale, a company is selling assets, so it does not affect

shares per se – so it would be atypical to trigger 189(7).

Dissent Rights Shareholders may dissent from a fundamental change and demand payment of the fair value of their shares s.190(1).

o If there is a FC occurring, any shareholder has the right to say no under the CBCA and to cash out. Exercise of dissent rights is relatively uncommon – acquisition agreements often include a provision whereby the

purchaser can back out if more than 5 to 10% of dissent rights are exercised. Dissent rights are generally not attractive, because court orders an appraiser, and more often than not the appraisal

value is less than you would have gotten in the M&A deal. Can be good for minority shareholders.

Jacobsen v United Canso Oil & Gas Ltd

United Canso adopted a bylaw capping voting rights at 1000 shares. This provision was added to the articles of incorporation. United Canso was reincorporated, Jacobsen brings an action to determine if the bylaw contravenes legislation.

Rights within a class of shares must be equal – voting rights can only differ as between classes of shares.

At least one class of shares must adhere to an unmodified equal voting rule.

There is a general understanding in corporate law that you can’t discriminate among different shareholders.Issue: does the voting restriction contravene the presumption that there is equality between shareholders?

A literal reading of provisions suggests a corporation can modify the voting rights of a single class of shares. However, the broader statutory framework suggests voting rights can only differ as between classes of shares. Meaning that, if different shareholders in a company are going to have different voting rights – it has to be because they own different classes of shares. You can’t discriminate among shareholders in the same class. The court holds that at least one class of shares must adhere to an unmodified equal voting rule.

Bowater Canadian Limited v RL Crain Ltd.

Company had common shares and special common shares. The special common shares carried 10 votes per share, but once shares were transferred, the transferee would have only 1 vote. The Trial Judge severed the provision, and special common shares carried 10 votes regardless of transfer. Bowater appealed.

This reinforces the rule from Jacobsen.

Rights are attached to the share, not the shareholder. Thus, a company cannot change voting rights depending on whether the subscriber or transferee holds them.

Rights constitutive of shares of a given class must be the same for all shares of that class.

Same shares cannot carry different number of votes depending on shareholder. Rights that are attached to a class of shares must be provided equally to all shares of that class.

Issue: can the provision stand against the CBCA?

If there was no equality of rights within a class of shareholders, there would be great opportunity for fraud, even though that is not a problem in this case.

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Agreed with TJs decision to sever step-down provision. This accords with intention of the parties at the time of creation.

Reasons Articles of incorporation sets out these different rights. Rights are attached to the share, not the shareholder. So, a

company cannot change voting rights depending on whether they are held by the subscriber or the transferee. If there were not equality of rights within a class of shareholders, there would be a great opportunity for fraud. Court also holds that the step-down provision can be severed without affecting the validity of the provision for ten

votes for each special common share. Thus, while you can have many share classes, with a variety of rights and restrictions between them, corporations

should have the same rights and restrictions attaching to each class of shares.

Rationales for Voting LimitsHistorically, shareholders were often entitled to one vote per person. Voting based on shareholding was considered unfair (or even undemocratic). Voting limits (and similar voting rules) can be used to protect small shareholders. They can also be used to entrench incumbent control groups. Cam says Jacobsen and Bowater stand for the same thing.

Proxy Voting The CBCA grants the right to vote by proxy s.148. A proxy is simply a vote on a shareholder’s behalf. Proxy voting is the only practical means by which shareholders in public corporations can vote.

o Because if you are the shareholder, it is not feasible for you to go to every meeting to vote.o Typically, BOD proposes a bunch of actions, including re-electing themselves and other basic stuff

depending on what is going on. Managers send out a proxy solicitation to SHs saying they will do “XYZ, please vote in favor of that”, you’d get a proxy vote in the mail, and most people don’t bother doing it.

Since management controls the proxy machinery, proxy voting tends to be very pro-incumbent.o Legitimate for them to use corporate funds to distribute these proxies. o If anyone wants to challenge them, they have to do that out their own pocket – can’t use the corporation to

run dissident proxies. Challengers can distribute their own proxy materials in a “proxy fight”.

o Relatively rare but happens sometimes.

Brown v Duby

Proxy fight between management and a large group of shareholders that owns 20 times the shares of what the incumbent board owns. Both competing and soliciting proxies. When soliciting a proxy, need to meet certain requirements, which includes material information to make informed decisions. Block of SHs send out something that looks like proxy solicitation, despite saying “this is not a solicitation of proxies”. United Canso brings a motion for interlocutory injunction.

Although a letter may state it is “not requesting proxies”, it might appear to be a solicitation within the meaning set out in CBCA 147(a)(2) and (3).

An injunction may not be the best remedy, as it would prejudice shareholders’ votes (because to grant one essentially means the plaintiffs would win).

Issue: is it still a proxy solicitation? If so, it runs afoul of the dissident proxy circular required by the CBCA.

Threshold issue court has to deal with first: United Canso is Canadian, the shareholders are all American based in

Texas. The shareholders they send the letter to are all US shareholders of Canso.

That is irrelevant, because corporation was incorporated in Canada, so if you are incorporated here, you have to follow Canadian law.

Cam says it seems like the shareholders were trying to do the right thing – they did comply with Securities act (US) but didn’t follow the Canadian act (maybe bad legal counsel).

Court says no, you have to follow Canadian rules. Issue of whether or not this is a proxy solicitation:

If proxy solicitation it would do so under the CBCA. 147a is a request to not issue a form of proxy is in itself a proxy solicitation.

Asking someone not to sign a proxy is soliciting a proxy.Easy case for the court – Canadian law applies, and argument that it’s not a proxy does not apply. Court defends in substance the argument of the plaintiffs – says Ps are right, Ds are wrong in law.

Held: however, no injunction is granted. The only possible remedy is an

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injunction, or damages, and damages make no sense in this context. An injunction is an extraordinary remedy, but more specifically, found that regardless of who wins this case, an injunction would be inappropriate because it would irreparably prejudice the proxy fight – the court would be indirectly saying that Canso would win the proxy fight (by preventing them from challenging them). Court being involved would damage the proxy process way more than if they didn’t.

Cam said the outcome would have been different if the shareholders had evidence of fraud, being misleading, wrongful, etc. But they just goofed, so court won’t punish them on that.

SHAREHOLDER PROPOSALS

Shareholders can directly propose resolutions at shareholder meetings. Actions that shareholders can propose include:

o Amendment of the articles s.175(1).o Amendment of the bylaws s.103(5).o Director nominations (only if the shareholder(s) holds at least 5% of shares) s.137(4).o Miscellaneous corporate actions s.137.

It is unclear whether general shareholder proposals are binding the BOD to take specific actions.

Varity Corp v Jesuit Fathers of Upper Canada

Through a subsidiary, Varity manufactured diesel engines in South Africa during the apartheid. In the late 80s there was an international movement to boycott SA businesses to end apartheid. Jesuit Fathers were shareholders in the company. Varity resisted including in its proposal circular to SHs that the purpose to boycott was for economic, political, racial, religious, or social clause – and in particular the abolition of apartheid in South Africa.

The legislation is clear that if the primary purpose is one of those listed, however commendable either the general or specific purpose may be, the company cannot be compelled to pay for taking the first step towards achieving it.

A corporation may refuse to distribute shareholder proposal if it “clearly appears that the proposal does not relate in a significant way to the business or affairs of the corporation”.

Issue: whether or not the SH proposal primarily addresses general racial, social, political issues. If it does, BOD don’t have to include it.

The court finds that although the specific purpose of the proposal was divestment from SA, it doesn’t save the proposal because the overall purpose was about the abolition of apartheid in SA. The rules of Varity need not include social goals in the proposals it makes to SHs. Held: not compelled to distribute the proposal.

CommentaryVarity was decided under a previous version of the CBCA. The rule has changed. Now: may refuse a proposal if “it clearly appears that the proposal does not relate in a significant way to the business or affairs of the corporation”.

Could the corporation refuse the SA divestment proposal under the current version of the CBCA? This answer turns on interpretation of “significant”. Cam says BOD cannot resist the proposal under the new rule. Under the new rule, it’s a lot easier for shareholders to bring these proposals. Cam says he thinks “clearly relating in a significant way to the corporation” is broad. The wording of it flipped the onus of persuasion. Under the old rule, you had to persuade a court to think you were not trying to go for a cause. Under the new version, the BOD has a burden to demonstrate a proposal does not relate to the business of the company.

Corporate social responsibility as a general matter is getting more and more common. But it’s important to make the point that even today, CSR is more salient, but the overwhelming majority of these kinds of proposals fail; and fail spectacularly. Rhetoric about CSR has outpaced the reality of actual SH decision making, these proposals are becoming more and more common, but they almost always lose very badly. This change in the CBCA increased the access of SHs to these kinds of proposals. More proposals have to do with corporate governance than social justice things.

E.g.: SHs propose company to have policies where it will pay all workers a living wage (social justice). These get 1% of the vote and lose badly. If a company is paying a living wage, that is going to result in less profits to SHs. SHs generally don’t vote against their own interests.

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B. SHAREHOLDERS’ REMEDIES

Dissent Rights Recall that shareholders have dissent/payment rights under CBCA s.190. These rights can be an important protection from shareholder oppression.

Investigation Under s.229, a security holder or the director may apply to a court of competent jurisdiction for an investigation of the

corporation. The court may order an investigation on evidence of fraud or oppression. Under s.230(1), a court may issue any order in connection with an investigation.

Three types of Shareholder Lawsuits Personal action

o A shareholder has been injured in a personal, particularistic manner (e.g. BOD denies rights of a single shareholder).

Derivative actiono An individual shareholder or group of shareholders sues on behalf of the corporation (e.g. the directors

violate their fiduciary duties to the corporation). Oppression remedy

o Most often used when a specific group of investors has been discriminated against (e.g. the directors deny the rights of minority investors).

Re Northwest Forest Products

Northwest had 51% of subsidiary Fraser Valley, and sold FV assets for 200,000 which appeared to be a great undervaluation (maybe 50% below). Northwest shareholders petitioned directors to vote on bringing a derivative action, but they declined, claiming that the shareholders ratified the sale.

Shareholder ratification won’t be overly persuasive to the court where the alleged misdeed is taken out at the bequest of the majority shareholders.

Under s.233 of the BCBCA, the applicable standard for a court to grant leave to commence a derivative action is that the legal proceeding “appears to the court to be in the best interests of the company”.

Issue: did SH ratification automatically disentitle SHs to get leave to bring the action? Is it prima facie in the best interests of the company that action be brought?

What is the nature of the prima facie standard? On the face of it, does the claimant have what seems like a plausible claim? Court determines the action is prima facie in the best interest of the company because: land was sold for well under value, board did not get other bids, one director was on the board of both companies and may have benefitted, procedural concerns about the vote (i.e. not sure if full quorum). Held: no. It was in the best interest of the company to bring the action.

Reasons Statute not a bar.

o Statute only stated that shareholder ratification was a factor to take into account to granting leave, not a bar to bringing a derivative action.

Best interests.o Interests of the company and the interests of the shareholders are not synonymous.o Differences between majority and minority shareholders.o Thus, ratification is not a true reflection of what were the best interests of the company.

Foss v Harbottle exception.o Foss was a general rule with one exception: fraud upon the minority by the majority.o Statute was designed to overcome this rule.

Evolution of the Statutory Standard The prima facie standard of Re Northwest was set forth in the derivative section of the old company act.

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The company act was replaced by the BC BCA in 2004. Under s.233 of the BC BCA, the applicable standard for a court to grant leave to commence a derivative action is that

the legal proceeding “appears to the court to be in the best interests of the company”.

Turner et al. v Mailhot et al.

Plaintiff and his wife owned 30% of the corporation; defendant and his wife owned the remainder. The plaintiff and defendant had a disagreement and the plaintiffs were fired and got locked out of the company’s premises. Plaintiff sought and obtained leave to bring derivative action against the defendant for the corporation’s lost income that was diverted the defendant and also applied for indemnity for costs.

Being given leave to bring a derivative action creates prima facie right to indemnity, but the court still has to look at whether there are reasons to grant it.

Court looks at 2 indicia: 1) Complainant’s ability to pay (though capacity to pay should not

necessarily deprive the plaintiff of indemnification) and 2) Whether the action is brought for the corporation’s benefit or

whether the complainant stands to personally benefit.

Issue: is the plaintiff entitled to indemnification for the costs of the action?

Indemnification is important because the claim will be benefitting the corporation as a whole (all shareholders will benefit). Therefore, it is fair that the corporation (and all shareholders) should pay for the claim. Plaintiff had the ability to pay for the action, there is no claim with regard to financial hardship. While technically a derivatives case, the action is more about settling a struggle between two shareholder groups, doesn’t fit the typical fact pattern of a derivative action. As the plaintiff and his wife are the only minority shareholders, he will have great monetary benefit if the action is successful. Held: half of incurred and future costs allowed.

Hercules Management v Ernst & Young

Shareholders sued Ernst and Young for providing negligent audit reports.

The rule of Foss is that individual shareholders have no cause of action for wrongs committed against the corporation. They must bring derivative action.

Issue: the SCC addresses the issue of whether the claims should have been brought as a derivative action.

Considering the fundamental principle of limited liability, shareholders are not responsible for the liabilities of their corporation, therefore, it only makes sense they cannot benefit from the claims of the corporation. Ernst & Young had no contractual proclivity with the shareholders. The shareholders do not have the same interests as the corporation. OPPRESSION REMEDY

S.241 provides a statutory oppression remedy. Available to any “complainant”.

o Current or former securities holders.o Current or former directors or officers.o The director (of corporations Canada).o Any other person who, in the discretion of a court, is a proper person to make an application.

A court may issue any order to remedy corporate action “that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director, or officer.

Very important under Canadian Law Historically, English law provided minimal protection to minority shareholders.• English common law did not protect minority shareholders from situations where a controlling shareholder group:

• Passes an amendment to prevent the sale of corporate stock to any non-shareholder (freeze-out).• Refuses to pay dividends.• Engages in self-interested transactions.

• Canada was slow to reform minority shareholder protections. • Innovations in minority shareholder protections came from the U.S.

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• In recent decades, both Canada and the U.K. began to provide stronger minority shareholder protections. Today, the Canadian oppression remedy (CBCA s. 241) is one of the most significant defenses for shareholders.

• The oppression remedy is broader than traditional fiduciary duties. Thus, breach of fiduciary duty almost always constitutes oppression. Most plaintiffs will plead both causes of action.

• The potential danger of the oppression remedy is that it allows significant judicial discretion, reducing certainty for businesspeople.

• The oppression remedy is most relevant to corporations in which there is a controlling shareholder group, though it has been used in the public company context as well.

Re BCE Inc: Statutory test for oppression:(a) Any act or omission of the corporation affects a result,(b) The business or affairs of the corporation or any of its affiliates have been carried on or conducted in a manner, or(c) The powers of the board of directors have been exercised in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director, or officer

Two-pronged test for oppression:1) The action complained of upsets the "reasonable expectations" of a security holder, creditor, director, or

officer, and2) There is evidence of "oppression," "unfair prejudice," or "unfair disregard".

Reasonable Expectations The reasonable expectations prong speaks to general principles of equity. The concept of reasonable expectations is objective and contextual.

o Reasonable person.o In the specific circumstances.

Inquiry is conditioned by the fact that different stakeholders have conflicting expectations. Ultimately, stakeholders are entitled to reasonably expect fair treatment.

Evidence of Oppressive Conduct Must be evidence of oppression, unfair prejudice, or unfair disregard.

o Oppression = bad faith.o Unfair prejudice = harmful, though not necessarily culpable.o Unfair disregard = negligence.

Breach of Fiduciary Duty of Oppression In Re BCE, the court conflates the oppression remedy and the directors’ fiduciary duties. According to Jeffery MacIntosh, this is problematic for multiple reasons:

o The two remedies were drafted to serve different legislative purposes (protection of minority interests versus protection from self-dealing). Conflating two purposes is legally inappropriate.

o The duty of loyalty was traditionally to shareholders.o The oppression remedy includes creditors.o How are the “best interests of the corporation” reconciled with particularized oppression claims.

Ultimately confuses both causes of action.

CONTROLLING SHAREHOLDERS AND CLOSELY-HELD CORPORATIONSA. POWERS AND DUTIES OF CONTROLLING SHAREHOLDERS

The problem of opportunism In this course, we have often discussed the conflict of interest between managers and shareholders. However, another potential conflict of interest exists – between controlling and minority shareholders. Controlling shareholders have the power to appropriate corporate value from minority shareholders.

o Interested transactions.o Freeze-outs and other oppressive transactions.

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o Control premium. This is a particularly serious issue in Canada, where many public corporations are dominated by controlling family

shareholder groups.

Early British CL Historically, British and Canadian company law was strongly majoritarian. The traditional rule was the majority could manage the corporation as they saw fit. Minority shareholders accepted the risk of their minority position.

Legal evolution The historical rule has changed in both Canadian and American Law. Over the years, courts have imposed increasing duties on majority shareholders.

Ferguson v Imax Systems Corp

(deadbeat husband doesn’t want to pay or allow wife to participate in company, so he doesn’t pay dividends to anyone).

Imax: a private, closely held corporation founded and owned / run by the plaintiff, her then-husband and 2 other couples. Each husband got 700 common shares, and each wife got 700 class B shares (non-voting, dividend of 5% in priority to common shares; equal shares in dividends and liquidation thereafter). Shares are non-redeemable (corporation has no obligation or right to repurchase shares). Plaintiff had knowledge and participated in running the corporation. Plaintiff and husband divorced and he tried to squeeze her out of the corporation: discharged from employment, he tried to force her to sell shares to him during divorce settlement, she was told by the other shareholders that the husband would not declare any dividends as long as she remained a shareholder, board passed a resolution freezing the class B shares and ordered them to be redeemed.

ADDED GLOSS TO BCE.

Court can look to personal interest of the shareholder in an oppression remedy claim (if sympathetic circumstances). 1. Individual circumstances do matter in oppression cases.2. Actionable oppression need not be illegal per se.

a. You can follow the letter of the law but still run afoul of the remedy if what you are doing is substantively unfair.

Issue: whether the corporations and directors were oppressive.

This case predates BCE by decades. Cam says BCE is the best case in announcing a clear, black letter test for oppression remedy claims. Not so much of a clear doctrinal test to use. Court cites old cases:• Goldex: majority shareholders have a duty to act fairly with regards

to minority SHs. • Alan: duty of good faith imposed on majority SHs. These impose extra duties on controlling SHs, but no explicit fiduciary duty.

How are these different to FDs? FD: put their interest above your own. Duty of fairness/good faith allow you to keep your interests above theirs.

Court has no trouble in characterizing this as a bad faith transaction under Alan. Under Goldex, the court thinks no; not just Ferguson trying to push wife out, all the other directors acted in concert to push her out for dividends. Held: yes, they intended to exclude her from any participation in the corporation. Plaintiff gets costs, and corporation is prohibited from implementing the resolution.

Re Canadian Tire

Family owned majority of voting shares (60.9%) but owned a relatively small portion of equity of company. There is a coattail provision designed so investors can’t just buy voting shares and disregard non-voting shares (makes it so non-voting shares can cash in on transactions because tender offers for voting shares convert all non-voting shares into voting shares). Would only be triggered if more than 50% of voting shares were tendered. Problem is that family can effectively block this from happening by not tendering enough of their shares into the bid. Family want to sell some shares for a

Securities regulators want to discourage behaviors that investors perceive as unfair. It is necessary to maintain integrity and confidence in public markets.

Fiduciary duties are not within the jurisdiction of the securities commission, but they may inform decisions regarding public interest jurisdiction to issue cease trades.

Issue: should the transaction be cease-traded?

Transaction like this one is bound to have an effect on public confidence in the integrity of Canadian capital markets. This transaction is “grossly abusive”. Arguments that this is a private matter between private SHs is wrong. When 83 million shares are involved, this is a public matter which has significant impact on the market’s integrity. Family are in fiduciary positions as defendants and as controlling SHs. Breach of this

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premium, get around loophole by only tendering 49%, then after the takeover bid, sell the other 51% of their shares in the public market. Class A holders don’t participate in the premium (don’t get more money for their shares). Class A holders (including institutions) are like “umm this is sketchy”, call for OSC to look into it.

duty supports finding that transaction is against public interest.Held: cease trade.

Cam’s Full AnalysisWhy is this a problem? You can structure the transaction in a way that the non-voting common will not get a high share price. Brothers trying to keep the control premium for themselves without sharing it with the minority. They set up a coattails provision, so the minority shareholders don’t miss out and then a few years later set up a deal

to ensure they don’t benefit this. Defeats the entire purpose of the coattail provision / protection. Act good, then behave bad.Securities commission is not impressed with the ethics of this transaction.

IssuesProcedural: is this a proper case for the securities commission to be hearing at all? Defendants were trying to say this is a private matter internal to the company. SC says no, this is ridiculous. Its

mandate is exactly to regulate public securities market, and this has a big impact on securities market. What does the securities commission say about fiduciary duties?

o Evidence of a breach of FD can be relevant. o Plaintiffs are bringing a FD claim. Defense says: “look, securities regulation has nothing to do with FDs”.

Cam says this is correct. OSC says: “you’re right, we don’t have the legal authority to make determinations regarding FDs, that is for the real courts. But evidence of a breach of FD can inform our decision regarding our public interest jurisdiction (whether or not we will issue a cease trade)”.

o On one hand, disclaim FD as the basis an OSC can make a decision, but also use FD to make their decision.

Substantive: if so, can the proposed transaction be enjoined as against the public interest? What does OSC say about FDs as they relate to the facts in this case?

o Brothers are directors, so they owe FDs to the company – that’s not controversial.o They are also majority SHs. Does the OSC say anything about FDs regarding controlling shareholders?

Court says controlling shareholders owe FDs, and they get this from Goldex. Cam says court is taking a liberal reading of the Goldex idea of treating honestly and fairly.

The OSC ultimately decides to order cease trade. Who thinks this case was correctly decided? What are some of the good arguments in favor of the outcome of this

case?o If they don’t cease trade this, there is a strong policy argument this was necessary to maintain integrity /

confidence in the public markets.o Securities regulators want to discourage behaviors that investors perceive as unfair, rightly or wrongly.o If public investors think they will be treated unfairly when they will invest, they will invest less.

What are arguments they got it wrong?o Outcome of this case is kind of a windfall to these institutional investors who bought the shares at a discount.o The fact that this coattails provision was inadequate and subject to abuse was well known on the market. o There is an efficient market hypothesis: all publicly known information about any company at any given

point in time is reflected in the price of securities in that market. If there is a problem with a company, it will be reflected in the price of the securities quickly. So, in this case it wasn’t a secret that if you buy non-voting shares that you get non-voting rights – if no right to vote, then it’s logical that your share is worth less.

Re Canadian Tire Two issues:

o Is the case a proper matter for the OSC?o If so, can the proposed transaction be enjoined as against the public interest?

Emphasizing the different roles of the commission and the courts, the commission states that a finding of a breach of fiduciary duty is unnecessary for a cease trade order.

However, a finding of a breach of fiduciary duty may establish facts supporting a cease trade order.55

Citing Goldex, the commission states that the controlling shareholders are in a fiduciary position to the other shareholders.

This is a liberal reading of Goldex, which itself is unclear. The commission was apparently using a quasi-fiduciary analysis in determining whether a transaction is in the public

interest.Takeaway: the securities commissions in Canada will use this funny quasi-fiduciary analysis in making public interest judgments. Basically, in making public cease trade decisions, they will not do a true fiduciary analysis, but they will bring in fiduciary – like concepts. Which is weird because securities law is not about fiduciary duties, but they have nonetheless been incorporated into securities law analyses.

Brant Investments v KeepRite Inc

In an effort to stabilize KeepRite’s financial position, the management proposed that KeepRite purchase certain assets from its majority shareholder. An independent committee of the board was established to review the proposal and ultimately concluded that KeepRite should proceed with the transaction. In order to finance the purchase of the assets, it was necessary for KeepRite to amend its articles to create a new class of shares. A shareholders meeting was held to approve the amendment to the articles, at which time a minority group of shareholders dissented under the appraisal remedy. KeepRite made an offer for the shares, which was refused by the minority shareholders, after which KeepRite applied to court for a determination of fair value. The minority shareholders sought relief under the oppression remedy including the repurchase of their shares for fair value and other damages. The trial judge dismissed the oppression action and the minority shareholders appealed to the ONCA.

For oppression remedies.1. Fiduciary relationships are unnecessary.2. Bad faith is not required.3. Onus is with majority shareholders to show no better

alternative transactions.4. No deference given to directors / officers.

Unfairly prejudicial is examined using an objective standard.

If a fiduciary duty claim is not available, it doesn’t matter, as the oppression remedy serves the same purpose under these facts.

Issue: were the transactions with the minority shareholder (including the sale of assets and creation and issue of new shares) oppressive or unfairly prejudicial to, or did they unfairly disregard, the interests of the minority shareholders?

Majority shareholders do not owe a fiduciary duty to minority shareholders because it would frustrate the FD of directors to the corporation as a whole. Bad faith is not a prerequisite to finding oppression. This is because oppression is an objective standard; cannot try to investigate subjective mindsets. The onus of proof lies with the majority shareholders that there are no better alternative transactions. Onus to show oppressive or unfair conduct still with complainant. The judge should not interfere with the BJR but is still equipped to decide whether the decision-making process is fair. Cannot judge decision but can judge the manner in which the decision was reached.Held: appeal dismissed, decision in favor of majority SHs.

Reasons The controlling shareholder of KeepRite, Inter-City Gas, caused KeepRite to purchase its own assets. The court cites 3 cases:

o Goldex: the majority must act fairly and honorably, and the category of cases in which fiduciary duties may arise is not a closed one.

o McLaughlin: it is unclear whether controlling shareholders have fiduciary duties.o Re Canadian Tire: controlling shareholders may (or may not) have fiduciary duties. Because it is a securities

commission decision. The court rules that none of these cases impose fiduciary duties on majority shareholders. This case highlights the substantive overlap between fiduciary duties and the statutory oppression remedy. The casebook states that Brant Investments: “appears to suggest that if a shareholder fiduciary duty need be crafted,

then this can be done under the oppression remedy”. An alternative reading is that Brant suggests the oppression remedy is an alternative to fiduciary duty. As we’ve discussed, there is some confusion between fiduciary duties and the oppression remedy in Canadian law.

Control Premium The court of appeal analyzes the duty of the BOD as among the different shareholder groups. The court finds that the board acted in the best interests of the shareholders, given the reality of the Schneider family’s

veto power. The court accepts the existence of a corporate control premium.

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The control premium is the premium over the market value of a corporation’s shares that a buyer is willing to pay to obtain control.

o If selling at X, and company wants to buy at X+Y, the additive bonus of +Y is the control premium. o Why do they pay a control premium?

1) dumb and paying too much (mis-valuation). 2) rationally paying more?

1) if control, have right to make or supervise decisions with respect to direction of the business.

2) if control, able to appropriate private benefits from the company (to the detriment of minority shareholders).

The control premium represents the value of being able to manage the company and/or appropriate corporate wealth. In the Pente case, the Schneider family was legally able to capture the control premium.

DUTIES OF CONTROLLING SHAREHOLDERS

To summarize, the current state of Canadian law is as follows: Canadian courts have not held that controlling shareholders owe fiduciary duties to the corporation or other

shareholders.o Though, they may owe a duty of fairness.o But in terms of actual courts / case law, the best answer is that controlling shareholders do not owe fiduciary

duties to minority shareholders. The oppression remedy serves as an alternative to fiduciary duties.

o And subsumes the duty of fairness. The oppression remedy is based on a similar standard of fairness. The securities commissions will apply quasi-fiduciary standards to unfair conduct by controlling shareholders.

o In court: controlling shareholder owes no FD.o In securities: semi-FD analysis.

The Role of Securities Pricing Many Canadian corporations have traditionally featured dual-class share structures. These structures can seem unfair to non-voting public shareholders. However, the vulnerability (can’t vote, and risk of being exploited) of non-voting shares is impounded into their

market price. Given their discounted price, it is not obvious that non-controlling shares should receive special legal protections.

Controlling Shareholders in Canada Canadian public corporations are much more likely than American public corporations to have controlling

shareholders. As of the 1990s, only 15-20% of public Canadian corporations were not controlled by a single shareholder group. This pattern has significant corporate governance implications. The presence of a controlling shareholder mitigates the conflict of interests between management and shareholders but

gives rise to another conflict between controlling and minority shareholders. Empirical evidence indicates that corporations controlled by a single shareholder group are more profitable but less

expensive. Cam says he thinks the reason is because the controlling shareholder can more tightly supervise management of the company. Even though they are more profitable and make a higher return on profits and equity, their share value is cheaper (trade at a lower price). This is because the minority shareholders are subject to exploitation of the company. They are better run firms, but they are not as attractive to investors. Speaks to the dynamic of the different varieties of opportunism that comes in corporate structures.

This suggests that controlling shareholders effectively monitor management but appropriate value from minority shareholders.

Theoretical implications The presence of controlling shareholders is the norm, not the exception. Public corporations in most countries (especially civil law countries) tend to be dominated by controlling

shareholders. Economic theory suggests that countries with stronger shareholder rights should have less ownership concentration. Yet Canada has strong shareholder rights.Law and finance theory: The US and UK are the only countries where companies aren’t dominated by controlling shareholders because they are the only countries where small investors are dominant because they know they will have legal protections. Thus, there are more minority shareholders. Cam thinks of this in terms of the Canadian context; you

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have very strong minority shareholders, but most companies are dominated by controlling shareholders. His take on this is that he thinks the law and finance theory has is backwards. He doesn’t think strong shareholder protections cause the existence of shareholders. But instead, the existence of minority shareholders causes strong shareholder protections. Historically, there were very weak minority SH protections in the US, especially if you go back before the 1920s. Wasn’t until you had massive investment by small SHs that it got stronger. The reason minority SHs started investing and there are so many has to do with the size of the American economy and the American securities market. Attributing the American public securities to law is backwards. He thinks the law is a result of economic patterns. So, in Canada, you see strong min SH protections. That suggests to Cam that it has something fundamental to do with the Canadian economy, and he doesn’t know what that reason is yet. The tail wagging the dog to say that law determines the economic outcomes. But Cam says its economic outcomes that determine the law.

B. CLOSELY HELD CORPORATIONS

Closely-Held Corporations Although most of the largest corporations are public (shares traded on the public market), the vast majority of all

corporations are privately held. Many very large and powerful corporations are privately held. Governance of private corporations is more amenable to private contracting.

o This is because public corporations are owned by a large number of anonymous SHs who are not in communication with each other. There is no feasible way for them to enter into private contracting arrangements to determine the management / governance of the firm.

Securities Law Implications Private corporations are generally exempt from securities law requirements to publicly disclose business and financial

information.o Public companies, whose shares are on public markets, are subject to securities regulations. Most important

of these are robust and detailed obligations to continuously disclose business information, e.g. quarterly reporting.

o Privately traded companies are not subject to any of these requirements. The business and financial requirements are far more opaque / secret than it is for public companies.

This is advantageous because compliance with securities can be very burdensome.o This is a big advantage for private companies. It’s a competitive disadvantage to continuously disclose

information about your business – competitors can use that against you. Very burdensome / costly to disclose this information on an ongoing basis.

Alternative Entities Private businesses need not be corporations. Other types of entities, including various forms of partnerships, may also be used.

o For example, limited partnerships. o The business vehicles in oil and gas or real estate, for example, are limited partnerships.

In the US, limited liability companies are the most common form of private business.o LLCs are the most common to the extent that Cam finds it shocking they don’t exist in Canada.

Shareholder Agreements Recall that pursuant to CBCA s.145.1, any shareholders may enter voting agreements.

o A voting agreement is just a contractual agreement to vote your shares in a certain way.o SHs can get into legally binding agreements to vote in a certain way.o Very common in private company – entering a K to promise they will vote their shares so as to implement a

customized governance structure. Also, under s.146, all of the shareholders may enter a unanimous shareholder agreement.

o Ordinary shareholder agreements are more common than unanimous ones. o Shareholder agreements are very common, they are ubiquitous in the private company context.

These are common means of mediating control of private companies.

Restrictions on Transfer

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The owners of closely-held corporations often have personal relationships with one another.o Owners value the personal relationships of their investors. o Not legally partners, but they all know each other, got into business because they have some familiarity with

each other etc. The last thing they want to see happen is a co-shareholder they trust sell their interest in the company to some unknown stranger.

It is often undesirable for a stranger to come into the corporation. For this reason, most closely-held corporations feature restrictions on transfer. These restrictions can be baked into the organizational documents or be included in a shareholder agreement.

o More common to see them in shareholder agreements – contracts between shareholders of the company, but you can also bake them into organizational documents of the corporations themselves.

Case v Edmonton Country Club Ltd

Gold club tried to amend their articles – enclosing fees and things. The imposed an obligation to pay fees on an ongoing basis (this was not important). They also imposed a rule whereby SHs can’t sell their shares without approval of the BOD.

Restrictions on transfer are fine, especially when they are in the articles of a company.

But both majority and dissent also think a reasonable exercise of discretion is important.

Issue: are restrictions on transfer enforceable?

Majority: article 20a restricts transfers without consent of the director. Traditional CL indicates that if you do this through a bylaw, it may be problematic. But if you do it through articles, that’s okay. SHs should have some fair warning baked into the articles. Majority holds that restriction on share transfer is fine, since it is part of the articles.Dissent: say that restriction must be reasonable, not entirely arbitrary. Dissent takes issue with unfettered discretion of the BOD to approve or disapprove of any transfer; need some reasonable constraint on the decision making if you want to restrict transfers.

Ringuet v Bergeron

SH agreement, disagreement occurred, one party sues.

Corporation has 6 shareholders. 3 of them (R, P, B) have an agreement to elect each other as directors, to elect one another to senior management offices, agreed on their salaries as officers, and agreed to vote unanimously at all meetings. Later, B is excluded from management, so he sues R and P for reneging on the agreement. R and P argue that the agreement was contrary to public policy, and therefore unenforceable.

Private shareholder agreements are private contracts.

Corporate law does not supersede shareholder agreements in any way.

Courts give great deference to private contracts shareholders enter into with each other.

Issue: are shareholder agreements enforceable contracts? Are there public interest implications such that it can be reviewed and struck down?

Court does not cite any case law and says that SH agreements are very common. If they struck it down, it would call into question a very basic and useful tool. It’s important to allow SHs to enter these contracts and organize their own relationships. Shareholders should have the freedom to bind themselves among contracts to each other, and the fact that the agreement may potentially be detrimental to minority SHs does not render it illegal and contrary to public order.

Reasons Does a shareholder agreement contravene the legal requirement that the affairs of a company shall be managed by the

board of directors?o Court alludes to this. Typically, SH agreements don’t impinge on the duty of the BOD to manage the

business and affairs of the company. They just set forth rights and responsibilities for the SHs with respect to each other. Generally, doesn’t speak to BOD. There is some suggestion the SH agreement did fetter the BOD, but SCC says that’s ok. Cam says he’s not comfortable with that.

o Off topic: Cam has never seen an SH agreement directly restrict the ability of the directors to manage the firm and do something the corporation. Under Delaware law an SH agreement cannot restrict directors but can only restrict shareholders.

SCC emphasizes the ubiquity of shareholder agreements. Also emphasizes their private nature – so no public issues at stake.

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Shareholder agreements are expressly authorized by CBCA ss. 145.1 and 146. This is an interesting case because the shareholder agreement (apparently) purported to bind the directors.

o You want to avoid putting restrictions on directors.o The same individual human being can be both SH and director, but their legal responsibilities as SH are

different to their legal responsibilities as directors.o Cam says it’s important to keep those responsibilities separate.

This happened prior to the CBCA – it wouldn’t have been valued under current law: Electing directors allowed. Electing senior officers not allowed, directors have authority to appoint senior officers. Salaries not allowed, directors fix salaries. Unanimous voting would be okay if only applicable to shareholder meetings. If trying to bind directors, it would

not be allowed. Shareholders can only limit directors’ management powers with a unanimous shareholder agreement.

UNANIMOUS SHAREHOLDER AGREEMENTS

Unanimous shareholder agreements under the CBCA are different from ordinary shareholder agreements. A unanimous shareholder agreement must restrict (in whole or in part) “the powers of the directors to manage, or

supervise the management of, the business and affairs of the corporation”.o Different than ordinary SH agreements because it allows shareholders to restrict the duties of the directors.o USA: restrict powers, get rid, can fundamentally alter how the corporation is governed.o Courts interpret USAs as carte blanche to reorganize structure of the firm.o A bit similar to how LLCs work in the US.

Disadvantage:o If you vest power of director in shareholder they are stuck with duties directors would otherwise have

(fiduciary duty, and duty of care). Other things equal, shareholders don’t want to be subject to these duties. o Big disadvantage if you transfer duties to shareholders. Once you owe a duty, you are potentially subject to

liability. No unanimous shareholder agreements under the BC act.

o There is a somewhat similar concept whereby the articles of the company can set forth an alternative system of governance.

o Some people have said to Cam the BC approach is better, more flexible / gives rise to a transfer of duties. He has no basis to say if it’s right or not yet.

Unanimous shareholder agreements have been interpreted to broadly modify corporate governance structures. The existence of a unanimous shareholder agreement can also impose directors’ liabilities on shareholders. Thus, ordinary shareholder agreements often specify that they are not unanimous shareholder agreements. Unanimous shareholder agreements do not exist in BC (rather, the articles may set forth an alternative system of

corporate governance).

Bury v Bell Gouinlock Ltd.

Bury was a former employee and shareholder of Bell who goes to work for a competitor. Bell has an agreement where departing shareholders have to sell their shares at fixed prices. Unanimous shareholder agreement says the company can delay this sale by 12 months and restrict former employees’ move to competitors.

You can only exercise the oppression remedy against directors. Cannot claim the oppression remedy against other shareholders.

Issue: does the oppression remedy apply?

The court holds that the oppression remedy should be interpreted broadly. The court assumes the corporation’s delay in purchasing the employee’s shares was intended to punish the employee, but the corporation may have been intending to enforce a non-competition provision. The court overstepped the acceptable limits of judicial intervention by effectively remaking a contract freely entered into by two consenting and full informed parties. There are good economic reasons for a contractual provision that allows the employer to inflict hardship on a departing employee.

Thoughts Assume that the 12-month delay period in Bury had been mandatory rather than optional. Would the plaintiff still

have a valid oppression claim? Why or why not?o If there was a possibility the term couldn’t be extended, it may be to the company’s advantage to be harsher

in drafting the contract, as it would be more likely to be enforced.60

o You can have a restriction on transfer, and like any contractual provision, you can’t waive it. Assume that the shareholder agreement in Bury specified the plaintiff could only alienate his shares with the consent

of all other shareholders, and such consent was denied. Would the plaintiff still have a valid oppression claim? Why or why not?

o Gets to a more specific point. You can’t have an oppression remedy claim against shareholders. The oppression remedy test has to do with acts of the company.

o You only have oppression remedy against company, you can’t have oppression remedy claims against shareholders, as shareholders.

o Think back to the example he gave with Bruce. There was no valid oppression remedy because Bruce was being a jerk as a shareholder, not acting on behalf of the company.

Assume that the shareholder agreement in Bury had been a unanimous shareholder agreement. Would the result be any different? Why or why not?

o Cam says not clear if it was a USA in the Bury case, but he will assume it’s not. o Because there was this right on behalf of the company to extend the transfer out to 12 months (that was a

valid contractual right). Court says that even though it was an oppression remedy case, the contractual provision was totally sound and reasonable, but it gets tripped up on the oppression remedy.

o Cam’s feeling is that if you have the USA, even though the oppression remedy is a side thing not directly related, he thinks a court will likely, but not definitely, be more deferential to the initial preferences of the SHs as expressed in their agreement.

o But we don’t know for sure as there are no cases on this specific point.

Private Corporation Keep in mind the vast majority of corporations are privately held. This means the vast majority of corporations you deal with as attorneys will be privately held. Whether you work with family businesses, small businesses, startups, venture capital firms, or private equity firms,

most of the corporations you interact with will be private. In this context, contractual agreements (purchase agreements, shareholder agreements, etc.) are of central importance. Ultimately, negotiating and drafting agreements (and closing deals) is more important to being a “corporate lawyer”

than knowing corporate law.

Cam’s Closing Thoughts for the Course

Cam says corporate decision making is a very complex endeavor that involves a lot of conflicting interests between human beings. Decision making of corporations, how they decide to invest, will they open a new factory etc., are all very complex decisions that are all subject to corporate law, which is a system of mediation of a lot of different economic interests. At the end of the day, corporations are made of human beings and aren’t just a metaphysical being. They have real human interests, and it is important to appreciate that. We must appreciate that corporations are extremely important institutions in our society. Resources are given under free enterprise, and the primary vehicle of our economy are corporations.

Corporations are so impactful and pervasive that they become invisible. Whether it involves food, housing, transport, entertainment, travel, luxury goods, etc., – it is all mediated by corporations, the primary force in our society. If you are thinking of corporations and their role in society in the future, be alive to the fact that they are governed by human beings that have their own messy interests – and the role of corporate law is to provide some form of mediation to figure out what those needs are. Be suspicious of people that say that corporations are this abstracted non-human force… but don’t fall for these simplistic stories about how corporations act, and what they should or shouldn’t be doing. Like an institution, they are based on the hopes, desires, prejudices of ordinary human beings. They are very interesting, messy, but ultimately an important phenomenon for the organization and functioning of our society.

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