Problems in Canadian Business Law

Pol/Soc Sci 3165 6.0A

Tuesdays, 2:30-5:30 pm

Simon Archersarcher@torys.com

Test, February 26, 2004 Testable material

Income trusts lecture (1 lecture) Overview of business associations (1/2 lecture) Law of agency (1/2 lecture) Law of partnership (1 lecture) Law of business associations (2 lectures)

*NOT* securities law (ch. 18). Format

Same as last test – mixture of • T/F and why• Short answer questions• One fact pattern.

The test will be shorter in length than the last one, and more time to write it: 2.0 hours.

Best way to prepare: read text and do problems/questions in the text.

Last class Corporations Part 1

Historical development of the corporation Nature of a corporation Methods of incorporation The incorporation process A “typical case”: Salomon v. Salomon

This class Shareholders Introduction to corporate securities Division of corporate powers Piercing the veil Criminal liability

Nature... Principal distinguishing features

Aspects of Control – Board of Directors Limited Liability – no general partners Separate existence from shareholders

Shareholder’s Agreements Relationship between shareholder and

corporation Relationship between shareholders Restriction of power as directors to do things

Can also be by constating documents Fact of a restriction required to be disclosed

Corporate securities Can issue shares, (common, preference, in series,

etc.) bonds & debentures

Division of powers Duties and Responsibilities of Directors

Separation of ownership (shareholder) and management (director)

• Major changes by SH, policy by D, day to day by hired CEO/employee

Fiduciary duty• Doctrine of Corporate Opportunity, essentially the

profit rule we did last fall Insiders

• Massive problem in Canada, virtually unaddressed• Cowpland, Nova Scotia

Liability in general Personal Liability of Directors

For things listed in statute, e.g., for unpaid wages in dissolution, for ultra vires actions, etc.

Shareholder’s Rights AGM, elect directors, financial reports, certain

key documents to review CL minority rights: ultra vires, affects rights,

failure to follow procedure, fraud on minority Statute: oppression remedy (includes

creditors!)

“Pierce the veil” The concept here is to decide when the

court will look through the corporation to say the shareholders should be treated as really a party along with the corporation.

Most drastic remedy - makes shareholder a partner of the corporation, and fully liable for the corporation’s actions.

Contrary to concept of limited liability

Gower, Modern Company Law, 5th Ed. (1992)• Three circumstances to pierce veil…

1. When the court is construing a statute, contract or other document.

2. When the court is satisfied that a company is a “mere façade” concealing the true facts.

3. When it can be established that the company is the authorized agent of its controllers or its members, corporate or human.

Case study 1: Rockwell v. Newtonbrook Kelner used “Rockwell”, of which he was

the 100% owner, to do deals. “Rockwell” signed an agreement to buy

real estate from “Newtonbrook”. There was a zoning problem so

“Rockwell” wanted to close with an abatement (price reduction).

“Newtonbrook” refused. “Rockwell” registered an assignment of

the offer to purchase against title.

Stuff goes down...

Rockwell sued for abatement and lost, with costs of $4,800 against it.

Rockwell only had $31.85 in assets. Newtonbrook sues Kelner personally

for its costs...

The winner is... Though Kelner was the individual who would ultimately

benefit, the contract was made by the company alone, and costs cannot be recovered from Kelner.

• The use of a “one man company” for the carrying on of business transactions is recognized in Salomon

Kelner was “the person who set this process in motion”, in the sense that he was the individual who, on behalf of the company, gave instructions to its solicitors, but this does not justify a finding that he was “the actual litigant”.

Can a corporation with assets of $31.85 and no debts be a separate entity?

Key question: When does the company become the agent of the principal?

Case study 2: Constitution Insurance Co. v. Kosmopoulos Leading case in the SCC - K was a retail leather merchant

who incorporated his business but was the only shareholder. (What is it about the leather business?)

He transferred business assets to the corporation but kept insurance on those assets in his own name. Fire destroys assets, insurer says K not owner, corp was owner, so don’t have to pay K insurance.

K wants to get insurance so sues arguing was a mere shell company for his sole benefit, he wanted veil pierced.

SCC said it would not pierce the corporate veil, particularly at the instance of the shareholder who set up the corporation.

In CBCA and some provincial jurisdictions, shell companies permitted, and statute will provide guidance… Remember, they are creatures of statute

Comments... It restricted the use of piercing the

corporate veil to cases where it would be clearly “unfair or unjust to do otherwise.”

Newer, looser language, suggesting to some lawyers that piercing was quite easy, “unfair” is pretty vague and some businesses have a hard time distinguishing that from “hard bargaining”.

Case Study 3: Transamerica Life v. Canada Life

The court will disregard the separate legal personality of a corporate entity where a) it is “completely dominated and

controlled” by parent; and b) it is being used as a shield for

fraudulent or improper conduct Two part test, very high threshold

Quote, unquote “A subsidiary, even a wholly owned

subsidiary, will not be found to be the alter ego of its parent unless the subsidiary is under the complete control of the parent and is nothing more that a conduit used by the parent to avoid liability. The alter ego principle is applied to prevent conduct akin to fraud that would otherwise unjustly deprive claimants of their rights.”

Elements...

1. “Complete control” – requires more than ownership. Complete domination must be shown.

2. “Conduct akin to fraud …” – relates to the nature of the conduct.

3. Very stringent test.

The guilt business It is obvious that for a corporation to

commit either a criminal act, it will have to involve a crime on the part of an individual, often an employee of the corporation.

Key questions to be addressed: when is the corporation liable when is the individual liable, and when are both liable?

R. v. Sault Ste. Marie Established three types of liability for corporate

criminal conduct... Absolute liability - where Crown only has to prove actus

reus and nothing to do with the mental element of the accused. If employee commits an absolute liability offence when acting for corporate employer, corporate employer alone will be liable.

Strict liability - where the accused will be convicted once the actus reus is shown unless accused can show that it exercised due diligence to avoid the actus reus. Due diligence is not of agent but of corporation itself - did it establish a proper system?

A “full” criminal offence where Crown must prove mens rea. Mens rea must be of the “directing mind” in order to hold the corporation liable.

Soooo In Sault Ste. Marie, SCC said the discharge of

toxic waste into a creek was a “strict liability” offense and City could get off if it showed it was duly diligent.

In general mens rea does not have to be proven by the Crown for regulatory offences.

Defendant will avoid liability where it can prove on a balance of probabilities either that:a) It had exercised due diligence by taking all reasonable steps to avoid the offence, or

or... b) It believed in a mistaken set of

facts, that, if true, would render the act or omission innocent.

Due diligence defense will depend on whether the directing mind of the corporation exercised due diligence.

Action of mere employee is not enough.

Test: Canadian Dredge & Dock, 1985, SCC Conspiracy to rig bids for dredging

Hamilton Harbour. How does a rigged bid work?

“Directing Mind” – the act in question must be done by the directing mind of a company when carrying out his or her assigned function in the corporation. Thus the senior executive in charge of policy in the area must be personally implicated. Then due diligence will not exonerate.

Problems Who is the directing mind? What were they thinking?

subjective (did know) and objective (ought to have known) tests for presence of knowledge…constitutional issues

very difficult to prove, often only by implication, paper trails (Arthur Anderssen...)

What is likely for a directing mind to do re: access and availability of knowledge?

Parmalat: first thing out of CEO’s mouth is “I never knew”.

Criminal penalties Actual individual who committed the

offense is also guilty, assuming mens rea established.

Can only fine the corporation. Could put individual in jail.

Dredge & Dock in context Long-standing municipal corruption

implicating both organized crime and cabinet ministers

Case broken by Economic Crime Directorate of RCMP, formed about 10 years earlier to stop this stuff, Rod Stamler was leading investigator, now works in private practice

context... Six month investigations at a minimum,

sometimes several years Very difficult to search for evidence,

corporations resist with lengthy litigation Forensic accounting hard to understand,

complex training, sophisticated suspects with lawyers

Unit has some successes, but cannot bring many cases it would like to, lack of evidence, lack of resources, and eventually...

more context Mulroney era dawns...1980s = lack of investigatory

independence See S. Cameron, “On the Take”. Always tip. New gov’t replaces head of Economic Crime Directorate

(Inkster, now on Bay St.) Under-funds the unit, Inkster stalls several initiatives, seen

as Mulroney toady AG denies/declines to pursue some cases, especially those

against government members Government questions scope and need for unit, many

competent staff leave Essentially now a shell of its former status Case against Mulroney (Airbus) dropped after $50M

lawsuit...

The case Mulroney successfully sued the

Canadian government in 1997 over statements from the Department of Justice that he was involved in "an ongoing scheme" involving secret commissions with Mr. Schreiber.

Tuesday, November 11 2003 It turns out after denying for many

years, Mulroney did actually take 300k in payments from Karheinz Schrieber in a “retirement deal” to “promote” Schreiber’s “pasta business”.

A pasta promoter? Really?

What’s up with that? Why didn’t the information about the deal

not come out at the Airbus trial in 1997? Mulroney acknowledged at the trial that

he had been in contact with Mr. Schreiber after leaving office.

Government lawyers did not ask Mr. Mulroney whether he had ever received any money from Mr. Schreiber.

"It was the crucial question, and it was not asked," Prof. Savoie, leading political scientist in Canada.