Web viewIntroduction. Three forms of economic structures: Sole proprietor. No structure, no incorporation. Doesn’t provide any protection from liability. For-Profit

FALL 2012 BUSINESS ASSOCIATIONS CANINSTRUCTOR: CHRIS AXWORTHY

PARTNERSHIPS...................................................................................................................................................................................................... 4INTRODUCTION........................................................................................................................................................................................... 4DEFINITION AND EXISTENCE OF THE PARTNERSHIP..............................................................................................................4

AE LePage Ltd v Kamex Developments Ltd....................................................................................................................................5Volzke Construction Ltd v Westlock Foods Ltd.............................................................................................................................5Pooley v Driver.......................................................................................................................................................................................... 5

THE LEGAL NATURE AND CHARACTERISTICS OF PARTNERSHIPS....................................................................................6Thorne v New Brunswick (Workmen’s Compensation Board)...............................................................................................6

RELATIONSHIPS OF THE PARTNERS WITH EACH OTHER......................................................................................................6Olson v Gullo............................................................................................................................................................................................... 7

RELATIONSHIPS OF THE PARTNERS WITH THIRD PARTIES................................................................................................7Clarke v Burton......................................................................................................................................................................................... 8Kucor Construction & Developments & Associates v Canada Life Assurance Co.............................................................8

LIMITED PARTNERSHIPS........................................................................................................................................................................8Haughton Graphic Ltd v Zivot..........................................................................................................................................................10Nordile Holdings Ltd v Breckenridge.............................................................................................................................................10

LIMITED LIABILITY PARTNERSHIPS (LLPS)...............................................................................................................................10THE CANADIAN CONSTITUTION......................................................................................................................................................................11

THE CONSTITUTIONAL FRAMEWORK...........................................................................................................................................11LEGISLATIVE POWER TO CREATE CORPORATIONS................................................................................................................11

Reference in the Matter of the Incorporation of Companies in Canada...........................................................................11Citizens Insurance Co of Canada v Parsons.................................................................................................................................11

REGULATING CORPORATE ACTIVITY.............................................................................................................................................11John Deere Plow Co v Wharton......................................................................................................................................................12Bonanza Creek Gold Mining Company v The King....................................................................................................................12Multiple Access Ltd v McCutcheon..................................................................................................................................................12

THE CANADIAN CHARTER OF RIGHTS AND FREEDOMS..........................................................................................................12R v Agat Laboratories Ltd.................................................................................................................................................................. 13

THE CORPORATE CONSTITUTION................................................................................................................................................................... 13THE FUNCTION OF A CONSTITUTION............................................................................................................................................13CORPORATE CONSTITUENCIES.........................................................................................................................................................13

External Groups.....................................................................................................................................................................................13Internal Groups..................................................................................................................................................................................... 14Division of Powers............................................................................................................................................................................... 15

Canadian Jorex Ltd v 477749 Alberta Ltd................................................................................................................................15Grievance Procedures.........................................................................................................................................................................15

Roles v 306972 Saskatchewan Ltd..............................................................................................................................................15TYPES OF CORPORATE CONSTITUENCIES (ALSO SEE HANDOUT #1)............................................................................15

Theoretical Differences......................................................................................................................................................................15Five Types................................................................................................................................................................................................ 16

Charter Corporations......................................................................................................................................................................16Special Act Corporations...............................................................................................................................................................16Letters Patent Corporations........................................................................................................................................................16Contractarian Corporations.........................................................................................................................................................16Division of Powers Corporations...............................................................................................................................................17

Practical Differences...........................................................................................................................................................................17THE CORPORATION AS A LEGAL PERSON......................................................................................................................................................18

THE PRINCIPLE OF CORPORATE PERSONALITY.......................................................................................................................18Theoretical Basis...................................................................................................................................................................................18

Salomon v Salomon...........................................................................................................................................................................18Practical Consequences..................................................................................................................................................................... 18

Macaura v Northern Assurance Co.............................................................................................................................................18

Kosmopoulos v Constitution Insurance Co of Canada.........................................................................................................19Lee v Lee’s Air Farming Ltd...........................................................................................................................................................19

PIERCING THE “CORPORATE VEIL”.................................................................................................................................................19Big Bend Hotel Ltd v Security Mutual Casualty Co...................................................................................................................20Hercules Managements Ltd v Ernst & Young..............................................................................................................................20

GOING BEHIND THE VEIL.....................................................................................................................................................................20The Corporations as Agents and Partners.................................................................................................................................20

Smith, Stone and Knight Ltd v Birmingham Corp...............................................................................................................21Inducing Breach of Contract............................................................................................................................................................21

Garbutt Business College Ltd v Henderson Secretarial School Ltd.................................................................................21Einhorn v Westmount Investments Ltd.....................................................................................................................................21McFadden v 481782 Ontario Ltd.................................................................................................................................................22369413 Alberta Ltd v Pocklington..............................................................................................................................................22ADGA Systems International Inc v Valcom Ltd......................................................................................................................22

Knowing Assistance in a Breach of Trust...................................................................................................................................22Air Canada v M & L Travel Ltd.....................................................................................................................................................23Transamerica Life Insurance Co of Canada v Canada Life Assurance Co....................................................................23

Thin Capitalization...............................................................................................................................................................................23Walkovszky v Carlton.......................................................................................................................................................................23Henry Browne & Sons Ltd v Smith...............................................................................................................................................24

CORPORATE PURPOSE.......................................................................................................................................................................... 24Dodge v Ford Motor Co........................................................................................................................................................................24Shlensky v Wrigley................................................................................................................................................................................ 24Peoples Department Stores Inc (Trustee Of) v Wise.................................................................................................................25BCE Inc v 1976 Debentureholders...................................................................................................................................................25

CORPORATE OBLIGATIONS...............................................................................................................................................................................25INTRODUCTION TO TWO THEORIES..............................................................................................................................................25CRIME AND TORT: ESTABLISHING THE CORPORATE MENS REA.....................................................................................26

The Common Law Test.......................................................................................................................................................................26The “Rhone” v The “Peter AB Widener”.....................................................................................................................................26

Criminal Liability: Mens Rea Offences..........................................................................................................................................26Criminal Liability: Non-Mens Rea Offences...............................................................................................................................27

R v Fitzpatrick’s Fuel Ltd................................................................................................................................................................27CONTRACTS: AGENTS, OUTSIDERS AND CORPORATE LIABILITY....................................................................................27

Constitutional Restrictions on a Corporation’s Abilities.....................................................................................................27Communities Economic Development Fund v Canadian Pickles Corp..........................................................................28Re Jon Beauforte (London) Ltd.....................................................................................................................................................28

Contracting Through Corporate Agents.....................................................................................................................................28Schwartz v Maritime Life Assurance Co....................................................................................................................................30

PRE-INCORPORATION TRANSACTIONS...........................................................................................................................................................30COMMON LAW POSITION.....................................................................................................................................................................30

Kelner v Baxter.......................................................................................................................................................................................31Black v Smallwood................................................................................................................................................................................31

ATTEMPTS AT STATUTORY REFORM............................................................................................................................................31Szecket v Huang.....................................................................................................................................................................................321394918 Ontario Ltd v 1310210 Ontario Inc.............................................................................................................................32

CORPORATE MANAGEMENT.............................................................................................................................................................................32MANAGEMENT’S ROLE: THEORY AND PRACTICE....................................................................................................................32MANAGEMENT POSITIONS..................................................................................................................................................................33

Qualifications..........................................................................................................................................................................................33Morris v Kanssen................................................................................................................................................................................33Oliver v Elliott..................................................................................................................................................................................... 34

Elections and Appointments............................................................................................................................................................34Money........................................................................................................................................................................................................ 34

MANAGERS’ LEGAL OBLIGATIONS...................................................................................................................................................35

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The Standard of Care, Diligence and Skill..................................................................................................................................35Soper v Canada...................................................................................................................................................................................35Peoples Department Stores Inc (Trustee Of) v Wise.............................................................................................................36

Insider Trading Rules......................................................................................................................................................................... 36Miscellaneous Statutory Duties......................................................................................................................................................36

MANAGERS’ FIDUCIARY OBLIGATIONS.........................................................................................................................................37The Nature and Source of the Obligation...................................................................................................................................37

Peoples Departments Stores Inc (Trustee Of) v Wise...........................................................................................................37Judicial Review of the Exercise of Managerial Power...........................................................................................................37

Hogg v Cramphorn Ltd....................................................................................................................................................................38Teck Corp v Millar............................................................................................................................................................................. 38

Conflict of Interest and Duty: Interests in Corporate Contracts......................................................................................38North-West Transportation Co v Beatty...................................................................................................................................38

Corporate Opportunities...................................................................................................................................................................39Regal (Hastings) Ltd v Gulliver....................................................................................................................................................39Peso Silver Mines Ltd v Cropper...................................................................................................................................................39Industrial Development Consultants Ltd v Cooley................................................................................................................40Gravino v Enerchem Transport Inc.............................................................................................................................................40

Conflict of Duty and Duty..................................................................................................................................................................40Ownership, Obligation and Opportunity....................................................................................................................................41“Ratification”: Red Tape or Red Herring....................................................................................................................................41Change or Control Transactions and Directors’ Fiduciary Obligations........................................................................41

Olympia & York Enterprises Ltd v Hiram Walker Resources Ltd....................................................................................42347883 Alberta Ltd v Producers Pipelines Inc.......................................................................................................................42Brant Investments Ltd v Keeprite Inc........................................................................................................................................43

MAJORITY RULE................................................................................................................................................................................................. 43MINORITY PROTECTION...................................................................................................................................................................................43

THE REFORMED STATUTE RESPONSE..........................................................................................................................................43Standing.................................................................................................................................................................................................... 44

First Edmonton Place Ltd v 315888 Alberta Ltd...................................................................................................................44STATUTORY REPRESENTATIVE ACTIONS (DERIVATIVE ACTIONS (SORT OF…)).....................................................44

Farnham v Finigold.............................................................................................................................................................................. 45Bellman v Western Approaches Ltd...............................................................................................................................................45

COMPLIANCE AND RESTRAINING ORDERS.................................................................................................................................45Caleron Properties Ltd v 510207 Alberta Ltd.............................................................................................................................45

THE OPPRESSION REMEDY.................................................................................................................................................................46Defining the Standard.........................................................................................................................................................................46

Westfair Foods Ltd v Watt.............................................................................................................................................................47Deluce Holdings Inc v Air Canada...............................................................................................................................................47BCE Inc v 1976 Debentureholders...............................................................................................................................................47

Oppression vs. Statutory Representative (Derivative) Action..........................................................................................48First Edmonton Place Ltd v 315888 Alberta Ltd...................................................................................................................48Hercules Managements Ltd v Ernst & Young..........................................................................................................................48

Remedies.................................................................................................................................................................................................. 49Naneff v Con-Crete Holdings Ltd..................................................................................................................................................49BCE Inc v 1976 Debentureholders...............................................................................................................................................49

APPRAISAL REMEDY.............................................................................................................................................................................. 49Re Cyprus Anvil Mining Corp and Dickson...................................................................................................................................50LoCicero v BACM Industries Ltd.......................................................................................................................................................50

INVESTIGATIONS, AUDITS AND THE “BIG D” DIRECTOR......................................................................................................50CAPITAL PUNISHMENT.........................................................................................................................................................................50

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PARTNERSHIPS

INTRODUCTION Three forms of economic structures:

o Sole proprietor No structure, no incorporation Doesn’t provide any protection from liability

o For-Profit Business Corporation Most common form of economic structure Lawyers and doctors, etc. are not permitted to incorporate as a group though, so

that’s why they usually create LLPso Partnerships

Not as important anymore as not many people use partnership vehicles Many varied forms of loose structure which business people carry on their activities No legislation saying you must register partnerships, so they can arise from express

agreement, implicitly or by conduct No difference between an express promise and implied promise except that

an implied promise is harder to prove Three types of partnerships:

Ordinary partnership Limited liability partnership (LLP) Limited partnership

DEFINITION AND EXISTENCE OF THE PARTNERSHIP What is a partnership?

o You must carry on a business It cannot be a charitable, not-for-profit business

o You have to act with a view to profit Don’t necessarily have to make a profit, but have to have a view to make one

o Must be an activity being carried on in common Can’t only be one person in a partnership A joint venture outside a business corporation

Law of partnerships in BC is a combination of the common law and the BC Partnership Acto BC Act hasn't changed much from 1890 UK Partnership Act, which codified CL positiono Therefore, partnership law is uniform amongst CL jurisdictions (i.e., Australia)

Nowadays, many law firms are limited liability partnerships, which are a separate statutory creation Critical features of a partnership:

o Ultimate Liability Each partner has unlimited liability for all debts/obligations of the partnership Liability is joint and several, so you can get judgment against all partners and

execute it against any one of the partners (i.e., inactive wealthy partner) This is the biggest reason why people don't want to form a partnership

o No Separate Legal Status Unlike corporation, partnership can't enter into legal contracts itself

o Relationship Ends Unlike the corporation, partnership ends on death or bankruptcy of any one of the

partners Common uses of a partnership:

o Professionals i.e., doctors, lawyers, accountants, engineers, etc.

o Joint Ventures Relationship among persons who agree to combine skills/knowledge/money to

pursue some common objective

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Two separate corporations may carry on a joint venture through a partnership, and terms of the joint venture agreement would then appear in the partnership agreement

o Tax Reasons Can deduct losses for tax purposes

This is probably the biggest reason why people become partnerso Default

People hadn't planned or organized to be partners but were found to be partners Important for advising clients, as they don't want to fall within s.2 of the Act

Advantages and disadvantages of a partnership:o Advantages

Easy to form Flexible Can write-off losses Lack of formality

o Disadvantages Can't limit liability (hence the corporation!)

Complications often arise, often with ending, single transactions, partnerships being found unintentionally, and comparisons with co-ownership

AE LePage Ltd v Kamex Developments Ltd Facts

o One member of a syndicate signed an exclusive listing agreement without authorization. Property was sold by an agent, and LePage wanted commission. Kamex refused to pay it because the agent had no authority. LePage argued agent was a partner, and therefore all were responsible for payment.

Ratioo Demonstrates that the courts don't apply an automatic checklist when finding a partnership,

but instead looks at the circumstances as a whole. The mere fact that one owns property in common and that profits are derived from the ownership of the property doesn't automatically create a partnership.

Volzke Construction Ltd v Westlock Foods Ltd Facts

o Bonel and Westlock enter into joint agreement at shopping mall to make improvements to the mall (i.e., joint cheques, bank account, introduced as partners, took out a mortgage, etc.). Both parties had a dispute, and when creditors came, Westlock claimed they were just co-owners based on the Kamex case.

Ratioo Control in and of itself has nothing to do with the existence or non-existence of a

partnership. Finding of partnership can go both ways depending on the evidence.

Pooley v Driver Facts

o Borrett and Hagen entered into partnership agreement to manufacture grease. Complicated loan agreement gave lenders entitlement to share of profits which was determined by how much overall lending they had contributed. P tried to sue Driver, but said they weren't partners carrying on the business, but just lenders.

Ratioo It's possible to have dormant partners even though they weren't actively carrying on

business. Courts will create partnerships even when the parties didn't intend to become partners.

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THE LEGAL NATURE AND CHARACTERISTICS OF PARTNERSHIPS The partnership does not exist on its own separate from its partners - it is not a separate entity that

has its own rights, etc.o If you have a problem with a partnership, you must sue all the partners (but you can sue

them using the partnership's name, but you are essentially suing the partners themselves - using the partnership name is just for convenience purposes)

o Different from a corporation because a corporation is recognized as a separate legal entity

Thorne v New Brunswick (Workmen’s Compensation Board) Facts

o Thorne was hurt at a mill and claimed for workers compensation, but was turned down. At trial, court held that he wasn't an employee even though partnership paid him a salary.

Ratioo Partnership is not a legal entity and unlike the corporation has no separate legal existence.

RELATIONSHIPS OF THE PARTNERS WITH EACH OTHER Requirements

o Personal nature of partnerships Partners within a partnership must be totally dedicated to the activities of the

partnership You tend to want to know your partners well and keep an eye on what they are

doing Partners are responsible for all the other partners as well as to all the other partners However, even in a partnership that starts out sound, there are instances when a

partnership breaks down Once one partner decides to leave the partnership, the whole partnership breaks

down (just have to give notice)o Fiduciary duty

Fiduciary duties are required at common law - an integral part of the partnership - cannot contract out of that duty

Business interests outside of the partnership can exist, as long as they are not interests that are in direct competition with the business of the partnership

Not usually found in legislation as it is a common law principle, however the BC Partnership Act explicitly states this fiduciary duty

In event of breach of fiduciary duty: Partner must account to the firm - the profit must be paid over to the

partnership and then be divided among the partners based on their original agreement - if no clear agreement, Partnership Act says it is divided equally (s.32 of the BC Partnership Act)

o Even if a partner behaves against a partnership, you cannot go against the BC Partnership Act

o Agency Each partner is the agent of all others in the matters relating to the business of the

partnership Third parties dealing with the partnership can assume that all partners have equal

responsibility - if there are restrictions, any third party dealing with the partnership must be made aware of the derogations

o Presumptive equality All partners are able to inspect the company books - this cannot be contracted out Some aspects of the equality of partners can be contracted out - but there are

fundamental aspects such as above that cannoto Consensual nature

Need unanimity to make any changes to the partnership agreement

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Olson v Gullo Facts

o Partnership to purchase and develop land. Gullo said farmers wouldn’t sell then bought and sold some land for big profit. Olson sued Gullo saying this was profit from the partnership - should be shared with the partnership (accounting of profit to the partnership - Olson should get half).

Ratioo Remedy of breach of Fiduciary Duty:

Partner must account to the firm - the profit must be paid over to the partnership and then be divided among the partners based on their original agreement - if no clear agreement, Partnership Act says it is divided equally (s.32 of the BC Partnership Act)

o Even if a partner behaves against a partnership, you cannot go against the Partnership Act

RELATIONSHIPS OF THE PARTNERS WITH THIRD PARTIES The relationship between the partners and persons affected by contracts entered into in connection

with the partners or torts committed in the conduct of the partnership business is also critical in the statute

There are two kinds of liability:o Joint liability

Each partner is liable for the same set of facts i.e., if you sue B, you can't sue C, D, E, etc. - suing one is a bar to suing the

otherso Several liability

Each partner is liable, but facts must be proven individually and only liable for your facts

i.e., can sue one at a time without being barred from suing others There are other liability issues as well:

o Pre-Partnership Liability One isn’t liable for partnership debts before one becomes partner oneself Exception: following a person's admission to partnership, assets are seized to satisfy

debts incurred by the partnership before that person became a partner (b/c partnership assets belong to the firm rather than to the individual partners)

o Liability as a Partner Actions of one partner can bind the others (recall principle of 'agency') Partners who retire, leave are still liable for debts, obligations incurred while they

were in the partnership. To bind the other partners, a partner's agreement must be "[carried] on in the usual

way of business of the kind carried on by the firm" Partners will be jointly and severally liable for:

Losses or injuries caused to third parties by wrongful acts or omissions of a partner acting in the ordinary course of business of the firm or with the authority of the co-partners

The misapplication of money or property of a third party received for or in custody of the firm

Wrongdoing partners jointly and severally liable: plaintiff can recover the entirety of its damages from any one of the “wrongdoing partners” – and then this wrongdoing partner can sue the other wrongdoing partners for a contribution to their share of the liability

o Holding Out Liability “Holding out” liability is akin to estoppel – where a person represents or knowingly

allows the representation that he/she is a partner in a firm, that person can’t later deny being partner of that firm, in the face of potential liability.

Knowledge of "general" representation sufficient to establish liability:

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Either an individual represented himself/herself as partner, or Allowed such a representation to be made. To establish "holding out" liability, third party who has incurred loss must

also have relied on that false representation and advanced credit to the firm.

o Liability after Withdrawal from Partnership (i.e., Clark v Burton) Absent adequate notice to third parties, a partner who leaves a partnership retains

liabilityo Posthumous Liability

Partners' estates are not liable for partnership liabilities incurred after death, whether or not the firm name, as it existed prior to partner's death, remains in use afterward, or whether the deceased partner's name remains part of the partnership name

A deceased partner’s estate is not liable for any debts incurred by the partnership after the partner’s death/retirement/insolvency

Clarke v Burton Facts

o Charles Burton worked for his father William Burton's insulation business, Burton's Insulation & Roofing. The two had a falling out and Charles left to work on his own, but continued working under the firm name Burton's Insulation. Burton informed the plaintiff he was no longer w/ his father. Plaintiff had sufficient notice: never considered the defendant a partner; had full knowledge that the defendant had severed connection w/ his father and was in business for himself.

Ratioo A creditor who continues to deal w/ the partnership w/ full notice of the dissolution cannot

claim against a retired partner merely b/c a certificate of dissolution has not been registered

Kucor Construction & Developments & Associates v Canada Life Assurance Co Facts

o Kucor Construction attempted to convey property to a limited partnership to which it was a party.

Ratioo LP is not a legal entity like a corporation: can’t own property. General partner has undivided

interest, title in the LP’s property.

LIMITED PARTNERSHIPS Happens when you want the tax advantages of a partnership but the protection of a corporation This is a statutory rather than a common law creation that is halfway between partnership and

corporation in terms of its structure and rights/liabilities of the partners…features:

o Like a corporation Must be registered with the registrar of companies, and there are more formalities

required than a partnership, as it doesn't exist only by virtue of people carrying on business together

Also, the partners have limited liability, so there isn't the same degree of risk (similar to shareholders)

o Like a general partnership As with general partnership, income and losses are not taxed as separate entities

There are two kinds of partners in a limited partnership:o General partners

Must be at least one, they have unlimited liability and can be involved in management

Generally the general partner is a corporation

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o Limited partners Must be at least one, but creditors can only go after assets they contributed to the

partnership Generally they are investors, and they can't take part in management operations

Features of a limited partnership:o Must be registered

Can't be created by the court, as it's a creature of statuteo Anti-deception

Must be clear who the general partners are as distinct from the limited partners Therefore creditors have more info than a general partnership to balance the fact

that creditors can't go after the limited partners' personal assets and therefore carries more risk

S.51(1) Formation of limited partnership "A limited partnership is formed when there is filed with the registrar a

certificate, signed by each person who is, on the formation of the partnership, to be a general partner"

o Thus certificate states who the general partners are, contributions, transfer rights, how additional partners can be added, etc.

Labelling requirement S.53(1) Name of partnership

o "The business name of each limited partnership must end with the words "Limited Partnership" in full or the French language equivalent"

o Must warn creditors who they're dealing with S.53(2) Name of partnership

o "The surname of a limited partner must not appear in the firm name of the limited partnership unless

(a) that surname is also the surname of one of the general partners, or

(b) the business of the limited partnership has been carried on under that name before the admission of that partner as a limited partner"

Rights of partners S.52(1) General and limited partners

o "A person may be a general partner and a limited partner at the same time in the same limited partnership"

S.55(1) Contribution of limited partnero "A limited partner may contribute money and other property to the

limited partnership, but not services" S.56 Rights of general partners

o "A general partner in a limited partnership has all the rights and powers and is subject to all the restrictions and liabilities of a partner in a partnership without limited partners except that, without the written consent to or ratification of the specific act by all the limited partners, a general partner has no authority to do any of the following:

(a) to do an act which makes it impossible to carry on the business of the limited partnership;(b) to consent to a judgment against the limited

partnership;(c) to possess limited partnership property, or to dispose of any rights in limited partnership property, for other than a partnership purpose;

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(d) to admit a person as a general partner or to admit a person as a limited partner, unless the right to do so is given in the certificate;(e) to continue the business of the limited partnership on the bankruptcy, death, retirement, mental incompetence or dissolution of a general partner, unless the right to do so is given in the certificate"

o Thus general LP partner has unlimited liability and has same rights as general partner in general partnership except that they must get consent of limited partners in certain situations

S.57 Liability of limited partnero "Except as provided in this Part, a limited partner is not liable for

the obligations of the limited partnership except in respect of the amount of property he or she contributes or agrees to contribute to the capital of the limited partnership"

o This is the limited liability clause 59(2) Share of profits

o "A limited partner may receive from the limited partnership the share of the profits or the compensation by way of income stipulated for in the certificate if, after payment is made, whether from the property of the limited partnership or that of a general partner, the limited partnership assets exceed all the limited partnership liabilities, except liabilities to limited partners on account of their contributions and to general partners"

o Thus limited partners get no return of capital if after payment the partnership would be insolvent

S.64 Liability to creditorso "A limited partner is not liable as a general partner unless he or she

takes part in the management of the business"o This is the management clause

Haughton Graphic Ltd v Zivot Facts

o Zivot and Marshall were limited partners of Printcast (limited partnership), Lifestyle Magazine corporation was general partner, of which Z said he was President and M said he was Vice-President. Haughton Graphic, a creditor of P, printed 5 issues, but only got payment for 2 since P went bankrupt. H then went after Z and M, who knew P was a limited partnership but didn't know what that meant. All they knew is that Z represented himself as President and M represented himself as the Vice-President

Ratioo Limited partners taking part in management will be liable as general partners by the courts

Nordile Holdings Ltd v Breckenridge Facts

o B and R were limited partners of Arman Rental LP, and Arbutus Corp. was the general partner. Brecekridge and Rebiffe were officers of Arbutus. Nordile, vendor, sold property to Arman in return for cash and a 2nd mortgage

Ratioo Even if you are a limited partner, and have a role to play in managing, if you are managing

solely as directors and officers of the general partnership, you are OK

LIMITED LIABILITY PARTNERSHIPS (LLPS) It was only in 2004 that the BC Partnership Act allowed for the creation of Limited Liability

Partnerships

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o Created in Texas in US during savings and loans scandals in the 1980s over fear that huge negligence actions and large damage awards could destroy large partnerships

This allows professionals to avoid unlimited liability unless:o They took part in negligence, oro They knew about it and didn't take reasonable steps to correct it

Must contain the suffix LLP on the name of the firm, and must be properly registered Provisions contained in Part 6 of BC Partnership Act In BC, anybody can enter into an LLP; in Ontario, it's limited to professional legal bodies

THE CANADIAN CONSTITUTION

THE CONSTITUTIONAL FRAMEWORK Primary aspect of legislation is usually enough to establish constitutional validity even if it affects

some matters outside the legislative competence Generally, constitutional issues don't really come up Not exactly clear what the limits are with respect to provincial intervention in a federal corporation

o It is definitely less extensive than the ability of the federal gov't to regulate provincial corporations

LEGISLATIVE POWER TO CREATE CORPORATIONS Provincial Power

o S.92(11) - province can make laws in relation to matters coming within class of subjectso The Incorporation of Companies with Provincial Objectso BC can only give power in that jurisdiction but can give capacity to attain rights in another,

have to register as extra-prov. company to carry on business there and may have a name issue

Federal Powero Implicit that can create re federal objects (but doesn’t say so) which are those objects that

cut across the country Difference between federal and provincial is largely territorial

o S.91 residual clause in preamble can incorporate companies due to the peace order and good government clause

Reference in the Matter of the Incorporation of Companies in Canada Facts

o Judicially considered the words “with provincial objects” in s.92(11) of the Constitution Act, 1867

Ratioo “Objects” means the business which the company is authorized by its constitution to carry

on with a view to the profit which is the ultimate purpose of its members. Clearly eliminates from provincial jurisdiction companies incorporated with Dominion objects. Limitation on provincial power to incorporation is a territorial one and limited to the province.

Citizens Insurance Co of Canada v Parsons Facts

o Two federal companies carried on business in Ontario. Ratio

o Power to create corporations: not necessary to rest entirely on Regulation of Trade and Commerce (s.91(2)). It falls within the general powers of the parliament of Canada.

REGULATING CORPORATE ACTIVITY Question is the ability to regulate corporations of another legislature, no question that you can

regulate your own

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o Paramountcy applies where both federal gov't and province enact statutes and they conflicto Provincial legislation will be inoperative

Two possibilities - the regulatory activity can fall into a non-corporate head of power or it can fall into corporate law

Province can regulate federal limited amount Small advantage to being CBCA corporation because province cannot prevent you from carrying on

business, can carry on in any jurisdiction Federal corporation still subject to laws of general application - can regulate if provincial company an

extra-provincial company Federal gov't can regulate power of province if has power under Federal Division of Power but can’t

encroach on provincial power Securities Regulation:

o Provinces under property and civil rights, Federal under trade and commerce powero Most issues national so should be federally regulated but not, so need approval of 10

commissions but federal gov't reluctant to take over b/c of $

John Deere Plow Co v Wharton Facts

o BC required extra-provincial corporations to get licenses to carry on business and made it an offence so contract unenforceable w/o licence. Appellant was federal company and was refused a license.

Ratioo Province cannot legislate to deprive a federal company of its status and powers so can’t force

it to get a licence. It is not within power of province to enact this provision. Could pass laws applying to companies without distinction or requiring registration within the province for certain limited purposes but that is not what is done here, it interferes directly w/ Dominion status.

Bonanza Creek Gold Mining Company v The King Facts

o Ontario incorporated company with contract re: mining in the Yukon, which was outside of its province of incorporation.

Ratioo Provincial objects would be only objects in respect of which the province can confer actual

rights. Rights outside the province would have to be derived from authorities outside the province. Without the capacity by the enacting province to gain rights in another province, another province could not bestow on it right and powers which enlarge that existing in its capacity.

Multiple Access Ltd v McCutcheon Facts

o Insider trading is buying or selling of corporate securities by insiders who know about the corporation but is not yet released to the public. Both Federal gov't and Ontario had regulations. Insider can be both a buyer (where seller is inside) or the insider could be the seller, which makes a buyer a complete stranger so it is not obvious that insider trading is an intra-corporate matter

Ratioo Province duplicated federal and doesn’t contradict it so the fact that the P had many choice

of remedy doesn’t make the provincial regulations inoperative, they can operate concurrently

THE CANADIAN CHARTER OF RIGHTS AND FREEDOMS Canada’s Interpretation Act (and similar in provincial acts) says “person” includes corporation, but

has been said not to apply since Charter is a constitutional document

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o Individual used in s.15 - doesn’t apply to corps because this traditionally excludes corpso Ss.3, 6 and 23: “citizen” excludes corporations

First consider whether the wording of the Charter includes or excludes a corporation Then if it does apply, ask whether they have a significant interest Could have application against search and seizure, useful for corps if they have something to hide Be aware that the legal issue is to what extent corporations, as legal “persons” are able to benefit

from Charter rights. Also be aware of the fact that the Charter uses very different and inconsistent language to identify the beneficiaries of rights in its various provisions: for example, “individuals”; “citizens”; “everyone”; “anyone”; and “persons”. The consensus is that “persons” includes corporations, and “everyone” and “anyone” likely does too, but that “individuals” and “citizens” do not.

R v Agat Laboratories Ltd Facts

o Corporation trying to rely on s.7 of Charter that right to life liberty and security of person violated because of failure to disclose material not made so couldn’t make full answer and defence

Ratioo S.7 protects right to full answer and defence, accused whether human or corporation has

identical interest in this when charged and corporation accused has an interest in this which falls within s.7 protection

THE CORPORATE CONSTITUTION

THE FUNCTION OF A CONSTITUTION Primary function - prescribe how the internal government of the organization is to operate

o i.e., allocating rights, duties, obligations and access to grievance procedures among membership and their elected or appointed officials

Corporate law in Canada is now built upon 4 major principles:o Corporate personality: corporation’s behaviour is to be legally analyzed by analogy to

behaviour of human beingso Managerial power: daily operation of corporate business done by relatively independent

managerial groupo Majority rule: internal corporate decisions are to be made by democratic process among

those constitutionally enfranchised on any particular issueo Minority protection: certain corporate, managerial or majority S/H inclinations ought to be

restrained from injuring the minority members of any voting group created by the corporate constitution

Function of a corporation’s statute is to create a system of rules for determining which principle prevails when 2 or more come into conflict

CORPORATE CONSTITUENCIES All internal groups will have explicit role in corporate constitution External groups will receive limited recognition in some situations

External Groups General Public

o Close economic relationship with corporate activity in every western industrial stateo Members of public may even interact with corporation (i.e., trade suppliers, customers)o Once a member of the general public buys a share, it becomes a shareholder

Governmento Relate in 3 different ways:

Provision of legislative scheme which allows for creation of corporations and which regulates general business activity

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Creation and administration of various anti-monopoly, tax incentive, foreign investment review and other political-economic statutory controls

Government participation in corporate affairs is by involvement as shareholder of particular corporation

Employeeso Unionized - field of labor lawo Non-unionized - field of “employment law”o Corporate personality does corporate actso So when employee acting on behalf of corporation they are not liable as individuals are for

what they do Creditors

o Creditor = someone to whom the corporation owes moneyo Can have great deal of involvement in a corporation’s affairs when it is in financial

difficulties

Internal Groups Internal vs. external groups – internal groups determine how corporation behaves Principal function of corporate constitution – allocate power to decide what corporation will do in a

given situation Shareholders

o Shares can be issued in different classes, which will have different rights attached to themo Are a source of capital and a constituency to whom to reporto Actively promotes buying and selling of shareso Corporations are democratic institutions BUT they positively encourage buying and selling

of voteso From management’s POV, shareholders are source of capital and constituency to whom to

reporto In sum, corps tend to serve the needs of capitalistso Holders of equitable interest in the companyo Elect the board of directorso In control: they have provided the funds the corporation uses to carry on business; they

make business decisions that control corporate destiny; they appoint/elect those who make day-to-day business decisions

o Directors and officers may be shareholderso Generally insulated from liability

Directors and Officerso Corporate management comprises 2 interdependent groups: directors (oversee corporate

strategy) and officers (function as tacticians)o Directors:

Cdn corporate statutes typically create a board of directors to supervise mgmt of the corporation. Elected by shareholders.

Directors determine direction of business and "have imposed upon them a correlative statutory obligation to exercise their powers 'with a view to the best interests of the corporation.'"

Most operate as review bodies, sounding boards for ideas, performance of the corporation's professional managers. "Traditional corporate law dwelt on the legal responsibilities of directors and largely ignored corporate officers. The officers of a typical corporation are far more important in the business world."

o Officers: Legal position: Employees who run day-to-day operations of corporation w/in long-

range policies set by board of directors. Reality: determine the corporate destiny; appoint board of directors, select their

own successors, regard shareholders as a "necessary rubber stamp" in accomplishing their long-term managerial goals.

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Division of Powers Who is able to decide what the corporation will do? Hollinger Inc v Hollinger International Inc

o In the context of who does what, Hollinger (both Hollinger Corps controlled by Conrad Black - he owned the majority of shares) reminds us that a controller cannot dictate how the Board of Directors can act no matter how many shares he owns

o Distinction between an independent BOD is that it can ignore the demands of the controlling shareholders as long as they act within the view of the shareholders' best interests (until removed)

Canadian Jorex Ltd v 477749 Alberta Ltd

Factso A special meeting called by Jorex was cancelled. A shareholder of the corporation applied to

court for an order confirming that the cancellation was of no force and effect. Ratio

o S.102 of the CBCA - directors have unlimited powers to manage the corporate affairs, except to the extent that these powers have been circumscribed by corporation’s bylaws or a Unanimous Shareholders Agreement - powers must be exercised for proper purpose

o A rigid no cancellation approach can lead to unreasonable results (absurd/unintended ones)o Court’s interpretation will not affect shareholder's rights to requisition a special meeting -

reading s.102 in conjunction with s.143 of the CBCA arguably means that the directors residual powers under s.102 would not extend to the unilateral cancellation of any meeting properly convened on the shareholder’s request

o Shareholders don’t lose their right to examine J’s auditors (s.168) b/c they have other venues (i.e., oppression remedies, requisition the call of a meeting, can ask the court for an order that the meeting proceed even though cancelled by directors (s.144 of the CBCA)), director’s power to cancel a general meeting limited by the statutory requirement that one such meeting should be held no later than 15 months, at such a meeting the shareholders may remove the directors, most important shareholders can eliminate the director’s power to cancel a meeting by amending the bylaws or the Unanimous Shareholders Agreement (USA) to that effect

Grievance Procedures Provide redress for potential or past violations of other provisions of the constitution

Roles v 306972 Saskatchewan Ltd

Factso R in his capacity of director applied to court for an order to inspect accounting records of the

company. Court refused, and after at the general meeting R was not re-elected as director. Ratio

o Giving access to financial statements alone doesn’t amount to having access to the accounting records of a company

o The case has to be considered on the basis that R is no longer a directoro If records were asked for as a director then presumed to have proper purpose, otherwise it

is incumbent for R to demonstrate that the reason for granting access is for the benefit of the company

TYPES OF CORPORATE CONSTITUENCIES (ALSO SEE HANDOUT #1)

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Theoretical Differences "Constitutions are of different types or models. They do not all have the same elements; and even

where two constitutions have elements with the same name, there is no guarantee that they are parallel in any other way" (i.e., role of the President in US, Ireland).

In practice there are not that many different basic models—people copy those that have worked, amending to take account of local conditions and correcting perceived shortcomings.

o What are the constitutional documents of a corporation?o What is the basis of powers held by different internal groups?o What is the grievance mechanism for ensuring compliance w/ the corporate constitution?

Five Types

Charter Corporations

1st type of corporation to be created by executive act Executive power by which they were created was the royal prerogative (discretionary power of

Crown)o Basic constitutional document: its Charter (bearing royal seal, by which corporation is

created) i.e., Governor and Company of Adventurers Trading into Hudson’s Bay

Special Act Corporations

Created by an act of legislature Main difference from Charter corporation: source of power is legislative rather than executive Similarities - created by particular act of executive or legislature Basic constitutional document - relevant act by which corporation is created

Letters Patent Corporations

Incorporated under a registration statute which adopts Charter corporation as its model Distinguishing characteristic from other types of registration - retention of a discretionary element in

the creation of the corporationo Letters patent (LP) statutes always provide that relevant governmental official “may” issue

the letters patent, while contractarian and division of powers statutes say “shall” Basic constitutional documents - LP (sets out name, capital structure, other basic features, requiring

special majority to change which is usually 2/3) and statute under which they were granted (creation of bylaws: easier to change than LP requiring simply majority)

In general, LP statutes do not provide for grievance procedures to correct or restrain violations of corporate Constitution

Contractarian Corporations

Also called “English-model” corporations or “memorandum and articles” corporations 1720 - “South Sea Bubble” burst and public distrust in chartered corporations as business

organizations Lawyers responded by developing “deed of settlement” company, which was an unincorporated

association implemented through a trust In law, these companies were partnerships 1844 - requiring registration of these companies 1855 - providing that stockholders in joint stock companies could not be made liable for the

company’s debts once they had paid for their shares 1897 - joint stock companies were corporations\independent persons in law Basic constitutional documents - “memorandum of association” (shorter document containing name,

objects, share capital) and “articles of association” (much longer documents containing all details of corporation including anything that would be a bylaw in any other type of corporation)

Shareholders are theoretical source of all power within the corporate Constitution

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o Directors not given any managerial powers by statuteo If they had powers, they came from shareholders as delegation set out in articles of

associationo Residual power - rests in shareholders

Problem - question of grievance procedures to secure compliance with corporate Constitutiono LP Corporations vs. Memorandum Jurisdiction:

Incorporation: LP jurisdiction: discretionary Memorandum jurisdiction: incorporated regardless

Ultra Vires doctrine In LP jurisdiction, had full capacity as a separate entity In Memorandum jurisdiction, if statute says you cannot, you cannot do it

(all capacity is from the statute) Problem because it applied ot S/Hs and to creditors Intended to protect shareholder but it hurt S/Hs as often as it helped them

o i.e., enter into contract with creditor and creditor would pronounce contract ultra vires and it would apply

Both memorandum and LP corps have been replaced with CBCA corporations or “division of powers” corporations

S.15: full capacity as natural person, got rid of ultra vires doctrine – can incorporate as a right, registrar cannot deny incorporation

Division of Powers Corporations

Now, the dominant one in Canada Statute expressly divides powers within the corporate Constitution between shareholder and

management Main difference to LP - no discretion to refuse to register a DOP corporation Like LP - directors given power to manage business and affairs of corporation, shareholder given

power to elect directors and have power in certain situations Basic constitutional document - articles of incorporation (corresponds to memorandum of

association in contractarian model or LP in letters patent model) and Unanimous Shareholder Agreement (USA)

DOP models are more thorough in providing grievance procedures

Practical Differences The Location of Particular Constitutional Provisions

o The type of Constitution in issue can determine the proper place for a given provision The Permissibility of Particular Constitutional Provisions

o Jacobsen v United Canso Oil & Gas Ltd Facts - bylaws said that no person is entitled to vote more than 1,000 shares even if

they hold more Issue - is this bylaw valid? What can and can’t go in the by-laws Decision: bylaw was invalid Ratio - argument that presumption of equality between shareholders and voting

restrictions contravenes this presumption But bylaw violated Companies Act that if voting rights are to vary there

must be more than 1 class of shares created Also, supposed to be set out in the articles, not the by laws Could have solved this problem by making more than 1 class of shares,

didn’t even have to issue themo Bushell v Faith

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Court said it was permissible to have provision in the articles of association (similar to bylaws) that upon resolution to remove a director, any shares held by that director carries 3 votes to the others

o These provisions are called a step up or step down provision

THE CORPORATION AS A LEGAL PERSON

THE PRINCIPLE OF CORPORATE PERSONALITY A corporation is an artificial person:

o Creature of lawo Doesn't exist in natural worldo Doesn't need to exist in a legal system, but all developed legal systems provide for them.o Can do many things human beings can do:

Hold property Contract w/ others Commit torts Sue and be sued, etc.

Theoretical Basis One of the most dramatic consequences of incorporation is the creation of a new legal person,

separate in law from its shareholders The law gives the corporation life Once created can be considered a real and separate person at law S.5(1) – incorporation (one or more persons)

o One person corporations are now recognized S.133(4) one shareholder meeting

o One shareholder can constitute a meeting S.97(2) number of directors

o One or more directors, however if offering shares to the public can’t be less than 3 Basic principle of corporate personality settled in Salomon in 1897

Salomon v Salomon

Factso Salomon incorporated his leather merchant business and issued 1 share to each kid and his

wife and 20,001 to himself to equal 7 people as required. He also loaned money to company and issued debentures to himself for it. Company in trouble and other creditors after him.

Ratioo The corporation is a legal person, a separate entity from its principals. Even a “one-man

company” is a separate entity, not an agent of the controlling shareholder/director.

Practical Consequences Principle that corporation is a legal person, separate from individuals who participate in running of

corporation’s business Lord Denning’s conclusions locus of corporate intent:

o Directors and managers represent directing mind and will of company and control what it does, the state of mind of these managers is state of mind of company and is treated by law as such

Acts of company’s directors and employees can be company’s act, even when individuals are not functioning within scope of their authority

Bolton (Engineering) Co v Graham and Sonso Acts of a company’s directors functioning within the scope of their authority are the

company’s acts

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Macaura v Northern Assurance Co

Factso Macaura cut down a bunch of wood on his estate. He then purchased insurance against fire

on “timber and wood goods” on this property. Finally, he transferred the wood to a corporation called Irish Canadian Saw Mills Ltd in return for 42,000 shares at 1£. In addition to being the company’s principal shareholder, Macaura became its principal creditor, as Irish Canadian Saw Mills Ltd owed him 19,000£. Subsequently, a fire destroyed most of the timber, now owned by Irish Canadian Saw Mills, that was lying on Macaura’s land. Macaura sought indemnity under the insurance policies he had purchased in his personal capacity

Ratioo A corporation owns its own property, and neither a shareholder nor a creditor has any legal

interest in it. However the insurable interest component of this decision was later overruled in Kosmopoulos.

o *Note: this case should not be considered in isolation from Kosmopoulos v Constitution Insurance Co

Kosmopoulos v Constitution Insurance Co of Canada

Factso Kosmopoulos (K) created a corporation to run his [previously sole proprietorship] leather

business. The lease was in K’s own name, but the corporation owned the other business assets. K got fire insurance for the business; the policy described the insured as “Andreas Kosmopoulos O/A Spring Leather Goods”. A fire broke out and the insurance company, which had accepted all premium payments, refused to indemnify K for damage to assets owned by the corporation. K argued that the “corporate veil” should be lifted, so that the company’s property was, in law, that of K.

Ratioo A S/H can have an insurable interest in the property of the corporation (Macaura partly

overruled). The insurable interest definition is expanded in insurance law, so even though a S/H cannot have insurable interest in business law, he can under insurance law.

Lee v Lee’s Air Farming Ltd

Factso Lee was sole shareholder, director and an employee (as chief pilot) in his company.

Corporation was insured against liability to pay compensation in the case of an accident to him. He died and his wife wanted compensation.

Ratioo A corporation is distinct from its controlling shareholders/directors and can contract with

them in their personal capacity. Can act in many capacities in a company just have to be careful which hat you are wearing when in determining liability.

PIERCING THE “CORPORATE VEIL” Despite the firmly-entrenched Salomon principle, in extraordinary circumstances courts have

proven willing to ignore the separate legal existence of the corporation and impose liability on controlling shareholders of corporations. These controlling shareholders may, of course, be natural persons or may themselves be corporations. This process is sometimes described as “lifting” or “piercing” the corporate veil.

Where judges ignore the existence of the corporate person and fix liability on the managers or the shareholders

Courts rarely pierce the veil – instead, hold up the principles of Salomon o Houle v Canadian National Bank:

Although the trial court and court of appeal agreed that lifting the corporate veil was appropriate, the SCC disagreed and upheld the principles of Salomon

Rationales for piercing the “corporate veil”:

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o Cases that involve allegations of fraudulent conduct or objectionable purposes on the part of a company’s principals (See Big Bend Hotel Ltd v Security Mutual Casualty Co below)

i.e., Transamerica Life Insurance Co of Canada v Canada Life Assurance Co: "[Courts will pierce the corporate veil] where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct.”

o Cases where a company existed as a “shell” and was clearly undercapitalized to meet its reasonable financial needs

o Cases that involve tort claims against the company, particularly those where a director, shareholder, or employee has committed an intentional tort, or the tort of inducing breach of contract

o Cases where the company was not incorporated for bona fide business reasons but for other purposes, often to avoid taxation

o Cases that involve non-arm’s-length transactions between parent and subsidiary companieso Cases where the courts determine that equity or the interests of justice are better served by

disregarding the corporate form i.e., Clarkson Co Ltd v Zhelka: Lifting the veil represents "refusals to apply the logic

of the Salomon case where it would be flagrantly opposed to justice" Veil lifting is NOT available to give shareholders ownership of the corporation’s assets. Separate

legal personality implies full ownership rights.

Big Bend Hotel Ltd v Security Mutual Casualty Co Facts

o Kumar was president and sole shareholder of corporation. Corporation burned down. Kumar had been president and principal shareholder of another corporation, whose hotel had burned less than three years prior. Insurers said that plaintiff or its agent fraudulently omitted to communicate material circumstances on his insurance application and therefore denied benefits.

Ratioo Courts may lift veil where individual uses a company as a shield for improper conduct or

fraud. Didn’t have to in this case because corp was aware of the shareholder’s past and knowingly omitted the information.

Hercules Managements Ltd v Ernst & Young Facts

o Ernst & Young was hired to provide audit services for the plaintiff firms and their shareholders. Eventually, shareholders and investors of the firms brought an action against Ernst & Young for losses allegedly suffered as a result of audit reports filed in three specific years.

Ratioo When a separate and distinct tort claim can be raised with respect to a wrong done to a

shareholder, a personal action may well be brought, as long as all the elements of a cause of action can be made out

GOING BEHIND THE VEIL

The Corporations as Agents and Partners An agent can bind a principal to a contract The principal is liable for torts committed by agent w/in scope of his agency (therefore if you can

prove agency, you can hold the principal liable for whatever the corp has done) Salomon case: relationship of controlling shareholder and corporation does not in general constitute

principal-agent relationship. To distinguish Salomon, court must distinguish between:

o Situation where controlling interest is merely exercising the prerogative of control, ando Situation where corporation is acting as agent of its controlling interest

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Controlling interest must have been acting in a personal capacity

Smith, Stone and Knight Ltd v Birmingham Corp

Factso Corp rented property to its subsidiary. City expropriated the land. Required to pay

compensation to commercial estate holders, but not to tenants. Knight claimed compensation b/c it, not subsidiary, was carrying on business on premises through agency of subsidiary.

Ratioo An exception to the Salomon principle arises when a corporation is simply the agent of a

corporate shareholder, by satisfying the following 6 tests:1. Were the profits treated as profits of the parent company?2. Were the persons conducting the business appointed by the parent company?3. Was the parent company the head and brain of the trading venture?4. Did the parent company govern the trading venture, decide what should be done,

and what capital should be embarked on the venture?5. Did the parent company make profits by its skill and direction?6. Was the parent company in effectual and constant control?

o These 6 criteria describe the classic parent-subsidiary relationship, but the “veil” is not lifted in every such relationship

Inducing Breach of Contract Each of the parties to a contract has a "right to the performance" of it and it is wrong for another to

procure one of the parties to break it or not to perform it Said v Butt exception:

o Establishes the exception that directors of a corporation cannot be liable for procuring a breach of contract between the corporation and a third party while acting bona fide in the scope of their authority

Garbutt Business College Ltd v Henderson Secretarial School Ltd

Factso Famous teacher Henderson worked for the plaintiff Garbutt College. Restrictive covenant in

his contract said he couldn't open a rival school. New school lured Henderson away. Enrollment at the first place declined "as students flocked to the Henderson name". Henderson held all shares of the new company except 3 held by his wife and daughter.

Ratioo Every day Henderson was employed w/ his company he was encouraged to break his

contract w/ Garbutt and he knew this was wrong. Corp committed a tort and is liable itself for damages.

Einhorn v Westmount Investments Ltd

Factso Belzbergs were in control of Westmount. Einhorn was a real estate agent and made

agreement that Einhorn would assist Westmount in acquiring ppt. W/ Einhorn’s assistance Westmount got ppty but refused to pay for services. Claim against the Belzbergs who controlled this and another co b/c knowingly caused property to be transferred to Midtown (another co) so it couldn’t pay E and broke K.

Ratioo They are guilty of intentional tortious act by clothing themselves in a corporate veil of their

own spinningo Interference with Einfeld’s contractual relations with Westmount and wrongful

procurement of breach of K.

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McFadden v 481782 Ontario Ltd

Factso McFadden had K of employment w/ PMAI who sold co. to PMAC. McFadden continued

employment and in a year PMAI bought back PMAC and McFadden was told he no longer had a job despite his contract was not up. Taylors (sole shareholders of PMAC) paid themselves and had no money to pay judgment to McFadden.

Ratioo Person who personally commits the act can be liableo Premised on justification, but what is it?

Doesn’t matter if is in the best interest of the co, only matters if they have the authority

369413 Alberta Ltd v Pocklington

Factso Had a multitude of corporations and used them to benefit himself. He owed the AB gov't - he

sold a property that had a mortgage with the AB gov't for a very low price Ratio

o Elements of inducing breach of contract: The existence of a contract Knowledge or awareness by the defendant of the contract A breach of the contract by a contracting party The defendant induced by the breach The defendant, by his conduct, intended to cause the breach The defendant acted without justification The plaintiff suffers damages

ADGA Systems International Inc v Valcom Ltd

Factso AGDA contracted to provide prison security systems to Corrections Canada. When AGDA’s

contract came up for renewal, CC put it out to tender and Valcom won it. Valcom won in part because its sole director, McPherson, and two senior employees, Ewing and and McKenzie, lured AGDA’s senior technicians away. In addition to suing Valcom, AGDA sued McPherson, Ewing, and McKenzie personally for inducing breach of contract, interference with economic interests, and for inducing breaches of fiduciary duty.

Ratioo Where a plaintiff relies on an independent cause of action against an individual defendant

that does not fall withino the limited exception from Said v Butt, the claim may proceed.

Knowing Assistance in a Breach of Trust Trusts arise in many contexts It is an equitable wrong to breach a trust and this wrong can be committed innocently (trustee is

liable to beneficiary for breach of trust even if it thought it was acting lawfully) When trust is breached, two kinds of accessory liability can arise (liability of so-called strangers to

the trust):o “Knowing receipt of trust property” - if third party acquires trust party from trustee in

connection with breach of trust, then property must be returned unless third party was bona fide purchaser for value and no knowledge of P’s equitable rights

o “Knowing assistance in a fraudulent or dishonest breach of trust” - does not depend on acquisition of any property by third party, this third party liability cannot arise unless the trustee’s breach was fraudulent or dishonest AND the third party whose liability is in issue

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must have had knowledge of the trustee’s dishonest scheme\states of mind of the two different people at issue

Air Canada v M & L Travel Ltd

Factso M & L had agreement w/ Air Canada that they would sell tickets on credit and would keep

proceeds in separate account in trust and then pay Air Canada within 30 days. M & L placed proceeds in general account then had financial trouble and ended up owing the air line. Air Canada brought action against directors of M & L personally

Ratioo Directors are personally liable for the breach of trust as constructive trustees provided that

the requisite knowledge on the part of the directors is proved.

Transamerica Life Insurance Co of Canada v Canada Life Assurance Co

Factso Transamerica made 54 mortgage loans which were in default and lost money. There was a

claim against CLMS also which had agreement with Transamerica and CLMS is wholly owned subsidiary of Canada Life

o Relationship b/w CLMS and Canada Life: Had own office and branches, different bank accounts, operated independent, except

for senior management they were independent but all CLMS board of directors are senior execs at Canada Life

Evidence of minutes that President was aware that CLMS was underwriting the Transamerica mortgages

Ratioo "[Courts will pierce the corporate veil] where it is completely dominated and controlled and

being used as a shield for fraudulent or improper conduct.” Two elements to find “complete control”:

The first element of 'complete control', requires more than ownership. It must be shown:

That there is complete domination and That the subsidiary company does not, in fact, function independently

The second element refers to the nature of the conduct: is there "conduct akin to fraud that would otherwise unjustly deprive claimants of their rights"

Thin Capitalization Some countries have substantial minimum capitalization requirements for setting up new

corporations - require that specified amount of cash or property valued at that amount be given to corporation in exchange for shares as condition of state’s creating new corporate entity

Minimum capitalization requirements have not been part of Canadian corporate tradition “Thin capitalization” - describes any situation in which a corporation is initially set up with an

abnormally high “debt to equity ratio” S/H will rank behind unsecured creditors

Walkovszky v Carlton

Factso Plaintiff Walkovsky severely injured by NYC cab, owned by Seon Cab Co., of which defendant

Carlton was shareholder, and nine other cab corporations. Each corporation had 2 cabs. Each cab had minimum mandatory amount of auto insurance ($10,000); Seon had little capital, insufficient to compensate Walkovsky.

Ratioo Thin capitalization insufficient basis to pierce corporate veil. o *Note, however, dissent disagreed:

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Carlton’s company was purposely undercapitalized so could avoid responsibility and help shareholders liable

The privilege of an investor being able to incorporate and realize a separation between his assets and the corporation's carries with it some responsibility to have the resources to cover reasonably expected claims

Henry Browne & Sons Ltd v Smith

Factso The plaintiff company is manufacturer and supplier of navigational device. On May 1962 it

supplied and fitted device for Smith. Smith argued order was not placed for him but for and on behalf of limited company known as Ocean Charters Ltd (2 shares issued). Ocean Charters was incorporated by Smith who is sole director with his wife holding 2 issues of shares.

Ratioo Where there is no clear evidence to support an agency relationship, the corporate veil will

not be pierced

CORPORATE PURPOSE Corporations (and directors - if you can successfully find a way to sue them) can be challenged for

breach of their fiduciary duty because they have to act in accordance with the view to the best interest of the company

o Just needs to be "with the view" to the best interest of the company - doesn't actually have to work out

Dodge v Ford Motor Co Facts

o By 1916, the Ford Motor Company had accumulated a capital surplus of $60 million. The price of the Model T, Ford's mainstay product, had been successively cut over the years while the cost of the workers had dramatically, and quite publicly, increased. The company's president and majority stockholder, Henry Ford, sought to end special dividends for shareholders in favor of massive investments in new plants that would enable Ford to dramatically increase production, and the number of people employed at his plants, while continuing to cut the costs and prices of his cars. In public defense of this strategy, Ford declared that they were putting the greatest share of their profits back into the business in order to employ more people and help build their lives. While Ford may have believed that such a strategy might be in the long-term benefit of the company, he told his fellow shareholders that the value of this strategy to them was not a primary consideration in his plans. The minority shareholders objected to this strategy, demanding that Ford stop reducing his prices when they could barely fill orders for cars and to continue to pay out special dividends from the capital surplus in lieu of his proposed plant investments. Two brothers, John Francis Dodge and Horace Elgin Dodge, owned 10% of the company, among the largest shareholders next to Ford.

Ratioo Corporations (and directors - if you can successfully find a way to sue them) can be

challenged for breach of their fiduciary duty because they have to act in accordance with the view to the best interest of the company

Shlensky v Wrigley Facts

o Defendant is the director of the Chicago National League Ball Club, which is the company that owns the Chicago Cubs. Although every other major league team had installed lights, Defendant did not install them for the Cubs because he was concerned that night baseball would be detrimental to the surrounding neighborhood. Plaintiff argued that the team was losing money, and that the other Chicago team, the White Sox, had higher attendance during

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the weekdays because they played at night. Therefore, reasoned Plaintiff, the Cubs would draw more people with weekday night games. Plaintiff asserts that Defendant’s first concern should be with the shareholders rather than the neighborhood

Ratioo A court will not interfere with an honest business judgment absent a showing of fraud,

illegality or conflict of interest

Peoples Department Stores Inc (Trustee Of) v Wise Facts

o The Wise Stores Inc. was a retail store chain whose share were primarily held by the three Wise brothers. In 1992 they acquired Peoples Department Store, a competitor. From 1994 their business interests went through a difficult time. To cut down on costs they developed a scheme where certain inventory would be purchased through Peoples and then given to Wise on credit. Soon, Wise owed more than 18 million dollars to Peoples. By 1995, both Wise and Peoples declared bankruptcy. The creditors for Peoples brought an action against the Wise brothers for breach of their fiduciary duties as directors under section 122(1) of the CBCA by implementing the credit scheme. The Trustees argued that the Wise brothers favoured the interests of Wise Stores over that of Peoples.

Ratioo Courts should be reluctant to second-guess the application of business expertise. They are

capable of determining whether an appropriate degree of prudence and diligence was brought to bear in reaching what is claimed to be a reasonable business decision based on the facts of each case.

BCE Inc v 1976 Debentureholders Facts

o BCE Inc. was the subject of multiple offers involving a leveraged buyout, for which an auction process was held and offers were submitted by three groups. All three offers contemplated the addition of a substantial amount of new debt for which Bell Canada, a wholly owned subsidiary of BCE, would be liable. One of the offers, which involved a consortium of three investors, was determined by BCE's directors to be in the best interests of BCE and BCE’s shareholders. This was to be implemented by a plan of arrangement under s.192 of the CBCA, which was approved by 97.93% of BCE’s shareholders, but was opposed by a group of financial and other institutions that held debentures issued by Bell Canada. These debentureholders sought relief under the oppression remedy under s241 of the CBCA. They also alleged that the arrangement was not “fair and reasonable” and opposed s.192 approval by the court. Their main complaint was that, upon the completion of the arrangement, the short-term trading value of the debentures would decline by an average of 20 percent and could lose investment grade status.

Ratioo A fiduciary duty is not owed to debentures or creditors - only to the corporation

CORPORATE OBLIGATIONS

INTRODUCTION TO TWO THEORIES The corporate veil will be pierced where there is an agency relationship Courts will also pierce the corporate veil with regards to criminal liability Where there is a requirement of mens rea the corp will only be guilty if the act was committed by a

directing mind acting within the scope of his/her authorityo We are essentially giving the corp a brain - and saying where that brain is located – it is the

individual's brain that creates the necessary mens rea So long as the corp or indiv can be said to be a directing mind of the corp for a sphere of activity that

caused liability the liability will be attributed to the Corporation A corporation can have any number of directing minds at any time

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o While an employee has to be engaged to their assigned work, they don't have to have specific instructions in how to do it in order for the Corp to be liable for what they have done

o The fact that the corp told the employee not to commit any criminal offences is not much of a defence to the Corporation

o Whether or not an employee is capable of attributing criminal liability upon a Corp is a question of fact NOT law and will be determined on the particular circumstances of each case

o Where an employee is acting in fraud, liability will never be attributed to the Corp if the fraud was NOT designed to benefit the Corp and did NOT result in the benefit of the Corporation

To start the analysis, start with the presumption that the Corporation can be analyzed as a human being

3 ways to create obligations:1. Personally contracting with a 3rd party or committing a tort that injures a third party2. Through an agent with consensual obligations - contracting with an agent to go out and do it3. Through an agent - however, we create tort obligations to 3rd parties when our agent

commits a tort to a 3rd party (principle of vicarious liability) Both you and the agent are responsible for their tort

2 distinct theories emerge here: 1. Try to find the human brain that could be said to be operating as the Corporate brain, in the

circumstances, once you have that indiv you base corp liability on the thoughts of that indiv (often criminal law and tort – this is the identification theory)

2. Looks at the human indiv's involved in the Corporate Acts and sees them as agents of the Corporation (K cases and most tort cases)

CRIME AND TORT: ESTABLISHING THE CORPORATE MENS REA A corporation is vicariously liable like any other employer for torts of its agents There are other situations where principal respondent superior does not apply to individuals or

corporations Many prohibited acts are criminal only if mens rea, elusive guilty mind, can be proved If vicarious liability does not apply, personal liability must be shown

The Common Law Test Whether the individual’s mind can be proved to have been the corporate mind in the circumstances

The “Rhone” v The “Peter AB Widener”

Factso Widener (boat) caused shipping accident. Captain Kelch worked for co that owned boat and

sought to limit liability under Canada Shipping Act which allowed this if damaged caused w/o actual fault or privity of ship owner.

Ratioo Key factor in finding directing minds from normal employees is capacity to exercise decision

making authority on matters of corporate policy not just give operational effect of policy

Criminal Liability: Mens Rea Offences Principles from Canadian Dredge & Dock Co and Rhone cases have now been added to the Criminal

Code provisionso You can hold a corporation liable by taking bits of a lot of people in the corporation and

finding a directing mind somewhereo Notion of aggregationo Trigger appears to be the Westray Mine disaster where 26 miners were killed and criminal

prosecutors did not have enough evidence to proceed with criminal charges against the corporation even after an inquiry had found that the corporate mine owner had been careless

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Criminal Liability: Non-Mens Rea Offences Absolute liability: breach, guilty, no defence and is primary liability b/c corp treated as natural

person Strict liability: act, guilty unless defence and is primary liability b/c natural person and corp in same

case No mens rea required in strict liability offences

R v Fitzpatrick’s Fuel Ltd

Factso Corp charged w/ selling beer to a minor. Fitzpatrick was sole shareholder, director and

officer but had 2 employees. Main business selling fuel. One employee sold beer to minor. Ratio

o Strict liability offence so no mens rea required. In this case the NFLD provincial court applied the identification theory in the context of strict liability offences. Doctrine of identification applied - met the test.

CONTRACTS: AGENTS, OUTSIDERS AND CORPORATE LIABILITY

Constitutional Restrictions on a Corporation’s Abilities Extent to which corporation approaches status of fully capable human being depends on authority

which created it Documents (i.e., articles) may expressly or impliedly prohibit certain corporate endeavors There are 2 possible interpretations of statutory prohibitions:

o Intended that result cannot possibly occuro Activity is sanctioned by criminal punishment

Ultra vires: someone who lacked the capacity to do something clearly did not do it, despite appearances to the contrary

Ultra Vires Doctrine: o Makes act invalid b/c outside the scope of the document that governso Doesn’t apply to the common law corporation, letters patent or memorandum or statute

corpso Applies to special act companies

Restrictions in the Corporate Constitution from the CBCAo S.15(1) - capacity of corporation

Gives the Corporation human qualities - eliminates the CL doctrine of ultra vireso S.16(1) - powers of a corporation

Eliminates the need for any bylaw to give power to directors or corporations - directors have residual power

o S.6(1)(f) - articles can restrict powers of corp Restricts the powers of the business of the Corporation

o S.16(2) - Corp is bound by the articles o S.6(3) - if the articles or the USA requires special majorities then the articles or USA will

prevail Protection for third parties - no act shall be invalid by reason alone of acting

contrary to the Corporate Articles (protects creditors and persons that K with corporations)

o S.17 - no constructive notice by reason only that articles are filed Old cases say the exact opposite of this – they are old and wrong

o S.18 - authority of directors, officers, and agents Internal management rule: No Corporation shall assert a violation of its internal

management against a party that has acquired rights against ito Special act companies still have ultra vires issues (see Communities Economic Development

Fund v Canadian Pickles Corp)

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o Constructive notice doctrine is the old way of determining liability b/c no longer happens today - never deemed to be given constructive notice of company’s docs (See Re Jon Beauforte (London) Ltd)

o *Ultimately, we do not have an Ultra Vires doctrine or doctrine of constructive notice anymore in modern law (however, ultra vires doctrine does still come up with special act corporations)

Statutory Reform of Corporate Incapacityo Since 1970 rules restricting corporation’s capacity and powers have changed in most

Canadian jurisdictions How far do new rules go?

CBCA:o S.6(1): articles of incorporation set out any restrictions on

businesso S.15(1): corporation has capacity of natural persono S.16(2): corporation shall not carry on business if restricted by its

articleso S.17: if just filed, not deemed to have notice or knowledge of

contents The Canadian Constitution: Some Residual Problems

o A corporation might be deprived of contractual capacity by deficiency of legislative power in incorporating jurisdiction

o Some subject matters are beyond legislative capacity of provincial legislature - some are exclusive to Provinces and beyond legislative capacity of Federal parliament

o It would seem that if provincial legislature cannot pass a statute establishing an inter-provincial railway, it cannot create a corporation to do so by passing an act to incorporate the inter-provincial railway corporation

Communities Economic Development Fund v Canadian Pickles Corp

Factso P corp. set up by special act w/ object to encourage optimum economic development of

remote communities. Made loan of $150,000 to D and took guarantees from D’s majority shareholders (O’Donnell’s). D defaulted on loan and P sued on the loan and sued the guarantors (O’Donnell’s).

Ratioo Special act companies still have ultra vires issues

Re Jon Beauforte (London) Ltd

Factso Corp set up to manufacture women’s gowns and changed to making veneered panels which

was not w/in object clause though reflected in letterhead. Veneer Panel letterhead used for supply order of fuel. The corp went into liquidation and the liquidators refused to pay the fuel bill.

Ratioo Constructive notice/ultra vires doctrine is the old way of determining liability b/c no longer

happens today - never deemed to be given constructive notice of company’s docso In this case, company needed fuel for legitimate business and fuel merchants cannot be

prejudiced by misapplication

Contracting Through Corporate Agents Corporate Ks are almost always analyzed under the law of agency Under K law, however, we must look to whether the agent had the required authority

o Off the directing mind test and onto who has the appropriate authorityo At least 3 people involved:

1. The Corporation

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2. Its Agent3. Third Party with whom the agent has contracted

Object or goal of third party trying to enforce a K made with an agent will be to prove that the agent had the appropriate authority to negotiate and enter into a K with the corporation

If the third party cannot prove this authority -- then there is NO K between the 3rd party and the Corporation

If they can prove the agent had the authority, the Corporation will be bound by that K as if they were the person making that K

The courts have looked at two types of authority1. Actual Authority: can be express (written or oral) or implied (customary, usual, incidental,

course of dealing)2. Ostensible Authority

Corporations cannot enter into contracts like a natural person - need to enter into agency contracts with an agent (gives authority)

Agents can enter into contracts with third parties If agent has authority to do the act which causes tort, liable as principal If tort, depends on whether you were acting in scope of employment not whether within scope of

authority Contractual liability of corporations brought about through agents (breach of warranty of authority) Actual Authority at Common Law

o Real issue here is to what extent is a corporation permitted to prejudice outsiders by citing a failure to comply with internal corporate procedures?

Ostensible Authority at Common Law (see Schwartz v Maritime Life Assurance Co)o Representation by the principal that the agent has this authorityo Principal estopped from denying the agents authority, can then sue corpo Representation must be made by someone in the corp who actually has the authority to

make that rep to the agent or third party: look to see if there is resolution, articles or bylaws that give the person authority of the company to give the agent authority

o Freeman Lockyer v Buckhurt Park Properties Ltd 4 things to fulfill if contractor can enforce contract against principal entered by

agent who had no actual authority to: 1. A representation that the agent had authority to enter contract 2. The representation must be made by person who actually has the authority

to manage the business and contract 3. The contractor was induced by the representation to enter the K and relied

on it 4. Under memorandum or articles of assoc. the co was not deprived of

capacity to enter K of that kind or delegate authority to agent Statutory Reform

o Whether a corporate agent had actual authority will depend on facts in each caseo Whether an outsider can establish the prerequisites to ostensible authority and preclude

corporate principal from denying the truth of some representation, will also depend on factso Facts in any case has more to do with what evidence can be mustered and presented in court

than with what really happenedo Result - whether a corporate agent lacked authority in a particular case usually will end up

not being a disputed point if the outsider alleges actual authority and corporation presents no admissible evidence to disprove it and makes no statements that can be heard by court in denial of it, then case can only proceed to judgment on basis that outsider’s allegations were admitted to be true by corporate principal (reformed Canadian statutes)

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Schwartz v Maritime Life Assurance Co

Factso Appellant is a business man (Schwartz) and respondent is a life insurance company.

Appellant contends Rideout was agent of respondent for purpose of receiving monies, monies were misappropriated.

Ratioo Agency is a form of K, relationship may arise in normal way by entering into a consensual

agreement, or can be created by the conduct of the parties, w/out anything having been expressly agreed upon. Agency can also arise by operation of law w/out any K, express or implied, having been entered into.

PRE-INCORPORATION TRANSACTIONS

Corporation does not come into existence until the day of issue of certificate of incorporationo No corporation in existence prior to that time

Incorporators have made arrangements on behalf of corporation before incorporation Important to realize legal implication of pre-incorporation transactions arranged on behalf A contract is a legally binding agreement between 2 persons Whether a transaction, or an agreement which is concluded prior to the existence of a corporation

constitutes a contract is question of law There can be no agent without a principal already in existence

COMMON LAW POSITION Clear that before a corporation comes into existence it cannot be a party to a contract any more than

an individual can be a party to a contract before she is born A contract also requires agreement as to at least its fundamental terms The question of who are the parties to a contract is fundamental There must be a common intention that A (person purporting to act on behalf of a corporation) is to

be personally liable on the contract with O (outsider with whom A purports to contract) If no company when contract made, even if they say it is on behalf of the company, there is no

contract (see Kelner v Baxter) If it is later determined on intention of the parties, found in the execution of the contract, if executed

on behalf of company, then it is a valid contract If A says he is contracting as agent of company w/ B, no contract exists b/c no company - may be

breach of warranty of authority and if B knew there was no company, then agent not liable S.14 of the CBCA addresses this: personal liability

o (1)(a) a person who enters into, or purports to enter into a written K in the name or on behalf of co, before co comes into existence, (i) is personally bound and (ii) is entitled to the benefits of the K and (b) the K has effect as K entered into by person in clause (a) [doesn’t’ apply to oral K so common law would still apply to them]

o (2) Co may w/in reasonable time after existence adopt written K made before came into existence and (a) the corp is bound by it and entitled to the benefits under it and (b) person purported to act for the co except as provided in (3) ceases to be bound or get the benefits

o (3) Except as provided under (4) whether written K adopted or not party to K can apply to court for order fixing obligations under the K as joint or joint and several or apportioning liability

o (4) If provided in written K, person who purports to act in name of or on behalf of co before existed is not bound by K or entitled to benefits

Words “on behalf of” don’t imply agency, especially when it is known to the user of the words that there is no principal in existence (see Black v Smallwood)

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Kelner v Baxter Facts

o Kelner made written contract to sell wine to individual Ds “on behalf of the proposed Gravesend Royal Alexandra Hotel Company, Limited”. In addition to clear reference to the proposed company, the contract was signed by all Ds “on behalf of the Gravesend Royal Alexandra Hotel Company, Limited”. All parties knew the company was not yet in existence at time of contracting. Kelner performed his obligations by delivering the wine to the Ds, who consumed it. The company was subsequently incorporated, and quickly failed before paying. Kelner sued the individual Ds for breach.

Ratioo A company cannot ratify a contract, or purported contract, entered into on its behalf if the

company was not in existence at the time the contract was made.

Black v Smallwood Facts

o Ps contracted to sell land to Western Suburbs Holdings Pty Limited whose directors were supposedly Smallwood and Cooper. The company had not been incorporated at the time the K was executed, but everyone (Ps and Ds) believed that it had been. Ds didn’t close the sale and P sued Ds for specific performance, alleging that the Ds contracted as agents on behalf of a non-existent principal.

Ratioo In every case, the court must look at what the parties intended or had fairly understood to

have intended. If these intentions were in writing, the written intention must be considered by the court.

ATTEMPTS AT STATUTORY REFORM Statutory reforms in this area have attempted to make 2 changes

o Reformers tried to impose contractual liability on A in situations where there would be no contract at common law

o Reformers also tried to enable a corporation to “adopt” pre-incorporation transactions, making the corporation a party to the contract and excusing A

Attempted reforms are flawed by legislative misuse of term “contract” There can only be a “written contract” before incorporation only if there is a contract between O and

A In such a case, s.14 of the CBCA is not needed in order to make A personally liable, although it might

still serve its alternative function of allowing the corporation to adopt the contract On the other hand, if at common law there is no contract between O and A, s.14 does not seem to

create one S.14: statute does not apply if oral contract (use common law for oral contracts)

o Oral contracts does not have execution section - have to go with what you have to decide on approach in the cases

S.20 of the BCBCA governs pre-incorporation contractso Based on an implied warranty that:

The corporation will come into existence within a reasonable time The corporation will adopt the contract

o If that is breached, then remedies can be awarded against the corporationo Usually courts are quite strict about wanting written confirmation of warranty

Courts have been relatively keen on finding facilitators/promoters responsible Legislation is not normally broadly interpreted (they use the plain and literal meaning)

o In these cases, they interpreted and applied the language in a much broader wayo Not really looking at the words of the statute and more at the intention of the legislationo There are very convoluted attempts to interpret the word contract

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o In Szecket v Huang and 1398918 Ontario Ltd v 1310210 Ontario Inc, the words of the legislation don't actually allow the courts to do what they did – it is a form of judicial activism

Rationale for the BCBCA is that the corporation is never established, then you have a remedy (protects the third party), but it is very odd to think you can have a pre-incorporation transaction when there never is a corporation to begin with

Szecket v Huang Facts

o H on behalf of co to be formed made agreement w/ S to develop and market S’s technology in Taiwan. Transaction was never completed and proposed company was never formed. S sued for breach of K and H denied personal liability. TJ found was a K b/w S and H and held H personally liable.

Ratioo No need to first determine the parties’ intention to the pre-incorp K, that Mr. H incur

personal liability before determining the issue of liability under the statute. Here is straightforward case which clearly attracts the statutory section: entered kn on behalf of the proposed company and is liable.

1394918 Ontario Ltd v 1310210 Ontario Inc Facts

o D entered into an agreement to sell land to “Raymond Stern in trust for a company to be incorporated and not in his personal capacity”. In March 2000, Mr. Stern assigned his rights to the P, a company incorporated a week earlier. P alleges that the agreement has been repudiated and claims damages from D. D filed a motion on the grounds that P does not have capacity to commence or continue the action. There was a term in the agreement expressly stating that the party would not be personally liable as he was acting on behalf of a yet to be created corporation.

Ratioo S.21 of the OBCA replaced the common law regarding pre-incorporation contracts and

should be interpreted with respect of the purpose it was intended to fulfill. Under s.21(4), if a promoter enters into a contract on behalf of a corporation to be incorporated and the contract expressly provides that the promoter is not personally bound by the contract, then he is not entitled to the benefits or subject to the burdens of the contract. S.21(2) provides that, after incorporation and notice of intention to adopt, the corporation is bound and entitled to the benefits retroactively to the date the agreement was signed. The corporation has status to bring the action.

CORPORATE MANAGEMENT

MANAGEMENT’S ROLE: THEORY AND PRACTICE The Governing Principles

o Three functions performed by groups of individuals in any economic pursuit:1. Proprietary interests in the enterprise2. Power over the enterprise3. Acting with respect to the enterprise

o During 20th century, 1. and 2. became separated as S/H lost all practical power over large corporations and became passive investors

o Result was separation of power and propertyo Roles of managers and shareholders are quite different

Myth and Realityo Found that Boards of Directors of most large and medium-sized companies do not establish

objectives, strategies, and policies, however defined These roles are performed by company managements

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The typical outside director does not have time to make the kinds of studies needed to establish company objectives and strategies

At most he can approve positions taken by management, and the approval is based on scanty facts and not time-consuming analysis

o A second classical role ascribed to BOD is that of asking discerning questions (inside and outside board meetings)

Again, it was found that directors do not in fact do thiso A third classical role usually regarded as a responsibility of a BOD is selection of president

In most cases, the decision as to who should succeed the president is made by the president himself

BOD were found to serve in an advisory role in the selection of a new president Though rarely do they reject a candidate recommended by the president

Source of Management Powero Directors

Directors are responsible for the management of corporate affairs Variations on the theme depending on governing statute BOD does have a legal duty to, at least, establish, long range corporate objectives

and policies, to map out broad corporate strategies, and to provide competent managerial personnel to carry them out from day to day

Managerial decisions aren’t usually subject to S/Hs’ review S/Hs as a group have only those powers specifically given to them - all other

managerial matters fall to the jurisdiction of the BODo Officerso Officers acquire their managerial powers by delegation from directors

MANAGEMENT POSITIONS

Qualifications Minimum Standards

o Most Canadian corporate statutes enact minimal standards for corporate directorso Typical requirements: 18 years of age, not incapacitated, not a bankrupt, usually Canadian

residentso Generally no statutory minimum qualifications for corporate officers set out (although

s.122(1) of the CBCA requires that they be of full capacity)o S.141(3) of the BCBCA imposes the same qualification requirements on officers

Defectso Failing to meet the minimum qualifications does not always preclude one of being elected as

a directoro No actual appointment is not a “defect” which will be overlooked (see Morris v Kanssen)o Where there is no quorum for voting in new directors, old directors cease to be directors the

moment their resignations are tendered and they are no longer competent to vote on appointment of new directors (see Oliver v Elliot)

Morris v Kanssen

Factso C and K only 2 shareholders and directors of corp. C and S wanted K out and falsely said S

was appointed a director but meeting of appointment never occurred and shares purportedly issued to C and S. At shareholder meeting S’s appointment was affirmed. K wants this issue of shares of no effect and his appointment had no legal basis. S relies on section of defects (valid appointment anyway).

Ratioo No actual appointment is not a “defect” which will be overlooked

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Oliver v Elliott

Factso Meeting held to retire and replace 5 corp directors. All resigned together and their

replacements purported to take over. Later meeting Elliott and Johnston resigned and the remaining 3 directors filled vacancies w/ 2 further appointees.

Ratioo Where there is no quorum for voting in new directors, old directors cease to be directors the

moment their resignations are tendered and they are no longer competent to vote on appointment of new directors

Elections and Appointments Number of Positions

o Canadian statutes normally require only 1 director, leaving the corporate constitution to specify more or to set maximum and minimum numbers

o At least 3 directors are usually required for corporations “offering securities to the public” Procedure

o Most statutes require that “first directors” be named in the application for incorporation, although in a contractarian statute they may be the same people as the 1st S/H

o They hold office until the 1st S/H meetingo Election to staggered terms of office is the norm, the statute may limit the termo The corporate constitution may permit class directors or cumulative voting

Cumulative voting is another way of substituting proportional representation for strict majority rule

Cumulative voting allows each S/H to cumulate all the votes attached to his or her shares in a multi-director election and divide them as he or she sees fit among the candidates

o The appointment of officers is generally subject to much less regulation, since, in theory, they are merely senior employees

Casual Vacancieso A quorum of BODs is usually statutorily empowered to fill vacancies occurring on the board

through resignation, disqualification or deaths Removal

o Canadian statutes provide power for S/Hs to remove directors with some care taken to prevent this from being weakened by corporate constitution

o It is not uncommon to find attempts to draft corporate constitution which entrench directorso Bushell v Faith held that it was permissible for a contractarian corporation to have a

provision in its articles of association that on a resolution to remove a director from office, any shares held by that director carried 3 votes per share

o Officers usually have service contracts - if removed, may have action for wrongful dismissal

Money Salaries

o The corporate constitution will ordinarily prescribe how much directors are to be paido If it does not, the statute may permit the directors themselves to set the amount o Officers, on the other hand, are probably entitled to be paid on a restitutionary basis where

the BOD or a contract has not fixed a salaryo What is the reason for the distinction between directors and officers on this point?

Standard explanation is that the director, like a trustee, is not entitled to any remuneration except as expressly provided under the corporate constitution (or the trust deed) because of the fiduciary character of his or her position - therefore does not allow for profit

Now that officers are also recognized as owing fiduciary obligations, it may be harder to justify treating them differently

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Indemnification and Insuranceo Indemnification of corporate managers against expenses incurred in their managerial

activities is generally covered by statuteo The prevalent statutory technique is to specify those circumstances in which a corporation

must indemnify its managers and those in which indemnification is permissibleo In other circumstances, it may be inferred, indemnification is prohibitedo It is also common for corporations to buy insurance policies to protect managers from

liability risks - permitted by statute

MANAGERS’ LEGAL OBLIGATIONS Corporate directors and officers, who collectively make up corporate management, are constrained

by a number of statutorily imposed standards of behaviour Legal Duties - originally imposed by the common law courts Equitable Duties - derived from general principles of equity and were imposed by chancery judges From time to time, a third group has been statutorily created to deal with particular problems with

reformers concluded were not adequately covered by the legal and equitable rules Canadian statutes make virtually all the general rules regulating corporate management applicable to

both directors and officers

The Standard of Care, Diligence and Skill S.122(1)(b) of the CBCA: every director and officer of a corporation in exercising his powers and

discharging his duties shall exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances

“Duty of care” - imposes a legal obligation upon directors and officers to be diligent in supervising and managing the corporations’ affairs

o This provision requires more of directors and officers than the traditional common law duty of care

Directors must be “reasonably informed” Diligence standard - have to attend meetings if you can attend, must have good excuse for missing

meetings The standard of care is an objective, contextual standard

o Contextual - dependent on the type of company No breach of the duty of care if directors act prudently and on a reasonably informed basis

o The decisions they make must be reasonable business decisions in light of all the circumstances about which the directors or officers knew or ought to have known

o Perfection is not demanded Standard of care, diligence and skill is an objective-subjective test b/c “comparable position” (see

Soper v Canada) Canadian courts have developed a rule of deference to business decisions called the “business

judgment rule” (see Peoples Department Stores Inc (Trustee Of) v Wise)o The court looks to see that the directors made a reasonable decision, not a perfect decision -

provided the decision taken is within a range of reasonableness, the court ought not to substitute its opinion for that of the board even though subsequent events may have cast doubt on the board’s determination

o SCC in the Peoples case doesn't like subjective-objective categorization - instead call it the "objective, contextual standard"

Soper v Canada

Factso Corp has duty to withhold taxes and other source deductions and remit them to Receiver

General under Income Tax Act and corp liable for amount if don’t and imposes joint and several liability on its directors. But directors can escape liability if establish exercises care, diligence and skill. Here directors of co joined when he knew they were having financial

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trouble. Never did the board discuss their failure to make remittances and he never inquired about this. He was assessed for the unremitted employee holdings plus penalty and interest.

Ratioo Standard of care, diligence and skill is an objective-subjective test b/c “comparable position”o Positive duty to act arises where director obtains information, or becomes aware of facts,

which might lead one to conclude that there is, or could reasonably be, a potential problem with remittances

Peoples Department Stores Inc (Trustee Of) v Wise

Factso The Wise Stores Inc. was a retail store chain whose share were primarily held by the three

Wise brothers. In 1992 they acquired Peoples Department Store, a competitor. From 1994 their business interests went through a difficult time. To cut down on costs they developed a scheme where certain inventory would be purchased through Peoples and then given to Wise on credit. Soon, Wise owed more than 18 million dollars to Peoples. By 1995, both Wise and Peoples declared bankruptcy. The creditors for Peoples brought an action against the Wise brothers for breach of their fiduciary duties as directors under section 122(1) of the CBCA by implementing the credit scheme. The Trustees argued that the Wise brothers favoured the interests of Wise Stores over that of Peoples.

Ratioo Unless the plaintiff can point to director's negligence as the sole cause of the loss, it will be

very difficult to sue directors when things fall apart due to bad business decisions

Insider Trading Rules Trades made by a person, where that person has inside information or access to information that is

not known to the general public It is not improper for an insider to buy or sell securities in his own company but it is improper for an

insider to use confidential information acquired by him by virtue of his position as an insider to make profits by trading securities of his company

Mere transfer of non-public information ("tipping") is also prohibited The securities regulations makes it necessary for insiders to report all their trades Full disclosure is intended to address the problem of insider trading Regulation found in the provincial Securities Acts and there are some provisions in Part XI of the

CBCA at the federal level, however many of the provisions were repealed in 2001 in favour of the provincial legislation

There are also some provisions in the Criminal Code as of 2004o Ss.382.1 and 425.1 (the "whistle-blower protection")

Miscellaneous Statutory Duties In some circumstances, if a director votes for or consents to a resolution contrary to certain sections

in the statute, he will be personally liable to the corporation Some of these sections prevent a corporation from purchasing or redeeming its own securities,

paying out dividends or making certain kinds of loans or guarantees if there are reasonable grounds for believing that the requirements of various financial tests will not be satisfied

Directors may also be liable where insufficient property is given as consideration for shares, unreasonable commissions are paid for sale of share, or other corporate managers are improperly indemnified for legal costs, charges or expenses

Directors may become liable in some jurisdictions, regardless of their consent or voting records, for the wages of employees of the corporation

Individual directors and officers have duties to furnish information to an auditor of the corporation and to notify the auditor of the errors they know of in a financial statement

There are duties imposed on directors collectively rather than individually: call a special meeting of S/H if there is no quorum of directors and to correct errors in and approve financial statements, send out directors’ circular to specified parties if subject of takeover bid

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MANAGERS’ FIDUCIARY OBLIGATIONS

The Nature and Source of the Obligation Directors have long been held to fiduciary obligations to their corporations Fiduciary duty evolved as result of power and influence which directors held over corporate entity Has been recognized that corporate officers owe the same fiduciary duties The term “fiduciary” has often been confused with the concept of a trustee, a fundamental error that

causes a great deal of judicial misinterpretation Universal Rule - no one that has fiduciary duties shall be allowed to enter into arrangements in which

he has or can have a personal interest conflicting with the interests of those of whom he is bound to protect

There is an obligation of loyalty and selflessness “Fiduciary” - reference to those situations which are in some respects trust-like but are not, strictly

speaking, trusts What is a fiduciary relationship?

o It is one in respect of which if a wrong arises, the same remedy exists against the wrongdoer on behalf the principal as would exist against a trustee on behalf of the cestui que trust

o Emphasizes essential quality of fiduciary relationships - every remedy which can be sought against a fiduciary is one which might be sought against a trustee on the same grounds

The word “fiduciary” is not definitive of a single class of relationships to which a fixed set of rules and principles apply

We must define them class by class and find out the rule or rules which govern each class In order to know whether a particular rule of equity is applicable we must know whether the

situation is fiduciary in the appropriate special sense

Peoples Departments Stores Inc (Trustee Of) v Wise

Factso The Wise Stores Inc. was a retail store chain whose share were primarily held by the three

Wise brothers. In 1992 they acquired Peoples Department Store, a competitor. From 1994 their business interests went through a difficult time. To cut down on costs they developed a scheme where certain inventory would be purchased through Peoples and then given to Wise on credit. Soon, Wise owed more than 18 million dollars to Peoples. By 1995, both Wise and Peoples declared bankruptcy. The creditors for Peoples brought an action against the Wise brothers for breach of their fiduciary duties as directors under section 122(1) of the CBCA by implementing the credit scheme. The Trustees argued that the Wise brothers favoured the interests of Wise Stores over that of Peoples.

Ratioo There are 2 central duties of directors, and they are owed not to any one group of

stakeholders but to the corporation itself

Judicial Review of the Exercise of Managerial Power There are two ways to understand this effect:

o Finds limitation within the power as a matter of construction: if a power was given for a particular purpose, it cannot be exercised for some other purpose and any attempt to do so will be legally ineffective

o Finds limitation in the fiduciary obligation owed by corporate managers: whether or not the power has been effectively exercised requires an examination of the motives for which it was used

Explored in the following cases: whether directors may issue shares in order to thwart a take-over bid by diluting the voting power of existing S/H

o Must see if they’ve properly exercised their power must be for the Corps interest, not their own

o Must examine motive

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It is an improper motive for directors to do something that is repressive to the minority or tampers with control of the majority (see Hogg v Cramphorn Ltd)

Test (see Teck Corp v Millar):o Directors must act in good faith - if they believe there will be substantial damage to the co’s

interest there must be reasonable grounds for this belief, if there are not that will justify finding of an improper purpose

Hogg v Cramphorn Ltd

Factso Cramphorn chairman and managing director thought takeover was disadvantageous so set

up an employee trust and proposed to issue shares to the trustee to maintain corporate control. Minority shareholders wanted this set aside.

Ratioo Power to issue shares was a fiduciary power and it was exercised for an improper motive so

the issue can be set aside

Teck Corp v Millar

Factso Afton was junior mining corp w/ ppty ready and Teck and Canex were interested. Millar

(director of Afton) and other directors thought it was in best interests of Afton by entering K w/ Canex. Teck had been buying shares and attained a majority so Millar purported to contract w/ Canex for development of ppty and issue Canex sufficient number of Afton shares to frustrate the Teck takeover. Teck wanted this issue of shares set aside.

Ratioo Directors must act in good faith - if they believe there will be substantial damage to the co’s

interest there must be reasonable grounds for this belief, if there are not that will justify finding of an improper purpose

Conflict of Interest and Duty: Interests in Corporate Contracts A corporate body can only act by agents, and it is of course the duty of those agents so to act as best

to promote the interests of the corporation whose affairs they are conducting Such an agent has duties to discharge of a fiduciary character towards his principal This broad statement of the scope of the fiduciary obligations of management has clear implications

for the situation where a corporation’s manager is somehow involved on the other side of a contract which the corporation has made

In such a case, there must always be a question whether the manager will bargain to the full extent of his abilities on the corporation’s behalf

The solution is simple: such contracts are voidable by the corporation, absent corporate authorization to deal notwithstanding the conflict, given with full and frank disclosure by the fiduciary

Most common example is when director enters into contract with a personal interesto Will tend the favor the company with the personal interesto Duty to corporation vs. economic interest so obvious conflict of interest

Traditional common law rule: if interest conflicts with duty and make a profit, there is no inquiry into it, you must give up the money

If appearance of conflict of interest between directors interests and corp's interests actions of the director are voidable (i.e., if the director hasn’t made full disclosure)

As long as you have consent (either before or after the transaction) it could cleanse the fiduciary breach (see North-West Transportation Co v Beatty)

North-West Transportation Co v Beatty

Factso P, Henry Beatty, is shareholder of NW Trans and sues for himself and other S/Hs. D is co and

rest of S/Hs at time of action were directors. Claim to set aside a sale made by Beatty to the

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company of a steam ship. General rule : every S/H has a right to vote even if has personal interest but directors cannot. Directors resolved that bylaw to purchase ship should pass and later S/H approved it. But majority of votes in favor was due to D J Beatty who had voting power to enable him to adopt the bylaw and ratify or make it voidable. J Beatty had 1/3 of shares.

Ratioo As long as you have consent (either before or after the transaction) it could cleanse the

fiduciary breach

Corporate Opportunities Question that arises is whether breach in taking an opportunity that the corporation believes was

properly for their benefit A director or officer who breaches his or her fiduciary duty to corporation is liable to give up any

profits he or she gains as a result of the breach When is there a breach?

o Aberdeen Railway Co v Blaikie Brothers: wide statement of fiduciary’s obligation Human nature being what it is, there is danger, in such circumstances, of the person

holding a fiduciary position being swayed by interest rather than by duty, and prejudicing those whom he was bound to protect

Statement above cannot be taken literally as reflecting corporate lawo Because it seems clear that modern judges seem inclined to circumvent the rule, often by

resorting to somewhat incredible factual determinations If the only reason you benefit is by reason of being director, you must disgorge (see Regal (Hastings)

Ltd v Gulliver) May be possible to argue that if the corp rejects an opportunity it may be possible for directors to

take it (see Peso Silver Mines Ltd v Cropper)o Although courts seem to be straying from this rule in more current cases

Regal (Hastings) Ltd v Gulliver

Factso Regal formed subsidiary to get theater leases. Needed $3,000 more in investments so had 4

directors take 500 shares each as did Garton, their solicitor. Gulliver, the chairman, took no shares personally but he persuaded two companies and one individual to take the remaining 500 shares. Decided rather than the subsidiary dispose the ppty, the shares of both the corp and the subsidiary would be sold to common purchasers. New shareholders subsequently elected a new board and the new directors brought action for breach of fiduciary duty against former directors and Garton.

Ratioo If the only reason you benefit is by reason of being director, you must disgorge.

Peso Silver Mines Ltd v Cropper

Factso Cropper was a director of Peso. A prospector offered a large block of speculative mining

claims to Peso, but the board rejected the offer because (a) it didn’t have the cash; and (b) it got 2–3 such offers per week. The trial judge found as a fact that the rejection was an “honest and considered decision” of the whole board done solely in the interests of Peso. The prospector then offered the claims to Cropper, who bought a share in them personally.

Ratioo If the board of directors bona fide rejects a corporate opportunity, then it no longer belongs

to the corporation and a director may pursue it without breaching his fiduciary duty.

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Industrial Development Consultants Ltd v Cooley

Factso Cooley, an architect, is managing director of P corp and attempted to negotiate K for the co

w/ Eastern Gas board but failed b/c board didn’t like the co’s corporate set up. New gas board chairman approached C and made it clear that they wanted to K w/ him personally so he resigned claiming ill-health and made the K.

Ratioo Fiduciary duties continue for some time after resignation (how long depends on the facts of

the case)o The opportunity doesn't actually have to be available to the corporation to be held liable for

breach of fiduciary duty Just have to get the opportunity as a director/officer of the corporation Doesn't have to be property of, or belong to, the corporation

Gravino v Enerchem Transport Inc.

Factso Gravino and Carson were directors, officers and substantial shareholders of Enerchem

Transport Inc from 1990-1996. Zaremba was a senior employee of Enerchem. Enerchem transported maritime petrochemicals in Quebec, which was a small market (fewer than a dozen vessels involved). Ultramar was a company that leased three oil tankers from Rigel. In 1994-1996, Gravino and Carson negotiated on behalf of Enerchem to sub-lease the Rigel oil tankers but Ultramar would not do so unless Enerchem had a transportation contract with another petrochemical company to ensure there would be enough work. Shell was looking for a transportation contract at the time. In 1996, Gravino and Carson exercised a "put/call" option as per an agreement with the shareholders of Enerchem and their shares were purchased by the majority shareholder of Enerchem as a result - this meant that the non-competition clause of the agreement no longer applied to Gravino and Carson. Gravino and Carson then resigned and set up Petro-Nav, another petrochemical transport corporation that was in conjunction with another company that was established in the market. Gravino and Carson convinced Zaremba to leave Enerchem and join them at Petro-Nav. While Enerchem and Ultramar tried to obtain a contract with Shell, Shell ended up contracting with Petro-Nav. As a result, Ultramar sub-leased the Rigel vessels to Petro-Nav. Enerchem sued Gravino, Carson, Zaremba and Petro-Nav for an accounting of profits. Trial judge held that the defendants were "solidarily" liable (equivalent of joint and several liability in common law) in the amount of $3,185,148.

Ratioo The Court was of the view that the appellants’ actions following their departure from ETI did

not constitute an illicit conflict of interest or a breach of their duty of loyaltyo The more the opportunity develops, the more impact the opportunity will have on a

fiduciary obligationo Depends on the opinion of the courts as to whether the fiduciary duty is owed

Conflict of Duty and Duty Fiduciary duty can be conflicted because financial interest is in duty to the corporation or to another

corporation If the company is in competing business, similar transactions at the same time, and have to make

decision for both organizations when your duty to both is in conflicto Can be director or employee of another corporation or are an agent of a principal (who is

entering into contract with your corporation of which you are a director)o And make a profit, you will be liable

This is not another example of fiduciary obligation (i.e., insider trading, improper purposes), it is a sidebar duty vs. duty and conflict of duty

What is the difference of duty vs. duty and duty vs. interest?

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o Duty vs. duty: one is a legal obligationo Duty vs. interest: personal interest

Ownership, Obligation and Opportunity Difference between property and obligation, between owning and owing, is fundamental The distinction between ownership and obligation features in various ways in the cases on fiduciary

obligationo North-West Transportation: “ratification” by S/H was not permissible in a case in which the

breach of fiduciary obligation involved the taking of corporate property The question of whether or not something is property has arisen in another context Some cases and articles in corporate law show a parallel urge to characterize what was taken as

property when they say that a director has misappropriated an opportunity which belonged to the corporation

One of the least meritorious attempts to use the appropriation of corporate assets approach involves the notion that a controlling S/H who receives a premium for the sale of his or her shares must share the premium with the minority

“Ratification”: Red Tape or Red Herring Long corporate tradition for the annual general meeting of S/H to approve a formalistic motion to

forgive (“ratify”) any breaches of duty the corporate arrangement may have accidentally committed in the past years

o Ratification in this sense vs. common law of agency (ratification means a principal’s decision to authorize an act which was done by his agent, on the principal’s behalf, but without authority)

The sense of ratification which is relevant in the context of a breach of fiduciary duty is one which comes from equity, it effectively means “forgiveness”

Unlike common law of agency, even advance approval is sometimes called ratification In either case, ratification is only valid if done with full information This concept can apply whether or not the fiduciary purported to act on behalf of other beneficiary If a D has committed a common law wrong, and the victim with full information, forgives the D, it is

not clear that there is any effect on the P’s legal rights What is the effect of the passage of such a motion?

o Many older cases assume that such a motion is effective Explicit ratification: when have full information In Canada, for the most part, the common law is overridden by statutory provisions to say that an

individual shareholder has no right to bring an action to have the corporate constitution enforced, however they may apply for specific judicial permission to bring a statutory representative action

Ss.239 and 242 of the CBCA S.232 of the BCBCA

Change or Control Transactions and Directors’ Fiduciary Obligations A take-over bid is an offer to purchase or otherwise acquire sufficient shares of the target

corporation so as to gain control of it Generally, this is done with the belief that the corporation is not being well-managed If the basis of a take-over bid is typically an understanding that the management is performing sub-

optimally, it is easy to understand why managers are often hostile to such bids If, however, the bidder is offering a price above recent market valuations, management may feel the

need to present some alternative to S/H, other than an assurance that the board is doing its best, to induce S/H to resist the offer

Take-over bids are heavily regulated, both by Provincial securities law and within the CBCA The board of the target corporation needs information in order to assess the bid and time to decide

whether or not to recommend it to S/H The S/H also needs information so they can make a fully informed decision There is also a sense that all of the S/H need to be treated equally

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The CBCA defines a take-over bid as an offer to acquire sufficient shares that would, if accepted, result in the offeror holding more than 10% of any class of issued shares

o Closely held corporations are exempto The bid is sent in a prescribed form to S/H and directors of the target corporation and to the

Directoro The board of the target then sends its own “circular” o S/Hs who wish to accept the offer tender their shares to the offeror

The CBCA also has provisions for going private: if an offeror succeeds in getting 90% of the shares in a class, it can force the remainder to sell at an agreed or assessed value

o Squeeze out provision - the court will enforce this Management is commonly hostile to a takeover and they may adopt some measures to foil and bid It does not matter that when the directors act in the best interests of the company and in good faith

that they also benefit (see Olympia & York Enterprises Ltd v Hiram Walker Resources Ltd) Rule from 347883 Alberta Ltd v Producers Pipelines Inc:

o When a corporation is faced with susceptibility to takeover bid or an actual takeover bid, the directors must exercise their powers in accordance with their overriding duty to act bona fide and in the best interests of the corporation even though they may find themselves, through no fault of their own, in a conflict of interest situation

o If, after investigation, they determine that action is necessary to advance the best interests of the company, they may act, but the onus will be on them to show that their acts were reasonable in relation to the threat posed an were directed to the benefit of the corporation and its S/H as a whole, and not for an improper purpose such as entrenchment of the directors

o Since S/H have the right to decide to whom and at what price they will sell their shares, defensive action must interfere as little as possible with that right

Directors and majority shareholders do not owe minority directors a fiduciary duty (see Brant Investments Ltd v Keeprite Inc)

Olympia & York Enterprises Ltd v Hiram Walker Resources Ltd

Factso Gulf tries to get majority of shares from Hiram offering $32 for 39% of shares. Hiram

arranged w/ Allied to sell their liquor division which was 40% of Hiram’s assets. Directors of Allied then created Fingas Co which issued voting shares of 49% to Hiram. Hiram paid for these w/ proceeds of liquor division sale. Fingas used the money to acquire 48% of Hiram shares at $40/share. Olympia (Parent of Gulf) tried to stop sale of liquor div. to Allied saying directors of Hiram were breaching fiduciary obligation by using assets of Hiram to entrench themselves in management.

Ratioo It does not matter that when the directors act in the best interests of the company and in

good faith that they also benefito It is the directors’ duty to take all reasonable steps to maximize value for all S/H and court

satisfied that they have done that

347883 Alberta Ltd v Producers Pipelines Inc

Factso PPI public co and another co wanted to acquire all outstanding PPI shares. Directors of PPI

implemented Shareholder’s Rights Agreement (poison pill) where each S/Hwould receive 10 shares for $75 if any person acquired more than 10% of PPI so it would dilute these shares. Agreement to expire on December 27 if S/H didn’t ratify it, directors amended the rights to extend expiry date and require unanimous director approval of the terms of any take-over bid. Called S/H meeting and they didn’t submit the agreement for approval. March appellant (a sub of PPI) applied to have agreement set aside under oppression remedy s.234.

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Ratioo When a corporation is faced with susceptibility to takeover bid or an actual takeover bid, the

directors must exercise their powers in accordance with their overriding duty to act bona fide and in the best interests of the corporation even though they may find themselves, through no fault of their own, in a conflict of interest situation

o If, after investigation, they determine that action is necessary to advance the best interests of the company, they may act, but the onus will be on them to show that their acts were reasonable in relation to the threat posed an were directed to the benefit of the corporation and its S/H as a whole, and not for an improper purpose such as entrenchment of the directors

o Since S/H have the right to decide to whom and at what price they will sell their shares, defensive action must interfere as little as possible with that right

Brant Investments Ltd v Keeprite Inc

Factso KeepRite made air conditioning equipment. ICG had sub ICM which made heating

equipment. ICG acquired 64% of KeepRite shares and transferred them to ICM. KeepRite purchased 20 million of assets from 2 subs of ICM pursuant to recommendation by independent committee of the board of KeepRite, financed by rights to buy more shares issued to S/H. Minority S/H of KeepRite brought oppression action and argued directors owed fiduciary duty to them.

Ratioo Directors and majority shareholders do not owe minority directors a fiduciary duty

MAJORITY RULE

Like our society, corporations are run on majority rule (one share, one vote) There has to be one class of shares to which votes are attached, but some people will receive

debentures, or non-voting shares The structure of corporations whether in BC or Canada, the constitutions are flexible to address all

these types of investment vehicles For example, in a small corporation it may be decided that mom and dad want to keep control of the

corporation but don't want to run it anymore - sometimes they will just hold on to voting control without having to deal with dividends, etc.

At the end of the day, whatever votes are attached, those shareholders will hold the deciding factor Shareholders have rights to elect boards of directors, elect auditors, approve bylaws, and to make

suggestions, etc. but not much more than that There are occasionally disputes about who has the right to vote, etc. There are also disputes with respect to using a proxy

o If travel is required, pursuant to legislation (ss.147-154 of the CBCA), shareholders can give directors of corporations the ability to vote for them as their proxy

Very strict legislative rules Shareholders have the right to put forth shareholder proposals or initiatives at AGMs Majority can essentially do whatever it wants in terms of pursuing shareholder interests as long as it

does not in some way oppress or abuse the minorityo Doesn't really fit well with Solomon v Solomono Doesn't really fit well with the remedies available through statutory legislation

Provides shareholders with the opportunity to keep the corporation on the straight and narrow

MINORITY PROTECTION

THE REFORMED STATUTE RESPONSE What amounts to a bill of rights/remedies to minority shareholders

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These rights are causing Canadian corporate law to diverge from the paths laid down by English and American judges

Legislative reform began in 1970 and most have been directed toward codifying the statutes "procedural remedies", designed to protect the individual shareholder from managerial power and majority rule

Legislation promotes remedies, not rights

Standing One person cannot sue on the basis of an injury suffered by someone else - only the injured party has

standing to complain, absent statutory authority S.238 of the CBCA gives the definition of "action" and "complainant":

o "action" means an action under this Acto “complainant” means

(a) a registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates,

(b) a director or an officer or a former director or officer of a corporation or any of its affiliates,

(c) the Director, or (d) any other person who, in the discretion of a court, is a proper person to make an

application under this Part

First Edmonton Place Ltd v 315888 Alberta Ltd

Factso A numbered company controlled by three lawyers signed a 10-year lease with FEP, a

landlord. As inducements to sign the lease, the landlord paid the numbered company $140K in cash and gave it an 18-month rent-free period. The lawyers immediately caused the corporation distribute the cash to them. They occupied the premises during the rent-free period plus 3 more months during which the numbered company paid its rent. They then vacated the premises and their numbered company, out of which they had transferred all the assets, stopped paying the rent. In this case, First Edmonton Place was not a shareholder. It was trying to get the corporation to pursue an action against the directors but they wouldn't because it would require the directors to bring an action against themselves. Here, the person wanting to bring the action is not a minority shareholder, it is a creditor.

Ratioo In order to have a protected interest under the Oppression Remedy, a creditor must have

been a creditor at the time of the conduct complained of. A lessor in respect of rent yet not owing is not such a creditor.

STATUTORY REPRESENTATIVE ACTIONS (DERIVATIVE ACTIONS (SORT OF…)) Derivative Action (of some sort)

o Properly actions belonging to the corporation Tend not to be pursued in court because the directors would have to decide as the

decision-making body of the corporation to bring an action against themselves, which they tend not to do

This is an action owed not to the shareholders but to the corporationo If the corporation does not sue, then shareholders can seek leave from the court to bring an

action in the name of and on behalf of the corporationo In the end, the corporation would be entitled to the damages or remedyo When leave is sought for a derivative action, you are not actually getting the remedy, it is just

granting you leave to bring the action - all the judge has to know is that it is on balance and there is an argument there

o The disputes we see are usually whether or not leave will be granted

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o Earlier cases try to differentiate between these actions for leave for shareholders to bring an action on behalf and those remedies that are being sought by shareholders in their own name

Prerequisite Stepso The derivative action requires leave from a court before a complainant can actually pursue a

suit. S.239(2) sets out a test with three requirements that were interpreted in the Primex case:

(a) the complainant must give at least 14 days’ notice to the directors that he plans to bring an application for leave;

(b) the complainant must be acting in good faith; and (c) the action must appear to be in the best interests of the corporation.

Farnham v Finigold Facts

o Appeal from dismissal of motion to strike the plaintiff's statement of claim b/c no reasonable cause of action and plaintiff has no status to maintain claim as class action. Plaintiff claims millions for damages for: conspiracy to injure the plaintiff and other S/Hs, breach fiduciary duty , damages from sale of shares, breach statute, etc.

Ratioo Miss-classified personal claims which were derivative and need court approval o You need to separate out the derivative claims from the personal claims and you need to

seek leave for derivative claims before they can be heard

Bellman v Western Approaches Ltd Facts

o Minority S/H sent letters to CBCA corp, alleging the directors breached fiduciary duties and asked corp to sue directors. Board asked law firm and acct firm to investigate allegations and found no evidence of this. Minority S/H sought leave to bring representative action.

Ratioo It is sufficient that it appears to be in the interest of the company that the derivative action

be brought - note that it doesn’t need to be in the best interests of the corp, just in the interest of the Corp

COMPLIANCE AND RESTRAINING ORDERS S.247 of the CBCA

o In the nature of an injunction or an order requiring the offending person to do a particular thing or act in a particular way

o If a corporation or any director, officer, employee, agent, auditor, trustee, receiver, receiver-manager or liquidator of a corporation does not comply with the Act, or any of the above mentioned rules of the corporation, a complainant or creditor of the corporation may, in addition to any other right they have, apply to a court for an order directing any such person to comply with, or restraining any such person from acting in breach of, any provisions thereof, and upon such application the court may so order and make any further order it thinks fit

o The trend became quite narrowly cast for minor details - was not seen by the courts as available to a shareholder to pursue a director for breach of fiduciary duty

This is likely because the fiduciary duty is not owed to the shareholdero However, now it is open to the breach of fiduciary duty

Caleron Properties Ltd v 510207 Alberta Ltd Facts

o Corp was incorporated under the laws of Alberta. The two original shareholders were Namo, controlled by Ed Oman, and Caleron, controlled by Ron Slater. Initially, Namo held 51,000 Class “A” shares and Caleron held 51,000 Class “B” shares. Caleron eventually

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became the sole Class”B” shareholder. Amendments were made to the the corp’s bylaws and two directors’ meetings took place that did not follow the bylaws.

Ratioo The bylaws were ruled to be in force and effect and the court directed all directors of the

corp to comply with them

THE OPPRESSION REMEDY Equitable remedy invoked in a wide variety of circumstances (judges are statutorily empowered to

do whatever they want in each case) Remedy invoked most often when the complainant has all of the equities and few if any legalities on

his side When considering the oppression remedy, you must ask the following questions:

o Does the applicant have standing to bring an oppression application?o Did the alleged oppression affect one of the interests protected by CBCA s.240(2)?o Does the application pass the BCE test for oppression?

Was a reasonable expectation of the plaintiff’s breached? Was this breach oppressive, unfairly prejudicial, or unfairly disregarding of a

protected interest? In addition, to the above, the following issues are raised:

o What if the directors have fulfilled their fiduciary duty to the corporation?o How does The Business Judgment Rule fit into applications regarding oppression?

Defining the Standard Standing and interests protected are very similar, but aren’t exactly the same thing. Standing refers

to who is permitted to bring an application which, in the case of oppression, is any complainant, as defined in s.238.

When standing becomes an issue, it is always over whether a person qualifies under the discretionary class of proper persons defined in paragraph (d) of the complainant definition in s.238

Even if a person has standing, his oppression application will fail unless it is found the oppression affected a protected interest enumerated in s.241(2). These interests are those of:

o A security holder;o A creditor; oro A director or officer.

Creditors are an odd class under the oppression remedy because some creditors have explicit standing as Complainants—any holder of a debt security such as a bond or debenture is a “security holder”—while others do not and have to sneak in under the proper persons clause. However, the interest of a creditor is a protected interest under s.241(2)

The courts are sensitive to the fact that some classes of creditors are able to protect themselves. For example, creditors have a contract law remedy against the debtor corporation to sue for repayment of the debt. In addition, voluntary creditors are frequently sophisticated businessmen who are capable of knowing standard commercial practices and negotiating for standard protections. Additionally, since voluntary creditors have chosen to contract with a corporation, they are supposed to accept the burdens of dealing with that legal form. Recognizing oppression against voluntary creditors requires a high bar since in some sense it is tantamount to veil-piercing. On the other hand, the courts are sensitive to the fact that involuntary creditors often had very little or no ability to negotiate protections as the harms they suffer are generally not reasonably foreseeable.

Not all conduct which violates reasonable expectations will be unfair. Conduct that qualifies may be “harsh and abusive”, as connoted by the word “oppressive”, or it may be something less, as suggested by “unfair prejudice” and the even less stringent term “unfair disregard”.

Although it likely wouldn’t be dispositive in cases where the result alleged is really oppressive, where directors have made a considered business judgment in good faith, the courts may be deferential to it. After all, The Business Judgment Rule exists because the courts aren’t well-equipped to make business decisions. However, they are well-equipped to determine if interests have been unfairly

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prejudiced or unfairly disregarded and will look for signs of good process before they defer. Factors they will consider:

o Were there any conflicts of interest, or did an independent body make the decision?o Did the directors actually deliberate?o Did the directors inform themselves?o Was relevant information considered?o Was there sufficient consideration of the protected interest?

Westfair Foods Ltd v Watt

Factso Westfair has 2 classes of shares, class A shares don’t get to vote, but do get regular dividend

and can share in assets if corporation wound up. Common shares get to vote. Change in corporate policy occurs, lots of money paid out to single holder of common shares (the $ that would have been paid in dividends). Rights conferred upon S/Hs are that they, at any time and in any way during their relationship w/ the company, are to be insulated from anything oppressive, unfairly prejudicial or that unfairly disregards their interests

Ratioo We regulate voluntary relationships by regard to the expectations raised in the mind of a

party by the words or deeds of the other, and which the first party ordinarily would realize it was encouraging by its words and deeds. This is called reasonable expectations, or expectations deserving of protection.

Deluce Holdings Inc v Air Canada

Factso D & P each held shares in Air Ontario; D 75%, P 25%. Relationship governed by USA.

Provision of USA gives AC option to acquire the Deluceco interest upon termination of employment of last of Stanley Deluce (father) & William Deluce by AO or holding company. Other calls for arbitration in event of a dispute over share value. Its triggering of this latter provision which is subject matter of the OR action that has been commenced on behalf of Deluceco. Deluceco says AC wrongly exercised its majority control of BODs of holding company to terminate Deluce’s employment at AO and it did so for sole purpose of buying out Deluceco minority interest in holding company and transfer in AO. Says conduct is oppressive & arbitration clause is of no force & effect.

Ratioo By enacting s.241, parliament intended attention should be paid to interests of all S/Hs, not

just legal rights. Even though actions made sense & were in good faith, still oppressive.

BCE Inc v 1976 Debentureholders

Factso BCE Inc. was the subject of multiple offers involving a leveraged buyout, for which an auction

process was held and offers were submitted by three groups. All three offers contemplated the addition of a substantial amount of new debt for which Bell Canada, a wholly owned subsidiary of BCE, would be liable. One of the offers, which involved a consortium of three investors, was determined by BCE's directors to be in the best interests of BCE and BCE’s shareholders. This was to be implemented by a plan of arrangement under s.192 of the CBCA, which was approved by 97.93% of BCE’s shareholders, but was opposed by a group of financial and other institutions that held debentures issued by Bell Canada. These debentureholders sought relief under the oppression remedy under s241 of the CBCA. They also alleged that the arrangement was not “fair and reasonable” and opposed s.192 approval by the court. Their main complaint was that, upon the completion of the arrangement, the short-term trading value of the debentures would decline by an average of 20 percent and could lose investment grade status.

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Ratioo S.241 oppression action focuses on harm to legal & equitable interests of stakeholders

affected by oppressive acts of corporation or its directors. Remedy available to a wide range of stakeholders.

o TEST: 1) first look to principles underlying the OR, in particular the concept of reasonable expectations. If a breach of a reasonable expectation is established, 2) go on to consider whether the conduct complained of amounts to “oppression”, “unfair prejudice” or “unfair disregard” as set out in s.241(2) of CBCA.

Oppression vs. Statutory Representative (Derivative) Action Oppression is a personal remedy. A derivative action is, at least nominally, undertaken by the

corporation to redress an injury done to the corporation. In terms of available remedies, there is considerable overlap between the oppression action and the

derivative action. However, for policy reasons, a derivative action may be preferable where the injury is done to the corporation itself and only indirectly harms individual persons through the price of their securities. This is the grounding for the rule in Pasnak v Chura, which is the law in British Columbia. The rule is that a shareholder can bring a claim in respect of the same breach for which a company could also claim provided that the complaining shareholder has been affected by the breach in a manner different from or in addition to the indirect effect on the value of all shareholders’ shares generally.

The oppression action has some advantages over the derivative action. Here are two of the biggest ones:

o The court has no statutory authority to control an oppression action like it does a derivative action under s.240(a–b); and

o There is no leave requirement for an application regarding oppression. However, recall that in both cases, settlement or staying the action is not permitted without court

approval!

First Edmonton Place Ltd v 315888 Alberta Ltd

Factso A numbered company controlled by three lawyers signed a 10-year lease with FEP, a

landlord. As inducements to sign the lease, the landlord paid the numbered company $140K in cash and gave it an 18-month rent-free period. The lawyers immediately caused the corporation distribute the cash to them. They occupied the premises during the rent-free period plus 3 more months during which the numbered company paid its rent. They then vacated the premises and their numbered company, out of which they had transferred all the assets, stopped paying the rent. In this case, First Edmonton Place was not a shareholder. It was trying to get the corporation to pursue an action against the directors but they wouldn't because it would require the directors to bring an action against themselves. Here, the person wanting to bring the action is not a minority shareholder, it is a creditor.

Ratioo In order to have a protected interest under the Oppression Remedy, a creditor must have

been a creditor at the time of the conduct complained of. A lessor in respect of rent yet not owing is not such a creditor.

Hercules Managements Ltd v Ernst & Young

Factso Ernst & Young was hired to provide audit services for the plaintiff firms and their

shareholders. Eventually, shareholders and investors of the firms brought an action against Ernst & Young for losses allegedly suffered as a result of audit reports filed in three specific years.

Ratioo To support a personal cause of action, such as OR, S/Hs must demonstrate a direct & indiv

harm suffered. If S/Hs act in respect of a corps interests, like Hercules, where they

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collectively oversaw activities of dirs & officers, they may not also be seen to be acting in their personal capacities as S/Hs and won’t be entitled to personal remedy.

Remedies Court has the primary power to rectify the effects of the unacceptable behaviour S.241(3) of CBCA says that court may make an order to rectify the matters complained of S.227 of the BCBCA - first says just shareholders, but then goes on to say whatever the court finds is

an "appropriate" person Refers to behaviour that is oppressive to one or more shareholders including the applicant

o Can't just be someone who is enforcing the legislation and constitution of the corporation, you have to show that the action has been oppressive to one or more shareholders including you

Actions available under the CBCA include actions that are unfairly prejudicial to security-holders, creditors, directors or officers (doesn't have to be you)

The BCBCA does not include the words "that unfairly disregards the interest of any security holder, creditor, director or officer" whereas the CBCA does

Naneff v Con-Crete Holdings Ltd

Factso A & B equal S/Hs of all common shares of one corp, N retained complete control. A removed

as officer & excluded him from participating in and mgmt of the business. Conduct by N & B to A found be oppressive.

Ratioo Discretionary powers must be exercised w/ two important limitations

They must only rectify oppressive conduct They may protect only the person’s interest as a S/H, director or officer as such

BCE Inc v 1976 Debentureholders

Factso BCE Inc. was the subject of multiple offers involving a leveraged buyout, for which an auction

process was held and offers were submitted by three groups. All three offers contemplated the addition of a substantial amount of new debt for which Bell Canada, a wholly owned subsidiary of BCE, would be liable. One of the offers, which involved a consortium of three investors, was determined by BCE's directors to be in the best interests of BCE and BCE’s shareholders. This was to be implemented by a plan of arrangement under s.192 of the CBCA, which was approved by 97.93% of BCE’s shareholders, but was opposed by a group of financial and other institutions that held debentures issued by Bell Canada. These debentureholders sought relief under the oppression remedy under s241 of the CBCA. They also alleged that the arrangement was not “fair and reasonable” and opposed s.192 approval by the court. Their main complaint was that, upon the completion of the arrangement, the short-term trading value of the debentures would decline by an average of 20 percent and could lose investment grade status.

Ratioo TEST FOR OR

Does the evidence support the reasonable expectation asserted by the claimant? Does evidence establish that the reasonable expectation was violated by conduct

falling w/in the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest?

APPRAISAL REMEDY Shareholders who invest in corporate shares sometimes find that other shareholders have voted to

change the corporate constitution. Dissenting minorities can sometimes force the co. to buy their shares at either a mutually satisfactory

or a judicially-set "fair" price.

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There are circumstances in which the remedy awarded is for purchase of the complainant's shares If you seek a remedy and the remedy is to "buy my shares" there is an entire process in which a fair

value is worked out through both the CBCA and the BCBCA Events that give rise to the appraisal remedy, re: the CBCA:

o Amalgamation w/ another co. (s.190(1)(c))o Major changes in the business "objects" (s.190(1)(b) and (e))o "Emigration" to another jurisdiction (s.190(1)(d))o Varying share provisions [changing share issue or transfer provisions, or affecting class

rights] (s.190(1)(a))o Court-supervised "arrangements" (s.192(4)(d))

S.190 of the CBCA sets out statutory process to be followed when invoking the remedy

Re Cyprus Anvil Mining Corp and Dickson Facts

o Valuation of shares in a company the subject of a takeover. The relevant legislation provided that where shares of dissenting S/Hs are compulsorily acquired on a takeover offer, the court shall fix a fair value for the shares. Fair value was not defined.

Ratioo Court adopted the Discounted Cash Flow (DCF) method for valuating the shares and found

that: It is not necessary to choose one method of valuation to exclusion of all others The takeover offer was relevant, though not conclusive evidence of the “net asset”

value but could be taken into account along with the value determined by the DCF method

LoCicero v BACM Industries Ltd Facts

o The majority shareholder announced an intention to cause a merger and offered to purchase the minority’s interest. The minority shareholders rejected the offered purchase price and caused an evaluation by the court.

Ratioo Market value of the shares (the offered price) was the fair value. Court of Appeal disagreed,

but the decision was ultimately appealed and the SCC restored the trial court’s decision.

INVESTIGATIONS, AUDITS AND THE “BIG D” DIRECTOR Lack of information can seriously inhibit minority shareholder protection. Statutes address this

problem in 3 ways:o Court-ordered investigations (CBCA s.29)o Elected [CBCA s.104(1)(e)] or judicially appointed [s.167] auditors, who report to

shareholders re: co.'s financial stateo "Director" – civil servant responsible for administration of the Act, given powers to

intervene [s.238(c)]

CAPITAL PUNISHMENT If all else fails, a minority shareholder could have the corporation killed S.214(1) of the CBCA:

o A court may order the liquidation and dissolution of a corporation… upon the application of a shareholder, [if oppression is proved, if a provision of a USA regarding dissolution is satisfied, or if it is “just and equitable” to dissolve]

S.324 of the BCBCA governs court ordered liquidation

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