Business Associations by chenmeixiu

VIEWS: 11 PAGES: 122

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                                           Business Associations
                                                                          Professor: Puri

                                                                              Winter 2009

Table of Contents

PART 1: INTRODUCTION ...................................................................................................................................................... 4
    WHAT IS A BUSINESS? ........................................................................................................................................................... 4
    STAKEHOLDERS OF A BUSINESS ORGANIZATION ................................................................................................................. 4
    TRADITIONAL VIEW OF BUS AS LAW ..................................................................................................................................... 4
    PROGRESSIVE VIEW OF BUS AS LAW ................................................................................................................................... 5
    INTERESTS, VALUES AND PUBLIC POLICY OBJECTIVES ....................................................................................................... 5
PART 2: CHOICE OF ENTERPRISE STRUCTURE .......................................................................................................... 4
    SURVEY OF DIFFERENT LEGAL FORMS OF BUSINESS ORGANIZATIONS .............................................................................. 6
    SOLE-PROPRIETORSHIP ......................................................................................................................................................... 6
    PARTNERSHIPS ....................................................................................................................................................................... 7
    THE CORPORATION ................................................................................................................................................................ 8
    CHOICE OF ENTERPRISE STRUCTURE ................................................................................................................................... 9
PART 3: PARTNERSHIP LAW ............................................................................................................................................ 10
    RELATIONS AMONG PARTNERS ........................................................................................................................................... 11
    PARTNERSHIP AGREEMENT: IMPLIED V. SPECIFIC TERMS ................................................................................................. 12
    MEMBERSHIP:....................................................................................................................................................................... 13
    FINANCING ARRANGEMENTS AMONG PARTNERS:.............................................................................................................. 14
    CAPITAL CONTRIBUTIONS V. ADVANCES/DISTRIBUTION OF ASSETS UPON DISSOLUTION................................................ 14
    M ANAGEMENT OF PARTNERSHIP BUSINESS: ...................................................................................................................... 15
    TERMINATION/DISSOLUTION: ............................................................................................................................................... 15
    PRINCIPLES OF AGENCY ...................................................................................................................................................... 16
    PRINCIPLES OF AGENCY (SS. 6 – 19) ................................................................................................................................. 16
    SITUATIONS IN WHICH APPARENT AUTHORITY IS AN ISSUE ................................................................................................. 17
    LIABILITY OF PARTNERS TO 3 P’S IN CONTRACTS, TORT AND FRAUD ............................................................................ 19

    THREE GENERAL PRINCIPLES: ............................................................................................................................................. 19
    EXISTENCE OF A PARTNERSHIP ........................................................................................................................................... 20
    EXISTENCE OF A PARTNERSHIP ........................................................................................................................................... 21
    JOINT VENTURES – CENTRAL MORTGAGE & HOUSING CORP. V. GRAHAM ...................................................................... 21
    LIMITED PARTNERSHIPS ....................................................................................................................................................... 22
    LIMITED LIABILITY PARTNERSHIPS ...................................................................................................................................... 23
PART 5: CORPORATIONS .................................................................................................................................................. 25
    PRINCIPAL REASONS FOR INCORPORATION: ...................................................................................................................... 25
    SALOMON V. A. SALOMON & CO. (1897) (HL)................................................................................................................... 26
    LEE V. LEE’S AIR FARMING LTD (1961) PC ....................................................................................................................... 26
    KOSMOPOULOS V. CONSTITUTION INSURANCE CO............................................................................................................. 26
    LIFTING THE CORPORATE VEIL .................................................................................................................................. 27
       1. Fraudulent or Sham Transaction – “fact by fact basis” [FRAUD = PIERCE] .......................................... 27
       2. Transactions between Affiliated Corporations ............................................................................................... 30
       3. Avoidance of Statutory Requirements – Company not incorporated for bona fide reasons: ............ 31
       4. Representations of Unlimited Liability: ............................................................................................................ 31
       5. Tort Creditors: ......................................................................................................................................................... 32
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   TORT LIABILITY & CRIMINAL LAW LIABILITY OF CORPORATIONS ...................................................................................... 33
   PRE-INCORPORATION CONTRACTS ..................................................................................................................................... 35
   RECAP: IS THE PROMOTER PERSONALLY LIABLE? ............................................................................................................. 38
PART 6: CREATION OF THE CORPORATION ............................................................................................................... 41
   PROCESS OF INCORPORATION ............................................................................................................................................. 41
PART 7: POWERS AND RESPONSIBILITIES OF THE CORPORATION ................................................................... 42
   LIABILITY FOR ACTS OF AGENTS ......................................................................................................................................... 44
PART 8: CAPITALIZATION OF THE CORPORATION ................................................................................................... 45
   TYPES OF SHARES ............................................................................................................................................................... 46
   DUAL CLASS SHARE STRUCTURE ....................................................................................................................................... 46
   FINANCING INNOVATIVE BUSINESS VENTURES – THE CAPITALIZATION CONTINUUM........................................................ 48
   QUESTIONS ON CAPITALIZING THE CORPORATION ............................................................................................................. 48
PART 9: MANAGEMENT & CONTROL OF THE CORPORATION .............................................................................. 50
   M ANAGEMENT STRUCTURE ................................................................................................................................................. 50
   CUMULATIVE VOTING – VARIATION ON SHAREHOLDER DEMOCRACY ............................................................................... 53
   POWERS OF DIRECTORS AND OFFICERS ............................................................................................................................. 53
   INSIDE DELEGATION (DIRECTORS OR SENIOR MGMT) ........................................................................................................ 54
   OUTSIDE DELEGATION (TO 3 PARTIES)............................................................................................................................. 55
   REMOVING OFFICERS - CONTRACTS & CORPORATE CONSTITUTION: ............................................................................... 56
   CONTROLLING CORPORATE M ANAGERS............................................................................................................................. 57
   VOTING RIGHTS: ................................................................................................................................................................... 59
   RIGHT TO DISSENT TO CERTAIN FUNDAMENTAL CHANGES ............................................................................................... 61
   PRE-EMPTIVE RIGHTS:......................................................................................................................................................... 61
   EQUALITY OF SHARES WITHIN CLASSES ............................................................................................................................. 62
   RIGHTS TO MEETINGS – S. 133: .......................................................................................................................................... 63
   RIGHT TO APPOINT A PROXY – S. 147 ................................................................................................................................ 65
   RIGHT TO M AKE SHAREHOLDER PROPOSALS – S. 137...................................................................................................... 66
   CONDUCT OF MEETINGS ...................................................................................................................................................... 68
PART 10: ROLE OF THE PROFESSIONAL AS ADVISOR ........................................................................................... 72
   AUDITORS ............................................................................................................................................................................. 72
PART 11: CORPORATE STAKEHOLDERS & SOCIAL RESPONSIBILITY ............................................................... 73
   APPROACHES TO CORPORATE SOCIAL RESPONSIBILITY:.................................................................................................. 75
   CORPORATE STAKEHOLDERS & SOCIAL RESPONSIBILITY................................................................................................. 77
   CREDITORS ........................................................................................................................................................................... 77
PART 12: DUTIES & RESPONSIBILITIES OF CORPORATE MANAGERS .............................................................. 79
   DUTY OF CARE AND DIRECTOR/OFFICER LIABILITY ........................................................................................................... 79
   DUTY TO ASK A QUESTION WHEN YOU THINK SOMETHING IS AFOUL ................................................................................... 82
   OTHER ................................................................................................................................................................................... 82
   STATUTORY DISCLOSURE REQUIREMENTS FOR SELF-DEALING ........................................................................................ 89
PART 13: SHAREHOLDER REMEDIES ............................................................................................................................ 93
   DERIVATIVE ACTIONS ........................................................................................................................................................... 94
   PERSONAL ACTIONS ............................................................................................................................................................ 97
   COMPLIANCE AND RESTRAINING ORDERS .......................................................................................................................... 99
   OPPRESSION REMEDY – “MOTHER OF ALL S/H REMEDIES” ..................................................................................... 100
PART 14: MERGERS AND ACQUISITIONS ................................................................................................................... 110
   ASSET TRANSACTION......................................................................................................................................................... 114
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   TAKEOVER BIDS – PURCHASE/SALE OF SHARES ............................................................................................................. 114
   COMMON DEFENSIVE TACTICS .......................................................................................................................................... 115
FUNDAMENTAL CHANGES .............................................................................................................................................. 120
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Part 1: Introduction

The Course
    Bus As is an introduction to the legal regulation of different forms of business organizations
          o sole-proprietorship
          o partnership
          o corporations
    Objectives are two-fold
          o Know the technical rules
          o Understand the policy, political & social frameworks

Substantive Overview
    What is a business and how does the law regulate businesses?
    Public policy considerations informing regulation of businesses
    Survey of different legal forms of business associations

What is a business?
   Commercial activity involving risks
           o Risk involves potential of profit or loss
   Under-inclusive definition?
           o Puri: This definition is typical, but under-inclusive: Other sectors, such as the social sector of the
               economy (hospitals, unions, credit-unions, chambers of commerce, agri business co-ops, some
               daycares) are overlooked in this definition
           o Not for profit, cooperatives – main difference is motivational purpose – for example: co-op main
               motivating feature is to provide goods and services to members (enhance economic wealth thru
               better prices but profit reinvested in the business – when the surplus is distributed it is based on
               amount of business member has transacted with the coop as opposed to how many shares you
               have in a typical business – emphasis is role as user not owner
           o Governance structure is also different – whenever an org gets large need a governance structure –
               coops –more democratic – each member has 1 vote – business corp controlled by those who have
               the most shares = votes (diff philosophy)

Stakeholders of a Business Organization
    Definition of Stakeholder? A stakeholder is someone who has an interest (personal or financial) in the
       business and anyone affected by a business.
    List potential stakeholders in a business organization
           o Public (including future generations)
           o Consumers
           o Shareholders
           o Managers
           o Employees
           o BoD
           o Regulators
           o Gov’t
           o Financial creditors
           o Community

Purpose of Bus As Law
   1. Relationship of owners and managers to the business and each other
   2. Responsibility of the business, the owners and the managers to other stakeholder groups

       Two views: Traditional and More Progressive

Traditional View of Bus As Law
    Narrow focus on relationship between owners, managers and business (other stakeholders should be
        covered thru other law NOT corporate law) NO DUTY
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       Relationships with non-shareholder stakeholders governed by other types of laws
       e.g., contract, tort, property, commercial, commercial, criminal law
       Exceptions:
             o s. 119 (1) of CBCA – Liability of directors for wages – Directors of a corporation are jointly and
                 severally, or solitarily, liable to employees of the corporation for all debts not exceeding six months
                 wages payable … for services performed for the corporation while they are such directors
             o s. 42 of CBCA – Dividends – a corporation shall not declare or pay a dividend if there are
                 reasonable grounds for believing that (a) the corporation is, or world after the payment be, unable
                 to pay its liabilities as they become due; or (b) the realizable value of the corporation’s assets would
                 thereby be less than the aggregate of its liabilities & stated capital of all classes

Progressive View of Bus As Law
    Recognition that business organizations have impact on public interest in terms of employment,
       environment, tax revenue, etc
    Legitimate to consider interests of non-shareholder stakeholders when making decisions
    Balance interests of investors with other stakeholders (should have a legal obligation)
    This view has gained some acceptance by courts: check BCE SCC ruling
           o Tech v. Miller (1970s, BC Trial Crt)  concerns management’s duties re takeover bids; What
              defensive tactics can be used? Crt said that management can consider the interests of employees
              & the context of the takeover (ie if people are being laid off at both companies)

Argument Against the Progressive View:
    If you are accountable to everyone, you are really not accountable to anyone.
    At least w/ the traditional view the interests of the shareholders are primary & decisions are made based on
      their interests.
    When profit maximization is the only criterion, it’s easy to judge effectiveness
    With the progressive view, any decision can be justified on the basis that it was in someone’s best interest

Interests, Values and Public Policy Objectives
     Broad policy themes and underlying objectives in drafting laws in relation to business organizations
            o Non-interference
                    enabling legislation rather than mandatory
                    give maximum flexibility and freedom to business people
                            e.g. The Partnership Act has both mandatory & enabling provisions. It contains a
                              default rule that profits & losses are divided equally between partners unless
                              otherwise specified in a partnership agreement
                    notion that state is not as good as private enterprise at managing business
            o Market Efficiency
                    main objective of corporate law is to allow for the efficient operation of business
                    reduce administrative and bureaucratic costs of running business
                            statutes can act as a standard form – since this is the type of agreement they
                              would sign anyway
                            CDA: provincial securities regulation system  make it national (efficiency)?
                            Reduce transaction costs, red tape requirements, cost/benefit analysis
                    market forces preferred to regulatory requirements
                            relationship between legal rules, and the market
                            under the traditional economic approach: legal rules should only step in when the
                              market cannot control the issue  how can you control & discipline corporate
                              officers to keep the stakeholders’ interests in mind (fiduciary duties, etc.)
                    allow for maximization of profits
            o Enhance Economy
                    Attract business to Canada and Ontario
                    Create environment favourable to business
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                       “Trickle down” theory
                       Transnational corporations?
                              A company can have a head office in CDA, factory in China, etc.  and
                                 incorporate in Delaware, under that statute (then they are bound by those rules)
            o Fairness
                    Regulation to protect vulnerable parties
                    Regulation is needed to protect vulnerable parties
                    Who?
                             o Minority shareholders – don’t get to elect board – can’t make impact
                             o Also employees, creditors, etc.
                    Protect reasonable expectations of parties & prevent unfair treatment
                    “oppression remedy” in the statute The section is very general & doesn’t specify what
                        “oppression” is – need to look at: a) commercial customs, b) judicial interpretation, c) social
                        norms (reasonable expectations)
                    Legislation sets out general fairness standards (e.g. oppression remedy) – s.241 of the
                             o Protects complainants from being oppressed or prejudiced by the corp or officers
                             o Ferguson: 2 couples in a business – husbands have the voting shares, wives have
                                 non-voting shares  one couple is getting divorced, one husband convinces the
                                 other couple to squeeze out his wife (court finds oppression in this case)
Public Policy Objectives
    Deconstructing
    Conflict or tension among objectives?
            o Non-interference vs. protecting vulnerable parties
            o Non-interference and enhance economy?
            o Non-interference and efficiency?
            o Non-interference and existence of corporation?
    Limited liability is a statutory provision – if really wanted no interference wouldn’t have this provision –
    Monopolies – government then interferes (unfair for other businesses, not good for pricing – competition
    Distribution of Wealth and Access to Capital
    Wealth and ownership of business assets is very unequal in Canada
    Most benefits of business have accrued to a small elite
            o Dual class share structures and control exercised by founding families
            o 1984 9 families controlled 50% of the TSX wealth – now has changed somewhat

Corporate Law is not about wealth distribution, it is about maximizing the capacity/ability for corporations
to create wealth

[write up the ABCP and global crisis]

Part 2: Choice of Enterprise Structure
Survey of Different Legal Forms of Business Organizations
    Sole-Proprietorship
    Partnership
    Corporation
    Which legal form is most appropriate?

    Oldest and simplest form
    Definition: business owned by a single individual
    Not a separate legal entity; no differentiation between the business and the individual
    All benefits retained by sole proprietor
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       One person owns all the assets
       Legally entitled to all profits
       Exclusive power to make decisions about business, unless gives up some rights by k (debt covenants
        could limit power to make decisions to protect the bank’s risk)
       Unlimited personal liability
       All liabilities of business are responsibility of sole proprietor
       Personally liable for all debts and liabilities incurred in business
       Responsible for performing all contracts
       Responsible for all torts
       Sole-proprietor’s personal assets are available to creditors of business
       Advantages
              o Simplicity and ease of creation and dissolution
              o No governing statute
              o Few formalities required
                         Ontario Business Names Act – avoid confusion of having multiple businesses with the
                            same name (protects goodwill)
                         Fine of $2000 if you do not register the name (if your own name is not included in the name
                            of the business)
                         If you do not register, you cannot sue – and banks may not want to give you a loan
       Disadvantages:
              o Unlimited personal liability (injury, defective product, debts)
              o Responsible for all torts
              o Raising capital is difficult
              o Restraint of growth after critical size
              o Harder to transfer ownership – not separate from the owner
              o Business dissolves upon owner’s death

     Definition (s.2 of the PA)
           o “…two or more persons…carry on business…together…with a view to profit”
           o (2 indiv.) or (an indiv and a corp) or (2 corps)
           o Cannot include another partnership – since a partnership is not considered a “person”
           o Cannot include a charitable organization (Non Profit Org) – they are governed under a different set
               of laws
           o Must have the intention to make a profit
     Developed by the courts in UK (contract law and agency doctrine) – Codified partnership law in the English
       Partnership Act (1890)
     Ontario Partnerships Act – (50 sections) based on the English Act
           o 60% facilitative – standard form contract governing the relationship between partners
           o Need default rules to govern actions of the parties
           o Rules say 50% 50% -- can modify that if relative contributions are not equal (initial or ongoing)
           o All partners entitled to manage (but larger groups that’s harder may want a committee)(might be
               absentee partners)(consider all these issues and modify act as appropriate)
                     Ss. 20 – 31: Partners to one another
                     Ss. 32 – 35: Dissolution
                              Can be changed or modified by the existence of partnership agreement
           o 20 – 30% normative – governs relations b/w partners and 3 parties
                     To the extent to which the 3 parties can look to the partner in the relationship [cannot alter
                          rd                                                            rd
                        3 party rules by partnership agreement – rules mandatory] [3 parties could agree to opt
                        out by limiting the amount of liability for example – however was it fair and reasonable etc.]
                              Calculate risks and define liabilities
     Need for a governing statute
           o Internal rules: Default rules or standard form contract – modified by partnership agreement
           o External rules: Reliance rules – much less flexible; mandatory
     Not a separate legal entity
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       Often will also have a partnership agreement to deal with various situations that could arise [look at Act first
        then relevant partnership agreement – who will manage what and how entry into partnership will be
       All benefits of partnership accrue to partners
       All partners are bound to the obligations of other partners (to the degree of the stake they hold in the
       Tax implications – Bankman Article (flow through benefits to partners because not a separate entity – tax
       Disadvantages:
             o Unlimited personal liability for obligations of partnership:
             o Liable to perform contractual obligations of partners (hard to control their actions!)
             o Liable for torts of partners
             o All personal assets of partner may be seized to satisfy partnership obligations

       Liability to Third Parties:
            o Mandatory rules – to protect disadvantaged groups
       Principle of Agency (s.6 of PA)
            o Don’t want your co-partners to act unreasonably, and act outside the agreements
            o Each partner is agent of partnership and of every other partner
            o Each partner can bind the partnership and every other partner (s. 6)
       Protection
            o Legal Protection -- Fiduciary duty among partners in common law and statute – good faith, honestly
                  and with a view to best interests of the partnership
            o (“in the ordinary course of business” used in act)
                       Money: cheque signing authorities, with threshold
                       Contract/Revenue: some/all partners must sign – with threshold
                       Example -- Hiring associates, support staff – 2 or more approvals to hire
                       Dissolution of partnership, kicking someone out
                       Various levels of partnership: managing partners, 2 tier, etc.
                       Insurance
            o Practical Protection
                       More management imposed  more bureaucratic
                       Safeguards: rules, checks, practices (i.e. 2 partner reviews opinion before given)
       Registration requirement under the OBNA
            o Minimizes confusion
[could enter into a limited partnership – not allowed for lawyers usually]
[LLP limited liability partnerships – also some talk about moving to allowing a law firm to be a corp]

The Corporation
    Statutory creature – not available in the common law – CBCA and provincial statutes (OBCA)
           o Goldman Sachs only recently became a corporation – after being a partnership for numerous years
    Creation by “incorporation”
    Where the need for capital outstrips the ability to raise capital from friendly sources (need external sources)
    File documents and pay fee (about $500 for CDA, about $300 in provinces)
    Choice of statutes: can incorporate wherever you want – may be a marginal benefit to register under the
       CBCA if you want to do business across Canada
    If under OBCA then will need licence to operate in other provinces
    Delaware – created corporate statute that is friendly to corporations – fees form about 25% of the state
       budget – has an incentive to provide responsive corporate law – is it a race to the top or a race to the bottom
       since managers and directors choose where to incorporate [exam debate ?]good for who?
    Created under corporate statutes: file articles and by-laws to registry system (public record), choose your
       statutes (viewed by provinces – under s. 92(13) “Property and Civil Rights”
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           o     Shareholders can customize relationships amongst themselves – corporate constitution and can
                 do so by a contract (SHA) that governs the relationship b/w the shareholders and shareholders &
                 management (separation of ownership)
            o Don’t have to file under OBNA unless the corporate name is different than business name
                      i.e. 12345 Ontario carries on business as “John’s Widgets”
      Three Main Advantages:
            o 1.) Separate legal entity: a “legal person” that can sue, be sued or criminally charged
                      Distinct from shareholders, directors and officers
                      Corporation carries on business, possesses rights, and enters into contracts in own name
                      Shareholder can be employee or creditor of corporation
                      Tax consequences – Bankman Article
                               Taxed separately on its profits – only if a dividend is declared by the corp for the
                                  benefit of s/h, do they see any of that profit
                               If a corp retains all profits, and do no declare dividends, then the s/h’s tax position
                                  is not affected
            o 2.) Perpetual Succession:
                      Unaffected by changes in ownership or death or retirement of shareholders
                      Will continue on forever
            o 3.) Limited Liability: aka “no liability”
                      Shareholders have limited liability for debts and obligations of corporation (rarely pierce
                         veil of corporation)
                      Liability is limited to extent of their investment in corporation
                      Shifts risk of business activity from shareholders (owners) to other stakeholders
                      Ability to attract greater amounts of capital into a business w/o downside risks
            o Separates management and ownership
                      Governance and fiduciary duties
                      Recognizes the divergence of interests
                               i.e. management vs. ownership interests
      Disadvantages
            o B/C of separate entity status it creates “double taxation” system on the corporate profits
                      Punitive – corporation is taxed on income and profits paid out to shareholders as dividends
                         is also taxed
            o Can only act through other individuals or agents
            o More formalities involved:
                      Must apply for corporate status and file documents
                      Annual Returns
                      Extra-Provincial Licenses
                      Transaction Costs: filing fees, legal fees
                      Requirements to hold meetings, elect directors, inform shareholders
                      Shareholders only have the ability to profit from equity of corporation
                               i.e. After all liabilities are paid off
      [why more formalities – protect shareholders – rights and remedies ALSO because have limited liability
       shifty risk to others so need balance on formalities – need to know hwo the directors are and what the
       business is all about]

JOINT VENTURES – really like a contract
FRANCHISES – statute and common law and franchise agreements

Choice of Enterprise Structure
    Other business forms?
           o Regulated industries (banks and insurance companies)
           o Not – for – Profit Organizations
           o No Share capital
                    Incorporated entity w/o ownership (has members or directors)
           o Unlimited liability organizations (tax purposes)
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            o   Joint venture (limited time and specific purpose)
            o   Strategic Alliance
            o   Contractual Relationships (i.e. licensing, franchises)
            o   Distributorships

    Difference between a Sole-Proprietorship and Corporation?
          o Key difference is the limited liability issue
    Difference between a Sole-Proprietorship and Partnership?
          o Number of people involved
    How to advise on appropriate legal form for a business?
          o What is the business going to do
          o Cost/benefit of filing fees, administration, etc.
          o Tax benefits: offsetting losses against personal income
          o Personal level of risk aversion – likelihood of being sued
          o Might not have the business/family network/knowledge to incorporate
          o Even if you’re a corp, but only have 1 s/h – banks will want personal guarantee anyway
          o Corp can issue shares so can sell part of the business

       Bankman article
           o Talks about the structure of Silicon Valley corporations
           o Why do people with technology ideas – set up corporations? Instead of using existing corporations,
              or partnerships – which in his view, would provide tax advantages
           o Can apply business losses against personal income, or profits from existing corporation
           o He found out that:
                   they wanted to minimize overall legal costs by starting a corporation – if they wanted to
                        have a partnership, they would have to incorporate later anyway if they wanted to go public
                   wanted to provide employee stock options to motivate them and provide incentives
                   not all investors can take advantage of these potential personal tax benefits (since they are
                        pension funds, etc.)
                   many Silicon Valley firms want existing corporations to report high earnings – instead of
                        deducting losses

Part 3: Partnership Law

Partnerships Act: Introduction
     Some history
     People were carrying on business in groups – judges would use tools to try to address disputes that arose
       (property law etc) once there was enough common law legislature codified into first partnership act in Britain
       – Canada closely based on the British model
     When considering a partnership must look to:
           o 1 : statute
           o 2 : case law
           o 3 : partnership agreements
     Structure of Partnerships Act
           o Nature of Partnership: sects 2-5
           o Relation of Partners to Persons dealing with them : sects 6-19
           o Relation of Partners to One Another: sects 20-31
           o Dissolution of Partnership: sects 32-44
           o Miscellaneous: 45, 46
     The act is not a complete code and s.45 (ONT) provides that the rules of equity and common law applicable
       to partnerships continue in force except so far as they are inconsistent with the express provisions of the Act
     Common law and equity still hovering around the issue
     Defn sect 2 – two or more persons
     Definition (s.2 of the PA)
           o “…two or more persons…carry on business…together…with a view to profit”
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            o   (2 indiv.) or (an indiv and a corp) or (2 corps)
            o   Cannot include another partnership – since a partnership is not considered a “person”
            o   Cannot include a charitable organization (Non Profit Org) – they are governed under a different set
                of laws
            o   Must have the intention to make a profit

       Could have a partnership for a single transaction

       Not a separate legal entity
           o But unlike SP: partnership is referred to and treated as a “firm”
                    “Firm” maintains own accounts for business purposes (bookkeeping)
                    Profit/loss flows through to each partner
                    Can be sued in the name of the firm – i.e. Stikeman Elliot & all partners names
       Factors suggesting a partnership (s. 3)
           o Sharing profits
           o Responsibility for operation, losses
           o Holding out that you are a partnership
           o Controlling the operations/management of the business

AE Lepage v. Kamex (CB. 11)
    Issue: Is co-ownership of a property a partnership for liability purposes?
    Decision: Co-ownership rather than a partnership; each of them were free to deal with respective ownership
      interests separately (decide on own shares separately)
           o Implication: agreement of one of the co-owners was not binding on the other co owner

Relations Among Partners
    Section 2 of the Partnership Act:
            o 2+ persons carry on business in common with a view to a profit (s. 2)
                      Could have a single transaction that forms the partnership
                      Not charitable or social causes – intention for profit
                      Intention to be partners – meeting of the minds
            o “persons” – can include corporations
    Legal Nature of Partnership:
            o Don’t have to have a written agreement – BUT, if you are forming a limited partnership, or a LLP
            o Courts don’t have a clear test of when a joint business venture constitutes a partnership
                      Objective:
                               Is a contribution of labour sufficient to create a partnership?
                               What if someone has agreed to share in profits?
                               What if a group of “partners” put in writing that they are or are not a partnership?
                                 Does the declaration determine the issue?
                      Subjective:
                               Courts might look at actions & infer an intention to create a partnership
                      Bottom line is that when deciding whether there is a partnership, the decision is informed
                         by issues of fairness
    Section 5, Partnership Act refers to the concept of “Firm”
            o Seems to suggest a separate legal entity
Cox and Wheatcroft v. Hickman (CB 6)
    Facts: An ironworks business was in default; transferred property of the business to trusts to run on behalf
       of creditors to pay down obligations. Trustees were to remain in control of business unless or until debts
       were paid off. Hickman sued the trustees as if they were partners for outstanding obligations.
    Issue: Difficulty drawing the line b/w lenders and partners
    Decision: Sharing the profits NOT found to exist
Re Thorne and NBWCB (CB 16)
    Facts: Agreed that each person would receive $75/week
            o Workers Compensation Act provides compensation to people injured in employment
                                                                                                         Page 12 of 122

       Issue: can Thorne be an employee?
       Decision: Court says NO – since he is a partner in this entity, and cannot get compensation
            o Upholds the common law rule – partnerships is not a separate legal entity from the partner 
                cannot contract with them [cannot be employee of himself]
            o Firm name is just a commercial practice – and doesn’t mean that a separate legal entity has been
            o What about the $75/week wages? Is this not for employees? Courts said this is just discussing how
                to distribute profits to the partners (doesn’t matter if you call it salary or not) s24 (1)
       Partnership has no separate legal existence apart from its partners (but not absolute, as implied in the
        Thorne case  tension in the statute because sometimes it is treated as a separate business vehicle)
            o Rights and duties of partners are somewhat mediated by the structure of the partnership
            o s.21(1): partners are considered to own partnership assets directly (no separate entity how owns)
            o But when partners contribute money or assets to the partnership – they cannot just withdraw it at
                their own will – once they contribute it, it becomes partnership property, and there is a process to
                get it back personally (so there is something separate in partnership property – give up ind rights)
            o Partners can advance money to the partnership with interest  but how can someone lend money
                to oneself?
            o Rules of Civil Procedure allow a partnership to sue using the firm name – as a matter of
                convenience, but providing some meaning to the entity
            o THUS, our law system is poorly designed for group action or collective actions, it is designed for
                individuals  thus the legal system views a group of people as one large person

Lee v. Lee (CB 75)
    Facts: Similar to Thorne but b/w a corporation and dominant shareholder
    Issue: Can a dominant shareholder be an employee of the corporation?
    Decision: A corporation is a separate legal

Rights and Obligations as Partners Between Themselves (Ss. 20 – 31)
    General Principle (s. 20)
           o [lawyer should not advise the partnership & the individual partners – conflicts]
           o “Mutuality” – mutual rights and duties
           o “Consentuality” – through terms of partnership agreement (express and inferred through a course
              of dealing)
           o “Equality” – s. 24(1)
                   Share equally and contribute equally – in the absence of an agreement
                   Some rights are absolute and some can be contracted out
                             S. 9 – equal access to records
                             S. 28 – duty to render accounts to all partners
           o “Fiduciary Concepts” – to each partner and the partners
                   Cannot go out and compete or take advantage of opportunities that should belong to
           o “Personal Rights/Relationships” – Ss. 31, 32
                   Rights you have in a partnership are personal to you
                   S. 31 – absent an agreement to the contrary, the death of a partner dissolves a partnership;
                       limited ability to assign or transfer standing as a partner

Partnership Agreement: Implied v. Specific Terms
     What matters should be addressed in fixing the terms of a partnership?
     Brainstorm
           o Membership: additional partners, initial contribution
           o Financial Arrangements: signing leases, payroll, ongoing contributions
           o Dispute resolution: arbitration, mediation
           o Mgmt of Partnership: who’s doing what, marketing, HR
           o Termination: based on contribution, revenue generated
     Rights and obligations among the partners themselves (sections 20-31 PA)
     [if you don’t negotiate specific terms and opt out of P. act]
                                                                                                       Page 13 of 122

       General Principle is contained in Section 20, PA:
            o “mutual” rights and duties of partners
            o “may be varied by the consent of all partners”
            o “consent…either express or inferred by a course of dealing” [could be written or oral]
            o Written a better record of the actual agreement
       PA’s themes re treatment of relationship among the partners
            o Consensual-ism
                     Unanimity rules in the Act
                              s. 20: to vary the partnership agreement, etc.
                              s. 24(7): to admit new members
                              s. 24(8): to make changes that are fundamental to the partnership
                     exception: s. 24(8): majority needed for ordinary matters (efficiency)
            o Equality
                     S.24(1): partners have right & obligation to share equally in profit & losses
                     S.24(5): all partners have right to participate in the mgmt of the business
                              Different from s/h, who have no inherent right to manage the business
                     S24 (8) every partner can see the books
            o Fiduciary Relationship
                     All partners need to act honestly, show loyalty and good faith with each other (ss.28-30)
            o Exclusive Personal Relationship
                     Rights and duties of partners are personal in nature – can’t just substitute other people
                     s.33: partnership automatically dissolves under the death or bankruptcy of a partner
                              Different than a corporation – where there is perpetual life
                              Usu. dealt with in the actual agreement negotiated
            o Collectivism
                     Protection of collective interests – over & above individual interests

   Initial
         o No clear test
         o Courts look at objective (observable conduct of the parties) & subjective (what did they say they
            wanted to do) factors to see if it is a partnership [common law]
         o Objective: look at the actual conduct of the parties – but not clear what activities are necessary to
            constitute a partnership (labour, capital, share in the profits, etc.?)
         o Subjective: should courts look at the declaration of the partners? Could infer from their actions – but
            does this confuse the objective and subjective tests? What about fairness and risk allocation?
         o A 3 party who was injured might want to call this a partnership to get at personal assets, etc. 
            courts might look at who can bear the loss better (3 party vs. the partnership)
   Bringing in New Members
         o S.24(7): need all the partners to agree to bring in someone new (consensual-ism & personal
            relationship) [consent of all members]
         o There might be a point when this is no longer feasible [too large] or wanted  so a change can be
            made to the partnership agreement to [majority or supermajority]
   Withdrawal/Removal
         o voluntary
                  partners could unanimously agree to dissolve
                  could have created the partnership for a fixed period of time or a specific project
                  any one partner can terminate the partnership by giving notice: dissolve and distribute
                     assets [default position of the Act]
         o involuntary
                  operation of law:
                          upon death or bankruptcy (but can contract out of this) s.33.1
                  expulsion:
                          what if someone does shoddy work, etc. – can you get rid of him? S.25: unanimous
                             consent is needed to expel him (even he must agree) – but can be contracted out
                             within the partnership agreement
                                                                                                         Page 14 of 122

                             if the activities become illegal (lawyers get disbarred)
                       court order
                             s.35: a court may dissolve a partnership may dissolve it with a court order by any
                                partner (mentally incompetent, permanently incapable of performing duties,
                                prejudice to perform activities against the partnership, just and equitable under the
                                court’s opinion – very rarely)

Financing Arrangements Among Partners:
     Capital Contributions and Partnership Property
     Equal Sharing of Profits and Losses – s. 24(1)
           o Presumption of equality
           o What if partners contribute different amount of capital at the beginning? Presumption of equality –
              unless they contract out in the partnership agreement
     Equal Sharing of Capital Gains and Losses – s. 24(1)
           o Partners have an inherent right to the profits of the partnership (as opposed to a corp, where the s/h
              do not have this right)
     Difference between profit and capital gain
           o Profits = revenue – expenses [income over certain period of time]
           o Capital Gain = Sale price – original price (the appreciation/depreciation) [capital is what you have at
              a particular time]
     Personal Expenditures – s. 24(2)
           o Will be reimbursed if used for (ordinary and proper conduct) the partnership – need to use good
              judgment, when making expenditures for the partnership (can contract out of this to make it more
           o indemnity for expenses if improper
           o incurred in “ordinary and proper conduct of the business of the firm”, OR
           o “necessarily done for the preservation of the business or property of the firm”
     Capital Contributions v. Advances – s. 24.1
           o Advance is a loan to the partnership at 5% interest [default rate] (s. 24.3)
           o Advance places partner in place of creditor vis-à-vis the firm (s.44.2)
                    Advance will be paid out before any residual money is distributed among partners
           o But 3rd party creditors get paid first before these partner advances
           o “Wind – Up”: 3 party creditors  payback of partner advances  distribute residual to partners

Capital Contributions v. Advances/Distribution of Assets upon Dissolution
    S. 21.1 – Capital Contributions in Partnership Property
             o Property rights or assets acquired by…for the purposes of the partnership business
    S. 28 – True accounts, bound to provide full information with respect to accounts and able to obtain full
        information with respect to other partner’s accounts (absent agreement to contrary – prudent course is to
        full disclosure)
             o P1: $10,000 Capital + $5,000 Advance
             o P2: $5,000 Capital
             o P3: $5,000 Capital
             o Love Money of $15,000
             o Angel Loan of $10,000
             o 40% 30% 30% division of profits

If business is being wound up: [do this for exam!!!!]

First --- Pay Non-Partners [s.44.2(a)] (love and angel money)
     Pay Partners Advances(s.44 (2) (b))
     Return Capital to Partners (s.44 (2) (c))
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       Residue? Divide according to profit allocation (s.44 (3))

       Consider Distribution

            o   40,000
            o   Love, angel minus 25,000
            o   Minus 5,000 to advance
            o   Split 10,000 (5,000, 2,500, 2,500)

       Consider Distribution if:
            o $110,000 in Assets
            o $29,000 in Assets
                     The $5K advance cannot be paid all out, so the partners are on the hook for the $1K
                        shortfall (using the 40-30-30 proportion)
            o $42,000 in Assets
                     Capital returned in proportion (50-25-25) before goes to the profit (40-30-30)
            o $10,000 in Assets
                     Since the fact pattern doesn’t specify, all 3 parties will get their money in proportion (Angel

                        $4K, Love Money $6K)
       Also do step 4 profit and loss allocations P1 40%, P2 30%, P3 30% (profit allocation)

Partnership Agreement: Implied v. Specific Terms
     Financial Information (Rights and Duties)
     “partners are BOUND to
           o render true accounts and
           o full information
           o of all things affecting the partnership

Management of Partnership Business:
    General Principle: All partners have a presumed right to take part in management of partnership – s. 24(5)
    Subject to Agreement - can contract out
    Dealing with Differences of Opinion (s.24.8)
        o majority vote for “ordinary matters”
        o consent of all partners if “change in nature of partnership business”

Fiduciary Duties:
    Utmost fairness and good faith
    Duty to account and give full information (s.28)
    Accounting for benefits derived w/o consent (s.29.(1))
    Competing with business w/o consent (s.30) – must pay over profits if infringing this rule

    Unanimous agreement (s.20)
    Expiry of Fixed Term – s. 32(a) – i.e. joint ventures
    Unilateral Notice if… dissolution by one partner giving notice – s. 32(c)
    Operation of law (s.35) – application for a t/d via court order (under a number of grounds i.e. mental
      incompetence, misconduct)
    Distribution of Assets on Termination

Relationship Among the Partners
    Standard form – can contract out or vary amongst partners
    But not vis-à-vis third parties – much more rigid and constrained, mandatory

Relationships with Third Parties – ss.6-19, PA
                                                                                                           Page 16 of 122

Principles of Agency
     Central to liabilities owed to third parties
     Almost all common law – lots of principles and policies
     Corollaries, twists, exceptions
     All business organizations carry out commercial activity through their agents
            o Agents have some authority to act for the principal (e.g. Bank Teller)
     Partnerships and corporations cannot act on their own
     Partners act as agents, corporate directors act as agents
     Even in sole proprietorship employees act as agents
     Legal framework for agency relationships (obligations b/w: principle, agent, 3 party)
            o Contract: 3 Party – Principle
            o Authority: Agent – 3 Party
                     Partnership can confer authority via agreement
     Agency relationships can be created by agreement
            o Apparent authority – Arises from representation
            o Actual authority – by contract or agreement
     Social and economic concerns
            o Market efficiency, commercial convenience, fair allocation of losses, vulnerability of certain market
               actors, relative power of various parties to a prevent a transaction

Definition of Agent
     Basic Principle
            o Representative that has the power to affect the legal position of her principal in relation to 3 parties
            o Sometimes said – power to contract on behalf of the principal
            o Ability of one person to render another person (principal) liable to a 3 party (very powerful)
                     could be thought of as elaborate set of rules for privity of contract
                     an exception to the concept of privity
                     agent has a lot of power over principal’s liability
            o Don’t have to be complex (give someone 5 dollars to go buy you lunch)
     How is an agency relationship created?
     [identify which it is on exam actual/estoppels][affects the nature and extent of liability from principal to 3

        party and principal and agent]

                 1. Agency by Agreement - Actual Authority principal provides actual power to the agent
                 2. Agency by Estoppel - Apparent/Ostensible Authority
                      Focusing on the 3 party and the principal
                      No clear guidelines as to whether or how authority is conferred
                                Any partner has apparent authority to bind every other partner and the partnership
                                   to contractual relationships and their accompanying obligations
                                Most cases arise where authority is exceeded or misrepresentation of authority by
                                   an employee
            o    Distinction is important: how did the agent receive the power? This will affect the liability of agent
                      If the agent had actual authority from the principal, and was within the scope of the
                          authority, then there is no liability  but if they entered into a contract beyond their
                          authority, they might bear some responsibility

Principles of Agency (Ss. 6 – 19)
     Agreement between P and A: arises from the actual authority from the agreement
     Written or verbal – express or implied (through a course of conduct)
     S. 6
            o Can bind by doing any act…doing regular act of the business in which he/she is a member
                    Unless they do not in fact have any authority or the 3 parties know they do not have the

     S. 7
            o Execute things in the firms name (i.e. legal opinions)
                                                                                                        Page 17 of 122

      Express Actual Authority:
            o created by words or written
            o for example a document that grants director authority to write cheques for the company
            o if there is ambiguity, courts will usually decide against the principal (not absolute rule)
                     principal can absorb the loss
                     agent is more vulnerable
                     principal is in on control of what they are granting
                     courts will construe the ambiguity against the principal generally
      Implied Actual Authority:
            o Is actual authority implied from the authority between the principal & the agent
            o conduct or context:
                     past actions may indicate implicit agreement that agent has authority to do certain things
            o incidental authority
                     where the agent has implied authority to perform actions relating to an express authority
                     things ancillary to the main purpose of the express authority
            o customary or usual authority
                     agents who carry on certain trades or profession – agent is implicitly authorized that is
                        customarily or ordinarily done in that profession
                     it is possible to expressly contract out of items that are customary to that profession
       The agent cannot be sued on the contract  the 3 party must sue the principal to get compensation
       If the agent goes beyond their power – can the 3 party sue the agent, is the principal still on the hook?

      Agency by Estoppel – Apparent/Ostensible Authority
          o Apparent authority is authority that might reasonably exist in the eyes of a third party, despite the
             fact that the agent isn’t authorized – there is no actual authority, implied or express
          o The principal is then estoppel from denying the performance of the contract
          o In most cases the principal is innocent – negligent perhaps, but innocent
          o If a office clerk is hired to buy supplies, etc. – but what happens if he buys more
          o They look at the contractual implication
          o What if the clerk was fired on FRI morning, and ordered a photocopier before he left? Can the
             company refuse to pay for the item?
          o The principal may be bound – under the principle of apparent authority (appearance of authority
             that may exist in the eyes of a reasonable 3 party, despite the fact that the purported agent is not
             actually authorized)  principal may have done something that gave the 3 party the false
             impression that the agent had authority
          o In reality, the principal in these cases is the innocent party – could have been small carelessness
          o Discusses the loss allocation between the principal and 3 party
          o Questions – did the supplier know the person was fired, did they know of spending limit of the
             employee, appearance of authority still?
           o   Rationale for applying loss to the principal, instead of the 3 party
                    better chance for the principal to recover from the agent
                    market efficiency: 3 parties might force incentive to perform more due diligence to make

                       sure the agent has authority
                    unjust enrichment: principal may have used the assets
                    principal is in the best position to impose spending limits, or escort out the fired employee,
                       or let the 3 party know that this is the spending limit

Situations in which apparent authority is an issue
     Two types of apparent authority cases:
            1. Agent exceeds her (actual) authority
                    3 party gets the impression that the agent has more authority than he actually does

                    A person in granted VP – but his actions are quite limited – however the outside world
                      might think he has more authority
                                                                                                          Page 18 of 122

                       The principal may not adequately inform the 3 party of the restrictions on the agent’s
           2. Person purports to act as agent without any (actual) authority
                   Barneet v. Deere (not in casebook) 1800s
                   A 3 party is entitled to think that the merchant has power over his business – man sitting

                       behind his desk (man paid money to a person (fraud) sitting behind the desk – debt was
                   Due to principal’s conduct – the agent appears to have authority, when the relationship has
                       been terminated
                   The representation was the office and allowing someone to sit there – reasonable to
                       assume that he was an employee
       Requirements to prove apparent authority
           o A representation must be made by the principal to the third party
                   This representation can be express, verbal or implied from a previous course of dealing
           o The principal must have actual authority to enter into a contract
                   eg Some corporations might be limited in what activities they can engage in
           o The third party must have been induced to enter a contract as a result of the representation
           o The third party must have relied on the representation to their detriment
       Why do we care whether agent had actual or apparent authority?
           o If A had actual authority & acted within, cannot recover against A
           o If A had apparent authority, but no actual authority, P might be able to recover against A

Freeman & Lockyer (CB 251)
    Facts:
           1. F&L they are the 3 party (architects), Kapoor (agent), Buckhurst (Principal)
           2. Plaintiffs did some work (architects), and the bill remains outstanding
           3. 3 party always dealt with Kapoor (agent)
           4. Originally Buckhurst wanted to sell the building at a profit, but they changed their mind, and decided
               to develop the building
           5. 4 directors (including Kapoor), bill is outstanding, and arguing that Kapoor had actual authority to
               act on behalf of the corporation
           6. Argue: Kapoor has ostensible authority – company is estopped from liability
           7. Defence of the company: Buckhurst argues that Kapoor was a director, but did not have actual or
               express authority to enter into contracts, and act on behalf of the corporation
           8. Company says that they did not provide any appearance of Kapoor authority – he did it all on his
               own – the company did not communicate with the 3 party
    Held: finds for the 3 party – ostensible authority – no actual authority, never appointed the managing

      director, but he was acting as if he was  board knew that this was going on, and routinely accepts
      contracts that he entered into
           1. CA: dismissed appeal – agreed there was ostensible authority  although he was not the CEO, he
               performed responsibilities, and they acquiesced this fact
    Diplock L.J.’s comments  Essential doctrinal requirements for ostensible authority:
      Essential Requirements for Apparent Authority: (doctrinal requirements)
      1.) Representation made by principal to third party
      2.) Principal has actual authority to enter into a contract
      3.) The 3 party was induced to enter into the contract based on this representation
                rd                                                                    rd
      4.) The 3 party relied upon this representation to their detriment and the 3 party did not have reason to
      believe they were not entitled to act as an agent

                        Was there a representation to the architects? Explicit, or implied from previous dealings, or
                         implied by other conduct?
                      This is an abstract concept – courts might construe anything as a representation
                      Here, the courts say that Kapoor was entering into contracts before, thus this is enough to
                         represent to the 3 party
        5) Principal had actual authority to enter into contract
                      3 P does not have to know, but the principal had to have actual authority
                                                                                                          Page 19 of 122

                    Corporation cannot act on their own, but the BoD has to act – Kapoor acted on behalf
                The court relied on Biggerstaff v. Rowatt (1896)
Liability of Partners to 3 P’s in Contracts, Tort and Fraud
     P. Act and Common Law of Partnerships are based on Principles of Agency:
     Each partner is an agent of the firm and of the other partners (s.6)
             Each partner can bind the other partners and the firm – each partner is liable for the other partner
     Process for Resolving Issues of Liability
             o Partnership agreement
             o Statute
             o Partnership Cases
             o Principles of Agency Law (when there are gaps)

Three general principles:
   1. Firm is liable if a Partner acts with actual authority
           o Actual authority can be express/implied & doesn’t matter if the 3 P knows he’s dealing w/ a partner
   2. Firm is only liable for acts within the ordinary course or usual scope of business where a partner exceeds
       her actual authority
           o If the acts were outside, then the onus will be shifted to the 3 party – to see whether the partner
               had authority or not
   3. 3 parties cannot hold firm responsible if they have notice that partner was acting outside of her authority
           o This applies whether the claim is in contract or tort – but in tort, the 3 party’s knowledge is

        The above 3 principles suggest that as long as a third party deals with a firm in a manner that’s consistent
         with the ordinary course or normal practices of a partnership business, and without any notice of any limits
         on a partner’s authority, then that third party is entitled to assume that the firm is answerable to her
[making arguments on both sides – past practice (#1 express/imply), industry standards (ordinary course), other
factors] (ie. Notice)

Other relevant sections that elaborate on apparent authority: (turn to each section in exam 6-15)
    s. 7 – Partners bound by acts on behalf of firm
    s. 8 – Partner using credit of firm for private purposes
    s. 9 – Effect of notice that firm not bound by act of partner
    s. 10 – Liability of partners

s.15: Holding Out by Non-Partners
     Creates liability for those individuals
     If a non-partner represents or knowingly suffers while representing themselves as a partner to a 3 P, may
        be liable as a partner to 3 parties who have relied on that representation when giving credit to the firm
     Important for a retiring partner to give notice to clients – or else they might be caught by s.15
     Also, employees might be caught under this section

P.31: Tower Cabinet v. Ingram [not covered in 2009]
     Facts: Business registered in 1916, operated for many years. Ingram gave notice to the firm’s backers that
        he was no longer a partner in the firm, Merry. Ingram and Christmas also agreed that Christmas would tell
        3 P that Ingram was no longer involved in the business, but they did not place a general ad (to tell the world
        at large). Business dissolved in 1947. in Jan 1948, Christmas sent an order to Tower Cabinet for
        merchandise on the old letterhead, and Christmas signed the order as “manager”. Tower now wants to
        recover the funds.
     Issue: is Ingram liable under s.15 for holding himself out as a partnership?
     Held: NO, Ingram is not liable under s.15
     Discussion: Ingram did not hold himself out as a partner when the order was being placed. Court refers to
        the section which requires “knowingly suffers”. Also s.36 – 3 party is able to treat all apparent members as
                                                                                                            Page 20 of 122

        still members, until 3 party has notice. Here, Tower didn’t know that Ingram was a partner, before it was
        dissolved – thus, no actual reliance by the 3 party before they entered into the contract. He may have been
        negligent for not destroying the letterhead, but that doesn’t mean he allowed Christmas to make a

Nature of liability (ss.10 &13)
    s.10 – Joint liability
            o For contractual debts
            o Say you have 5 partners is a firm – all the partners are jointly liable. Each person can be asked for
                 $100 from the 3 party
            o 3 party will want to sue all the partners – can’t go back and sue the partner himself afterwards
    s.13 – Several liability
            o For claims relating to Torts
            o Several liability: can sue a partner separately, but then they can only apportion the liability to each
    Historical differences are resolved by Rules of Civ Pro
            o Joint and Several liability is the norm – so 3 parties have a lot of protection when suing

Existence of a Partnership
     Critical issue because of rights and obligations that come into play once a partnership is created
     s.2: relationship between 2+ persons/carrying on business/in common/with a view to a profit

       Introduction: What’s at stake in deciding when a partnership exists?
             o As between alleged partners?
                      Sharing profits, mgmt roles, etc.
             o In relation to claims by 3 P’s?
                      Increases who you can claim losses from
       Underlying policy concerns in deciding whether a partnership exists
       Two modes of analysis:
             o Benefit/Burden Analysis
                      Courts reason that if the person enjoys the benefits of the partnership (profits) – then they
                         must be ready to shoulder the burdens too  an objective test, not looking at their intention
             o Contract Analysis
                      Only if the partners actually agreed that the other partners would be agents, and they
                         would be liable for their actions  did they really authorize the others to act on their behalf
                          a subjective test, looking at the intentions of the parties; gives more weight to the fact
                         that the parties will be denying that a partnership exists

Existence of a Partnership
     Before this case, courts generally held everyone liable (expansive notion) – when they were entitled to
       receive any share of the business [watershed case in partnership law]
     Cox and Wheatcroft v. Hickman (1860) HL (CB 6)
     Places a limit on this expansive notion
     Facts: a father and a son who operated a business, financial difficulty
           o creditors decided that action was necessary to protect their interest
           o creditors thought that they could recover more if the business continued operating – instead of
               closing down, and selling the assets
           o 5 creditors were named as trustees, and the business’ assets were assigned to the trustees, and
               they would run it
           o The net income would be still property of the father/son, but creditors would be entitled to a ratable
               portion, until they were all paid off
           o Any overage would go to the father/son
           o BUT, the business fails again
           o Hickman (another creditor) sues, and he says that he should be able to recover against the 5
               creditors, since they were partners
                                                                                                              Page 21 of 122

       Issue: Can Hickman recover from Trustees as partners in Smith’s business?
       Held: NO
            o Trustees were not partners – they didn’t authorize the father/son to act on their behalf as agents 
                looks at the subjective analysis
            o Sharing in profits is not conclusive of partnership (not the essence) – the essence is that other
                people can act on your behalf
            o Creditors’ interest has a limited upside – limited amount, and limited duration, and once fulfilled, no
                more interest in the business
            o Smith is still only the residual owner
            o 2 tests – subjective intent of the parties – was there a meeting of the minds here – no didn’t agree to
                become agents
            o 2 – benefit/ burden analysis -- only benefit up to amount they are owed
       Any other result is bad policy?
            o To hold the trustees liable – bad policy?
       RATIO: a receipt of the share of profits is NOT conclusive proof that a partnership exists

Existence of a Partnership
     s.3 PA - factors to consider in determining whether an investor is a creditor or partner.
           o S 3.1 Joint ownership of property is not conclusive
           o S.3.2: sharing of gross returns not conclusive of a partnership
           o S.3.3: sharing of profits is proof in the absence of evidence to the contrary – but not conclusive
           o Loan is being repaid in installments from profits in the business – not necessarily partner
           o Employees receiving compensation as a percentage of profits – not necessarily a partner
           o Clause d? a loan repayment that varies with the profits for the year – not necessarily a partner
     s.4 PA (Insolvency) - requires subordination of an claim (as compared to other creditors) where investor
       receives a share of the profits of a business but is not a partner in business
           o will be protected from partnership liability – but will be a price to pay (subordinate the priority)
AE LePage v. Kamex Developments Ltd. (CB 11)
     Facts: property owned by a corporation (Kamex) – 2 s/h (Kalmkow and “X”)
           o Real estate agent deals with Kalmkow
     When are co-owners of property considered to be partners?
           o Court looks to the intentions of the parties, examines facts to see if K and X were carrying on a
               business for view of profit, or co-owners
           o Held: they were co-owners, no partnership – refers to the agreement between K and X
           o The mere fact that property is owned in common & that profits are derived therefrom doesn’t of itself
               constitute the co-owners as partners
           o There was a clear intention of the parties that they co-owned the property & weren’t partners
     Is the real estate agent entitled to recover commission?
           o How could she have better protected herself? Performed a title search
           o When you compare this with Lansing (p.15) – the judge distinguished – there WAS a partnership in
               this case, since there was an intention to carry on a business
                     The corporations had an agreement making it clear that no partnership was being formed
                     Despite this intention, a partnership was found

Joint Ventures – Central Mortgage & Housing Corp. v. Graham
     Facts: CMHC has proposed a housing project in Nova Scotia, and provides 100% financing, through a
            o Graham is a home owner, and stops paying, due to deficiencies
            o CMHC sues Graham, but he says that they are jointly responsible for the deficiencies
            o CMHC says that they are only the mortgagers – but the court says there WAS a partnership, since
                they exercised a significant amount of control
            o Construction company on its own had very little power
     Held: CMHC is liable for the builder’s deficiency
     Joint ventures are a contractual undertaking of 2 or more parties to undertake a venture that is limited in
        duration or scope – not a legal term of art & have to use partnership law to find liability w/in the joint venture
                                                                                                           Page 22 of 122

Limited Partnerships (separate from Partnership Act)
    Subcategory of partnership law created by statute (not recognized under common law)
           o Limited Partnership Act: an alteration of the common law definition
    Comprised of 2 classes of partners
           o General Partners
                   Same rights as “ordinary” partners as seen above
                   Wanted to keep someone who will remain fully responsible  those people involved in the
                      management of the firm
                   The reason is that 3 P must know who is fully responsible

           o Limited Partners
                   They have limited liability (up to the limit of their investment in the partnership)– not liable to
                      creditors of the firm, except to the extent of their capital contribution  personal assets
                      generally cannot be seized
                   Dormant or silent
    Can the general partner be a thinly capitalized corporation (few assets) – and have the limited partners run
       the firm?

Limited Partnerships
    Formation
           o by filing a declaration which must be signed by all the General Partners
    Q: Why is declaration only signed by general partners?
    They are taking on the liability if anything goes wrong – 3 parties care about who the general partners are.

    Q: What happens if agreement formed by a # of people, but declaration is not filed by General Partners?
           o if not declaration – the court can deem it a regular partnership, and the LP’s will be considered GP’s

Limited Partnerships
    Dissolution
           o Priorities for distribution are set out in s.24 Limited Partnership Act
                     First pay out Ordinary 3rd Party Creditors
                     Then Limited Partners
                     Then General Partners
           o Can Limited or General Partners take security on business assets and rank ahead of ordinary 3rd
               Party creditors?
           o Section 12 says limited partners can’t take security and rank ahead of the creditors
Limited Partnerships: Management
    Requires two things: General Partner and Limited Partner
    General Partners: party who files declaration required to create the limited partnership and does
       everything in relation to running of the business (have the right to manage the business)
           o True partner in the sense that they have unlimited liability
           o If a new GP or LP will be brought on, usually the LP will have to consent (unless contract out)
    Limited Partners: possess limited liability
           o lose their limited liability status if they “take part in the control of the business”
           o S.10 and s.12(2): LP have the right to accounting info, can dissolve by court order
           o But, if they take part in the mgmt of the firm, they will become GP
    What actions by a Limited Partner will amount to taking part in the control of the business?
           o S.8:
           o If has to consent to significant fundamental changes those are permitted
           o What if Limited Partners must consent to
                     The incurring of any significant debt? Yes ok
                     A change in location of the business? Yes ok
                                                                                                          Page 23 of 122

            o   What if Limited Partner is in charge of hiring employees for business? Maybe need more facts or
                try to suggest different possibilities of when it might or might not…
            o   If involved in the day to day business then the court says you can’t have limited liability anymore
            o   (usually creditors, general partners – more difficult--make the argument)

Limited Partnerships
    General Partner is a Corporation
    Limited Partners are individuals who are also Directors of the Corporation
    Issue: Do Limited Partners lose limited liability status?
    Two Approaches Used by Courts:
    Test for who is controlling the business…
           o Control Test (slightly broader – more likely to impose liability)
                   Haughton Graphic Ltd. v. Zivot (1986) (Ont. H.C.) (CB45)
                            A LP called Printcast: 2 LP’s and a GP (Corporation)
                            Mr. Zivot was the Director (sole s/h) of the GP corporation, and also an LP
                            Mr. Zivot did everything (Marshall was just an LP)
                            Haughton: a printer 3 party – and $128K is owed to the 3 party
                                                      rd                                     rd

                            The LP has no funds, and the GP corp is thinly capitalized, no funds
                            The 3 party argued that Zivot become a GP, because he managed the firm

                            Court agrees  Zivot personally liable (looks at the substance of the control)
           o Specific Reliance (by 3 parties)Test (more hurdles, narrower test)
                   Nordal Holdings (1992) (BCCA) (CB51)
                            Used by USA courts, and some CDN courts
                            GP can also be an LP so long as when he is doing business he is making it clear
                               that he is a GP
                            LP will only lose the status, if result of his conduct, the 3 P believed that he was a

                               GP with unlimited liability, and used that reliance to extend credit to the business
                            This narrows the scope, and recourse  don’t want to give a windfall to 3 parties

                               who never thought this to be the case
           o No clear answer – depending on who you are representing make the arguments – fairness,
               expedition of market, act, commercial practices,

Limited Partnership vs. Corporation
    Flow through of profits  Avoid “double taxation”
    LP gets benefits of both worlds – profits almost directly into their hands and only taxed at individual tax rates
    NO liability and NO double taxation – usually like an income trust

Limited Liability Partnerships
    Background
           o Professions have historically been required to carry on business using a partnership
           o “Created by lawyers for lawyers to protect lawyers”
           o Amendment to Partnership Act in 1998
    Formation
           o From scratch (s.44.1(1))
           o Already a partnership and continuing as an LLP (s.44.1(2))
           o Not everyone can form a partnership (s.44.1(3)) (have to be a part of a professional body)
                1. Situations where LLP is extra provincial LLP you may have to register in other provinces with
                    other requirements
                2. The governing body must allow them to form LLP (ICAO, Ont. Bar)
                3. Minimum level of mandatory insurance  to protect the 3rd parties
                4. The LLP’s name is registered under the OBNA
                5. The LLPs name must include the words LLP
    Key Change in Liability
           o S.10(2): Partner in an LLP isn’t liable for the negligent acts or omissions of another partner in the
                course of the partnership business
                                                                                                   Page 24 of 122

                   If 2 partners were negligent, and there were 50 other partners, those 50 are not liable
        o    S.10(3): Partner in an LLP remains liable for her negligence or the negligence of anyone under her
             “direct supervision or control”
                   What if they had 3 associates under them working on the matter
                   Those partners would be liable for the negligence of their associates
                   What about the managing partner – are they liable for the associates under them?
                   What about articling student? Would the hiring committee be responsible – or the partner
                      above them?
                   What if the 3 party does not sue for negligence – but sue under contract breach?

                   (negligence claim 1 partner – contract might be all partners not covered here) – same for a
                   S.10(2) limit the liability under negligence, but say nothing about contract breach, or
                      intentional torts, or criminal matters (these items would make all partners responsible)
                   Most claims will be handled through insurance first, assets of the firm and then personal
                      assets of any individuals. – insurance is a requirement
   Policy Issues
        o Does LLP status change the internal dynamics of a law firm? If yes, how so?
                   Does the lack of responsibility for your partner’s work and being only responsible for your
                      own work change the way people interact?
        o Are unsophisticated purchasers of professional services harmed as a result of LLPs?
                   Are unsophisticated purchasers of professional services harmed as a result of LLPs?
        o Should we resist the trend of the “corporatization” of the professions?
                   Is there any difference between lawyers, accountants & the rest of the world? Should we
                      resist corporatization, or let it happen b/c it is happening?
        o Do LLPs get it right in terms of allocating losses between “innocent” (ie non-negligent) partners and
             “innocent” third parties?
        o Do we need to mandate insurance to adequately protect third parties?
                                                                                                    Page 25 of 122

Part 5: Corporations
     What is a corporation?
             o Entity created to maximize profits?
             o Doesn’t exist at all?
             o The main defining legal features of a corp:
                      Separate corporate personality – “legal person”
 Can contract in its own right
 Can own land and property in its own right
 Has perpetual life (death, etc. has no effect on the legal status)
                      Limited s/h liability
 Really early corporations – there was personal liability by the s/h
 This was not really an issue, since back then, the small corps had personal assets in it anyway
 Became an issue when the corp became larger – and the s/h could not use the personal assets, and be part of
    the mgmt  thus, push to have limited liability
 Many of the early corps – seen as a delegation by the King/Queen to complete public purposes (state was a
    contributor, and had quasi-gov’t status)
 Corps used to be elite, monopoly power (in the 1700’s) – came under attack by Adam Smith  laissez faire
    liberalism become the norm
 Became an amasser of capital
     Definition will depend on purposes for which definition is being used and perspective and normative
         assumptions of definer
             o Judges could have a different interpretation than others
     Separate personality is often conflated with limited liability

Principal Reasons for Incorporation:
               1) Limited liability (for the shareholders of the corporation)
               2) perpetual existence
               3) liquidity of equity
               4) avoidance of estate freezes
               5) tax reasons

Advantages of Being Artificial Persons
   1. As an artificial person, a corporation can contract in its own right & sue & be sued in its own right
          o In contrast, a partnership can only sue & be sued by its partners
   2. A corporation can own property or land in its own right
          o In contrast, partners have an undivided interest in the partnership property
          o Any land owned must be held in trust for the firm by the partners
   3. Corporations have perpetual life
          o Shareholders dying or changes in ownership have no affect on the company’s legal existence
          o In contrast, partnerships are dissolved upon the death or bankruptcy of a partner or by one partner
              wanting out
   4. Shares are readily transferable – “liquidity”
          o In contrast, in partnerships, need the consent of other partners before selling “shares”
          o This is generally true in public corporations
          o In closely held corporations w/ 3 or 4 shareholders, there might be a right of first refusal
                                                                                                        Page 26 of 122

Salomon v. A. Salomon & Co. (1897) (HL)
     A corporation has a separate legal personality and its shareholders are not liable for its debts and
          o Statute required a minimum of 7 s/h (wanted to prevent the formation of 1 person companies)
          o People began to make 1 real s/h and 6 dummy s/h (become very common)
     Facts: Shoemaker formed a corporation and sold sole proprietorship business assets to it for £39,000
          o Gave a secured loan to corporation for £10,000 (charge on the assets of the corp)
          o Sold all assets to the corporation – acted as director and officer of corporation – but was argued by
               creditors that it was a “sham”
                    Business went bankrupt
                    Wanted S to be liable for obligations of the business
                    Shoemaker wanted to be first in line for his loan repayment and not be personally liable for
                        the debts
     Decision: Corporation met statutory requirements (all the formalities, and that is all that is needed to be
      asked) and created a separate legal entity
          o Intention of legislature was to recognize (artificial) separate existence of a corporation
                    The 7 s/h  the intentions are not a proper field of inquiry
                    Statute says that if you only own 1 share, that’s fine
          o [trial level found him to be just an agent not protected by corp. and personally liable]
          o [court of appeal affirms]
          o House of Lords over-turns
          o Lord Halsbury: – they did everything required under the act therefore should be protected
          o Lord Watson:
                    Other unsecured creditors ought to have taken steps to protect themselves
                    “..a creditor who will not take the trouble to use the means which the statute provides for
                        enabling him to protect himself must bear the consequences of his own negligence…”
                        [could have secured the debt or asked for a personal guarantee] [might be imbalance in
                        bargaining power – walmart- or no assets to secure though]
          o Lord MacNaughten:
                    Declared intention of the legislation is that the company is at law a different person from its
                        shareholders [it’s the corp you can go after not the shareholders]
                    Nor are the shareholders as members liable, in any share or form, except to the extent and
                        in the manner provided by the Act
                    “The unsecured creditors…may be entitled to sympathy, but they have only themselves to
                        blame for their misfortunes.”
     Important Point: Criticism of this case: “that the courts have failed to give the protection to the business
      creditors which should be the corollary of the privilege of limited liability”
     Court doesn’t “pierce the corporate veil” and finds that a person can “wear many different hats” in a
      corporation (i.e. shareholder, director, officer, president and employee)

Lee v. Lee’s Air Farming Ltd (1961) PC
    A shareholder of a company can wear many hats - Lee can be both a managing director as well as an
    The mere fact that someone is a director of a company is no impediment to his entering into a contract to
        serve the company
    Logical consequence of the decision in Salomon’s case that one person may function in dual capacities

Kosmopoulos v. Constitution Insurance Co.
    Facts: Created an insurance contract for assets of the corporation as a sole shareholder
         o Filed a claim for insurance money but insurance co. argued:
                  Sole shareholder has no insurable interests b/c it’s the corporation’s assets not the
                     shareholder’s – the “person” whose assets were lost are the corporation NOT s/h
                  The insurance policy – refused to pay in relation to the harm, since the policy should have
                     been taken out from the company, and not the individual
                                                                                                            Page 27 of 122

            o K argued that they should lift the corporate veil – and he is the company, and the company is him
            o Court says that the shareholder has an insurance interest in the corporation
       Held: he could recover from the insurance company since he was insured, and could get funds
            o Court did not want to pierce the corporate veil
            o In the end, what is the difference? Piercing the corporate veil would have broader implications – so
                the court only talked about insurable interests
            o Q: Does it make a difference if the insurance company knew of this beforehand? Individual vs. a
                company who is on the insurance policy
            o Q2: Courts try not to pierce the corporate veil, but rather find ways of imposing (or in this case not
                imposing) personal liability w/out openly disregarding the separate legal personality of the corp
            o Instead of piercing the veil, the court will just peer behind it – not a lot of predictability

Corporate Personality & Limited Liability
    CBCA
    s.5 - one or more persons (18+) can incorporate a corporation (no longer need 7 people)
    s.45(1) – S/H are not liable for liabilities or debts of corporation
           o s/h can contract out of this, where a bank is lending money, and want personal guar. from the s/h
           o minor exceptions – registering liens on shares of a shareholder
    Exceptions
           o S.226(4) & (5): Allows a court to order the s/h to pay back money to the corp or 3 parties
           o S.246(5): can agree to have s/h take on the responsibilities of the directors
           o “USA” (unanimous s/h agreements): usually in small corporation


       Disregarding the Corporate Entity
       [Exceptions or qualifications of the rule of limited liability]
       Judicial qualifications to the limited liability concept
            o Ignore the separation b/w the s/h and the corporation – to impose personal liability
                       Usually taboo to do this – so they might just peer behind it for a little bit to impose personal
                           liability (very serious to pierce the corporate veil)
            o Very difficult to predict what the court would do in any case – since there is no logic/justification 
                 below is not a checklist, but some factors to consider
       When are courts more likely to “lift the corporate veil”?
            o Sham/Fraud Transaction
                       If action was fragrantly opposed to justice
            o Affiliated Corporate transactions [parent/subsidiary] sometimes the creditors of the sub can pierce
                 the veil if some wrongdoing can be proven – to get money that has been transferred to the parent
            o Avoidance of Statutory Requirements
            o Representations of Unlimited Liability (told people that they were not limited)
                       Representations were relied upon
            o Thinly Capitalized Corporations (when someone gets injured or needs to get paid (usually ok)
                 combined with some wrongful action – a judge may force the shareholders personally responsible)
                       Raise capital by issuing shares or debt: $1/share
            o Tort Creditors
       A court will sometimes ignore the distinction between the shareholders & the corporation & impose
        unlimited personal liability on shareholders

    1. Fraudulent or Sham Transaction – “fact by fact basis” [FRAUD = PIERCE]
     A person cannot incorporate a company as a cloak or sham to do something she cannot do in her personal

Clarkson v. Zhelka (CB 111) – [Court doesn’t pierce veil:]
     Facts: Selkirk (owns multiple companies: industrial, fidelity, etc.)
                                                                                                          Page 28 of 122

            o    He treated them as one, didn’t really think they were separate
            o    Industrial bought a piece of land – money from other companies
            o    Next year, land is transferred to Zhelka – consideration? (promissory note for $120K)
            o    Zhelka further mortgages the property – missed payments – foreclosed, land sold to pay off tax lien
            o    Selkirk goes personally bankrupt
            o    Clarkson is the trustee for the personal creditors – and wants a declaration from the court that this
                 land  the companies were just agents, holding the land for the Selkirk, the principle  so the
                 creditors should be able to access the land
            o Claimed a “constructive trust over sham conveyances”
       Court: if they were the creditors of Industrial company (and the land was transferred with no consideration)
        – and they should be able to access the land – without evidence of fraud cannot PCV!
            o (115) …close to the line but the P did not satisfy the court that the corporation was his alter ego or
                 mere agent for his personal business…”
            o There was no fraud or sham at the time when he created the corporations – didn’t shield his
                 personal assets in the corporations
       NOTE: If a company is formed for the express purpose of doing a wrongful or unlawful act, or, if when
        formed, those in control expressly direct a wrongful thing to be done, the individuals as well as the company
        are responsible to those to whom liability is legally owed
            o The plaintiff has failed to satisfy me that I should declare Industrial to be his alter ego or his mere
                 agent for the conduct of his personal business or for the purpose of the conveyance in question to
                 the defendant Zhelka

Newtonbrook (CB 117)
    Facts: Similar to the above case, but raises a further issue of thin capitalization
          o Kelner owns 100% of Rockwell Developments
          o Parsham owns 100% of Newtonbrook
          o Rockwell enters into an agreement to by assets from Newtonbrook
          o Cheque directly from Kelner
                    There is a disagreement, and lawsuits ensue
          o Newtonbrook wins the case – no damages are awarded, but N obtains order for costs
          o Rockwell is thinly capitalized, so Newtonbrook says that they should be able to access the personal
               assets, since he was the principal (did all the negotiations)
          o The only act done by Rockwell was signing the contract – funds were all supplied directly from
               Kelner, and other administrative items done by Kelner, and not the company
    Decision: the agreement was made only by the companies – Parsham did the exact same thing  and they
      knowingly entered into this agreement
          o Court refuses to pierce the corporate veil to impose costs on a lawyer who had set up shell
               companies in order to do real estate transactions
                    Usual way of conducting real estate development
          o Kelner kept bad records but no one connected with company could allege fraud on his part except
               on himself
          o Did not use the corporation to facilitate a fraudulent purpose
    Waitzer: this decision seems intuitively unjust  isn’t right for companies to be drained of their assets to
      protect themselves from judgments made against them
    A minimum capital requirement could negatively impact small businesses the most & have little impact on
      larger corporations

Recap [When are courts more likely to “lift the corporate veil”? Sham/Fraud, Affiliated Corporations,
Avoidance of Statutory Requirements, Representations of Unlimited Liability, Thinly Capitalized
Corporations, Tort Creditors, Corporate Personality & Limited Liability]
    Court pierces veil:

    Gilford Motor (CB117)
     Facts: Horn was the managing director of Gilford Motors – then he resigned
                                                                                                                  Page 29 of 122

           o Clause in the employment contract: non-compete agreement for 5 years, within a 3-mile radius
           o Attempted to bypass this agreement by creating a corporation that directly competes with GM
       Decision: Court found the corporation was only a shield to get out of this employment contract
           o Cannot create a corporation for the sole purpose of avoiding contractual obligations you purposely
                entered into and ordered an injunction to cease its business
           o The defendant company was a “mere cloak or sham”

    Big Bend Hotel (CB 116)
     Facts: PREVIOUSLY -- Controlling s/h of a corporation suffers a fire loss and has policy cancelled. Fire
        insurance loss claim – THEN -- in order to get insurance the owner shifted ownership to a corporation to
        avoid disclosure of previous loss claims (personally). Has another fire and claims insurance monies under
        the new corporation.
     Decision: Court upholds the insurance company’s decision – if they knew of the previous fire, they would
        have increased the premium.
            o Compelled to “pierce the corporate veil” – failure to disclose was fraudulent and the only reason for
                the shift in ownership to the corporation was to avoid/disguise past insurance loss claims
     General Rule: Judge’s possess a sense of equity and fairness and are mindful of the principles of cases
        (minimize uncertainty and risk) b/c cases on the line are decided other way based on these judge’s personal

    Fleisher (CB 122)
     Facts: As a condition of getting an interim injunction – a company gave an undertaking to the court, saying
        that the corp would be responsible for the costs if the injunction was discharged
             o Ultimately unsuccessful (so no big deal), Undertaking provided by 2 people of the corp
             o Court said in Obiter: If the company had been liable on the undertaking– then the controlling
                 shareholders could have been liable if they knew at the time of the undertaking that the company
                 could not perform (since it was thinly capitalized)
     The corporate veil can be pierced if when incorporated “those in control expressly direct a wrongful thing to
        be done.”
     The courts will disregard the separate legal personality of a corporate entity where it is completely
        dominated & controlled & being used as a shield for fraudulent or improper conduct
     If the corporation is acting as a mere agent of a controlling incorporator it may be said that the company
        is a sham, cloak or alter ego

1A. Company Undercapitalized

Iron City Sand & Gravel (CB 120 note 1) TORT CLAIM
     Facts: Company was incorporated and had banks accounts (rarely used) but everything that was done with
        respect to the company was as if it was Pitrolo himself. It was never run with the intention or idea that it was
        a separate (corporate) entity. He made all the corporate decisions and was undercapitalized with most/all
        expenses paid out of his pocket. Barge owner sued WFT due to the defendant’s negligence while a bailee
        of its barges.
     Decision: Found WFT was the mere “alter ego” of Pitrolo. Never treated it differently then himself, thus
        the court would not either.

       BRIGHT LINE TEST: Either the stockholder is conducting the business in his individual capacity or he is
        not. If he is, he will be liable; if he is not, then it doesn’t matter – insofar as his personal liability is concerned
        – that the enterprise is actually being carried on by a larger “enterprise entity”.
       Barring:…Soloman’s principle is in good standing

       EXAM: If presented with a thinly capitalized corporation
           o Must look to see if it has enough capital to pay off its foreseeable debts and meet its financial needs
              (Soloman VS. Iron City cases)
           o Whether it is being used for a business purpose or as a mere alter ego or cloak for its own personal
                                                                                                           Page 30 of 122

    2. Transactions between Affiliated Corporations
     Affiliated Corporations (Parent & Subsidiary):
             o S.2(3)
             o S.2(5)
             o Sub: More than 50% of the votes to cast directors, and would give the holder the power to elect the
                 majority of the directors
     Courts appear more willing to pierce the corporate veil as between affiliated corporations.
     This will be done particularly where a parent company owns so many shares of the subsidiaries that it can
        control every movement of the subsidiaries – idea here is to treat the corporate groups as one large
     Where there’s a high degree of economic & managerial interaction btwn members of a corporate group,
        traditional “entity doctrine” is inappropriate to determine legal rights – in this scenario the courts will use
        “Group Enterprise Theory” by looking at the corporate group.
     Group Enterprise Theory says that the law should recognize in this context the essential unity of the
        corporate group to ensure the legislative or other public policy objectives
     The fact though that a parent is controlling a subsidiary doesn’t necessarily mean that the crt will pierce the
        veil & see them as one entity – some argue that there must be an unusual amount of control

Factors to consider:
    Intra-group transactions
    Who are the contracts with? (do third parties contract w/ the parent or the subsidiary?)
    What kind of financial inter-dependence is there
    Whether the subsidiaries have their own sources of revenue
    Whether there is administrative inter-dependence
    Employment structure
    Whether there are common group trademarks or logos

DeSalaberry Realties Ltd. v. MNR (CB 123)
    Facts: Multiple transactions b/w a series of affiliated corporate entities. Gov’t is reassessing the taxes for
      previous years (at this time, there were no taxes on Cap Gains).
          o In the proceeds of ordinary business then the proceeds are taxed at higher rates
          o If you are purchasing real estate as investments then proceeds are treated as capital gains (which
              are taxed at lower rates)
          o Not always clear if the asset is a capital asset or part of inventory
                    Land is particularly troubling in this case – since the use is debatable
          o Here, land was inventory  but DeSalaberry said that it was capital, and only sold when it became
              impossible to use, and zoning was not obtained
          o Minister said that the company was just speculating in land, and the business was about buying &
              selling land for profit
          o Court looked at a number of factors:
                    Past conduct
                    Frequency of such transactions
    Held: Court concluded that they were part of a group enterprise that was in the business of buying & selling
      land (not an isolated incident – families that own all the subsidiaries are into RE investment and it should be
      considered inventory)
    Should be looking at the entire group of companies rather than each individual company in order to
      determine the nature of the business
          o There was a history of buying & selling – amongst all of the subs  common practice of the parent
              to incorporate every one or two land transactions, and they bought more land than needed, and
              disregarded zoning laws, and decision-making was done at the parent level at all stages
          o Did the court lift the corporate veil here? Not really, they didn’t impose liability on other subs, but
              only looked at the whole picture to get a feel about DeSalaberry’s situation
                                                                                                          Page 31 of 122

            o   The related companies were only relevant for the purpose of characterizing De Sal’s conduct
            o   No liability was imposed on another entity, as occurs in traditional corporate veil cases

    3. Avoidance of Statutory Requirements – Company not incorporated for bona fide reasons:
     Corporate veil is more likely to be lifted when attempt is being made to avoid statutory or regulatory duties or
        where legislative rationale would be frustrated
     A key issue is whether a court should consider the purpose of the legislation and “read in” meaning to cure
        technical gaps or whether a crt should employ a literal interpretation & leave redrafting of legislation to
     Courts willing to disregard separate corporate entities in tax cases (courts look at the entire business
        enterprise), secondary picketing and corporations breaching the securities Act (ensure that the purposes of
        OSA aren’t defeated)
     “Deep Rock Doctrine”: reach through subsidiary to see who is the real controlling mind/body corporate

Jodery Estate v. Nova Scotia (p.129)
More likely to “PCV” where there is an attempt to avoid statutory/regulatory duties or legislative rationale
would be frustrated – “improper purpose”: reason for establishing the corp is for the purpose of avoidance
of statutory requirements
     Facts: Jodery has 12 grandkids – who are beneficiaries, would have to pay significant taxes
             o So he sets up 3 companies:
                       WRI: grandfather owns
                       JBH: each kid gets 100 shares
                       JCG: a 100% sub of JBH
             o Grandfather transfers all his assets in WRI to JCG – in return for a promissory note for $3.7M
             o In his will, he revokes his previous bequests directly to his kids, and thus avoids succession taxes
     Court: said that the relationship between the parent & sub, no business, no unique directors [puppet
        companies]  so they looked at the substance over form
             o Tried to avoid succession taxes by setting up thinly capitalized holding co.
             o Improper purpose – the reason for setting up corporations was avoidance of statutory requirements
     Dissent: (Dickson J): should respect the separate entity of the corporation (from the Solomon case) –
        should stick to “the Solomon principle”
     Courts more likely to pierce corporate veil when an attempt to avoid statutory or regulatory duties or
        legislative rationale would be frustrated if you didn’t look through the corporation
             o CCRA or tax authorities

Stubart [not covered in class]
    Decision: the Income Tax Act is one where you don’t have to follow the “spirit of the Act” but the black letter
       and the taxpayer is entitled to organize their affairs where you can avoid taxes
           o Distinction between avoidance and evasion – had to create provisions that redefined boundaries
               between avoidance and evasion

    4. Representations of Unlimited Liability:
     Corporate Formalities - s.10(1) - “Naming of Corporations”
           o Any name must use “Ltd., Inc., Corporation”
           o Reason is to put the person on notice that they are dealing with a limited liability corporation
           o Shouldn’t be allowed to take advantage of misrepresentations
               10(5) set out name in legible form on all contracts, orders for goods, etc.
           o What if forget to do this?
     Courts appear more likely to lift veil where representations of unlimited liability made to 3 P

Wolfe v. Moir (CB 89)
    Facts: Wolfe is a teenager who is injured at a roller skating rink. Not advertised as a limited company
                                                                                                         Page 32 of 122

       Moir ‘s defence is that hat he is suing the wrong person – owned by Chinook Corporation.
       Moir and spouse are the sole proprietors of Chinook Corp.
       Decision: “Pierced the corporate veil” and held Moir is personally liable because he:
            o Failed to show name of corporation in ads or on tickets (contrary to Alta. Act)
                     i.e. owned by a corporation
            o Held himself out personally as owner/operator of rink
            o WHY? Failed to show he complied with formalities of incorporation
            o Contrary to the Alberta act
            o Held himself out as the operator in public etc.
            o Therefore failed to comply with the formalities & stat requirements of the corporation act
            o Seems to lead to implying liability

       This case was distinguished from Salomon b/c Moir didn’t comply w/ statutory formalities
            o In Salomon, all statutory requirements had been complied with
    Policy position – because extraordinary protection for corporations one MUST follow the stat requirements

    5. Tort Creditors:
     Courts are more likely to “pierce the corporate veil” in relation to claims by third parties or non-consensual
        creditors because they didn’t choose to interact with the corporation
     No real opportunity to bargain with the corporation – ie. Hit by a taxi

Walkovszky v. Carlton (CB 138) ** Majority and Minority decision
    Facts: Seon Cabco is one of the companies owned by Carlton
    W is injured in an accident  not much money in Seon [2 cabs for each one corp]
          o Carlton has only has minimum insurance for each of his companies, and the profits are taken out
          o W sues all the sister companies  as this is an attempt to defraud the public [trying to use the
              group enterprise theory]
          o Carlton argues that there is no cause of action, since W can only sue Seon and that it is not open to
              the defendant to sue anyone by Seon
    Majority:
          o Strikes out action against Carlton personally (a blow against W) and refuses to “PCV” even though
              there was intentional creation of separate corporations that were thinly capitalized and minimally
          o All formalities for corporations were complied with
          o Very different to use this structure to carry on business and restrict liability not fraudulent at all
          o Companies were not mere agents for Carlton
          o Mere under-capitalization of a corporation is not sufficient to warrant piercing the corporate veil
          o Law permits incorporation for the very purpose of limiting personal liability

       Dissent: Keating
            o There is a case for holding individual shareholders liable
            o Intentional under-capitalization of a corporation in relation to the risks associated with its
                business is sufficient in itself to justify lifting the corporate veil
            o The business KNEW that there would inevitably be liability claims
            o Cites authorities showing that the intentional under-capitalization of companies to avoid
                tort claims is EXACTLY what the corporation structure should protect
            o Intentional effort to avoid risks and liabilities inherently involved in running of the business
            o The minimum insurance is only for redress – intended for small cab companies, not for large
                companies – Enterprise here was large and sophisticated
            o This would only discourage people who would deliberately abuse this privilege
            o [serve to avoid the policy reasons behind the statute]
            o Answer to argument that lifting the veil would limit corporate activities – uses the rhetoric of
                privilege – Business risks should be undertaken in good faith
       Class discussion:
                                                                                                            Page 33 of 122

            o    Tort creditors should be viewed differently – since they didn’t know what they were going to get into
            o    Had the plaintiff gone after the corporation using connectedness doctrine, he would have been
            o    Instead, he went after the individual & had to prove fraud, which was difficult since the defendant
                 had met the statutory requirements
            o    Points to possible need for legislative reform
            o    Piercing the corporate veil might be FAIR but it may create some uncertainty
            o    May be appropriate in the context of more high risk of injury operations – should this be at the
                 discretion of Judges
            o    This happens in a LOT of high risk operations – big policy issues
            o    SH don’t currently have to consider the potential risks
            o    However rather than limited liability for shareholders, minimum insurance amounts is the most
                 appropriate way to deal with this issue
            o    Note: AMEX in the 60’s had unlimited liability for its SH – now changed

Tort Liability & Criminal Law Liability of Corporations
     Tort liability
             o Vicarious and direct liability
                      Vicarious: committed by someone acting on behalf of the corporation (broad)
                                In what circumstances will the corporation be liable? In what circumstances will
                                   the individual be held liable?
                                Criteria:
                                        o Was there a master – servant relationship: must have status as an
                                            employee or acting as an agent of the corporation
                                                 Let the master answer.
                                        o Directors and officers don’t fit criteria
                                        o Not only in the employment relationship but also acting in the course of the
                                            employment relationship when the tort was committed
                      Direct: generally cannot directly commit a tort unless the person committing the tort is an
                          employee AND the person must be considered a “directing mind” of the corporation
                          (essentially the same as criminal liability)
     Criminal liability
             o Initially courts felt there was no directing mind and thus no criminal liability
             o How can a corporation be held criminally liable? (no vicarious liability – directing mind)
             o Basis of finding liability has various tests – may be as an extension of vicarious
                      Punishment of a wrongdoer by the state
                      If we look at a corp as a pure legal construct – then it makes little sense to punish the corp
                          separately, should only punish the people behind it
                      However, the corp becomes recognized in the community – and don’t always know who is
                          behind it
                      Judges were slow to adopt punishment, since it was personal in nature – but later on, it
                          came into play (corporate vicarious liability – now includes criminal)
             o Respondent Superior Doctrine  “let the master answer” (any of the corp employees or agents –
                 even if the individual who committed the offence is a lower level one, and has little authority to bind
                 the corporation)
             o Identification Theory/Directing Mind (UK and CDA have taken a different approach)
                      NOW OVERTURNED SEE BELOW
                      Corp will only be convicted of a crime where the criminal activity was performed by
                          someone who is a directing mind of the corporation  their actions identified with the
                          corporation (they speak for the corporation – Director or Officer or anyone else that controls
                          the actions of the corporation—actions can be identified with the corporation
                                Ie. They “speak” for the corporation
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                        Courts have adopted this doctrine quite elastically – HELD: a corp can have many
                         directing minds ie. Different aspects of the business (depending on geographical locations,
                      As a result the doctrine has been applied where a lower ranking employee has discretion
                         over a particular matter
                      One example – office manager didn’t send in taxes, corporation was convicted.
                      Historically difficult
                      Crown must show that they were the directing minds as understood by the common-law
            o   Bill C-45 – Amendments to the Criminal Code: Replaced the “directing mind” test
                      Partial response to the 1992 Westray mining disaster in Nova Scotia (26 miners died) – and
                         the company didn’t comply with the health & safety laws
                      Crown didn’t go after the company’s directors due to the difficulty of getting a conviction
                         Due to the existing standards for liability
                      There were no successful convictions
                      There was political pressure on the government to rework the legislation to find criminal
                      C-45 changes the test in that it gets rid of the directing minds principle – instead they look at
                         fault/liability tied to all the senior officers (def’n: all employees or agents or contractors –
                         who play an important role in the establishment of the policies and procedures, or have
                         responsibly for managing an important part of the company’s activities) are deemed to
                         incur criminal liability on behalf of the corporation
                         HAS IT MADE A DIFFERENCE?
                         2004 expanded again – actual prosecution is still quite low
                         What are the sanctions against a corporation?
                         What are the appropriate deterrents?
            o   When should we call something criminal vs. regulatory, etc?
                      Criminal has more stigma, but also higher burden of proof & Charter protection
                      What about private litigation – people using court system to get compensation from corp.

Tesco [not covered]
    Decision: court held that the corporation can avoid liability for an offense involving the actions of a manager,
       even though it hadn’t put in a place adequate systems for controlling them
    SCC: Interpreted as saying if these systems are in place the manager cannot be considered a
       directing/controlling mind of the corporation

Canadian Dredging [not covered]
    Facts: “Bid rigging” on contracts – fraud was negotiated by senior officers of bidding corporations. Senior
      officers also kept personally a portion of payoffs meant to be go into corporation’s coffers.
    Decision: Court accepts where someone ceases to act in the interests of corporation and acts in fraud to
      corporate employer the “identification theory” shouldn’t operate
           o But in this case the directing minds did not deprive the corporations completely and allowed the
               corporations to profit regardless
           o Sets too high a standard to say an individual is a “directing mind or agent” of corporation

Charter Status of Corporation
    Charter of Rights to protect rights, freedoms and liberties of persons
    To what extent is this “legal person” (corporation) entitled to the protections enshrined in the Charter?
    Ie. Right to freedom of expression
    To what extent can the corporation invoke the Charter if its rights have been infringed
    Also, can you raise Charter defense if you are a corporation?
           o Easy definitions exclude corps (voting s3, mobility, minority language) that clearly exclude
               corporations, rights conferred to citizens, freedom of religion
           o Drafting entitlements are broad enough to cover incorporations
                    Being charged with an offence: right to fair and reasonably timed trial
                    Fundamental rights (i.e. freedom of expression) that all persons are entitled to including
                       corporations [tobacco advertising]
                                                                                                          Page 35 of 122

                      Freedom from unreasonable search and seizure
       Legislatures saying corporations are a good thing and conferring “legal person” status
            o Limit liability
            o Facilitates raising capital and growth of enterprises
       Should the Charter apply to corporations?
            o Can they claim the rights (freedom of expression, equal protection of the law)
            o Not very clear what are the rights – and who is entitled to these rights
            o S.2 says that “everyone has the right”
            o S.7 [not applicable detain] & s.8 “anyone” [some rights under these sections – look to case
            o S.15 “every individual” [Little Sisters Book case]
            o 11b right to trial reasonable time, 11 d innocent until proven guilty
            o Section 1 – should the courts balancing be different because is a corp.??
            o Law has developed – corp. can get s.8 but not s.15
            o Highly controversial area from a policy standpoint – is it a perversion to extend it to Charter to allow
                 corporations to take advantage of those with less power?
            o A tool to resist public regulation?
            o Others take a more formal view say that we should protect everyone the same – no matter if it a
                 powerful group or and disempowered group
            o Can claim some as a defence but not as a relief
       Discussion: should
       Provinces has ability to regulate corporations with provincial focus
       Federal authority not specifically enumerated (POGG based on case law) there is the CBCA
       Securities regulation – each province and territory has responsibility
       Have to apply to every jurisdiction (not like the SEC)
       Canada only OECD without common securities regulator
       Que., Alb., Man. opposed to common regulator
       [how do you address local interests with a common regulator]
       Hockin expert panel

Pre-Incorporation Contracts
     Introduction
            o A certificate is when a corp comes into existence – on that date (given by the regulatory agency)
     Why do people enter into pre-incorporation contracts? [by a promoter with a 3 party on behalf of a corp not

       yet in existence]
     Timing Issue:
            o Rush to get things signed up  opportunity is only available for a short window of time
                      Want a commitment from the other side and to lockup the opportunity
            o A contract entered into by a promoter with a 3 party on behalf of a corp that is not yet in existence
            o A promoter is someone who will bring the corp. into existence (maybe an officer, director, agent)
            o Could be a sole-proprietor that is going to become a corp. shortly
            o Could be ignorance on when the corp. will come into existence
            o Might want to enter into agreements to attract investors and others
     What happens when people forming a corporation begin to contract on behalf of the corporation before it is
       actually incorporated?
     Largely addressed by statute itself – designed to be standard form contract to avoid uncertainty and
            o Forming a corporation used to be a lengthy process – business ideas need to be capitalized, thus
                enter into contracts as though the business exists (technically it still does not)
     “Promoter”: a person who has a stake in the corporation & brings a corporation into existence (is in the
       process or intends to) [shareholder, officer, director]
     Legal Issue: Does the transaction between the promoter & the 3rd party give rise to any enforceable legal
       rights or obligations? (b/c the promoter is acting on behalf of a corporation not yet in existence & the third
                                                                                                            Page 36 of 122

        party is dealing w/ a promoter but intends to contract with the corporation; third parties will try & attach
        liability to the promoter)

Pre-Incorporation Contracts
     Common Law Position: The common law serves as a default rule to the CBCA sect 14 [pg. 181]

Situation #1: Promoters and 3 P know corporation was not in existence at time K entered into

Kelner v. Baxter (1866)(CB181)
No contract is formed b/w a company and 3 party in pre-incorporation contract – personal liability
    Facts: Kelner and others – agree to create a corp (a Hotel)
           o They sign a memorandum of association (article of incorporation) – but still have to wait for their
                      Both parties know that the company is not incorporated
                      Director Kelner sells wine to the company that he knows hasn’t been incorporated and the
                          deal is signed under the corporate name by Baxter et al
                      A few months later the certificate comes through for the hotel and then the directors &
                          promoters ratify the contract, saying they accept the contract as signed

            o  Company then becomes insolvent,
            o  The party Kelner, wants to recover from the corporation – arguing that they are personally liable
               for the contract price
       Decision: Where a contract is signed by one of who professes to be signing as “an agent”, but who
        has no principal existing at the time, and the contract would be altogether inoperative unless
        binding upon the person who signed it, he is bound thereby.
           o The principal did not exist – thus the person(s) who signed it are personally liable
           o The contract must have anticipated that the obligation would be paid by someone
           o A corporation could not ratify the contract after the fact – but once incorporated must subsequently
               enter into a new contract which supercedes the previous contract that was made with the directors
           o “There must be two parties to a contract; and the rights and obligations which it creates cannot be
               transferred by one of them to a third person who was not in a condition to be bound by it at the time
               it was made.”
           o that give them effect, rather than rendering them null & void
           o The fact that the plaintiff had fulfilled his end of the bargain – that there would otherwise be an
               unjust enrichment – was a significant consideration
Situation #2: Both Promoter and 3 party mistakenly believe corporation is in existence

Black v. Smallwood (1966) (HCt Aust.) (CB 186)
    Facts: Black owned a piece of land – and wanted to sell it to Western
           o Smallwood and Cooper signed as directors of Western
           o Purchaser company (Western) did not exist at the time of the contract – but eventually formed
           o However, they do not want to buy the land – sued those 2 personally for specific performance
               (relies on Kelner v Baxter)
    Held: Promoters are not personally liable – no contract was actually formed (nullity)
           o Court looked to intention of the parties no intention to personally contract & impose liability
           o Both parties to the contract believed they were dealing with the corporation
                     Said that Kelner is not always applicable – adds intention of parties to findings
                             In Kelner, all of the parties know of the legal state of affairs – and the 3 party

                                performed his part of the bargain – showing that they would be paid by someone
           o This case was different – promoters believed company existed; they had no intention of contracting
                                                                                                          Page 37 of 122

            o   What about the underlying equities – there was no unjust enrichment – Black just has to find
                another purchaser
            o   Have to look to the intentions of the parties signing the contract. If the parties intended to execute
                the contract for the corporation & the corporation doesn’t exist, then really are executing for
                themselves (personally liable). However, if the parties intended to execute the contract as a
                corporation, then not liable. If a company doesn’t exist, then the contract doesn’t exist either
            o   The difference is that there is no unjust enrichment (a significant consideration), as the land hadn’t
                been used or damaged & Black could find another buyer (vs. Kelner, who suffered a loss, as he
                supplied the wine)

Newbourne (CB 189)
    Facts: Promoter signed on behalf of the corporation that both sides believed to be in existence. Promoter
      goes to sue under the corporate name and then when it is discovered the corporation was not in existence
      at the time of entering into the contract, he then attempted to sue under his personal capacity relying on
    Held: Intended to be a contract under the corporation and not in his personal capacity. He was barred from
      making a claim in his personal capacity.
           o The only contract made was with the corporation, & not w/ the plaintiff. Since the corporation
               wasn’t in existence when the contract was signed, there was never any contract (cannot sign
               on behalf of something that doesn’t exist – annuls contract)
           o The court suggests that where the corporation’s name is given first, there is a suggestion of an
               intention that the corporation only (and not the promoter) is intended to be bound
           o The CBCA (s.14) attempts to remove doubt that the form of signature isn’t something to be
           o [review section 14] subject to this section, must be a written contract, common law still applies for
               verbal contracts!!
Situation #3: Promoter knows but 3 party does not know that corporation does not exist

Wickberg v. Shatsky (CB 190) not covered
    Facts: Shatsky brothers are the directors of a company that does exist (Rapid)
          o Brought in new capital, and were planning a re-org (form a new corporation)
          o Although the new company was not in existence, they had letterhead printed up
          o They enticed Wickberg away from his previous company, and the offer was printed on the new
              letterhead of the non-existing corp
          o The brothers formed another company – and never told Wickberg that his company did not exist,
              but told him to drop the “limited” part from all the dealings
          o The business failed, and Wickberg sued for his salary
    Issue: Makes three claims
          o (1) the defendant LS is liable personally under the contract since it was signed by him personally for
              a non-existent principal
          o (2) The S’s were liable in that they made a warranty of authority that Rapid Data which was
          o (3) The business is a firm in which the S’s were partners at the time of entering into the contract and
              thus they are liable for the losses suffered by W for non-performance of the contract
                    Trying to prove that it was the parties intention to contract personally on behalf of
                       non-existent company  if that fails try to argue that it was a partnership
    Held: Promoters were not held to be personally liable on employment contract
          o The court uses the intention test set out in Black & finds that the parties didn’t intend to make the
              defendant personally liable for the plaintiff’s salary
          o Whose intention are we looking at? Court seems to look at the brothers
          o Court does not find the brothers liable or guilty of making false promises (warranty of authority) –
              but there are only nominal damages, and cannot get his salary back (problem caused by the failure
              of the business)
                    Held the real losses were a result of the failure of the business and not the non –
                       existence of the corporation (reliance)
                                                                                                            Page 38 of 122

            o   When Wickberg was asked to drop the “limited” – he should have known that there was an issue,
                and it was not incorporated
            o   The court suggests that Wickberg didn’t rely on the info given b/c he was told to drop the “Ltd.” &
                this should have indicated to him that the corporation didn’t exist – suggestion that Wickberg had
                some responsibility here (is that fair though?)
            o   Black v. Smallwood – intention of the 3 party was to contract with the corporation and not the
                director personally
                      Should not be allowed to “better the situation/position”

    Delta Construction (CB 194 note 2) not covered
     Principle: the non-existence of the corporation would be a “windfall” to the plaintiff if they were able to get at
        the directors in a personal capacity

Recap: Is the promoter personally liable?
    1. Both the promoter & the 3 party knew the corporation wasn’t in existence
          a. It’s presumed that the promoter is personally liable, since that reasonably reflects the intention of
              the parties (ie who is the 3 party contracting with, if not with the promoter? Kelner v. Baxter)
    2. Both the promoter & the 3 party mistakenly thought the corporation existed
          a. There is no presumption that the promoter is personally liable. You must look at the facts to infer the
              intention of the parties (Black v. Smallwood)
    3. The promoter knew that the corporation didn’t exist, but the 3 party thought it did exist
          a. This creates an uncertain result b/c some courts have held the promoter liable & others haven’t 
              since no contract existed, there was no consensus between the parties (Newborne v. Sensolid)

Pre-Incorporation Contracts
     Unsatisfactory common law  statutory reform  Problem w/ the Statute:
           o It works on the basis that a contract has been formed
           o In common law though, court have found that no contract may be formed at all if only the
               corporation was supposed to be bound by the contract & it doesn’t exist at the time the contract is
           o If the corporation didn’t exist, the contract may be a nullity at common law
           o The statute may be saying that once a corporation adopts an agreement, that retroactively
               validates the contract
           o But what happens when the corporation doesn’t adopt the contract, or else the corporation is never
           o Puri: The sensible way to work around the issue is to read the statute as saying that a
               contract is deemed to have been created between a 3rd party & a promoter

       CBCA s.14(1) - Promoter is personally liable on a pre-incorporation contract, subject to other provisions
        within the section
            o Promoter will be in the best position to know the status
            o 3 party who has incurred out of pocket costs due to reliance of the promoter – not fair for promoter
                 to escape liability
       Qualifications:
            o “subject to [other provisions in] this section”
            o must be a written contract
            o common law still applies for verbal contracts (makes the form of the signature obsolete)
       s.14(2) - corporation may adopt a pre-incorporation contract (within a reasonable time), thereby binding
        the corporation and releasing the promoter from liability
            o if they adopt it, the corporation becomes bound (as if they had been in existence); and
                      tries to change the Kelner rule
       Qualifications:
            o Must adopt within “reasonable time”
                                                                                                              Page 39 of 122

             o   “By any action or conduct signifying its intention to be bound”
                       The best route is to have the directors resolve [resolution of the board]
                       Performing the contract, or accepting substantial benefit – may show that the contract was
                          adopted (depends on the circumstances)
     s.14(4) - Promoter is not personally bound if express exemption from personal liability in written contract
             o a 3 party might not have a remedy – could be taking a substantial risk
     s.14(3) – subject to (4) a Party to a pre-incorporation contract can apply to court to apportion liability
        between corporation and promoter [doesn’t say what the test will be – deals with general fairness]
     s.14(4) – cannot override
             o promoter is not personally bound to obligations of contract if there is an express exemption of
                 personal liability within the written contract (contractually waive oblgations)
             o leaves residual power in the court – and could provide equitable relief
             o can’t affix liability to someone – if they expressly say that they will NOT be liable in the contract
Personal liability
14. (1) Subject to this section, a person who enters into, or purports to enter into, a written contract in the name of
or on behalf of a corporation before it comes into existence is personally bound by the contract and is entitled to its

Pre-incorporation and pre-amalgamation contracts
 (2) A corporation may, within a reasonable time after it comes into existence, by any action or conduct signifying its
intention to be bound thereby, adopt a written contract made before it came into existence in its name or on its
behalf, and on such adoption
    (a) the corporation is bound by the contract and is entitled to the benefits thereof as if the corporation had been in
existence at the date of the contract and had been a party thereto; and
    (b) a person who purported to act in the name of or on behalf of the corporation ceases, except as provided in
subsection (3), to be bound by or entitled to the benefits of the contract.

Application to court
 (3) Subject to subsection (4), whether or not a written contract made before the coming into existence of a
corporation is adopted by the corporation, a party to the contract may apply to a court for an order respecting the
nature and extent of the obligations and liability under the contract of the corporation and the person who entered
into, or purported to enter into, the contract in the name of or on behalf of the corporation. On the application, the
court may make any order it thinks fit.

Exemption from personal liability
 (4) If expressly so provided in the written contract, a person who purported to act in the name of or on behalf of the
corporation before it came into existence is not in any event bound by the contract or entitled to the benefits thereof.
      Statute operates under the assumption that a contract has been formed
      But under Black, they said that the contract was a nullity
      The term contract is ambiguous
      Read the statute to see if a contract was deemed to be made – but this was not the path taken in the
          Westcom case

Westcom Radio Group Ltd. v. MacIsaac (CB 200)
    Facts: Promoter thought that they were incorporated – but it never was; as did 3 party
          o The 3 party never got their money, so they sue
    Issue: Claim for personal liability of promoter
    Held: The contract was actually with the corporation, that did not exist, and thus the contract could not exist
      and was a nullity. One party did not exist and the legislation speaks to contracts and if one party was not in
      existence  contract does not exist, therefore no personal liability of the promoter
          o Promoter not held liable under equivalent of s.14(1) when both promoter and 3 party believed
              corporation to be in existence and thought contract was with it
          o Only intended to contract with the corporation  state of mind
          o Especially troubling since s.14 was supposed to clear up the ambiguity and the intentions analysis
          o Clear that neither the company or the 3 party wanted a contract with MacIsaac personally  now
              looking like Black  contact is now a nullity
                                                                                                          Page 40 of 122

            o If the court had found an intention to bind MacIsaac personally, then she would be personally liable
        Inconsistent with the CBCA: 3 party assuming the risk
            o The way the court decided this, they rendered the statute meaningless

Szecket v. Huang (CB 201)
Overturns Westcom and says “speaks to the intention of the legislation”
    Facts: The plaintiff developed a patent for bonding metals. In 1985 the defendant approached the plaintiff w/
       an opportunity to develop their technology in Taiwan. In 1988, the plaintiff & defendant signed an
       agreement that had a provision that the defendant would personally guarantee payment of the fees in the
       1st three years of the agreement. A previous draft said “personally & on behalf of the company to be
       incorporated.” The company was never incorporated & the contract wasn’t performed. The plaintiff sought
       to hold the defendant personally liable for the performance of the contract
    Held: defendant is personally liable, pursuant to s.14(1)
            o effectively overrules Westcom
            o Intention of s. 14 was to replace the common law
            o Two part analysis of Westcom to hold the 3 party liable, defeats the notion that the risk should be
                shifted to promoters (even in cases of mistake)
            o It did distinguish Westcom on its facts – both parties mistakenly believed a contract existed in that
    Jurisdictional issue
            o There were jurisdiction issues addressed in the case  which jurisdiction’s laws apply when the
                relevant corporation doesn’t come into existence?
            o Jurisdiction is a significant issue where a corporation was never created  different statutes have
                different degrees of liability imposed on the promoters & the corporation

Landmark Inns v. Horeak (CB 201)
[Very broad interpretation to the legislative intent]
     Facts: The defendants (promoters) seem to have engaged intentionally in the breach
            o 4 individuals set up a contact lens business (South Albert Optical) and before the company is
                  incorporated, C enters into an agreement with Landmark – the tenant is shown to be South Albert
                  (and there are renovations). They break the lease and go to a different shopping mall, and give
                  notice – LL was able to get a new tenant, but6 months later. The landlord brought a claim under s.
                  14(1) that H was personally liable b/c there was no express exemption in the contract. Incorporates
                  a company that then passes a resolution claiming they are the real party to the contract and adopt
                  the contract on his behalf.
     Held: The promoter is personally liable for breach of contract. There was no express provision that the
        contract was not in his personal capacity and the contract was repudiated at the moment/time that they
        broke the lease, the corporation could not adopt the contract after the fact that the contract was repudiated.
     Ratio: By the time the lease was adopted by the corporation in March, it had already been repudiated & the
        plaintiff had already accepted the repudiation
            o Therefore, there wasn’t any contract to adopt b/c it had already been repudiated
            o The promoter’s reliance on s.14(4) fails – in order to relieve personal liability there must be more
                  than just entering into the contract in the name of the corporation
                       Must contain an express provision that the promoter who entered into the contract on
                          behalf of the pre – inc company to remove personal liability
     The judge doesn’t mention anything about the parties intentions – we don’t know if the LL was aware if the
        company had been formed yet  the judge just states that s.14(1) replaces the common law & intention is
        no longer relevant
     In this case the promoters intentionally breached the contract, whereas in Westcom Radio, both the
        promoter & the 3rd party believed the corporation existed  this might explain the different holding

Soloman v. Cedar Acres (CB 205 note 4)
    Facts: Minority s/h entered into pre-inc contract and tried to then claim that the corporation had ratified and
      adopted the contract. There was nothing in the minute books, no directors resolution and little evidence to
      the fact.
                                                                                                        Page 41 of 122

       Decision: Ratification of a contract by one who was not a party to the contract requires that the ratifying
        party be in possession of all material facts and act with such knowledge. The only s/h who had knowledge
        of all material facts concerning the agreement was the promoter. His knowledge however cannot be
        imputed to the corporate defendant. Knowledge possessed by a single promoter having only a minority
        interest cannot bind the corporation.
       NOTE: Easier to make argument if you are the sole s/h and only d/o and there was a resolution in the
        minute book.

Part 6: Creation of the Corporation

A. History of the Recognition of the Corporation as a Legal Form

The Development of Canadian Corporations Statutes
    Corporations were formed to provide a basis for very large pools of capital - people were very reluctant
       before & corporations provide a way by which money could be sprung
    Are limited liability vehicles – is the device used in Salomon v. Salomon
    Put in place Ontario Business Corporations Act, followed by Canada Business Corporations Act
    Incorporation became a matter of right - individuals could apply for company certificate
    Full faith credit system - undertaken to recognize incorporations from other jurisdictions
    Deal under Canadian law as Americans are entitled to do business here - companies are incorporated
       under the auspices of a province subject to limitations that apply under provincial jurisdiction
    Federal incorporation doesn't mean a corporation has to do business in more than one province
    Constitutional limitations are very serious - could be doing business in another province while incorporated
       in Ontario
    Could use jurisdiction to do something not acceptable in one province but b/c are incorporated in other
       province  use it as back door to do business

B. Constitutional Issues (p.62)
     Both the provincial & federal governments have concurrent/overlapping jurisdiction in corporate law
     Section 92(11)  provinces have exclusive power to enact laws for the incorporation of companies w/
       provincial objectives
     Section 91(15)  Court have read in the federal residual powers (POGG) the power to regulate the
       incorporation of companies w/ trans-provincial objects (Citizens Insurance v. Parsons, 1881)

Process of Incorporation
    s.5 - corporation formed by competent individuals
    s.6 - articles of incorporation
           o in the prescribed form
           o required so anyone can get the basic information on the corporation
           o deliver these articles of incorporation to the Director of the Corporations Branch
           o 6(1) (c) number of shares authorized to issue – not the same as actually issued – cannot exceed
               without amending
           o Could have multiple classes of shares (common, preferred, or could call them class I and class II if
               you want) – set out rights that attach for each class of shares (and restrictions if any)
           o 6 (1) (e) number of directors [public company minimum 3 directors – usu. 7-15]
           o 6 (1) (f) restrictions on what the company can do
    s.7 - delivery of articles & materials in ss. 19 & 106
           o to the capital deed director of the CBCA
    s.8 - Director on receipt shall issue a certificate of incorporation
           o incorporation is a statutory right – the Director has no discretion to not issue you a certificate
               (unless there is an issue with your name)
    s.9 - corp. comes into existence on date shown on certificate
    s.13 to alter corp. constitution
                                                                                                        Page 42 of 122

       Corporate Names, s.10(1) - must include Ltd., Inc, or Corp., s.10(5) - must set out corporate name
        on documents, s.11(1) - can reserve a name for 90 days, s.11(2) - can use a number as corporate
        name, s.12 - “Director” can refuse to register a name or order a change in name if ...
       0 start – then at 2 mo dir meeting By-Laws then – AGM within 18 mos and then subsequent AGM within 15
        mos of the previous one (no later than 6 mos after year end)
       s.173 - amending the corporate constitution – changes to “articles of incorporation”
            o Fundamental changes
                      (i) in order to effect the changes there needs to be a special resolution that approves the
                          proposed amendment
                               special resolution is a legal term:
                                      o passed by not less than 2/3 of the votes cast by the s/h that actually voted
                                          on the resolution
                                      o not the directors passing a resolution
                                      o could be done in writing – basically unanimous – then you don’t have to
                                          hold a meeting
                                      o who is entitled to vote? Depends on the type of shares
                                      o s.176 highlights separate class voting – for certain issues
                      (ii) Amendments to articles of incorporation must be filed with Director of Corporations

Articles of Incorporation will sometimes deal w/ the following matters:
 1.) s.28(1)  Pre-emptive rights
        o Before a company can issue shares to anyone else, the owners of existing shares have the “Right of
             First Refusal” to buy additional shares (prevents dilution of share capital)
 2.) s.32(1)  Restrictions on share purchases
 3.) s.107  Cumulative voting
 4.) s.6(3)  Special majorities for directors’ or shareholders’ actions
 5.) s.111(4)  Provision for filling vacancies among directors
 6.) s.114(2)  Quorum of directors of less than a majority
 Want to include anything in the articles that can be put into by-laws
        o Will require 2/3 vote in order to amend
        o By-laws require simple majority approval (50% + 1) and no longer part of public record

By – Laws
 Under the CBCA there are a series of default rules that are assumed to apply unless they are altered by the
       o S. 114 – where the director meetings are too be held, quorum of directors etc.
       o S. 132 – location of shareholder meetings
       o S. 139 – quorum of shareholder meetings
       o S. 141 – voting procedures at shareholder meetings
       o Compensation and Indemnification of Directors
                 Indemnification: if directors are sued in the course of duty the corporation will indemnify them,
                     unless they are acting wrongfully (Conrad Black)
       o Titles and Duties of Officers
       o Procedures for paying dividends
       o The “fiscal” (financial) year of the corporation
 (s. 103) By – laws are effective when they are passed by the directors but only remain effective if they are
   subsequently ratified by the shareholders at their next meeting
 Less difficult to amend than articles – only require simple majority

FORMS – at back of CBCA

Part 7: Powers and Responsibilities of the Corporation
                                                                                                          Page 43 of 122

       In the past, you had to delineate what the object of the corporation was
       Now, it is presumed that a corporation can do whatever a natural person can do – except for the items that
        are restricted in the articles of incorporation (most companies do not)
       Powers of the Corporation: Abolition of the Ultra Vires Doctrine
             o In the past, if a corporation acted outside of its objects – courts deemed it a nullity (void)
                      Result is that 3 parties usually suffered the loss
       Common Law Position: If something restrictive is contained in the articles of the corporation, the parties are
        deemed to have knowledge of this information.

Freeman & Lockyear (CB 251)
 Facts: F & L enter into contract with Kapur (manager) as architects but are never paid. Company claims they
   never entered into the agreement, but Kapur did – who was not authorized.
 Decision: By allowing Kapur to act as managing director even though he was not, the board effectively
   represented that he held this authority and thus they should be held to execute the contract.
 Test to entitle enforcement of contract entered into on behalf of company by an agent who had no
   actual authority:
       o (1) that a rep’n that the agent had authority to enter on behalf of the company into a contract of the kind
           sought to be enforced was made to the contractor
       o (2) that such rep’n was made by a person or persons who had actual authority to manage the business
           of the company either generally or in respect of those matters to which the contract relates
       o (3) that he (the contractor) was induced by such representation to enter into the contract, that is, that he
           in fact relied upon it; and
       o (4) that under its memorandum or articles of association the company was not deprived of the capacity
           either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a
           contract of that kind to the agent
 There was nothing in the articles that restricted Kapur’s appointment of managing director and the corporation
   acted as if he were and the 3 party (F&L) acted on this representation to their detriment.

Powers of the Corporation: Abolition of the Ultra Vires Doctrine (Ss. 15 – 18)
    Modern remedy is to uphold the rights – but give the courts broad power
    A corporation isn’t bound by a contract entered into by a corporation’s agent insofar as it exceeds the
      prescribed authority of the corporation. The implication is that a company lacks the power to do anything
      beyond that which is expressly authorized by its articles of incorporation
    Common law position: Courts developed a doctrine of ultra vires under which a corporation was held not to
      be bound by acts of the corporation’s agents that were beyond the powers of the corporation
    CBCA: essentially negated the constructive notice concept
    Statutory Reform:
           o The ultra vires doctrine was abolished by statute
           o s.15 - co. has the capacity, rights, powers and privileges of a natural person
           o s.16(1) - no need for a bylaw to confer particular powers on co.
           o s.16(2) - corporation shall not do anything contrary to its articles
           o s.16(3) - BUT acts contrary to articles or CBCA those acts are not invalid (only because they violate
               s.16(2) by reason only that the act is contrary to the articles – cannot shield yourself of claims
               b/c you acted contrary to the articles
      o Example: There’s a restriction in a corporate Charter saying that the company won’t engage in
           o of Real Estate. The company then enters into a contract for the purchase of land. Under s.16(3),
               the corporation can’t say that they won’t close the deal b/c they’re not authorized OR the 3 party
               can’t refuse to close the deal b/c the corporation isn’t allowed to engage in real estate deal. Both
               have to perform. s.16(3) allows shareholders to obtain relief if they can show other types of
           o S. 17 – Third parties are not assumed to have constructive notice by reason only of public
                    Doesn’t create the presumption that the 3 party had notice (ultra vires)

           o S. 18 – confirms rules of apparent authority – can assume that internal procedures have been
               complied with
                                                                                                                       Page 44 of 122

                        (d) ostensible authority – Person held out as director, officer or agent; even if not appointed
                         or do not have authority, the company cannot assert the defence that they did not possess
                         this authority
                               Unless: the 3 party knew or ought to have know of the defect of the person’s

                                  authority as a result of their relationship with the company
                     S. 116 – an act of a d/o is valid, notwithstanding an error in their appointment or defect in
                         their qualifications
        How are the s/h protected from the directors violating the articles?
            o Due to the agency principle – directors have a fiduciary duty
            o Can look into the oppression remedy (s.241)
            o S.247: can get compliance/restraining order from the court

Powers of a corporation
16. (1) It is not necessary for a by-law to be passed in order to confer any particular power on the corporation or its directors.
Restricted business or powers
(2) A corporation shall not carry on any business or exercise any power that it is restricted by its articles from carrying on or
exercising, nor shall the corporation exercise any of its powers in a manner contrary to its articles.
Rights preserved
(3) No act of a corporation, including any transfer of property to or by a corporation, is invalid by reason only that the act or
transfer is contrary to its articles or this Act.
1974-75-76, c. 33, s. 16.
No constructive notice
17. No person is affected by or is deemed to have notice or knowledge of the contents of a document concerning a corporation
by reason only that the document has been filed by the Director or is available for inspection at an office of the corporation.
1974-75-76, c. 33, s. 17.
Authority of directors, officers and agents
18. (1) No corporation and no guarantor of an obligation of a corporation may assert against a person dealing with the
corporation or against a person who acquired rights from the corporation that
(a) the articles, by-laws and any unanimous shareholder agreement have not been complied with;
(b) the persons named in the most recent notice sent to the Director under section 106 or 113 are not the directors of the
(c) the place named in the most recent notice sent to the Director under section 19 is not the registered office of the corporation;
(d) a person held out by a corporation as a director, an officer or an agent of the corporation has not been duly appointed or has
no authority to exercise the powers and perform the duties that are customary in the business of the corporation or usual for a
director, officer or agent;
(e) a document issued by any director, officer or agent of a corporation with actual or usual authority to issue the document is
not valid or not genuine; or
(f) a sale, lease or exchange of property referred to in subsection 189(3) was not authorized.
(2) Subsection (1) does not apply in respect of a person who has, or ought to have, knowledge of a situation described in that
subsection by virtue of their relationship to the corporation.
R.S., 1985, c. C-44, s. 18; 2001, c. 14, s. 8.

Liability for Acts of Agents
     Actual authority: Actual authority of an officer may be determined by his employment contract or by a
         formal board resolution
     s.18(1)(a) – 3 parties can assume that corp.’s internal procedures have been complied with
             o Want an efficient market place – don’t want 3 parties to have to check all the time
     S.18(1)(d) – ostensible authority codified
             o If a corp. holds out that someone is a director, agent, official of the corp. – then that person has the
                 authority to perform the duties that are customary with that title
     S 18 (2) Doesn’t apply if the 3 party ought to have known about the lack of authority (imposing some
         responsibility on the 3 party – what a reasonable person would have known)
                                                                                                             Page 45 of 122

             o The articles are publicly available documents – should 3 parties have read this?
             o [fact pattern – agency rules and also 16,17,18 and how they operate so know how to proceed]
        s.17 – 3 parties are not assumed to have constructive notice of publicly filed documents (such as the
        articles of incorporation) – changes the common law of constructive notice

Sherwood Design (CB 259)
    Facts: N bought property on behalf of a client for a company that was going to be incorporated. N used shell
      company and transferred a share to his client. Created draft documents and sent to the vendor’s lawyers
      but N’s client decided that price was too high and refused to accept transfer of share from shell company. N
      then took shell company and used it for another client, but the vendor sued the shell company (owned by
      unrelated individual).
    3 party – Sherwood suffered injuries, and want to recover ($300,000 +) even though the company is

      someone else
    Held: Contract was enforceable against the 2 client, as it conveyed the intent to be obligated by the

      contract for sale of property. Principle of professional ethics that it is important to be able to rely on lawyer’s
      representations/undertakings (personal undertakings  heightened obligations)
          o the lawyer was an agent for the corporation – and the letter sent to Sherwood reflects instructions
               he had form the client – the indoor management rule (s.18), prevents the company from disputing
               what the lawyer sends out (lawyers has the authority to speak for the client)
          o Dissent: said that s.18(1)(d) – said there was no holding out by the corporation, only the agent who
               held themselves out
                     Company never adopted the contracts, the drafts were unsigned and the resolutions were
                         unsigned – should have been enough to put the vendor on notice (pre – incorporation
    In the end, it is likely that the law firm ended up paying the damages – since it was their shell company 
      probably should have dissolved the company, instead of assigning it again
    This document, along w/ the other unsigned documents sent w/ the letter, made it obvious that the
      corporation hadn’t been formed & thus, hadn’t had the opportunity to direct its mind to whether it would
      adopt, or reject, the pre-incorporation contract
    This is a difficult case – you want the 3 party to recover, but not from a new company – who had nothing to

      do with them

Part 8: Capitalization of the Corporation

       A share is a bundle of ownership rights in a corporation – intangible personal property
       No rights to the assets of the corporation – only rights to vote, dividends, cash on dissolution
       Rights based on the terms of the share – based on the articles of incorporation
       Can create an unlimited variety of shares and share structures – have to be set out in s.6 (articles of
       If only one class of shares – 3 rights must attach to that class of shares – s. 24(3)
       If there is more than one class of shares, all three rights do not have to attach to each class, but each of the
        three rights must attach to at least one of the classes of shares – s. 24(4)
       Key rights: 24 (3) – 24 (4)
             o 1. dividend rights (profits earned by the corp, see s.42, discretionary) (priority of payments)
             o [dividends cumulative or non-cumulative]
             o 2. voting rights (how many votes per share) (right to a voice in the corporation, elect the BoD)
             o 3. rights on dissolution – priority ranking

       Evidencing Share Ownership:
            o Share certificate – s. 49
                    S. 13 – share certificate must state “legibly” whatever restrictions, rights and conditions
                       attach to the shares
                    People rarely take delivery of share certificates – held in depository
            o Shares can get issued in “classes”
                    Common shares – residual
                    Preferred shares
                                                                                                        Page 46 of 122

       Buying a company can mean buy the shares of a company or buying the assets of the company – different
        transactions for the same purpose
            o Shares: Director of A can make an offer to purchase the shares of B
            o Assets: A can buy some/all of the assets of B – can have a vote if there is a significant
                 sale/lease/exchange of assets (s.189(3))  special resolution vote
       s/h have equity interest
       creditor holds a debt interest – claim against the assets of the corporation
       creditor’s claims rank above the s/h

Types of Shares
    Common shares
           o Not referred to in the CBCA
           o Voting shares: shares that control the corporation
           o Election of the direction
           o Residual owners of the corp
           o Ranks last
           o Riskiest investment – but highest upside
    Preferred shares (s. 30)
           o Often non-voting (or less voting power than common shares)
           o Some preference over other classes of shareholders for something (voting, dividends, liquidation)
           o Usually fixed or limited dividends – but rank above c/s
                  Cumulative vs. non – cumulative
           o Convertibility (preferred shares  common shares)
           o Retraction or Redemption – s. 36(1)
                  Redemption: company has a right to buy back the shares (cancels shares) – reduces
                     “Stated Capital Account”
                  Retraction: allows you to have the company buy back shares
    Dividends
           o Issued/declared by directors – s. 115(3)(d)
                  Exception: unanimous s/h agreement  preempts decision of d/o
           o Constraint is that they must satisfy the “solvency test” or “capital impairment test” (s. 42)
                  A corporation shall not declare or pay a dividend if there are reasonable grounds for
                     believing that
                           (a) the corporation is, or would after the payment be, unable to pay its liabilities as
                               they become due; or
                           (b) the realizable value of the corporation’s assets would thereby be less than the
                               aggregate of its liabilities and stated capital of all classes
                  Must be solvent after declaring dividends – cannot prejudice higher ranking creditors
                           Directors are personally liable if they declare a payment of a dividend contrary to s.
                               42 [reasonable ground to believe]... – s. 118(2)(c)
           o Can be preferred shares w/ dividends (i.e. $1/yr as long as declared)
           o Cumulative dividends – if a dividend is missed, then no dividend is paid to junior dividend until that
              missed dividend is paid

Acquisition and Transfer of Shares  2 basic ways
    When a corp issues shares from its treasury – primary issuance
    Secondary market – company not involved in this
    Advantage is that shares can be transferred freely – but subject to the articles of incorp (small businesses
       might say that there needs to be approval from the others) – or subject to statutes (e.g. certain industries
       need 50% of shares held by a CDN)

Dual Class Share Structure
    Dual class share structure companies – controlling s/h has voting rights in excess of its cash flow rights
                                                                                                         Page 47 of 122

       Founding people – went public – the share structure was set-up so the founding person can have 10 or 100
        votes per share, where the public has 1 vote or 0 votes per share
       But the public holds the significant amount of the equity (80% of the equity)
       Controlling shareholder has 80% of the votes
       The CBCA allows such a structure

    There is freedom under the CBCA to create different shareholder structures & investors have the choice of
     which companies to invest in
         o Of course, in a small capital market (as exists in Canada) actual choice is limited
         o For example, some investors are limited to how much foreign investment they can conduct (eg
             RRSPs have foreign content rules)
    Whether shareholders have a vote or not doesn’t matter as long as everyone’s making money
         o In article, Hollinger states: “Investors who buy shares of a company w/ a controlling shareholder go
             into the situation with their eyes open and are crying their own crocodile tears all the way to the
         o But empirical results are mixed as to how profitable dual-class shareholder structures are doing

   Issues of democracy
   While public shareholders provide most of the equity they have minimal or no voting rights
   In contrast, the controlling shareholder has only a small portion of the equity, but total control

Capitalization of the Corporation
    Debt Financing
            o Advantages:
                     Interest payments are pre-tax – deductible
                     Could signal to the market – that you’re a healthy company
                     It won’t dilute the existing value of the shareholders’ shares & doesn’t mean added
                        shareholders who will share in any growth
                             Equity owners still retain upside of the company
                     Debt financing doesn’t affect voting rights
            o Disadvantages:
                     Might have to put up collateral – security on assets to protect the loan
                     Lenders might impose heavy restrictions on what the company can do by way of contract
                             +/- covenants
                             Financial Ratios (debt:equity)
                     Obligated to pay interest – can be problematic if not earning revenues
                     Hierarchy of obligations to pay (trustee in bankruptcy  secured lenders unsecured
                        lenders  shareholders)
                     2009 really hard to get debt financing and higher spread over the prime rate

       Equity Financing
           o Advantages:
                     Can still have room to get more debt financing – leveraged
                     No maintenance fees (interest payments)
                     Give it out as you need it
                     Can change your financial picture – not necessarily “true”
           o Disadvantages:
                     Will dilute current shareholding if more issuances – lose “upside”
                     Dividends are after-tax
                     Can have large costs – subject to Securities Act – but there are also debt securities
                     Buyers might want representation on the BoD
                     Can open yourself up to fiduciary duties
                     “Last money in wins” – liquidation preference and/or cumulative dividends
                     Signals the market in some cases
                                                                                                            Page 48 of 122

      Retained Earnings
          o If the corp makes a profit – can either distribute, or reinvest into the corp

Financing Innovative Business Ventures – The Capitalization Continuum
Love Capital ------- ------ Bank -------        --Venture Capital--  Public Equity               Private Equity

      Love Capital
           o This is money from friends & family
           o It might be in the form of debt or equity
           o Limited resources – exhausted quickly
           o Informational issue – they invest only because they love you, not because they think it’s a good
      Banks
           o Never really equity positions in small or medium sized businesses  DEBT
           o Often want personal guarantees
           o Higher interest rates – greater risk of failure
           o Compare U.S. and Canada to Germany and Japan (differs on bank financing vs. private capital)
                    Banks play a larger role in financing in Germany and Japan (historically)
      Angel Investment
           o Business term – highly sophisticated business investors
           o These types of investors occur most commonly in the high tech industry
           o Informal market – can’t really just go out and find one (based on your networking)
           o Only 2.6% of the business plans put before angel investors are actually financed
           o A lot of screening – highly unlikely that you will actually be funded, but if you are, they will want a lot
               of power, and very high returns
           o Gilson article
      Venture Capital Markets
           o Highly regulated industry
           o Want control and a big stake in the company
           o May want to have convertible debt (preferred shares) – with various triggering events
           o May want to bring in significant management people
           o High returns (25-50%)  usually want to get out when it IPOs
           o Compare U.S. and Canada to Germany
                    Germany’s public capital market is not as strong – banks play a larger role
           o USA is the best capital market – look at the model, for how to set one up  however the Russian
               one failed, due to lack of enforcement, and it didn’t catch on
           o VC market usually dependent on the success of the public capital market
      Public Capital Markets
           o Heavily regulated
           o Attractive because of liquidity, ability to calculate value, ability to easily sell
           o Compare U.S. and Canada to Germany
      Private Equity Markets
           o Taking firm private again
           o Leveraged or management buyouts
           o Very attractive b/c less stringent listing requirements (vs. Public Equity Markets)
           o Optimize balance sheet through various means (increasing debts, selling of sectors)

Questions on Capitalizing the Corporation
   1. Who decides when a corporation will issue new shares?
           S.25(1) says the directors have authority to issue shares (and to whom)
           If only one class – look at how many are authorized – subject to -- look at the articles of
              incorporation, by-laws, unanimous shareholder’s agreement, etc
   2. How is the price determined for issuance of new shares?
           The price of shares will depend on how much capital needs to be raised & what the market will
              accept (NPV of future earnings is a guideline)
                                                                                                        Page 49 of 122

             “Without nominal or par value”: board of directors determine the value at the time of issuance in
              accordance with subscriptions
            S. 25(2): Shares are non – assessable: a corporation cannot go back and ask for additional money
              from shareholders (“no call on the shares”)
            S. 25(3): consideration for share has to be fully paid up before the issuance – Shall not be issued
              until the consideration is paid fully in money, property or past (only) services (not promissory note)
            S.25(4): shares should be exchanged for fair value (if not for cash)
3.   What is a “series”? How is it different from a “class”? [have to have a least 1 class of shares – all 24 rights
     have to be attached see 24(3) – 24(4) can have more than one class of shares – put in articles and list what
     rights attach – voting, dividends and priority of sequence of distribution of assets at unwinding]
            S.27(1) Series is a subclass of shares  can have a class, and break it out into series
            Directors will set of the parameters that attach to the class or series
            Can fix the number of shares or authorize the directors to determine the number of shares, shares
              in a series…gives the directors a great deal of opportunity to create additional shares in the future
            Terms of a series can’t be inconsistent w/ terms attached to the class as a whole (as set out in the
            No series in a class can have priority over another series (but a series could have a slightly higher
              dividend – depending on market conditions)
            S. 27 (2)…??
            S. 27(3) – all shares within a series must have same priority in terms of dividends and return of
            There can be distinctions between different series in terms of voting rights b/c the statute doesn’t
              prohibit that
4.   How does one determine which shares of a company are entitled to vote?
            If nothing is stated otherwise, assume all the shares are voting shares w/ one vote each(s. 140)
            If only 1 class all can vote
            BoD determines this – look to the articles of incorporation
            S.24(3) rights attached to shares
            Dual class shares – family gets 500 votes/share and common gets 1 vote/share
5.   Is it possible to incorporate a company with no voting shares?
            S.24(4)(b): NO, at least one class of shares must be voting – in order to vote in director(s), etc.
            Accountability to the s/h – decision making rights
            Voting is mandatory for a CBCA corporation
6.   If a corporation has more than one class of shares, which class has the prior right to capital on dissolution?
            Must look at the articles of incorporation
            If the articles don’t state that Preferred Shares get priority, then both the Preferred & Common
              shares rank equally
            If it’s not clear that all the classes of shares vote equally, then turn to the common law
7.   What records are companies required to maintain with respect to share capital?
            S.26(1) and S.26(2): shall maintain a separate stated capital account for each class and series of
              shares it issues
                      o must keep financial records about how much money it received – in its capital account,
                          and also a securities register
              o (2) “…consideration that you receive for shares must be added to a stated capital account…”
            The stated capital account is important for tax purposes – it shows the amount of money that can be
              returned to shareholders w/out having to pay income tax b/c it’s their initial investment
            Adjusted when
                      o 1.) Issue new shares – ADD to stated capital [and when issuing dividends]
                      o 2.) Redeeming/repurchasing shares – SUBTRACT from stated capital
            RELEVANCE: Capital Impairment Test – s. 42(b)
            S. 38(1)(c) A corporation can by special resolution reduce its stated capital account [for any
              purpose] declaring its stated capital to be reduced by an amount that is not represented by
              realizable assets
            S. 38(3) imposes limits on when you can reduce stated capital: if there are reasonable grounds for
              believing that
                                                                                                            Page 50 of 122

                      o   (a) the corporation is, or would after the reduction be, unable to pay its liabilities as the
                          become due; or
                       o (b) the realizable value of the corporation’s assets would thereby be less than the
                          aggregate of its liabilities
               s. 50 securities register -- s. 21 as well

    8. Does a corporation have power to borrow money at any time?
           Borrowing seems to have less restrictions than issuing shares
           S.189(1): directors have broad borrowing power, but subject to articles of incorporation (w/o s/h
           Directors powers are also subject to contractual agreements w/ lenders or financial organizations
              who might limit the company’s borrowing capacity

Part 9: Management & Control of the Corporation
     Introduction to the Legal Model of Management & Control
     How you allocate control b/w shareholders, management and officers
            Separation of: ownership , control and management
     Legal Model [101 check this]
           1. Shareholders who elect
                    Depending on allocation of voting rights
           2. Directors who appoint/hire
           3. Management who employs
           4. Employees
     The legal model does not necessarily reflect the social reality of the corporate world
     Extra-legal factors are significant
     The legal framework has 3 overlapping systems:
           o Statute (ie CBCA)
           o Private law (ie Articles of incorporation & corporate by-laws)
           o Common law (ie the judicial interpretation of the above)

    Underlying Themes:
    1. Shareholder Democracy: sometimes majority, or super-majority
            o Qualifications to protect minority s/h – can give rise to difficult matters
            o Shareholder conflicts are decided by majority vote (either simple or super), subject to qualifications
                to protect minority shareholders (eg access to the oppression remedy)
            o Rights to vote on fundamental changes, residual rights etc.
    2. Management Autonomy
            o Once elected, directors are entitled to manage without interference
                      Business efficiency – do not want to have to go to the s/h for every transaction
                      Directors must be able to make decisions based on the corporation’s best interests & not
                         just based on shareholder interests
                      Accountability though is maintained b/c shareholders elect & remove directors
            o Qualification of Management Autonomy
                      Shareholders have a voice when there will be fundamental changes to the corporation
[courts use business judgment rule to measure soundness of decisions – personal benefit? Instead of corp}
Management Structure
     Election of Directors:
     Number of Directors - s.102(2)
            o Need at least 1 or 2, but if public co., need 3 or more, and at least 2 of them must not be employees
                or officers of the corporation  outside independent people will balance against entrenchment of
                internal managers
                     o S, 6(1)(e): must specify number of directors in articles
            o Outside directors do not have their job at stake – so they will make better decision
            o Reality: directors are from a small community of people – who have the same interests
            o Discussion:
                                                                                                            Page 51 of 122

                         Reinvent the outside directors as a full-time professional directors who have the requisite
                          expertise & serve on the Boards of perhaps 6 corporation
                      As full-time directors of a limited number of corporations, they would have a focused
                          mandate & the time to familiarize themselves with the corporations on which they serve as
                          board members
                      These professional directors would be chosen by institutional investors
       Qualifications - s.105
           o 105 (1) Cannot be
                     o (a) under 18
                     o (b) of unsound mind as found by a court
                     o (c) a person who is not an individual
                     o (d) bankrupt
           o 105 (2) statute – directors not required to hold shares unless articles say do
           o 105 (3) Residency: majority of the BoD must be resident CDN – used to be 50%
                     o Policy: CDN citizens are more responsive to CDN national interests in the operation of a
                          corporation’s affairs that non-citizens. But d/o’s duty is the promotion of the best interests
                          of the corporation and not Canada
           o But this is a point of contention, from multinational corporations
           o This requirement might be avoided w/ wholly owned CDN subsidiaries  the Parent can appoint a
                majority (or all) of the CDNs to the subsidiary board & then by a unanimous shareholder
                agreement, strip the board of any real power
       Method of Election/Appointment:
           o Within the first 18 months of the corp, must elect directors
           o SH’s elect directors by ordinary resolution at annual general meetings (½ of the votes actually cast
                at the s/h meeting)
           o Term of Office: default 1 yr; max. 3 yr (can be re-elected) – s. 106
           o S.111(1): a quorum (majority) of directors can fill a vacancy for the remainder of the term (if
                someone resigns or goes bankrupt)  if no quorum, then they must have a meeting
                      If you want, could have s/h fill that spot instead – written in the articles of incorporation
           o Could have a staggered BoD – to ensure there is continuity of members
                      This makes it much more difficult to have a hostile takeover bid – since they can’t get rid of
                          the BoD at the next AGM

Management Structure
    Removal of Directors
               o S. 108 – disqualifying: death, unsound mind, bankruptcy
               o s.109(1) – removed by ordinary resolution at a special meeting of the SH’s (in between
                    AGM) to approve the resolution – not look to issued shares, look at who showed up at the
               o EXAMPLE: If 1000 shares and 900 at the meeting you would need 451 shares voting in favour
                    to vote at the meeting to remove the Director
               o Quorum requirement: generally the quorum is a majority of the shares
               o Therefore in our example you would need 500 shares to show up to the meeting
               o However, you can change this quorum requirement in your by-laws
               o Who calls the meeting? In big companies where SH rep a small portion each, may be hard to
                    have the SH’s to put a Director’s meeting in place
               o Each meeting must have a post-out to ALL members .. therefore if 100,000 SH may just be
                    more prudent to wait out the term of the contract of the underperforming Director
               o s.6(4) - articles can’t require higher majority than s.109 – “principled constraints”
    don’t want to make it SO difficult to remove directors – if they are not living up to what is expected
    If disqualified or removal of director(s) brings the number below quorum, then the directors are required to
      call a meeting without delay to fill the vacancy
    [s2 ordinary resolution – res. Passed by a majority of the votes cast by the s/h who voted in respect to that
      resolution] [in contrast to special res – that requires 2/3s of the votes cast]
    [example 1000 shares issued – 500 vote – need 251 to succeed (also need quorum)
                                                                                                         Page 52 of 122

Sec. 109(4) – person who steps into this role because everyone else resigns will be given ALL of the liabilities
Sec. 109(5) – exception for those who are providing professional services

What about the liability? Liability continues on past their resignation.
Those who step into their place, sub sec 109.5C (Cox case) Turn company around … specifically protects them
from liability … you can ask the court to look upon your role favourably.

       Directors exercise their power by resolutions – what if they disagree?
            o S. 123 – process for dissenting decisions (made by consensus – simple majority) and directors are
                deemed to have agreed to the decision unless they ask for their dissent to be recorded in the
                minutes or send a written dissent to the secretary
                     Typically a liability concern – public record so pressure not to dissent
            o S. 117 – alternative to meetings
                     Do by resolution, signed by all directors – can decided anything you could do in regular

Bushnell v. Faith (CB 224)
Circumvented by weighted voting provisions
     Facts: B, B, and F owned 100 shares each (300 shares total)
                o 2 sisters (B&B) and one brother (F)
                o Each share carried one vote but sometimes obtained triple-voting rights (Art.9)
                o In certain circumstances including removal of Director
                o B & B want to remove F as director – succeed on a show of hands
                o F defeats resolution with triple-voting rights
                o 200 votes for the resolution (sisters) against 300 as per his triple votes
     Issue: Sisters apply to the court for a finding that special article 9 is void.
                o s. 184 of UK Companies Act – removal of directors by ordinary vote
                o similar and equivalent to our sec. 109
     Held: MAJ: NO - Articles are valid, therefore the brother cannot be removed from office
“Reasoning is slippery.” Will it accept triple voting rights and NO voting rights in some circumstances?
Where do you stop when you say that certain types of multiple voting rights are appropriate.
           o Want to leave maximum space for private agreements – since they all agreed, it should remain
           o Would other factors change this result? If wasn’t a small closely held corporation. No oppressed
                group in this case.
           o Court didn’t look behind the special provision
     Minority: Concerned that D’s are irremovable.
           o Uses a different approach – gives the relevant statutory provisions a more purposive approach –
                what are the meanings behind it?
           o This special rights for ONLY the director being removed – where the others in the same class, do
                not get the same rights  goes against the theory of same class, same rights
     THUS: in the end, this case is still good law – but at the next AGM, the sisters can remove the brother (since
      his term ends at that time and needs to be re-elected)
     This case reflects judicial deference to governance issues
     Public Policy: While this article made it impossible to remove a s/h against their will, there are still other
      articles in the statute that a s/h can invoke to remove a director that is acting harmfully to the company
     Since they agreed they should be held. Would it make a difference if the shares were inherited? If they
      were bought? If they set them out themselves?
     The judges work technically and don’t look at the policy implications because the result is in
      conflict with the spirit of the legislation. Violates the principle of equality of shares in a class.
     Supposed to be equal at all times and no special rights …
     Considered to be VALID LAW.
     Underscores the point that the brother remained in place for that time, but would he be re-elected when his
      re-election comes up.
     What if there is a personal dispute that is motivating this removal? Could the Director pursue a claim on the
      basis on the “oppression remedy”? Esp. if removal was for an improper purpose.
                                                                                                           Page 53 of 122

Cumulative Voting – Variation on Shareholder Democracy
    Every shareholder has a single vote per share but you can aggregate your vote in a number of ways
          o Cumulative voting allows minority interests to obtain representation on the board
    Method  multiply the number of shares owned by the number of directors to be elected
    The CBCA doesn’t required cumulative voting, but is available under s.107 if the articles so provide
    There has been some talk of making it mandatory. It could be problematic though in large public
      corporations. It works well though in closely held companies.

Example – Cumulative Voting
    Distribution of 10 total shares:
          o SH1  has 6 shares (60%)
          o SH2  has 4 shares (40%)
    If are electing 3 directors using cumulative voting:
          o SH1  has 18 votes (6 x 3)  wants A,B,C elected for the Board
          o SH2  has 12 votes (4 x 3)  wants M,N,O elected for the Board
    If SH2 is strategic, he can get one nominee appointed to the board.
          o SH1  A (9 votes), B (8 votes), C (1 vote)
          o SH2  M (8 votes), N (3 votes), O (o votes)
    Result: A (9), B(8) and M(8) are elected

    1. Cumulative Voting for Directors – s.107
           o In public corps, someone with even 20% of voting rights – can elect the BoD they want
           o In closely held corps, anyone with 50% + 1 share, can elect whoever they want
           o Enables minority interests to obtain representation on the Board
           o Multiply Number of Shares Owned by Number of Directors to be Elected
                    If there are 30 votes in total (10 shares x 3 directors)
                    S/H #1 will get 18 votes, and S/H #2 will get 12 votes
                    Each S/H can put how ever many votes he wants to any candidate
                    Take the 3 directors with the highest number of votes
           o Only required “when articles provide”
                    Tried to make this mandatory – but didn’t happen
    2. Class Voting of Directors
           o Management Structure
           o Can have a class of shares voting for a position on the BoD (say 1 out of 9)
           o Could have another group of stakeholders vote (not s/h)
                    Germany has employee representative on the BoD
     Directors responsible for the entire corp – not necessarily for benefit of the constituents who voted them in

[often just a slate of candidates – vote yes or vote no – often no option to vote no for 1 director for example]

Powers of Directors and Officers
    s.102(1) - D’s shall manage SUBJECT TO Unanimous Shareholder Agreement (USA)
    s. 102(2) – Number of directors
          o Private: 1+
          o Public: 3+ directors, two of which are not officers or employees of the corporation or its affiliates
                   Shares remain outstanding and held by more than one person
    s.104 - requirement to hold organizational meeting
          o After issue of the certificate of incorporation, a meeting of the directors of the corporation shall be
              held at which the directors may:
                  1. make by-laws
                  2. adopt forms for security certificates & corporate records
                  3. authorize the issue of securities
                  4. appoint officers (CEO, CFO, etc.)
                  5. appoint an auditor to hold office until the first annual meeting of shareholders
                  6. make banking arrangements
                                                                                                          Page 54 of 122

                    7. transact any other business
       s.103 - process for enacting bylaws
            o directors may make or amend a by-law that regulates the company (effective immediately but has
                to be approved at the next AGM of shareholders – and then continues in force [or not])
            o If the SHs reject the by-law at their meeting, the by-law ceases to have any effect as of the date of
            o If the by-law is submitted & rejected by the shareholders, the directors cannot then make any other
                by-law that has substantially the same purpose or effect without first getting shareholder approval
                     s.103(4) Restriction: If a by-law, amendment or repeal is rejected by the shareholders, or
                         if the directors do not submit a by-law, an amendment or a repeal to the shareholders as
                         required under 103(2), the by-law, amendment or repeal ceases to be effective and no
                         subsequent resolution of the directors to make, amend or repeal a by-law having
                         substantially the same purpose or effect is effective until it is confirmed or confirmed as
                         amended by the shareholders.
            o If transactions w/ third parties occur on the basis of a by-law, those transactions will be valid – it’s
                only at the date of the shareholder meeting that the by-law ceases to have effect
       s.114 – way in which you conduct shareholder meetings
            o 114(2) Quorum -- requirement of the number of people (or votes) required to validly transact
                business – need majority of the number of directors or if no set number of directors then quorum is
                50% of the minimum number of directors required
            o Also deals with Notice to Directors. One director can have a “meeting” if they are the only Director.

Management Structure
    Appointment of Officers & Delegation of Management Powers
    s.121 – Authorizes D’s to create offices and to appoint officers (CEO etc to fulfill specific duties and powers
      relating to managing specific aspects of the company)
    s.115 - D’s can delegate to a Managing Director (Chair of the Board) or sub-committees of boards
               o rationale: efficiency or bring certain expertise to the Board
    s.125 - D’s fix remuneration of officers, employees and selves
               o conflict there (will come back to this)

Management Structure
    Statutory Constraints on Delegation:
    s.115(3) – non-delegation of some matters – with rationale of accountability
         o There are both statutory restraints [s.115 (3)] and common law restraints on duties that can be
         o The power to manage the corporation must ultimately lie with the directors
         o The common law position is that directors can only delegate to officers or third parties the power to
             engage in ordinary business transactions
         o Directors can’t delegate power that might usurp the board’s power or authority itself
         o Examples: issue new shares, declare dividends, create by-laws, amend or repeal by-laws
         o Cannot issue securities

Common law -- ultimately the directors must be responsible – courts will reject a wholesale delegation to the
management or a third party – SH expect that it is the Board that is ultimately responsible for the affairs
Courts will reject that sort of delegation:
Court phrases – delegate out ordinary business practices – not articles, usurp power of board, share issue
If they delegate too much they will lose their core functions

Inside Delegation (Directors or Senior Mgmt)

Hayes v. Canada-Atlantic (CB 235)
    Facts: Executive committee (3 members) could exercise the powers of the BoD when they were not in
       session in accordance with the Charter.
    Amendments:
                                                                                                            Page 55 of 122

              o 1) bigger salaries,
              o 2) 2 of the 3 Executive Committee amended the by-laws to benefit them, and to
              o 3) need only 2 of them to make decisions (instead of 3), and
              o 4) only needed 1 person to call a meeting
       Decision: these powers were not allowed as they could usurp powers of entire Board of Directors – not
        within legitimate powers of the committee – court interpreted FULL powers, as ordinary course of business
        – court read down the executive powers  gives it to the BoD [reserves ultimate power to main Board]
       They proceeded in such a way that, if their action had been effectual, the 2 men, acting in their own
        pecuniary interests, would have absorbed the entire powers of the corporation for an indefinite period
       It is intolerable to maintain that the words “full powers” in the provision for the appointment of the executive
        committee, practically divested the directors of all their functions
       Even though the term that created the executive committee referred to “full powers of the board,” these only
        referred to the ordinary business transactions of the company
       The board has residual responsibilities
Outside Delegation (to 3 parties)

Sherman & Ellis (CB 238)
    Facts: Enters into a 20 year contract with a 3 party to run an insurance company

    Decision: Corporations may, at least for a limited period, delegate to a stranger certain duties usually
      performed by the officers
          o Some question of degree  long term of this may be fatal
          o Courts want to see some residual control remain in the Board
          o However, there are duties, the performance of which may not be indefinitely delegated to outsiders
          o Here, nothing of importance was left for the board of directors, but the unimportant, the ministerial
          o The grant of corporate power by a state is upon the hypothesis that these powers shall be
              exercised by the corporation’s officers, annually elected by the stockholders & not by the officers of
              another corporation

Kennerson v. Burbank (CB 239)
    Facts: Manner theatre building
          o Contractor to report periodically to the BoD – court said that this was not sufficient control retained
               by the BoD – should retain some over decision-making, etc.
          o The board argues that the requirement that Kennerson must report & account saves this contract
          o Cannot delegate powers for an indefinite period -- ? reporting is not sufficient management
          o Board must retain some of their power to make substantial decisions that affect the company
    Decision: The directors must exercise & maintain control over corporate affairs in good faith, they are
      prohibited from delegating such control & management to others & any contract so providing is void
          o In this case, the Board attempted to confer upon him the practical control & management of
               substantially all corporate powers [just getting back information]
          o However, if substantially all corporate powers are delegated, the contract will be held void &
          o The period reports to the board isn’t a sufficient retention of discretionary decision-making power
        SUMMARY: BOTH CASES: Can contract out some of the powers to a 3 party – BUT cannot give all the
        powers for an indefinite period – directors have to be a part of the decision-making in some way, in good
        faith, cannot absolve all the responsibility – and have to retain some residual control [can delegate for a
        short amount of time potentially]

See Handout and Discussion in Class z
The limits are often found in the common law rather than in the legislation

Problems with the legal model
Studies indicate:
     D’s in fact exercise very little managerial authority
                                                                                                         Page 56 of 122

       D’s don’t get involved in setting business policy or developing corporate strategy
       D’s don’t challenge senior management
       D’s don’t select the CEO

Removing Officers - Contracts & Corporate Constitution:

Southern Foundries (CB 244)
    Facts: Officers are a hybrid of corporate appointees, and contractual employees. Get responsibility/status
       from the statute (CBCA) – can appoint officers, also a contractual agreement between the CEO and the
       company. Director had a 10 year contract – and the articles of incorp said that they could remove any
       director – managing director (if removed) would be dissolved. Federated bought out the company, and
       changed the laws – so they could remove any director at their pleasure  they removed the director and
       managing director
    Issue: What governs the rel’p between the company and the CEO – when there are conflicts?
    Held: court said that YES, they can fire the person, but subject to the original contract – thus they have to
       pay breach of contract damages – no implied terms in the employment contract in what the articles of incorp
       says  there is an inverse relationship [not going to limit the ability of the company to change its articles]
            o Where the articles do not speak to the issue – the corp can remove an officer with/without cause –
                without prejudice to employment standards legislation, etc.
            o They still have to comply with the contractual agreements (if 5 year contract – might be in breach of
    A company cannot forgo its right to alter its articles, but it doesn’t follow that the alteration may not be, or
       result in, a breach of contract
    [nothing in CBCA – articles don’t speak to it – directors can remove an officer with or without cause but if he
       is removed he can pursue a breach of contract for termination]

Class Discussion – Mega Corp.

    1. Does the BoD have the authority (articles of incorporation by-laws); s.189
              (1) directors don’t have to go to the shareholders first). s.189
              (2) borrowing power can be delegated (debt securities); under CL, issuing shares is a fundamental
              matter (s.115)
              (3)(c)) limits delegation for issuing shares – but can be authorized

Shares, debt securities, debt (traditional financial institution)
           a. Looks like issuing shares can’t be delegated to the CEO, unless there are strict guidelines
           b. Debt seems to be allowed – lower standard for debt compared to equity (debt not covered by
               securities law is okay)

    2. CBCA s.125: directors may set the compensation (s.115 does not seem to restrict) – but as a practical
       matter, it does not seem like a good idea  Securities Act – should have a compensation committee to
       set the remuneration – borderline breach of fiduciary duty – could have an efficiency argument that the CEO
       knows more about what it going on (but with restraints) to set the compensation of the other directors

    3. CBCA s.109(1) - by ordinary resolution at a special meeting of the SH’s  thus at this director’s meeting
       can’t do much, you have to call a s/h meeting, the entire BoD has to call the meeting (can’t remove Mr. X on
       our own) [when is the next AGM – could just wait, talk to him, he may be willing to resign]

Critique of the Legal Model of Corporate Mgmt & Control
     Problems with the legal model
     Studies indicate:
     Directors in fact exercise very little managerial authority
     D’s don’t get involved in setting business policy or developing corporate strategy
     D’s don’t challenge senior management
     D’s don’t select the CEO
                                                                                                         Page 57 of 122

      Some of these things relate to time constraints – so how much time can you really expect them to devote?
      Part of a tight knit group – some do not want to rock the boat

      Enron: criticized for not performing their stewardship function  blame placed on BoD
      BoD: it was a stellar board – how could they have allowed this to go on?
      The BoD utterly, and completely FAILED in their fiduciary duties – they let Enron go ahead with risky
       accounting, off the books transactions, allowing excessive executive compensation to senior officers – and
       they knowingly knew that Enron was participating in risky practices (this is a really high mens rea) – setting
       up for a criminal charge?
      Found that the BoD was not actually independent of Enron – too many financial ties
      Some of the recommendations from the investigation subcommittee – strengthen the independence of the
       BoD vs. outside director
      The Subcommittees findings: (1) Fiduciary failure, (2) High Risk Accounting, (3) Inappropriate Conflicts of
       Interest, (4) Extensive Undisclosed Off-The-Books Activity, (5) Excessive Compensation, (6) Lack of
      Greater independence of the audit committee – and the auditors (Arthur Andersen) – auditing vs. consulting
      Saw a lot of reforms in the US – Sarbanes Oxley  similar debates in CDA
      A lot of focus on independence – but a critical policy issue – does independence really increase the
       effectiveness of a BoD – how do you define the effectiveness of a BoD?
      Empirical studies show that independent BoD members do not necessarily increase profits or shareholder
       prices – the value does not necessarily mean higher share prices – but intangibles – transparency,
       accountability, and independent judgment
      Study: more than 80% of investors would pay a premium for a well-governed company (significant number
       of independent directors)

Critique of the Legal Model of Corp. Mgmt & Control
     Outside/Independent Directors
     Chair of Board separated from CEO
     Nomination Committees
     Compensation Committees
     Composition of Boards – Women on Boards [Norway] [mandatory 40% women – politics, wealth creation?,
        tokenism, power relations, resistance, ensuring compliance][women make high % of purchase decisions]
            o Article: women on BoDs influenced mgmt decisions – but what does this mean?
            o Usually BoD are homogeneous – mostly male over 55 years old
            o Most Fortune 500 have 1 female, but rarely do they have more than 1
            o Does diversity mean higher profits? Does diversity increase effectiveness?
     Other Suggestions?

Controlling Corporate Managers
    Corporate Governance
    Berle & Means: The Modern Corporation and Private Property (1967)
           o 2 US scholars who wrote a book in the 1930’s – corporations as private property – they said that
               ownership and control have been radically separated in the modern public corporation
           o Modern public ownership – so widely owned among small investors, that there are no effective
               constraints on the professional managers hired  so it becomes the professional managers who
               end up controlling the company
           o Management though, b/c it lacked a direct stake in the corporation, wouldn’t be motivated to
               advance the welfare of the corporation & its owners
           o Contrast this with a private corporation – where the same people who own, also control
    Issues surrounding the separation of ownership and control
    Divergence of interests between shareholders and managers
    Use Legal Rules (CBCA, common law) or
                                                                                                        Page 58 of 122

            o   Legal instruments restrain managerial opportunism by imposing ex post costs on managers
                engaging in such activities
            o Others see the role for law in a more expanded way
            o Perhaps the recent examples of corporate recklessness demonstrates that more regulation is
       Market Mechanisms (capital, managerial, corporate control, products)
            o Capital markets: If the managers steal, etc. – will be reflected in the share price
            o Products: if mangers choose bad products, it will show up though consumers
            o Managerial: won’t shirk or steal – since their reputations are at stake
            o They also furnish info to the corporation’s principals, which enhances the quality of supervision by
                corporate owners
            o Corporate control: market for takeovers – if run poorly by professional managers, it will be taken
                over by a hostile bidder, and the ineffective management will be booted out
       Fiduciary duty – to act in the best interests of the company/shareholders
            o If there is a breach – then the s/h have access to the oppression suit, etc.

Legal Relationship between Managers & Shareholders:
    Once the power to manage the co. has been vested in the D’s, SH’s are not entitled to usurp that power
       except when expressly provided by CBCA or corporate constitution (s.102(1))
           o Directors have the complete power to manage

Kelly v. Electric Construction (CB 230)
     Facts: 1897 The bylaw wasn’t approved at the next s/h meeting. Approved in 1905 – voting by proxy (had
        to be deposited at the HQ at least one day before the meeting). In 1907, there were 4 absent s/h who were
        represented by proxy – and brought the proxies with them, but didn’t allow them to vote, due to the bylaw
     Decision: the bylaw was ineffective – since it was not adopted by the s/h at the NEXT meeting – so it ceased
        to have any effect
     Even if it was approved in 1905 – it couldn’t have been approved since it ceased to exist in 1898
     S.103(3): the bylaw is effective on the date that the directors approve it – and effective until the next AGM
        when the s/h can accept, amend, reject
     What if it is rejected at the AGM? S.103(4) says it ceases to exist as of the AGM
     What about the stuff that happened after the directors approval, and the AGM rejection – the 3 party
        agreements are still in effect, and if breached – the 3 parties have right of recourse
     Can the directors do this over & over (cycle this?) – hopefully not, since they have a fiduciary duty – and in
        s.103(4), if the directors create a bylaw that has substantially the same purpose as the one that was
        rejected – they FIRST have to have it approved by the s/h (protection under the CBCA)

Automatic Self-Cleaning v. Cunningham (CB 232)
    Ratio: Once the power to manage has been vested in the directors – the s/h are not entitled to usurp
      that power – except as expressly provided for in the statute or corporate articles
    Facts: s/h wanted to sell assets – entered into an agreement – then requisitioned a meeting of s/h to pass a
      resolution to sell the assets – the resolution passed by a simple majority (1500 votes in favour, and 1200
      votes opposed) – but the directors of the company thought that the proposed contract was not in the best
      interests of the company, and they refused to carry out the s/h resolution – the s/h wanted the courts to
      compel the directors to carry out the contract
    Held: the court said that the directors cannot be bound – even though there was a majority vote
    Analysis: the s/h argued the agency relationship – the s/h are the true principals, and the directors are only
      their agents
    Courts said that the directors are the agents of the company – NOT a majority of the s/h [post-BCE
      it’s also stakeholders]
    The company here has a separate interest – which encompasses many interests (majority and minority
      interests)  codified in s.102(1) [oppression remedy? Check this]
    S.146(5): says the directors – if they have been relieved of certain duties – they are also relieved of the
      associated liabilities
                                                                                                                       Page 59 of 122

        S.103 CBCA: allocates power to make by-laws to the directors (default rule) – subject to the art. of incorp.[if
         there was a unanimous s/h approval for a by-law change then power could be taken away from the
        In some sense, this power over by-laws are shared – since s/h must approve the by-laws at next

Voting Rights:
     SH have statutory rights to vote on certain matters – fundamental changes
           1. To give S/H a voice (generally) on items that are fundamental to the company – don’t want directors
               to make these decisions on their own
           2. Want to give minority S/H some protection from majority rule
           3. Want to give non-voting S/H some protection from the voting S/H
     Irrespective of their voting rights, holders of each class of shares are entitled to vote on fundamental
       structural changes

Rationales & Practical Realities
     Each share presumed to carry one vote (s.140(1))  if not, must be put in the articles of incorporation
             o Simple majority – ordinary resolution
             o Super majority – special resolution
     Ordinary Resolution (½ of votes cast or in writing all S/H entitled to vote) – (s.2(1))
     Special Resolution (2/3 of votes cast or in writing all S/H entitled to vote) – (s.2(1))
     [exam trick – how do you determine if a special resolution has been approved – based on the number
       issued or the number of votes that show up on the day of the vote –answer based on what voters show up
       ---- for 600 that show up therefore = ord res need 301 votes special res need 401 votes]
     Sometimes requires separate votes in classes and/or series of shares  different classes may have
       different objectives, and may be affected differently by these fundamental changes
     Confers special rights on certain shares – even if they are otherwise non-voting
     Sometimes allows access to appraisal remedy – a failsafe, if they do not agree with the fundamental
       change (can ask the majority to buy their shares at FMV) – have to vote against the transaction (but this is
       not sufficient – they have to do other stuff too)
     Casebook: the smaller investors usually do not vote – since it is not worth their cost/benefit to get informed
       and vote  causes S/H apathy issue (what about the proxy system – will look at it later)
     CBCA: at least one class of shares must be voting

“Fundamental Changes” must be approved by Special Resolution

Amendment of articles
173. (1) Subject to sections 176 and 177, the articles of a corporation may by special resolution be amended to
(a) change its name;
(b) change the province in which its registered office is situated;
(c) add, change or remove any restriction on the business or businesses that the corporation may carry on;
(d) change any maximum number of shares that the corporation is authorized to issue;
(e) create new classes of shares;
(f) reduce or increase its stated capital, if its stated capital is set out in the articles;
(g) change the designation of all or any of its shares, and add, change or remove any rights, privileges, restrictions and
conditions, including rights to accrued dividends, in respect of all or any of its shares, whether issued or unissued;
(h) change the shares of any class or series, whether issued or unissued, into a different number of shares of the same class or
series or into the same or a different number of shares of other classes or series;
(i) divide a class of shares, whether issued or unissued, into series and fix the number of shares in each series and the rights,
privileges, restrictions and conditions thereof;
(j) authorize the directors to divide any class of unissued shares into series and fix the number of shares in each series and the
rights, privileges, restrictions and conditions thereof;
(k) authorize the directors to change the rights, privileges, restrictions and conditions attached to unissued shares of any series;
(l) revoke, diminish or enlarge any authority conferred under paragraphs (j) and (k);
                                                                                                                   Page 60 of 122

(m) increase or decrease the number of directors or the minimum or maximum number of directors, subject to sections 107 and
(n) add, change or remove restrictions on the issue, transfer or ownership of shares; or
(o) add, change or remove any other provision that is permitted by this Act to be set out in the articles.
(2) The directors of a corporation may, if authorized by the shareholders in the special resolution effecting an amendment under
this section, revoke the resolution before it is acted on without further approval of the shareholders.
Amendment of number name
(3) Notwithstanding subsection (1), where a corporation has a designating number as a name, the directors may amend its
articles to change that name to a verbal name.
R.S., 1985, c. C-44, s. 173; 1994, c. 24, s. 19; 2001, c. 14, ss. 83, 134(F).

        Amendment to Articles (s.173.1) [require a vote]
             o subject to s.176 - may require separate class voting
             o if this class is somehow prejudiced by voting
             o s.176(e) if a new class has equal but superior rights to a previous class (dividend payments) 
                 class B shares will be allowed to vote – even if they are normally non-voting  need 2/3 approval
                 from the people who show up to vote
             o voting occurs by special resolution
             o does class A get a separate vote? Probably do – since class C will be priority over A in return of
                 capital [each class has to approve by vote – but there are exceptions we will discuss later]
             o s.176(1)(i): special section relating to cumulative dividends – when prejudicing certain rights  that
                 class gets to vote
             o change of name – yes it is in the articles
             o add or remove restrictions on business
        Amalgamations (s.181-185)
             o 2 companies are merging into one – and continued in the new corporation
             o Shares exchanged for debt or shares in the new company – or cashed out entirely
             o The amalgamation agreement must be approved by special resolution – by each of the
                 amalgamating companies
             o S.183(3): each share of each amalgamating company – has a right to vote on the amalgamation
                      Even if one class of shares is non-voting, they get to vote on the amalgamation
                      Usually both classes will vote together – and need a 2/3 majority
                      S.183(4): where separate class voting is allowed – if there is a prejudice against that class
             o Short form amalgamations: s.184 and s.185
                      Provide a streamlined procedure – where the companies are related
                      Only need the directors to approve
                      Parent and Sub  into one (vertical)
                      2 subs  into one (horizontal)
             o Long form amalgamations:
        Continuance under Laws of Another Jurisdiction (s.188)
             o To change jurisdictions (ie leave the CBCA), a special resolution is required
             o Although there are mandatory voting rights, there aren’t any separate class voting rights
             o The Director of the CBCA must also approve the transaction, who considers whether the
                 continuance would adversely affect the interests of creditors
        Sale, Lease or Exchange of All or Substantially All Assets (s.189(3))
             o Requires the approval of the S/H in accordance with the rest of s.189 – special resolution
             o S.189(6): each share gets to vote – even if they are not usually voting !!
             o S.189(7): allows for class voting – if that class is somehow affected differently
             o Usually a qualitative analysis – looking at how critical these assets are to the business
             o Directors may terminate a sale agreement if in the initial shareholder approval resolution they
                 assumed that authorization
             o Substantially all – could be 20% if it is the interesting oart of the business – high % for sure – low %
                 maybe – then look at the qualitative and quantitative – is this what the investors reasonably thought
                 they bargained for when they bought the shares?
                                                                                                          Page 61 of 122

            o   The directors can then terminate the agreement without returning to the shareholders for another
            o   This is allowed b/c in the context of a sale the shareholders have a right to dissent & use the
                appraisal remedy (can ask for the corporation to buy back their shares at fair market value if don’t
                approve the transaction)
            o   [example – if have class A shares = voting and Class B preferred shares non-voting [but get to vote
                in this situation due to the CBCA see s176] ---- classes may get to vote separately if the class is
                going to be oppressed --- if being prejudiced needs to approve it before it goes forward (because
                small group]

       Voluntary Dissolution (s.210, 211)
            o s. 210(1) – Dissolution before commencing business – A corporation that has not issued any
                shares may be dissolved at any time by resolution of all the directors
            o s. 211(1) – Proposing liquidation and dissolution – The directors may propose, or a
                shareholder who is entitled to vote at an annual meeting of shareholders may, in accordance with
                section 137, make a proposal for, the voluntary liquidation and dissolution of a corporation.
                Requires special resolution of each class of shares (s.211(3))

Right to Dissent to Certain Fundamental Changes [APPRAISAL REMEDY]
    Appraisal Remedy (s.190) Voting against it and exercising my right to dissent if it passes and then the corp
        will have to buy my shares at fair value
    [policy reason – why not just sell in open market – what if shares don’t actively trade, private companies,
        etc.] [present value of future earnings, or other method]
    SH entitlement to dissent to certain fundamental change and demand corp’n purchase shares for “fair
             o Amend articles change transfer of ownership
             o Amend articles change business restrictions
             o Long form amalgamation
             o Continuance
             o Sale lease or exchange
             o Going private
    S.190(3): the S/H is entitled – if he complies strictly with s.190 – to have to the company buy the shares at
        fair value
    S.190(4): Must vote the same for all of his shares – must have the company buy back all of his shares
    S.190(12): Directors make offer and how arrived at the calculation
    190 provides procedures to go to court if not working out
    If a large number dissent corp may not proceed with the amalgamation since it would take all their cash to
        pay people out

Pre-Emptive Rights:
     Right of existing SH to receive first offer to take up any new shares to be issued by the corp’n, in proportion
      to their existing holdings
     S/h1 has 6 shares of 10 – S/h2 has 4 shares of 10 – bring in new person S/h3 has 10 of now 20 (50%)
     Now S/h1 6 of 20, S/h2 4 of 20 and S/h3 10 of 20 [directors have to act in the best interest of the corporation
      – technically allowed but fiduciary duties]
     Pre-emptive rights to a first offer to any shares the corp is issuing in proportion to their holdings
     Rationales?
           o Majority S/H does not want to lose his control
           o Minority S/H may not want dilution – in cases of special resolutions, etc.
           o Preventing directors from abusing their power
     Pre-Emptive Rights exist only if articles specifically provide (s.28(1))
           o Usually only see this in closely held companies – or private companies
     Apply only to SH of the class in which shares are being issued (s.28(1))
     Remedies?
                                                                                                         Page 62 of 122

            o   Minority S/H can sometimes argue that they are oppressed – if there is a 60/40 split, and the
                majority S/H knows that the minority S/H is in financial difficulties – a new share offering, and the
                majority S/H buys the 60 new, and the minority cannot buy, so majority S/H decides to buy
           o Now A has 160, B has 40  lots of dilution
       Exceptions (s.28(2))
           o Notwithstanding that the articles provide the pre-emptive rights, shareholders have no pre-emptive
                right in respect of shares to be issued
                      for a consideration other than money [land etc]
                      as a share dividend; or
                      pursuant to the exercise of conversion privileges, options or right, previously granted by the

Equality of Shares within Classes
    Shares in same class must be treated equally – unless it expressly allows for separate classes of shares
       which have different rights [shares not shareholders]
    Equal rights in one class – especially on voting rights
    Common law principle: all shareholders within a class are deemed to have equal voting rights wrt all matters
    Formal Equality Rationale  rights attach to a share, not the shareholder
    Capped voting rights  Occurs when the voting rights of large shareholders are limited
    Super voting rights  multiple votes are attached to one class of shares
    Triple etc. voting rights  A class of shares may have more than 1 vote

Jacobsen v. United Canso (CB 697)
    Facts: Deals with capped voting rights. Before, they had one vote for every share. Bylaws of United
      amended 10 years after start-up so that SH could only vote a maximum of 1000 shares – even if they hold
      more – then they put the provision into the articles later
          o Concern was that they didn’t want one person to obtain too much voting power
          o Incorporated in predecessor of CBCA -Continued in the CBCA (1979) – moved to a different statute
    Decision:
          o Capped voting rights are invalid – NOT permissible (section 140, section 24 (3))
          o Shares in same class must be treated equally – if you’re going to vary voting rights, you have to
              create a new class
          o Differential treatment based on identity of shareholder is impermissible
          o Based on these provisions, parliament clearly intended that different rights & restrictions attach
              only when there are multiple classes
          o The corporate structure in this case violates the principle of equality of shares
    Class Discussion
          o Could they have sold 2 different classes of shares?
                   YES, this is permissible under the CBCA
          o Could they have kept the 1 class of shares – and said that one person can’t hold more than 1000
                   In private companies, you could do this – but would you want to limit capital?
                   In public companies, you cannot put restrictions on sales, and transfers
                           (s.49.9 of the CBCA – a distributing company can’t have a restriction on the
                              transfer or ownership of shares) – want public market to trade freely, and would
                              defeat the purpose of a public market if places restriction
                   Exception: other pieces of legislation where public companies may be required to place
                      requirements and restrictions – such as residency rules on publishing or media companies
                      – and no S/H can control more than 10 or 20%, since you don’t want too much
          o What about CDN natural resources? e.g. Noranda – being purchased by Min Metals (a Chinese
              gov’t company) – the relevant gov’t minister needs to approve such a transaction

       How should this case be reconciled (both good law in Canada) with Bushnell, where super-voting rights
        were allowably triggered when a director was being removed
                                                                                                          Page 63 of 122

       Bushnell  Was a closely-held corporation & it appeared that all the shareholders consented to the
        structure [and had the right to the provision]
             o In a sense, that case was upholding private contractual rights
       Jacobsen  Was a publicly-held corporation,  not all the shareholders could make informed consent
       [s. 49 (9) and s. 174(4)]
       Bushnell  super-voting rights were adopted when the corporation was incorporated
       Bushnell – the shareholders got proportionate rights to what they owned – J not even close
       Jacobsen  the capped voting rights were adopted via amendment after incorporation

[some industries are capped – [Bank Act for example 10% cap] [sovereign wealth funds – Can in national interest –
US national security]

Re Bowater Canada (CB 708)
    Facts: Crane Company: Class of special common shares carried 10 votes each if held by original SH, if
      transferred, “step down” provision that converted to 1 vote
          o Bowater Company has purchased Crane shares on the open market – wanted to strike down the
               “step down” provision
          o The special c/s are held by the Crane family – who retains the control though these shares
          o B purchased the ordinary c/s, and challenges validity of C’s articles – violating the equality of
               shares in each class
          o Bowater indirectly wants to take over the company – attempted hostile takeover of Crane, through
               buying the ordinary c/s
    Decision:
          o Step-down provision invalid b/c offends common law principle of equality of shares within a class
               and s. 24 (shares within a class must be equal in all aspects)
                    Court is aware of the competing interests – takes into consideration if Bowater was
                        deceived, or knew what they were getting in to
                    Identity of the s/h shouldn’t matter – the rights attached should be the same
    Remedy: Court severs the step-down provision – holds that the special c/s has 10 votes no matter who
      holds them (transferable)
          o Why didn’t the court just make all special c/s have 1 vote? Knew that the Cranes wanted to retain
               control, and that Bowater was fully cognizant of this structure – and keeping the 10 votes is along
               the same lines as the intentions of the parties – and that Bowater was only buying a minority right in
               the company
          o If Bowater is really interested in buying the company – should make an offer for the special c/s to
               the Crane company – that they will accept
    CONCL: If you want to create different rights, you must create a different class of shares

Distinction between this case & Bushnell:
     Bowater involved a “step-down” provision whose purpose was to maintain effective control in event of a
         Takeover Bid
     In contrast, in Bushnell, there was a share certificate that stated that whoever was being removed would get
         3 votes for every 1 share in order to make it hard to remove a director
     In both cases the court was trying to uphold corporate law provisions while still giving effect to the intention
         of the parties – the law should be facilitative
     Bushnell: right attached to the share & not the s/h – if the share was transferred, the same right would apply
     In Bowater, it mattered who the shareholder was
     Jacobsen discriminated on different shares depending on the number of shares someone owned.

Other Shareholder Rights
   The board of directors has a fiduciary duty to shareholders and there are exercisable rights

Rights to Meetings – s. 133:
    Directors are required to call Annual General Meetings (s.133(1))
                                                                                                       Page 64 of 122

        o   every year (doesn’t actually mean every 12 months – has 18 months to call the first AGM, and the
            subsequent AGMs must be called within 15 months)
                  elect directors, appoint auditors, receive financial statements
   Directors have power to call special meetings (s.133(2))
        o e.g. approval of fundamental change, amend articles, removal of director – requires approval
            through s/h vote
        o Fundamental change: selling of substantial assets, restructuring of company
   Shareholders are entitled to notice of meeting (s.134, 135)  21 to 60 days [check this]
        o Test of Notice: must provide sufficient details of what is to be dealt with at the meetings (i.e.
            proposed transaction) so as to allow SH to make reasoned judgment (s.135(6)
   Quorum is holders of majority of shares issued [not all authorized though] that are entitled to vote at meeting
    (s.139(1)) – for the meeting to be “officially on”  must have at least 50% + 1 of the shares [different from a
    vote within the meeting which is 50 +1 of shares that show up for the meeting]
   [reg resolution 50% +1 special res 2/3+1 quorum 50% + 1 of issued]
        o The CBCA allows you to change the threshold for the quorum to occur (higher or lower) – in the
            articles of incorporation – or can make it the number of people who actually show up to the meeting
        o In an adjourned meeting the quorum requirement is “whomever shows up”
   A shareholders can requisition a meeting (s.143)
        o If they hold at least 5% of shares entitled to vote – This is a method to force items on the corporate
        o Directors then have 21 days to call the meeting (set a date for the meeting)
        o Exceptions [directors would try to use these]
                  If they have already set a meeting to deal with this issue – they can just use that meeting
                  If the purpose of the desired meeting relates to something that a s/h is not entitled to
                      discuss or make a s/h proposal on (to be discussed later on)
   S.143(4): the s/h themselves can call a meeting if the directors refuse – and can get reimbursement for the
    reasonable costs of the meeting
   A court can order a SH meeting under s.144
        o Court has very broad discretion to call a meeting
        o Easier case: impossible for some sort of technical reason – to convene a meeting (lack of quorum,
            due to the death of a s/h)
        o Harder cases: deals with situations where the directors refused to hold a meeting – superficially
            based on a technical reason – but really reflects a conflict of corporate policy, or a fight over the
            control of the corporation  courts much more reluctant to intervene in these types of cases
        o impracticable

 Facts: Wanted to call a meeting and the purpose was to replace the board of directors and management
   and replace them with their own slate
       o Set a record date for Creo’s annual meeting – to preempt their requisition of a meeting to replace
           the board – gave Creo time to go and search for a friendly bidder

Airline Industry Revitalization Co. v. Air Canada (1999) S.C.J.
 Facts: Onex teamed up with American Airlines to purchase AC shares thru a company they have set up.
     Onex was to bid for AC in order to bypass provision in AC’s articles that prohibited major foreign ownership.
          o Onex wanted to set up a special meeting – the purpose was for the s/h to approve the takeover,
             amend the articles, and to remove the existing directors (put in their own slate of directors)
          o Current directors of Air Canada said that they have already set up a meeting – just before the
             request was received by Onex  thus, didn’t have to respond to Onex’s request
          o Onex decides to go to court – to call a special meeting ASAP – or for the court to order a meeting
          o Air Canada’s defence – they have already set a date (Jan 7, 2000) – what more do you want?
 Held: in favour of Onex – states that Air Canada has called a meeting, but didn’t put on the agenda the items
     that Onex wanted – especially the point of removing current directors
                                                                                                            Page 65 of 122

            o   AC must call a meeting, but court reluctant to actually call their own meting – the s/h have the ability
                under the CBCA to call own meeting, and get reasonable costs reimbursed – s. 143(4)
            o   The court itself didn’t order the meeting b/c it was reluctant to intervene when the shareholder could
                rely on express statutory provisions to achieve the same result
            o   In the end the takeover bid failed b/c of complications w/ the Competition Act & federal prohibitions
                of individuals holding more than 10% of the Air Canada voting stock

Right to Appoint a Proxy – s. 147
    Definition: SH entitled to designate someone to vote on her behalf, in accordance with her instructions
        (s.148(1))  statutory right to vote by proxy (can be the form & person – 2 meanings)
            o Rationales?
                      Growing separation of ownership & control in the modern corporation
                      Small proportionate interest – cease to have any direct involvement in the mgmt of the
                         company  class of professional managers
                      Large corporation – these managers are made accountable through voting procedures –
                         but there is very little incentive for people to vote
                      If they feel that the company is not giving them an adequate return – easier to sell, than to
                         inform themselves and vote
                      s/h rational apathy  difficult to hold mgmt accountable to shareholders
    D’s of widely-held corp’ns are required to send a form of proxy to SHs along with notice of SH meeting
            o Given the opportunity for someone else to vote on their behalf
            o Full disclosure
            o Actually can entrench mgmt  mgmt can vote his shares
    Meaning of “Solicitation” (s.147)  mandatory for certain companies
            o (a) includes:
                      (i) a request for a proxy whether or not accompanied by or included in a form of proxy
                      (ii) a request to execute or not to execute a form of proxy or to revoke a proxy
                      (iii) the sending of a form of proxy or other communication to a shareholder under
                         circumstances reasonably calculated to result in the procurement, withholding or
                         revocation of a proxy, and
                      (iv) the sending of a form of proxy to a shareholder under s. 149
            o Proxy forms are generally not sent neutrally – usually sent by a party who recommends that you
                vote one way or another
            o People other than mgmt can send out proxy forms – dissident group of s/h – who want you to vote
                against mgmt
            o Can create a proxy battle – s/h can receive 2 or more proxies to vote in different ways  often
                relate to control of the company
            o Exceptions
    Proxies can be lawfully solicited only if accompanied by extensive disclosure (“info circular”) (s.150)
            o Must satisfy the test of providing sufficient information to make reasonable judgments
                      Supposed to allow s/h democracy – to review mgmt policies in a substantive way
            o Policy: Want voting to be “fully informed”
            o Exceptions (without sending proxy info circular):
                      Solicitation to >15 s/h (1.1) – allows to talk amongst themselves w/o breaking provisions
                      Solicitation by public broadcast, speech or publication (1.2)

       Critiques of Proxy system
             o Despite all this mandated disclosure – do s/h actually read & understand?
             o Most s/h mechanically return to mgmt – to vote as they see fit
             o Mandated disclosure makes it very costly for dissident s/h to mount a campaign against mgmt
             o “solicit” is defined very broadly – s/h have been found to trigger solicit – which requires them to
                prepare a dissident proxy circular
                                                                                                        Page 66 of 122

                    Case: a s/h group sent a letter to vote against mgmt – and to not execute the form of proxy
                     they received from mgmt  this letter was held to trigger the proxy requirements under the
                   Caused a chill on s/h communication  could encourage s/h to be passive – since they do
                     not unintentionally want to be caught in this proxy requirements
           o   Amendments:
                   Def’n of solicit (s.147): if you make a public announcement of how you will vote & the
                     reasons why – this is excluded from the def’n of “solicit”
                   Institutional investors have used this – and stated on their websites how they will vote at the
                     next meeting (OTPPB)
                   s.150: you may be soliciting proxy by these means – but not require you to distribute a
                     dissident proxy circular
                          s.150(1.1): fewer than 15 s/h – cost/benefit analysis
                          s.150(1.2): if you’re soliciting proxies by public broadcast, speech, or publication

Right to Make Shareholder Proposals – s. 137
    SH “entitled to vote” at AGM may notify corp of any matter s/he proposes to raise at the meeting
    Registered or Beneficial (recent change) Owner

   Verdun v. TD Bank (CB 777)
    Facts: Verdun & his wife was the beneficial owner of over 2000 shares of TD Bank through his RRSP
      account. He submitted 11 proposals relating to the structure & make-up of the board of directors &
      procedures at AGM. Management refused to circulate the proposals, arguing that they were submitted to
      address a personal grievance & that Verdun was seeking to gain publicity. Also argued that he wasn’t a
      shareholder entitled to voice, as per the Bank Act. Also argued that since Verdun wasn’t a registered
      shareholder, he wasn’t a “shareholder entitled to vote.”
           o Note  this case arose out of the Bank Act¸but the provisions are identical to the CBCAs
    Issue: Whether someone who is a beneficial but not registered shareholder is entitled to make a proposal
      for an annual meeting.
    Decision: As a matter of statutory interpretation, a beneficial owner is not entitled to vote. Must be a
      “registered owner” under CBCA in order to make a proposal.
           o Note: unless you specifically request for shares to be registered or a share certificate – broker will
               buy the shares on your behalf but they will stay in their name – you are a beneficial owner
           o In response to this case, the CBCA was amended: “…registered or beneficial shareholder…”

      Eligibility Thresholds
            o S. 47: for the purposes of S. 137(1)
                      Minimum number of shares: 1% of O/S voting shares or $2,000 worth of shares (whichever
                         is less) – usually the $2,000 level  s/h’s can get together to make the $2,000 threshold
            o Minimum length of s/h: 6 months

   Michaud (CB 776)
    Facts: Michaud was a registered shareholder of National Bank who was qualified to make proposals under
      the shareholder proposal provisions in the Bank Act. He sent resolutions to the National Bank, the Royal
      Bank (after purchasing a single registered share to qualify) & the other major CDN banks. The proposals
      related to aspects of corporate governance. The banks declined to submit his resolutions & he sought an
      order that the banks circulate the proposals
           o There was no min. amount of shares required to make a proposal
           o Company must bear costs of proposals by putting them into information circulars
    Decision: Michaud had standing & wasn’t abusing the shareholder proposal right
           o Ordered to include his proposals in their proxy & let his proposals go to a vote at the AGM
           o Amendments to the CBCA created eligibility thresholds for submitting shareholder proposals
    s.137(1.1) and Regs s.46)
           o Should there be minimum thresholds to be able to make s/h proposals?
           o Should important provisions be contained in Act or Regs?
                                                                                                                       Page 67 of 122

[print diagram from March 5 powerpoint!!!]

Other Shareholder Rights
    Right to Make Shareholder Proposals
           o Matters that may be raised
           o SH is also entitled to discuss any matter on which she could have made a proposal(s.137(b))
    Limitation: generally speaking, approval of proposal by SH does not necessarily require action by directors
    Practically speaking, they likely wouldn’t ignore them, but nonetheless, they aren’t legally binding
    As well, ultimately articles must be amended through shareholder resolutions, indicating that these
       proposals, if passed, would be effective & not require further action
    Most commentary suggests that shareholder proposals re by-laws aren’t binding

Other Shareholder Rights
    Limitation: Corp’n is not required to circulate proposal if fits in s.137(5)
       (a) Time limit: proposal isn’t submitted to the corp. w/in 90 days of the anniversary of the previous AGM
       (b) personal claim – doesn’t specifically relate to the business or affairs of the corporation
       (c) failed to present a proposal that was included by mgmt at prior AGM
       (d) SH’s proposal didn’t receive min support in previous years
       (e) Legislation being abused to secure publicity – “catch all”

Other Shareholder Rights
    S.137(5) Exceptions
    (b.1) clearly appears that proposal doesn’t significantly relate to the business or affairs of the corp’n
    USED TO BE: “primarily for the purpose of promoting general economic, political, racial, religious, social or
       similar causes”  cases seen below – relate to the old section – no cases on the new section
    How will interpretation of two sections be similar or different?

Greenpeace Foundation v. Inco (CB 776)
    Facts: Greenpeace submitted a proposal that Inco should adopt pollution control measures to reduce
      sulphur dioxide emissions to a specified level per day. Inco relied on s.137(5) in refusing to circulate
      proposal (“promoting general economic, political…causes”)
    Decision: Court upheld Inco’s decision
          o GrP was not a SH at relevant time (90 days before the AGM – a technical issue)
          o Proposal substantially same as last year’s (s.137(5)(d))
                   this year they had a relatively higher emission – as opposed to previous year, where there
                      was less
                   Court is saying that it is a “substantially similar” matter – should it have been excluded on
                      this point?
          o Related to an “environmental” cause (looking at the OLD section) – said it was one of these
              enumerated factors
    The meaning of “substantially similar” (s. 137(5)(d)) was at issue here
    This case also demonstrates the marginalization of corporate goals other than profitability

Varity Corp. v. Jesuit Fathers (CB 772)
     Facts: Proposal to disinvest from South Africa – terminate all relationships with RSA. Purpose of proposal
        as noted in preamble: “to achieve peaceful elimination of apartheid (by disinvesting)” and “economic
        investments in SA too risky”. Varity refused to circulate proposal.
     Decision: court held Varity did not have to include proposal b/c falls into s.137(5)(b)
     (b) it clearly appears that the primary purpose of the proposal is to enforce a personal claim or redress a personal
        grievance against the corporation or its directors, officers or security holders;
     (b.1) it clearly appears that the proposal does not relate in a significant way to the business or affairs of the corporation;
             o If primary purpose is one of those listed in s.137(5)(b), then any other specific or general purpose
                 cannot save proposal
             o If you frame a proposal in terms of shareholder value/wealth & profit maximizing, it will be more
                 likely to be included in the circular
                                                                                                             Page 68 of 122

       Even if the proposal is voted on by s/h (50% majority) – there is no action required by the directors
            o Merely an advisory resolution – any action that is going to be taken must be done through a
                 directors resolution
       Under the new test the amount of litigation over s/h proposals have sig. decreased
       Policy not to reject: worse publicity for fighting the proposal, especially if you know if will be defeated
            o Corporate social responsibility is becoming more relevant

Promise of shareholders proposals:
    Get a chance to speak with other shareholders
    Can influence attitudes
    Might get an institutional investor interested

Problems w/ shareholder proposals:
    If management refuses to circulate the proposal, SHs have to litigate to have it included [expensive and
    They are limited in length (500 words), although management can respond at length
    Historically they have had low success rates
    For small investors, it’s often more economical to sell shares rather than change policy
    Shareholder proposals have little effect, even if passed
    However, they may shift management if there are enough unhappy shareholders
    Institutional investors are particularly influential if they threaten to vote against or abstain
    Don’t have to implement the proposal – can study it, sit on it, no reporting back requirement [think about
       reforms to CBCA]
    [in the states when a mgmt rejects a s/h proposal have to send a copy to the SEC

Conduct of Meetings
    Normal agenda of AGM 
          o (1) receive directors’ reports
          o 2) receive financial statements of the company for its most recent fiscal period,
          o 3) Receive reports of the auditor,
          o (4) elect new directors if required,
          o (5) appoint the new director, if necessary
    S. 137(1)(b) – S/H have express limited right of discussion of proposals  provided it is reasonable and
      subject to the broad right of Chair to put an end to discussion when sees fit. Courts have not set a fixed rule
      CBCA doesn’t cover to any extent.
    Duties of the Chair:
          o The right to discussion is subject to the chair’s discretion to end discussion when he sees fit
          o Courts are usually deferential to the Chair’s authority to terminate debate
          o However, a court will more likely intervene if management is using its power to obstruct the wishes
               of a majority of the members
          o The Chair must balance democracy against efficiency & management responsibility
          o Concerns about conduct of the Chair usually only occur when control is in dispute – eg the Chair’s
               rejection of proxies

        “Closure” of Meeting:
            o Courts attempt to come up with decisions that promote reasonableness
            o Shareholders are entitled to bring up proposals and be heard, BUT if the chair cannot bring closure
                – the meeting can be “hijacked”

    National Dwelling Society & Sykes (CB 758)
     Facts: s/h proposed a committee investigate the affairs of the company. The chairman rejects the proposal
        and instead puts a resolution to the s/h to accept the financial account for the year. The s/h vote down the
                                                                                                         Page 69 of 122

        resolution by a majority and furious, the chairman refuses to carry on any further business, orders the
        meeting dissolved and walks out. The s/h continue the meeting and appoint an investigative committee
       Decision: the s/h were entitled to take action on their own – the chair is not entitled to stop the meeting
        whenever he wants to suit his interest.
            o S/H are entitled to make proposals at the meeting and can discuss them provided that it was
                 proposed prior to the meeting or it is a matter that could have been proposed before the meeting.
            o The chairman’s power to conduct the meeting doesn’t extend this far [not allowed to cancel meting
                 according to own will and purposes] – it wasn’t reasonable
            o Chair’s duty to run the meeting and process

    Wall v. London & Northern Assets (CB 755)
     Facts: A meeting of s/h was called to approve a sale of assets. Majority of s/h was objecting – they were
       prevented from fully airing their views at the meeting, and the Chair cut off the discussion, and called for a
       vote. Minority s/h wanted to make the resolution void – it looks as if the minority s/h had an opportunity to
       have their discussion, and the majority s/h wanted the vote.
     Decision: upholds the resolution – as long as all members were allowed to express, and the majority
       decides – they don’t really have to care what the minority s/h says (give them a reasonable amount of time)
            o The chair though is in control of the meeting & can close discussion, provide that the majority are
               acting in good faith & the minority has been consulted

       Duties of Chair of Meeting

Blair v. Consolidated Enfield (CB 763)
     Facts: A group of s/h (another company Cdn Express) said Blair (controlling s/h) had acted improperly and
         claiming against him in regard to the selection of board members. [nominates Tim Price but B says the
         proxy form can’t be used to vote for Price only for the slate put forth by mgmt. – delays meeting talks to
         lawyers, doesn’t allow a representative for the other company speak). [can’t exculpate only on saying
         lawyer’s advice ]
     B was seeking to be indemnified for his legal costs [s124 CBCA 124(1) says can indemnify but limitation in
         124(3) requires individual to have acted honestly and in good faith and with a view of the best interests of
         the corporation] – remaining s/hers said he shouldn’t b/c he was acting improperly as the chair.
     Decision: Blair had acted in good faith [lower court said no appeal court said yes] and on reasonable
         reliance of legal advice which met the required standard. Given the necessity of the determining who the
         legal directors of the company were, so that business could continue, some decision was required. There
         was no obvious error or oversight that would enable the Chair to discount the advice of the company’s
         solicitors and court said he should be indemnified.
              o Chair must act in good faith when conducting a meeting
              o Chair often has an interest in the outcome – not a judge-like neutral person
              o Not a judicial or quasi-judicial function  but honesty and fairness to all individuals involved

Access to Corporate Records
 S. 19 – must have an address
      o Allows s/h and others to know where the registered office is
 S. 20 – what records must be kept and available to be inspected
      o Articles, by-laws, s/h’s agreements, USAs unanimous sh agreements, minutes, resolutions of s/h,
           securities registrar (list of all sh) and notices of directors
 S. 20 (2) records that must be maintained that are available to the director
      o Financial records, copies of minutes, resolutions of directors and board members
 (5) Accounting records do not have to be held in Canada
      o Only those that keep those records that are necessary for assessing the operation of the business on a
           quarterly basis
 S.21 – creditors and s/h can go to business during business hours and make copies free of charge as long as
   comply with rules – if a distributing company any person can get the records as long as pay for copying
 S 21 (9) – use of information – affidavit saying have a legitimate purpose for the list – trying to influence vote,
   want to buy the shares, any other legitimate purpose
                                                                                                            Page 70 of 122

   S 263, 266 – can get records filed with the capital D “ Director CBCA” in Ottawa

Shareholder Agreements – s. 146
 Unanimous Shareholder Agreements [contract amongst all sh restricts some or all of powers of the directors to
   supervise and manage the affairs of the business – transfers to shareholders]
 s146 (5) if transfer power rights then also liabilities and defences that directors had
 common law captured in the statute now
      o Displaying responsibilities, duties and liabilities of the board of directors
 No restriction on shareholders entering into agreements (i.e. vote together or restriction of share transfers)
      o Typical in private companies (esp. share transfer agreements)
                 i.e. absolution restriction on transfers w/o consent of s/h or must first offer transfer among
                    existing s/h [right of first refusal,. Shotgun provision, piggyback clause – minority sh also gets
                    control premium]
 Anything constraining transfers must be noted on share certificate
      o Gives notices to 3 parties
      o Are not bound by agreement/restrictions unless it is on the share certificate

Ringuet v. Bergeron (CB 839)
 Facts: S/h agreement requiring directors to vote in a certain way (overlap of directors and s/h). Directors are
   responsible for managing and supervising the mgmt of a company.
 Issue: Can an agreement allow you to override the duties of directors?
 Decision: SCC said no, agreement was void (1960).
       o 2001: s.136 inserted into the CBCA reversing the decision (not very effectively)
       o Intention: To override the SCC and allow entry into USAs and in doing so can substitute USA for
           director’s discretion and assume director’s liability
       o Valid subject to compliance with s. 146 (i.e. notice to 3 parties) and relieving directors of liabilities
           (fiduciary duties) and substituting s/h’s in the place of directors by way of USAs
                 Directors liability only removed under the CBCA and not under any other statutes

   Must give notice for:
         o USAs
         o Shareholder agreements restricting transfer of shares
   S. 146(3) – purchaser to a s/h agreement is deemed to be a party to the agreement
   (4) – if notice isn’t given in the manner prescribed in s. 49(8), then the purchaser has the ability to rescind the
    transaction for a period of 30 days after they became aware of the USA
         o You cannot upset the s/h agreement b/c involves all other s/h
         o Sale is ineffective b/c you bought a bundle of rights other than what you had agreed to

   S. 49(8) – No restriction, charge agreement or endorsement is effective against a transferee unless they have
    knowledge of the restriction, charge, agreement or endorsement or unless reference to it is noted explicitly on
    the share certificate
         o Share transfer restrictions (other than s. 174 – regulated industries)
         o Charges in favor of the company – s/h owe money and pledged shares to cover the debt
         o USAs or endorsement under s. 190(10)
                   S/h dissents to fundamental change – they possess “dissent rights” remedy to force sale of
                      shares at fair value
                   Becomes an unsecured creditor until agreement on fair value
   S. 51(1) the company (issuer) is entitled to deal with the registered owner when dealing with notices, dividends
    etc., who must then transfer that information onto the beneficial owners
         o i.e. broker  owners of shares
   s. 60(1) and (2)
         o On delivery of a security…I get what you got…unless been part of a fraud affecting the security or have
              notice of an adverse claim with respect to the security
    S. 62 – bona fide 3 party purchaser acquires the security free from adverse claim if not given notice
   S. 65(3) – how transfers take place; endorsement takes place when appropriate person puts signature on
                                                                                                             Page 71 of 122

        o   Provision of transfer where registered owner (or someone authorized on their behalf) signs over
            transfer of security to 3 party
        o Private Party: to sell the certificate they must endorse the back of the security  negotiable instrument
            that can be used in any way
   S. 76(1) – Duty to register a transfer (on part of the company)
        o (a) show up with endorsed share certificate and comply with all steps and pay the fee: the transfer agent
            is obligated to process/register the transfer
   S. 78(1) Limited duty on the issuer to enquire into adverse claims
        o No obligation to transfer and limited obligation to resolve adverse claim  shifts back to transferor

Share Restrictions – Directors had absolute and uncontrolled discretion to deny a transfer

Smith v. Fawcett (CB 825)
 Facts: The company’s articles contain a provision saying “the directors may at any time in their absolute and
   uncontrolled discretion refuse to register any transfer of shares.” [not allowed for public companies of course]
   The directors refused to allow a father  son transfer, unless they sold 2,000 shares to a named director at a
   certain price.
 Decision: Directors are subject to exercise their discretion bona fide in what they consider (fiduciary duty to act)
   in the best interest of the company and not for other collateral purposes [not acting in good faith]
        o Companies are able to draft wide and comprehensive powers to directors to refuse to transfer as to
            enable them to take into account any matter which they conceive to be in the interests of the company
            and thereby to admit (or not admit) a particular person and to allow (or not allow) a particular transfer for
            reasons not personal to the transferee but bearing on the general interests of the company as a whole

[prof says application of the business judgment rule is lenient in general unless there is personal gains or conflicts
involved – post BCE may apply in many more contexts]

Edmonton Country Club (CB 829)
 Facts: Articles were altered to impose minimum annual fee and to give a right of forfeiture or forced sale of
   shares in the event of a default. Also altered article 20A which gave directors a right to refuse to register any
   transfer of shares.
 Decision:
       o The levying of an “annual fee” resolution was ultra vires for offending the principle of limited liability,
            namely, that a s/h who has paid for their shares is thereafter free of further pecuniary obligations with
            respect to those shares.
       o Article 20A was upheld as valid – directors were allowed to deny a transfer unless evidence of “bad
                  Dickson: “The power to refuse to consent to a transfer of shares was reserved to the directors
                    upon incorporation of the company, by the contract contained in the articles, and is not
                    something now sought to be imposed upon unwilling shareholders…There is no evidence…nor
                    is it alleged, that the directors have at any time in the almost 30 year history of the company
                    acted in bad faith or arbitrarily or otherwise abused the power.” [no bright line test leave it in
                    hands of the decision-makers]
                  Note: Share transfers were really about admittance of new members and shouldn’t put
                    corporate fiduciary duties to their discretion to allow new members into the club – (Dissent)
                    wanted the article 20A struck down as the articles didn’t provide for criteria that set out a
                    reasonable exercise of the discretion [wanted a bright line] and that there was no limitation on
                    the time on the restriction.[concern that their exercise might be discriminatory]

       145.1 pooling agreement – agree on how will vote on an issue more narrow than s.146 USA
                                                                                                             Page 72 of 122

Part 10: Role of the Professional as Advisor

Directors’ Perspective
     S. 123(4) and (5) – Due diligence defences
            o “Due Diligence” – Directors relieved from their liability if: they have complied with their duties
               under s. 122(2), if they exercised the care, diligence and skill that a reasonably prudent person
               would have exercised in comparable circumstances, including reliance in good faith on (a) or (b)
            o “Good Faith” – A director has complied with their duties under s. 122(!) if the director relied in good
               faith on (a) or (b)
                     (a) financial statements of the corporation represented to the d/o of the corporation or in a
                        written report of the auditor of the corporation fairly to reflect the financial condition of the
                        corporation; or
                     (b) a report of a person whose profession lends credibility to a statement made by the
                        professional person
     Should there be a “gate-keeper” liability? Which would be different than their regular duties
     What is the role of the auditor in public companies?
            o To review & report on the F/S that are prepared by company’s mgmt at the AGM
            o Usually the CFO prepares the F/S along with his staff
            o Huge potential for bias if F/S are internally prepared – staff wants to meet targets and keep their
            o External auditors are hired to review the F/S
            o Not every company is required to appoint an external auditor (s.163 allows non-public companies
               to not appoint an auditor for a particular year – with the unanimous consent of all the s/h)
            o Auditors job: great deal of discretion in the job generally – more problematic given the lack of
               independence from mgmt
     What rules does the CBCA contain to ensure the integrity and independence of the external auditor?
            o S. 161 – Qualifications of the auditor – must be independent of the corporation
                     (a) independence is a Question of fact [no material relationship w. the company]
                     (b) sets out the test for “business partner” – not independent
            o S. 162(1) – S/h appoint the auditor by ordinary resolution at AGM (and successive AGM)
                     Mgmt recommends an auditor and set remuneration – and the s/h vote on this
            o S. 165(1) – s/h can remove an auditor by ordinary resolution at a special meeting
                     The auditor is given the chance to respond in writing – company must FWD the response to
                        all the s/h  to make sure the auditor has a chance to respond, and s/h knows why they
                        are being removed (s.168(5) and (5.1))
            o S. 168(7) – If there is a replacement auditor – they must get a written statement from the previous
               auditor, giving information on why the predecessor is being replaced
            o S. 170 – “Right to information” – Auditor has a statutory right to get information from the company
               on demand (“shall furnish”)
                     (a) information and explanations
                     (b) access to records, documents, books, accounts and vouchers of corp and subsidiaries
     What are benefits and costs of broad financial disclosure?
            o Want to ensure transparency and accountability for mgmt
            o Affects not only s/h – but many other stakeholders
            o Market efficiency – will punish companies who do not disclose
     Is the audit committee effective (s. 171) ?
     [enron – the auditors got way more money for consulting than auditing so there were big problems]

Hercules Management Ltd. V. Ernst & Young [1997] SCC [CB 903]
    Facts: Ernst & Young were hired in 1971 to audit financial statements & provide audit reports to the
       companies’ shareholders. In 1984 the corp went into receivership. In 1988 shareholders & investors
       brought an action against Ernst & Young, claiming the audit reports for 1980,81,82 were negligently
       prepared & seeking damages in tort & contract [contract with company]
                                                                                                             Page 73 of 122

       Issue: Do the accountants (auditors) owe a duty to investors in the company, in the preparation of financial
        statements and audits, to ensure the integrity of the statements?
       Held: appeal dismissed – auditors do not owe investors a duty of care
            o Auditors owe a duty of care to the company, but not to shareholders
                     Management hired the auditors – the contractual relationship is between the auditor & the
                        corporation – no direct contractual relationship for negligence in the performance of its
                        audit to the s/h
            o Not reasonable to assume investors would use audit and financial statements in reliance to making
                investment decisions
                     Reliance on financial info from the auditor is fine for evaluating past (but not future)
                        performance of the corporation
                     Shareholders & investors can’t rely on auditors’ statements to make predictions about the
                        company’s future performance
            o Policy: Didn’t want a floodgate of shareholders suing b/c auditors had messed up

       S. 237.3(1) – following Hercules – narrowing of auditor liability and closely followed by an amendment to
        CBCA from “joint and several” liability of defendants to “proportionate” liability in situations where there is a
        financial loss that arises out of an error, omission or misstatement in financial information.
            o Old Scheme: 2+ D’s liable for losses
                      1 D (auditor): 5%
                      X Ds: 95%
                                Auditor could still be liable for 100% of P’s losses
            o New Scheme: auditor is only liable for the extent that they were responsible for the losses

Part 11: Corporate Stakeholders & Social Responsibility
     Traditional focus of corporate law has been to maximize SH wealth – facilitative philosophy
     Duty to act in the best interests of the owners of the corporation – except in ‘insolvency’
             o Owners  s/h and creditors (flow of concern and accountability) – opposite for ‘insolvency’
     Corporate stakeholders: A definition
             o Suppliers, employees, community, government, environment, etc.
     CSR debate is about the extent to which directors and officers should have regard to non-s/h constituency
        interests when making decisions

Dodge v. Ford Motor Co. (CB 263)
    Facts: major s/h Henry Ford (owned 58%) – controlled the company and the Dodge brothers owned 10%,
      and other families owned the remaining shares. Ford was used to giving out generous dividends (regular
      and special dividends). In 1916, Ford decided that instead of paying out dividends to SH, Ford decided to:
          o reduce prices on cars (testified that he wanted the benefits of the industrial system to benefit as
              many people as possible) – actually said that the company was making too much money, and he
              wanted to make cars accessible to more people
          o want to hire the most employees to share the benefits of the system
          o finance the expansion of assembly lines
    Dodges sought a court order requiring Ford to pay dividends & succeeded (ford knew that they wanted the
      money to start their own company and compete against him)
    Decision: orders the payment of the additional special dividend – very unusual for court to do this – have to
      show high reasonable expectations and bad faith on the part of the corporation

       Court doesn’t interfere with mgmt’s decision to expand the assembly lines
           o The s/h can’t force mgmt to pay out dividends – not a legal obligation, even though historically paid
                every year
           o Court does not seems to like this attitude – of disregarding the s/h – and making the business less
                profitable  the corporation is not a charitable organization
           o The purpose of the corporation is profit maximization, and this is what the directors are
                supposed to be thinking about – carried on for the profit of the s/h not interests of Henry Ford,
                who can do whatever charitable deeds he wants with his own money
                                                                                                           Page 74 of 122

            o    Director’s can’t change the goals of the corp – and reduce the profits – and not distribute to s/h for
                 some other altruistic purpose
       “A business corporation is organized and carried on primarily for the profit of the stockholders.”
       This is a leading case about the purpose for which corporations exist  business is organized for making
       A corporation can’t employ surplus funds for the benefit of a party other than a shareholder

Parke v. Daily News (CB 269)
    Facts: Board decided do “wind up” unprofitable company – sells off the assets and pays off debts. The
       directors seem to completely ignore the s/h – and focus solely on the employees. Minority s/h sues.
           o After payment of all expenses (creditors), Daily News voluntarily paid its employees the surplus as
                severance compensation (not required by law to do); SH received nothing
    Issue: Employee vs. shareholder interests.
    Decision: Court held that it is a breach of directors’ duty to disregard the interests of a company’s s/h in
       order to confer a benefit on its (former) employees.
           o Directors are obliged to maximize shareholder value
           o The decision had no business purpose & the directors must act in the best interests of the
           o Directors need a unanimous shareholder agreement

Teck v. Millar (CB 277) (Cdn case) – Directors’ duties in the context of a take-over bid
    Facts: One offer for $12/share vs. other offer for $10.50/share
            o Mgmt of the target try to convince everyone that the $10.50 offer is a better fit (larger company,
                financially more secure, and will treat the ees of the target better)
    Decision: Directors may observe a decent respect for other interests lying beyond those of the company’s
        shareholders. Considers that there are other stakeholders in the operation of business.
    Obiter:
            o Directors may “observe a decent respect for other interests lying beyond those of the company’s
                shareholders” without breaching their fiduciary duty to the corporation
            o The classical theory of the firm must “yield to the facts of modern life”
            o In defining the fiduciary duties of directors, the law ought to take into account the fact that the
                corporation provides the legal framework for the development of resources & the generation of
                wealth in the private sector of the CDN economy

Theodora Holding Corp. v. Henderson (CB 278) – Corporate philanthropy: Reasonable giving to charities is
    Facts: $528,000 to a charity from a company that had a total income of $19 million --was reasonable?
        Assumes there is a reasonable connection between corporate goals and giving to charity
    Issue: The ability of a company to make charitable donations – spending the s/h’s money w/o allowing them
        to make a decision.
    Decision: Test of reasonableness – company with gross income of $19M+ and donation of ~$500k
            o Was within federal tax deduction limitation of 5%
            o Seems to be more room for other interests – not only profit maximization
    Should public companies be required to disclose their contributions to charities? To political parties? What
        function(s) would disclosure serve?
            o Disclosure of charitable donations or contributions might impose discipline in forcing management
                to justify what they are doing
    Post-BCE – good corporate citizens??
    Milton Friedman article – corps should make profits give to s/h and s/h should decide if give to charity
    Should companies have to disclose who they give money to – article assigned Professor Williams says yes
    [cost to disclose, political contributions?, Williams argument 2 categories – is the company abiding by the
        laws and 2 what about contentious issues and who agrees with what donating to]
    Bce gives directors a shield but doesn’t give them much guidance on what to do

                                                                                                      Page 75 of 122

      In considering what is in the best interest of the corp directors may look to the interest of inter alia
       s/h ,employees, cred itors, cons etc…[look up]
      Oppression remdy – contains many groups – some mya conflict – sh para 64!!!!!!!!!!!!!!!!!!!!!!
      Para 66!!!!!!!!!!!!!!!!!!!! Director required to act in best interests of the copration viewed as a good
       corporate citizen
      Shareholders entitled to fair treatment

Approaches to Corporate Social Responsibility: [update re BCE -- Less focused on skholdeers fiduciary
  duty to act in best interests of corporation – much broader – don’t id who the corp is lots of interests
  affected by the corp]

      Approach #1 – most traditional (Dualist Traditionalist Approach)
          o directors should maximize profits of corporation – accepted by the courts (Dodge, Parke)
          o interests of other stakeholders (ee, customers, environment) are protected by other areas of law
              [contract, environmental, tax, property –law]
          o rationale: ensures accountability of directors – know their duty is to max sh value – one job to focus
              on -- know how they are doing, can assess their performance at the end of each year
          o concern: government regulation of corporations is inadequate for other stakeholder interests –
              lobbyists can impact the political process -- putting lot weight that other areas of law can
              adequately protect stakeholders [economy, political mood]
          o Friedman in favour of this approach however since directors are not experts in other areas should
              focus on what they are good at

      Approach #2 (Monist Approach)
          o corporations should engage in some socially responsible activities that are conducive to profit
          o This approach sees the goal of profit maximization in a broader perspective
          o giving to charities and universities has been accepted by courts so long as it is reasonable
          o concerns:
                   lessens management accountability to SH (could be self-interest)
                   too little scope for corporations to respond to non-shareholders

      Approach #3 (Modest Idealism)
          o corporate managers would follow the spirit of laws in addition to technical compliance
          o CBCA might have grand principle – act in interest of corp – onus on parties to read and interpret the
              legislation – interpret principles – principle-based (rules only encourage a loop-hole mentality)
          o even if non-compliance with the spirit of the law would increase the value of the corp’n
                    how resources are allocated to different areas
                    what investment levels there are, technologies in production
                    quality of the goods they offer
          o in other areas – the gov’t would be making these decisions  so you say that they are making very
              important decisions, and not just profit maximization
          o example: Corporation moves gas tank to a location that would reduce the risk of injury or loss even
              if cost > benefits
          o Cons: Corporations that do not follow the modest idealist approach will have a competitive
              advantage over corporations that do, so there are competitive pressures to abandon this approach

      Approach #4 (High Idealism)
          o corporations would be required to directly respond to non-shareholder interests by:
                   expanding the purposes of the corporation to include non-SH groups (has been done in
                      numerous USA state corporate statutes) – crafted as permissive directors may consider
                                                                                                           Page 76 of 122

                         the interests but no legal right of action – no recourse if interests have not been considered
                         or considered and rejected or given low priority
                        corps act like governments they decide how much of the workforce will be employed, what
                         new products will be built, what econ areas will have activity, decide what tech advances
                         will be made – very significant public policy decisions
                        direct representation of non-SH in corporate decision-making process (German corporate
                         boards are required to have certain ee representation – co-determination model) ee tier is
                         an advisory board and doesn’t have authority

                         should we have ¼ of reps be representing ee/community in CDA?
                        Nothing in CBCA but now from BCE (and Peoples) should consider stakeholders – this is
                         the equivalent of the US just done by judiciary instead of legislators who decided not to
                         include in CBCA in 2000ish. No recourse if consider and reject BJR supported
            o This is basically the third model, with non-shareholders invited to be get involved with the
                decision-making process
       EXAM QUESTION – german model incorporates all approaches NEIL – makes ee feel more included and
        potentially value for the stakeholder group mand the overall corp

Three Thoughts from Waitzer – Philanthropy and Prosperity
    1.) Ethical Conduct: Good Business
          o Reputational capital is built up over a long period of time – easily squandered and once you lose it,
              it’s very difficult to regain.
          o “End of History” – costs of raising capital for corporate enterprise is very high; little confidence or
              trust in public entities
          o NA: Factors that facilitate business being conducted in certain sort of way; large enterprises being
              funded by certain capital markets
    2.) To a certain extent there is a false dichotomy – deals with timeframes
          o Annual and quarterly earnings, bonuses etc.
          o Typical business plans are “one year out” – too short term
                     5 year long term plan  but each year it is reassessed and thus it more resembles 5
                        separate 1 year plans
          o Hard to reconcile short term profit maximization with CSR in the long term
          o In order to reconcile you must take a more long term look
                     Long term profitability and CSR – must be more “hand in hand”
          o Some of the best business opportunities may be addressing CSR (i.e. Nestle)
                     Nestle created R&D project to make instant coffee to assist economic crisis in Brazil
                     Taking advantage of public need and formulating a market based solution
          o “Time Horizon” argument extends beyond social responsibility
                     Managers say the stakes are big enough for us personally that we are prepared to make
                        ST decisions that would cripple the corporation b/c they would gain substantially on
                        personal basis
                     Becomes easier to reconcile CSR if you look long term: most successful enterprises adopt
                        long term views with concern for CSR and consider other stakeholders of the corporation –
                        focus on long term sustainability
    3.) Chicago vs. Business obligation to mitigate social impacts (control corporate conduct) – debate that
       obscures social obligations vs. business success
          o Duty to s/h – relatively little time dealing with s/h and a lot of time dealing with customers, suppliers,
              ee’s and community (stakeholders)
                     These relationships are crucial for success of enterprise
          o Find social needs and solutions
                     Public needs and addresses them with social solutions
                     Ethical conduct: internally a business organization is easier to manage b/c supposed to do
                        the right thing, attracts better ee’s, better and more profitable relations with various
                              Businesses find demand and id market and solutions – fundamental
                                                                                                        Page 77 of 122

Corporate Stakeholders & Social Responsibility
    U.S. Stakeholder Statutes
           o allow directors to consider the interests of non-shareholder interests in making decisions
           o generally permissive; no legal right of action
           o benefits?
                    Directors don’t have to worry about liability from suing shareholders
           o criticisms?
                    It lessens management accountability – directors can justify decisions by pointing to
                    It may be difficult & costly for managers to serve many people w/ multiple objectives
           o This approach was rejected for inclusion in the CBCA
    Representation of Non-Shareholder Constituents on the Board
           o e.g., employees, customers, community, creditors
           o benefits?
                    This is a democratic system & allows for non-shareholders to be directly involved
           o criticisms?
    Interesting legal question: whether d/o owe duties to creditors and stakeholders in certain circumstances
           o As the company approaches insolvency the shareholders don’t really have a stake in the company
              and the creditors are really the equity holders
           o Must give rise to interests of creditors as if they were s/h in these “insolvency area” cases

    Do corporate directors and officers owe duties to creditors in some circumstances?
    The End of History for Corporate Law, by H. Hansmann & R. Kraakman
          o There’s normative consensus today that shareholders alone are the parties to whom corporate
            managers should be accountable
          o The best means to pursuing aggregate social welfare is to make corporate managers strongly
            accountable to shareholder interests
          o But creditors are, to some degree an exception
          o Corporate law should directly regulate some aspects of the relationship between a business
            corporation & its creditors

Peoples Department Stores Inc. v. Wise (SCC) (2004)
    Facts: W acquired P’s stores that had been acquired far earlier, part of the terms of the transaction were
       that they could not be merged until P was fully paid. W bought P to expand…problems led to both
       businesses failing. [north American suppliers 85% of buying overseas 15% -- peoples is buying a lot from
       N.A. suppliers then transfer to wise then wise owes peoples money $18 million at one point where suppliers
       say the money should be paid to them] Claim against Wise that there was fraudulent preference – took
       advantage of P’s ability to extend credit, which gave rise to insolvency of both companies.
    Decision:
            o (1)Directors do not owe a fiduciary duty to creditors, even if the company is on the brink of
                     Fiduciary duties are fiduciary duties and they do not change
            o (2) Acting in the best interests of the corporation means not favoring any particular group of
                stakeholders [CSR]
                     [47] “…in using skills for the benefit of the corporation…directors must be careful to attempt
                        to act in the best interests…in creating a better corporation…and not favor the interests of
                        any one group of stakeholders…” (must be even handed with whole range of stakeholders
                        within the operation of a corporation)
            o (3) Due Diligence defence
                     Got advice from VP of finance and their expertise was relied on in operation of inventory
                        management scheme
                             [78] “…although CFO had degree and experience…does not correspond to the
                                 level of expertise that can be relied on and used in the due diligence defence…”
                                      o Not under the definition of professionals: lawyer, accountant, engineer etc.
                                                                                                    Page 78 of 122

           o Creditors can try to access the oppression remedy
           o Creditors can try to establish a breach of the duty of care
      peoples bankruptcy case – interests of creditors -- BCE next – company for sale – bondholders impacted –
       price of bonds and bond rating – shareholders getting a 40% premium on their shares while economics of
       bondholders suffers – shouldn’t all stakeholders be benefiting
      Waitzer: peoples was the Right decision but for the wrong reasons


           –   Rules of professional conduct 2.02 and 2.03 (look up)

           –   Role of legal counsel in corporate and securities matters

           –   Do the Rules of Professional Conduct require lawyers to engage in “up the ladder
               reporting”? [yes you move it up to superior or the Board] [or you have to withdraw] Should

           –   Do the Rules of Professional Conduct require lawyers to whistle-blow and advise
               appropriate regulatory agencies of corporate misconduct? [not required, client
               confidentiality, solicitor/client privilege, would stifle client lawyer discussions]

           –   Some cases where info 2.03 (3) can be released – imminent risk (of something yet to
               happen) to identifiable person or group of people of risk of death or serious bodily harm
               can disclose confidential information [could be serious psychological risk of harm to
               mental health]
                                                                                                         Page 79 of 122

Part 12: Duties & Responsibilities of Corporate Managers
     Two branches to Director/Officer Liability – Common Law:
        [when analyzing breach questions look at both of these] [1 duty related to negligence, live up to a standard,
        to supervise the affairs of the corporation and fulfill your job as a director]

       1.) Duty of Care (standards of competence and diligence) – CBCA s.122(1)(b)  Every d/o shall:
             o exercise the care, diligence and skill that
             o a reasonably prudent person
             o would exercise in comparable circumstances

                [use this section for director conflict, or personal interest in a transaction that now challenging]
                [example director takes an opportunity of the corps, or contracts with corp at an inflated price and
                personally profiting]

       2.) Duty of Loyalty & Good Faith (fiduciary duties and conflicts of interest) – CBCA s.122(1)(a)  Every
        d/o has a duty to:
             o Act honestly and
             o In good faith
             o With a view to the best interests of the corp. [balancing the interests of different stakeholders e.g.
                Peoples (trade creditors) ]
             o [BCE bondholders argued duty of god faith and not in best interest of the corporation because didn’t
                take into account bondholders reasonable expectations that market price and credit rating would be
             o [both cases arguments were rejected by the supreme court]
             o [can often take the same facts and make an argument on both – may succeed on one]
                     S. 122(2) – cannot contract out of these duties – they are absolute
       Business Judgment Rule (BJR): courts are reluctant to displace the judgment of mgmt with their own

Duty of Care and Director/Officer Liability
    COMMON LAW -- Very low standard – had to be guilty of gross negligence (fraud or willful misbehavior) as
        a director
    Common law: in the following cases

City Equitable (CB 301)
     Issue: Were other directors paying close enough attention in monitoring the managing director’s conduct.
       Liquifdators took action against remaining directors and auditors under duty of care provision after
       managing director jailed
     Decision: yes, some were negligent, but NO liability – there was no willful misconduct
           o Duty of Care: “reasonable person test” (obj.); being a d/o is not a full time job that obligates them to
                conduct continuous monitoring and do not have to exhibit a greater degree of skill than a person
                with their degree of knowledge and experience.
     Policy issue: Should courts enforce a restriction in the articles of a public company that disallows suits
       based on a breach of a duty of care?
     (1) Not liable for mere errors in judgment, (2) not bound to give continuous attention to the
       business and (3) can rely on delegation of duties to other parties
     More than mere negligence—has to be gross negligence -- no duty to take all possible care, some
       level less than that
     Directors not responsible for errors of judgment (business decision rule)

Brazilian Rubber (CB 305) – “Gong Show”
    Facts: Promoter was hyping the board and marketplace on an ultimately failed rubber plantation.[got board
        members who were induced to the board by little work expected – no knowledge]
    Issue: The liability of outside directors [again liquidator launches action]
                                                                                                        Page 80 of 122

       Decision: The directors were found non-negligent b/c they weren’t aware of the misrepresentation and
        cannot be found liable for errors in judgment nor suppose a higher standard than a reasonable person in
        similar circumstances
            o Directors had a duty to act w/ care reasonably expected, having regard to knowledge & experience
            o But directors aren’t bound to have any special qualifications for this office
            o In particular, the directors in this case didn’t need to know anything about rubber, so they aren’t
                 held to the same standard as a person w/ specialized knowledge about rubber
       Standard of Care is or a reasonable man in comparable circumstances with comparable experience

Smith v. Van Gorkem (Cb 344) [watershed case] [review class notes from March 10 as well]
    Facts: Management decided they wanted to do a buyout of the business due to tax advantage. Approached
       a financial partner and approached the board at a regular meeting and offered the proposal.
    $55 per share – Van Gorkom approaches takeover specialist Pritzer -- agrees to offer 55 (current price was
       37) – meets with senior managers – 2 of 5 approve of the transaction but VG gives presentation to board –
       doesn’t say how 55 was determined (50-60 range discussed in the summer)
    Told board they maybe sued if don’t accept – tells them the price is fair and not legally required to get an
       opinion on the fairness of the price – the board was 5 inside directors and 5 outside directors [argument was
       made that this was a breach of duty of care]
    Decision: Directors were not entitled to rely on the “business judgment rule” in relation to merger b/c they
       did not exercise the standard of care that a prudent director would have in the circumstances
    Whether a business judgment is an informed one depends on whether the directors informed themselves of
       all material information reasonably available to them
    In this case, the directors did not make an informed business decision b/c
            o they didn’t inform themselves of all material information that was available to them:
                      i. senior management’s role in forcing the sale and establishing price; and
                     ii. the intrinsic value of the corp’n
            o they met only for 2 hours w/o prior notice and w/o emergency – what was the rush?-- absence of
                documentation – no disclosure about how deal came to be – no questions about the value of this
    Effects of this case:
            o Resulted in a “bomb” exploding – it made real the possibility of D’s being personally liable
            o Resulting in spiraling increase in d/o insurance costs (premiums) [settlement was huge – pritzer
                paid a chunk of the settlement for some reason – he may have benefited from the lack of finding
                another offer]
            o Creation of “D’s chill” – no longer any D’s who would want to serve on BoD because of this threat of
                personal liability
    Policy issue arising from Van Gorkem: Is rigorous procedural review sufficient to ensure that substantively
       fair outcomes are generated?
    Court focuses on process – paperwork, longer meeting, check off all the boxes you should
    What if you want to dissent: you have to register your dissent – but what else? Consider resigning

Smith v. Van Gorkem (CB 345) – revisited
 Decision (Horsey): Directors did not act on an informed basis and cannot take advantage of the presumption of
   the BJR.
       o (1) Directors should have asked questions about VG’s role – suspicious
       o (2) $55 (premium offer) cannot be relied on if you do not consider the intrinsic value of the company on
           the market
                Premium means nothing if you don’t investigate intrinsic value
                Should have obtained a fairness opinion from evaluator or I – banker
       o (3) Grossly negligent for approving the sale in under 2 hours with only a 20 min. presentation
                Cannot rely on argument of reliance on report (not enough)
       o (4) If you were acting on the presumption of the BJR you would not be sued anyways
                Lawyer’s advice that they were to be sued
       o (Overruled) Marvel: Directors acted on an informed basis in coming to their decision and were able to
           take advantage of the presumptions of “BJR”
                                                                                                         Page 81 of 122

        o MacNeilly (dissent): The board’s directors (inside/outside) have incredible experience and are not the
          type of people to be duped. They knew the sale was to occur for sometime and had put much thought
          into it. The d/o were fully informed, unlikely to be duped and should be able to rely on “BJR”
   NOTE: This decision lead to the proceduralization of decisions by boards
      o Consideration of alternatives, prescribed steps to making all decisions

Statements of Principle on Duty of Care
    1. Directors cannot be compared to trustees (City Equitable) [trustees higher]
            Ds are fiduciaries & act in that capacity, but the type of skill required of a cautious trustee is very
               different from that required of the enterprising director, who must be risk-calculating rather than
            Directors are called upon to take risk w company assets in order to expand corporate wealth & are
               therefore allowed a wider margin of error than other types of fiduciaries
    2. Standard of care depends on context
            There is no one fixed standard of care for all directors and officers as it will depend on the type and
               size of business and the needs of the company in question – varies w/ nature of decision
    3. Business decisions are not subject to scrutiny on merits (Brazilian Rubber)
            In the U.S. this is known as the business judgment rule
            If you exercise diligence, prudence and standard of care in making the decisions – the courts will
               not scrutinize the decision and will not substitute their business decisions for that of the managment
            Courts are not competent to second guess the decisions of directors (high degree of deference)
            20/20 hindsight – not allowed
                     i. judges are not business professionals and may not be competent to evaluate business
                        decisions and there is concern that the contrary rule would open the floodgates (though the
                        court can rely on expert evidence, just as they do when considering a scientific question of
                        fact, and judges may specialize in corporate cases)
            BUT, Judges certainly do second guess professional judgment of lawyers, doctors, auditors, etc. –
               with expert witnesses
            Note: Note that in a case where it is alleged the directors breached the duty of loyalty, the business
               judgment rule will not be applied very rigorously

    4. Directors are not required to have special skills or knowledge about the company’s business
            Directors use whatever skill and knowledge they have & must act reasonably with the level of skill
               they possess [don’t have to acquire the knowledge]
            However, unlike professionals, they don’t have specific standards they are required to live up to
    5. Directors are not required to attend full-time to the company’s affairs
            Rationale  Directors don’t work exclusively for the corporation - they have other day jobs and their
               role is simply to monitor the affairs of the business periodically at Board meetings
            At common law directors don’t have to attend all board meetings, but when they do, they must act
               w/ reasonable care
            A director is deemed to have agreed with the decisions of the BoD, unless he actively dissented – if
               you were present or not  this will have impact on your potential liability if there is litigation
            S.123(3): director dissent – if you are not present, as soon as you become aware of the resolution,
               you must dissent, and put in the meeting minutes
    6. Directors are entitled to trust and rely on officers and others
            Directors can look towards what senior mgmt, outside law firms, etc. – have to say before they
               make their decision
            But if there is some obvious reason to suspect foul play, they shouldn’t take the words at face value
            Have to ask tough questions; directors are rarely in a position to question management’s decisions
               (BD(J)R) – but cannot rely blindly on management’s decisions and expertise
            Statute codifies this reliance on outside experts – s.123(5)
                                                                                                           Page 82 of 122

    7. Standard is objective/subjective (Peoples)
            S. 227.1(3) standard is not merely objective nor subjective…not enough to say that s/he did their
              best…equally as clear that honesty is not enough…standard is not of a professional…objective
              elements (reasonable person) and subjective elements (same skills, experience and situations).

DELAWARE LAW was changed so that the Van Gorkem case was effectively reversed – corp can as an
option, amend articles so that if a breach is found the directors are not liable.

Peoples – fiduciary duty to the corporation at all times – in bankruptcy doesn’t switch to the creditors –
duty of care in addition can be directly owed to stakeholders – peoples said that directors did not breach
their fiduciary duty to the corp or their duty of care to the creditors

When company in play – equity holders have a lot to gain from the sale of that company – consensus that
the fiduciary duty (good faith and loyalty) while in play is to maximize shareholder value (before BCE).

BCE looked for oppression then look to see if fiduciary duties upheld.

Duty to ask a question when you think something is afoul

Ford Motor Canada – Transfer Pricing: price at which companies charge to transfer inventory to each other
    Facts: Rubber stamping on transfer pricing that was abhorrent and not in the best interests of its Canadian
    Decision: Cannot justify simply rubber stamping things that are not in the best interests of the company

Business Judgment Rule
 Not an actual “rule but a presumption (Delaware)
 Absent of evidence of fraud, illegality or conflict of interest the directors are presumed to have acted in good
   faith and on a reasonable basis
        o If one can adduce evidence of fraud, illegality or conflict of interest then the onus shifts on the directors
 Rebuttable Presumption that in making a business decision, directors acted on an informed basis, in good faith
   and in the honest belief that the action taken was in the best interests of the corporation
        o If one cannot show otherwise – the courts look at the BJR and will defer to the board – “will not play
            armchair director in looking at the decisions of the Board.”

Smith v. Van Gorkem (CB 345) – revisited
 Decision (Horsey): Directors did not act on an informed basis and cannot take advantage of the presumption of
   the BJR.
       o (1) Directors should have asked questions about VG’s role – suspicious
       o (2) $55 (premium offer) cannot be relied on if you do not consider the intrinsic value of the company on
           the market
                Premium means nothing if you don’t investigate intrinsic value
                Should have obtained a fairness opinion from evaluator or I – banker
       o (3) Grossly negligent for approving the sale in under 2 hours with only a 20 min. presentation
                Cannot rely on argument of reliance on report (not enough)
       o (4) If you were acting on the presumption of the BJR you would not be sued anyways
                Lawyer’s advice that they were to be sued
       o (Overruled) Marvel: Directors acted on an informed basis in coming to their decision and were able to
           take advantage of the presumptions of “BJR”
                                                                                                          Page 83 of 122

        o MacNeilly (dissent): The board’s directors (inside/outside) have incredible experience and are not the
          type of people to be duped. They knew the sale was to occur for sometime and had put much thought
          into it. The d/o were fully informed, unlikely to be duped and should be able to rely on “BJR”
   NOTE: This decision lead to the proceduralization of decisions by boards
      o Consideration of alternatives, prescribed steps to making all decisions

KeepRite (CB 358) – Canada’s adoption of the “BJR”
 Decision: The board does not have to look at ALL possible alternatives but must take steps to explore them.
   The court ought not to usurp the role of the board.
       o “The court will not substitute decisions made at a different time, in a different place and with a different
           mindset and say that the decision was wrong.”

Business Judgment Rule “after Disney” by D. Nordick
 Facts: Termination of Michael Ovitz with a $140M golden parachute. In these times of corporate upheaval the
   “BJR” still applies
      o Duty of Care is that of your subjective/objective person
      o So long as you are informed and go through the process – make any decision you like
    In Canada, the courts view (Schneider) is that they “may be willing to look at whether the business decision
      was a reasonable one” Whether a business judgment is an informed one depends on whether the directors
      informed themselves of all material information reasonably available to them
    In this case, the directors did not make an informed business decision b/c
           o they didn’t inform themselves of all material information that was available to them:
                      i. senior management’s role in forcing the sale and establishing price; and
                     ii. the intrinsic value of the corp’n
           o they met only for 2 hours w/o prior notice and w/o emergency
    Effects of this case:
           o Resulted in a “bomb” exploding – it made real the possibility of D’s being personally liable
           o Resulting in spiraling increase in d/o insurance costs (premiums)
           o Creation of “D’s chill” – no longer any D’s who would want to serve on BoD because of this threat of
                 personal liability
    Policy issue arising from Van Gorkem: Is rigorous procedural review sufficient to ensure that substantively
      fair outcomes are generated?
    What if you want to dissent: you have to register your dissent – but what else? Consider resigning

Director/Officer Liability Generally
     Directors are personally liable to employees for 6 months of unpaid wages (s.119(1))
     Directors are also subject to other specific liabilities under corporate law statutes (ie s.118) and other
       regulatory statutes (environmental legislation, income tax act, etc)
            o Is the expansion of d/o liabilities beneficial or problematic?
            o Does the possibility of insurance or indemnification (s.124) by the corporation negate the
                rationales/effects of personal liability?

Bata (CB 324)
    Facts: MofE charges 3 directors with failure to take reasonable care to prevent discharge of chemicals into
       the environment. New manager was trying to save failing company and made massive cuts to middle
       management. Bata circulated a comprehensive document wrt environmental concerns. Looked for some
       quotes on removal of waste from their site ($58K too much, $28K was never honored).
    Issue: What is appropriate delegation? What does one have to do to satisfy the due diligence defences
    Decision:
           o Bata: Absolved. He was not aware of the problem, had a great record and his department sent out
               the info circular on environmental concerns and have never been to Battawa site.
           o Marchant: Guilty. Knew of the problem (was there weekly) but didn’t do anything.
                     Defence: Delegated the responsibility
                                                                                                       Page 84 of 122

                       Duty to ensure that those whom you delegated the responsibility to were properly carrying
                        out their duties
           o Weston: Guilty. On-site director – knew of the problem but did nothing. Did nothing to investigate
                          st                        nd
               the high 1 quote and accepted the 2 quote b/c it was cheaper without ensuring they were able to
               perform the job.
                    To the extent that he delegated his duties, he did not do so appropriately and needed to
                        ensure that the person to whom he delegated the duties to, knew what they were doing and
                        were doing it
      Not a “business judgment decision” – recognized that a business corporation is profit – oriented and that an
       honest error of judgment should not impose liability provided the requisite standard of care was met.”

   •   RECAP: two branches to director/officer duties:
           –   DUTY OF CARE (standards of competence and diligence)
           –   DUTY OF LOYALTY AND GOOD FAITH (fiduciary duties and conflicts of interest)
   •   Directors Duties to Creditors
   •   Do corporate directors and officers owe duties to creditors?
   •   Peoples Department Stores Inc. v. Wise (SCC)(2004)

           –   Facts

           –   Directors do not owe a fiduciary duty to creditors, even if the company is on the brink of
               insolvency – duty is to the corporation

           –   Creditors can try to access the oppression remedy

           –   Creditors can try to establish a breach of the duty of care

   •   Directors Duties When a Company is in Play

   •   When a company is for sale, do the directors have a duty to maximize shareholder value?

   •   What responsibilities or obligations do they have to consider the interests of other stakeholders?

   •   BCE Litigation

Sequence of events
   • BCE working to improve shareholder value

   •   Rumors and private indications of interest in BCE as an LBO target

   •   BCE’s board rejects overtures, choosing instead to focus on executing its business plan for 2007

   •   BCE is ‘put in play’: Teachers’ files 13D with SEC, indicating that its intentions as a BCE
       shareholder have changed from passive to active shareholder – indicates you plan on doing more –
       telling the SEC and the world that you are interested in control
                                                                                                  Page 85 of 122

   •   BCE Litigation

Bidding parties:
   • Teachers/Providence, KKR/CPP and Cerberus – set out an auction process and don’t want a single
       bidder to dominate the process

Board’s objective
   • Maximize shareholder value, while complying with legal/contractual obligations to other

   •   Avoid domination by a single bidder

   • Special committee, expert advisers, etc. – not usually senior management since they have a
       conflict will often be removed once the purchaser takes over

   •   BCE Board established the rules and time-line for the auction

   •   Each party submitted a bid - including financial terms and a draft of the definitive agreement

   •   Teachers original bid would have triggered the right to vote by the bondholders – board advises
       they should go back and adjust their bid to avoid that

   •   Strongest bid then formed basis for final negotiation of the agreement

   •   BCE Litigation

Stakeholder impact:
   • BCE shareholders: 40% premium – approved by 97% majority

   •   Bell Canada bondholders: contractual rights respected, but result is a decrease in the economic or
       trading value of the bonds by ~ 20% -- and rating would be reduced to non-investment grade

   •   30 billion of the debt would be guaranteed by Bell Canada – impacts the economic value of the
       bonds they are holding (these are large institutional investors)

    • Plan of arrangement (teachers --- BCE --- Bell) court would determine whether the plan to move
       from the existing structure to the new structure -- would be fair for all of the parties (whatever was
       in trust indentures did not trigger the bondholder rights – the court said they could have easily
       asked for this if they wanted things to be triggered)

   •   Avoided amalgamation structure, which would have triggered bondholder rights

   •   BCE Litigation

   • Transaction is oppressive (s. 241)
                                                                                                 Page 86 of 122

   •   S. 192 Arrangement is not “fair and reasonable”, and should not be approved

  •    Obligation to maximize shareholder value in change of control - value given to bondholders would
       be a windfall (not negotiated) the bondholders are sophisticated and could have asked for any
       provisions they thought necessary to buy the bonds

   •   Bondholders rights are limited to the indenture

   •   BCE Litigation


Court says arrangement is fair and reasonable under section 192 aaand says will not consider oppression
claim because the arrangement was fair and reasonable


Is the transaction oppressive? Undecided.
     • QCA considered this moot - preferring to analyze the arrangement

Is the Arrangement fair and reasonable? No.
     • BCE’s sole focus on shareholder value and ONLY on stakeholders’ contractual rights was wrong
        (not sufficient in the context of directors duties)

   •   BCE’s board not owed deference of the Business Judgment Rule for failure to adequately consider
       bondholder interests (contractual and reasonable expectations that go beyond what’s written in a

   •   BCE failed to appropriately weigh the interests of stockholders and bondholders in structuring the

Implications for the “duty of loyalty”:
In a change of control:
    • Shareholder value maximization is out (C of A)

   •   Weighing and balancing of stakeholder interests is in (like Peoples even though that was

   •   BCE Litigation


Is the transaction oppressive? No.
     • Look to language in section 231 – have any terms been violated – also put all three tems together
         and focus on the reasonable expectations of the parties – court says prefer reasonable expectations
         approach – look to many things like commercial practice (could have had change of control
                                                                                                 Page 87 of 122

       provisions for example – should have negotiated), could have contained credit rating covenants,
       trust indentures didn’t have these provisons – bondholders said there were statements “we are
       going to make every effort” at the bottom disclaimers say will try hard but doesn’t mean anything

   •   SCC sees that the bondholders are big pension plans so sophisticated – lowers expectations of
       what is outside the contract since they are equal in power no need to infuse equity into the analysis

   •   Bondholders had a reasonable expectation that their interests would be considered (in this case
       that’s pretty much what is in the contract – another situation might be different)

   •   BCE’s Board satisfied reasonable expectations: interests considered and contractual terms
       complied with

   •   Para 66 confuse things a little where it says there has to be a balancing and that’s where the

Is the Arrangement fair and reasonable? Yes.
     • SCC was satisfied that both criteria necessary for an arrangement to be “fair and reasonable” were
        satisfied [check section 122 (1) (a)] : (i) valid business purpose, and (ii) fair resolution of
        objections by parties whose rights are being arranged

   •   Fiduciary duty owed to the corporation not any particular stakeholder group – consistent with
       peoples but doesn’t say how the balancing should be done – they say that BCE was fine – are they
       saying on paper that no particular duty to any stakeholder group but can you interpret from the
       outcome that you have to max sh value and live up to everyone else’s contractual right

   •   Sh don’t have a detailed trust indenture they have a bunch of expectations – can you say what their
       reasonable expectations are when they don’t have a contract

   •   [What about employees – if plant will be shut down – what about the government – competitiors]

   •   Court doesn’t give guidance on any roadmap as director on what to do –[most people would sayb
       when company on play should max sh value

   •   [Creditors might have led to a different outcome who knows]

   •   Implications for the “duty of loyalty”:

   •   Duty owed to corporation, not particular stakeholders (among whom there’s no clear priority)

   •   Consideration of stakeholders is permissive

   •   Business judgment rule applies to board’s balancing of stakeholder interests in pursuit of the best
       interests of the corporation [given broad interpretation]

   •   Regardless of how you balance out the duties the B.J.Rule will insulate the directors from liability
       the courts will defer to the boards balancing act
                                                                                                       Page 88 of 122

    •   Duties and Responsibilities of Corporate Managers

    •   [who is a stakeholder, under the pedigree of oppression still, try to narrow who is a stakeholder]

    •   No clear right/wrong decision – analysis – as long as turn mind to stakeholders interests and
        document that [in BCE it was only a casual brief consideration that was ruled adequate at SCC]

    •   If consider too briefly Van Gorkem – [didn’t consider well enough]

    •   [if bondholders had the vote under the original proposal the vote happens class by class and the
        bondholders would effectively have a veto right and could have commanded more money]

    •   [oppression remedy available to many stakeholders – will examine later]

RECAP 122 (1) (a) and (b) duty of care – fiduciary duty – etc – write this up fro her slides
2 types of cases under fiduciary duty subsection

[corporation works through agents – what if they are not acting correctly?]

       Basic self-dealing
       Taking of corporate opportunities

Directors Duties to Creditors
     Do corporate directors and officers owe duties to creditors?
     Peoples Department Stores Inc. v. Wise (SCC)(2004)
           o Both companies are struggling financially – and People’s becomes a creditor ($18 M) through an
               agreement for inventory procurement
           o Directors do not owe a fiduciary duty to creditors, even if the company is on the brink of insolvency
           o Creditors can try to access the oppression remedy – equitable remedy that gives relief if prejudiced
           o Creditors can try to establish a breach of the duty of care
           o In the end, it didn’t work out – but there were many other reasons for its demise

Duty of Loyalty – Fiduciary Duties
    s.122(1)(a) – Every d/o has a duty to act honestly and in good faith with a view to the best interests of the
            o Cannot put own interests ahead of that of the corporation – most cases turn on receiving an
               advantage at a cost to the corporation
    Two types of cases
            o Basic Self-Dealing or Interested Party Transactions (acting as director and outside contract)
            o Taking of Corporate Opportunities
    Remedy: obligation to account for those advantages to the company (reimburse)
    Basic Self-Dealing – absolute prohibition under the common law (conflict of interest) – voidable not void

Basic Self-Dealing – absolute prohibition under the common law:

Aberdeen Ry. Co. v. Blaikie Brothers
    Facts: Director of Aberdeen negotiated a K to purchase chairs from Blakie Bros (himself).
    Decision: Contract voided on application of company
          o The director must not put himself in a position where their own interests conflict with her duty to the
              corp’n – Blaikie’s duty to the corp’n and personal interest were in conflict
          o Absolute rule: it will be voided where there is or could be conflict of interest
                                                                                                         Page 89 of 122

                         Company has an option to accept the deal or void the deal – with no inquiry into the
                          fairness or efficiency of the deal
                       The offending director must then turn over resulting profits to the company
       What if this is the only supplier? Or the best price – and you have to buy at a higher price? Since it’s
        voidable, and not void – only if someone objects? CL was a bright line but -- These questions led to a
        statutory solution with more flexibility where the bright line rule is too harsh.

Statutory Disclosure Requirements for Self-Dealing
     CBCA (s.120) now permits these transactions but requires compliance with disclosure and other provisions
     Have to disclose any material interests in the company or a party to a contract with the company (indirect)
           o S. 122(3) – cannot relieve directors from their fiduciary duty in the constitution or by-laws
     Procedural Fairness:
           o S. 120(1) – d/o must disclose conflict of interest (a material contract – doesn’t say from whose
               perspective it is material – value owed to the company, should accrue to the corporation) – at a
               director’s meeting and later at s/h meeting
           o S. 120(2) – timing – as soon as possible (when he contract is being considered or the director
               becomes interested)
           o S. 120(5) – abstain from voting for approval of contract (from director’s meeting only not restricted
               from voting at a s/h meeting (maybe an issue under securities law)
           o S. 120(6) – continuing disclosure of “interests” by interested director
           o However, the interested director can be counted as part of the quorum
           o These provisions address procedure & not whether the transaction is fair & reasonable, which is a
               question of fact to be determined by the court
     Substantive Fairness
           o If you declare and then abstain from voting then must still be fair and reasonable
           o Determine fair market value, or hire experts to evaluate [safeguard]
           o contract must be fair and reasonable to corp’n and SH
           o s.120(7): on both sides of the transaction – (c) NOT invalid as long as all the (disclosure)
               requirements were complied with, AND the non-interested directors approve the contract, AND the
               contract was fair & reasonable to the corp when it was approved  can’t void it, and s/h will have a
               difficult time disputing it
                     if there was some issues in this process, turn to s.120(7.1)
           o s.120(7.1): s/h approval – if the s/h approve the contract by special resolution, and if meaningful
               disclosure about the transaction was made to the s/h, and if the contract was fair & reasonable to
               the corp  the contract is valid, and that director is not accountable to the corp or the s/h
           o Contract can be sustained if: d/o was acting honestly and in good faith, if approved by s/h in a
               special resolution and the s/h were fully informed of the nature of the contract

National Instrument 61 – 501: Related Party Transactions
     Tests:
            o Heightened disclosure requirements (what’s in it for related parties)
            o Independent committee approval (independent financial advice: fairness or valuation opinions)
            o Minority vote requirement

Corporate Opportunities and Director’s Self-Interest
    Overriding Principle that directors must not compete with the corp in the pursuit of business opportunities
    If a director wrongly takes an opportunity for themselves which belongs to the corporation, the director has
       to turn over any profit to the corporation [they re agents of the company – trying to increase value of
    Issues: When does an opportunity rightfully belong to a corp’n?
            o What if company cannot take up the venture? Does not have the infrastructure, or funding
            o What if the company had decided not to take up the offer?
            o What if company is unlikely to win contract?
            o What if director hears about opportunity while not acting as a director?

Regal Hastings Ltd v. Gulliver (CB 392)
                                                                                                            Page 90 of 122

       Facts: Corp’n not in financial position to take up a corporate opportunity. Trying to lease theatres through a
        subsidiary and landlord wanted 5,000 pounds invested in the subsidiary or directors’ personal guarantee on
        the leases. Company not in position to reach 1 requirement, so directors invested 3,000 pounds
        personally along with Regal’s 2,000 pounds (no s/h approval). Voted to sell the company – selling their
        “shares” at a profit and the subsequent purchaser brought a claim against the directors for breach of
        fiduciary duties – profiting at the company’s expense.
             o Discussion: the benefits were going to go to the s/h – but when the D’s realized the profitability, they
                  wanted to take part, so they issued themselves shares, and when the business was sold, they
             o When they issued themselves shares – they didn’t get any approvals to act in their own interest (no
                  required but would have helped their case)  so the s/h sued, saying the profit was theirs, and not
                  the D’s who issued themselves shares
       Decision: Directors breached fiduciary duties and had a fiduciary duty to act in the best interest of the
        corporation -- “duty to account” to the company for profits
             o A director must not make a profit out of property acquired by reason of his relationship to corp’n
             o If opportunity “golden,” then the corp could have found a way to finance it – financial incapacity is
                  weak argument
       Strict liability: directors cannot make a profit out of property acquired by reason of their relationship to the
       What could the directors have done here to satisfy their fiduciary duties?
             o s/h approval? Disclose to them – saying they do not want to give personal guarantees
             o should the s/h have been able to participate in the profits?
       TEST:
             o 1.) Did the opportunity arise b/c they were directors?
             o 2.) Were they acting as directors in implementing the transaction, which ultimately benefited them,
                  at the expense of the corporation?

Peso Silver Mines Ltd v. Cropper (CB 410)
    Facts: Corp’n rejected an offer to purchase certain unproven mining claims – have too much on the go
       already, rejection on the merits of the opportunity – seemed to be good reasons for rejection. Cropper took
       part in board meeting and later took up offer in personal capacity. Peso Mines was bought out by another
       company – who later decided that they wanted to take up the mine and brought a claim for accounting the
    Decision: Director did not breach fiduciary duties to corp’n. Peso ceased to have interest in the mines when
       the board decided not to purchase them – it was an informed decision and no longer a corporate
    a group formed a company including cropper and bought the rights – when the new boss takes over all but
       cropper agree to re-assign their interests back to Peso – Cropper then gets fired.
           o 1.) An express rejection of the opportunity, and
           o 2.) Merely b/c Cropper acquired the knowledge as a director does not prohibit him from personally
                pursuing the offer
                     if the corporation determines not to pursue the opportunity, the director is free to pursue it
                        on his own
                     If whole BoD taken up the opportunity, rather than just 1 guy, court might have engaged in
                        a balancing act
    NOTE: Roadmap to avoid fiduciary liability – make sure to receive a lot of advice, deliberate and wait some
       period of time until you pursue the opportunity yourself

Canadian Aero Service Ltd v. O’Malley (CB 419)
    Facts: O’Malley & Zarzicki senior officers of Can Aero, a topographic mapping corp and were assigned to
      negotiate a new deal for mapping with Guyana. They are frustrated with the company, so they resigned and
      set up a new company, Terra Surveys Inc., which shortly thereafter submitted a bid for a Guyana project
      and won the project.
    Holding: O’M and Z breached their fiduciary duties to Can Aero; Accounting for profits earned.
         o SCC basically strikes down Peso (must have access to the opportunity and take the opportunity as a
          benefit to themselves personally)
                                                                                                        Page 91 of 122

      Reasoning:
          1. Fiduciary duties apply to senior officers and other top mgmt, not just directors.
          2. Especially when officer directly involved with negotiations [how to define top mgmt? fact specific]
          3. Irrelevant that project was not ultimately identical to the one previously negotiated
          4. Not necessary to show that Can Aero would have certainly obtained contract otherwise (TS bid)
          5. Fact that they resigned their posts before acting irrelevant [how long do fid duties carry on?]
          6. Not necessary to prove damages; remedy relates to gain by officers (fiduciaries) – duty to account
              for profits to the corporation
          7. Scope and duration of fiduciary duties must be determined case by case relevant considerations
      Remedy:
          o The fiduciaries had to account for all the profit
          o The court doesn’t care if there’s a certain amount of unjust enrichment
          o The rules contains asymmetry & isn’t restorative justice
          o It’s not a condition for recovery of damages that the corporation establish what its profit would have
              been or what it lost by failing to realize the opportunity
          o Also doesn’t have to prove that but for the intervention of Terra, they would have gotten the contract

Laskin’s Considerations on Corporate Opportunity [look these up!!!! 424 CB]

[Laskin gives a very broad and flexible definition of the scope of fiduciary duties of corporate agents]

      1.) Focus on whether the opportunity belongs to the company – proximity of the opportunity
            o How significant the opportunity is materially
            o Ripeness of the opportunity
            o Specificity of the contract
            o Whether the opportunity was a private or public opportunity
            o Whether the opportunity was rejected in good faith by the boad
                    How and why was it rejected? Fully informed?
      2.) What was the relationship of the fiduciary to the company?
            o Their position and function within the company
            o Relationship of fiduciary to the opportunity
                    Did they only know of it b/c of their role?
            o Their knowledge of the opportunity
                    Knowledge that was non-public and greatly predicated on their position
            o Extent to which they use their fiduciary position
            o How much time has lapsed since they resigned their fiduciary position
      Following this – how would you protect yourself from liability?:
            o Resignation of fiduciary position
            o Disclosure and informed consent – estoppel
                    Certify that you’re not using information that you obtained while in a fiduciary position

PROTECTING YOURSELF AS A DIRECTOR why are these cases different

      Mining – company rejects bona fide – Peso seems to be a proper rejection at the board and then
       pursued privately 6 weeks later --- the corp. rejected for 2 reasons finances and had enough of
       these claims in its portfolio – these were unproven claims and there wasn’t an element of
       immediate profit like there was in Regal [good faith rejection]
      whereas Regal the Board decides against but at the same meeting the directors come up with the
       funds themselves – weak argument that Regal couldn’t have found some way for the company to
                                                                                                  Page 92 of 122

      do it – directors didn’t try hard enough s agents for the company – clearly at the same meeting they
      found a way in their personal capacities and made a personal profit


     personally liable to employees for 6 months of unpaid wages (s119 (1)) [responsible for wages of
      employees while they were directors]
     limitation – not liable under this section unless still a director at the relevant time 119 (3) time
      limitation – sued while being a director or within 2 years of ceasing to be a director – if continue to
      be directors subject to continuing liability
     is the expansion of d/o liabilities beneficial or problematic?
     s124 – indemnification and insurance – does the possibility of insurance or indemnification by the
      corp negate the rationales/effects of personal liability? -- CBCA says not much on insurance – on
      indemnification – not allowed to do this under all circumstances (not criminal activity etc) s124 (3)
      corp cannot indemnify unless (a) indiv operated in good faith OR (b) if a criminal or administrative
      action the director had reasonable grounds for believing that his conduct was lawful [write up this
      POLICY issue for exam prep] [indem clause may not be triggered, insurance premiums would
      skyrocket of bad actors so still modifies behavior]
     124 (3) (b) egregious cases it would get triggered
     Directors are also subject to other specific liabilities under corporate law statutes (ie s.118) and
      other regulatory statutes (environmental legislation, income tax act, etc)
         o Is the expansion of d/o liabilities beneficial or problematic?
         o Does the possibility of insurance or indemnification (s.124) by the corporation negate the
           rationales/effects of personal liability?

     Conclusion on Directors Duties

     What happens when directors/officers breach their duties?

     How do you attach liability to directors and officers?
                                                                                              Page 93 of 122

Part 13: Shareholder Remedies

   •   Introduction
          –   When a right has been breached, how do you attach liability or address the breach?
          –   What is the process that is involved? What is the substantive standard that must be met?
          –   Shareholder and stakeholder Remedies
          –   Personal actions versus derivative (representative) actions
          –   Think about process, substantive tests, who controls information and costs
          –   Oppression Remedy
   •   Introduction
          –   “The broadest, most comprehensive and most open-ended remedy in the common law
   •   A Complainant may apply to court for an order re oppression (s.241(1), s.238)
          –   shareholders (reg’d or beneficial; present or past)
          –   directors or officers (present or past)
          –   the Director
          –   any “proper person”
          –   Ben-Ishai and Puri Paper on Oppression 71 cases decided on their merits – the wording of
              the oppression remedy is 241 (2) grounds upon which can apply to the court – act or
              omission by the corp which affectsa a result OR the affairs of the business carried on in a
              manner or Directors powers exercised in a manner that …. [look up]
          –   Remedy available to public widely held as well as small closely held (92% closely held)
              (8% were public companies) – 51% in favour of the complainant 49% against the
              complainant – [much lower likelihood of success in a public company] [BCE – oppression
              analysis over-layed by the BJR and director responsibility][most companaints weres/hs
              and most minority s/hs – some employees/s/h and some debt-holders] [no free-standing
              employees given status because have other avenues for remedy] [creditors had a very high
              success rate of 83% but not in BCE]
          –   Who should bear the costs in the end and even interim?
                                                                                                       Page 94 of 122

Legal Remedies
   1.) Derivative Actions
         o Most of the duties owed by d/o and advisors are duties that are owed to the company (vs. to s/h)
         o Thus asserting rights on behalf of the company
   2.) Personal Remedies
   3.) Other Statutory Remedies
   4.) Oppression Remedies

Derivative Actions [or representative action on behalf of the corporation – harm to corporation]
     Introduction
           o Focuses on breaches of duties to the corporation – ideally brought forth by d/o, there are provisions
               for s/h to bring it forth on behalf of the corp
           o Common law rule was very restrictive
           o Minority s/h had a lot of difficulty accessing the derivative suit  why? Doctrine of majority rule
           o NOW: the statute allows it
           o Under the derivative action, a shareholder on behalf of the corporation brings an action which
               derives from the corporation’s cause of action

The Rule in Foss v. Harbottle (CB 865) [not covered]
    Facts: s/h in court complaining that the sale by a director of the company of his own property to the
       company was at an unfairly inflated price.
    Decision: s/h’s cannot bring a complaint – to the extent that the director owes duties and that harm was
       done these are to the corporation and NOT to the s/h’s
    Rule #1: If a corporation is wronged, the only proper person who can bring an action is the corporation and
       not individual s/h’s.
            o “A claim that attempts to redress a wrong done to the corporation cannot be brought by a
                shareholder but the corporation itself.”
            o But it is a problem if the d/o is the one who was implicated
    Rule #2: The wrong can be ratified by an ordinary majority of SH. Minority SH has no recourse.

Mozley [not covered]
    Facts: d/o were being elected illegally and complainant brought an action to the courts
    Held: So long as the majority ratifies the decision, the court will not look into that decision

MacDonald        [not covered]
    Held: When the matter is an internal dispute, it is for the majority to decide

Exceptions in the Common Law (CB 864) [not covered]
    Limited under the common law – very narrow, and difficult to fall under
          o 1.) Fraud against the minority committed by majority s/h’s
                    i.e. Controlling shareholder is exercising powers to benefit themselves at the harm of the
                       corporation and can easily use votes to ratify transactions/moves
          o 2.) Ultra Vires Act: If the corporation didn’t have authority under its articles to engage in the
          o 3.) If the impugned action required a super-majority of shareholder approval & only simple majority
               was reached
          o 4.) Personal Claims/Rights: If the shareholders characterize the derivative action as personal

Derivative Actions – s.239: Statutory Derivative Action: quite broader [not covered]
     S. 239 – effectively replaces Foss v. Harbottle
     S. 238 – prescribes who can bring an action: Minority s/h can bring derivative action, and a “complainant”
           o A “Complainant” (s.239(1), s.238) – relatively broad category
                    reg’d or beneficial, present or former shareholders
                    present or former directors or officers
                    the Director of the CBCA
                    a “proper person” – (discretionary category) – i.e. creditor, employee, etc.
                                                                                                           Page 95 of 122

                                 must be someone with a direct stake in the business operations of the company
                                 pg. 879 [note 4]: not impossible but hasn’t been successful as of yet

Derivative Actions – s. 239(1) The Leave Requirement (“Gatekeeper” Role of Courts) [not covered]
     A “complainant” may apply to a court for leave to commence an action in the name and on behalf of a
        corporation or any of its subsidiaries, or intervene in an action to which any such body corporate is a party,
        for the purpose of prosecuting, defending or discontinuing the action on behalf of the body corporate
             o Note: The requirements to prove merits are relatively low
     Policy: to deter frivolous, vexatious – prevent floodgates; “gatekeeper role” of courts
     S. 239(2) Before granting leave, court must be satisfied:
             o (a) “Notice” – Complainant gave 14 days notice to directors of their intention to bring an action if
                 they do not bring it themselves (d/o must respond affirmatively)
             o (b) “Good faith” – Complainant is acting in good faith
                      Ties into the “gatekeeper role” for meritous actions
             o (c) “Interests of Corporation” – Action appears to be in the interests of the corporation – often
                 the focus of litigation

s. 242(1) – eliminates the rule in Foss v. Harbottle [not covered]
     Evidence of shareholder approval is not determinative, but will be taken into account (i.e. voted to ratify
     (2) Once a derivative action has commenced the court is in charge
             o Need approval to:
                     Stay, settle, discontinue or dismiss the action – “gatekeeper role”
     (3) Complainant is not required to give security for costs
             o Policy: The applicant shouldn’t be required to pay b/c bringing the action with “notice” in “good faith”
                and “in the best interests of the corporation” – met the 3 requirements
     (4) Court can award interim costs to complainant/applicant
             o Policy: should provide assistance b/c brought meeting 3 requirements
                     Subject to the courts ability to hold the applicant accountable should their claim fail

“Best interests of the Corporation” – s. 239(2)(c)

Re Northwest Forest Products Ltd. (CB 867) [not covered]
    Facts: Northwest owned 51% of Fraser Valley
          o The assets of Fraser Valley were sold to Green River for $200,000 and Green River pledged the
              same assets to the bank on the same day for $290,000
          o Two directors of Northwest also sat on board of Green River
          o Majority of SH ratified transaction
          o Minority SH apply for leave to commence derivative action – why was there a $90K shortfall?
          o Reasonable notice: they wrote a letter to mgmt – who ignored the letter, hoping they just went away
          o S. 242 – evidence of s/h approval is not decisive but will be taken into consideration
    Issue: Was the derivative action prima facie in the best interests of the corp’n?
    Decision: Yes; leave granted and lays out the test for “best interests”
    Test:
          o Complainant must put forward sufficient evidence prima facie discloses a cause of action (i.e. a
              failure on the part of the d/o to take the degree of care req’d of them and accordingly will be granted
              leave to bring an action in the name and on behalf of the corporation)
                    Recognizes minority shareholders, at the outset, will not be able to adduce evidence to
                       fully support their case
          o Evidence (on the case at hand):
                    Sale was apparently $90,000 less than true value
                    Directors apparently failed to solicit competing bids
                    Directors sat on both Northwest and Green Valley – interlocking directors
                    Directors apparently failed to seek out current market value of assets
          o SH approval was not decisive – s. 242(1)
                                                                                                              Page 96 of 122

             o   Judge refused to take into account apparent SH ratification w/o considering whether shareholder
                 majority included votes by “conflicted/interested directors”
                     s.242(1) states that a court may take into account evidence of s/h approval but it is not

Derivative Actions - Independent Litigation Committees [not covered?]
     “Notice”: When a minority s/h gives notice of a complaint and want d/o to take action – directors often look to
        independent committees that recommend whether or not the company should take action itself
     Theory is that the independent committees, unlike shareholder ratification (involving “conflicted
        shareholders”), addresses the conflict and provides a decision that the company can rely on
     Issue: What weight/deference should a court give to the directors’ decision that the pursuing the litigation is
        not in the best interests of the corporation? – based on recommendations/decisions of “independent
     Two schools of thought
             o View #1: Courts should defer to independent committees and directors on their decision whether or
                 not to pursue an action – “Business Judgment Rule” [Marc-Jay Investments]
             o View #2: Insufficient to be satisfied simply by the process in making the decision. The court should
                 also look at the reasonableness of the substantive decision [Re Bellman]

Mark-Jay Investments v. Levy (CB 871) [not covered]
In determining whether to grant leave in a derivative suit, a judge’s function is to deny the application if it is
frivolous or vexatious or bound to be unsuccessful
     Should the d/o be the ones who are starting the action? But what if they are the ones who are causing the
             o The s/h can bring an action – with leave of the court
     Facts: Levy bought Premium from Seeway and the d/o on the boards were the same for Levy and Seeway
        (“interlocking”). The minority s/h states that there was insufficient disclosure when s/h approval was
        solicited, and this contract was not in the best interests of the corporation
     Decision: The minority s/h is acting in good faith and granted leave to bring derivative action. Claimants had
        gone through the process of giving notice to the board and they appear to be acting in good faith and in the
        best interests of the corporation.
             o Clear affirmation that beneficial s/h have status
             o In order to grant leave all the court must decide is that the action is not frivolous, vexatious or
                 without merit
     LOWERS Test: You will prima facie meet the requirements for being granted leave to commence an action
        so long as the application is not frivolous, vexatious or without merit
             o Is the litigation in the best interest of the corporation? The judge said that this is not a trial, this is
                 only an action for leave  sets up a relatively low standard, and the judges function is to deny
                 leave only if frivolous or vexatious – or bound to be unsuccessful

Armstrong (CB 872 note) [not covered]
    PRINCIPLE: Application for leave can be granted based on the information and belief of others, since
       firsthand evidence usually is not readily available to minority s/h’s/
            o Not frivolous, vexatious or without merit…will likely be granted leave
            o BofD don’t usually disclose what happens in the boardroom
                     If one thinks the corporation has been injured by the actions or inactions of the d/o – you
                       will likely need to have 3 party evidence and opinions based on the information that can
                       be gathered or is available
Re Bellman (CB 873) [not covered]
    Facts: Dispute b/w two s/h groups, both who had representation on the board. Dispute over a loan
       agreement with the bank that allowed the maj. to buy-up the min. shares. In order for the bank to allow the
       loan the corporation was obliged to provide access to confidential information of the company. Min. s/h
       complained that maj. s/h were misusing a corporate assets. Majority set up a litigation committee to review
       the process.
                                                                                                          Page 97 of 122

       Issue: What weight should the court give to the “independent” committee’s decision on whether or not the/a
        company should pursue a derivative action?
       Decision: Litigation review committee’s members not independent of defendants of derivative suit b/c they
        had been appointed to the board by the controlling s/h (defendant directors) and thus there was too much
        conflict in their decision. (Contracted away their independence – pg. 875)
            o Were nominated by investors group at the time when controlling s/h held a majority of the
                  shares…the effect upon their independence…act and vote in ways favorable to the lender
            o Borrower or controlling s/h was able to enter into agreement but did not give them power to forece
                  others on the board in a certain way nor did it relieve them of their duties
            o Instructions given to the committee were insufficient

(CB 876 note 1)
    Cases where the court simply refuse to overturn the decision of a litigation committee that is disinterested
       and performed an adequate investigation
    Other cases: will take into account the determination of an independent and adequate litigation committee,
       but will still evaluate the reasonableness of that determination

Derivative Action Process
     Strike a litigation committee
           o Give them the freedom to hire and consult with experts
           o Ensure their independence
           o Abide by their decision

First Edmonton
Issue: Is it possible for a creditor to proceed with an action under the derivate action remedy

                                             rd                                                                rd
        Shareholders who sell shares to a 3 party, also sell their rights to bring a derivative action to that 3 party
           o Problem(s): if you have proper notice and information and the price has (likely) been lowered by the
               wrongs – why should you be allowed to buy at a discounted price and then bring a claim to “gain”
               from the devaluation
                    “windfall”
                    Allows people to “shop” for a right to sue

Personal Actions [not covered]
    Very few personal actions pursued – difficult onus
    Must discern b/w wrongs to corporation and wrongs against the individual
          o Right to information, vote, proxy etc – not likely to give rise to claims (mechanical rights)
          o Cases giving rise usually breach of fiduciary duty – deemed to be wrongs against corporations
GoldEx [CB 897] [not covered]
    Facts: A claim by shareholders that there was a misleading information circular (deficient) and misleading
      annual report
    Issue: Drawing the line b/w personal and derivative claims
    Decision: Personal when the SH suffers a personal wrong, as opposed to a wrong against the company
          o Misleading information gave rise to a personal claim
Hercules [pg. 903] [not covered]
    Facts: Shareholders suit claiming that E & Y filed misleading financial reports
    Decision: Financial reports/audits do not give rise to personal claims on the part of shareholders – the
       auditor’s filing is relied on by shareholders as a group wrt the interests of the corporation and not the
       individual shareholder’s interest
            o To the extent of reliance on annual reports, the shareholders were relying on them in a
                “quasi-managerial” role and not that of an individual shareholder
                                                                                                          Page 98 of 122

            o Fails to recognize that in supervising management, must be seen as acting as a body with respect
                to the corporation’s interest and not with respect to their own ends
            o Shareholders take a “managerial role” when overseeing d/o – making collective decisions wrt
                interests of the corporation itself

Duty of Controlling Shareholders to Minority Shareholders [not covered?]
    In addition to fiduciary duties of directors, is there a duty owed by majority shareholders (controlling SH’s) to
        minority shareholders?

Northwest Transportation v. Beatty (CB 552) [not covered]
    Facts: Beatty participated in a related party transaction, purchasing a steamship from himself while acting
      as a d/o. The by-law which adopted the contract was ratified by a majority resolution involving Beatty’s
      votes. Minority shareholders bringing a claim to strike out the contract claiming Beatty violated his fiduciary
      duty as majority s/h.
    Decision: (SCC) Because it constituted a related party transaction, B should not be able to participate with
      his votes in ratifying the transaction. NWT needed to obtain a ratification of the min.  “maj of the minority”
           o Privy Council: looked at the substance of the transaction and held it was a legitimate transaction
              (no fraud or illegitimate purpose). The articles of the company enabled B to purchase share and
              exercise his voting powers as a majority shareholder and he could participate in any decision he
              had an interest in.
    Note: (pg. 556) SCC crafted a remedy requiring “the votes of the directors who had interest (in the
      steamship) not be counted for the purposes of determining whether the s/h had ratified the corporation’s
      conduct”  majority of the minority resolution required

Brant v. KeepRite (CB 561) [not covered]
    Facts: Family of companies; IMG (parent) decided to cause KR (subsidiary) to buy assets from ICM and EP.
        Board decided assets should be shuffled and businesses reorganized to realize benefits. KR set up an
        independent committee and negotiated lower purchase prices and committee recommended to KR board
        that it was a legitimate transaction, board “OK’d” the transaction. Minority SH filed a claim saying majority
        SH caused the transaction (beneficial to maj SH) at the expense of minority SH.
    Issue: What duty if any is owed by majority shareholders to minority shareholders?
    Decision: No absolute fiduciary duty of majority s/h to minority s/h’s.

    Facts: Maple Leaf Foods made a bid to by Schneider. Schneider family held voting shares and public held
       non voting shares (S – 70% votes with 8% shares). S was able to exercise veto rights for takeover bids, not
       interested in MLF (competitor that they hate) taking over the company. Set up a committee that found other
       bidder and did not bother going back to MLF (S’s refused to sell) and recommended bid from Smithfield.
       Recommended b/c S’s said they would tender to their bid (“lock up” agreement). [MLF offers the most
       money but Scheiders won’t cooperate so drag down price for everyone else] Minority SHs sued claiming a
       breach of fiduciary duty [they are being oppressed – oppression remedy].
    Issue: Is there a duty on the part of Schneider’s, the majority (voting) SH to sell for the best price?
            o How could they know it was the “best price” if they did not see what the highest possible bid was?
    Decision: Board had discharged its duty when they found a bidder to present to the Schneider’s (no
       obligation to find a better offer)
    Majority SH does not owe a fiduciary duty or obligation to the minority to tender to the highest bidder or any
            o The majority shareholder is free to do what they desire with their property rights (i.e. controlling
                voting shares) – don’t have to sell to anyone or any bidder, no matter how lucrative or on any basis
            o Can act with (or against if they so desire) own interests in choosing to do something
            o Anyone who bought the shares should have known that Schneider family owns a lot and a s/h
                cannot sue another s/h for oppression – [the company wasn’t truly in play because of the blocking
                power of the Schneider family]

[Further Duties  see: Oppression Remedy]
                                                                                                          Page 99 of 122

Compliance and Restraining Orders [not covered]
   Tend to be invoked in a more private company context
   S. 247 – Compliance (Restraining) Order
         o Corporation or any d/o of a corporation does not comply with this Act, regulations, articles, by-laws,
            or a USA, 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 on such application the court may so order and
            make any further order it thinks fit.

Rectification of Corporate Records – s. 243 [not covered]
 “Application to court to rectify records”
   243. (1) If the name of a person is alleged to be or to have been wrongly entered or retained in, or wrongly
   deleted or omitted from, the registers or other records of a corporation, the corporation, a security holder of the
   corporation or any aggrieved person may apply to a court for an order that the registers or records be rectified.
 “Notice to Director”
        o (2) An applicant under this section shall give the Director notice of the application and the Director is
            entitled to appear and be heard in person or by counsel.
 “Powers of court”
        o (3) In connection with an application under this section, the court may make any order it thinks fit
            including, without limiting the generality of the foregoing,
                   (a) an order requiring the registers or other records of the corporation to be rectified;
                   (b) an order restraining the corporation from calling or holding a meeting of shareholders or
                     paying a dividend before such rectification;
                   (c) an order determining the right of a party to the proceedings to have their name entered or
                     retained in, or deleted or omitted from, the registers or records of the corporation, whether the
                     issue arises between two or more security holders or alleged security holders, or between the
                     corporation and any security holders or alleged security holders; and
                   (d) an order compensating a party who has incurred a loss.

Investigations – Part XIX – Ss. 229 – 236 [not covered]
 Enables a security holder or director to apply, ex parte or on such notice as the court may require, to a court
    having jurisdiction where the corporation has its registered officer for an order directing an investigation to be
    made of the corporation and any of its affiliated corporations
 Grounds: (2) If, on application under (1), it appears to the court that
        o (a) the business of the corporation or its affiliates is/has been carried on with the intent to defraud any
        o (b) the business or affairs of the corporation or its affiliates are/have been carried on or conducted, or
            the powers of the d/o are/have been exercised in a manner that is oppressive OR unfairly prejudicial
            OR that unfairly disregards the interests of the security holder
        o (c) the corporation or its affiliates was formed for a fraudulent or unlawful purpose or is to be dissolved
            for a fraudulent or unlawful purpose, or
        o (d) persons concerned with the formation, business or affairs of the corporation or any of its affiliates
            have in connection therewith acted fraudulently or dishonestly
the court may order an investigation to be made or the corporation and any of its affiliated corporations
 (3) – Director is entitled to Notice
        o A security holder who makes an application under (1) shall give the Director reasonable notice thereof
            and the Director is entitled to appear and be heard in person or by counsel

Hollinger [not covered]
 Facts: S/h application alleging that C. Black was misappropriating money for his own personal interests.
 Decision: The Court appointed an investigator to see if funds were misappropriated – doesn’t have the same
    powers as an OSC investigation
       o Same powers as civil procedure courts to compel evidence and examine persons under oath

Winding Up – s, 214 [not covered 2009]
                                                                                                                Page 100 of 122

    Only really used in a private company context
          o S/h situation where things breakdown and cannot be worked out (“divorce”)
 s. 213 – Court order involving the dissolution of the corporation
          o i.e. Haven’t kept up filing requirements or AGM requirements
 s. 214 – order for dissolution and liquidation of a corporation or any of its affiliates on application of s/h
          o (a) where the court is satisfied that the corporation or any of its affiliates
                    (i) act or omission effects a result,
                    (ii) business or affairs have been conducted in a manner,
                    (iii) powers of the d/o have been exercised in a manner
that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, d/o
          o    (b) the court is satisfied that
                       (i) A USA entitles a complaining s/h to demand dissolution of the corporation after the
                        occurrence of a specified event and that event has occurred, or
                       (ii) it is just and equitable that the corporation be liquidated and dissolved
 Tend to be cases where there are irreconcilable differences b/w s/h of a private company
 Cannot be carried on for the reasons the corporation was conceived
 Serious misbehaviour on part of mgmt where the s/h have a justifiable lack of confidence
 Fundamental disagreement or a deadlock – no s/h agreement or mechanism for dissolving disputes
 “Last Resort”
          o If any value as a going concern, it wouldn’t make sense to “wind-up” unless the differences are so
              irreconcilable and cannot sell off shares to other party or to 3 party(s)
 Now: With the oppression remedy, even with cases of irreconcilable differences the court can now tailor
     different relief that will preserve value for everyone involved – short of “winding up”

OPPRESSION REMEDY – “Mother of all s/h remedies”
    Introduction
          o Usually the actions relate to a harm to a particular individual or group – even if the actions of the d/o
               were in the best interests of the company
          o Extremely broad & comprehensive and open-ended remedy – and where complaining s/h will go
               first, rather than a derivative action or a CBCA remedy  and an equitable remedy
                      Encompasses basically all other remedies available under CL
                      Rarely see derivative actions b/c oppression remedy is much easier to bring and broader
          o Protection of the “reasonable expectation” of the individual
          o Legislative intent: Created for the minority s/h of private corporations – but there are no limits, thus
               can make an action against a public company, and other stakeholders trying to access this remedy
    A Complainant may apply to court for an order re oppression (s.241(1), s.238)
          o (a) shareholders (reg’d or beneficial; present or past) [security holders actually includes debt]
          o (b) directors or officers (present or past)
          o (c) the Director of the CBCA
          o (d) any “proper person” – discretionary category – could be a creditor, employee, etc.
    Substantive standard - grounds for bringing an action
    [this is different from 241 (1) definition of complainant --] S. 241 (2) The conduct complained of must be
     oppressive or unfairly prejudicial or unfairly disregards the interests of any security holder, creditor, director
     or officer (s.241(2))  reasonable expectations? Were they violated?
    How so? End result or process can be oppression
    Effects based test:
          o (a) The effect of the conduct was oppressive
    Process based test:
          o (b) the manner in which the corporation’s business was carried out was oppressive
          o (c) the powers of the directors were carried out in a manner which was oppressive
    Indicators of Oppressive Conduct (see Scottish Co-op case below): [also discussed in BCE briefly]
                                                                                                               Page 101 of 122

             o   Lack of valid business purpose for transaction [or just avoiding giving to minority s/hs] [peoples –
                 did the procurement policy have a valid business purpose – court says yes]
             o   Failure of corporation and controlling s/h to try to simulate an arms-length transaction (i.e. by an
                 independent committee)
             o   Lack of good faith on part of directors (not an absolute requirement but…)
             o   Discrimination among s/h which benefits majority (controlling) and detriments the minority
             o   Lack of adequate and appropriate disclosure of info to minority s/h for them to make informed
             o   Plan to eliminate the minority [exactly what happened in Scottish Co-op]

Private Company Cases

Ebrahimi v. Westburne (CB 565) – [not covered]

Under UK “Winding-Up” Provisions – same as s. 214(1)(b)(iii) – “just and equitable that the corporation should be
liquidated and dissolved”
In determining whether the effect of a decision/course of conduct/action “hurt” or was “oppressive” to the
s/h’s rights, the court looks at the “reasonable expectations” of the party  broadens grounds for remedy
 Facts: Carpet dealer that started as 50/50 partnership (500 – Ebrahami, 300 – Nazar & 300 Nazar Jr.). Wanted
     to get rid of Ebrahami and with 600 shares was possible. First, removed E from the board of directors – normal
     majority vote and removed from his position. Ebrahimi brought a motion to “wind-up” the company.
 Decision: Court ordered “wind-up” on the grounds that it is “just and equitable” to do so. Looks at the
     reasonable rights and expectations, inequitable and beyond the reasonable expectations of Ebrahimi that he
     would have been expelled from the corporation in the manner that he was.
         o 1.) Wasn’t within the rights of N’s, in justice or equity, to take advantage of legal powers in the way they
         o 2.) In expelling him as a d/o – E was cut off from his legal right to share in the profits (d/o fees) – only left
               with his dividend entitlements

IMAX (CB 922) [not covered]
    Facts: Several couples holding shares in company. Ferguson’s had ¼ shares of the company going into
       the endeavor. Essentially tried to force Ferguson’s ex – wife from the business – cancelled “wives’” shares
       and converted them to stop dividends etc.
    Decision: Trying to force out ex-Mrs. Ferguson was unfairly prejudicial and contrary to her legitimate
           o Resolution authorizing a change of capital in the company, culminating event in the course
               of…prejudicial conduct

Diligenti (CB 924) [not covered]
     Facts: Four equal partners in a franchise. Acquired a 2 franchise and 3 of the 4 partners decide to remove
        the 4 director who had been the manager. Removed him as manager and director and formed their own
        management company to run the business.
     Decision: Breach of reasonable expectations and acts/business were conducted in an “oppressive” and
        “unfairly prejudicial manner” (treatment). No explicit agreement saying all s/h’s could participate in the
            o Disentitled to an economic interest that was within his legal interests.
            o Oppressive: an interference with the strict legal rights of the petitioner
            o Unfairly prejudicial: allows importing of Ebrahimi notion of equitable rights into the oppression
                 remedy and thus to inquire into whether their equitable rights have been violated

Public Company Cases

Westfair (CB 927) [not covered]
    Facts: Two classes of shares (A & B), one had a priority of $2 on dividends and then equal payments
       thereafter. Policy of distribution of dividends from year-to-year: pay out small dividends but retained most of
                                                                                                            Page 102 of 122

        its earnings in the business. The Board decided to change the policy and essentially distributed out all
        earnings as dividends. The A s/h – “dividend priority”, felt it was oppressive b/c it did away with their
        dividend priority – brought an “oppression application”
       Decision: Compelled the company to repurchase the Class A shares from s/h at a “fair value”
             o Value of $2 priority of Class A shares had diminished
             o Decision was all about reasonable expectations and fact specific
       (pg. 929) “…always fact specific, cases decided on other facts provide only a limited guide. Reasonable
        expectation of Class A s/h was that their value was maintained by their dividend policy disappointed that
        reasonable expectation.”
       Principle: “one clear principle that emerges is that we regulate voluntary relationships by regard to the
        expectations raised in the mind of a party by the word or deed of the other, and which the first party
        ordinarily would realize it was encouraging by its words and deeds….’reasonable expectations’, or
        expectations deserving of protection…all words and deeds of the parties are relevant to an assessment of
        reasonable expectations, not necessarily only those consigned to paper and not necessarily only those
        made when the relationship first arose.”

Scottish Co-op (CB 942) [important for factors]
    Facts: They wanted to enter the rayon business, but needed a license. Found 2 people who had this
       license (Meyer & Lucas) and formed a sub – and Scottish co-op owned 4000 shares (3/5 dir.), and M & L
       owned 3900 (2/5 dir.). After 5 year contract, they wanted to take the business back “in-house” and allowed
       the subsidiary to decline and become an empty shell corporation. M & L commence an oppression action –
       saying the actions of the d/o were oppressive
    Decision: ordered relief, finding that Scottish’s actions were oppressive.
            o There was no independent committee procedure – was basically a unilateral action
            o Some consideration should have been paid to the sub (M & L)
            o Discrimination against the minority s/h – Clearly an attempt to eliminate the minority
    Remedy:
            o Scottish was ordered to purchase the shares of the minority shareholders at a fair market price
                    i.e. the estimated value of the shares at the time of the decision, had there not been any
            o This remedy is useful b/c it only inflict injury on the oppressor, but doesn’t destroy it
            o The court didn’t order a winding up b/c the value of the company was already pillaged by Scottish
            o The minority SHs would have received very little had the company been liquidated

First Edmonton Place (CB 915) - Test for determining whether a creditor should be granted complainant status
     Facts: Applicant was a landlord – entered into a 10-year lease, which had very favourable terms for the
        corp (18 mos rent-free, and the LL would make a cash payment $100,000 upfront so they will enter into the
        lease). Corp is controlled by 3 lawyers, and when the lease is entered into – gets the $100,000, and pays it
        out to the lawyers – and then takes advantage of the 18 mos free rent – then pays 3 mos of rent – then
        breaks the lease
             o The LL wants to recover damages for the broken contract, not only from the corp, which has no
                 money, but from the 3 lawyers, on the basis that their actions were oppressive
     Decision: LL cannot use the oppression remedy – wasn’t a “complainant” or “security holder” capable of
        exercising rights under the oppression remedy and he was not considered a creditor at the time of the act or
        conduct complained of(security holders have certificates entered into a security registrar, lease is not a
        security issued by the corporation but a debt – mortgages however are an issued security)
             o “…a creditor can be a ‘complainant’ under s. 231(b)(i) only if it holds or is the beneficial owner of a
                 security of the corporation, and if the security is a type which is capable of being registered under s.
                 88(2)or(5) with the Registrar of Corporations, and in the register of mortgages specifically affecting
                 property of the corporation…S. 88.2 creates a scheme for the registration of mortgages…written
                 evidence of a debt obligation is in my view a certificate evidencing…a…debt obligation”. [p. 916]
             o Focuses on the creditor’s (LL) reasonable expectation – creditor had no reasonable expectation
                 that the corp would hold on to the $100,000, or have sufficient assets to perform on the lease 
                 court said that this is not an appropriate case to be suing under the oppression remedy – and you
                 should have gotten a personal guarantee – LL consciously and intentionally contracted with the
                 corp alone, and knew that they would be out of luck if the corp had no money
                                                                                                         Page 103 of 122

            o Looks at inequality of bargaining power – but the LL was sophisticated business LL
       NOTE: An argument can be made that a debt holder or creditor, where they can attach a register to it, can
        be brought under the definition of a security holder to bring a claim
            o “Proper Person”: an applicant does not have to be a security holder but could be a creditor or even
               a person toward whom the corporation had only a contingent liability at the time of the act or
               conduct complained of…he would not be held to be a ‘proper person’ unless he satisfied the court
               that there was some evidence of oppression or unfair prejudice for the interests of the security
               holder, creditor, d/o…”

       However, there are other cases where creditors have been able to establish oppression and brought the
        applications under (d) of the definition – criteria of First Edmonton are not exhaustive, where justice and
        equity would entitle a creditor to be regarded as a “proper person” under s. 324 :
            o 1.) Where directors or mgmt are engaging in acts which constitute allowing the corporation to
                 commit fraud on the creditor
            o 2.) Acts and conduct of d/o have breached underlying expectations arising from the creditors
                 relationship to the corporation
                       Historically, creditors have had more success than other stakeholders (80% vs. 50%)

[pg. 934]
     Decision: The finding of the court that “bad faith” does not need to be established in order to get relief under
        the oppression remedy. Highly probative (KeepRite) but doesn’t need to be shown and “unfairly prejudicial”
        is a lesser standard than bad faith.
             o i.e. it is sufficient that the conduct complained of had an unfairly prejudicial effect, even if it was
                 caused unintentionally.

Question: How broad a remedy is the “oppression remedy”? Does it extend to affiliates beyond the corporation? (i.e.
controlling s/h, another corporation)
A: Non – affiliates do not appear to be covered under the “oppression remedy”.

241(3) – Powers of court – In connection w/ an application under this section, the court may make any interim or
          final order it thinks fit including, w/out limiting the generality of the foregoing,
        o (a) an order restraining the conduct complained of;
        o (b) an order appointing a receiver or receiver-manager;
        o (c) an order to regulate a corporation’s affairs by amending the articles or by-laws or creating or
             amending a unanimous shareholder agreement
        o (d) an order directing an issue or exchange of securities
        o (e) an order appointing directors in place of or in addition to all or any of the directors then in office
        o (h) an order varying or setting aside a transaction or contract …
        o (j) an order compensating an aggrieved person
        o (l) an order liquidating & dissolving the corporation
        o (n) an order requiring the trail of any issue
 Seems to provide “unlimited flexibility” to the courts

    •   People v. Wise (SCC)
            –   Court found stated that the duty of loyalty/fiduciary duty is owed to the corporation, not to
                individual stakeholders.
            –   Court states that stakeholders have other remedies at their disposal (see para 47 onward)
                such as oppression remedy
            –   Fact that creditors interests increase as corporation on brink of insolvency is relevant to
                exercise of discretion by court re complainant status
                                                                                           Page 104 of 122

       –   “In our view, the availability of such a broad oppression remedy undermines any perceived
           need to extend the fiduciary duty imposed on directors by s.122(1)(a) of the CBCA to
           include creditors.”
       –   Court also states that duty of care is owed to stakeholders directly [creditors can sue
           directors directly for a breach of duty of care] [peoples suggests broad open ability to get
           remedy ounder oppression remedy – BCE provides more context – sets out elaborate test of
           brach but then over-lays with directors duties]
•   Oppression Remedy
•   BCE (SCC)(2008)
       –   Oppression focuses on harm to legal and equitable interests of stakeholders
       –   Court can focus on not just what is legal but what is fair
       –   Oppression is fact specific
       –   What is just and equitable is determined by examining reasonable expectations of
•   Oppression Remedy
•   BCE (SCC)(Cont’d)
       –   TWO QUESTIONS:
       –   1. Does the evidence support the reasonable expectations asserted by the claimant;
              •   General commercial practice
              •   nature of the corporation
              •   Relationship between the parties
              •   Past practice
              •   Steps the claimant could have taken to protect itself
              •   Representations and agreements
              •   Fair resolution of the conflicts between corporate stakeholders
       –   2. Does the evidence establish that the reasonable expectation was violated involving
           unfair conduct and prejudicial consequences?
       –   BUT THEN, the court goes on to say that oppression involves a duty to treat individual
           stakeholders fairly and equitably. The directors must act in the best interests of the
           corporation, having regard to all relevant considerations, including the need to treat
           affected stakeholders in a fair manner, commensurate with the corporation’s duties as a
           responsible corporate citizen. (See para 66, for example). Duty of directors is to the
           corporation, not individual stakeholder groups.
                                                                                                          Page 105 of 122

            –   Oppression Remedy
    •   Remedies available
            –   Court’s powers are broad: (s.241(3))
            –   Court may make any “order it thinks fit” including orders from an enumerated list
            –   Most common remedies

Naneff (CB 950) [not covered]
 Facts: Family real estate business where the father brought in two sons and later decided he did not like how
   one son was living. Kicked the son out of the house and also removed him as an officer of company’s within
   family business and removed him from managerial position (cut-off from income from salary etc.). Son brought
   an oppression application.
 Decision: Yes, this was oppressive behavior. Reasonable expectations were frustrated and the conduct of
   others to ostracize the son from the business was oppressive, inequitable and unfairly prejudicial.
        o Ordered dissolution (public sale).
 Court of Appeal: Substituted the remedy to force the sale of business and ordered the remaining family
   members to “buyout” the son – “Appraisal Remedy”
        o “Elephant Gun” remedy where it was not required, nor just and equitable to force the entire family to sell
           the business.

    APPRAISAL REMEDY [not covered]
   Rights of a s/h to require the company to purchase their shares at an appraised price if the company takes
    certain “triggering” actions from which they dissent
   The right works as a device to reconcile the majority’s need to adjust to changing economic conditions with the
    right of members of the minority to refuse to participate in ventures beyond their initial contemplation
   Triggering event: “Fundamental Changes” (situations involving major structural changes while the enterprise
    is continuing)
   S. 190 – s/h dissents if the corporation resolves too:
         o (a) amends its articles under s. 173 – 174 add/change/remove provisions restricting or constraining the
             issue, transfer or ownership of shares of that class
         o (b) amend its articles under s. 173 to add/change/remove any restriction on the business(es) that the
             corporation may carry on
         o (c) amalgamate otherwise under s. 184
         o (d) be continued under s. 188
         o (e) sell, lease or exchange all or substantially all its property under s. 189(3), or
         o (f) carry out a going-private transaction or a squeeze out transaction
   (3) “Payment for shares”
         o In addition to any other right the s/h may have, subject to s. 26, when the action approved by the
             resolution from which the s/h dissents or an order made under s. 192(4) becomes effective, to be paid
             by the corporation the fair value of the shares in respect of which the s/h dissents, determined as of the
             close of the business on the day before the resolution was adopted or the order was made
   Dissent Rights Principle: Determining the “fair value” as of the date on which the event occurred which gives rise
    to the remedy – no past/future valuations

Determination of “Fair Value” [not covered]
 1.) Market Value Approach
 2.) Underlying Asset Value Approach
       o Many companies trade at a discount to underlying asset value
       o Their “fair value” is greater than what it is trading for in the market
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                  i.e. Real Estate, Mutual Funds
   3.) Earnings Value Approach
         o Look at earnings and cash flows and apply a multiplier
                  “Multiplier” – depends on a case-by-case basis and on the industry
   4.) Hybrid – Combination Approach
         o Apply all three valuation methods to come to a final “fair value’ assessment

Determination of Fair Value [not covered]

Domglas Inc. v. Jarislowsky, Fraser & Co. (QB S.C. [1980], aff’d QB C.A. [1982])
    “Squeeze-out” situation with shareholders dissenting  appraisal remedy required
    What is the appropriate method of determining “fair value”?
    Generally accepted and recognized valuation principles are theory have postulated four approaches to
       the valuation of corporate shares
    (1) The Market Value Approach: the quoted market price on the stock exchange
    (2) The Assets Approach: the valuation of the net assets of the company at fair market value
    (3) The Earnings or Investment Value Approach: the capitalization of maintainable earnings
    (4) Some combination of the three above-noted approaches
    General Rule: (from Libby case) there is no definite rule for determining “fair value”  the proper results in
       each case will depend upon the particular circumstances of the corporation involved
    Consensus that the component elements to be relied upon in determining “fair value” are stock market
       price, investments value, and net asset value  all 3 components of “fair value” may not influence the
       result in every valuation proceeding, yet all 3 should be considered
    Market Value Approach: given a consistent market in the sense of a market that is not “the effect of a
       transient boom or sudden panic” or that is “not spasmodic or ephemeral”…the stock market is the best
       evidence of fair market value  in this case the market for Domglas’s shares was “irregular” and therefore
       the stock market value approach was found to be totally inappropriate and was rejected
    The Assets Approach: a careful appraisal of the physical assets is indispensable as a guide to the
       forecast of earning power  Court rejected assets method as a direct method of valuation in this case
       because Domglas was a going concern
    The Earnings (or Investment Value) Approach: the generally accepted method to value a business as a
       going concern  it reflects the principle that commercial and industrial property is worth what it can earn
    Earning Approach is a two-stage process:
    (a) to arrive at the most probable and reasonable prospective net earnings; i.e. a stream of maintainable
       earnings projected into the near future;
    (b) to capitalize those projected net earnings at an appropriate rate; i.e., to fix an appropriate multiple – or
       price: earnings ratio
    The Combined Approach: in Libby case, the appraiser and the Court fixed three different share values by
       applying separately each of the 3 approaches  the 3 values thus derived were then weighted, based upon
       the particular facts and circumstances of the case
     Court adopted the investment value (earnings) approach, in order to fix a fair value as of the close of
        business on the valuation date, of the common shares of Domglas held by the dissenting shareholders on
        that date  that is the benchmark approach in valuing a business as a going concern, where no liquidation
        is postulated
     RATIO #1: In legislating the term “a fair value”, Parliament conveyed upon the Court the equitable
        jurisdiction and the obligation to fix a value which is fair, just and equitable, having regard to all of
        the circumstances; including, in particular, a situation which is tantamount to an expropriation of the
        shares held by the minority shareholders
     RATIO #2: ... in a “squeeze-out” situation…the absence of a discount in valuing a minority holding
        and the increment or premium for forcible taking are the essence of the distinction b/w “fair market
        value” and “fair value”  the Court will, therefore, first calculate and establish the “fair market
                                                                                                             Page 107 of 122

         value” of the dissenting shareholder’s shares; and from there go on to fix “a fair value” for those
        RULE: the “fair value” of a given share can be equal to or greater than, but never less than, its “fair
         market value” 
        “the payment by the petitioner (i.e. company) of “a fair value”, even if more than the “intrinsic value” of
         the shares, is the price that must be paid by it for the privilege of effecting the amalgamation over
         the protest of the dissenting shareholders, who in effect are being ousted from the corporation”
        Court must make its determination in such a manner that it will be fair, just and equitable to the
         dissenting shareholders provided that no injustice is done to the petitioner

Smeenk v. Dexleigh Corp. (1993, ON H.C.)(aff’d [1993] OCA)  appraisal remedy case that discusses valuation
principles [not covered]
     Amalgamation of Foodex Inc. and Hatleigh Corp. was approved by special meetings of the shareholders of
         the 2 corps.  formed Dexleigh
     Application brought by holders of Foodex preference shares and Hatleigh class A shares; they dissented in
         the amalgamation and were offered $1.30/share for F. pref. shares and $1.00/share for H. class A shares
     Dissenters applied to the court to have the fair value of the shares determined
     (1) No onus on the applicants to demonstrate that the value represented by the company’s offer is too low
          the Court must itself value the shares of the dissenting shareholders
     (2) Court must proceed on the basis of evidence offered by the parties  where expert evidence is offered
         the court should be cautious in exercising its discretion to reject it
     (3) Valuation of shares under s. 190 of the CBCA is a matter of assessment in accordance with the facts of
         the particular case; an important element of judgment involved and particular attention must be given to
         seeking a value that is fair having regard to all of the circumstances; this invokes the equitable
         jurisdiction of the court
     (4) Advantages of hindsight are not available either to the applicants or to the court
     (5) Applicants are not entitled to obtain the benefits of the amalgamation, having dissented from the
         transaction (i.e. in Smeenk, the applicant were not “squeezed out” but rather were offered a continuing
         interest in the amalgamated corp.  applicant declined in favour of referring the matter of their
         compensation to the court)
      Court has discretion to select a valuation method to use. What method is selected depends upon
          the facts of the case.
      Factors include: (a) whether the corp. is publicly traded and at what volume, (b) the ease of asset valuation,
          and (c) the likelihood of liquidation
      CAUTION: If the events behind the need for a valuation amount to a forcible taking of the shares (for
          example, a transaction that “squeezes out” some shareholders), should this be taken into account in the
          valuation of those shares?  while Domglas [above] held that a forcible taking premium applied, this
          decision appears to have been reversed

Apportionment of Liability – Part XIX.1

Degree of responsibility
 237.3 (1) Subject to this section and sections 237.4 to 237.6, every defendant or third party who has been found
responsible for a financial loss is liable to the plaintiff only for the portion of the damages that corresponds to their
degree of responsibility for the loss.

Uncollectable amounts
 (2) If any part of the damages awarded against a responsible defendant or third party is uncollectable, the court
may, on the application of the plaintiff, reallocate that amount to the other responsible defendants or third parties, if
the application is made within one year after the date that the judgment was made enforceable.

                                                                                                                 Page 108 of 122

 (3) The amount that may be reallocated to each of the other responsible defendants or third parties under
subsection (2) is calculated by multiplying the uncollectable amount by the percentage that corresponds to the
degree of responsibility of that defendant or third party for the total financial loss.

Maximum amount
(4) The maximum amount determined under subsection (3), in respect of any responsible defendant or third party,
may not be more than fifty per cent of the amount originally awarded against that responsible defendant or third

Exception — fraud
 237.4 (1) The plaintiff may recover the whole amount of the damages awarded by the court from any defendant or
third party who has been held responsible for a financial loss if it was established that the defendant or third party
acted fraudulently or dishonestly.

 (2) The defendant or third party referred to in subsection (1) is entitled to claim contribution from any other
defendant or third party who is held responsible for the loss.
 Always going to see defendants arguing that they are only subject to limited amount of liability
 Can reapportion liability if it has not been paid up by other parties – subject to the maximum allowable amount
 Fraud is always the exception – “Greenlight”

Joint and Several (Solidary) Liability
Individual or personal body corporate
 237.5 (1) Defendants and third parties referred to in subsection 237.2(1) are jointly and severally, or solidarily, liable
for the damages awarded to a plaintiff who is an individual or a personal body corporate and who

(a) had a financial interest in a corporation on the day that an error, omission or misstatement in financial information
concerning the corporation occurred, or acquired a financial interest in the period between the day that the error,
omission or misstatement occurred and the day, as determined by the court, that it was generally disclosed; and

(b) has established that the value of the plaintiff’s total financial interest in the corporation was not more than the
prescribed amount at the close of business on the day that the error, omission or misstatement occurred or at the
close of business on any day that the plaintiff acquired a financial interest in the period referred to in paragraph ( a).

(1.1) Subsection (1) does not apply when the plaintiff brings the action as a member of a partnership or other
association or as a trustee in bankruptcy, liquidator or receiver of a body corporate.

 (2) For the purposes of this section,

(a) a personal body corporate is a body corporate that is not actively engaged in any financial, commercial or
industrial business and that is controlled by an individual, or by a group of individuals who are connected by
marriage, common-law partnership or any legal parent-child relationship or are connected indirectly by a
combination of those relationships, whether or not the individuals through whom they are connected are members
of the group; and

(b) a common-law partnership is a relationship between two persons who are cohabiting with each other in a
conjugal relationship and have done so for a period of at least one year.
 Can only make claims up to a prescribed amount – Regulation 11
        o Amount of value of total financial interests is limited at $20,000
        o Subject to s. 237.6 – “Equitable Grounds”
                  (1) If the value of the plaintiff’s total financial interest referred to in s. 237.5(1) is greater that the
                     prescribed amount, a court may nevertheless determine that the defendants and 3 parties are
                                                                                          Page 109 of 122

jointly and severally or solidarily, liable if the court considers that it is just and reasonable to do
      “egregious, vexatious” situations where you’ve invested more than $20,000 the court
         may hold parties j/s liable for >$20,000 maximum
                                                                                                          Page 110 of 122

Part 14: Mergers and Acquisitions
     Introduction
     Economic Rationales
            o Replace inefficient with efficient mgmt – brings in a new team, and turns it around
            o Create synergies
                     economics of scale
                     vertical/horizontal integration (of operations)
            o Tax advantages
            o Diversification of risk: a Holdco will go out and buy other industries – offset losses with profits
            o Big egos – empire building? Is this rational? Do we want to encourage this?
     Policy issue: Do mergers and acquisitions increase shareholder wealth? If so, at what cost to other
        stakeholder groups?
            o Seems that the efficiency argument dominates – and empirical studies show that s/h wealth does
               increase with TOB – when announced, the target shares increase, but the offeror, stays the same
               (or goes down)
            o In the long run, the overall share price usually increases
            o Is this short term loss for the e’ees? Or do we want to impose obligations on the TOB companies

Four Ways in which you can buy a business:
 Share Transaction
      o Negotiated share purchase – “private”
      o Takeover Bids – “public”
 Asset Transaction – see farther below
      o Must be approved by shareholders via “special resolution” (2/3 majority vote of who comes to the
          meeting or proxy?? and votes)
               Buyers – nothing in CBCA that requires approval from shareholders
               Buyers – if issue shares to buy a company might be situations (not for this class) that draw
                  attention of securities regulators
               Sellers -- Sale of all or substantially all company’s assets s189
               Sellers – requires special resolution s189(3) each share gets the right to vote s189( 6) – even if
                  doesn’t ordinarily have voting right – s189 (7) could require separate class voting if one class
                  will be affected differently than others [if just getting money then all would be affected the same]
               Might buy a particular patent for money or shares
 Amalgamation
 Arrangements

Statutory Amalgamations – s. 181
 Two or more corporations, including holding and subsidiary corporations may amalgamate and continue as one
        o 2+ corporations – must be corporations governed by the CBCA
                 If you want to amalgamate must continue with that corporation under that corporation’s
                  jurisdiction (i.e. CBCA, OBCA)
        o S. 188 – must have notice to s/h and s/h meeting and special resolution vote
                 CBCA  OBCA
                        Must send a circular, resolutions being voted on and comply with mandatory timelines
                 Can now be amalgamated with other CBCA(OBCA) corporations
        o S. 184 – can do short form amalgamations both horizontally and vertically
                 Only requires resolution of directors
 Why?
        o 1.) Takeover Bids
                 51+% and you can ‘control’ the company but if you want 100% ‘control’ of the company and its
                  assets you’ll have to find a way to “squeeze out” the minority
                        ‘Control’ of company but may still be limited as to what you can do with the assets
                        Have to run the two companies separately and deal with minority s/h (fiduciary duties)
                 Want to combine a BidCo. with TargetCo. (if you don’t have 90+%  “squeeze out”)
                 On amalgamation – the residual s/h of TargetCo. might be given redeemable preferred shares
                                                                                                          Page 111 of 122

        o   2.) Tax motivations
                  Highly profitable company and company with large tax losses that cannot be utilized for tax
                       purposes (pooling of interests) – market for buying “high loss companies”
   S. 182 – Mechanics
        o In order to execute an amalgamation – must enter into an amalgamation agreement saying what the
            new combined entity will look like
        o Essentially provide the constating document of what the corporation will be (articles, by laws, share
            capital structure etc.)
        o Contractual provisions – representations and warranties from each company to the other as to assets,
            liabilities and nature of the business etc.
                  If one company misrepresents its assets – can be sued or amalgamation rescinded
   S. 183(1)
        o The boards of each company in the amalgamation must approve the amalgamation agreement and
            then must submit it to s/h for approval
        o Must be approved by s/h via ‘special resolution’ (2/3+)
        o In order to vote – proxy circular
                  Summary of amalgamation agreement
                  S. 183(2)(b) – “dissenting rights”: if you vote against the amalgamation and it succeeds, you
                       are entitled to make an application to the court seeking “fair value” for shares
        o s. 183(4) – s/h given class vote to the extent that they would have a class vote if it were contained in the
            amendment to articles and they were entitled to a class vote
                  Also subject to s. 183(2)(b)  s. 190(1)(c)
   Long Form Amalgamations: s/h in the amalgamating companies are different
   Short “         “          “ : s/h base in the amalgamating companies is the same
        o S. 184 – directors can approve/control the amalgamation

Vertical Short Form – s. 184(1)
 Parent Company  SubCo.
        o Parent owns 100% of SubCo. – trying to eliminate a subsidiary
 Must ensure:
        o 1.) The articles of both companies are the same – s. 184(1)(b)(ii)
        o 2.) Shares of the subsidiary are cancelled

Horizontal Short Form
 2+ subsidiaries of a parent company are amalgamated
       o Amalgamating the a class of subsidiaries below the parent company
                SubCo A.  SubCo. A(B)  SubCo. B
 S. 184(2)
       o Each of the directors of the SubCo.’s must approve the transaction
       o The articles of the Subco.’s must be the same
       o Must decide which of the SubCo.’s share capital is cancelled
       o Must decide who the “new” directors of amalgamated company will be – usually the directors of the
           non-cancelled SubCo. (i.e. SubCo. A in example)
 S. 185 – after the amalgamation is approved
       o Send the articles of amalgamation to the director under the CBCA
       o Send statutory declaration as to the solvency and reasonable grounds that no creditor will be prejudiced
           by the amalgamation
                Alternative: s. 185(2)(a)(ii) – stating you given adequate notice to creditors and none of them
                   have objected on otherwise known grounds that are frivolous or vexatious
                (3) – “Adequate Notice”
       o (4) – director of CBCA issues a certificate of amalgamation
 NOW: a new company

Amalgamation Agreements
182. (1) Each corporation proposing to amalgamate shall enter into an agreement setting out the terms and means
of effecting the amalgamation and, in particular, setting out
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(a) the provisions that are required to be included in articles of incorporation under section 6;
(b) the name and address of each proposed director of the amalgamated corporation;
(c) the manner in which the shares of each amalgamating corporation are to be converted into shares or other
securities of the amalgamated corporation;
(d) if any shares of an amalgamating corporation are not to be converted into securities of the amalgamated
corporation, the amount of money or securities of any body corporate that the holders of such shares are to receive
in addition to or instead of securities of the amalgamated corporation;
(e) the manner of payment of money instead of the issue of fractional shares of the amalgamated corporation or of
any other body corporate the securities of which are to be received in the amalgamation;

(f) whether the by-laws of the amalgamated corporation are to be those of one of the amalgamating corporations
and, if not, a copy of the proposed by-laws; and
(g) details of any arrangements necessary to perfect the amalgamation and to provide for the subsequent
management and operation of the amalgamated corporation.

Shareholder Approval – Any time there is not a short form (horiz/vert) amalgamation
183. (1) The directors of each amalgamating corporation shall submit the amalgamation agreement for approval to
a meeting of the holders of shares of the amalgamating corporation of which they are directors and, subject to
subsection (4), to the holders of each class or series of such shares.
 Notice of meeting
 (2) A notice of a meeting of shareholders complying with section 135 shall be sent in accordance with that section
to each shareholder of each amalgamating corporation, and shall
(a) include or be accompanied by a copy or summary of the amalgamation agreement; and
(b) state that a dissenting shareholder is entitled to be paid the fair value of their shares in accordance with section
190, but failure to make that statement does not invalidate an amalgamation.
 Right to vote
 (3) Each share of an amalgamating corporation carries the right to vote in respect of an amalgamation agreement
whether or not it otherwise carries the right to vote.
 Class vote
 (4) The holders of shares of a class or series of shares of each amalgamating corporation are entitled to vote
separately as a class or series in respect of an amalgamation agreement if the amalgamation agreement contains a
provision that, if contained in a proposed amendment to the articles, would entitle such holders to vote as a class or
series under section 176.
 Shareholder approval
 (5) Subject to subsection (4), an amalgamation agreement is adopted when the shareholders of each
amalgamating corporation have approved of the amalgamation by special resolutions.
 (6) An amalgamation agreement may provide that at any time before the issue of a certificate of amalgamation the
agreement may be terminated by the directors of an amalgamating corporation, notwithstanding approval of the
agreement by the shareholders of all or any of the amalgamating corporations.

Arrangements – s. 192
 Original purpose: To allow you to make any fundamental changes that could not be done practicably in the
    ordinary way
 S. 192(3) – need to go to court; where it is not practicable for the corporation that isn’t insolvent to effect a
    change…apply to the court…approving the fundamental change under the arrangement
        o Go to court and have the entire arrangement overseen by a judge
        o Extremely flexible and can do multi – step transactions in “one stroke”
 NOW:
        o 1.) In order to do a fundamental change via an arrangement – court approval:
                Court decides the process
                Must come to a substantive decision that the proposed process of the transaction is fair –
                   certainty to insulate from potential liability (minority s/h’s)
        o 2.) Can do things that couldn’t be done by other ways
                                                                                                            Page 113 of 122

                      Issues an interim order for process
                            s/h notice, s/h approval (special resolution), disclosure requirements
                   Issues an order to deem fairness of transaction – protection from liability?
                            This 2 stage is where the dissenting parties bring claims

                   Court must still approve the substantial fairness of the arrangement
 The standard is not of “impossibility” under the other prescribed procedures
         o Must be able to satisfy the court that doing the transaction directly is inconvenient or less advantageous
              than doing it by plan of arrangement
 Complex transactions, reorganizations, customized amalgamations and obtains a court order for approval
         o 1 Stage: Fairness of process
         o 2 Stage: Fairness of transaction
 S. 192(2) – Cannot do an arrangement when a company is insolvent
         o Cases where arrangements are allowed when one company Is insolvent and one isn’t
                       Amalgamations cannot be done b/c you must certify the solvency of companies
Definition of "arrangement"
192. (1) In this section, “arrangement” includes
         o (a) an amendment to the articles of a corporation;
         o (b) an amalgamation of two or more corporations;
         o (c) an amalgamation of a body corporate with a corporation that results in an amalgamated corporation
              subject to this Act;
         o (d) a division of the business carried on by a corporation;
         o (e) a transfer of all or substantially all the property of a corporation to another body corporate in
              exchange for property, money or securities of the body corporate;
         o (f) an exchange of securities of a corporation for property, money or other securities of the corporation
              or property, money or securities of another body corporate;
         o (f.1) a going-private transaction or a squeeze-out transaction in relation to a corporation;
         o (g) a liquidation and dissolution of a corporation; and
         o (h) any combination of the foregoing.
Where corporation insolvent
(2) For the purposes of this section, a corporation is insolvent
         o (a) where it is unable to pay its liabilities as they become due; or
         o (b) where the realizable value of the assets of the corporation are less than the aggregate of its liabilities
              and stated capital of all classes.
 Application to court for approval of arrangement
(3) Where it is not practicable for a corporation that is not insolvent to effect a fundamental change in the nature of
an arrangement under any other provision of this Act, the corporation may apply to a court for an order approving an
arrangement proposed by the corporation.
 Powers of court
(4) In connection with an application under this section, the court may make any interim or final order it thinks fit
including, without limiting the generality of the foregoing,
         o (a) an order determining the notice to be given to any interested person or dispensing with notice to any
              person other than the Director;
         o (b) an order appointing counsel, at the expense of the corporation, to represent the interests of the
         o (c) an order requiring a corporation to call, hold and conduct a meeting of holders of securities or
              options or rights to acquire securities in such manner as the court directs;
         o (d) an order permitting a shareholder to dissent under section 190; and
         o (e) an order approving an arrangement as proposed by the corporation or as amended in any manner
              the court may direct.
 Notice to Director
(5) An applicant for any interim or final order under this section shall give the Director notice of the application and
the Director is entitled to appear and be heard in person or by counsel.
 Articles of arrangement
 (6) After an order referred to in paragraph (4)(e) has been made, articles of arrangement in the form that the
Director fixes shall be sent to the Director together with the documents required by sections 19 and 113, if
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Certificate of arrangement
 (7) On receipt of articles of arrangement, the Director shall issue a certificate of arrangement in accordance with
section 262.
 Effect of certificate
 (8) An arrangement becomes effective on the date shown in the certificate of arrangement.

Asset Transaction
    Requires the selling company to obtain approval of the s/h’s at a special meeting
          o Must obtain approval via “special resolution” – 66 2/3%
    S. 189(3) – Extraordinary sale, lease or exchange
          o A sale, lease or exchange of all or substantially all the property of a corporation other than in the
              ordinary course of business of the corporation requires the approval of the s/h’s in accordance with
              Ss. (4) – (8)
          o (4) Notice of Meeting – s/h notice ((a) summary of sale agreement and (b) inform of s. 190 rights)
          o (5) S/h approval – s/h may authorize sale and may fix or authorize d/o to fix terms and conditions
          o (6) Right to vote – each share of the corporation carries the right to vote – whether or not that share
              carries voting rights
          o (7) Class vote – class of shares is entitled to vote separately as a class, only if they are affected by
              the sale differently that other classes
          o (8) s/h approval – sale is adopted when the s/h of each class entitled to vote have approved
          o (9) Termination – may abandon the sale w/o further s/h approval
    Why an asset sale?
          o Sometimes company’s don’t want the entire corporation but a lucrative division
          o Q: is it a division within a corporation or a subsidiary?
                   Subsidiary: you can just go and buy the shares of the subsidiary
          o When conducting due diligence you may find something you don’t like about the corporation
    Rare in the public context
          o Many times it is a friendly deal where you ask the corporation to roll those assets into a separate
              company and do a private deal
          o Remember: Assets of ParentCo. set up in SubCo. – thus the sale of the shares requires the same
              approval as a sale of assets
          o Must be approved by shareholders via “special resolution” (2/3 majority vote of who comes to the
              meeting or proxy?? and votes)
                   Buyers – nothing in CBCA that requires approval from shareholders
                   Buyers – if issue shares to buy a company might be situations (not for this class) that draw
                       attention of securities regulators
                   Sellers -- Sale of all or substantially all company’s assets s189
                   Sellers – requires special resolution s189(3) each share gets the right to vote s189( 6) –
                       even if doesn’t ordinarily have voting right – s189 (7) could require separate class voting if
                       one class will be affected differently than others [if just getting money then all would be
                       affected the same]
                   Might buy a particular patent for money or shares

Takeover Bids – Purchase/Sale of Shares
    Regulated by provincial securities legislation [used to be in CBCA – no longer]
          o Acquisition of “control” when you obtain 20+% securities of a class
    Friendly take-overs
          o BoD are communicating, and usually the BoD/Mgmt will not be replaced
          o BoD will tell the s/h to accept the TOB
          o Must supply a circular stating what the TOB will consist of and call a meeting
          o Bids need to be open for 35 days – time to consider and possibly open an auction of bids
    Hostile take-overs
          o BoD is opposed to the TOB, and tells the s/h NOT to tender their shares
          o Go directly to the s/h to ask them to sell  and offer them a premium (usually 30-60% over the
              market price to entice them to give up their shares)
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           o   Supply your own circular of what the TOB will consist of and call a meeting [here’s who we are and
               here’s what we think is good about the company and what we are planning]
      Premium for Shares of C2 (Target company)
      Same offer MUST be made to ALL security holders
           o Policy: presumes that premiums for control should be shared ratably
      Must offer consideration that is the same as the highest price you have paid for securities in the last 90 days
      Statutory “Squeeze Out”
           o Hold 90% of the shares of a class – allowed to ‘squeeze out’ the last 10% of holders @ “fair value”
      Many times you will see TOB that want to acquire 66 2/3% of company’s voting shares
           o Once you reach 66 2/3%  amalgamation
      Disclosure Requirement: designed to ensure offerees are in a position to make an informed decision
       when tendered with a bid
      Disclosure Requirements Increase:
           o Special: offering shares other than class – prospectus level of disclosure about shares being
           o Related Party Transactions (non-arms length bids)
                    “buy back”
                    “going private”
                    “insider bids”
                             Heightened disclosure
                    Target company must set up an committee of independent directors to evaluate the
                       fairness of the bid (3 party negotiation)
           o Generally required to obtain a valuation or fairness opinion from an independent financial advisor
           o Transaction generally entails heightened s/h approval – “special resolution”
                    Typically 2/3 + vote or whatever is prescribed by statute
           o Securities: must get a majority of the minority s/h’s approval – “disinterested s/h’s”

      Proper Role of Target Company’s Management in Response to a Take-Over Bid
          o Initial Reaction: Resist bid
                   Concerns about change in control of the on-going business
                   to save their own jobs
          o Achieve the highest possible premium to shareholders (by initially resisting bid)
          o Resist bid b/c of concerns about effect on employees & other stakeholders?
                   Poor track record with PR, or environmental concerns, etc.
          o Duty to act in best interest of corporation taking into account reasonable expectations of
              stakeholders [BCE] not just shareholder value – directors have a lot of discretion after BCE to
              manage this

Common Defensive Tactics
    Keep the stock price high
        o Don’t have unrealized value in stock
        o Problem: involved short term behaviour orientation
                  Buy back shares in the marketplace
                  Manage earnings to keep them high and predictable
    Make target more attractive to current shareholders
        o pay out a really good dividend – to create loyalty
        o have a media campaign extolling the virtues of the company
    Make target company less attractive to offerors
        o Acceleration agreement in loans to provide for hostile takeover to become payable immediately.
        o Golden parachutes
        o Employment contracts with “change of control provisions”
                  Significant premiums for senior employees
                  3 party contracts – imposing higher costs on bidders

        o Trigger a “poison pill” – a.k.a. Shareholders’ Rights Plan
                  Many companies now have a plan such as this in place
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                       Equality rights get thrown out the window – it violates this principle
                       When should this pill be removed …. Did the s/h approve this “pill”
                       Courts have not yet had the opportunity to rule on this as no case law on subject
                       Securities laws allow the takeover company to acquire some amount before they make a
                        bid for many shares
                     Company sets this poison pill up in advance … trigger threshold of 5 – 10 %
                     All s/h except the one who has triggered the plan (hostile TOB person) – can buy many
                        shares at a greatly reduced price (peak discount to market value) DILUTE
                     Right is attached to the share and only separates and is exercisable if the board does not
                        approve of the TOB – “board of directors must exercise these rights”
                              Court’s have not really litigated these plans – in regard to the equality of shares
                                 issue – securities regulators are the ones who usually look at it and say the focus
                                 should be to maximize share value and they should approve well before offering
                                 company comes into the picture
                              Dilutes the shares, and makes it harder/more expensive to acquire the shares
    Issue shares to a “white knight”
           o Friendly 3 party is issued a block of shares
           o Deal with them that you will carry on as management
           o White knight could make offer to s/h or management issue new shares to the WK
    “Pac-Man” Defense
           o Someone bids on your company and you bid for them
Golden parachutes. Hefty payments if they have to get rid of management.
Green mail. Buy back existing shares at a premium. Bid for your own shares above price
    Sell off “crown jewel”
           o Sell off the most attractive assets of the company upon a hostile TOB
           o Key patent, key asset, key business component is attracting hostile T/O
           o With that gone likely the reason for takeover is gone
           o Keep management entrenched
           o Wouldn’t necessarily be a concern to s/h
    Solicit rival take-over bids – “Auctions”

Cases – Very Fact Specific
 Consider fiduciary duties owed to the corporation
 Consider the appropriate scope of defensive tactics

Teck v. Millar (CB 466)
 Facts: Afton approached Canex – Canex purchased shares (100,000 @ $3.00) and received right of first refusal
   on any “ultimate” deal received by Afton (Ultimate deal is where purchaser buys shares but the acquired stays
   inviolved) Tech launched a hostile bid for smaller mining company Afton. M didn’t think T was the proper bidder
   and approached Canex and created a deal with Canex in spite of protests from T. T had become close to being
   a controlling s/h of M thru market activity and was offering a higher price for TOB. A sold 100,000 shares to
   Canex for $3/s while T (controlling s/h) was offering $4/s. Tech attempted to block the sale of shares which
   would dilute share capital and make them no longer a risk to become controlling s/h.
 Decision: Followed Hogg v. Cramhorn – the board must act in good faith and in the honest belief that they are
   acting in the best interests of the company.
        o In this particular case the company was bringing a mine into production and the BofD had legitimate
            (honest) reasons to believe that preventing T from obtaining control was in the best interests of its s/h’s
                 Because of this they were free to make a deal with Canex (Placer Dome) even though it was
                     rejected by major s/h Teck
        o (Pg. 474) “The purpose of the directors/officers in their negotiations with Canex was from the beginning
            a legitimate one. The purpose was to get a favourable ultimate deal for Afton. That purpose continued
            throughout. Did it become an improper purpose because Tech acquired large shareholdings?...I think
            on the evidence the answer must be no.”
                 “…the plaintiff has failed to show the directors had no reasonable grounds for believing that a
                     TOB by Teck would cause substantial damage to the interests of Afton and its s/h’s.”
                                                                                                            Page 117 of 122

   Note: This decision gave wide scope for actions of BofD in response to TOB’s – “acting honestly and in good
    faith (reasonable grounds for their belief) and with a proper purpose, in the best interests of the company.”
         o Not acting in a self-interested way – in this case an ultimate deal involves a long-term relationship
US Case Law

UnoCal v. Mesa Petroleum [not covered]
 Facts: “Two-tiered” offer – bidder makes a bid for ~60% of a company’s shares, offering a premium and
   discloses when making the bid that they will follow up with a “squeeze out” transaction offer at a substantially
   lower price.
        o Incentive for all s/h’s to tender into the initial premium offer and avoid the “squeeze out” offer to the
            minority at a discounted price – “Stampede Effect” on s/h’s
        o These transactions do not work in Canada
                 Pre – bid Integration: as part of making ensuring all s/h’s share in the premium, TOB must offer
                    all s/h the same price – within 90 days you cannot offer a lower price
                          Wait 90 days – s/h have dissent rights to obtain “fair value” for shares
 Facts (cont’d): Unocal offered an issuer bid (“buy back”) on its own stock to all s/h except Mesa (selective issuer
   bid) at a premium to whatever price Mesa was offering. Mesa files a s/h claim.
        o In Canada, must make issuer bid to all s/h’s
        o Mesa would end up taking a company with far larger debt and less outstanding shares available – far
            less economically attractive
 Decision: Good defensive tactic based on the belief that the Mesa bid was unfairly priced and coercive
        o Mesa’s prior activities led directors to believe this was a “greenmail” attempt
        o Board’s actions were reasonable in the circumstances
 “Proportionality Test”
        o What you do by way of defensive tactics is considered by the court relative to the nature of the bid, the
            behaviour and history of the bidder
        o Your defensive tactics must be proportional to these factors
Revlon (CB 484) [not covered]
 Facts: R was one of the 1st leveraged buyout situations in US (Pearlman was a known corporate raider). R was
   attempting to go out and solicit other buyers, believing that P’s bid was undervalued.
 Decision: Invoked the “proportionality test” – once the sale of the company is inevitable, the duty of the Board
   shifts from canvassing alternatives for a change of control (blocking bid)  making sure the auction of the
   company is run as efficiently as possible and to obtain the best price for the s/h’s
        o Hostile and determined bidder – initial defensive tactics worked to the s/h’s benefit (met the UnoCal
             burden of proportionality to justify measures) but at some point – here the “lock-up” deal – the control of
             the company was most certainly gone/ceded. The preferability of the buyer is now less important than
             obtaining the maximum price for s/h
        o Revlon was prepared to sell the company (cede control) when they entered the “lock-up” agreement
             and thus could no longer invoke defensive measures inconsistent with obtaining the best price available
             for s/h’s

Paramount v. Time Warner [not covered]
 Facts: P was attempting to acquire TW and TW’s Board stated “no, they would not support the bid or any other
   bid.” Claimed they had a longer term plan for TW and its s/h and it would not allow it to be abandoned for what
   seemed to be certain short term gains.
 Decision: d/o are not obligated to avoid/abandon long term plans to accommodate for short term profits for
   s/h’s, unless there is no clear basis for their long term strategy to remain unchanged

Paramount v. QEC Networking (CB 491) [not covered]
 Facts:
 Decision: A heightened level of judicial scrutiny applied to changed of control transaction, both with respect to:
                                                                                                         Page 118 of 122

        o 1.) Process the Board uses to deal with potential bidders
        o 2.) Reasonableness and fairness of the actions of that process
   (pg. 494) Two situations that give rise to Revlon duties (“running of an auction”)
        o 1.) Target company initiates a change in control
                  Active bidding process seeking to sell itself or to effect a business reorganization involving a
                     clear break up of the company
        o 2.) In response to a hostile bid the target abandons its long term strategy (if it has one)
                  Seeking an alternative transaction involving the breakup of the company
        o Accordingly, when a corporation undertakes either of the above transactions – the directors’ obligation
            is to seek the best value reasonably available to the s/h’s
        o Distinguishes b/w Revlon and Time Warner

Canadian Case Law

Pente Investment Management Ltd. v. Schneider Corp. (CB 495)
    Facts: Schneider is controlled by the S family – 70% voting shares
            o Maple Leaf makes a bid at $19/share
            o S’s BoD sets up an independent committee of non-family directors to consider options
            o Decide to reject the offer – then the offer is upped to $22/share
            o They receive an offer from Smith Fields for $25/share + $4 tax advantage
            o Maple Leaf ups to $29/share
            o Independent committee recommends Smith Fields – and knows that the S family will NOT sell their
                 shares to Maple Leaf
    MLF brought an oppression action against Schneider’s claiming the Board breached its fiduciary duty by
        rejecting MLF’s bid and accepting the lower SF offer.
    Issue #1: What is the duty/role of the directors? Have the directors acted in the best interests of the
        company in defending the TOB and recommending SmithField’s offer?
            o Cannot delegate their duties unless there is a USA (mostly a private co. situation)
            o Board has the fiduciary duty to act in the best interests of the company – but controlling s/h would
                 not sell to the highest bidder – limited the Board’s power outside of resignation [took into account
                 labour practices and employee’s interests]
    Issue #2: Was the process taken by the Board – setting up an independent committee – appropriate and
        was there a Revlon duty?
    Decision:
            o #1.) they did act in the best interests – since they set up an independent committee, and they acted
                 in good faith, reasonably and on an informed basis (S family was unwilling to sell to Maple Leaf)
            o #2.) There was no Revlon duty
                      There existed no obligation on the controlling s/h to sell (period) – because of this there
                           shouldn’t have been a reasonable expectation of the Board being able to run an auction
                      Schneider family (controlling s/h) told the Board it had analyzed the proposals and their
            o The Family as controlling shareholders didn’t have to sell to anyone or to any bid, no matter how
                 lucrative that bid may be seen on any objective basis
            o The controlling SHs have don’t have any fiduciary duties to the minority SHs
    Directors aren’t the agents of the shareholders
    The directors have absolute power to manage the affairs of the company even if their decisions contravene
        the express wishes of the majority shareholders
    But was the committee really independent? Since the CEO was allowed to negotiate with potential
        acquirers – but the court said that there needs to be a balance between independence and efficiency
    Is there a duty to sell to the highest bidder? Just an auction?
            o In the USA – there is the Revlon duty  auction and sell to the highest bidder [offers guidance in
                 our area Delware law]
            o In Ontario, the law doesn’t require an auction every time a company is being sold – but it is one way
                 to address the conflicts of interest
            o BCE – duty is not to the shareholders it is to the corporation so no legal requirement –[however
                 BCE did set up an auction so it is still arguably what is reasonably expected]
                                                                                                        Page 119 of 122


       Don’t focus on one stakeholder, look at all and requires a balancing act and the balancing by directors will
        be protected by the Business Judgment Rule [need to determine what reasonable expectations of the
        shareholders? Perhaps --Based on past practice and other factors – set up special committee, look for
        other bids, etc.
       BCE has grand statements but lookb ack to old cases for specifics on the role of special committee,
        defensive tactics, etc.

TSE Powers (CB 509 – 516)
 Ability to requires s/h approval when a company is issuing shares from treasury of sufficient quantity to effect
   control of the company (arm’s length and non-arm’s length)
 Came up recently in Goldcorp (amalgamation):
       o Single biggest s/h went to TSX and Courts requesting the ability to vote on the transaction – proposed
            transaction only allowing Glamashire s/h’s to vote on the transaction

Torstar (CB 510)
 Facts: Southam took a defensive measure to issue stock to a friendly 3 party Torstar, in light of rumored TOB.

   Sold 20% of Southam from treasury (new shares) to Torstar and Torstar did the same, in order to avoid the
   approval requirements of the TSE. S/h appealed to the TSE b/c the bidder never surfaced.
 Decision: Did not give an order to “unwind’ the transaction, but denied certain exemptions – shares couldn’t be
   traded on the TSE. (Nothing stopped trading of shares on NYSE)

Canada Malting
 Facts: Similar to Torstar. Molson and Labatt accounted for the largest percentage of CM business sales and
   were also large s/h’s. CM issued shares to M and L in response to a rumoured TOB, which significantly
   increased their holdings (30%  40%). Gave M & L the ability to take the company private.
 Issue: Asked TSE for approval (given), s/h’s then appealed to the OSC.
 Decision: Allowed the issuance of shares b/c it was a non-arm’s length transaction that made business sense.
       o OSC: On appeal deferred to the judgment of the TSE.

Coattail Provisions (CB 513)
 Issue: Should control premiums be shared ratably or do they legitimately belong to the controlling s/h’s?
 Decision: Should be shared by all s/h’s – promotes trading and activity in the equity markets
        o Voting shares had been traded at large premiums prior to the decision
        o NOW: In order to trade on the exchange you must include a “coattail provision” allowing these rights
                 If someone makes a successful bid for control – all shares become equal and the potential
                    acquirer must bid for all the shares
                          Will take pro rata from all tendering s/h’s
        o Companies that traded prior to this rule were allowed to “Grandfather” into the exchange w/o “coattail
            provisions” included in their articles – share structure was already in place

Securities Regulation Policies
 Policies in place with respect to defensive tactics
 Very s/h friendly policies
        o When someone makes a bid the primary objective of TOB policy is to protect the interests of minority
           s/h’s of the “target company”
 Consequence: When targets attempt to invoke defensive tactics, for whatever reason, they must go to the OSC
   to prove their defensive tactics are justified
 Prepared to allow a BofD to implement defensive tactics in order to find more time – “run an auction”
        o Timeline: ~ 75 – 90 days to carry out search for alternative potential buyers

Jorex (in Chapters)
 Decision: There comes a time when a “poison pill” can no longer be in effect (75-90 days into TOB)
 Result: Canada has become a very attractive place for US corporate raiders
        o Able to identify an undervalued company and “put it into play”
                                                                                                       Page 120 of 122

        o   Knowledge that within 75-90 days something will happen wrt that company:
                Successful TOB (new owner)
                Make money selling off acquired shares to successful bidder

Chapters (CB 519)
 Facts: Hostile TOB for Chapters.
 Issue: What is the ideal time for TOB and allowing a Board to seek out alternative (better) options?
 Decision: Shut down TOB process after ~54 days. No reasonable possibility that given a reasonable period of
   time, the Board of Chapter’s could realize a greater value or options for its s/h’s.

Fundamental Changes
 Amendments to Articles
 Amalgamations
 Arrangements
 Sale of all or substantially all of the company’s assets
 Termination of a company (voluntary vs. involuntary)
 Continuances

Amendment to articles – s. 173
 List of “things” that may be amended in the articles
       o Name, registered office, restrictions on business, stated capital, classes of shares
 Generally require – “Special Resolution” by s/h
       o 2/3 vote
       o     Can be higher if articles specify for a higher threshold
 Separate Class Votes – s. 176
       o When the amendment effects the rights of one class of shares differently than other classes, they are
            entitled to vote as a class
       o S. 190(2) – On any amendment requiring a class vote, also triggers dissenting rights
                  Votes against resolution – can compel the company to pay “fair value” for their shares
 Exceptions (to special resolution requirement)
       o S. 173(2) – Exception
                  In order to change the co. name from a #’d company name to a substantive name does not
                     require a special resolution
       o S. 27(1)
                  Allows articles to authorize directors to fix the attributes of series of shares within a class
                  Alter capital structure

 Taking a company into or out of a jurisdiction
       o Changing a CBCA  X jurisdiction
       o X jurisdiction (incorp)  CBCA
 S. 187 – Importing
       o Bringing the company into the CBCA
 S. 188 – Exporting
       o Bringing a CBCA company into another jurisdiction
 Why?
       o (1) Choice of Statute – may be features of one corporate law that are more attractive for business
               Nature of remedies, residency of d/o, provisions for constrainined shares
       o (2) Attempting to do an amalgamation
               Companies must be under the same statute
 Mechanics – Twofold:
       o Ex. Importing into the CBCA
                                                                                                      Page 121 of 122

                  1.) S. 187(2) – shareholder approval
                         Requires an amendment to the articles
                 2.) s. 187(1) – Permission from the jurisdiction in which you are incorporated (exporting from)
                         i.e. XBCA  CBCA
                                 o Must get authorization from X – the laws of which you are incorporated under
                         File orders/certificate of continuance
                                 o s/h approval and deemed lawful
                         Director of CBCA then checks with equivalent exporting jurisdiction from (6) and upon
                            approval the director issues a certificate of continuance
                 All the rights attached to the corporation under s. 187(7) of CBCA
        o   Ex. Exporting out of the CBCA – s. 188: CBCA applies to jurisdiction X to be continued
                 1.) Must be authorized by s/h’s
                         (5) via special resolution
                 2.) Director under the CBCA must be satisfied that continuance into jurisdiction X will not
                   adversely effect the rights of creditors or s/h’s of the corporation
                         S. 188(10) – prohibition in continuing under laws of XBCA jurisdiction unless they
                            preserve the fundamental rights of the corporation

“Going Private”
 Ss. 193 & 194 – “Squeeze Out”
       o Can do a going private transaction if you can comply with relevant securities laws
                Heightened disclosure
                Special committee to make recommendations
                Independent valuation
                S/H approval:
                        Special Resolution
                        Majority of minority
 If you obtain 90% of shares of the company, you can squeeze out the remaining 10% of shareholders
 Can do a “squeeze out” by doing a consolidation of shares
       o (a) comply with securities law
       o (b) class vote
       o (c) dissenting rights

“Winding Up”
 Three ways:
       o (1) Voluntary – s. 210
       o (2) Involuntary – s. 211
       o (3) By directors
 1.) Voluntary – s. 210
       o (1) by resolution – no shares have been issued
       o (2) By special resolution, once it has started to do business, if it doesn’t have assets or liabilities
       o (3) By special resolution, if the assets have been distributed and disposed of and liabilities have been
                “liquidation
       o Ss. 211 & 215 – Notice to shareholders and creditors
                Ensures distribution and discharge
       o File a certificate: s/h resolution, assets distributed and obligations have been discharged: the
           corporation sends its articles of dissolution to the Director  (5) Director issues a certificate of
       o (6) Effect of certificate – Company ceases to exist
 2.) Involuntary
       o Court supervised dissolution – s. 211(8)
                Creditors, directors, s/h file in court for dissolution
                         Court becomes seized of dissolution and makes any order it wants to make
       o Oppression applications
                Court can order the dissolution of the company
                                                                                                          Page 122 of 122

                  Deadlocked s/h’s
        o    Ss. 215 – 217 – the range of authority the court can exercise in connection with the dissolution
                  S. 216(3) Powers of the Court – may order the corporation to furnish all material information
                     known or reasonably ascertainable
                           (a) Financial statements
                           (b) name and address of each s/h, and
                           (c) name and address of each creditor/claimant including those with unliquidated,
                               future or contingent claims and any person with a contract with the corporation
                  (4) Publication
         o S. 217 – Powers of the Court – in connection with liquidation/dissolution
                  (a) order to liquidate
                  (b) order appointing a liquidator
                  (c) order appointing inspectors or referees and specifying their powers
                  (d) order determining the notice to be given to any interested person or dispensing the notice
                  (e) order determining the validity of any claims made against the corporation
                  (f) an order at any stage, restraining the d/o from
                           (i) exercising their powers, or
                           (ii) collecting or receiving any debt or property of the corporation and paying out or
                               transferring property, except as permitted by the courts
                  (g) an order determining and enforcing the duty or liability of any present or former d/o or s/h
                           (i) to the corporation, or
                           (ii) for an obligation of the corporation
                  (h) an order approving the payment, satisfaction or compromise of claims against the
                     corporation and the retention of assets and determining the adequacy of provisions for
                     payment or discharge of obligations of the corporation
                  (i) an order disposing of or destroying the documents and records of the corporation
                  (j) – (n)
                  (o) after the liquidator has rendered the final account to the court, an order dissolving the
         o In effect the court proceedings becomes a receivership
   3.) By directors – s. 212(1)
         o (a) a director may dissolve a corporation by issuing a certificate of dissolution, if the corporation
                  (i) has not commenced business within 3 years after the date of incorporation
                  (ii) has not carried on its business for three consecutive years
                  (iii) is in default for a period of one year in sending to the Director any fee, notice or document
                     as required by the Act
                  (iv) does not have any directors or is the situation under s. 109(4)
         o (b) apply to a court for an order dissolving the corporation under s. 217
         o Basically dissolving company that is:
                  Dormant
                  Doesn’t keep its filings current

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