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Agency Law Legal and Lit

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Agency Law Legal and Lit Powered By Docstoc
					Agency Law .............................................................................................................................. - 5 -
  Determining if an Agency Relationship Exists ................................................................ - 6 -
  Duty of Loyalty .................................................................................................................... - 7 -
    Non-Competition Agreements....................................................................................... - 8 -
  Authority of the Agent – Actual and Implied Authority ............................................... - 9 -
    Actual Authority .............................................................................................................. - 9 -
    Apparent Authority and Estoppel............................................................................... - 10 -
       Estoppel......................................................................................................................... - 10 -
  Respondeat Superior ......................................................................................................... - 11 -
Partnerships ........................................................................................................................... - 12 -
    Tax Benefits of a Partnership ........................................................................................ - 13 -
    Suing a Partnership / Partnership Suing Other (pg. 103) ........................................ - 13 -
  Relationship between Partners: Formation and Governance ...................................... - 14 -
    Default Provisions under the Partnership Act .......................................................... - 14 -
       Partnership Property .................................................................................................... - 14 -
       Money and Management ............................................................................................... - 14 -
       Removal of Partners ..................................................................................................... - 15 -
       Fiduciary Duties ........................................................................................................... - 15 -
       Assignment .................................................................................................................... - 15 -
       Dissolution .................................................................................................................... - 15 -
  Relationship between Partners and Third Parties......................................................... - 16 -
    Liability in Contract ....................................................................................................... - 16 -
       Apparent Authority........................................................................................................ - 16 -
       Actual Authority ............................................................................................................ - 16 -
       Third-Party Notice of Restriction on Authority of Partner ........................................... - 16 -
       Joint Liability for Debts of Partnership ........................................................................ - 16 -
       Liability of New Partners and Retired Partners ........................................................... - 16 -
    Liability in Tort ............................................................................................................... - 17 -
    Other Matters .................................................................................................................. - 17 -
       Indemnification ............................................................................................................. - 17 -
       Holding out ................................................................................................................... - 17 -
       Retiring Partner ............................................................................................................ - 17 -
Limited Partnerships ............................................................................................................ - 18 -
    Statutory Provisions ...................................................................................................... - 19 -
    Maintaining Limited Liability and the Management of the Business .................... - 20 -
    Relations Among the Partners ..................................................................................... - 21 -
       Separation of Ownership and Control .......................................................................... - 21 -
       Other Aspects of the Relations Among Partners........................................................... - 21 -
Limited Liability Partnerships ........................................................................................... - 22 -
    Full Shield Liability – s.10 of Ontario Partnerships Act ............................................. - 22 -
The Corporation .................................................................................................................... - 23 -
  Introduction to Corporate Law ........................................................................................ - 23 -
    Investors in a Corporation ............................................................................................ - 23 -
  The Corporation as a Legal Person ................................................................................. - 24 -
    Other Consequences of Incorporation and Separate Legal Identity ...................... - 25 -
Piercing the Corporate Veil................................................................................................. - 26 -
  Statutory Exceptions to Separate Corporate Personality ............................................. - 30 -
    Personal Liability – s.118 ............................................................................................... - 30 -
    Unpaid Wages – s.119.................................................................................................... - 30 -
Process of Incorporation ...................................................................................................... - 31 -
  Reasons for Incorporating................................................................................................. - 31 -
    Seven Commonly Given Advantages of Incorporation: .......................................... - 31 -
       Limited Liability ............................................................................................................ - 32 -
       Perpetual Succession .................................................................................................... - 32 -
       Ease of Transfer of Shares ............................................................................................ - 32 -
       Shareholders alone cannot bind the corporation ......................................................... - 32 -
       A Shareholder can contract with a corporation ........................................................... - 32 -
       Facilities for a Body to Secure Additional Capital ....................................................... - 33 -
       Tax advantages in conversion to corporation .............................................................. - 33 -
       Costs of Incorporation .................................................................................................. - 33 -
  Steps in the Incorporation Process .................................................................................. - 34 -
    1. Articles of Incorporation ........................................................................................... - 34 -
  Existence of the Corporation and Pre-Incorporation Contracts .................................. - 37 -
  Post-Incorporation Steps under the CBCA – pg.261 ..................................................... - 40 -
Capitalization of the Corporation – pg.303-316 ................................................................. - 41 -
       Issue: Can a share be construed as a proprietary interest in the corporation’s assets or the
       corporation itself? ......................................................................................................... - 42 -
  Formalities of Capitalization ............................................................................................ - 43 -
    Authorized and Issued Capital .................................................................................... - 43 -
    Common and Preferred Shares .................................................................................. - 43 -
       Preferred Shares ........................................................................................................... - 43 -
       Common Shares ............................................................................................................ - 43 -
    Subscriptions for Shares ................................................................................................ - 43 -
Corporate Governance & Voting ....................................................................................... - 44 -
    Statutory Requirements for Boards of Directors & Voting Issues .......................... - 45 -
       Election and Removal of Directors ............................................................................... - 46 -
       Removal of Director ..................................................................................................... - 47 -
    Authority and Powers of Directors ............................................................................. - 48 -
    Outside Directors ........................................................................................................... - 49 -
       Janis Sarra Gender Bullshit.......................................................................................... - 49 -
    Role and Duties of Directors (from Peoples) ............................................................... - 52 -
Shareholder Voting Rights – pg. 544 ................................................................................. - 54 -
    Shareholder Residual Powers ...................................................................................... - 54 -
       Unanimous Shareholder Agreements ........................................................................... - 55 -
       Shareholder Proposals ................................................................................................... - 55 -
       Amendment of Bylaws ................................................................................................. - 55 -
       Fundamental Changes ................................................................................................... - 55 -
       Class Voting Rights ...................................................................................................... - 56 -
       Distribution of Voting Rights ....................................................................................... - 57 -
       Cumulative Voting ........................................................................................................ - 59 -
       Market for Corporate Control ....................................................................................... - 59 -
  Shareholder Meetings – pg.577 ........................................................................................ - 60 -
       Annual General Meeting ............................................................................................... - 60 -

                                                                   -2-
       Special Meetings ........................................................................................................... - 60 -
       Ordinary and Special Resolutions ................................................................................. - 60 -
       Place of Meeting ........................................................................................................... - 60 -
       Conduct of Meetings ..................................................................................................... - 61 -
       Shareholder Voice ......................................................................................................... - 62 -
       Meetings Requisitioned by Shareholders...................................................................... - 62 -
       Meetings by Order of the Court .................................................................................... - 62 -
       Intervention on the Basis of Fault ................................................................................. - 62 -
       Constitutionality Requirements .................................................................................... - 63 -
       Access to the List of Shareholders ................................................................................ - 63 -
The Business Judgement Rule............................................................................................ - 64 -
  Closely-Held Corporations ............................................................................................... - 65 -
     Different Treatment of Closely-Held Corporations under Modern Canadian
     Statutes ............................................................................................................................ - 65 -
     Share Transfer Restrictions ........................................................................................... - 67 -
The Role of Regulators in Corporate Governance ......................................................... - 68 -
  Proxy Solicitation and Corporate Governance .............................................................. - 70 -
     Requirements for the Form of Proxy ........................................................................... - 71 -
     Who Must Solicit Proxies .............................................................................................. - 71 -
       Compliance with More than One Set of Proxy Solicitation Rules ............................... - 71 -
     The Meaning of Proxy Solicitation .............................................................................. - 72 -
       Adequacy of Disclosure ................................................................................................ - 73 -
       Materiality Standards in Proxy Solicitation .................................................................. - 74 -
     Express Statutory Remedy ............................................................................................ - 75 -
  Access to Records and Financial Disclosure .................................................................. - 77 -
  Certification of Disclosure ................................................................................................ - 79 -
  The Role of Audit Committees......................................................................................... - 80 -
  Role of Corporate Counsel................................................................................................ - 82 -
Governance through Liability ............................................................................................ - 83 -
  Liability for Failing to Exercise Appropriate Skill and Care ....................................... - 84 -
     Statutory Duty of Care .................................................................................................. - 85 -
     Causation of Loss ........................................................................................................... - 86 -
     Non-Attendance at Meetings ....................................................................................... - 86 -
     Reliance by Directors on Officers or Professional Opinions .................................... - 87 -
     Business Judgement Rule.............................................................................................. - 89 -
       Indemnification in Canada ........................................................................................... - 91 -
  Liability for Misappropriation of Corporate Assets .................................................. - 92 -
     Ratification and Derivative Actions ............................................................................ - 93 -
     Safe Harbour for Interested Contracts ........................................................................ - 94 -
     How Interested does the Director have to be?........................................................... - 95 -
  Looting: Corporate Opportunties .................................................................................. - 96 -
     Corporate Opportunity and Corporate Impossibility .............................................. - 98 -
     American and Canadian standards ........................................................................... - 100 -
     Fiduciary Duties of High Level Corporate Employees .......................................... - 101 -
     Director of Many Corporations .................................................................................. - 101 -
  Issues in Enforcing Manager’s Duties ........................................................................... - 102 -

                                                                     -3-
    Shareholder and Corporate Remedies ...................................................................... - 102 -
      The Statutory Derivative Action.............................................................................. - 102 -
      Statutory Framework for Derivative Actions ............................................................ - 104 -
    The Role of the Directors in Derivative Litigation .................................................. - 105 -
    Costs in Derivative Actions ........................................................................................ - 107 -
The Oppression Remedy ................................................................................................... - 108 -
    Statutory Framework................................................................................................... - 108 -
      Scope of the Oppression Remedy ............................................................................... - 109 -
      Oppression Relief vs. Derivative actions .................................................................... - 109 -
      Relationship with Director Obligations ...................................................................... - 110 -
      Standing to Complain ................................................................................................. - 110 -
      Proper Person to bring the Application ....................................................................... - 111 -
      What is Covered by Oppression Remedy? – oppression, unfair prejudice, disregard - 115 -
      Oppression, Unfairness, and Reasonable Expectations .............................................. - 115 -
  Good Faith, Reasonable Expectations, and Business Judgement ............................. - 118 -
      Derivative Action and the Oppression Remedy.......................................................... - 121 -
    Right to a Remedy for Past Oppression .................................................................... - 123 -
    Winding Up .................................................................................................................. - 124 -




                                                                 -4-
Agency Law
    The firm does not need to contract with its agents about their duties, as through statute, the
     law provides a kind of “standard form contract” that sets this out
    As an employee, you are an agent of your employer, and as an agent, you owe (by law)
     certain duties to your principal (i.e. your employer)
         o Principal = person on behalf of whom another person acts
         o Agent = person acting on another’s behalf; any person who is authorized to act on
             behalf of another
    An agent can affect the legal relations of the principal in several ways, primarily through
     entering into contracts on the principal’s behalf (through actual or apparent authority).
    As well, principal can be found vicariously liable for torts committed by the agent
     (respondeat superior).
    Forming an agency relationship takes mutual consent – there must be consent by the
     principal to have the agent act, and consent by the agent to act, and both must agree that the
     agent is going to be acting for the benefit of the principal and subject to the principal’s
     control
         o It is not necessary to have a contract to form an agency relationship
    In determining if an agency relationship exists, Court will look to the facts of the
     relationship.
         o Do not care what the parties involved call their relationship
                  If it is the kind of relationship what shows mutual consent with the principal
                      in control, then a Court may say that it is an agency relationship
         o To rephrase – what the parties call their relationships in their contracts or other
             documents is not going to be determinative to the Court
                  Court can still find that an agency relationship exists
    There are many internal consequences to finding an agency relationship (i.e. the
     consequences within the firm = internal consequences)
         o If the parties don’t negotiate some aspect of their relationship, then they will still
             have the relationship that the law imposes
         o You cannot contract out of the duty of loyalty
    The duties the agent owes to the principal are the duty of care and the duty of loyalty
         o In corporate law in Canada, the duty of loyalty is the only one of these duties that is
             considered a fiduciary duty
         o The duty of care is a statutory duty
    The parties are able to negotiate and vary some aspects of these duties, e.g. a variation of the
     duty of care to establish working hours
    The duty of care is essentially a duty of work hard and make intelligent decisions
         o However, note that this duty has been cut back in many ways, and there are many
             different defences to it
    The law treats the duty of loyalty very carefully and centrally
         o This duty requires you to act in good faith, and in a way that you believe is in the
             principal’s best interest
         o Act solely for the benefit of the principal in all matters connected with the agency
             relationship
         o It also includes specific behaviours: put principal’s interests first, not to compete with
             principal, not to steal information/opportunities/clients from principal
    Principal owes the agent a duty that it will provide the necessary tools needed for their job,
     indemnification (if liable for action done in good faith for the principal), and other things –
     but not the duty of loyalty

                                              -5-
Determining if an Agency Relationship Exists


      Recall that it does not matter how the parties themselves characterize their relationship
       (e.g. in employment contracts or other documents), the Court can still find that an agency
       relationship exists.
      The finding of an agency relationship is based on the facts of the relationship between the
       two parties
           o Mutual consent with the principal in control




Basile v. H&R Block, Inc. (2000) (Supreme Court of Pennsylvania)
Facts: H&R Block offered their customers an “instant” tax refund. They would file the tax
       papers with the government, then a 3rd party bank would give the customer a loan in the
       amount of the estimated refund, and when the refund came, it would go directly to the
       bank. H&R Block received a percentage. Basile alleges that H&R Block should have
       disclosed the nature of the loan, and the exorbitant interest rate, and this was a breach of
       the fiduciary duty owed by the agent to the principal. H&R Block alleges there was no
       agency relationship because not enough control was delegated by the customers to the
       accountants.
Issue: Does an agency relationship exist between H&R Block, such that H&R Block could be
       found to have breached its fiduciary duties to the customers by not informing them of the
       percentage/benefits received from each loan?
Decision: No agency relationships existed as not enough control was delegated by the customers
       to H&R Block.
Reasons: Court stated that the law is clear in Pennsylvania that the three basic elements of
       agency are “the manifestation by the principal that the agent shall act for him, the agent’s
       acceptance of the undertaking and the understanding of the parties that the principal is in
       control of the undertaking”. Weight of authority finds no agency relationship in this
       situation. No evidence that customers intended Block to act on their behalf, as had 3
       options for filing, only one of which involved the loans in question. Decision to use
       advance (“RAL”) was up to the customer.
Dissent: Used same test and found an agency relationships; found that H&R Block breached its
       fiduciary duty as an agent in failing to disclose the profit it was making from the loans.




                                               -6-
Duty of Loyalty

      The duty of loyalty is a fundamental element of business associations law
      You cannot get out of the duty of loyalty, even with a contractual agreement not to be
       found by it
      The duty of loyalty is considered a fiduciary duty in Canadian corporate law
      Duty of loyalty requires an agent to act in good faith, and in a way that the agent believes
       is in the principal’s best interest
      Duty of loyalty also includes specific behaviours
            o Duty to put principal’s interests first
            o Duty to act solely for the benefit of the principal in all matters connected to the
                agency relationship
            o Duty not to compete with principal
            o Duty not to steal information/opportunities/clients/stuff from principal
      Duty of loyalty is owed by the agent to the principal, not by the principal to the agent
            o Whereas duty of care is owed by both
      Fiduciary duty of loyalty requires full disclosure (e.g. Reporters should have disclosed
       they were journalists in Food Lion)
      Duty of loyalty also protects principal from competition by its agent under the fiduciary
       duty, but this ends the day the employment/agency relationship ends
            o Employer should worry about the agent’s access to confidential information, and
                how it could be used against them once the agency relationship ends
            o Note that if information if a trade secret or patent, principal protected by IP law
            o If the information is not at that level, employer should be careful with information
                that may later be used to compete against them
            o It is to protect themselves against this risk that many employers require its
                employees to sign NCAs

Food Lion, Inc. v. Capital Cities/ABC, Inc. (1999) (United States Court of Appeals)
Facts: 2 investigative reports took jobs in Food Lion’s deli in order to expose the grocery store
       for its disgusting food-handling practices. Reporters used false resumes to get the jobs,
       and took video footage while working, which was used by ABC in a broadcast critical of
       Food Lion. Food Lion sued the defendants, including corporation and 2 reporters not for
       defamation, but based on how ABC gathered its information through claims for fraud,
       breach of duty of loyalty, trespass, and unfair trade practices. Claim for fraud based
       on misrepresentations of fact made by reporters to get job, trespass claim was as a result
       of the fraud.
Issue: Did the actions of the reporters constitute a breach of the duty of loyalty?
Decision: Court found that there was a breach of the duty of loyalty (but only for the reporters,
       not for ABC Inc.).
Reasons: Reporters were a conflicting agent for another principal, as they were employed by
       ABC while working at Food Lion. While it is alright to have 2 non-conflicting jobs (i.e.
       “moonlighting”), in this case the Court found that the conflicting nature of the jobs
       created a breach of the duty of loyalty to Food Lion.
Note: No specific test for determining when the duty of loyalty is breached, but disloyalty has
       been described in fairly broad terms. Employees are disloyal when their acts are
       “inconsistent with promoting the best interest of their employer at a time when they were
       on its payroll”, or deliberately acquire an interest adverse to their employer.

                                               -7-
Non-Competition Agreements

      An agent’s fiduciary duty of loyalty to her principal ends the day the agency relationships
       ends, and thus the former agent may begin to compete with the former principal
      However, reasonable NCAs will be upheld by law
          o To be reasonable, must be must be limited in time (3 years or less, typically), and
              contain sensible geographic boundaries.
                   To be reasonable, must also not unreasonably limit the duties included in
                      it (i.e. what kind of job the former employee can take)
          o Courts will not support long-term NCAs as it is a waste of human capital and may
              prevent the former employee from being able to work/use their skills




Stoneham v. Proctor & Gamble
Facts: Paul Stoneham was VP of shampoo marketing for Proctor and Gamble. He designed
       models to predict which shampoo would sell best in which country. He signed NCA
       stating that he would not compete with Proctor and Gamble for 3 years after termination
       of employment in exchange for stock options.
       He then left Proctor and Gamble and became President of Alberto. Proctor and Gamble
       took him to court. Lower Court did not enforce the NCA and found that the sales models
       were not a trade secret.
Decision: Reversed decision of lower found and enforced NCA.
Reasons: It was a voluntary agreement and Stoneham entered into it in exchange for stock
       options – he did not have to do this. The agreement was reasonable because it only
       sought to prevent his employment in hair care, and not in every good/service, thus there
       is not a concern about him not being able to work at all for the period of the NCA.




                                              -8-
Authority of the Agent – Actual and Implied Authority
      Principals can be half liable for the tortuous actions of their agents, and can be required to
       fulfill contracts into which their agents have entered
      There are several factors used by the Courts t justify holding principals responsible for
       the consequences of their agents’ actions
           o Primary rationale for imposing liability is based on the existence of control
                     However, note that control alone is usually insufficient for a finding of
                        liability
           o Also use the rationale of imposing liability based on the existence of benefits to
                the principal (those who gain from the actions of another should also sometimes
                be half to answer for the costs inflicted by those actions)
                     i.e. principal choose to enter the agency relationship and can terminate it
                        when they want – they get the benefit of the agent’s actions
           o Courts also sometimes rely on the notion of consent to justify liability, as consent
                is central to the determination of when an agency relationships exists, and thus
                when it is fair to impose liability on the principal for the actions of the agent

Actual Authority
      Actual authority is created by a manifestation from the principal to the agent that
       the principal consents to the agent taking actions on the principal’s behalf
      Note that this does not have to be in the form of a written contract, except in certain
       situations (e.g. authority to sell real estate for another)
      To evaluate the actual authority of the agent, one must examine the communications from
       the principal to the agent
      An agent’s actual authority typically includes both express and implied aspects.
           o The express, actual authority of an agent to act on a principal’s behalf may be
               conveyed orally or in writing.
           o The implied, actual authority is the power to do those things necessary to fulfill
               the agency, i.e. to do the job they were employed to do
                    Whatever is necessary for agent to fulfill the terms of their express, actual
                        authority
      When potential liability arises from the actions of an agent, principals may seek to
       narrowly construe their agent’s actual authority, both express and implied, in order to
       remove the liability from them – e.g. Case Farms

Castillo v. Case Farms of Ohio, Inc. (1999) (US District Court)
Facts: Case Farms was a chicken plant in Ohio. They hired ATC to recruit workers from Texas
        to work in the plant, thus creating an agency relationship. The housing and transportation
        conditions were horrible, but represented as acceptable. The plaintiffs sued Case Farms
        for negligent misrepresentation. Case Farms argued the agency relationship was limited
        to hiring the workers, not making representations about transportation and housing. It was
        a limited relationship where all Case did was ask ATC to bring employees.
Issue: Did ATC have the authority to make representations as to the transportation/housing
        conditions in order to fulfill their agency of hiring employees?
Decision: Court found that in hiring ATC to recruit and hire people to work at Case Farms,
        relationship included both the express authority to recruit/hire and the implied authority
        to do all things proper, usual and necessary to exercise that authority. Therefore, Case
        Farms is liable to the workers.

                                               -9-
Apparent Authority and Estoppel

      In situations where actual authority is not given, or limited actual authority is given and
       the agent goes beyond it, the principal may still be bound by the actions of the agent due
       to the agent’s apparent authority
           o One person may bind another in a transaction with a third person, even in the
               absence of actual authority, when the third person reasonably believes, based on
               manifestations by the purported principal, that the actor is authorized to act on
               behalf of the purported principal
      This can occur in two distinct situations:
           o Where a third-party reasonably believes the agent has the authority
                    Where a third party knows there is no agency or no authority, there is no
                        apparent authority and the principal cannot be bound by the actions of the
                        agent or held liable
           o Where the principal communicates something seen as a manifestation to the
               third-party
                    Manifestation can be in the form of written words, oral communication, or
                        conduct, e.g. putting the agent in a position to deal with the third-party
      There are 2 key points to finding apparent authority: the manifestation must emanate
       from the principal and must be received (either directly or indirectly) by the third person,
       and the of the agent’s apparent authority depends on the third party’s reasonable
       interpretation of that manifestation
      In considering whether it was reasonable for a third person to believe that the agent with
       whom they were transacting business had the authority to enter into a particular
       transaction has subject and object components:
           o Courts consider prior dealings between the parties, customs that apply in the
               particular setting, and nature of the proposed transaction
      Reliance is not technically required to establish apparent authority – rather, it is an
       element of estoppel, though some courts inquire after reliance in some circumstances
      As with actual authority, the rationale for imposing liability based on apparent authority
       seems to implicate issues of control, benefit and consent
           o Control does not refer to the principal’s control of the agent, but rather the
               principal’s control over the third-party’s expectations
           o Concept of consent provides the most powerful justification of liability based on
               apparent authority
      The doctrines of apparent authority and estoppel exist in order to facilitate business
       transactions; it would be inefficient for a third-party to have to repeatedly confirm an
       agency relationship with the principal


Estoppel
    Estoppel is created when the principal leads the third-party to believe that the agent is
      acting on his behalf, even though he isn’t
          o In order to estoppel to exist, the third-party must change his position due to his
              reliance that an agency relationship exists
          o Estoppel can be used as an argument by a third-party to assert rights against the
              principal, but cannot be used by a principal to asserts rights against a third-party


                                               - 10 -
Bethany Parmacal Co. v. QVC, Inc. (2001) (US Court of Appeal)
Facts: QVC was a shopping network that was going to select 20 manufacturers and 5 alternates for show.
        Contracted with NTA, who contracted with DCCA for recruitment. Janis worked for DCCA. She
        signed correspondence as QVC project manager. There was no actual authority because the
        contract made it clear that only QVC would make the final contracts to appear on show. Bethany
        was selected to be an alternate but they thought that they were going to be an actual member of
        the show, because Janis’s post-it saying “alternate” fell off the package sent to Bethany, and
        phone call to them was unclear. Bethany ordered 60000 units of cream and sued for losses based
        on Apparent Authority.
Issue: Can QVC be found liable based on the apparent authority of Janis?
Decision: Court of Appeal found an agency relationship, but included detrimental reliance in the test for
        apparent authority (which is apparently wrong).
Reasons: Apparent authority cannot be proven based on the conduct of the agent alone. Principal must
        do something to lead the third-party to believe that a relationship of agency exists. However, if
        the principal knows that the third-party is holding a mistaken belief as to agency, and does
        nothing, then apparent agency may arise. Here there was also no estoppel because the reliance
        was unreasonable (i.e. to make 6000 cases of crappy cream because you are going to be a home
        shopping network).
        Court not convinced by Bethany’s argument that Janis represented herself as agent of QVC,
        because as soon as QVC learned of mistaken belief in agency, contacted Bethany. As well, initial
        contracts stated that only a QVC purchase order as a valid contract.

Respondeat Superior
       Under this doctrine, an employer is responsible for torts committed by an employee in
        the scope of their employment with justification that employer has right to direct how
        work is done
            o The scope is limited to an employment relationship, and conduct falling within
               that employment relationship (more specific than agency relationship)
       Independent contractors (person who acts on behalf of another but is not an employee)
        may or may not be agents, depending on the principal’s level of control
            o This is a fact-specific analysis, that relies on factors such as where the work is
               done (e.g. in the principal’s office), whose tools are used, who directs the
               specifics of the work, how the person is paid, etc.

Dias v. Brigham Medical Associates (2002) (Supreme Judicial Court of Massachusetts)
Facts: Plaintiffs sued defendants, a medical group, for medical malpractice of one of its physician’s
        group’s members under the doctrine of respondeat superior.
Issue: Should BMA be held vicariously liable for the negligence of the doctor, its employee, under the
        doctrine of respondeat superior?
Decision: Court found that BMA was liable.
Reasons: Employer does not have to control every detail of an employee’s actions in order to be liable.
        The fact that a corporate entity cannot control the minute actions of an emergency doctor doing
        his job should not allow them to escape liability. Liability should be put on the party most able to
        bear it. Plaintiffs only need to establish that employment relationship existed, and negligence
        occurred within the scope of doctor’s employment. Where it is uncertain if there is an
        employment relationship, like in this case, the plaintiff must prove that one exists. A fact –
        specific analysis of direction and control useful here. Alternatively, if there is no proven
        employment relationship, the test of agency for independent contractors applies and Court should
        look at direction and control.


                                                   - 11 -
Partnerships
     A partnership is the relationship that exists between people carrying on a business in
      common with a view to profit.
         o There are no formalities necessary for formation of a partnership
                  Courts need only to see an agreement between persons to carry on a
                     business in common with a view to making profit.
                  Thus, people can sometimes be in a partnership and not know it.
                  However, there are many exceptions listed in the statute where the
                     relationship will not be found to be a partnership

     Recall the “Urban Decay” case, where an inadvertent partnership cost Sandy Lerner 50%
      of the assets of the company (found to be her partner’s, even though partner had not
      fronted any capital)
     Statutes and common law create a series of default rules that may apply even where, in
      the circumstances, the parties intended something other than the existence of the
      partnership
          o s.45 of the Ontario Partnerships Act provides that common law and the rules of
              equity are applicable to partnerships unless they are inconsistent with express
              provisions of the Act.
          o s.3 of the Partnerships Act sets out a series of rules for determining whether, in
              particular circumstances, a partnership does or does not exist

     Partnerships do not have a legal identity separate from its owners (like a corporation
      does)
          o Thus, partnerships have unlimited liability of each of the partners for the debts
             and obligations of the partnerships

     Every partner in a partnership is an agency of every other partner in matters relating to
      the business of the partnership – implications of this found in s.10 (vicarious liability)
          o Through a partnership agreement, partners can internally create an obligation to
              indemnify all other partners, but this internal agreement has nothing to do with
              obligations to third-parties – you cannot get out of this responsibility unless you
              use a limited liability partnership

     The Partnerships Act of Ontario provides a statutory definition of partnership in s.2:
         o “the relation that subsists between persons carrying on a business in common
            with a view to profit”

     The necessary requirement of having more than one member is what sets partnerships
      apart from sole proprietorships

     Once it is determined that a partnership exists, what is its legal status? Thorne is about
      workman’s comp, but at its essence is determined on the basis of the legal status of
      partnerships, i.e. can a partner be an employee/make a contract with himself?


                                              - 12 -
Re Thorne and New Brunswick Workmen’s Compensation Board (1962) (NBCA)
Facts: Thorne and Robichaud decided to start a lumber and sawmill business. Robichaud would be in
        charge of the lumber, Thorne would be in charge of the mill, and they would both make $75 a
        week. Thorne got hurt and applied for workers comp.
Issue: Was Thorne a workman employed by the partnership?
Decision: No, as partnership is not a legal entity.
Reasons: The Partnership Act of NB gives them rights and imposes on them duties. But the firm is still
        not an entity. When someone sues or contracts with the firm in the firm’s name, or when the firm
        owns property, it’s really just shorthand for all of the partners in the firm.

       This case has a number of consequences from partnerships not being legal entities:
           o Each partner is liable for the partnership’ debts and liabilities
           o Partner may not be an employee of a partnership
           o Partner cannot be the creditor of a partnership, except where specified by the
               Partnership Act
           o Partnership cannot hold title to property (Re Kucor Construction v. Canada Life)

Tax Benefits of a Partnership
       Since the partnership is not a separate legal entity, it cannot be taxed.
       Instead, the income is allocated between the partners and partners are taxed individually
        on their shares of the partnership income.
       This allows them to avoid the “double taxation” that occurs with firms (taxing corporate
        profit and also shareholder’s gains)
       Losses from the partnership can be declared on partners’ personal income tax and cancel
        out income from other sources.
            o This makes it a good deal to have a partnership initially where start-up costs will
                be high and losses may be incurred.

Suing a Partnership / Partnership Suing Other (pg. 103)
       Rules of Civil Procedure:
            o Rule 8.01: Proceeding against 2 or more partners can be done against the name of
               the partnership itself
            o Rule 8.02: Defence must be given in the firm name, and no partner can give a
               separate defence except with leave.
            o Rule 8.03: Partners can be served separately, and then the order is enforceable
               against each personally.
            o Rule 8.06: An order can be enforced against the partnership’s property, and
               against any served partner’s property
            o Rule 8.06(3): An order against a partnership is enforceable against any partner,
               served or not.
       Essentially, an action may be brought of defended in the “firm name”. Any judgement
        can be enforced against the property of the partnership and against any person who was
        served with notice of the action against the firm and who is a partner of the firm; and,
        under rule 8.06(3), after the order against the partnership has been made, against any
        person alleged to be a partner, and this partner is liable unless he disputes his partnership.
            o Thus, all partners are bound by the judgement, even if they were not named in the
               action, or even served with notice of the action.
            o Note in Thorne, Court said that presence of rule did not mean partnership was a
               separate legal entity, and is simply a convenient means of commencing an action
               against partners for claims arising out of the conduct of the partnership business.
                                                 - 13 -
Relationship between Partners: Formation and Governance

      The Partnership Act provides a set of default rules that will govern the relationship
       between the partners to the extent that they have not either explicitly or implicitly agreed
       otherwise
           o Act serves as a kind of “standard-form contract” between the partners
           o Act provides rules that govern structure, management, rights, and obligations of
               partners in the absence of any other agreement
           o However, partners can also contract with each other to have different rights – if
               they fail to do so, they are then governed by the default provisions of the Act
      Default rules in the act are based on the assumption that the partners are equal with
       respect to their capital contributions, rights to participate in the management of the
       business, and rights to share in the profit of the business
           o However, most partnerships don’t work this way, which is why it is important to
               be familiar with the statutory provisions and to expressly provides rules in a
               partnership agreement in a way that overrides the default rules where they are
               inconsistent with what the partners desire
      Even where default rules are consistent with what the partners want, it is useful to set out
       a partnership agreement in order to provide a source of information for the parties to
       determine their rights and entitlements



Default Provisions under the Partnership Act

Partnership Property
   - Partnership property is property brought into the partnership, acquired on account of the
       firm, or for the purposes of and in the course of the partnership business – s.21
   - Must be held by the partners exclusively for the partnership
   - If a specific piece of land belongs to the partnership but is held in the name of an
       individual partners, it is held in trust for the partnership
   - Property bought with partnership money belongs to the partnership

Money and Management
  - Partners share equally in capital profits and losses – s.24.1
  - An individual partner must be indemnified by the partnership for payments made in the
      conduct of or for the survival of the business
  - A Partner who advances more capital to the firm than he agreed to invest is entitled to be
      paid back with interest
  - A Partner who invests in the business is not entitled to interest on that capital. The partner
      makes his money back through profits
  - Every partner must take part in management of the business equally – s.24.5
  - No new partner can be admitted without the consent of all partners
  - Decisions on ordinary business matters are by majority. Decisions on changing the nature
      of the partnership business are by unanimity
  - Books are kept at the main place of business, and each partner is entitled to see them and
      make copies
  - No partner is entitled to remuneration for acting in the partnership business – s.24.6

                                              - 14 -
Removal of Partners
  - No partner can be removed by the majority without his consent, unless this power is put
     into the partnership by express agreement – s.25

Fiduciary Duties
   - Partners are agents for each other
   - They owe fiduciary duties to each other
           o Disclose information about things affecting the partnership to each other
           o Must account for any benefits derived without the consent of the other partners
               from use of partnership property
           o Partners must turn over profits from competing businesses to the firm
           o Not to compete (implied in the fiduciary duty)
   - Note that Fiduciary duties of partners in Ontario have been confirmed in Rochwerg v.
       Trister (2002) (Ont. CA)

Assignment
   - Partnership interest can be assigned
   - Does not result in assignee becoming a partner
   - Assignee gets share of profits, and share of assets when partnership dissolves, but cannot
      participate in management of business – s.31
   - Why? People want to go into business with people they trust, not be forced into
      partnership with someone they don’t know

Dissolution
Dissolution by partners themselves can happen in one of 3 ways:
   - Fixed term for partnership (the partnership automatically dissolves unless partners
       consent otherwise) s.32(a)
   - Partners agree partnership will dissolve at the end of a specific venture s.32(b)
   - Or by notice of intention to dissolve (dissolves on specified date or date of note) s.32(c)
Dissolution upon death, bankruptcy, or dissolution of a partner
   - The partnership dissolves automatically s.33(1)
           o Conceptually – a partnership is just a collection of individuals, therefore when
              one leaves, the partnership dies and a new one forms
           o Trust relationship – don’t want to be in business with dead partner’s estate
           o Sharing of losses – don’t want to share losses with bankrupt guy
   - Partnership agreements can state that the partnership doesn’t dissolve upon death,
       bankruptcy, or dissolution of partner
           o When whole partnership dissolves, a new partnership needs to be formed.
              Sometimes some partners hold out for changes to the agreement. This can get
              frustrating
           o Or in BC, the Partnership Act states that the partnership continues to apply
              between remaining partners




                                              - 15 -
Relationship between Partners and Third Parties
      The relationship between the partners and the persons affected by contracts entered into
       in connection with the partners or torts committed in the conduct of the partnership
       business is a critical aspect of the statutory regime
      The Act provides default provisions for when partners are liable for the acts of their
       fellow partners in the conduct of partnerships business, and when parties might be able to
       recover from partners not directly engaged in a breach of contract or commission of a tort

Liability in Contract
Apparent Authority
   - Every partner is an agent to the firm and to each other – s.6
   - Every partner who does anything in the course of the usual business of the firm binds the
       firm unless:
           o The Partner had no authority to act for the firm in that particular matter
           o And the 3rd party knew they had no authority or didn’t think they were a partner
   - Reliance must be reasonable to bind firm. It is unreasonable where:
           o Partner carrying out business not usually associated with the firm
           o Partner doing something inconsistent with the way business is usually carried out
              by the firm
Actual Authority
   - An act done in the firm name by a partner or agent is binding on all the partners – s.7
   - If 3rd party has notice of partner’s authority being restricted, that partner’s actions no
       longer bind the firm – s.9
Third-Party Notice of Restriction on Authority of Partner
   - s.9 provides that if a 3rd-party has notice of a restriction on the power of a partner, then
       the partner’s actions in contravention of the restriction do not bind the firm.
   - This section refers to “notice”, not “knows” – a person dealing with the firm may not
       have been given “notice” of a partner’s lack of actual authority, but may nonetheless have
       knowledge of that partner’s lack of authority
Joint Liability for Debts of Partnership
   - Every partner is jointly liable for the debts of the partnership
   - When the partner dies, their estate is still liable
   - New partners will not be liable for debts of the partnership incurred before they joined –
       s.18
   - Retiring from the partnership does not excuse you from contracts entered during your
       partnership – s.18(2)
           o A creditor can agree to relieve the retiring partner
Liability of New Partners and Retired Partners
   - s.18 provides that a person who joins an existing partnership is not liable to creditors for
        debts of the partnership that arose before they joined the firm.
   - Once a person is a member of the firms and partners or agents of the firm enter into
        contracts that bind the firm, the person does not cease to be a party to those contracts just
        because they left the partnership – confirmed by statute.
   - If a creditor agrees to relieve a retiring partner from further liability, then that agreement
        will be binding, subject to the normal rules of contract law.

                                                - 16 -
Liability in Tort
   -   s.11: The firm is liable for the wrongful acts or omissions of the partner
           o Where the partner acted with the authority of other partners
           o OR in the ordinary course of business
   -   Jointly and severally liable, just like for debts (s.13)
   -   Scope of the statutory liability provisions addressed in Falconi

Ernst & Young v. Falconi (1994) (Ont. Gen. Div.)
    - Facts: Falconi was a lawyer who assisted people who were judged bankrupt in making
        fraudulent transfers of property. His partner Klein argued that he was not to be included
        in this liability because Falconi’s actions were not part of the ordinary activities of the
        business. Falconi did this at the firm, and using firm resources
Issue: Is Klein liable for Falconi’s actions under the Partnership Act?
Decision: Klein, as a partner, is liable for Falconi’s actions.
Reasons: While committing fraud is not in the ordinary course of business, using firm resources
        to prepare mortgage documents, etc. is within the ordinary course of business for a law
        firm, even if they were done for improper purposes.


Other Matters
Indemnification
A person who is victim of a tort or breach by one partner is allowed to collect from any/all of the
partners, e.g. if Fasken broke a K with someone, but Martineau is a deep pocket, the victim can
collect from Martineau, regardless of who committed the breach or tort. The partners can then
work it out among themselves later
Holding out
   - If you represent yourself as a partner (orally, in writing, or by conduct), or knowingly let
      yourself be represented as a partner, you are liable as a partner.
   - e.g. If I let my name be used to get credit for my friend starting a business, I may be
      liable to the creditor
   - This could apply where there is no partnership under s.15(1)
   - You can either make the representation yourself, or allow another person to do it
Retiring Partner
   - Still liable for debts/Ks incurred when he was a partner
   - If 3rd parties don’t know he retired and enter into agreements with partnership, he is still
       liable s.18(2), unless he
            o Provides actual notice to everyone who the firm has dealt with
            o Places notice of retirement in the Gazette
            o Files revised registration statement removing that partner’s name from the list of
                partners
   - Creditor and other partners may sign agreement relieving retiring partner from liability
   - Partnership agreement could include clauses of indemnification for future debts of
       retiring partner, and requiring partnership to take steps to save retiring partner from
       continued liability


                                               - 17 -
Limited Partnerships
      Persons investing as partners will often seek limited liability despite the unlimited
       liability of the partnership form of business organization. However, there is a risk that
       third parties could be deceived by such an undisclosed limitation on liability
      If there is a concern on the part of creditors that such a situation exists, they will assume
       that partnerships have limited liability and will charge higher explicit or implicit rates of
       interest to reflect this
      Investors who would be willing to reduce the risk of loss for creditors by assuming
       personal liability will find it difficult to do so because creditors will assume they in fact
       have limited liability
      There may, however, be some situations in which the preferred arrangement between
       creditors and investors would be to allow the investors to have limited liability
            o If the investors and creditors agree to this in advance, creditors would not be
                deceived and could charge an appropriate amount to compensate them for the
                greater risk of loss they would bear in light of the investors’ ability to shelter
                themselves behind limited liability
            o Investors might find that there are other benefits to limited liability that more than
                compensate for the added cost of credit
      The time and costs associated with the creation and enforcement of these kinds of
       arrangements makes them impractical in the context of ongoing business arrangements.
      The solution is a means of shifting the default rule away from personal liability to limited
       liability, but in such a way that creditors are not deceived
            o A limited partnership provides such a solution
      Unlike a partnership, limited partnership is a creature of statute rather than common law.
      Limited partnership statutes permit some of the partners (investors) to have limited
       liability, but only if the partnership conducts business under a name that adds the words
       “Limited Partnership”.
            o This signals to third parties dealing with the partnerships that some of the partners
                have limited liability
            o Limited partnerships must also be registered pursuant to the requirements of the
                statute for the jurisdiction in which the partnership wishes to function
      Limited partnership statutes generally also provide that the limited partners may not take
       part in the “management” or “control” of the business
            o This is the most critical feature of the limited partnership form; if a limited partner
                becomes engaged in “management”, the benefit of limited liability may be lost
      Like a regular partnership, a limited partnership is not a legally recognized separate entity
            o The partners, both general and limited, collectively own the assets of the business
      Contracts between the limited partnership and others are, unless otherwise provided,
       contracts between those others and all of the partners, both general and limited
      As a result of restricted involvement in management of the business, limited partners may
       not be directly liable for torts committed in carrying on the business, but may be
       vicariously liable for acts of agents/employees engaged in carrying on the business
      The limit of their liability is the amount of their investment

Tax Considerations
    Limited partnerships are a common form of financing for start-up operations
    Losses can be passed on to the limited partners and used to offset other sources of income

                                               - 18 -
Statutory Provisions

     Limited partnerships are creatures of statute.


     In Ontario, the relevant provisions are contained in a separate statute – the Ontario
      Limited Partnerships Act


     There are three important statutory provisions that must be complied with:

         o Limited Partnerships must consist of one or more limited partners and one or
           more general partners
               Liability of the limits partners is restricted to the amount that that partner
                  contributes or agrees to contribute to the limited partnership
               Liability of the general partners is unlimited

         o Limited Partnerships must be formed by filing a certificate or declaration.
               This is essential to the formation of the limited partnerships and if it is not
                  filed, there is no limited partnership
               Certificate or declaration must set out names of the general partners, and
                  must also set out the contribution provided or to be provided by the
                  limited partners
               Clarity of the parties’ intentions, or appropriateness of a limited
                  partnership in the circumstances is irrelevant

         o Compliance with statutory provisions for the protection of third parties
              For example, the requirement to add the cautionary suffix
              Limited partner cannot have name in name of the partnership except for
                 certain exceptions – if they do, and do not meet a statutory exception, then
                 they cease to be a limited partner
              Limited partners contribution is restricted (s.7(1) of LPA) – cannot
                 contribute services, only money or property
              Cannot be involvement in management of firm




                                             - 19 -
Maintaining Limited Liability and the Management of the Business
      Limited partners are precluded from taking part in the management of the business at the
       risk of losing the limitation on their liability
      A common structure for a limited partnership is to have a corporation as the general
       partner
      Promoters of the business will be made officers of the corporation and perform the
       management functions of the limited partnership business on behalf of the general partner
       corporation
      This raises the question whether limited partners who are officers in the general partner
       corporation are in fact liable as general partners on the basis that they have taken part in
       the management of the business
           o Two cases (below) have considered this issue


Haughton Graphic Ltd. v. Zivot (1986) (Ont. HC)
Facts: Zivot and Marshall were limited partners in Printcast, a company that launched a
       magazine. The general partner was Lifestyle, a corporation that was incorporated by
       Zivot. Printcast contracted with Haughton to print the magazine. Zivot introduced himself
       as president of Printcast, and listed himself as president in the magazine. Zivot and
       Marshall had complete control of the magazine. They made all management decisions
       and signed all the checks. Printcast went bankrupt, leaving Haughton unpaid for 3 issues.
       Haughton awarded damages by the court, and wanted to collect from Zivot personally
Issue: Did Zivot’s role in the general partner corporation compromise his status as a limited
       partner?
Decision: Zivot found personally liable – no longer a limited partner.
Reasons: If a limited partner takes control of the business, he is liable as a general partner, to the
       full extent of his assets. The belief and reliance of the creditor is not an issue. Even if
       Nash knew how Printcast was structured, the liability would have been the same.


Nordile Holdings v. Breckenridge (1992) (BCCA)
Facts: Nordile sold a piece of land to Arman LP. Arman took out a mortgage from CMHC and
       also from Nordile. Arman fell into default. Nordile went to court and got default
       judgement against Arman and Arbutus Ltd (the general partner of Arman LP). This was
       not paid. This action is a request for an opinion of the court on whether Breckenridge and
       Rebiffe (limited partners in Arman and directors of Arbutus) are liable for the debt for
       “taking part in the management of the business.”
Issue: Are the directors of the general partner liable (i.e. no longer limited partners)?
Decision: Directors retain their limited partner status. Not liable.
Reasons: Directors in the management of Arman, but only as directors of Arbutus. This excludes
       the possibility of them acting in the capacity of limited partners of Arman.


Reconciling Haughton and Zivot:
    A Limited partner is a passive investor. They can from time to time give advice on
      management. If they are engaged in running the limited partnership, they are treated as
      general partners and have unlimited liability. Zivot was acting as a representative of
      Printcast (the limited partner), not Lifestyle (the general partner).

                                                - 20 -
Relations Among the Partners


Separation of Ownership and Control
      Limited partners are not allowed to participate in control of partnership or else they are
       exposed to unlimited liability.
      Also there are usually many limited partners so each one has a small incentive to
       participate in control.
      Therefore ownership (as capital contributors, limited partners are known as owners) and
       control are separate.
      One would think this would create statutory safeguards ensuring competence of
       management, but this is actually left to the parties.
           o However, there are 2 safeguards:
                    s.56 – General partners cannot perform an act that makes it impossible to
                       carry on the business, or consent to a judgement against the partnership.
                            They cannot possess partnership property or dispose of it unless it
                               is for a partnership purpose.
                            These are not alterable in the Partnership Agreement.
                            Variations require consent of all limited partners
                    s.58(1)(c) – limited partner has same right as general partner in s.38 to
                       dissolve the limited partnership by court order under certain circumstances
                       (involving situations in which the partnership agreement would be
                       frustrated, or at the discretion of the court).
                            This provides a last resort to the limited partner who believes he is
                               being treated unfairly


Other Aspects of the Relations Among Partners
Right to inspect books
   - Limited partner has same right as general partner to inspect and make copies of the books
   - This is a mechanism for assessing progress while not allowed to have control
   - Can be modified in partnership agreement
Assignment
   - Ontario – a limited partner can assign his interest, subject to restrictions under s.18
Admission of new partners
  - Generally fairly easy as new limited partners may be needed when capital needs grow
  - However limited partners may have reasons to not want new limited partners added
  - Ontario – permitted through amendment of record of limited partners under s.17
Share of Profits
   - Important to consider statute and partnership agreement
   - Ontario – right to share in profits and return of contribution under s.11



                                              - 21 -
Limited Liability Partnerships
      Professionals such as doctors, lawyers, accountants are not allowed to incorporate as they
       cannot limit their liability.
      They also can’t have an LP because they need control of the business.
      The solution is a Limited Liability Partnership.
      The LLP is restricted to specific professions by provincial legislation.

Full Shield Liability – s.10 of Ontario Partnerships Act
      Amendments to the OPA now provide for full shield liability for LLPs
(2) Subject to subsections (3) and (3.1), a partner in a limited liability partnership is not
liable, by means of indemnification, contribution or otherwise, for,
  (a) the debts, liabilities or obligations of the partnership or any partner arising from the
      negligent or wrongful acts or omissions that another partner or an employee, agent or
      representative of the partnership commits in the course of the partnership business
      while the partnership is a limited liability partnership; or
  (b) any other debts or obligations of the partnership that are incurred while the
      partnership is a limited liability partnership.
Limitations
(3) Subsection (2) does not relieve a partner in a limited liability partnership from liability
for,
 (a) the partner’s own negligent or wrongful act or omission;
 (b) the negligent or wrongful act or omission of a person under the partner’s direct
      supervision; or
  (c) the negligent or wrongful act or omission of another partner or an employee of the
      partnership not under the partner’s direct supervision, if,
       (i) the act or omission was criminal or constituted fraud, even if there was no
           criminal act or omission, or
      (ii) the partner knew or ought to have known of the act or omission and did not take
           the actions that a reasonable person would have taken to prevent it.
Same
(3.1) Subsection (2) does not protect a partner’s interest in the partnership property from
claims against the partnership respecting a partnership obligation.

      Essentially, this means that a partner in an LLP is not liable for the debts of another
       partner arising from negligence, or the debts of the partnership itself
      However, a partner is not relieved from debts that arise from their own negligence, the
       negligence of someone under their supervision, or the negligence of another partner if is
       arises from criminal fraud or you knew or should have known about it
      Under s.3.1, your interest in the partnership is not protected.

Business Name Registration Requirements
    Under s.44.3, the name of the LLP must be registered under the Ontario Business Names
      Act, and the name must contained the words “limited liability partnership”, “LLP”, or the
      French language equivalent in order for the LLP to be allowed to carry on business.
    No other name can be used to carry on the business.

                                             - 22 -
The Corporation

Introduction to Corporate Law

      Corporations are separate legal entities – they can enter contracts and own assets
      Corporations have shareholders – many equity investors, with no minimum
           o Shareholders do not have legal title to the assets of a corporation, the corporation
               itself does
      Corporations are limited liability for the investors/shareholders – limited to the amount
       of investment
      Investors can take part in the management of the corporation
      Corporations have a perpetual existence – do not die when shareholders die or go
       bankrupt
      The management of a corporation is elected by the shareholders, who elect a Board of
       Directors, who in turn appoint the officers for the corporation.
           o Management and decision-making are centralized in the corporation, under the
               shareholder governance model, as opposed to the stakeholder governance model
      Corporations can be either closely-held (very few shareholders / privately-held
       corporation) or widely-held (many shareholders / publicly-held corporation)

Investors in a Corporation
      Equity Investors(shareholders) have the right to receive the residual interest from the
       corporation
          o e.g. if the profit is greater than the expenses, the equity investor is entitled to the
              rest of the profits in the form of dividends
          o If the business is sold off, the corporation pays off creditors and the equity
              investors get what remains
          o Equity is freely transferable on the stock exchange
      Debt Investors (creditors) are entities that are owed money by the corporation, e.g. a
       bank
          o They have a right to receive the principal of their loan back, plus interest
          o They can also impose conditions on the loan (e.g. assets on hand must always be
              twice as large as debt)
      Trade Creditors are someone who supplies a good or service on credit



                               Peoples Departments Stores Inc.
   “Insofar as the statutory fiduciary duty is concerned, it is clear that the phrase “best
     interests of the corporation” should not be read simply as the best interests of the
 shareholders….in determining whether they are acting with a view to the best interests of
the corporation it may be legitimate, given all the circumstances…to consider, the interests
     of shareholders, employees, suppliers, creditors, consumers, government and the
                                       environment.”


                                               - 23 -
The Corporation as a Legal Person

Salomon v. Salomon (1895-1899) (HL)
Facts: Salomon incorporated his leather company and gave himself $10000 in debentures along
        with 20000 shares and $6000. The company went bankrupt and Salomon realized that if
        he paid off his debentures (evidence of indebtedness, like a promissory note) to himself,
        there wouldn’t be enough money left to pay his creditors. The liquidator claims the
        company is just a front/alias for Salomon himself. Therefore the creditors should be paid
        first. The trial court says the company was really just designed to let Salomon escape
        creditors.
Issue: Is Salmon Ltd. a separate entity from Salomon, and therefore Salomon is not liable for its
        debts?
Decision: The two are separate entities and do not share liability.
Reasons: Salomon Ltd. is a separate entity therefore Salomon is not personally liable. He
        incorporated to take advantage of the freedoms afforded to him by the law – limited
        liability, etc. He owned debentures in the company and therefore is entitled to be paid off
        first upon bankruptcy. No investigation into motivations (independent, wealth-minded)
        of shareholders required. No share proportionality required – not noted in legislature
        therefore can’t infer that was the legislative intent. No obligation to warn creditors when
        business is going bad. The sole question is whether the corporation has been validly
        formed or not – if yes, it is a separate person. Precedent – if Salomon was found liable,
        all one-man companies would be trusts and have unlimited liability

      While the authority of Solomon remains undisputed, the decision has been unpopular
       with certain academic commentators, especially as it fails to give protection to business
       creditors which should be the corollary of the privilege of limited liability
      Policy debate as the whether such a precedent requires creditors to trust a company at
       their own risk, and whether the government should be offering them sort of protection.
      Khan Fruend advocates a minimum stated capital requirement, which would make it so
       that a share must be worth some stated amount, and cannot just incorporate family
       members for $1
      It is all well and good for corporations to have unlimited liability, but it does not
       guarantee payment on debts – i.e. if corporation has no assets or goes bankrupt
      Easterbrook and Fischel – Limited Liability and the Corporation’s article “Limited
       Liability and the Corporation”:
            o Common when large number of agents, and their talents required, and a lot of
                 capital required
                     Separation and specialization of function
                              Risky due to agency costs but the corporation as a form survives,
                                 so risks must not be too great
            o Limited Liability is conducive to less monitoring of agents
                     Passivity
                     Diversified investments
            o Limited Liability reduces monitoring of other shareholders
                     If there was unlimited liability, each shareholder would want to make sure
                         every other shareholder was leaving enough money in the company
            o Free transfer of shares means managers are monitored less
            o If a manager’s actions are not beneficial, investors will simply sell their stock

                                               - 24 -
Other Consequences of Incorporation and Separate Legal Identity
       Perpetual succession of a corporation
       Distinction between a corporation and its controlling shareholders – corporation is
        distinct from its controlling shareholders
       Separate ownership by the corporation of its own property
Lee v. Lee’s Air Farming (1961) (PC) – corporation distinct from controlling shareholders
Facts: Lee was a pilot who incorporated his crop dusting business. He owned 2999 of the company’s
        3000 shares. He appointed himself director. He also worked for the corporation as a pilot for a
        salary. He died and his wife claimed worker’s comp, which provided compensation for a
        worker’s wrongful death.
Issue: Could Lee be considered an employee of the corporation and thus entitled to workmen’s
        compensation benefits?
Decision: Lee was a worker under the definition of the Act and entitled to the benefits.
Reasons: company was a separate legal person capable of forming a contract with a person, Lee. Both
        parties entered into the K willingly. Thus Lee was a worker under the definition of the act. Being
        a director is no impediment to being a contracted employee. One person may function in dual
        capacities

Macaura v. Northern Assurance Co Ltd et al (1925) (HL) – corp. owns its own property
Facts: Macaura owned a plot of land with some timber. He sold it to Irish Canadian saw mills Ltd., a
        company of which he owned almost the whole interest. It then burned.
Issue: Can he, as a shareholder, recover from the burning of the goods of a company?
Decision: No, shareholder does not own corporation’s assets.
Reasons: No. A shareholder has a right to a share of profit, and share of assets when company is wound
        up. A shareholder does not own a corporation’s assets. A corporation owns its own assets. The
        only thing a shareholder can claim for is the diminished value of his share of profit or windup
        assets which, when the burned asset is one of many, and the shareholder is one of many, is
        impossible to determine. So Macaura as a shareholder cannot insure lumber held by corporation.
        (Even though Macaura was pretty much the only shareholder) the goods were still the company’s,
        not his.

Kosmopoulos v. Constitution Insurance Co. (1987) (SCC) – corp. owns its own property
Facts: Kosmopoulos owned a leather goods store as a sole proprietorship. He incorporated and became
        the sole shareholder and director, but carried on business in the same way, not telling the people
        with whom he does business. The lease was still in his name, not the corporation’s, as the
        landlord would not assign it. The insurance company issues a policy to him personally, even
        though they know his business is a corporation. There was a fire and the insurance company
        denied payment, because Kosmopoulos himself had no insurable interest in the assets of the
        corporation – only the corporation does.
Issue: Does Kosmopoulos, as sole shareholder, have an insurable interest in the corporation?
Decision: A sole shareholder does have an insurable interest in a corporation.
Reasons: While there is a danger that this encourages wilful destruction of company property on the part
        of the shareholders, this is a remote possibility and best left dealt with by the criminal justice
        system.
        There was also some discussion on lifting the corporate veil, but this was ultimately rejected, and
        the insurable interest held by a sole shareholder was found. However, actions the court took are
        consistent with piercing the corporate veil, even though they say they are not.
        One argument was that the corporate veil is never lifted for the benefit of the shareholders, only
        for third parties, as those who reap the benefits of incorporation must also bear the burdens.
        A second argument was that if the veil was lifted here, it would create an arbitrary and unfair
        distinction as cases involving only 2 shareholders in the past refused to life the veil. Therefore, it
        was not lifted (i.e. it was, but they called it something else)

                                                    - 25 -
Piercing the Corporate Veil
      Rule established in Salomon is that a corporation is a legal entity in its own right,
       separate from its creators and shareholders.
      A corporation’s liability cannot be extended to its principals
          o This reflects the formalism of corporate law – if people follow right formalities
              and procedures, and hold to the technical requirements, the Court will not want to
              look too far beyond that to see if they are evading the “sprit” of the law
      However, in certain circumstances, the “veil” of separate corporate identify can be lifted,
       either to impose personal liability on the shareholders of a corporation, or to grant some
       right or interest to an individual shareholder that, strictly speaking would belong to the
       corporation itself:
           o Where it would be “flagrantly opposed to the principles of justice” to keep the
               separate corporate identity
                     This will occur only in rare instances, and it is very difficult to find a
                       pattern in piercing decisions.
      Piercing occurs in approximately 50% of “alter-ego” cases, i.e. veil was lifted between
       closely-held corporations and sole shareholders, finding personal liability for corporate
       debts
      Piercing occurs in approximately 33% of enterprise-liability cases, i.e. veil between
       parent and subsidiary corporation lifted.
      Generally, to avoid being a pierced, a corporation should:
           o have corporate formalities in place, e.g. separate bank accounts, shareholders
               meetings with minutes taken, etc.
           o have proper capitalization, i.e. the corporation should have enough money to do
               what it exists to do
           o be incorporated for its own purpose – i.e. if the corporation comes into
               existence solely for an illegal/improper/fraudulent purpose, it is likely to be
               pierced
           o be under its own control – i.e. not just a puppet or instrument of sole shareholder

General Categories where it has been found appropriate to separate legal personhood of a
corporation for instrumental reasons include (pg.168):
   1. Cases that involve allegations of fraudulent conduct or objectionable purpose on the part
      of a company’s principals
   2. Cases where a company existed as a “shell” and was clearly undercapitalized to meets its
      reasonable financial needs
   3. Cases that involve tort claims against the company, particularly those where a director,
      shareholder, or employee has committed an intention tort, or the tort of inducing breach
      of contract
   4. Cases where the company was not incorporated for bona fide business reasons but for
      other purposes, often to avoid taxation
   5. Cases that involve non-arm’s length transactions between parent and subsidiary
      companies
   6. Cases where courts determine that equity or the interests of justice are better served by
      disregarding the corporate form

  ***Page 186 of Text has a Good Summary of Case Law on Piercing Corporate Veil***
                                              - 26 -
Clarkson Co. Ltd. v. Zhelka (1967) (Ont. HC)
Facts: Selkirk was a crooked businessman who incorporated a bunch of companies. One of the
         companies, Industrial, had no money but was given money by some of the other companies, and
         bought some land. 44 acres were sold to the City of Toronto. The other 40 acres of the land was
         sold to Zhelka, Selkirk’s sister, for a promissory note. Zhelka subsequently mortgaged the land.
         Selkirk went bankrupt. Clarkson, Selkirk’s trustee in bankruptcy, whose job it is to count and
         distribute all his assets to creditors, seeks a declaration that the land belongs to Selkirk and can be
         given to his creditors. This would require the corporate veil between Selkirk and Industrial to be
         pierced (note: opposite of a typical piercing case, as instead of piercing the veil to get at the
         assets of a shareholder of a bankrupt company, plaintiff wants to get at the assets of a company
         with a bankrupt shareholder). Plaintiff argued the alter-ego theory: corporation has no separate
         legal existence and is just the alter ego of Selkirk, as Selkirk completely dominates what happens
         in Industrial.
Issue: Is piercing the corporate veil appropriate in this situation?
Decision: Veil not pierced – no fraud.
Reasons: Industrial was formally incorporated. “The legal persona once incorporated is distinct from its
         shareholders and directors, even with a 1 man company. There are exceptions where it would be
         flagrantly opposed to justice.” Industrial owned the land and they weren’t going bankrupt.
         Industrial wasn’t undercapitalized. It had no capital, but it was doing nothing in the world to
         create risk, so 0 is enough capital for its purposes. It is only where the company is formed with
         the intent of being just an alter-ego that the veil is lifted and liability is given to those who it is
         owed. There was no evidence that Industrial was incorporated for the purpose of defrauding
         creditors. Zhelka would have to be found to be holding the land in trust for Selkirk, which the
         Court found she was. Zhelka paid for the land using a promissory note for money she didn’t
         have. There was no consideration. The transaction was just done to hinder creditors. Also, the
         land was seized to pay off her mortgage, and she ended up with only $9000, which ended up in a
         bank account of another of Selkirk’s companies. Evidence falls short of proving fraud, and there
         is nothing unlawful or illegal about the interchanges of funds between companies. There was no
         express wrongful act, and company was not acting as mere agent of owner, therefore not
         appropriate to lift the corporate veil.
Note: This case demonstrates Court’s reluctance to pierce corporate veil, as very close to fraud.

642947 Ont. Ltd. v. Fleischer (2001) (Ont. CA)
Facts: There was a property in North York that was owned by Fleischer and leased out to Sweet Dreams,
        a company controlled by Halasi. 642947 offered to buy it. As the leaseholder, Sweet Dreams had
        the right of first refusal. They refused. 642947 again offered to buy it and Fleischer agreed. Sweet
        Dreams brought an injunction to stop the sale. As part of an injunction, there is an undertaking to
        pay any losses caused by the injunction. In 1990 the real estate market tanks. Sweet Dreams
        dropped their injunction but 642947 refused to close the sale. Trial judge found the damages
        were caused by the injunction, and Sweet Dreams was liable for damages, but since it had no
        assets the corporate veil should be lifted and Halasi should be liable for the damages.
Issue: Would lifting the corporate veil be appropriate in this situation?
Decision: Lifting the corporate veil would have been appropriate (but CA found damages not caused by
        the injunction, but by market crash and 642947’s refusal to close sale).
Reasons: CA stated that had the damages been caused by the injunction, they would have lifted the
        corporate veil. Sweet Dreams was undercapitalized. It did not have sufficient assets to back up
        the undertaking. It was completely dominated and controlled by Halasi. While it was not
        formed as a shield for improper/illegal/fraudulent conduct, it was used as such. The court is
        quick to lift the corporate veil here because the corporation offered an undertaking to the court,
        (this is not just a contractual obligation case). Not lifting the veil would send a message that
        corporations with no assets could bring injunctions with hollow undertakings and then get away
        with not compensating parties who are injured by the injunction.

                                                     - 27 -
De Salaberry Realty v Minister of National Revenue (1976) (FCA)
Facts: Bronfman and Steinberg, through other companies, owned 50% of De Salaberry each. De
         Salaberry bought 2 areas of land to build malls. However, one was already a tentative site for a
         park and the other was not zoned properly. So they eventually sold both sites and made some
         money off the sale. Bronfman and Steinberg are real estate developers who often sell excess land
         from developments. De Salaberry itself is a new company. The Minister of National Revenue
         wants to count the sale of the land as part of the overall real estate business of Bronfman and
         Steinberg, making it taxable in a higher bracket, as profit arising from a business.
Issue: Is this an appropriate situation for piercing the corporate veil, in order to the MNR to realize
         greater tax revenue?
Decision: Lifted the veil and found De Salabarry a trader in land, thus revenue from the sale was profit
         and taxable at the higher bracket (income from business).
Reasons: Courts are willing to pierce the veil where there is Enterprise Liability (a chain/web of
         companies all acting toward the parent company’s purpose). The courts look for control and a
         unity of group enterprise. The court looks to see if the subsidiary is just an instrument of the
         parent companies, if the parent dominates the subsidiary to the point that it has no independent
         functioning of its own. Words like “puppet” are used. De Salaberry has no purpose of its own.
         Its business is not apparent unless it is considered as a subsidiary. It was incorporated as
         instrument of the larger group of companies. It had thin capitalization and the money needed to
         buy the land was provided by the parent companies. The court lifted the veil and found De
         Salaberry was a trader in land, thus the revenue from the sale was profit and taxable at the higher
         bracket.
Test: This case laid out the “Smith Test” for looking at parent/sister companies as agents of the
       appellant. Test came from Smith Stone and Knight Ltd. v. Birmingham Corporation
       (1939) which set out criteria to look for in determining whether corporations are distinct
       or if corporation is simply an agent of the shareholder:
                Were the profits treated as profits of the parent company
                Were the people conducting business appointed by the parent company?
                Was the parent company the brain of the venture?
                Did the parent company govern and make all decisions on the venture?
                Did the company make the profits by its skill and direction?
                Was the company in effectual and constant control?
Note that there is a problem, as the answer to all of these can be always be yes, so it is difficult to know
        where to draw the line.

Alberta Gas and Ethylene Co. v Minister of National Revenue (1989) (TCC)
    - Facts: AGEC wanted to attract American insurance companies as investors. But
       American insurance companies who invest in foreign companies charge a higher rate of
       interest. So AGEC incorporated the subsidiary ASCO in Delaware, which got the loan
       from American insurance companies and loaned it to AGEC. AGEC paid ASCO the
       interest and ASCO paid it back to the insurance companies. AGEC did not pay tax on the
       payments it made to ASCO so Minister sued. AGEC argued that ASCO was not a real
       entity. It was a part of AGEC. The corporate veil should be lifted – ASCO was doing
       nothing more than carrying out the business of AGEC.
Issue: Should the veil be lifted?
Decision: Tests not satisfied and veil should not be lifted.
Reasons: The 6 tests are not sufficient to alone prove agency. The purpose/context of ignoring
       the subsidiary must be looked at. The separate entity is not ignored when lifting the
       corporate veil, but rulings are made in spite of it.


                                                    - 28 -
Gregorio v. Intrans-Corp. (1984) (Ont. CA)
Facts: Gregorio bought a defective truck from Intrans who bought it from Paccar Canada who
        was the Canadian subsidiary of the US manufacturer, Paccar Inc. Paccar Canada had
        ordered the truck from Paccar Inc. Gregorio brought a successful breach of warranty
        claim against Intrans-Corp, and also made a claim against Paccar Canada for negligent
        manufacture of the truck, and Intrans made an indemnification claim against them as
        well. However, Paccar Canada did not manufacture the truck – its parent company did.
        Argument was that Canadian subsidiary was one and the same as the parent company.
Issue: Is the Canadian subsidiary one and the same as its parent company?
Decision: Canadian subsidiary not found to be the alter ego of the parent company.
Reasons: Just because Paccar Canada is a wholly-owned subsidiary does not make it the alter
        ego of its parent company. In order for it to be the alter-ego of the parent company, it
        would have to be under the complete control of the parent and nothing more than a
        conduit used by the parent to avoid liability. Alter ego principle is applied to
        prevent conduct akin to fraud that would otherwise unjustly deprive claimants of
        their rights.




Walkovszky v. Carlton (1966) (NY Ct. App.)
Facts: Walkovsky was hit by a cab driven by Marchese, and owned by Seon Inc, which only
       owns a few cabs, in order to only be required to keep minimal insurance. Seon is one of
       many companies owned by Carlton who operates the fleet like a single entity.
       Walkovsky wants to hold all the corporations liable for his damages thereby getting
       access to more insurance, and says the structure is an unlawful attempt to defraud tort
       victims. Carlton wants the case against him dismissed as there is no cause of action
       against him
Issue: Should the court lift the veil between affiliated corporations where tort liabilities owed to
       a third party might warrant lifting the veil?
Decision: Court refused to pierce veil between affiliated corporations.
Reasons: The corporate form is disregarded if the corporation exists to further the goals of the
       parent and not its own business. Here this is not the case. This case does not fall into
       either of the 2 piercing models. It is just a bunch of cab companies owned by Carlton.
Dissent: Carlton owns 10 companies with 2 cabs and minimal insurance. This was set up
       intentionally to minimize liability in accidents. Also all income was periodically drained
       from the companies. – Limited liability abused. Setting up insufficiently capitalized
       businesses to avoid financial responsibility should result in shareholder liability.
       Corporation should not block state policy, in this case, recovery for the injured. Judicial
       interference in legislative policy? Not where the corporation was trying to skirt this
       policy in the first place




                                               - 29 -
ADGA Systems v. Valcom Ltd. (1999) (Ont. CA)
Facts: ADGA was a prison tech support company with 45 employees. It came time to renew the
       K so the government opened up for bids. A condition was a minimum of 25 employees.
       Valcom, with no employees, approached ADGA’s employees and offered them a deal
       where they would sign on as employees and switch over if Valcom got the contract.
       Valcom thus has a viable bid and got the contract. ADGA accuses Valcom of stealing
       employees. They want to hold the director and 2 others personally liable for designing
       and implementing the employee stealing program.
Issue: Can the director/2 other officers be held personally liable for acting in the best interests of
       their employer and stealing the employees of another company.
Decision: Personal liability is appropriate here.
Reasons: Directors/employees of a corporation are liable for tortious conduct even if it is in the
       bona fide interests of the parent corporation, with the exception of Said v. Butt where
       they cause a K between the corporation and a 3rd party to be breached. Unique position
       of torts in getting the corporate veil lifted. Where agency law transfers liability of
       employee/director to the corporation itself, lifting the corporate veil extends it back to the
       tortfeasor




Statutory Exceptions to Separate Corporate Personality


       There are two sections of the CBCA that override separate corporate personality


Personal Liability – s.118
       Directors are personally liable if they:
           o Issue shares without receiving full payment – 118(1)
           o Purchasing shares or helping others to purchase shares – 118(2)

       Shareholders can be personally liable to:
           o indemnify a director if they were recipients of funds in 118(2) – 118(4)




Unpaid Wages – s.119
       Normally only a corporation is liable for unpaid obligations. However, in the case of the
        wages of employees, the directors can be jointly and severally liable for unpaid wages to
        a maximum of 6 months.
           o This often leads to directors resigning en masse when the company is in financial
               trouble, in order to avoid such liability.



                                                - 30 -
Process of Incorporation
     Once the incorporators of a company have selected the jurisdiction of incorporation, the
      next step is to incorporate the company and organize it within the requirements of the
      incorporating statute
     Incorporators of a CBCA company (or their lawyers) will begin the process of
      incorporation by drafting the articles of incorporation
     For simple incorporation, this requires completing a standardized form obtained from the
      federal government.
     The CBCA and other statutes has made the process of incorporation far more simple than
      it was before, however, the importance of understanding the required steps to ensure that
      a company has been properly incorporated have not diminished
           o These steps go beyond “filling out a form”
     Legal and business decisions must be made in order to determine the answers required for
      all of the categories of information that are asked about in the relevant form
     At the end of the incorporation process, the new corporation is turned over to its
      promoters, who may commence carrying on business through it.
     A critical step in the life of the corporation is securing appropriate capital or financing to
      permit the corporation to carry on its activities


Reasons for Incorporating

Seven Commonly Given Advantages of Incorporation:
  1. A corporation provides limited liability for its shareholders as against the joint and
     several liability of partners
  2. A corporation provides the perpetual succession of a body corporation contrasting with
     the indefinite tenure of partnerships
  3. A corporation allows for ease of transfer of shares as against the difficulty and
     inconvenience of terminating partnerships to permit changes in personnel
  4. Individual partners may bind the firm, but a shareholder alone cannot obligate the body
     corporate
  5. A shareholder can contract with or sue a body corporate; a partner cannot sue or contract
     with his firm
  6. Facilities for a body corporate to secure additional capital are not possessed by a
     partnership
  7. Tax advantages may accrue to the sole proprietor or small partnerships that converts to
     the corporate form

                        SEE DETAILS ON FOLLOWING PAGES

***Note that in many situations these advantages may not be particularly significant, and
      may be override by other considerations – especially tax considerations***

                                              - 31 -
Limited Liability
    The liability of shareholders is limited to their investment
          o Protection against personal liability for small amount of trade credit,
          o Torts (but it is still prudent to purchase tort insurance) – except
                   Where courts pierce the corporate veil (likely in closely held corporation
                   Where courts find the officers themselves committed the tort
    Exceptions – with smaller corporations, a personal guarantee may still be required on
       bank loans, leases, and supplies on credit.


Perpetual Succession
    A corporation continues to exist when one of its owners dies, retires or goes bankrupt.
          o But in a sole proprietorship, the assets of the business can be bequeathed or
             assigned and another person run essentially the same business in their own name
          o Partnerships can account for death or bankruptcy or retirement by choosing to
             have the partnership continue in these events in the Partnership Agreement


Ease of Transfer of Shares
    Shares are freely transferable unless there is an express restriction on the transfer of the
       shares in corporate bylaws.
           o But securities laws further restrict the transfer of shares, especially in closely held
               corporations (who have to comply with securities laws if shares end up being
               publicly distributed) – probably no difference between this and partnership
               interest.


Shareholders alone cannot bind the corporation
    But shareholders are usually officers of the corporation when it is closely held and are
      agents anyways
    Also if there is a situation of ostensible authority, the corporation should make sure to
      take steps to avoid agency relationship. In a partnership, it is important to put parties on
      notice of partner’s constrained authority. This amounts to the same thing in practice

Tort
      Liability is ascribed to the corporation for torts of officers, agents, and employees. In a
       closely held corporation where one guy is all of the above, incorporation probably won’t
       make a huge difference


A Shareholder can contract with a corporation
- This can be got around in a partnership when a partner contracts with all of the other
   partners, which is allowed




                                               - 32 -
Facilities for a Body to Secure Additional Capital
Shares and Debentures
    In partnership, either the existing partners can invest more, or add more partners
          o This is pretty much like selling more shares to existing shareholders or other
             shareholders, and can even be structured like shares
Debentures
    They are just evidence of indebtedness
    It can be made by anyone
    Even if these facilities are advantageous, corporations have to deal with securities
      regulation



Tax advantages in conversion to corporation
    There are also tax disadvantages
          o Double taxation –
                  a corporation is taxed on its income
                  and that money is taxed again when it is distributed to investors
          o Formerly corporations were taxed in the highest individual income bracket, so if
             your income as an individual in a sole proprietorship or partnership was much
             lower than this, it would pay to stay unincorporated. Presently the corporate
             bracket has been lowered due to international pressures
          o Small business deduction – corporations that are active can obtain a reduced tax
             rate on income under $300000. But this is just a deferral. Corporate tax rates are
             charged at normal level when the shares are distributed to the shareholders. The
             advantage is that the corporation can decide when this happens, and do it at an
             advantageous time
    Tax advantages for sole proprietorships or partnerships
          o Losses often incurred during start-up can be passed through the corporation and
             balanced against profits of owners from elsewhere. This cannot happen in a
             corporation



Costs of Incorporation
    Fee for incorporation – a few hundred dollars
    Legal fees in incorporation – several hundred or thousand dollars
    Fee for filing annual reports
    Maintenance of corporate records, filing tax return for the company




                                             - 33 -
Steps in the Incorporation Process


      Under the Canadian Business Corporations Act:
          o One or more individuals or bodies corporate may form a corporation – s.5
          o Any individual must be 18, and can’t be of unsound mind or bankrupt – s.5(1)
          o Steps in the incorporation process:
                  Filing Articles of Incorporation
                  Filing a Notice of the Registered Office of the Corporation
                  Filing a Notice of Directors
                  Paying the Prescribed Fee


1. Articles of Incorporation
Articles of Incorporation for a simple corporation are prepared by filling out Form 1, as set
out in s.6(1). The articles must include:

      1. Name of proposed corporation under s.6(1)(a)
           o Number also alright. Law firms incorporate shelf companies – ready for use
             companies that are available for clients who want to quickly incorporate.
           o Number company can then use a business name (s.10(6)), but officially it will be
             referred to as, e.g. 234234 carrying on business as Quickbuys
                  Full corporate name must be set out in all contracts, invoices, negotiable
                     instruemetns and orders for goods and services issued or made by or on
                     behalf of the corporation under s.10(5)
           o If using a name, it must be registered with province so that it is readily accessible
             to the public, in order to allow them to know who they are dealing with.
                  If business fails to register properly, corporation will not be “capable of
                     maintining a proceeding in a court [in the province] in connection with
                     that business except with leave of the court” under s.7(1) of the Ontario
                     Business Names Act
           o Shelf companies faster and no need to search for conflicting names
           o Name search – Corporations must do this is they do not want to use a numbered
             name, to ensure that the name or style is not already in use
                  Industry Canada owns corporate names database. Incorporators pay $20
                     and search themselves. Printout result usually done by name searching
                     company or the law firm and any conflicts or confusions are sent to the
                     director
                  If the proposed name is either prohibited or confusing with respect to
                     existing trades or names under the regulations, director may direct the
                     corporation to change its name after incorporation under s.12(2)
                  Note that the officers of one corporation can seek to have the director
                     instruct another corporation to change its name of the two names are likely
                     to be confused, and if the director refuses to do so, the 1st corporation can
                     protects its interests by appealing that decision under s.246(b)
           o If doing business in Québec must have an English and French name
           o Suffix Ltd or Inc or Corp required.

                                              - 34 -
   2. Location of Registered Office of the Corporation under s.6(1)(b)
        o Under s.19, a corporation must have at all times a registered office in the province
           of Canada specified in its articles.
                    This is the location where the corporation can be served with legal
                        documents and at which it may be required to maintain corproprate
                        records
        o Under the CBCA, it is only necessary to state the province of the office, not the
           municipality – i.e. do not have to have a street address, this is instead placed in
           the notice of registered office instead
                    This makes it easier for a corporation to change their address
                    The street address only needs to be given in the notice of registered
                        office, to be filed in a separate notice with the articles of incorporation
                        (s.19(2))
                    Street address may be changed without amending the articles so long
                        as it is being changed to another address within the same province or
                        territory specified in the articles of incorporation (s.19(3))
                    If the corporation wishes to change the province or territory in which
                        the registered office is located, the articles of incorporation must be
                        amended under s.173(1)(b)
                              This requires a special resolution of the corporations
                                 shareholders (s.173(1))
        o Does not have to be place where business is done. Small corporations will often
           declare it their lawyer’s office, so he gets documents
        o If the corporation is registered under the CBCA, the office can be anywhere in
           Canada.
                    If registered in a specific province, office must be in that province


   3. Classes and Maximum Number of Shares
        o s.6 of the CBCA provides that the articles of incorporation must set out:
                ▪ the classes and any maximum number of shares that the corporation is
                     authorized to issue
                ▪ the rights and privileges attaching to each class of shares if there is to be
                     more than one class
                ▪ the authority to be given to directors to determine the rights and privileges
                     attaching to shares in a particular series if classes of shares can be issues in
                     series
                ▪ any restriction on the issue, transfer or ownership of shares in the
                     corporation (ss.6(1)(c) and (d))
        o Small issuers may not have different classes of shares but may have restrictions
           (i.e. if they want to keep it in the family)
        o No limit on number of shares, no mandatory declaration of number of shares
           anymore. Can declare unlimited shares
        o s.6 of CBCA is now permissive and does not require a corporation to specify the
           maximum number of shares that it is authorized to issue (although such a
           maximum may be specified if desired)
                ▪ Instead, relevant section of articles of incorporation might state that they
                     are authorized to issue an unlimited number of shares.

                                             - 35 -
   4. Any Restriction on the Transfer of Shares
        o Private companies – those corporations whose articles of incorporation:
              ▪ Restrict the right to transfer shares
              ▪ Limit number of shareholders to 50
              ▪ Prohibit any invitation to the public to buy shares

   5. Number of Directors
        o under s.6(1)(e), articles of incorporation must set out the minimum and maximum
            number of directors
        o Exact size of the board of directors does not have to be set out when the articles of
            incorporation are filed, except where the articles of incorporation require
            cumulative voting (under s.107(1))
        o Every corporation must have at least one director under s.102(2)
        o When the corporation is a “distributing corporation”, or one that has sold its
            shares to the public, it is required to have at least 3 directors under s.102(2)
        o At the time of filing the Form 1, a second notice (Form 6) must be filed naming
            the people who are to serve the inaugural directors of the corporation under ss. 7
            and 106(1)
    o First Directors have the authority to issue the initial shares of the corporation and to
        take the other steps required to organize the corporation after the certificate of
        incorporation has bee issued (s.104(1))
    o Initial meeting of directors will ordinarily address the making of bylaws for the
        corporation, authorize the issuing of securities, making banking arrangements for
        company, appoint officers, adopt forms of corporate records, appoint an auditor and
        deal with other necessary business


   6. Restrictions on the Business of the Company
        o Any restriction to the kind of business the company may carry on must be set out
           in the articles of incorporation under s.6(1)(f)


   7. Other Miscellaneous Provisions
        o Articles can set out further provisions as long as they are not in conflict with the
           statute
        o Apart from specific matters peculiar to private companies because of securities
           law concerns, articles will sometimes deal with the follow matters:
               ▪ pre-emptive rights for existing shareholders to acquire new shares of the
                   company before offered to outsiders (s.28(1))
               ▪ restrictions on the repurchase of shares by the company (s.34(1))
               ▪ cumulative voting (s.107)
               ▪ special majorities for votes of directors or shareholders to effect any action
                   (s.6(3))
               ▪ provision for filling vacancies among directors (s.111(4))
               ▪ quorum of directors at less than a majority (s.114(2))

                                           - 36 -
Existence of the Corporation and Pre-Incorporation Contracts


     When the director receives the articles of incorporation, he is required to issue a
      certificate of incorporation under s.8
     The date on the certificate is the date as of when the corporation comes into existence
      under s.9
          o Important because a lot of stuff is bought right at the beginning – lease,
              equipment, first inventory, office supplies – and the corporation will want to make
              sure it is under limited liability


     Contracts will need to be entered into on behalf of the new business before the company
      has been incorporated
          o If a corporation is found to have made the contract, it will be liable and the
             supplier unable to collect if the corporation has no assets
          o If the individual is found personally liable they will be obliged to make payments
             to the supplier from their personal assets

     Date of incorporation becomes important to determine how an artificial entity that was
      not in existence when the contract was made can be made legally bound by such an
      agreement
          o The date of incorporation is extremely important as it allows the court to
              determine when the company was in existence and thus able to be contacted
              directly

         o   Pre-Incorporation Contracts are explicitly addressed in s.14:
                  Person who entered 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
                    benefits
                  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 in its behalf, one on such adoption, 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 to the contract, and 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
                  (4) provides an exemption from personal liability if it 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


                                            - 37 -
Kelner v. Baxter (1866) (Common Pleas) – common law position
Facts: Kelner and Baxter and a few other people decided to form a corporation to run a hotel out
        of Kelner’s lodge. Kelner sold wines to the Ds as agents of the company, before the
        company was formed.
Issue: Is the contract valid?
Decision: Promoters who enter into contract on behalf of a non-existent corporation are
        responsible for the contracts they enter.
Reasons: A corporation cannot later ratify a K from before its existence and assume its
        obligations. A stranger 3rd party who was not in position to be bound by K when it was
        made (the corporation) can’t just come along and ratify it, or take on obligations between
        2 parties in the K. This is contrary to K law. But is the promoter automatically personally
        liable for the K (rule of law approach), or does it depend on whether they intended to
        become a party to the K (rule of construction approach)?
Nicholls (textbook dude): The Ds in Kelner v. Baxter were held liable because it was clear that
        all parties intended the K to be enforceable, and this was the only way the K could be
        enforceable. There is no way it would ever be binding on the corporation (because a
        corporation can only ratify a K that it could have entered into at the time of formation),
        which did not exist at the time of formation.



Problems with the Common Law Approach
    Creates risks for both parties that there would be no enforceable K
    Creates possibility of unjust enrichment (if other parties were not made to pay Kelner for
      his wine)
    Also inefficient, as it persuades both parties to make sure the agreement is enforceable
      (that the corporation already exists)
          o The most efficient thing to do would be to have the promoters be able to confirm
              the existence of the corporation, as they can do it at the lowest cost

      Thus, in 1970, OBCA reforms made it possible for a corporation to ratify a contract
       signed on its behalf prior to its incorporation
      Promoter stayed liable if corporation didn’t ratify the K. If it did, the promoter would be
       relieved of personal liability
      Sometimes wronged 3rd parties could seek to hold the promoter and the corporation
       jointly and severally liable (e.g. if corporation had no assets)




                                              - 38 -
Sherwood Designs v. 872935 Ontario Ltd. (1998) (Ont. CA) – DISSENT ONLY
Facts: Promoters of a not yet existent corporation contracted with Sherwood to buy them. Miller
       Thomson kept a bunch of shelf companies for clients, all of which partner Fuller was the
       director of. The lawyer for the respondents assigned one of the shelf corporations to the
       respondents so they could buy Sherwood. He let Sherwood know. Sherwood claims this
       is an action signifying corporation’s ratification of the K to buy Sherwood, but was
       unsigned. The corporation stayed with Fuller. It was assigned to another organization to
       buy a building later that year.
Issue: Did the corporation adopt the written contract? If not, are the promoters liable for the
       contract?
Reasons: Dissent at Appeal Level undertook overview of common law on pre-incorporation
      contracts: Kelner v Baxter – Where an individual purports to contract on behalf of a
      named corporation before that corporation has come into existence, the individual is
      personally liable on the contract. Newborne, Black – no. Baxter and the other Ds were
      held liable because they intended to be bound by the K. Where the promoter doesn’t
      intend to be bound, they are not.
       Statutory Reform of 1970: The Corporation should be able to adopt or ratify a K made
       on its behalf. The promoter should be personally liable on the K prior to adoption, and
       entitled to enforce it. Court should have discretion to apportion liability between
       promoter and corporation.
       s.21 of OBCA & s.14 of CBCA: A promoter who enters into a K on behalf of a
       corporation before its existence is bound by it and entitled to its benefits. If the
       corporation comes into existence and adopts the K, it is bound by the K and entitled to its
       benefits, and the promoter is no longer bound or entitled to benefits. The other party can
       request the court assign liability on both the corporation and the promoter, regardless of
       whether the corporation has ratified the K.
       The promoter and other party can agree in the K that the promoter is not liable for the K
       no matter what. Here the shelf corporation did not know of the actions and did not yet
       assent to them (the company was not yet transferred to them when the letter was sent), so
       there is no liability on the part of the corporation. The promoters are thus liable for the K
       (as the corporation did not ratify it, and they did not contract out of liability. But they
       have no money anyways). – Rule of Law Approach

Majority on Ratification: the action of the lawyer taking the corporation off the shelf and
      writing a letter to Sherwood is an action of the corporation ratifying the K. The manner of
      adoption/ratification is not specified by the Statute, and formalism is not necessary.
      Sending each other letters is plenty, even if the corporation was not yet transferred to the
      Ds at the time the letters were sent. Shell companies are always used for these
      transactions and both sides knew this.




                                               - 39 -
Post-Incorporation Steps under the CBCA – pg.261
     Once a corporation has been incorporated, there are a number of post-incorporation steps that
      need to be taken
     s.104 provides that after the issue of the certificate of incorporation, a meeting of the directors
      shall be held at which the directors may:
          o make by-laws
          o adopt forms of security certificates and corporate records
          o authorize the issuance of shares
          o appoint officers
          o appoint an auditor to hold office until the first meeting of shareholders
          o make banking arrangements
          o and transact any other business

By-Laws
     General bylaws are another important constitutional document of the corporation governing its
      internal procedures
     Names and addresses of directors must given in the notice of directors under s.106(1)
     Directors will pass organizational resolutions under s.104(1), including one approving the
      corporation’s general bylaws
     Resolutions can be passed with unanimous written consent and not through mtg. – 117(1)
          o Bylaws will normally include:
          o Procedures at directors meetings
          o Procedures at shareholder meetings
          o Procedures for allotting and issuing shares
          o Procedures for declaration and payment of dividends
          o Procedures for appointing officers
     Bylaws can be made, amended, or repealed by the directors 103(1) – relatively easy to amend
      compared to amending articles of incorporation under 173
     Bylaws are Effective from date the directors make them, and only out of effect if the shareholders
      do not confirm them at their next meeting
     Articles of incorporation do not come into effect until the date of the certificate of amendment
      granted by the directors – 179
     Thus bylaws are preferred as they are quicker to pass, so they are most often used for the routine
      business of the corporation
     Bylaws are also different from resolutions which deal with a specific issue
     At the initial meeting the directors will also adopt a form of share certificate 104(1)(b) and pass a
      resolution allotting shares – 104(1)(c)
     Officers are appointed 104(1)(d) and may be appointed specific tasks associated with the carrying
      on of the corporation
     A resolution may be passed adopting the forms adopt a form of corporate record keeping –
      104(1)(b)
     Directors can appoint someone to act as an auditor until the first meeting of the shareholders –
      104(1)(e)
               o Corporations that are not publicly traded can waive this
               o Corporations that are publicly traded must appoint an auditor
       Banking arrangements may be made – 104(1)(f)
       A corporate seal is often adopted and affixed to documents binding the corporation, but not
          required by law – 23
       A Shareholder’s Agreement may be entered that modifies their rights – 146
               o The agreement may state that certain rights normally decided by shareholder vote can
                   be decided at the initial meeting, such as who will be elected to board of directors,
                   the salaries of the chief employees

                                                  - 40 -
Capitalization of the Corporation – pg.303-316
      When a corporation borrow money, the obligation to pay it back is a debt
           o raising money by borrowing is thus debt financing
      When a corporation raises money by offering new shares to purchasers, the shareholder
       interest is equity
           o raising money by selling shares is thus equity financing
                     Equity is the most expense form of financing because it is permanent,
                       and every time a corporation issues shares, it dilutes the ownership of the
                       corporation

Debt ranks ahead of equity
    When the corporation shuts down, the money owed to creditors is paid back first. Until
       this is all repaid, the equity investors get nothing
    A corporation is under a legal obligation to repay a debt. It is not under a legal obligation
       to pay back equity, which becomes part of its permanent capital
    When a corporation makes a payment to a creditor for interest on money lent, this
       payment is deducted from income for taxation purposes.
           o When a corporation makes a distribution to a shareholder (dividend), this money
                is not deductible from income for taxation purposes

      When a creditor receives a payment for interest, it taxed as income. When a shareholder
       receives a distribution, it is taxed at a lower rate subject to Income Tax Act’s dividend tax
       credit, acknowledging that that money has already been taxed once before. Dilution of
       ownership
           o Equity entitles the shareholder to voting rights, to elect directors at annual
                meeting
           o More new shares means more votes – this can dilute and undermine the control
                over the corporation held by existing shareholders.
           o Alternatives – can issue shares with no voting rights, or existing shareholders can
                issue themselves a separate class of shares with enhanced voting rights
           o This doesn’t come up in debt as creditors almost never control the company

What is a Share?
   Common, divided, participation interest in the corporation’s business.
          o Connected to money invested in the corporation
          o Can be issued by another shareholder
   Fractional part of capital – but the meaning of this is also elusive
   NOT a proportionate share in the assets of the corporation – only the corporation owns
      those assets. Shareholders are not entitled to receive these assets upon dissolution, just a
      fractional value of them after creditors are paid off.
          o United Fuel Investments v Union Gas – United was a holding company (its sole
              purpose was to hold shares in United Gas). When it was wound down, its
              shareholders asked instead of selling off all its assets (the shares of United Gas)
              instead just enough could be sold off to pay back creditors, and the rest of the
              assets just given to the shareholders. The court found they were not entitled to
              this. The only thing they were entitled to was a share of the remaining proceeds
              once everything had been sold off and all obligations had been repaid.

                                               - 41 -
Issue: Can a share be construed as a proprietary interest in the corporation’s assets or the
corporation itself?

Sparling v. Quebec (Caisse de depot et placement du Quebec) (1988) (SCC)
Facts: Caisse was created by statute to manage funds given to Québec by Canada. They owned
       22% of Domtar. Thus they were an insider of Domtar, but didn’t submit the required
       report to the Director, claiming state immunity.
Issue: Can Caisse du Québec claim immunity and put itself outside the auspices of the CBCA?
       Did Caisse waive immunity by buying shares of Domtar (a benefit) and are they now
       subject to the burden of declaring insider status to the Director?
Decision: Crown is bound to the rights and obligations laid down in the CBCA.
Reasons: There must be a nexus between the benefit and the burden. In this case, the nexus
       between the rights and the obligations is a close one, thus the Crown is bound to the
       rights and to the obligations laid down in the CBCA.
       Definition of a Share:
            Not an isolated piece of property
            A bundle of rights and liabilities
            These rights and responsibilities are governed by the CBCA and are not separable
               from them
            Purchasing a share is an implicit acceptance of the benefits and burdens of
               holding a share under the CBCA
            CBCA establishes a relationship from which certain results might flow. It does
               not seek to govern the Crown, but where the Crown enters into the relationship
               governed by the CBCA (owning a share) it must take the relationship as it is –
               benefits with burdens. Otherwise it would be taking a right that has not been
               created by the CBCA




                                            - 42 -
Formalities of Capitalization
       LaForest J. described a share as a “’bundle’ of interrelated rights and liabilities”
       In issuing a share in exchange for capital, the question that the corporation and the investor will
        both be focused on is what rights and liabilities form the “bundle” being issued to the investor
       CBCA provides considerable flexibility with respect to the rights that may form part of a share –
        this is an important feature because it allows companies to consider a wide range of options when
        designing their share structures
Authorized and Issued Capital
    Authorized capital = the maximum of shares that that management could issue.
          o Before the CBCA, it had to be stated, and could only be raised by 2/3 shareholder vote.
              This was often left effectively without a ceiling by setting authorized capital at a much
              higher number than would probably be needed
          o Today the CBCA doesn’t require corporations to state a maximum, but they are allowed
              to if they want, under 6(1)(c)
    Outstanding/Issued capital = shares issued.
    Significant shareholders sometimes want to see a maximum so that their interest does not
      proportionally decrease with adding of many new shareholders
Common and Preferred Shares
     How many classes of shares will be issued must be stated in Articles of Incorporation – s.6(1)(c)
Preferred Shares
     Have Special rights/restrictions in voting (depending on what rights they are given by the Articles
        of incorporation), dividends, distribution upon liquidation (i.e. can’t get more back upon windup
        than investment + interest/dividend)
     Called “Senior Securities”
     Rights may include right to be paid dividends before the common shareholders
     May be redeemable by the corporation
     May be returnable by the shareholder
     Don’t have to be advantageous, just have a special condition – non-voting share can be preferred
     The rights attached to preferred shares must be stated in the Articles of Incorporation – 6(1)(c)(i)
     If directors wish to issue a new class of shares, Articles of Incorporation must be amended
             o But if the preferred shares are issued in a series, the directors can later decide what rights
                are attached, upon issuance of the shares – 6(1)(c)(ii)
             o When the rights are decided and the shares are issued, articles of amendment must be
                prepared – 27(4)
     Shares of same class cannot have prior rights to payment of dividends or return of capital (27(3))
Common Shares
     No special rights or restrictions

Subscriptions for Shares
    Subscription agreement – a contract where a corporation undertakes to issue shares to subscribers
      at a later date (and the subscriber to pay for them at a later date)
    Used to be the case that a corporation could offer shares that would be paid for partially now and
      partially upon call by the corporation. Upon bankruptcy the corporation’s trustee would demand
      they be paid in full. This was problematic, especially if the subscription was a pre-incorporation
      contract. 3 theories were used to find liability
           o Subscription was not a K but an offer that corporation could accept in calling balance in
           o Subscriber’s conduct after incorporation was new offer that the corporation could accept
           o Subscriber estopped from denying liability
    Pre-incorporation subscription now governed by s.14 – a corporation can ratify the pre-
      incorporation subscription K if it chooses to, and demand payment. Until then subscriber under
      no duty.

                                                   - 43 -
Corporate Governance & Voting
     Corporate governance looks at the relationships between directors, shareholders and
      managers, and asks the following questions:
         o Who is the corporation to be governed for?
         o What should the role of regulation be?
                  The role of securities regulation and the interaction between it and
                      corporate governance
         o What is the relationship between shareholder voting rights and governance
             structures?
     Also looks at the structure by which corporate decisions are made, so that:
         o Capital can be raised cost effectively
         o Assets are used in the efficient generation of wealth with a view to the
             sustainability of the corporation
         o Corporate decision makers are held accountable to those who have an investment
             in the firm

     Accountability between shareholders and directors – shareholders are explicitly the only
      ones with the power to elect director; however, who is nominated to be a director is the
      function of who the board wants to nominate, so the board itself actually holds a lot of the
      power to determine who the directors are going to be, and who will continue to be
      directors

     Inside Directors are people who work full-time within the company in addition to their
      membership on the Board of Directors
     Outside Directors do not work for the company and have no connection with the
      company outside of their Directorship
     Corporate governance has recently begun to put a lot of emphasis on independent
      directors, due to failures such as Enron, etc.
     However, outside directors may or may not be independent – it depends on their
      relationship to the corporation
          o Oftentimes outside directors will still have a business relationship with the
              company, e.g. have worked for them, like an architect that designed Epcot on the
              board for Disney
          o Corporate governance is generally trying to put much more emphasis on having a
              majority of outside independent directors
                   E.g. Disney – “Independent” board member who is chair of executive
                      compensation council was the headmistress of the private school attended
                      by CEO’s children. Is this true independence?

     Directors are often former/current CEOs or Presidents of other large publicly-held
      companies
          o The higher the percentage of other CEOs on your board, the greater the likelihood
              of “runaway” compensation for the Directors
     Recall that there are few qualifications for being a director – over 18, sound mind, and
      not personally bankrupt (but you can have been the director of a bankrupt corporation)


                                             - 44 -
Statutory Requirements for Boards of Directors & Voting Issues
     s.102(2) – if it is a corporation with shares that are sold to the public, at least 2 Directors
      need to be outside Directors
     s.105(3) – at least 25% of the individual directors need to be Canadian
     If there are fewer than 4 people on the Board of Directors, one of them needs to be
      Canadian
     As part of the formation process, an initial director must be named under s.106(2)and
      then the shareholders must vote on the directors in an annual meeting that must happen
      within 18 months of the formation of the corporation
     Cumulative voting is a system that permits minority shareholders to have representation
      on Board parallel to their shares, e.g. a 20% shareholder group will be guaranteed 20% of
      seats on the Board
     The Board has a self-perpetuating nature, as the Directors nominate the future directors,
      creating a self-perpetuating group. This means that shareholder elections are not
      necessarily a good accountability mechanism.
     Dual-class capitalization allows a specific group to retain control of the corporation, e.g.
      a class of shares each worth 50 votes
     One of the major corporate governance issues in Canada deals with companies that have
      a majority shareholder – how do you ensure that the directors of those companies, elected
      by that controlling shareholder, operate the company in everyone’s best interest and not
      just in the best interests of the controlling shareholder?
     A staggered board of directors is a strong anti-takeover device
           o Staggered board = not all board members are up for re-election in the same year
           o Thus, you cannot take out the entire board at once
     s.111 gives directors the power to fill vacancies in the board that come up between
      elections; however, Canadian law does not give directors the power to fill vacancies
      where they were created by the Directors expanding the number of board members
     Directors also have the power of removal
           o Shareholders in general have the right to remove directors by ordinary
               resolution, which is defined in the CBCA as a majority vote
           o This must be construed in accordance with s.6(4), which states that the articles of
               incorporation can vary downward but not upward – i.e. you cannot require more
               than a majority to remove a Director, but you can require less.
           o In the USA, you can do this – it makes the company harder to take over
     s.102(1) gives directors a general duty to manage or supervise management of the
      corporation
     s.121 gives them the power to delegate that authority
     s.115 deals with delegating authority to a board committee
     There is a growing pressure that committees be made up of mostly outside directors or
      independent directors
     Important transactions that have to be approved by the shareholders have to be approved
      by the whole board, including declaring dividends
     s.114 provides the requirements for a legitimate board meeting
     s.122 sets out standards for directors, including the duty of loyalty (s.112(a)(1)) and the
      duty of care (s.112(a)(2)). Directors have duties under the statute and at common law.
           o Recall that duty of loyalty is also referred to as the statutory fiduciary duty
           o Directors must not act in a manner that is oppressive, unfairly prejudicial to, or
               unfairly disregards interests of security holders and in some cases, other parties.

                                              - 45 -
Election and Removal of Directors

Election
    Notice of First Directors is written upon incorporation. These directors govern until the
       first shareholder meeting, which must be within 18 months of incorporation under
       s.106(2).
    Then shareholders are elected by an ordinary (majority of votes cast) resolution under
       s.106(3)
    Shareholders must elect directors at every annual meeting under s.106(3).
    This requirement cannot be waived
    Annual meetings must be held no later than 15 months after the last annual meeting under
       s.133
    Important in exercising control over company
            o Even shareholders with small voting powers can alienate their right, allowing
                another to accumulate voting rights to influence an election and replace directors

Term of Office
    Typically a year – from general meeting until next general meeting – 106(3)
    But can be up to 3 years if altered by Articles of Incorporation
    Directors can be re-elected for as high a number of terms as they want
    Where no directors are elected at an annual meeting (or meeting where directors should
      be elected) then the incumbents remain directors under s.106(6)
    Elections may be staggered – 106(4)
          o Advantageous to existing Board as they cannot all be ousted at once
          o Sometimes staggering is not permitted, as it would prevent a major accountability
              check on the Board
    Corporation, shareholder, or director can apply to court to resolve election controversies
      and the court can make any order it sees fit, including ordering a new election and
      restraining the person in question from taking office, or ordering a new election under
      judicial supervision under s.145

Filling of Vacancies – 111(1)
         Directors usually appoint other directors where there is a vacancy
         However they cannot appoint a director where they have created the places for them
            by increasing number of directors, or from shareholders failing to elect the minimum
            number of directors

Ceasing to Hold Office
   - A Director ceases to hold office when they die, resign, become disqualified, or are
      removed from office by resolution of shareholders under s.108




                                              - 46 -
Removal of Director
      Can normally be done by ordinary resolution – 109(1)
          o This majority requirement can be decreased but cannot be increased – CBCA 6(4)
      The meeting that removes a director may also install a replacement.
          o If shareholders fail to fill the vacancy, the directors can – 109(3) and 111(1)
          o If all directors resign or are removed without replacement, the person who
             manages or supervises the management of the corporation is deemed to be a
             director – 109(4)
          o 109(5) – 109(4) does not apply to:
                  An officer who manages the affairs of the corporation under the direction
                     or control of a shareholder or other person
                  A professional whose participation is solely the provision of professional
                     services
                  A trustee in bankruptcy or other person whose involvement is solely for
                     realization of security or administration of a bankrupt’s estate


Bushell v. Faith (1970) (HL)
Facts: Bushel, Faith and their sister were the 3 shareholders of a corporation with 100 shares
        each. Faith was being a dick so Bushell and sister voted to remove him. Normally the
        votes would have been 200-100 and he would have been kicked out. But under an article
        of the corporation, if a resolution is proposed for a removal of a director, the votes per
        share of that director will be tripled. So Faith argued that the actual vote was 200-300 and
        he was not kicked out. The legislation provides for an ordinary resolution
Issue: Is the article of the corporation valid thus overriding the statutory provision?
Decision: Article of the corporation is valid.
Reasons: The legislative provision was put in place to deal with directors drafting articles
        requiring large majorities to remove them, thus making it almost impossible. Here the
        court finds that the legislation requires an ordinary resolution but a corporation being able
        to change that was not defying the legislation, and nowhere did the legislation fetter the
        right of a corporation to issue shares with rights and votes as it saw fit


                      ***Case would not likely be upheld in Canada!***




                                               - 47 -
Authority and Powers of Directors
   -   Directors have the authority to manage or oversee the management of the corporation –
       102(1)
   -   They cannot delegate their powers in the areas of – 115(3)
          o Filling a vacancy among directors
          o Securities – issuing them, purchasing, redeeming, or otherwise acquiring them, or
              declaring dividends
          o Bylaws – adopting, amending, repealing them
Adoption, Amendment, or Repeal of the Bylaws – 103(1)
  - The directors have the power to adopt, amend, or repeal the bylaws
  - This power is subject to the articles or unanimous shareholder agreement
  - Any changes in the bylaws must be put before the shareholders at the next annual
      meeting, and is in effect until then but remains in effect only upon approval
Borrowing Powers
   - Directors have the power to borrow – 189(1)
   - Also subject to articles, bylaws, or unanimous shareholder agreement
   - May delegate this power to: director, committee of directors, officer
         o Subject to articles, bylaws, unanimous shareholder agreement)
Declaration of Dividends
   - The directors have the power to declare dividends , and under most circumstances, this
      power cannot be delegated under s.115(3)(d)
   - s.115 specifies that company may declare a dividend and s.171(1) adds that the directors
      can set the record date for dividends.
   - The declaration of dividends is subject to a solvency test.
Appointment and Compensation of Officers
  - This is also a power of the directors, subject to bylaws, articles, and unanimous
      shareholder agreement – 121
  - Sometimes done by committee of directors
  - The officers run the company usually with the directors in only a supervisory role. The
      shareholders can replace the directors who can replace the officers.
Removal of an Officer
  - Also a power of directors
  - Important in shareholder control – If shareholders are unhappy that management failed to
     remove an incompetent or crooked officer, they can remove the director.
  - Trade-off in offering long-term Ks to officers – they will be more likely to invest their
     human capital in the firm, but will be able to sue for wrongful dismissal.
Director Meetings
   - Mechanics of calling and holding these are in the bylaws
   - Majority – majority of board or majority of minimum required directors stated in the
       articles – 114(2)
   - Meeting by conference call permitted – 114
   - Written resolution instead of meeting ok, for all business where a written resolution is
       accepted instead of a meeting – 117
   - Meetings with one director are ok where a company has one director – 114(8)

                                             - 48 -
Outside Directors

   -   In a publicly traded corporation, at least 2 directors have to be outside directors – CBCA
       102(2)
   -   An Outside director is a director who is not employed by the corporation or an affiliate.
       An Inside director is also employed by the corporation or an affiliate
   -   TSX recommends a majority of Unrelated directors
   -   Independent director = a director who is free from any interest in any business or other
       relationship that could interfere with their ability to act with a view to the interests of the
       corporation
           o Or could be perceived to
           o Not including shareholding
   -   Independent outside director – majority of board memberships of public corporations, ¼
       of all Canadian corporation boards
   -   Outside directors could have formally had a relationship with the company, i.e. retired
       executives
           o Con – may be affected by current management.
           o Pro – may know a lot about the corporation
   -   They are often CEOs of other publicly held corporations.
           o Good – they know how to run companies
           o Bad – if we’re looking to the outside independent directors to be a monitoring
               agent, offering accountability, limits, constraints, we’re not seeing it.
                    The higher % of other CEOs on your board, the more likely we see
                       runaway executive compensation


Potential Problems with Outside Directors
   -   Selected by management thus not truly independent
   -   Executives of other businesses – same perspective
   -   Same background – same perspective
   -   Lack information staff or expertise to effectively monitor the corporation
   -   They monitor the managers but who monitors them?


Nicholls
   - Role of Outside Directors is to monitor, but since the directors are also on the board, it is
       difficult to monitor yourself.
   - Or if CEO is on the board, directors are supposed to monitor him, but they are also his
       employees.
   - Proposal for outside full-time directors who serve on a few corporations.



Janis Sarra Gender Bullshit
   - Very little diversity on Boards – 7.4% of all corporate board seats are held by women
   - Diversity does improve the corporation in many ways – oversight and monitoring
       activities such as corporate codes of conduct, conflict of interest guidelines, and training
       programs. Also innovation and community and social responsibility

                                                - 49 -
- 50 -
      For many years there was the suggestion that the directors and officers of a
       corporation had a fiduciary duty to act in the best interests of shareholders.
      This view has been seriously challenged by the SCC in a recent judgement that held
       that the fiduciary obligation is owed exclusively to the corporation
      In Peoples Departments Stores, the SCC discussed the scope of duties of directors
       and officers both for the financially healthy and finally distressed corporation, in
       the context of determining a question of insolvency law
      SCC held that the best interest of the corporation should not be read simply as the
       best interests of the shareholders; rather, from an economic perspective, the “best
       interests of the corporation” means the maximization of the value of the corporation

Peoples Department Stores Inc. (Trustee of) v. Wise (2004) (SCC)
Facts: The case involved a suit by the trustee in bankruptcy of Peoples (on behalf of their
       creditors) against the Wise brothers (in their role as Directors of Peoples; not Wise) for
       breaching their duties as directors of Peoples (pursuant to s.122(1) for unfairly favouring
       Wise to the detriment of Peoples as a result of the joint purchasing scheme). Peoples was
       chain of 80 department stores operated in Canada as a division of Marks & Spencer (U.K
       based). It was not profitable and M&S had decided to sell it. Wise was public Canadian
       company controlled by the Wise brothers, operating 50 department stores. Wise was
       public, but controlled by Wise brothers. 1992 Wise agreed to purchase Peoples for $27
       million payable in instalments over a period of 8 years. Wise went into debt for the full
       price borrowing the first instalment from TD. Wise hoped to make future payments from
       operating profits. M&S had wanted a cash deal and only reluctantly accepted this offer
       from Wise. As a result, it structured the transaction to ensure that it would receive over
       50% of the purchase price in the first 2 years….and then a bunch of other shit.
Issue: Do the directors of a company owe a duty of care to their creditors in the vicinity of
       insolvency?
Decision: No. The duty remains to act in the best interests of the corporation, even when facing
insolvency. There was no duty to the creditors, but there may be under different circumstances.
Reasons: Creditors should not need to rely on the statute; they should be protected by the
       contract of indebtedness. SCC states: “It is difficult to find a breach of loyalty when
       there has been not fraud or dishonesty or personal benefit derived”. This seems to
       be a little strange since the statute does not indicate that fraud is required. Looked at the
       2 duties as “distinct and designed to secure different ends”.
       “The trial judge’s determination that there was no fraud or dishonesty… stands in
       the way of a finding that they breached their fiduciary duty. In the absence of
       evidence of a personal interest or improper purpose in the new policy, and in light of
       evidence of a desire to make both Wise and Peoples better corporations….”
       Goal can be to make the corporation a “better” corporation. Interests of shareholders,
       creditors and corporation will be consistent with each other if corporation is profitable.
       Creditors’ interests are protected in other ways- oppression, duty of care, etc.
       Contextual element of duty of care permits prevailing socio-economic condition to
       be taken into consideration




                                               - 51 -
Role and Duties of Directors (from Peoples)
Primary Role of Directors 102(1)
   - Manage or supervise the management of the corporation, subject to unanimous
       shareholder resolution

Officers
   - Power delegated to them by Directors

2 duties of directors and officers in 122(1)
   a) Fiduciary duty, Duty of Loyalty, Statutory Fiduciary Duty
   - Act honestly, and in good faith with a view to the best interests of the corporation
           o Owed exclusively to the corporation, not the shareholders
           o Best interests of corporation = maximizing the value of the corporation
   b) Duty of care
   - Imposes a legal obligation on directors and officers to be diligent in supervising and
       managing corporation’s affairs

Statutory Fiduciary Duty – 122(1)(a)
   - Act honestly and in good faith vis-à-vis the corporation
   - Avoid conflicts between duty to the corporation and personal interest
   - Avoid abusing their position to gain personal benefit at the expense of the corporation
   - Maintain confidentiality of information

McLachlin in KLB v BC – loyalty, avoidance of conflict between duty and interest, and duty not
to profit at the expense of the beneficiary
   -   May be different in different contexts
   -   Can even go so far as to disgorge profit gained from position even where it did not come at
       expense of position –
           o But they don’t always have to avoid personal gain – they will often also be shareholders
                and thus profit when the company does, and as employees they benefit from the company
                in the form of a salary.
   -   Doing what is in the best interests of the company is not the same as doing what is in the best
       interests of the shareholders.
   -   Doing what is in the best interests of the company = maximization of the value of the company
   -   Can include decent respect for employees and community and other interests beyond the
       shareholders without breaching duty – depending on the case, these and suppliers, creditors, the
       environment (stakeholders)
   -   Duty is constant – does not change when corporation is in financial trouble.
   -   Here duties toward corporation, shareholders, creditors, may not be synonymous
           o I.e. upon bankruptcy the shareholder’s residual rights become worthless
           o Control of the corporation is transferred to a trustee to divide their assets among creditors
           o Upon nearing bankruptcy the shareholder’s residual rights will be almost worthless so the
                shareholders will want the corporation to do something high-risk to make the money back
                while the creditors will want the corporation to stay the course so as not to jeopardize
                current assets
           o When corporation’s financial stability is deteriorating, it is the duty of the directors to use
                their knowledge to remedy the situation – if they succeed all stakeholders will have their
                interest served. In any case, the duty is to the corporation, not to one set of stakeholders



                                                  - 52 -
   Statutory Duty of Care – 122(1)(b)
   - Every director in doing their duty shall exercise the care, diligence, and skill of a reasonable
       person
   - Open ended – no specified beneficiary (but does include creditors)
   - Objective standard – what would the reasonable person have done?
   - Deference to business decisions – hindsight is 20/20 – Business Judgement Rule
           o The court looks to see if the directors made a reasonable decision, not a perfect one
           o If the directors selected one of several reasonable decisions, the court defers, even if the
              outcome was negative
           o Directors will not be held to have breached the duty under (b) if they acted prudently and
              on a reasonably informed basis – reasonable decisions in light of the circumstances they
              knew or should have known about
                   The Court isn’t suited to second guess business decisions, but is suited to judge
                      reasonableness and prudence
  The Board’s fiduciary obligation is to the best interests of the corporation, though they
  may consider stakeholder interests. Fiduciary obligation is limited to acting in the best
   interest of the corporation. Directors may, however, owe a duty of care to particular
                stakeholders, but the contours of this duty are still developing.
Nielson Estate v. Epton (2006) (Alta. QB)
Facts: Nielsen died while using a hoist to lift a beam while working for Fabtec. The hoist and
       beam were not compatible. His estate sued Epton, the CEO of Fabtec, for failing to
       ensure the accident didn’t occur when he knew or ought to have known that the beam
       couldn’t latch safely onto the hoist, and failing to set out proper safety measures.
Issue: Does a corporate director owe a personal duty of care to corporate employees?
Decision: Epton owed a personal duty of care to Nielson.
Reasons: The existence of the possibility of directors purchasing insurance coverage suggests
       that there are instances where directors would be liable personally to employees.
       CBCA uses language to place some responsibility on directors – duty to take measures
       reasonably within their capacity to establish policies to ensure the legal requirements for
       safety of workers and the public are met. Directors are not expressly included or
       excluded in the Worker’s Compensation Act which suggests that there are some
       situations where they would be factually/legally proximate enough to owe a duty of care
       to employees and some where they wouldn’t, and the legislature left this to the courts
       to decide. Court laid out a three-step framework to assisting in determining
       circumstances in which a court should find a personal duty of care of corporate directors
       towards the corporation’s employees. Personal duty of care should be found where:
               1. The Director has or should have personal awareness of serious,
                   avoidable/reducible danger that corporate employees are exposed to, in
                   relation to corporate activities
               2. It is within the authority of the Director to envision, establish and enforce
                   corporate policies which could reasonably avoid or reduce the danger
               3. It is within the capacity of the Director to envision, establish and enforce
                   actions necessary to carry out these policies and avoid or reduce the danger
Obligation is on the director personally, because the characteristics give rise to a personal duty of care,
not a vicarious one. This is realistic because the danger is serious – it foreseeably threatens life, limb,
                             and psychological health, not transitory/trifling.
           Directors have obligation to dissent where they do not agree with board decision, and
         recording of dissent may act as a liability shield for actions brought against directors for
                                             decision contrary to law
                                                  - 53 -
Shareholder Voting Rights – pg. 544
      Shareholders are not owners of the corporation
          o But they do have important financial interests – the right to elect directors, and
             residual economic interests
                  residual economic interests = a “claim” to whatever value might remain in
                     the corporation after the corporation’s fixed claimants have been paid

Shareholder Residual Powers
The Power to Manage
   - Shareholders elect directors who manage the corporation. Shareholders do not manage
      the corporation – 102(1)
   - Codification of long-accepted practice, as suggested by Automatic Self-Cleaning
      Filter…

Automatic Self-Cleansing Filter Syndicate v. Cunninghame (1906) (CA)
Facts: McDiarmid wanted to sell the company and arranged the sale. The shareholders passed a
       resolution to sell the company. The directors refused to sell the company because they
       didn’t think this was in the company’s best interests. The shareholders brought an action
       compelling them to sell the company (sell off assets, affix company seal to sale, etc.)
Issue: Do shareholders have the authority go against the wishes of directors to sell a corp.?
Decision: Even a majority of shareholders cannot impose actions on the Directors. It is up to the
       Directors to run the company.
Reasons: If the shareholders want to change the powers of the directors, this must be done by
       extraordinary resolution. Directors as agents? Maybe but for the whole entity, not just
       the majority
Notes: This is the leading case sustaining the authority of the board of directors as against the
       shareholders-in-meeting.
   Within its realm of authority, as established in the incorporating statute or unanimous
  shareholder agreement, the board may act independently of the views of the majority of
                shareholders and indeed in a manner opposed by a majority.
                    s.102(1) of the CBCA codifies the result in this case.
While the CBCA permits directors to manage, it is more usual for corporation’s senior officers to
manage, and for directors, at most, to supervise the officers. OBCA s.115 acknowledges the fact
that directors typically “supervise the management of the business and affairs of a corporation”,
but even that standard is not entirely descriptive of what many boards do.
In fact, directors of many public corporations exercise only the most general oversight. This has
started to shift as directors are given new responsibilities in the post-Enron era under securities
legislation.
However, s.102 is of continuing importance for the formal grant of authority to directors
implicitly removes power from shareholders, as was held in this case. In addition, this section
focuses contents for control of the corporation around the shareholder’s right to elect directors.
This is a rule of economic efficiency – by giving managerial authority to a separate class of
managers, the CBCA facilitates specialized economies in the firm’s business decisions. Limiting
shareholder decisions concerning day-to-day management may also influence stock market
liquidity and facilitate takeovers that operate to control management behaviour.

                                               - 54 -
Unanimous Shareholder Agreements
  - 146 – Shareholders can remove authority from the board of directors and give primary
     managerial responsibility to the shareholders by unanimous shareholder agreement
        o Absolves directors from managerial duties and statutory liabilities and transfers
            them to the shareholders
        o Common among closely held corporations
OBCA 108
If someone is issued or transferred shares that are subject to unanimous shareholder agreement
    - That person is deemed to be a party to the agreement, whether they knew about it or not
    - The unanimous shareholder agreement does not terminate
    - If the person is a purchaser for value and didn’t know there was a USA, they can rescind
       the K (if issued) or send a notice of objection and be entitled to rescind the K or get their
       market value on the day of notice of objection plus rest of amount they paid (if
       transferred)

Shareholder Proposals
   - Shareholders can bring shareholder proposals to shareholder meetings
   - Scope of what they can be about is highly regulated
   - Even if accepted by a majority of shareholders, shareholder proposals are not binding on
      the directors
   - But they may be persuasive, as shareholders elect directors

Amendment of Bylaws
   - Default – can be done by the directors (subject to unanimous shareholder agreement,
       articles, bylaws) – 103(1)
           o So bylaw amendment can be placed in the hands of the shareholders
   - Shareholders can make proposals for changes in the bylaws – 103(5)
Director changes in the bylaws must be approved by the shareholders (this is what normally
happens) – 103(2)

Fundamental Changes
   - Shareholders are entitled to vote in favour of fundamental changes.
        o I.e. Special Resolution (2/3 majority) is required to amend the Articles – 173(1)
   - Special resolution required to
        o Change name
        o Change restriction on business the corporation may carry on*
        o Change registered office
        o Create new class of shares
        o Increase or decrease number of directors or max/min
        o Change restrictions on issue, transfer, ownership of shares
        o Amalgamation*
        o Sale or lease of all/most of the corporations assets*
        o Continuance of corporation under laws of another jurisdiction*
        o Liquidation or dissolution of the corporation
                 Any shareholder, even nonvoting shareholder, gets to vote on special
                   resolutions –183(3)
                 * If these resolutions pass, shareholders who voted against them can have
                   their shares bought by the corporation at an appraised value – 190

                                               - 55 -
Class Voting Rights

      Some changes to the corporation require the approval of a specific class or series of
       shares (i.e. changes to rights/restrictions on class of shares)

      CBCA 176 - Class of shares can vote separately as a class on:
         o Increase/decrease of maximum number of shares in the class or a different class
            with equal or superior voting rights
         o Reclassification or exchange or cancellation of shares of that class
         o Add, remove, Change rights of the class
                Rights to accrue dividends, right to cumulative dividends
                Redemption rights
                Liquidation preference, dividend preference
                Conversion, voting, options, transfer or pre-emptive rights
         o Increase rights or privileges of a class with superior rights to that class
         o Create new class of shares equal or superior to that class
         o Make an inferior class equal or superior
         o Make a right of exchange from shares of another class into that class
         o Constrain issue/transfer of shares of that class




      A separate vote of a series of shares is required where the series of shares is affected
       differently from other shares of the same class (e.g. s.170 OBCA). Where there is a right
       of a class series of shares to vote separately, the right applies where or not the shares
       otherwise carry tight right to vote (s.176(5))

      Where separate class of series voting rights apply, a proposed amendment to the articles
       is not adopted unless each class or series of shares that is entitled to vote separately has
       approved the amendment by a special resolution (s.176(6)).

      Sale, Merger require class votes where the class would be differently affected – 183(4),
       189(7)

      Dissolution requires special resolution of each class – 211(3)




                                               - 56 -
Distribution of Voting Rights
   - There exists NO requirement that shares have voting rights – preferred shares are often
       non-voting and common shares sometimes are too
   - There must be at least 1 class of shares that has a vote
   - There are some corporate decisions on which all shareholders are permitted to vote
       (fundamental structural changes)
Restricted Shares – Non-voting, non-preferred
   - No priority to earnings or assets
   - No/limited voting rights
   - Issued in order to go public while keeping voting powers in specific (i.e. Canadian) hands
   - Must be clearly described as restricted, not as common shares
   - Must be approved by majority votes of minority shareholders (those who are not
       affiliated with the issuer and do not control the issuer)
   - Some other securities regulations, i.e. disclosure of this restriction during takeovers
   - Coattail rights –– they allow restricted shares to become voting shares on a takeover bid
       unless an identical bid is made for the restricted shares and the non-restricted shares.
           o Mandated to list on TSX
           o This almost amounts to a prohibition on restricted shares as takeover bid votes are
                the main distinction between common and restricted shares
Should restricted shares be prohibited?
   - One share, one vote is more efficient – voting rights held by whoever holds the residual
       interest
   - But firms should not be constrained in granting voting rights
Voting Restrictions
   - Limit voting rights of large shareholders
   - Endow a class of shares with more than 1 vote per share or limit a class’s voting rights
   - These are called shark repellents because they are obviously targeted at preventing
       takeovers
Jacobsen v. United Canso Oil & Gas Ltd. (1980) (Alta. QB)
Facts: Company passed bylaw saying the maximum number of votes a person can have is 1000,
no matter how many shares they own.
Issue: Does this contravene the CBCA?
Decision: Yes, violates presumption of shareholder equality.
Reasons:
S 6 – if there are 2 classes, the rights, etc, of each must be set out
    - This shows a distinction between a situation where there are 2 classes and a situation where there
         is just 1 class. Where 1 class it must be assumed that there are no rights or restrictions on shares.
134(1) – Each share is entitled to 1 vote unless the articles provide otherwise
    - This must be read in light of 24 (3) and (4) which provide for shareholder equality
    - It is again clear that different rights arise only where there is more than 1 class of shares
    - The Act must be looked at as a whole
D – The limitation does not affect equality – any shareholder is subject to the same restriction
    - Court – No – would it be equality if shareholders were entitled to 1 dividend per share but only
         up to 1000?
    - Each shareholder has the right to 1 vote per share. This presumption is only upset where there are
         more than 1 class of shares.
    - The 1000 vote maximum does contravene the CBCA and is invalid
Note – this bylaw was passed because there was an ongoing battle for control for United Canso, and the
current directors enacted it as an attempt to avoid being ousted

                                                    - 57 -
Equal Treatment of Shareholders holding shares of the same class consists of both dividend
rights and voting rights

The Queen v. McClurg (1990) (SCC)
Facts: Jim McClurg is president of Northland Trucks. He and Ellis are the only directors of the
         company. There are 3 classes of shares: Class A common – common voting shares, Class B
         common – common, non-voting shares. They shall be participating where the directors authorize
         them to participate, and Class C preferred – preferred, non-voting shares. Receive dividends
         exclusive of other classes of shares, if directors authorize it. But all classes can receive dividends
         exclusively. Essentially, the Directors can choose which class to give dividends to. Ellis and
         McClurg’s wives were the only class B shareholders. The company distributed dividends only to
         class B. But according to the Income Tax Act, $8000 of the $10000 in dividends given to Wilma
         was actually attributable to Jim McClurg.
Issue: Is this a violation of the common law rule of equality of distribution of dividends?
Reasons: Minister argued the shares should all receive dividends equally, regardless of class restrictions.
         The decision to declare a dividend is at the discretion of the directors, subject to restrictions in
         Articles of Incorporation. There are limits to distribution of dividends, recognized by both
         common law and statute, i.e. if distributing dividends would leave the corporation unable to pay
         its debts. Power of directors is fiduciary – distributing shares should therefore be done in good
         faith. The rights carried by all shares to receive a dividend are equal, unless otherwise provided
         in the Articles of Incorporation (also accepted at common law). Equality amongst shares and the
         prerequisites required to rebut that presumption. Prerequisite – Division of shares into different
         classes. This is the accepted means of having differential treatment of shares. Why? Shares are
         equal, not shareholders. Classing is a way to distinguish shares, not shareholders.
Court held that Allowing dividends to be given to each class at the discretion of the directors is within
         the common law and statute – the right to receive dividends in unique amounts is a class
         distinction – it can only be viewed as creating differences between share classes. That was the
         rationale of the clause. Many rights are discretionary – voting rights, transfer rights. Absence of
         mathematical voting formula does not invalidate the clause – the decision to grant dividends, and
         how much to grant in the first place, is at the discretion of the directors. Creating a preferred
         class gives the directors discretion to allocate dividends to that class only. It is essentially the
         same situation except that because McClurg didn’t call this class “preferred” it is not
         unimpeachable by law. Declaration of dividends and allocation of dividends used to be one
         decision. What this company has done is divide these two components into two separate
         decisions. Purpose of corporations acts is facilitative – allows parties to structure corporate bodies
         as they wish. No complaint has been lodged through the oppression remedy. Nothing in the
         legislation disallows the technique and there are no complaints.
Dissent: The Article gives power to directors that they never had before – power to discriminate between
         classes of share in determining how a dividend should be distributed. At common law
         shareholder rights had to be expressly provided in the shares themselves. Principle of equality of
         shares – the directors should treat all the shareholders (through the shares) equally. More than just
         a contractual right. Fundamental shareholder rights must attach to the shares themselves (right to
         dividend, right to vote, right to participate in distribution of assets of company upon dissolution).
         Making dividend distribution discretionary makes the director unable to fulfill his fiduciary duty
         to the corporation as a whole, as there is no differentiation in the articles, so this decision would
         have to be made by the director – a dividend will be declared for the benefit of one class at the
         expense of another. 2 Possibilities in terms of statute on declaration: The articles can say that
         classes can receive a dividend entirely at the discretion of the director, or the articles must specify
         the mode of distribution of dividends expressly. Allowing dividend distribution to common
        share classes at the discretion of the directors would mean this was extended to large
        publicly-held corporations where there is greater potential for unfairness, conflicts of
        interest, etc.

                                                    - 58 -
Cumulative Voting
  - Multiplies votes by number of people running for Board and Allows shareholders divide
     their vote among the different candidates in any way they wish.
  - In Canada, corporations that permit cumulative voting are not allowed to stagger their
     Board elections, as this defeats the purpose of cumulative voting

CBCA 107
Where there is cumulative voting:
   - There must be a fixed number of directors, not a maximum and minimum
   - If a shareholder has voted for 2 directors without specifying number of votes to each, it is
       assumed the votes are divided equally
   - Candidates with fewest votes will be eliminated
   - Director removal – votes against removal will be multiplied by number of directors on
       board
   - Revision to number of directors – votes against revision will be multiplied by number of
       directors
There will probably still be majority control as long as majority votes wisely




Market for Corporate Control
Takeover
   - Acquirer assumes control of target corporation by purchasing a majority of its voting
      shares
   - Incumbent management is displaced through exercise of votes attached to these shares
   - Acquisitions are at a premium above market price
   - Voting shares trade at a premium over non-voting shares, even when there is no takeover
      on the horizon, because of the possibility of one
   - Anti-takeover strategies will likely reduce premiums, and thereby shareholder wealth
   - Non-voting shareholders will not be harmed by the absence of a takeover bid, as their
      share value is not dependent upon this

Efficiency argument for voting shares – voting rights operate to attract shareholders as a way of
        backing up the promise of effective management




                                              - 59 -
Shareholder Meetings – pg.577
Annual General Meeting
   Required by corporate law.
   At this meeting, shareholders:
         o Elect directors – 106(3)
         o Appoint auditors – 162(1)
         o Receive financial statements of the corporation – 155(1)
   Must be held at most 18 months after corporation comes into existence – 103(1)(a)
   Must be held at most 15 months after last AGM – 103(1)(a)
   Management’s ability to choose date of AGM can help it put down challenges to control

Special Meetings
    All shareholder meetings other than the AGM
    Usually to approve a transaction that is not in the ordinary course of business, where
       shareholder approval is required
Ordinary and Special Resolutions
    Describe the quantum of majority approval required for different shareholder votes
    Ordinary resolution – majority of votes
    Special resolution – 2/3 of votes, or sometimes up to ¾ – 2(1)
    Most matters dealt with at AGM require ordinary resolution
    Most matters dealt with at a special meeting require special resolution
          o Fundamental changes, i.e. changing the capital structure, amendment to articles of
             incorporation, sale of assets, amalgamation, dissolution
          o These matters can also be brought up at an AGM
    Removal of directors almost always requires a special meeting but can be done by
      ordinary resolution
Place of Meeting
    Meetings are held in the place specified in bylaws, or failing this, determined by the
       directors – 132
    Quorum for a meeting:
           o Requirement met if a majority of shares are present/proxied – 139(1)
    Notice for a meeting
        Directors will fix a “record date” 21-50 days before the meeting.
        Notice of the meeting will be mailed to everyone who is a shareholder on the record
           date
        The notice must be sent 21-50 days before the meeting
        Must specify nature of the business of the meeting in enough detail that the
           shareholder can form a reasoned judgement about it
        Special business – all business to be transacted at a special meeting, all business to be
           transacted at an AGM, except consideration of the financial statements and auditor’s
           report, reappointment of incumbent auditor, election of director
        If notice is defective, a dissenting shareholder can get the business of the meeting set
           aside
        Often a lot of shares are owned by brokerage houses. This is actually because
           beneficiaries leave shares in house’s name to facilitate trade, or because the shares
           haven’t been signed over to the shareholder yet. Securities regulators have issued a
           National Instrument regarding how beneficiaries will get notice and exercise control
                                              - 60 -
Conduct of Meetings
    Chair of the meeting of shareholders, who is often president or CEO of the corporation, is
     under a general duty to assist the meeting in achieving its objectives.
    To this end, the chair’s duties are:
         o To preserve order
         o To see that the proceedings are regularly conducted
         o To take care that the sense of the meeting is properly ascertained with regard to
             any question properly before it
         o To decide incidental questions arising for decision during the meeting
    In exercising their duties, the Chair is to act in good faith, and in an impartial manner



Re Marshall (1981) (Ont.H.C.)
2 brothers had their shares in a trust. They wanted to exercise their votes. So they wrote a note to
the chairman asking if they could vote the way they wanted instead of the trust, as they were the
beneficiaries of the trust. The court held it is not the company’s right to enter into disputes
between beneficiaries and trust on how those shares should vote. It does not determine the legal
rights of beneficial owners of shares registered to others. It is difficult to go behind the register
and determine who has ownership of the share. The court relies on the votes cast by the
registered owner.
Note – While the chair can’t get in the middle of conflicts between the registered owner and the
beneficial owner, the chair can be called upon to decide who the registered owner is and who is
entitled to vote.
Note – in United Canso, Chairman Buckley refused to count proxy votes received by fax,
received by corporation, received by stockbroker on behalf of beneficiary. The court found he
was acting in bad faith in an unlawful attempt to retain control of the corporation.


Blair v. Consolidated Enfield (1993) (Ont. CA)
Blair was president of Consolidated Enfield and chairman of the board. Canadian Express owned
shares of Enfield and voted by proxy to remove Blair and the board. Blair asked the Enfield
lawyers about the proxies and they said the proxy votes could only be valid in replacing the
board of directors but not Blair himself. They also advised Blair that as chairman he had to make
a ruling. He ruled that he and the board had been re-elected. Canadian Express brought an action
and it was held that their votes did count and they got damages against Enfield (who they now
controlled) and Blair. Blair sought indemnity under OBCA 136(1) – a director can be
indemnified against costs if he acted honestly and in good faith with a view to the best interests
of the corporation. The trial court said no – he had not acted in the best interests of the
corporation.
CA
     -   It is not automatically in bad faith that he acted to keep his position. This would mean
         that the only good faith action would have been to give his position up. The test should be
         whether the ruling was made with the bona fide intent that the company have a lawfully
         elected board of directors.
     -   Legal advice – doesn’t automatically sanctify conduct but should be considered
     -   Even a disinterested chairperson would have had to look to the corporation’s solicitors
     -   He did properly perform his duty of fairness in the decision making process

                                                - 61 -
Shareholder Voice
   - Shareholders are entitled to speak, but if everyone got to say everything they wanted the
      meeting would be very long and thus costly.
   - The chair of the meeting must allow shareholders to speak, but only for a reasonable time
      on reasonable matters



Meetings Requisitioned by Shareholders
  - Meetings are usually called by the Board
  - But a shareholder of at least 5% can requisition a meeting “for a stated purpose” – 143
  - The directors must then call a meeting. If they don’t, the shareholder can call it and must
      be reimbursed for the cost of calling it
  - Without this power it would be hard to have a meeting to remove directors



Meetings by Order of the Court
  - Court may order a meeting where it is “impracticable” to call or conduct a meeting any
      other way - 144
  - Court will use discretion and only call a meeting that by articles or regulations should be
      called – will be called in keeping with corporation’s rules as much as possible
  - Re Morris Funerary Services 1957 ONCA – a meeting will not be called for the purpose
      of placing one or two contending shareholder factions under director control, except
      under extraordinary circumstances



Intervention on the Basis of Fault
Should a court intervene where one party seems more at fault than the others?
Re Routley’s Holdings Ltd 1960 OWN– there had not been a meeting in years. The minority
shareholders threatened to sue unless a meeting was held. The president held a meeting in his
law office and rejected their proxies. The court ordered another meeting and changed the proxy
requirements.
Athabaska Holdings v ENA Datasystems 1980 ON – should the court refuse to order a meeting
where the applicant has more than 5% of the shares and thus can requisition a meeting himself?
In circumstances where requisitioning a meeting would be futile to having the actual meeting,
the court can order the meeting.
Re Canadian Javelin Ltd. 1976 QUSC
The Board consisted of 11, who split off into factions of 6 and 5 and each disqualified the others
and appointed replacements. Because this was an abnormal situation, and detrimental to the best
interest of the company, an annual general meeting was ordered by the court (even though it was
possible to requisition a meeting) and appointed a neutral chair.



                                              - 62 -
Constitutionality Requirements

Could a court-ordered meeting consider a matter assigned to the competence of the board or
officers to manage the corporation by 102(1)?
Also could a shareholder-requisitioned meeting by 143 deal with such an issue?

Charlebois v Bienvenu 1968 ONCA
Judge ordered a meeting to be called. At this meeting the directors were voted out. The bylaws
say a director serves a full term, a year, until the next election, and any vacancies between
elections are filled by the Board of directors. The directors appeal the decision to call the
meeting.

Can a court order a meeting of the shareholders where they can do something that wouldn’t be in
their powers at an ordinary meeting?
        No – once the impracticalities of holding a meeting are removed by the court, the meeting
        is considered a normal meeting. A further specific provision would be required to grant
        additional powers. Therefore the appeal is allowed.




Access to the List of Shareholders

21(3) – corporation must provide access to the list to shareholders, creditors, and the director,
and if publicly held, any other person

This is useful in calling a meeting, removing directors, and takeovers
Mechanics
  - Party can either examine the list and take extracts from it
  - Or request a copy of their own from the corporation, on 10 days notice




                                               - 63 -
The Business Judgement Rule

     Recall that Directors owe a fiduciary duty and a duty of care

     Where there are complaints that the directors did not meet their common law or statutory
      duties, the court will defer to the business judgement of the directors where they have
      made decisions that were duly diligent and informed in all the circumstances

     Directors have more expertise than the court in business decisions
     Some decisions are time-sensitive and made with incomplete information, but hindsight
      is perfect
     Failure of court to exercise deference to business decisions could set a precedent for
      unhappy shareholders to bring actions in hindsight for officer decisions, and make
      directors afraid to act due to litigation
     Deference cannot be completely unfettered – i.e. if deference is total in disclosure,
      corporations can just do whatever they want and not disclose it an then rely on the
      Business Judgement rule
     This is why there is due diligence, the duty to be informed, consider various courses of
      action, and act in the best interests of the corporation

     Where the court is satisfied that the directors have acted within a range of
      reasonableness they will not substitute their own decisions for the board’s decision
     Peoples v Wise – many business decisions are defensible though unsuccessful, made with
      high stakes and under time pressure, but seen as unreasonable in hindsight. This is why
      we have the business decision rule
     UPM-Kymmene Corp - Decisions are not subject to microscopic examination with
      hindsight, but are subject to examination

     Court assesses the reasonableness of the decision, not whether it was a good or perfect
      decision

     In finding that directors owe a duty of care to creditors under s.122 of the CBCA, the
      SCC in Peoples made the strongest statement to date regarding deference by the courts to
      directors’ and officers’ business judgements

     The issue of business judgement and where it fits into the court’s consideration of
      shareholder remedies and deference to the business decisions is discussed later – refer
      to section on shareholder remedies/governance through liability




                                            - 64 -
Closely-Held Corporations

   -   No universal definition. Characteristics:
          o Relatively few shareholders (10-50)
          o Most participate in the management of the corporation
          o No established market for shares
          o Restriction on transfer of shares, often
   -   Popular because sole proprietorships and partnerships seek limited liability but don’t
       want to pay the transaction and agency costs of having shareholders

Corporate Governance Modifications for Closely-Held Corporations
   - Because there are few shareholders and a lot of them are actively involved in running the
      business, there is less need for monitoring, and less efficiency is gained in delegating
      management to directors
   - Thus different treatment is provided for closely held corporations
   - Instead of different legislation for closely held corporations, the common approach now
      is to modify the law dealing with specific areas likely to involve closely held corporations

Re Barsh and Feldman 1986 OHCJ
Barsh and Feldman started a company that owned land in the 60s. They built and sold some
houses but still had some land. The corporation was inactive for 20 years then Barsh died leaving
his third of the shares to his son, who already had a third. His son wanted to call a meeting in
order to sell off the land and change the quorum from unanimity. Since Feldman would be
outvoted he refused to attend the meeting. The son applied for a court order to hold a meeting.
The court didn’t grant it.
    - Feldman is reasonable in refusing to attend a meeting that would result in his losing
        control

The proper solution where there is irresolvable disagreement is to wind up the corporation



Different Treatment of Closely-Held Corporations under Modern Canadian
Statutes

Waiver of Notice to Shareholder meetings
  - A Shareholder can waive notice to a meeting (also available to widely held corporations
      but most likely to be used here) – 136

Resolutions by Unanimous Consent in Lieu of Meetings
   - Resolutions can be passed by being signed by all shareholders entitled to vote (difficult to
      do in widely held corporations so used mostly here) – 142

Avoiding Proxy Solicitation Requirements
   - Corporations that have not made a public offering are not subject to proxy solicitation
      requirements – 149(2)


                                              - 65 -
Dispensing with an Auditor
   - A Company who hasn’t distributed shares to the public can decide not to have an audit –
      max assets 2 500 000, max revenue 5 million – 163


Financial Disclosure
   - A Company who has not distributed shares to the public can avoid filing its financial
      statements publicly – 139(4)



Shareholder Agreement
102 – Directors have the power to manage the corporation, subject to unanimous shareholder
agreement
Unanimous shareholder agreement to give managerial power to shareholders is more likely to be
found in closely held corporations

Ringuet v Bergeron SCC 1960
The shareholders of the company signed a K saying they would all vote the same way and that if
they didn’t, the shares of the dissenter would be divided equally among the others.
Is this contrary to public order?
Can the parties establish whatever sanction they choose for a breach of this agreement?
   - There is nothing against the legislation or the public interest about an agreement between
       shareholders
   - Agreeing to set the company on a particular course of action.
   - If minority rights are affected, the minority can bring an action.
   - Made reference to this being a closely held company
    So shareholders are generally free to agree on how they will vote to elect directors.



      To inform investors that shareholder agreements exist, one thing to do is print a legend on
       the share certificates saying an agreement exists. This, or actual notice, binds the investor
       to the agreement



      But the investor may not be bound by a non-unanimous agreement – Greenhalgh v
       Mallard 1943 Eng CA– Here there was an agreement between some shareholders to vote
       to give Greenhalgh control of the company. Some people sold their shares. Greenhalgh
       sued for a declaration that the buyer was still bound by the agreement. The court found
       no intention for the agreement to last past 1 shareholder or restrain sale of shares.




                                              - 66 -
Share Transfer Restrictions

   -   Where shareholders control and run the company, their identity is important. Thus shares
       in closely held corporations may have restrictions on transfer

   -   Restrictions can also make it possible for owners to maintain power structure and
       ownership proportion, just like issuance restrictions

   1) Absolute restrictions – shareholder cannot sell. Rare.

   2) Consent restrictions – shares can only be transferred if Board approves

   3) First Option restrictions – shareholder can’t sell shares without first offering them to
      the corporation or the other shareholders. The others could then buy them at offer price or
      assessed value by valuer/corporation auditor. Most common

   4) Buy-Sell Agreements – upon a triggering event, shareholder must sell and other
      shareholders must buy. I.e. on death of shareholder.

   5) Buyback rights – corporation has the right to buy back the shareholder’s shares, whether
      he consents or not, upon some triggering event, such as firing of shareholder


Transfer restrictions are not allowed in publicly held corporations – 49(9)
   - However, if the restriction is to comply with Canadian ownership requirements, it is
       allowed. The corporation can sell a shareholder’s shares as if they were the corporation’s

Validity – while American courts see shares as property and are therefore likely to see
restrictions as restraints on alienation of property, English courts are more likely to see shares as
a K and thus allow restrictions




                                                - 67 -
The Role of Regulators in Corporate Governance
     Corporate governance is increasingly being regulated by securities regulators
     Corporate law and securities law are no longer distinct areas of law, and there is an
      increasing mount of overlap
     While much of the regulation is with regards to mandatory disclosure, the move by
      securities regulators into corporate governance as a means to advance investor protection
      goals raises important public policy questions regarding how this narrower conception of
      corporate governance fits into the broader policy discussion of the different theoretical
      conceptions of the corporation
     US Securities Regulators have imposed new requirements aimed at enhancing governing
      practices due to Enron et al
     Many Canadian-based issuers are dependent on access to US market and thus want to
      meet US requirements
     Given the move by US securities regulators to regulate corporate governance, Canadian
      regulators have followed suit, although to a lesser extent
     Regulatory and policy intervention in governance can be viewed as both investor-
      confidence and investor-participation measures, aimed at enhancing the efficiency and
      integrity of Canadian capital markets
     Some of the regulatory intervention in Canada has provided greater certainty to
      shareholders with respect to their rights to participate in voting
          o e.g. through the use of proxies if they cannot attend meetings
     Regulatory intervention has also addressed the changing nature of share ownership
          o With the increased volume of share trading and electronic trading, many
              individual shareholders do not hold shares in their own name and rather the shares
              are held by intermediaries who are the registered shareholders
          o The individuals are the “beneficial” shareholders rather than the “registered”
              shareholders
          o Creates issues as the parties with the financial interest sin the shares are not the
              ones who hold the voting rights that come with the shares
          o new securities law provisions et out a basis on which beneficial shareholders can
              be advised of any development and vote their interest in the shares
                   These kinds of shareholder rights are aimed at increasing the
                      accountability of corporate directors and officers to investors
     Once a corporation becomes an issuing corporation, i.e. they release sales for share to the
      public, they are no longer bound only by corporate law requirements, but also by
      securities law requirements and the regulatory requirements therein
     The structure of Canadian corporations suggests that some regulatory intervention may
      be necessary to ensure that directors, officers, and controlling shareholders to not engage
      in self-dealing transactions to the detriment of investor interests
     Corporate governance mechanisms are means to ensure that this conduct does not occur,
      as directors are responsible for oversight and for acting in best interests of corporation


                                          continued…



                                             - 68 -
   How a board structures its activities may have a direct impact on the level of
    accountability by officers for their overall strategic and risk management decisions
   In Canada, such structures have not been regulated generally, although, in areas such as
    audit committees, regulators have now imposed independence and financial literacy
    requirements as investor protection measures.

   In other aspects of governance, regulation has intervened largely to require disclosure of
    corporate governance practices

   Frequently, corporate law statutes do not require an audit committee unless the
    corporation is an issuer
        o According to CBCA, s.17, issuing companies must have an audit committee
            composed of not less than 3 directors of the corporation, a majority of whom are
            not officers or employees of the corporation or any of its affiliates
        o Director may, on the application of a corporation, authorize the corporation to
            dispense with an audit committee, and the Director may, if satisfied that the
            shareholders will not be prejudiced, permit the corporation to dispense with an
            audit committee on any reasonable conditions that the Director thinks fit.
        o The duty of the audit committee is described “review the financial statements of
            the corporation before such financial statements are approved under s.158
   Board committees are not regulatory requirements, although some aspects increasingly
    are viewed as best practice
   There is no statutory or regulatory requirement for the CEO and the board chair to be
    different people, although best practice suggests that the separation of roles enhances
    corporate governance
   Recent regulatory initiatives have now required that corporations disclose any
    information on their board committee and other governance practices, which in turn may
    pressure corporations into assessing whether their board structure and practices are as
    effective as they can be.




                                           - 69 -
Proxy Solicitation and Corporate Governance
      Officers are required to solicit proxies from shareholders who cannot attend AGMs and
       SGMs
      Quorum requirements are usually 50%. In corporations with 10000 shareholders, this is
       impractical.
           o The reality is that nobody goes to shareholder meetings. That is why it is
               mandatory for management to solicit proxies – this way; everyone gets
               represented, even if they miss the meeting.
      Proxy = person appointed to represent a shareholder at a meeting; the form or instrument
       by which such a person is appointed
      Proxy Process = the manner in which proxies for meetings are solicited from
       shareholders and information is provided to them in connection with the solicitation
           o Management solicitation must occur for every AGM and SGM
           o Proxy must explicitly state the authority sought
           o Information Circular – provides the background information that allows investors
               to make informed decisions in respect of the control rights they possess. Must
               accompany solicitation
                    Approval of directors, auditor approval, acceptance of financial
                       statements, special business
      The sale of shares by investors if they are dissatisfied with the overall governance and
       direction of the issuer is called “exit”
      The exercise of security holder rights through the proxy process is often referred to as
       “voice”
      Both these practices are governance roles and signal shareholder dissatisfaction with
       management, but exist is imprecise and can send mixed messages, whereas voice sends
       direct communications to the BoD

Report of the senate standing committee – corporate governance
       Importance of governance aspects of proxy solicitation process
              o Shareholders must be informed and indicate their approval/disapproval with
                 corporate decisions
              o This is based on continual communication with the market, the company, and
                 each other
              o Canadian proxy rules impede this communication
              o As this report was issued in 1996, the proxy requirements were then probably
                 changed to give shareholders exit and voice options

Proxy Process Prior to Regulation by Statute
       Regulation started in the 1960s
       Even before this, courts held that information circulars had to give shareholders
         sufficient information to form a reasoned judgement about the matters that would be
         dealt with at the meeting.
       If not, the meeting’s results would be set aside. The courts might also disapprove of
         the form of proxy if it didn’t give shareholders real choice, but the meeting wouldn’t
         necessarily be set aside
       Proxy rights had to be found in the corporate constitution and were mostly restrictive
         – e.g. proxy could only be given to another member of the corporation
       No statutory obligations except to give adequate notice when scheduling a meeting

                                             - 70 -
Requirements for the Form of Proxy
      under s.54 of CBCA, any form of proxy, whether used by management or by others,
       must state that the shareholder may appoint as proxy a person other than the one pre-
       designated on the form and must provide a space to do so
      The form must either state clearly how the pre-designated individual intends to vote on
       the business to be brought before the meeting or provide a means for the shareholder to
       specify how his or her shares shall be voted
      With regard to the appointment of the auditor and the election of directors, for which the
       voting is not or against but rather granted or withheld, the proxy form must provide a
       means for the shareholder to instruct whether or not his or her shares shall be voted
       against the nominees
      Re Goldhar and D’Aragon Mines Ltd. (1977), dissidents had requisitioned a meeting to
       remove the directors and appoint new directors.
           o The proxy designated a proxy holder and provided a space to vote for or against
               removal, but stated that if removal was passed, the proxy holder would vote all his
               proxies toward the re-appointment of the board.
           o Court found proxy void as it contained no way to exercise choice and was unfair.

Who Must Solicit Proxies
      Management of a publicly-held corporation must include a proxy form with notice of
       shareholder meeting to every shareholder under s.149 – not just management-friendly
       ones
      Dissent shareholders can also solicit proxies.
      An information circular must be sent, which:
           o Provides information such as interest of person making the solicitation
           o If sent by management, must include interest of directors and officers,
              information about proposed directors, executive compensation,
           o Must provide information in sufficient detail to permit shareholder to form a
              reasoned judgement concerning the matter
      Where management doesn’t send an information circular, the court will nullify the
       shareholder meeting
                      ***Sample Proxy Form on Pages 650-655***

Compliance with More than One Set of Proxy Solicitation Rules
      Sometimes corporate law and securities law overlaps with respect to proxy solicitation
       rules
      Ontario Securities Act, s.88 – where a company is under the jurisdiction of the OSA, and
       the corporate law of its own jurisdiction, the corporation is exempt from OSA proxy
       regulation.
      It is assumed that the corporate law that the corporation is under covers proxy solicitation
       requirements, as long as the law is substantially similar to the OSA
      Being incorporated under the CBCA always exempts a corporation from OSA proxy
       solicitation requirements.
      NI 51-102 – national instrument by securities regulators aimed a bringing transparency
       and continuity to proxy solicitation requirements in securities law
      Companies that trade in US and solicit proxies must comply with Securities Exchange
       Act of 1934. This is more onerous and specific, as opposed to principle based.
      In Canada-US law conflict, the Corporation can seek advance ruling from US SEC.
                                              - 71 -
The Meaning of Proxy Solicitation

      Broad Definition – since the 1990s, definition has changed so that communication
       between shareholders doesn’t always fall under solicitation rules
      Under s.147 of the CBCA, solicitation includes:
           o Request for proxy, accompanied by proxy form or not
           o Request to execute a form of proxy, request not to execute a form of proxy,
               request to revoke a form of proxy
           o Sending proxy form to shareholder, sending any form to shareholder that can be
               reasonably calculated to result in a procurement, withholding, revocation of proxy
           o Sending a form of proxy to a shareholder under CBCA 149
      Solicitation does not include:
           o Sending a form of proxy in response to an unsolicited request by a shareholder
           o Performance of administrative acts on behalf of a person soliciting a proxy
           o Sending of documents (referred to in 153) by an intermediary
           o Solicitation by a person about shares they are the beneficiary owner of
           o Public announcement by a shareholder about how they plan to vote and why
           o Communication to get the required number of shares for a proposal under
               137(1.1)
           o Communication made to shareholders under any prescribed circumstances as long
               as it is not made by management




Restrictions on Soliciting Proxies and Exceptions to Allow for Shareholder
Communication

      Shareholders may want to communicate with one another to influence a vote or policy.
      Shareholders can also solicit proxies. These proxy solicitations are highly codified. They
       are also at the cost of the shareholder doing the soliciting
      Definition is contested as once something is codified as a proxy, it has costly
       requirements. The definition has been opened up recently to allow shareholder
       communication without activating proxy solicitation requirements.
      CBCA amendments in 2001 –
           o Aimed at enhanced shareholder participation – allowing electronic voting and
               electronic shareholder meetings or conference calls
           o Revised proxy rules to facilitate shareholder communication

      Under s.150(1) of the CBCA, a person can’t solicit proxies unless they provide a
       management/dissident proxy circular. Non-management proxy solicitation doesn’t have
       to provide a proxy circular if they solicit 15 or less proxies, or if they solicit by public
       broadcast, speech, or publication




                                               - 72 -
OBOs and NOBOs
   Objecting Beneficial Owners and Non-Objecting Beneficial Owners
   Most shareholders are beneficial shareholders (non-registered shareholders)
   Institutional investors or clearinghouses are the registered shareholders while the
     individual shareholder is the beneficial shareholder
   Only the registered shareholder or their proxy are allowed to vote at a shareholder’s
     meeting
   Notice of meeting and Management proxy circular must be sent to beneficial
     shareholders by the registered shareholders, if they have indicated they so desire

NI 54-101
    Continuous disclosure obligations aimed at enhancing access to information for
       beneficial shareholders by improving procedures for delivery of proxy-related
       information to them
           o OBOs – beneficial shareholders who want to remain anonymous
           o NOBOs – beneficial shareholders who have no objection to having their names
               disclosed and are interested in receiving information and exercising rights to
               participate
    Encourages participation by non-registered owners in the proxy process
    Beneficial shareholder must complete proxy form and return it to the intermediary or
       service
    Beneficial shareholder can consent to specified proxy or substitute another person or
       themselves
    Registered shareholder must provide NOBO lists to issuing company. This allows for
       transparency, and for communication between company and NOBO
    NOBO lists can only be used for matters relating to the affairs of the issuer




Adequacy of Disclosure
    When a corporation solicits proxies for a shareholder’ meeting, it must comply with 3
     separate statutory disclosure standards:
         o First, must give shareholders sufficient information of “special business” to
             permit a reasoned judgement to be formed thereon (s.135(6))
                  Note that all business transacted at a special meeting of shareholders and
                      all business transacted at AGM, except consideration of financial
                      statements, auditor’s report, election of directors and reappointment of
                      auditor is considered “special business”
         o Second, similar materiality requirement is imposed on management when it
             solicits proxies, with the general requirement in CBCA Reg.57(z.6) that “the
             substance of each such matter or group of related matters” be disclosed “in
             sufficient detail to permit shareholders to form a reasoned judgement concerning
             the matter”
         o Third, regulations prescribe detailed disclosure of certain items.
                  For issuing corporations, regard must be had to both corporate law and
                      securities law requirements


                                             - 73 -
Materiality Standards in Proxy Solicitation
   Even prior to statutory disclosure requirements, courts sought to ensure that adequate
      disclosure was provided to shareholders by nullifying the effects of a shareholders’
      meeting where inadequate disclosure had been made
   The judicial principle of notice has now been codified, but the pre-statute decisions are
      still of interest with respect to the definition of materiality
Pacific Coast Coal Mines v Arbuthnot 1917
2 groups of shareholders in a Pacific company had an argument. It was resolved in settlement
that the BC group retire from management and should be given debentures. A shareholder
meeting was held to settle the capital restructuring necessary, and the resolution was passed. It
was held that the meeting was invalid, as it was not disclosed that the shares would be given to
the directors, and that it would release any claims against them
Wotherspoon v Canadian Pacific Ltd. 1982 ONCA affirmed by SCC
80% of Ontario and Québec Railway was owned by CP. Wotherspoon was a minority
shareholder. He wanted the result of the shareholder meeting set aside because of inadequacy of
notice. The purpose of the meeting was to sell some of O&Q’s land to Marathon, a CP
subsidiary. The notice claimed the sale price was above FMV. However, management did not
send out copies of the appraisal reports. Marathon had received a higher appraisal of the value
of the land. The court found that disclosure was adequate. Firstly, the price was found to be
fair. Secondly, the appraisal reports would have been far too big to send out to shareholders.
Harris v Universal Explorations 1982 ALCA
An order approving an amalgamation of 2 companies is appealed. Alberta Companies Act – If
action on a matter is to be taken, the substance of each matter should be briefly described in
sufficient detail to permit shareholders to form reasoned judgement concerning the matter.
    - What is sufficient detail? Rathie v Montréal Trust Co 1953 SCC – supply the
        shareholders with the controlling facts to enable them to come to a decision one way or
        the other
    - What is a controlling fact? US – don’t want to set the standard too low otherwise the
        corporation would be held liable for failing to declare minutia, and might bury
        shareholders in an avalanche of insignificant paperwork out of fear. This is why the
        standard should be if there is a substantial likelihood that a reasonable shareholder
        would consider it important in deciding how to vote
Here the companies were valued on assessment of their oil and gas and gold reserves by
independent assessors. One of the 4 reports, by Colt engineering, is actually an operational
analysis which includes general profit projections based on the rising price of gold. It is not an
independent appraisal of the project’s worth. It is not necessary to include an appraisal in the
information circular, but if asserting something as an independent appraisal, this should be true
    - Standard – whether there was a substantial likelihood that someone (reasonable
        shareholder?) was misled by the appellant.
    - If the estimate was accurate, the mis-description might be excusable, but it is not
    - The accuracy of the information circular is important – if the duty here is breached,
        the proposal cannot be approved and the meeting is invalid.
            o Even if the misled shareholders are still treated fairly or beneficially despite the
                mis-description (here they still came out on top of the deal)
The meeting was overturned. Another one was held with inadequate notice due to out of date
balance sheets. Another one was held where the amalgamation was approved.

                                              - 74 -
Express Statutory Remedy
       An express statutory remedy for non-disclosure in a proxy circular is provided in s.154 of
        the CBCA, which permits an interested person to apply to court for a restraining order
        where a form of proxy of a management or dissident proxy circular “contains an untrue
        statement of a material fact or omits to state a material fact required therein or
        necessary to make a statement contained therein not misleading. On an application
        under [this section] the Court may make any order it thinks fit”
       This provides an express statutory cause of action for non-disclosure in a proxy circular.
       However, the remedy exists only for misstatements and omissions that are material
       The CBCA requires disclosure of a considerable amount of information in Reg.ss.32 to
        43, not all of which may be determined to be material.

Access to Management’s Proxy Soliciting Materials: Shareholder Proposals
    Shareholders are entitled to submit proposals for consideration at a meeting – s.137
          o Management is obligated to give notice of proposals in proxy soliciting materials
          o If a shareholder provides a statement in support of a proposal, management must
             include it
          o Management may include a statement of its views on the proposal
    This can be very useful for shareholders with limited resources
    Management is entitled to refuse to include some proposals - 137(5)
          o Mainly those that for the purpose of enforcing a personal claim or redressing a
             personal grievance with the corporation, managers, directors, officers,
             shareholders
          o Proposal that doesn’t relate in a significant way to business or affairs of the corp.
          o Where proposal rights being abused to secure publicity

CBCA s.137 (who may make a proposal, what must be submitted, and the scope of the proposal)
1) registered holder or beneficial owner of voting shares can
         a. Submit a proposal to the corporation about a matter they wish to discuss
         b. Discuss the matter
1.1)     a) to be eligible to make a proposal, a person must be a registered/beneficial owner of 1% of voting shares
         (or appraised at worth $2000) or more for at least 6 months
1.1)     b) or have the support of people who have been registered/beneficial owners of 1% of voting shares (or
         appraised at worth $2000) or more for at least 6 months (Proof of this may be requested up to 14 days after
         proposal is received and must be provided within 21 days after request– 1.4)
1.2)     Information to be provided – a proposal must be accompanied by the name/address of the person and their
         supporters, and the number of shares held by person and their supporters, and when they were acquired.
Information Circular
2) Corporation that solicits proxies must include the proposal in the management information circular (500 words
     max combined with statement of support)
3) And a statement in support of the proposal, if the person requests it (500 words max combined with proposal)
4) Nominations for directors may be included in the proposal if it is signed by holders of 5% of voting shares
Exemptions to including the proposal and support statement (5)
     a) The proposal was not submitted by the deadline – 90 days before anniversary of last year’s notice of AGM
     b) It clearly appears the primary purpose of the proposal is to enforce a personal claim or redress a personal
         grievance against the corporation, directors, officers, shareholders
b.1) The proposal doesn’t relate significantly to the business of the company
     c) The person failed to present on a proposal he had included in the management information circular 2 years
         ago or later.
     d) The same proposal was submitted and received less than 3% of votes at an AGM (or 6% at second AGM or
         10% at 3rd AGM) within the past 5 years
     e) Abuse to secure publicity


                                                       - 75 -
Scope of Proposals has been Broadened
      Under old legislation, proposals could not be brought that related to causes. This was
       included under (5)(b)

      Varity Corp v Jesuit Fathers of Upper Canada –
           Varity applied to exclude a shareholder proposal from Jesuit Fathers that Varity
              end their investments in apartheid South Africa because it was primarily for the
              purpose of a cause.
           Jesuit Fathers – the proposal involves specific goals or purposes, thus doesn’t fall
              under 137(5)(b) exemption to circulate
           proposal does have a purpose specific to Varity, however its primary purpose to
              the abolition of apartheid. The existence of a more specific purpose does not save
              it, thus it falls under s.5(b) and Varity gets its exclusion.
      Greenpeace v. Inco –
           Greenpeace submitted a proposal for inclusion in the management information
              circular that Inco’s Sudbury complex reduce sulphur dioxide emissions for the
              purpose of reducing acid rain. However, Greenpeace wasn’t a 1% shareholder
              at least 90 days before the meeting, a similar proposal was rejected the year
              before, and the proposal was primarily for a cause.
           Section 137(5)(b) was amended to remove exemption from circulation a proposal
              based on a cause in 2001.




                                             - 76 -
Access to Records and Financial Disclosure

Access to Records
    Corporations are required to maintain and provide access to other corporate records.
    Shareholder list, plus
           1) Articles, bylaws, and amendments
           2) Unanimous shareholder agreements
           3) Minutes of shareholder meetings and shareholder resolutions
           4) Minutes of director meetings and director resolutions
           5) Copies of notices of who the directors are and any changes in the members of the
              board
           6) Securities register
    Accounting records
           o Normally kept at the registered office of the corporation but may be kept at
              another location if the directors see fit
           o Where kept outside Canada, there must be sufficient accounting records at a place
              in Canada that will allow the directors to determine the financial position of the
              company with reasonable accuracy
           o Other records must be kept at the registered office or another location in Canada
    Minutes of director meetings, resolutions of directors, accounting records,
           o Must be open to inspection by directors at reasonable times
           o Not available to shareholders, creditors, the general public
    Articles, bylaws, unanimous shareholder agreement, minutes of shareholder meetings,
       shareholder resolutions, notices of directors, securities register
           o Shareholders, creditors, and agents have access to these
           o Can examine them and take extracts free of charge
           o Where corporation has made distribution of shares to the public, the general
              public has access to them too
           o Can examine them and take extracts for a reasonable fee



Financial Reports
    Financial statements for previous year must be placed before the shareholders at every
      annual meeting
    Must be sent to shareholders at least 21 days in advance of the meeting – CBCA
    In widely held corporations, the financial statements will be included in the proxy
      circular, will contain balance sheet, income statement, statement of retained earnings,
      statement of changes in financial position
    Must be prepared in accordance with CICA standards
    Must be filed and available for public scrutiny if public corporation




                                             - 77 -
Auditing of Financial Statements
   CBCA 161 – requires financial information to be reported on by an auditor who is
      “independent” of the corporation
          o Exemption for small firms – corporations that are not publicly held can dispense
              with the requirement of an auditor with unanimous consent of shareholders
          o Directors approve the financial statements before they are issued
          o In a publicly held corporation, The Board of Directors must appoint an audit
              committee – they examine the financial statements before they are submitted to
              the board for approval
          o Clean audit contains pronouncement that :
                   Financial statements are in accordance with Generally Accepted
                     Accounting Principles
                   Financial statements present fairly the financial information of the
                     corporation




Issue: Sometimes GAAPs overlap. Here it is in the prerogative of management to choose a
GAAP to follow. This blurs the line between this and fair presentation:



Kripps v Touche Ross and Co 1997 BCCA
Statement in issue – financial statements present fairly the financial position of the company in
accordance with GAAPs – ambiguous
Touche – the statements unfairly present financial position, but they do it in accordance with
GAAPs, so they are in accordance with the statement
Here failing to disclose an amount of arrears was not fair presentation, but it was in accordance
with GAAPs. Touche argues that the GAAPs provide the standard for fair presentation there is
no other standard.
This is not true. The statements must be a fair presentation of the financial position of the
subject, not just follow GAAPs.
     Auditor may be removed by ordinary resolution of shareholders. The vacancy is filled by
        shareholders at that meeting, or if not, the directors
     Auditor can attend and speak at shareholder meetings and audit committee meetings
     When auditor leaves, can submit a written statement of position to management to be
        included in management information circular
     In some statutes – No person is to accept a position as auditor until they have received a
        statement from the last auditor detailing circumstances of departure
     NI 52-108 – where a company’s financial records are accompanied by an auditor’s report,
        the report must be signed by a public accounting firm that is a participant in CPAB




                                             - 78 -
Certification of Disclosure

Certification of Disclosure
Accountability in financial statements
   - How do we ensure corporations are accountable for the fairness and accuracy of annual
       filings?
   - Corporate officers will be responsible for financial statements
   - CEO and CFO must give assurances about quality of disclosure, as opposed to
       monitoring mechanisms



Certification Requirements
MI 52-109 s. 5.1 – certifying officer must stipulate that to the best of his knowledge, the annual
filings do not contain any untrue statement of a material fact or omit to state a material fact
required to be stated.
     - CEO and CFO must certify the corporation’s financial statements fairly present the
        issuer’s financial condition, results of operation, and cash flow
            o A broader standard than GAAP financial reporting standards
     - The officer must confirm that he is responsible for maintaining disclosure controls and
        procedures
            o Designed or supervised the design of these controls and procedures
            o Designed or supervised the design of internal control over financial reporting
            o Reasonable assurance about reliability of financial reporting and preparation of
                financial statements in accordance with GAAPs
     - Reasonably evaluated the effectiveness of Disclosure controls
            o Reasonable assurance of meeting control objectives or not
     - Must also certify that the corporation will disclose changes in issuer’s internal control
        over financial reporting during the period, if it will likely materially affect corporation’s
        internal control over reporting



Proposed Reform
Internal control reporting requirements
    - CEO/CFO will have to certify they have evaluated internal control over financial
        reporting that period
    - Must describe Process for evaluation of internal control over financial reporting, and state
        results
    - Can collaborate with auditor if they want
    - Why? improve quality, reliability, transparency of financial reporting, and increase
        management focus on internal
    - Annual and Interim certification requirements can be waived if CEO and CFO file
        certificates through SEDAR (online public access for reporting)



                                                - 79 -
The Role of Audit Committees

Auditors
  - Provide an opinion that financial statements fairly present the financial position of the
      company and the results of its operations in accordance with GAAPs
  - Retained by and accountable to the shareholders
  - Really, Usually recommended by audit committee or corporate officers

Audit Committee
  - Committee of the Board who has responsibility for oversight of financial reporting
      process
         o Accountability checks on manager financial decisions and solvency of the
              corporation
         o Helping directors meet their responsibilities
         o Providing better communication between directors and external auditors
         o Enhancing independence of external auditors
         o Increasing credibility/objectivity of financial reports
         o Facilitating in-depth discussions among directors, management, and the external
              auditor

 Shareholders are too dispersed and each hold too small a stake to monitor corporation’s
             finances. The audit committee serves this role if independent.

MI 52-110
   - Assigns audit duties to independent audit committee, to ensure audits are done
      independently of management

Requirements
   - Audit committee must
          o Be made up of at least 3 directors
          o Manage Relationship between company and external auditors on behalf of
             shareholders
          o Recommend to Board nomination/compensation of external auditors
   - Audit committee is directly responsible for overseeing the work of the external auditors
   - Audit committee must be satisfied that adequate review procedures are in place for public
      disclosure of financial information, including periodic assessment of adequacy of those
      procedures
   - Establish procedures for complaints from the company about accounting, internal
      accounting controls, auditing , and anonymous employee concerns about questionable
      auditing/accounting procedures (whistle blowing)




                                             - 80 -
      -   Every issuer must have an audit committee that complies with the requirements of the
          instruments (2.1)
      -   Every issuer must require its external auditor to report directly to the audit committee
          (2.2)
2.3
      -   Audit committee must have written charter that sets out its mandate and responsibilities
          (1)
      -   Audit committee must recommend to Board (2)
              o The auditor
              o The auditor’s compensation

Audit committee must
  - Be directly responsible for overseeing work of external auditor (3)
  - Pre-approve all non-audit services that the auditor provides (4)
  - Review corporation’s financial statements, annual earning press release, interim earning
       press release, and MD&A before corporation publicly discloses it (5)
  - Be satisfied that adequate procedures are in place for the review of corporation’s public
       disclosure of everything else, and periodically assess those procedures (6)
  - Establish procedures for (7)
           o Receipt, retention, treatment of complaints about accounting, internal accounting
               controls, or auditing matters
           o Anonymous submission by employees on questionable auditing or accounting
               matters
  - Approve corporation’s hiring policies on auditor company employees/partners

Independence of Audit Committees
   - Every member must be independent
         o Absence of any material relationship (direct or indirect) between the director and
            the corporation that could (in the view of the Board) reasonably interfere with the
            exercise of the director’s independent judgement
                 An employee or executive officer of the corporation (or former, or
                    immediate family member of)
                 Affiliated with (former) auditor within given time period
                 Others

Affiliated entity
   - If a person/entity controls the other, or if both are controlled by the same person/entity,
   - Both a director and employee of affiliated entity
   - Executive officer, managing partner, general partner of an affiliated entity

Control
   - Direct or indirect power to direct the management or policies of a company, through
        ownership of voting securities or otherwise
   - A person is not an affiliated entity of a corporation if they own 10% or less of any class
        of voting shares of the corporation and are not an executive officer of the corporation
Audit committee members have the authority to retain advisers, set their pay, and communicate
with internal/external auditors


                                                - 81 -
Temporary exceptions to Independence requirements of Audit Committee Members
Available if committee member can still exercise impartial judgement necessary to fulfill his
responsibilities
    - Cannot be chair of committee
    - Majority of directors must still be independent
    - Board of directors must determine it will not materially adversely affect the ability of the
       audit committee to act independently

Financial Literacy
   - Required for all audit committee members
   - The ability to read and understand a set of financial statements that present a breadth and
      level of complexity of accounting issues at level that can reasonably be expected to be
      raised by the corporation’s financial statements
   - Doesn’t include GAAPs
   - Corporation must disclose in its Annual Information Form any education/experience that
      has given them understanding of accounting principles.
   - A director that is not financially literate can become financially literate within a
      reasonable period of time of being appointed to the committee, as long as the Board finds
      it will not affect the ability of the audit committee to act independently.

Non-Audit Services
  - Non-audit services must be approved by the audit committee
  - Policies must be in place for non-audit services, including for compensation, allowing the
     auditor to remain independent
  - De minimis non-audit services are allowed if no more than 5% of total annual fees from
     issuer to auditor

Exempt from some audit committee composition and reporting requirements
    - Venture issuers, but must complete separate disclosure form
    - US companies following US requirements
Who should regulate the role of corporate counsel in corporate governance?
 In Canada, corporate counsel is regulated by self-regulating Law Societies. There is no specific
regulatory body for corporate counsel or requirement for corporate counsel to report misconduct,
like in the United States.
    - This puts the corporate counsel in the position of not being able to report fraudulent
         activity, even though they have a different role than outside counsel, despite corporate
         governance requirements
    - Line between legal advice and business advice?



Role of Corporate Counsel
Who should regulate the role of corporate counsel in corporate governance?
In Canada, corporate counsel is regulated by self-regulating Law Societies. There is no specific regulatory
body for corporate counsel or requirement for corporate counsel to report misconduct, like in the United
States.
    - This puts the corporate counsel in the position of not being able to report fraudulent activity, even
        though they have a different role than outside counsel, despite corporate governance requirements
    - Line between legal advice and business advice?

                                                  - 82 -
Governance through Liability
     Corporate law statutes have created governance structure based on the election of
      directors by shareholders and the supervision of the corporation’s activities by those
      elected directors.
     Creditors may challenge specific decisions that drastically impair the corporation’s
      financial health, but they are not granted either a voice or a vote in the corporation’s
      affairs generally.
     Current corporate governance structure results from the combined statutory and
      regulatory effort that is designed to maintain and reinforce that structure.
     Court decisions and findings of personal liability for directors and officers whose conduct
      has failed to meet applicable legal standards help create incentives for managers and
      directors to meet these standards of conduct
     The basis for imposing liability on corporate management is that their actions constitute a
      legal wrong which grants the shareholders a remedy
     Who is the best party to impose liability? The courts, the legislature, the securities
      commission?

     Liability strategies impose costs and therefore assume a failure in alternative devices to
      cure management misbehaviour, such as governance techniques.

     There are four different kinds of “management self-dealing” that can be identified.

         o shirking: under invest in managerial competence and care
                This is not fraud, even if manager effectively transfer wealth to themselves
                  by consuming excessive leisure
                important question is whether an appropriate balance is being achieved by
                  the courts’ articulation of the standards of behaviour and the effects of
                  extralegal incentives to take care

         o Excessive risk aversion in investment decisions is a consequence of a conflict of
           interest between themselves and other claimholders, who are less concerned abut
           the risk of firm failure than managers are.
                Managers might sometimes choose an investment with a lower EMV but
                   greater security, breaching promise to investors.
                Legal rules have never been applied to this area

         o looting refers to the “garden varieties” of fraud as well as breaches of the strict
           equitable rules
                any expropriation of corporate assets
                direct and indirect compensation exceeding what the manager is entitled to

         o control transactions occur where an insurgent seeks to wrest the levers of
           corporate power from incumbent management
               “proper purpose doctrine”


                                             - 83 -
Liability for Failing to Exercise Appropriate Skill and Care

       The minimum qualifications for corporate directors are found in s.105 of the CBCA
       s.122(1)(b) imposes a further “duty of skill” on officers and directors
            o But who should be subject to such a duty?
            o To what level of skill are officers held?
            o Is there even a need for legal requirements? The market should govern the skills
               of managers.

       Like duties of skill, the need for a legal requirement of care by managers may reasonably
        be questioned.
       Shirking leads to the devaluing of human capital, and group shirking leads to devaluing
        of corporation, attracting takeover.
       Liability is expense, and leads to over-caution.

Barnes v. Andrews (1924 – USDC SDNY)
Andrews was appointed director of a company that manufactured engine starters. He was the
largest stockholder, and friends with the president and never paid attention to the business of the
company except through discussions with Maynard, the president. He resigned after a year. It
went bankrupt a year after that. The plaintiff is the receiver.
Is Andrews liable for:
    - The collapse of the company
            o General inattention to his duties
            o Not liable for failing to attend meetings – there were only 2 during his tenure
            o Failure to keep advised of corporate affairs
            o Measure is uncertain and vague (i.e. a director must give reasonable attention to
               the corporate business)
            o Directors shouldn’t interfere individually with the conduct of affairs of the
               company
            o But they should keep themselves informed in some detail
                    All Andrews did was talk to Maynard and was satisfied with answers such
                       as “business is booming.” If he had pressed further, he would have learned
                       of the production delays and personnel conflicts that eventually
                       bankrupted the company. He had a duty to learn about these things.
            o Because this is an omission, the P must show Andrews would have been able to
               ameliorate the situation had he taken action. Here the company failed because of
               dissention and inefficiency of managers. There was nothing Andrews could
               have done

       No implied warranty of special fitness or good judgment on the part of directors




                                              - 84 -
Statutory Duty of Care
          Historically, no heavy standards on management – Overend & Gurney Co v Gibb
          Standard may have even been as low as gross negligence
          Barnes v Andrews – Duty of Diligence imposed on directors – a Director’s duty of
           care entails informing oneself what is going on with some particularity. There is no
           reason to assume all is well, even when there’s no reason to assume something is
           going wrong.
          Dickerson report – attempted to upgrade common law director’s duty of care.
           Eventually CBCA 122(1)(b) was implemented and interpreted in People’s v Wise
               o

Peoples Department Stores Inc. v. Wise
Court undertook a Survey of the Law:

Common Law – relaxed, subjective measure (personal skills, knowledge, capacity). Directors
must just avoid being grossly negligent, but not expected to have any particular skill or
judgement.

Dickerson Report (Standard of Care) - Every director and officer shall exercise the care
diligence, and skill of a reasonably prudent person. Upgrades the low standard of care from
the requirement that a director must demonstrate the degree of care, skill, and diligence that
could reasonably be expected from him having regard to his knowledge and experience.
Argument that this would deter people from becoming directors. But this hasn’t deterred people
from becoming professionals or any other role that has a duty of care

CBCA s.122(1)(b) (Duty of Care) - Does not replicate Dickerson report, but more than common
law. Every director and officer shall exercise the care, diligence and skill that a reasonably
prudent person would exercise in comparable circumstances. Objective standard, but the
context in which a decision was made must be taken into account – “in comparable
circumstances”. Important: the factual aspects of the circumstances surrounding the decision,
not the subjective motivation of the director/officer

Business Judgement Rule - Directors have expertise in business the courts do not. Some
judgments that turn out to be unsuccessful are still reasonable at the time. Business decisions
must be made under considerable time pressure without detailed information. As hindsight is
perfect, it is easy to criticize these decisions. The Business Judgment Rule – the court looks to
see if the directors made a reasonable decision, not a perfect decision. If the directors selected
one of several reasonable alternatives, the court defers to their decision. - Maple Leaf Foods v
Schneider (It is only if an available alternative was clearly more beneficial to the company that it
becomes relevant)

In order to challenge business decision, plaintiff must establish a breach of the duty of care
in a way that caused injury to the plaintiff.
There is no director liability under s.122(1)(b) if the directors acted prudently and on a
reasonably-informed basis. Perfection is not required, merely prudence and diligence.
Statutory standard of care cannot be made less demanding in articles of incorporation or
bylaws. No exculpatory clauses – 122(3)

                                               - 85 -
Causation of Loss
      Burden is on Plaintiff to show director’s breach of duty was a proximate cause of loss.
            o I.e. Andrews did breach his duty but this didn’t lead to the bankruptcy.
            o The policy adopted by the directors in Peoples was a breach of duty, but the
               bankruptcy was due more to financial condition of the 2 companies pre-
               acquisition, increased debt load to finance acquisition, and increased competition
               from Wal-Mart
                     Does this suggest that director negligence must be the only cause of loss?
                     CBCA 237.1 – defendants are only liable for the portion of damages
                       corresponding to their degree of responsibility for the loss
      If there is questionable management behaviour and the director votes against it, is the
       director excused from liability, or must the director be a whistleblower?

Joint Stock Discount Co. v. Brown (1869)
Brown was a director of a company where the rest of the directors decided to misappropriate
money to make it look like a bank to which they were a creditor was not going bankrupt, when it
actually was. He wrote a letter to the rest of the Board protesting, and then considered his duty
done.
Court
    - It was his duty as a director, knowing what was going on, not to remain acquiescent
    - He could have put his letter on the minutes and insisted a vote on it. If the other directors
        voted to keep misappropriating the money, he could have sent a circular to the
        shareholders. Then he could have gone to the Court of Chancery.
Today
    - Outside directors can call up a journalist
Should liability be imposed on outside directors for not whistle blowing? These requirements
might result in information being withheld from suspected whistleblowers which is costly, and
the whistleblower might lose his career in the firm or the industry


Non-Attendance at Meetings
Re Dominion Trust Co 1916 BCCA
   - Money held in trust was mixed with corporate funds.
   - Directors who skipped all board meetings were found not liable for negligence, but
       directors who went to board meetings were found liable for not ensuring the money
       stayed separate
   - Principle – a director is not obligated to attend board meetings but must take care if they
       do
Re City Equitable Fire Insurance Co 1925
   - A director is not bound to attend all meetings, but should attend where he is reasonably
       able to do so
CBCA 123(3)
   - A director who is not present at a meeting is deemed to have consented to resolutions
       passed at that meetings
   - Unless, within 7 days of becoming aware of it, she notes her dissent
   - If the absent directors assents (through lack of dissent), he will be liable if it is an illegal
       transaction under CBCA 118 (transfer of shares for consideration other than money,
       redemption of shares in violation of insolvency rules)

                                                - 86 -
Reliance by Directors on Officers or Professional Opinions
   -   Often liability arises because officers are doing something untoward.
   -   Officers are put in their position to manage the company, and directors must trust them to
       do such, or business couldn’t go on – Dovey v Cory 1901. Directors are entitled to trust
       the officers
           o Must directors demand full accounts of the activities of officers/management? No
           o Must directors verify what officers/management have to say? No, unless their
               suspicions have been aroused.
   - Defence of reliance on management doesn’t succeed in
           o Actions for misrepresentations in a prospectus or other corporate communication
               – OSA 130
           o Liability to secondary market participants – OSA 138.1
   - CBCA 118(2) – director is absolutely liable for improper corporate payments except
           o CBCA 123 – A director is not liable under 118, 119, 122 if they exercised the
               care, diligence, and skill that a reasonably prudent person would have exercised in
               comparable circumstances, including
           o Relying in good faith on financial statements of the corporation by officer or
               auditor (4)
Report of professional – lawyer, accountant, engineer, appraiser (5)

Peoples Department Stores Inc. (Trustee of) v Wise 2004 SCC
Defence of Directors – they relied on professional opinion of Clement, VP of Finance about the
inventory management scheme – 123(5)
     - Clement was not a member of the listed professional groups. His title as VP of Finance
         should not automatically put him in that category.
     - Profession, not Position, is used in 123(5)
Here Clement was better equipped than the Wise brothers to make the decision in question, but
still not under 123(5)




                                              - 87 -
UPM-Kymenne Corp v UPM-Kymenne Miramichi Inc (Repap) 2002 ONSCJ
Berg was director, chair, and 4.3% shareholder of Repap. Its largest shareholder was TD Asset
Management with 18.7%. This is a case on whether to oppress Berg’s employment contract,
which overcompensated him. The employment K was opposed and a compensation committee
was formed, who hired executive compensation consultant Engel from Mercer. The
Compensation committee a year later recommended approving the K, and the board, who was
differently constituted, voted for it. UPM bought all of the shares of Repap, including TD’s. Due
to shareholder opposition, several directors again resigned and Berg was not nominated to be re-
elected. He claims $27 million in benefits for termination without cause, a clause of the K.
    - It was held that the K unfairly disregards shareholder interests, and Berg breached his
        fiduciary duty in bringing it to the Board
    - Did the directors and compensation committee fail to act prudently and reasonably,
        leading to the unfair K? Yes
            o Where director decisions are likely to affect shareholder welfare, the decision
                must be made on an informed and reasoned basis
                     Act in an informed and independent fashion, after reasonable analysis of
                        the situation, with reasonable grounds to believe their actions will promote
                        and maximize shareholder value – CW Shareholdings
            o Board can retain advisors, but this doesn’t relieve them of the duty of due care,
                rather seeking outside advice is an extension of this duty – Hanson Trust v ML
                SCM (Here the directors made a decision after a short meeting only looking at the
                summary descriptions by the advisor)
Here the compensation committee failed to have or seek sufficient information on which to make
a reasonable decision by
    - Failing to oversee the consultant (Engel), failing to oversee lawyers drafting K
    - Failing to obtain report of compensation consultant or look at report of previous
        compensation committee
    - Allowing the board to assume they reviewed the agreement fully
The Board had failed to analyze agreement’s terms, which was required as part of their duty.
    - The business judgment rule does not indemnify the Board – their actions were wrong and
        unreasonable, and the business judgement rule only indemnifies wrong but reasonable
        decisions
The board had an independent obligation to act reasonably and prudently and make an
informed and reasoned decision. Relying on the Compensation committee is reasonable, but in
order to discharge their duty, they also had to review the K and the consultant’s opinion. Had
they done this, they would have realized they didn’t need and couldn’t afford Berg. Also they
just met him and hired him on a ridiculous package after a 30 minute presentation.

The Business Judgment Rule
US – courts will not interfere in the management of a corporation in the absence of an allegation
that director’s actions involve fraud, illegality, conflict of interest
Canada – deference to business judgements by directors (but fraud, illegality, and conflict of
interest are still important to courts)
Takeover bids – made at offering prices that exceed market value, therefore defence against
them costs shareholders that advantage, and may be self-dealing by directors/officers. US courts
have been tougher on directors in these cases
Few claims for breach of duty of care have succeeded


                                               - 88 -
Business Judgement Rule
       Rule announced in Shlensky v. Wrigley (Illionois, 1968) that courts will not interfere in
        the management of a corporation in the absence of an allegation that the director’s actions
        have been tainted with fraud, illegality or conflict of interest is known as the business
        judgement rule
       Adhered to by all American jurisdictions, and in Canada the SCC has applied the term
        “business judgement rule” to a form of deference to business judgments by directors
        developed by Canadian Courts, e.g. in Peoples
       Courts in Canada have been insistent that the facts demonstrates that directors were
        diligent and acted on reasonable grounds before the rule will be applied in the absence of
        fraud, illegality or conflict of interest
       Corporate litigation may often turn on the question of what constitutes a substantial
        allegation of fraud, illegality, or conflict of interest
       Business Judgement Rule has also been applied in some American courts when firm
        management is charged with improper defensive manoeuvres on a takeover bid for the
        firm
       Due to barriers to litigation, very few claims for breach of the duty of care have
        succeeded
       In both Canada and the US, the search for cases in which directors of industrial
        corporations have been held liable in derivative suits for negligence uncomplicated by
        self-dealing is a search for a very small numbers of needles in a very large haystack

Smith v Van Gorkom 1985 Delaware SC
Trans Union’s profit was low. Management thought about buying all shares themselves as a solution.
CEO and chairman of the board Van Gorkom went to Pritzker and offered all shares to him for $55 a
share. He came up with this price not out of any valuing of the company, but based on a previous
projection that the debt required to buy the shares could be paid off within 5 years using Trans Union’s
profits. Pritzker bought the shares. The board agreed to the merger, after hearing 2 hours of presentations.
Senior management rebelled against the merger. The K allowed Trans Union to receive higher offers for 3
months after merger. There were no competing bids so Trans Union was stuck with the merger.
Court
Application of the business judgment rule
Court of Chancery
    - Board approval of the merger fell within business judgement rule and had to be deferred to.
         Sufficient time had been given to the decision. The board’s finding was reasoned and informed.
    - Why? Because the K allowed for receipt and acceptance of higher offers for 3 months after the
         merger, and none were given
    - Decision overturned
Court
    - Due care and prudence by the board was required by the Business Judgment Rule
    - Board – their decision to approve the merger at the price of $55 a share was informed because
         they were highly qualified, well informed, and deliberated over the proposal 3 times.
Business Judgment Rule
    - Business and affairs of a corporation are managed by directors
    - Directors are charged with fiduciary duty to corporation and shareholders
    - Business judgement rule exists to protect exercise of managerial power by directors
    - Presumes that directors were well informed and acted in good faith and in honest belief that the
         decision was in the best interests of the corporation.
              o This presumption must be rebutted by a party calling a board decision uninformed
              o In determining whether a decision is informed, look at whether the directors have
                  informed themselves, before the decision of all material reasonably available to them

                                                   - 89 -
    -    Duty of care, as opposed to duty of loyalty
    -    Standard of care – gross negligence
    -    Director has a duty to act in an informed and deliberate manner in determining whether to
         approve an agreement of merger and submit it to the shareholders
    - Board – because the merger was open to competing bids for 3 months, what they did in these 3
         months to become reasonably informed should count towards their duty. Court – no. Their
         informed decision requirement is as of the actual transaction to sell the company.
Was the approval of the merger an informed business decision?
No.
    - The directors didn’t adequately inform themselves about Van Gorkom’s role in forcing the sale,
         and his technique in coming up with the price
    - They were uninformed on the intrinsic value of the company
    - They were therefore grossly negligent in approving the merger after a 2 hour meeting without the
         existence of emergency
Board – the high premium of the $55 offer price over the $38 market price justifies approval of the
merger.
Court – no.
    - This alone does not justify merger approval.
    - The company had been consistently undervalued on the stock market. So $38 was not the actual
         value of the company and no efforts to accurately value the company were taken (CFO was not
         asked to analyze company’s value in detail).
    - The board also didn’t inform themselves as to all information that was reasonably available to
         them on the $55 offer price. If they had, they would have found out Van Gorkom suggested this
         price to Pritzker, and based it on recovery projections.
Board – the 3 month market test provision, coupled with the absence of higher offers, means the board
acted reasonably.
Court – also rejected this argument because the company wasn’t allowed to solicit offers so it is not
surprising that they didn’t get any.
If not, were the actions of the directors in the following 3 months sufficient to remedy their fault?
(An uninformed business decision can be cured by becoming informed and deliberate in a timely way)
No
    - The amended provision for 3 months of offers was actually quite restrictive, (only allowed
         rescission upon another merger, not another offer) and the board and Van Gorkom were grossly
         negligent in not reviewing it
    - At their meeting after 3 months, the Board could have rejected the merger, but then would have
         faced suit from Pritzker, as they had not received a better offer. Thus they were bound by the
         decision. So the second meeting was not a consideration of all reasonable options so as to cure the
         initial unreasonableness.
Dissent
    - The board had considerable expertise on business transactions and on the company in general.
         Thus the decision to approve the merger, even on short notice, was an informed one.
    - Also, clause giving Trans Union the 3 month period to receive better offers was adequate to give
         them freedom to test the market

Consequences of this decision
   - US – make it harder to interest people in being outside directors
   - US and Canada – increase rates for director and officer insurance
   - Inhibit firm growth by inducing excessive caution – i.e. waiting to go forward with a
       transaction until getting a fairness options from valuers or investment bankers
Permitting a corporation’s charter to limit personal liability of directors for specified breaches –
CBCA 118

                                                   - 90 -
Indemnification in Canada
CBCA 124
   - Liability cannot be shifted if the director/officer/manager has not acted honestly and in
       good faith with a view to the best interests of the corporation
   - Effectively, indemnification is restricted to situations of
           o Breach of due care standards under CBCA
           o Breach of statutory duties imposed on managers for harm done to parties other
               than the firm (such as the OSA)
   - Indemnification is sometimes mandatory – 124(3)
   - Manager entitled to indemnification as of right (automatically) when he was substantially
       successful on the merits of his defence
           o Where not an entitlement as of right – The firm may indemnify at its discretion.
               This can be included in an employment K.
           o Limited by 124(3) –
                    124(3)(a) Corporation can only indemnify where manager has acted
                        honestly and in good faith with a view to the best interests of the
                        corporation
                    124(3)(b) In a criminal/administrative action, corporation can only
                        indemnify manager where he has reasonable grounds for believing his
                        conduct was lawful
           o Presumption of good faith – corporation must rebut this presumption to avoid
               paying out indemnity
   - If a director is paid an indemnity and it is later found out that his actions do not fall
       within 124(3)(a) or (b), he is obliged to return the indemnity – 124(2)
   - Directors who pay an indemnity that violates 124(3)(a) and (b) that cannot be recovered
       from the individual are personally liable for the indemnity – 118(2)(d)
   - 124(4) – indemnification in derivative actions –
           o Derivative action – action brought by shareholder against director for not
               authorizing legal action in the corporation’s name
                    Derived from harm done to corporation, not to a shareholder
                    Damages are paid to the corporation
                    Indemnification requires court approval
                    Doesn’t contemplate indemnification from settlement
           o Non-derivative (personal) action – brought by the shareholder on his own behalf.
               Damages are paid to the shareholder personally. Indemnification doesn’t require
               court approval.
The vast majority of Canadian corporations have liability insurance, and indemnify managers
who incur liability to the full extent.




                                            - 91 -
Liability for Misappropriation of Corporate Assets
    In addition to wishing to ensure that managers work in the best interests of the
       corporation, courts have been concerned to ensure that managers do not engage in looting
    Recall that looting is the Expropriation of corporate assets or Direct and indirect
       compensation exceeding what the manager is entitled to
Aberdeen Railway Co v Blaikie Brothers 1854 HL
Blaike was a director of the Railway and a partner in Blaikie Brothers. The Railway contracted
with Blaikie Brothers to buy chairs. Some were delivered and the railway refused to accept
delivery of the rest.
Court: Is the director of a railway company precluded from dealing with his own firm?
    - It is the fiduciary duty of managers to promote the interests of the corporation – agency
        relationship
    - Nobody with this duty can enter into agreements where he has a personal interest that
        may conflict with his fiduciary duty. There can be no question as to the fairness of the K
        – even if it is the best deal, it cannot be entered into
Here Blaikie had a fiduciary duty and was thus restricted from contracting with himself. Conflict
of interest – Railway would want the chairs to be sold for the lowest amount possible, and
Blaikie Brothers for the highest. Note – this may cost the corporation valuable opportunities
North-West Transportation Co v Beatty 1887 PC
Shareholders bring action against company and directors. James Beatty, a director, sold his
steamer, the United Empire to the company.
    - Majority resolution of the shareholders is binding on minority and the company
    - Director cannot deal with himself or enter into engagement where he has or might have
       an interest that conflicts with the fiduciary duty
    - North-West needed another steamer to replace one that was wrecked. There was no other
       steamer available besides the United Empire. A shareholder resolution was passed
       approving the by-law to purchase the United Empire.
    - Before the vote, James Beatty didn’t have majority control, then acquired majority
       control, then transferred some of his shares to 2 other people who thought the purchase
       would be beneficial
    - SCC – the interested director’s contract could be ratified only by a disinterested majority
       of shareholders.
           o There was no majority here (the majority in favour of the purchase only existed
               because of James Beatty’s votes)
    - It was in the competency of the shareholders to adopt or reject by bylaw to by the
       steamer. The majority vote must prevail unless it came about through unfair or improper
       means. Here the only unfairness was that Beatty was a controlling shareholder.
    - Beatty was acting within his rights in voting for purchase of the boat. His actions were
       not so oppressive as to invalidate the vote and give effect to the views of the minority and
       disregard the majority.
OSC Rule 61-501
A company that enters into a transaction with a majority shareholder (related party transactions)
worth 25% or more of the company’s market capitalization has to
   - Get a formal valuation of the asset, to ensure a fair price is being obtained
   - Get approval of a majority of shareholders excluding the interested party (majority of the
       minority)

                                              - 92 -
Ratification and Derivative Actions
       North-West v Beatty was a derivative action – it was derived by a wrong to the firm. It is
        brought by the shareholder on behalf of the firm, and the damages go to the firm.
       When can an individual bring an action on behalf of the firm? Much debated topic

Foss v Harbottle
Directors of Victoria Park Company bought property necessary to the company and then sold it back to
the company at exorbitant prices. 2 minority shareholders sued the directors to recover damages for the
company. The claim was dismissed.
Court
    - Injury was not to the plaintiffs exclusively, it was to the whole corporation
    - Companies move and director decisions are ratified by majority vote. In entering a corporation,
        even minority dissenters must consent that the majority binds the corporation. So it would not
        make sense for them to then complain against an action taken by the corporation.
     A corporation is the proper plaintiff in an action to vindicate corporate rights, not the shareholder
     Rule in Foss v Harbottle – A suit to redress a wrong done to a corporation may not be brought
        by a shareholder where the decision can be ratified by an ordinary majority – (a derivative action
        cannot be brought on a wrong ratified by a majority)
    - The decision to litigate is left up to management – 102(1)
    - What about cases of possible self dealing? Here it would not be as wise to leave the decision to
        litigate to management
    - Common Law (Foss v Harbottle) – Give management the right to decide on litigation, but where
        they decide not to sue, allow derivative actions, only in the following situations
             o Ultra vires transactions
             o Actions that could validly be taken only with approval of special majority of shareholders
             o Contravention of personal rights of shareholders
             o Fraud on the minority by the majority who were still in power to decide the litigation
                  question and decided not to sue
                      Where managers has expropriated assets that belong to the firm in law or equity
                               Includes expropriation of corporate opportunity
                               e.g. Menier v Hooper’s Telegraph Works, where Hooper’s had a
                                  contract to build a telephone line in Brazil, then the chairman
                                  appropriated it. Hooper’s sued. The chairman settled by agreeing to share
                                  the franchise. The minority shareholders sued. Court – the majority have
                                  put something into their pockets at the expense of the minority

CBCA – Circumstances in which a shareholder has standing to bring a derivative action
Complainant (238) may bring a derivative action upon obtaining leave of the court – 239
Standard – flexible – looks at questions such as good faith of the complainant and the interests
of the corporation
    - It is now easier to bring a derivative action where Foss v Harbottle would have
        previously prevented it
    - It is also more difficult to bring one that would have previously been allowed, as leave of
        the court is now required
    - Shareholder ratification will not suffice to stay a derivative action – 242
            o But it will be taken into account in granting a remedy for a derivative action



                                                  - 93 -
Safe Harbour for Interested Contracts
CBCA 120 – provides a mechanism for upholding interested contracts on a review of their
substantive fairness
K where director or officer has a material interest is not voidable by reason of that interest where
     Director or officer has made written disclosure of their interest in the K
     K approved by disinterested majority of board or majority of shareholders after disclosure
     K was reasonable and fair to the corporation when it was approved
If not, the corporation or shareholder may apply to have the K set aside – 120(8)
Interested directors may still count toward quorum at board meeting where the K is approved
    - But cannot participate in portion of the meeting that deals with the transaction
    - Cannot deem remaining directors to constitute quorum 132(5)



How much must a director disclose for “safe harbour”?
UPM-Kymmene Corp v UPM-Kymmene Miramichi Inc 2002 OSCJ
CBCA 120 – director shall disclose the nature and extent of any interest he has in a material
contract with the corporation
Gray v New Augarita Porcupine Mines Ltd 1952 PC
     - No precise formula
     - Depends in each case on the nature of the K and the context in which it arises
     - Must make colleagues fully informed of the real state of things
     - I.e. if it is material that they know not just that he has an interest but what it is and how
         far it goes, then he should tell them this
Here, the directors of Repap were not fully informed of the real state of things. It was material
for them to know
     - About the comments of management and the former board about his compensation
         package
     - Mercer had not done any research, benchmarking, or analysis of comparative companies
         that the board requested
     - The March 23 agreement was different from the March 18 agreement
It is not an answer to the duty to disclose that the directors could have found it out for themselves
     - Besides CBCA 120, companies may wish to
              o Approve the K by a committee of independent directors
              o Have the K certified as fair by a securities firm
     - However there are no clear standards of what adequate fairness review consists of




                                               - 94 -
How Interested does the Director have to be?

  -   Transvaal Lands Co v New Belgium Land and Development Co 1914 CA
         o Interest does not have to be pecuniary
         o Where a director of a corporation is a shareholder of another corporation, this
              interest is sufficient enough to be a conflict of interest, even if they are just the
              registered shareholder and not the beneficial shareholder
  -   Exide Canada Inc v Hilts 2005 OSCJ
         o There will be a conflict of interest even if it is someone close to the director, not
              the director himself, who is interested in the other corporation
         o Here the director of Exide conducted a 300000 dollar transaction with a
              corporation controlled by his assistant, and a material interest was found
  -   A directorship in another corporate party to the transaction is an interest – 120(1)(b)
  -   120(1)(a) – discusses material interests of officers and directors in Ks with the
      corporation generally
         o “Material” not defined = Substantial or Significant – book
         o If there is a possibility that the director was to benefit from the K more than de
              minimis, then it should be disclosed
         o Wherever interest might be relevant to decision-making process
                   I.e. if corporation would undertake additional due diligence, or assign
                      another director/officer to negotiate K
  -   57(s) – Material interest of directors in a transaction must be disclosed in proxy circulars
         o If shareholders are asked to approve a transaction at a meeting, the interest must
              be disclosed, even if action won’t be taken at that specific meeting
         o Omissions permitted
                   Where director/officer’s interest is that they are director/officer of another
                      corporate party
                   K where price is fixed, by law or competitive bidding
                   K for banking or other depository services
                   K made in ordinary course of business worth at most 10% of corporation’s
                      gross sales/purchases and where director’s interest is worth at most 10%
                      of other company’s shares
         o Common among the omissions (but not stated in act) – none of them are material
              – relationship between omissions and definition of materiality in 120




                                             - 95 -
Looting: Corporate Opportunties

Regal (Hastings) Ltd v Gulliver 1942 HL
Regal was a corporation that owned and managed a theatre. It had 5 directors, 4 of whom are
respondents, and 20 shareholders. In July 1935, they decided to lease another 2 theatres from
Elite. Regal would create a subsidiary that would issue al its shares to Regal. They were also
considering selling off all their assets, including the 2 new leases. Hastings, the subsidiary, was
incorporated with the 5 directors and Garton (legal counsel) as its directors. A buyer approached
Regal with an offer for 92500, split at the request of Garton into 77500 for Regal and 15000 for
the leases. The Regal was not undervalued, thus the leases were not overvalued. They then had 1
meeting that served as the board meeting for both companies approving the sale and anticipating
the lease. Regal could only afford to buy some shares of Hastings, so the directors bought 500
shares each. Because the initial sale of the companies fell through and a second one was
conducted later, the shares of the directors in Hastings matured at a higher value. The
corporation sues the directors for 8000 pounds.
Court
    - Assume the directors acted in good faith, in a fiduciary relationship to Regal (as opposed
        to trial judge who stated that mala fide was necessary part of the action)
    - Those who by use of a fiduciary relationship make a profit have to account for that profit.
        The liability arises from the mere fact of the profit having been made – equity
             o Doesn’t depend o fraud
             o Doesn’t matter whether the profit would have gone to the P
             o Actual damages/benefit to P don’t matter
    - Keech v Sandford – a lease was given to a trustee for an infant beneficiary. The lease
        couldn’t be renewed in the infant’s name so the trustee renewed it in his own name. The
        court ordered him to assign it to the infant – “the trustee is the only person in all mankind
        who may not have the lease”
    - Here, the directors are in a fiduciary relationship to Regal, and acquired the shares simply
        because of their relationship as directors to the company. Thus they must account for the
        profits
    - It doesn’t matter that Regal couldn’t have purchased the shares in any other way.
    - The directors were not buying simply as members of the public
    - As there is no rule that a lawyer must account for profits coming out of his relationship to
        the company, Garton is not liable
    - Trial judge refutes the following proposition as having no support in cases/legislation:
        When a Board of Directors considers an investment, and concludes the company
        shouldn’t make the investment, any director who then goes ahead and makes the
        investment himself must be seen as doing it on behalf of the company and thus must
        account for the profit. This court makes a point of saying that rule doesn’t apply to this
        case (relevant in next case – Peso)
    - Had the directors obtained shareholder ratification, they would not have been liable
Issue – had the directors not taken action, Regal would have lost the opportunity to make
profit from the sale, but they were still held liable




                                               - 96 -
Peso Silver Mines Ltd v Cropper 1966 SCC
Cropper was a founding director of Peso. He owned shares in Cross Bow Mines and Mayo Silver
Mines. Peso wanted a declaration that they shares were owned in trust for Peso or that Cropper was
liable to Peso for the shares. Trial and BCCA dismissed Peso’s action.
In 1959 Cropper and 2 others incorporated Tanar Gold Mines, and later added a 4th director. In 1961,
Tanar incorporated Peso, with 6 directors including Cropper. Tanar bought shares of Peso using land
claims in the Yukon. Peso was converted into a public company and sold shares for exploration and
development. Peso took on 128 new land claims, which strained it financially. Cropper was made
managing director of the company. Dickson, a prospector, offered some more land to Peso, but Peso
declined, which the court found was done in good faith. Later, Dr. Aho, who was a consultant to
Dickson, came to Cropper and suggested they buy the Dickson properties together, even though they
were speculative and high risk. They did, incorporating Cross Bow which owned the properties and
then Mayo, a public company which bought the properties, and Cropper bought 50000 shares in
Mayo. In 1963, Charter bought Peso. The new chairman discovered Cropper’s shares in Mayo and
Cross Bow, and asked him to vacate his office, which he did. They then brought the action.
Peso
    - Cropper obtained his shares in Crossbow and Mayo as a result of his position as director of
         Peso, without the approval of the shareholders. Thus equity demands he account these shares
         to Peso. It doesn’t matter that he acted in good faith, or that Peso decided not to buy the
         Dickson property for good reason, or that Peso had suffered no loss
Court
Test from Regal v Gulliver
    - Had a fiduciary relationship
    - Made a profit because of the fiduciary relationship
Here, it is impossible to say Cropper made a profit (shares in Mayo and Crossbow) because of his
fiduciary relationship as a director of Peso
    - It was Cropper’s duty as a director of Peso to be part of the decision concerning Dickson’s
         offer. He did this in good faith
    - There was no confidential information given to Peso, and thus obtained by Cropper, that
         could not be obtained by any member of the public
    - Dr. Aho approached Cropper as an individual member of the public to be a coventurer.
In Regal, the HL comment on the trial refutation (of the principle that a director who takes the
opportunity that a company passes up must account for profits to the company) must have been
intended to mean the HL agreed with that refutation. That situation does apply here, and thus the
principle applies.
    - Cropper is not liable to account for profits from the opportunity he took that Peso passed up
Notes
    - Issue – the court found that Cropper had not obtained his shares in Crossbow and Mayo
         because he was a director of Peso. But couldn’t that exact same thing have been said about
         the directors of Regal?
    - Cropper first learned about the opportunity to purchase the land because Aho advised
         Dickson to go to Peso. Thus he learned about it because of his position as a director of Peso.
             o A director must first offer an opportunity that he learns of because of his position to
                 the company
             o Here the court found that if the company passes it up, the director can pursue it
    - Other facts about the case
             o Cropper and the 2 other directors who joined with Dr. Aho to form Crossbow
                 dominated Peso’s affairs at the time and voted against the purchase
             o Another director wrote to government that he thought it was important that Dickson’s
                 claims belong to someone friendly to Peso
             o The other directors agreed to turn over their Crossbow/Mayo shares to Peso

                                                - 97 -
Zwicker v Stanbury SCC 1953
Defendants were directors of the corporation that owned the Lord Nelson Hotel. CP owned about
50% of the shares in Lord Nelson Hotel, and also were the creditors on Lord Nelson Hotel’s
second mortgage. Lord Nelson needed more money but CP said they had written their
investment (the mortgage) off as a loss and were not willing to give more money to Lord Nelson.
The directors of Lord Nelson then said that if CP would give their shares back to Lord Nelson for
free, they would find a way to refinance (make good on?) the mortgage. CP gave their shares to
the directors. The directors refinanced a bond (?) and used that money to buy their second
mortgage from CP, (thus becoming creditors of the corporation?). Lord Nelson became
successful and the shares became valuable. The SCC found the directors were holding the shares
in trust for the corporation and thus owned the corporation the shares plus interest.
     - In the share transaction – Here the directors were acting for LN in dealing with CP, so
         any consideration CP gave to LN should have gone directly to LN, not the directors
     - In the mortgage transaction – because of their position, the directors learned CP
         considered the mortgage a complete write-off and thus valued it very low. However, the
         mortgage had low interest and was not due for a long time, so it wasn’t very valuable
         anyways



Corporate Opportunity and Corporate Impossibility
The impossibility argument – that a director takes an action on behalf of the corporation that the
corporation cannot do – i.e. when the directors of Regal put in the extra $2000 to but Hastings
that Regal didn’t have
    - Court don’t give much value to this argument. Why? Because the directors decide what is
       possible and what is impossible for the corporation
    - Irving Trust Co v Deutsch 1934 – Acoustic was going to purchase Deforest, which
       owned valuable radio patents. Before the sale, Acoustic’s president Deutsch announced
       that Acoustic didn’t have the money and thus Deutsch and 2 other directors bought the
       company and let Acoustic work the patents. The directors were held liable for the profit
       they made. Why?
           o If directors could use impossibility to acquire shares and keep the profits, they
               would be tempted to work less hard to make it possible for the corporation to
               make the acquisition. I.e. Deutsch owed the company money but didn’t pay it
               back to them.

   -   Abbey Glen Property v Stumborg 1978 ALSC – The Stumborgs owned Abbey/Terra,
       an Edmonton land development corporation. They sought to enter into a joint venture
       with Traders. Traders said they didn’t enter into joint ventures with publicly held
       corporations. So the Stumborgs incorporated Green Glenn and held it privately for the
       joint venture. The Stumborgs were held accountable to Abbey/Terra for their profits

   -   Robinson v Brier 1963 – Brier and the Robinsons owned L. L owned M. Brier was
       director of M. M made luggage, and bought wooden frames for their luggage. Brier found
       that M was paying high prices for the wooden frames. His company, S, could do it for
       cheaper. So M contracted with S to buy the wooded frames. The Robinsons sued Brier to
       account for his profits. The suit failed.


                                              - 98 -
Canadian Aero Service Ltd v O’Malley 1974 SCC
Canaero sues O’Malley and Zarzycki for improperly taking the fruits of a corporate opportunity in
which Canaero had a prior and continuing interest. O’Malley and Zarzycki were officers and
directors of Canaero. Canaero was a topographical mapping and geographical exploration company
owned by US parent company. O’Malley and Zarzycki resigned due to the limits placed on their job
by the parent company and the insecurity of their positions. They incorporated their own
topographical mapping company, Terra.
Canaero had been working on a bid for a project for the Canadian government mapping Guyana.
O’Malley and Zarzycki were involved in this project before they resigned. It was unsure whether the
project would go forward. After he resigned, Zarzycki returned to Guyana and put together a detailed
proposal. The project did go forward. Canaero and Terra bid for it. Terra’s bid was accepted because
of Zarzycki’s expertise, the greater level of detail in the bid, and the general ability to conduct aerial
photography.
Court
    - Were O’Malley and Zarzycki directors of Canaero? Yes. There is a distinction between a
        mere employee/servant and an agent. OZ were agents, despite their supervision by the US
        parent company. They were high level officers, thus agents
    - Therefore they were in a fiduciary relationship with Canaero, and owed Canaero loyalty,
        good faith, and avoidance of a conflict between fiduciary duty and self interest
            o They are precluded from obtaining any advantage belonging to the company or for
                which it has been negotiating
            o This ban continues even after resignation if the resignation occurred to get the
                opportunity for himself
    - On test from Regal v Gulliver that profits must be accounted for if acquired solely by reason
        of being directors, in the course of office  this is not a rigid test that must be met in order to
        have liability. Liability can be found without meeting it.
    - Reaping of a profit at a company’s expense makes a director liable.
            o Even when profit is made without costing the company, director must sometimes still
                be held accountable because he is not allowed to use his position to make a profit,
                even if it was not open to the company – even where there is no actual conflict
                between duty and self interest – equitable principle
            o Why? position of control that directors and officers have
            o In sum – equity establishes a principle that a director or officer cannot appropriate a
                business opportunity that in fairness should belong to the corporation. This duty
                survives after termination of employment relationship (as opposed to the right to use
                non-confidential information that has become part of your knowledge after the
                employment relationship)
            o Honesty of purpose is not a defence – even though OZ left because they were
                dissatisfied with their jobs, and even though they thought the Guyana K wouldn’t go
                to Caneco
    - Here OZ had a continuing fiduciary duty of loyalty, good faith, and avoidance of conflict of
        duty and self interest, and they breached it. This is not to be read like a statute, but is fact
        based and includes many factors such as:
            o Position held
            o Nature of opportunity – ripeness, specific ness
            o Officer’s relation to it
            o Amount of knowledge possessed, kind of knowledge (special or not)
            o Circumstances of termination
    - Here damages are not intended to compensate the beneficiary. That is why they don’t need to
        prove they would have gotten the K but for the actions of the directors. Damages are brought
        to compel faithless fiduciaries to answer for their gain

                                                  - 99 -
American and Canadian standards

What constitutes a corporate opportunity?

   -   Oldest test – Present Interest or expectancy standard – prohibits a manager from
       competing with his company for an opportunity in which the company had a present
       interest or expectancy growing out of an existing right – the interest in Canaero would be
       off limits to OZ
   -   1939 – Line of Business test
           o Guth v Loft – Guth was the president of Loft, a soft drink manufacturer. He
               acquired an interest in Pepsi and sold a bunch of Pepsi to Loft. This was a
               corporate opportunity
           o When a corporation is engaged in business and an opportunity comes up that is in
               an area which it has knowledge, practical experience, and the ability to pursue,
               adaptable to business’s financial position, and in line with its expansion needs and
               plans, it is in the line of the corporations business
           o Problem – too lax a standard where a company is involved in many businesses
           o Problem – too harsh where the company has decided not to exploit every single
               opportunity i.e. Peso, i.e. Burg v Horn where Horn was a land developer who
               joined with Burg for a venture to operate a low-rent building. Horn then started to
               operate another low-rent building on their own. The court found this building was
               not a corporate opportunity of the joint venture, since there was no agreement that
               all low rent buildings be offered to the joint venture. The court found the duty not
               to compete with your own company is case-based
   -   Fairness standard – Canaero – also now used in American courts. Laskin emphasized
       rejection of the rules with heightened awareness of self dealing. Does this replace
       prophylactic rules with a pure case-based fairness standard and alertness to self dealing?
           o The rules survive – Laskin’s statement early in the case that there may be cases
               where profit must be disgorged even if it did not come at the expense of the
               company, because a director must not use his position to make a profit even if it
               the transaction wasn’t open to the company
           o The rules do not survive – Laskin’s critical remarks on Regal, close attention to
               factual circumstances




                                             - 100 -
Fiduciary Duties of High Level Corporate Employees
Generally
   - An employee is allowed to resign one day and compete against the employer the next
      day, absent a covenant (non-competition agreement)
   - An employee can never use employer’s trade secrets or confidential commercial
      information, i.e. customer lists
Canaero
   - Alters this rule for high level officer or director or key management person
   - Christie v Creer – Creer was director, secretary, key management person of Christie. He
      quit and started to solicit Christie’s clients.
          o Director/officer/key management person who occupies a fiduciary position and
              leaves can accept business from former clients but cannot actively solicit it
   - Extends to high level employees who are not officers or directors


Director of Many Corporations
Johnston v Greene 1956 Delaware SC
Johnston was a shareholder of Airfleets who sued Odlum, the president and a director of
Airfleets. Odlum was also director of Atlas, an investment company. Airfleets was designed to
finance corporate jets but had not done that and had a lot of money it was looking to invest.
Hutson owned patents to some nuts, as well as Nutt Shell, the company who licensed the patents
from Hutson. Hutson wanted to sell the patents and the company, and approached Odlum
because of Odlum’s reputation as a financier. Odlum was advised that it would be unwise for the
patents and the company to be owned by the same person. So Airfleets bought the company but
decided not to buy the patents. Odlum dominated the other directors and so even though he
didn’t vote on the motion, the decision to pass on buying the patents was actually his. The
patents were eventually bought by a group of investors including Odlum.
Trial – the court found the opportunity to own the patents belonged to Airfleets
SC –
     - Hutson’s offer came to Odlum as a person, not as director of Airfleets
     - The business of the company and the patents (self-locking nuts) was not related to the
         business of Airfleets
     - Airfleets had no interest or expected interest in Nutt Shell
It is one thing to say that a corporation with money it wants to invest has a general interest in
investing the money. This does not mean that the corporation has a specific interest in every
business opportunity that may come to an individual director, precluding the director from ever
personally taking the business opportunity for himself.
     - It is possible for a situation to arise where the director cannot take an investment
         opportunity because it rightfully belongs to the company. This depends on the facts and
         the existence of circumstances that would make it unfair for him to take the opportunity
         for himself. That opportunity doesn’t exist here
     - Odlum owned 2 corporations, neither of which has a tie to the business of Nutt Shell –
         why should he have offered the opportunity to Airfleets instead of Atlas?
Odlum was offered the opportunity for himself and chose not to take it and thus gave it to the
corporation that was best able to handle it in terms of taxes. The question isn’t why didn’t he
give both opportunities to Airfleets, it is why did he give the one opportunity to Airfleet (when
he could have kept the stock and sold it to another company at a profit)

                                             - 101 -
Issues in Enforcing Manager’s Duties

Shareholder and Corporate Remedies

The Statutory Derivative Action
      CBCA ss.238-242codify the rules governing shareholder derivative actions.
      A “complainant” under s.238 may commence a derivative action with leave of the court
       under s.239
           o The court will only permit the action to be brought under s.239(2) if:
                    Complainant has given reasonable notice to the directors of his intention
                        to apply to the court
                    b) Complainant is acting in good faith
                    c) Action appears to be in the best interest of the corporation
      Note that it is not clear what second condition adds to the third condition. While an
       honest but misguided complainant might wish to bring an action that would not be in the
       best interest of the corporation, it is hard to imagine the reverse.

Primex Investments Ltd v Northwest Sports Enterprises 1995 BCSC
Northwest owned the Vancouver Canucks. A new arena was being built by Arena Corp, their
wholly owned subsidiary. They were also looking for an NBA franchise which would use the
new arena. Griffiths was a majority shareholder in Northwest. He obtained permission to pursue
an NBA team (because Northwest couldn’t get the NBA team themselves for some reason) based
on the misconception that the NBA team would be renting space in the arena from Northwest.
What actually happened was Griffiths took over Northwest and thereby sold the stadium and the
NBA team to his other company. The minority shareholders complain that Griffith paid to little
for Northwest because the NBA team was not yet playing at the arena at the time of the takeover.
They bring a derivative action against Northwest
Issue – does the derivative action meet b) good faith and c) best interests of the company?
Good faith
    - Minority argues they have met the onus of good faith
    - Primus argues it is a high burden and the minority hasn’t met it, because they are
       pursuing a vendetta against Griffiths.
            o Why is the burden so high? Because in a derivative action, the minority
                shareholder is causing the corporation’s resources to be spent on an action that the
                majority decided not to take
    - Here, even though Rennison (one of the minority, petitioner) may not like Griffiths, he
       still believes the cause of action is valid, and thus there cannot be any bad faith
    - Issue of self-interest motivating the derivative action – self interest will motivate any
       derivative action, as the shareholder will want to maximize value of his shares. This does
       not imply bad faith.
    - Here Northwest was left without the arena or the NBA franchise, thus lost value. Basing
       a claim on this is bona fide
Interests of the company
    - Dispute over test
            o Bellman v Nemetz – an arguable case that the suit is in the best interests of the
                corporation – minority shareholders want this test to be applied
            o First Edmonton Place v 315888 – that the suit has reasonable prospect for success
                – majority shareholders want this test to be applied
                                              - 102 -
   -    Law here is based on Dickerson report – c) bars actions to recover small amounts, or
        actions to embarrass directors. The court must decide whether the proposed action has
        a reasonable chance of success or is bound to fail (continued)
            o This doesn’t mean the court is trying the case in certification – it just means they
                are filtering out actions that are doomed to fail
            o This also doesn’t mean the applicant must establish that the action will probably
                succeed
            o If there is a defence to the derivative action, the court must consider whether the
                defence is bound to be accepted
            o Also, it must be considered whether the relief is sufficient to justify the time and
                effort expended by the corporation in trying the action
Also, the amount of legal costs will be considered, but is not as important

NBA Franchise
Here the claim for lost opportunity in the NBA franchise does have a reasonable prospect of
success
Griffiths
    - The selling of the NBA franchise was ratified
    - Northwest couldn’t acquire an NBA franchise on its own
    - Northwest was no longer pursuing an NBA franchise
Court
    - The selling of the NBA franchise was not conclusively ratified, and was not ratified with
        knowledge of all the facts, and it is possible that it may be seen as unratifiable
    - Incapacity is not necessarily a defence – Abbey Glen
    - Here Northwest may still have been pursuing an NBA team – they did not clearly pass up
        on the opportunity like in Peso
Therefore the claim does have reasonable prospects of success and thus is in the best interests of
the corporation

The Takeover Bid
Here the minority shareholders claim the directors were liable in approving the transfer of shares
in Arena to 453333 (Griffiths’s company) in order to get a more attractive takeover bid. Griffiths
defends himself in saying that the action was approved by shareholders and the action was being
taken in the best interests of the shareholders because selling the asset of the Arena company
would make for a better takeover bid. The court finds this is not a necessary defence, thus the
action may succeed despite it (the plaintiff puts evidence that when the duty of the directors to
the shareholders and the duty of the directors to the corporation conflicts, the duty to the
corporation takes priority)
Again here, the derivative action has a reasonable chance of success and thus it is in the best
interests of the corporation




                                              - 103 -
Statutory Framework for Derivative Actions

240 – the court may make a variety of orders to govern the conduct of the litigation in a
derivative action, including making the corporation pay costs of litigation, and that the amount
may be given to past/present shareholders instead of the corporation itself. Why? If the
defendants are majority shareholders of the corporation, this would defeat the purpose of the
action

242 – the court may order the corporation to pay the complainant’s inerim costs, without
prejudice to costs allocation upon judgement

242(2) – settlement only with leave of court – to prevent corrupt settlements where the P is
offered more than he is owed but less than the corporation is owed

242(1) – a derivative action will not be dismissed just because the conduct in question had been
ratified by the shareholders. However, ratification will be considered in seeing whether an action
would be in the best interest of the corporation

238 – who may be a complainant?
   - Registered or beneficial owner of a security of the corporation or affiliates
   - Former owner of a security
   - Director or officer, present or former or corporation or affilitate
   - Director of Corporations appointed under 260
   - Any other person the court deems proper (i.e. creditor)

Sources of rules governing derivative actions:
   - Professor Gower’s disapproval of Foss v Harbottle
   - Jenkins committee report UK
   - OBCA 99

Where statute provides for derivative actions, this is the only way to bring an action if you
are a shareholder
   - A shareholder cannot avoid the requirement of ratification by citing one of the exceptions
       to the rule in Foss v Harbottle to bring an action
   - Personal claims under statute do not require leave of the court




                                              - 104 -
The Role of the Directors in Derivative Litigation

CBCA 239(2)(a) –
Leave to bring a derivative action shall not be granted unless the P has given reasonable notice to
the directors of his intention to apply for leave
    - A letter to the corporation’s solicitor to complain about the transaction would suffice
    - The notice should at least give details of the claim
Why?
    - To give the corporation a chance to sue on its own
What if notice is given and the corporation decides not to sue on its own? Does this just mean the
shareholder P has cleared this hurdle? Or is this considered as a reason not to grant leave (best
interests of the corporation)?
    - What if directors give reasons as to why they are not suing – i.e. have concluded it would
        be too costly, little likelihood of recovery, low present value?
    - Can the decision to sue or not to sue be left to the business judgement rule?
    - What if the decision involves suing a manager?

Auerbach v Bennett 1979 NYCA
Auerbach was a shareholder in General Telephone and Electric. There was a scandal in the
industry that corporations were paying kickbacks in order to obtain foreign Ks. GTE launched an
investigation and found that the did indeed pay 11 million dollars worth of kickbacks, and the
directors were involved in making these payments. Auerbach brings a derivative action against
the directors and the outside auditor. The company established a committee to assess the
litigation and found that it would be a waste of time of the corporation, the costs would be high,
success would be unlikely, and it would bring bad publicity. The motion was granted and the
defendants as well as the corporation appeal.
Court
The claim was for the kickback transaction. However, because the corporation established a
committee that decided not to litigate, the decision is protected by the business judgement rule.
I.e. Auerbach’s main cause of action is now not justiciable.
     - The deliberations and conclusions are protected only if the decision-makers are
         disinterested. Their disinterested independence is not protected, i.e. can be ruled on
     - P – any committee (like the one to investigate the action) authorized by the board where
         defendant directors are members is not valid. Court – rejected. Where some directors are
         charged with wrongdoing, the business judgement rule still applies as long as the
         remaining directors are disinterested and independent. Thus the committee is valid
     - The business judgement rule applies to the final substantive decision of the board
     - However, the committee’s choice of investigative procedures and methodologies is
         something the court is well equipped to deal with – as long as they don’t cross the line
         into business judgement
     - The committee may be required to show their decision was made in good faith – that the
         areas and subjects looked into in deciding whether or not to litigate were examined in a
         reasonably complete and not half-hearted way
     - Here the committee did use proper investigative methods – they conducted interviews,
         reviewed work of the prior audit committee, etc.
     - They also did this in good faith


                                              - 105 -
Zapata Corp v Maldonado 1981 Delaware SC
Stockholder Maldonado brings derivative action against 10 officers/directors alleging breach of
fiduciary duty
The officers held stock options and changed the date of their maturity in order to get them
sooner, thus lessening tax burden, but raising tax burden on the company.
    - Maldonado didn’t go to the board first, as they were all defendants. The board then got a
        minority of disinterested shareholders, who ordered a committee be formed to investigate
        the derivative action, consisting of themselves. The committee’s ruling was decided to be
        binding on the corporation
    - The business judgement rule does not confer power to directors to terminate a suit
    - Can the board delegate its authority to the committee when it is tainted by a majority of
        self interested directors? Yes. The tainted majority is not a legal bar to the board’s power
        to appoint a committee of disinterested board members who can dismiss litigation if it
        finds it is not in the corporation’s best interest
Claim in the court of chancery – whether the suit should/not go forward as it is/not in the best
interests of the corporation, considering committee ruling
    - Issue – a committee ruling if allowed to be binding though the business judgement rule,
        could preclude every derivative action. But – if committee rulings are not binding, then
        the corporation has no way to filter out meritless and harmful litigation. So, a balancing
        point must be found.
    - What is the standard? In past it has been a business judgement standard – if
        independence, good faith, and reasonable judgement are met, the decision is not subject
        to judicial review. The court here finds this is not a proper balancing point. Why?
            o Time delay
            o Directors passing judgement on fellow directors – might evoke sympathy
    - So, the Court of Chancery can use its own judgment in a case involving termination
        of a derivative action about a transaction where the director is on both sides
Process
    - A committee can advise a corporation to bring a motion to dismiss the derivative action
            o Basis – best interests of the corporation, as determined by the committee
            o Each side should be able to make a record (like in a summary judgement)
            o The court can dismiss the action if there is no issue of fact
    - Test the Court of Chancery is to apply –
            o 1) Inquire into the independence, good faith, and reasonableness of the
                 investigation. Here the corporation has the burden of proof. If this test is met then
            o 2) The court should determine, using its own business judgement, whether the
                 motion should be granted




                                               - 106 -
Costs in Derivative Actions

CBCA 242(2) – the court has discretionary power to make the corporation pay the P’s legal costs
before final adjudication of the action

Sarra – Review of Derivative actions under CBCA – Costs

240 – court may order corporation or subsidiary to pay reasonable legal fees incurred by the
client

242(3) – a complainant is not required to give any security for costs

242(4) – court may make an interim order as to costs

124 – the court may order an indemnity as to costs for directors and officers
Are these provisions a good balance or are they insurmountable barriers to derivative remedies?
   - Shareholders should not always be expected to bear the costs of the litigation when the
       benefit goes to the corporation
   - Individual shareholders can often not afford to bring an action, and institutional
       shareholders must weigh the costs of litigation and may just exit the firm
   - On the other hand, the corporation must not be required to finance numerous suits, often
       against its own directors and officers
   - The court filter aims to eliminate frivolous or vexatious suits, or suits where the costs will
       exceed the benefits




                                              - 107 -
The Oppression Remedy
       The oppression remedy is a statutory remedy that protests the interests of security holders,
        directors, officers, and creditors from conduct by the corporation and/or its directors that is
        oppressive or unfairly prejudicial to those interests or that unfairly disregards them
       If a court finds that oppressive or unfair conduct has occurred, it can make any order it thinks fit,
        including replacing a board of directors, amending the corporation’s articles, or requiring it to
        issue securities to certain individuals
       Oppression remedy can be distinguished from the other legal proceedings imposing liability on
        directors because it protects the interests of certain stakeholders, rather than rights arising out of
        contracts, the corporation’s articles or bylaws, or the general duties of the directors to the
        corporation and its stakeholders
       Oppression remedy is protecting the reasonable expectations of members of the protected class
        about how the corporation and its managers will conduct themselves with respect to those
        interests, even where those expectation do not arise from an express agreement, but rather from
        implicit understanding that form the basis of the relationship with the corporation
       Oppression remedy in Canada is a unique creation of Canadian legislatures and courts that
        provides “the broadest, most comprehensive and most open-ended shareholder remedy in
        the common law world”
Statutory Framework
CBCA 241 A complainant may apply to a court for an order
    1) If the court is satisfied that
             a. An act or omission
             b. The business or affairs
             c. The powers of the directors
         Of the corporation or affiliates
Are oppressive or unfairly prejudicial, or unfairly disregard the interest of an
officer/director/shareholder/creditor, the court may make an order to rectify the matter.
    2) The court can make an order
             a. Restraining the conduct complained of
             b. Appointing a receiver
             c. Amending articles or bylaws or creating/amending unanimous shareholder agreement
             d. Directing an issue or exchange of securities
             e. Appointing directors in place of or in addition to current directors
             f. Directing the corporation to buy shares back from shareholders
             g. Directing the corporation to pay a shareholder the money it paid for the shares
             h. Varying a transaction/K, setting aside a transaction/K, and compensating the corporation
                  or any other party to the transaction/K
             i. Requiring a corporation to produce financial statements by a deadline, to the court or
                  someone else
             j. Compensating an aggrieved person
             k. Directing rectification of the registers or other records of a corporation under 243
             l. Liquidating and dissolving the corporation
             m. Directing an investigation under Part XIX to be made
             n. Requiring the trial of any issue
    3) If an order directs the amending of bylaws or articles of incorporation, the directors will comply
         with 191(4) and no other amendment to the bylaws or articles will be made without the consent of
         the court until a court orders otherwise
    4) A shareholder cannot dissent under 190 to an amendment to the articles
    5) A corporation will not make a payment to a shareholder if there are reasonable grounds to believe
             a. The payment would make the corporation unable to pay its liabilities
             b. The corporations assets would be less than its liabilities
    6) An applicant here can apply for an order under 214 in the alternate

                                                   - 108 -
Complainant:
  - Security holder or former
  - Officer/director or former or of affiliate
  - Any person who is in the discretion of the court a proper person to be a complainant

Conduct:
   - Oppressive, unfairly prejudicial to, or unfairly disregard the interests of a security holder,
       creditor, director, or officer
Act or Omission
   - May be that of the corporation, affiliate, or director
Besides the list 241(3)a-n, the court can also make any order it sees fit

All provinces and territories have adopted the oppression remedy except Québec and PEI

Voluntary Adoption
   - In some forms of business organization, i.e. business trusts, there is no adoption of the
      oppression remedy
   - However, some business trusts have adopted it in their declarations

Scope of the Oppression Remedy
OBCA 248 1982
   - Broadest Canadian oppression remedy
   - Not only conduct that is occurring but that is threatened
   - Statutory mandate to the court to intervene where the conduct of directors or officers is
       oppressive, unfairly prejudicial, or unfairly disregards particular interests

Oppression Relief vs. Derivative actions
  - Oppression is simpler than derivative action procedure, thus has surpassed it in popularity
3 crucial procedural differences
Derivative actions
    - Complainant must seek leave of the court to bring a derivative action
           o This can be timely and complicated
           o If an issue is relevant to whether leave should be granted, it will be litigated there
               as well as on the merits
    - By statute, the court has supervision over the derivative action that enables it to issue
       orders concerning the manner in which the action is conducted, which party will have
       conduct of the action, and who will receive any damages awarded
    - The damages will normally go to the corporation unless the court orders otherwise
Oppression remedy
    - No leave requirement
           o Commenced using application procedure
           o Evidence submitted by written affidavit
           o Trial may be ordered where there are disputes about the evidence, but the parties
               will not be permitted to litigate the same issues twice
    - Court has no power by statute to intervene
           o Except settlement, discontinuance, or abandonment requires court approval, but
               the same is true for derivative actions
Claimant can pursue claim for personal compensation for harm

                                              - 109 -
Relationship with Director Obligations
   - An action that complies with duty to act honestly and in good faith with a view to the best
       interests of the corporation under 122(1)(a) can still give rise to a claim under oppression
           o In oppression, courts focus on effects of corporate actions – are the actions
               oppressive or did they unfairly prejudice or disregard the protected interests?
           o Directors acting in good faith have been found to be acting in this way – but only
               where the remedy sought was against the corporation – undoing a transaction or
               redemption of shares
   - Under 122(1)(b), the director must meet an objective standard of diligence
           o The business judgement rule is applied – the court will not intervene where the
               directors have made their decisions honestly, prudently, in good faith, and on
               reasonable grounds
           o So conduct that meets this standard may not give rise to a successful oppression
               remedy application
Standing to Complain
Classes of Applicant
Defined –
    - Current/former registered/beneficial shareholder
    - Current/former director/officer/creditor
    - The Director (a government official)
Undefined – whoever else the court deems a “proper person”
    - Does the presence of the undefined class create too much uncertainty?
    - While who may bring an action is unspecified, who may get a remedy is restricted to
        defined class
    - Creditors fall under “proper person” but courts have been uneven
Stats from Puri and Ben-Ishai study of 71 oppression claims
    - 80% of complainants were shareholders, 67% were minority shareholders
    - 92% were in closely held corporations – success rate 52%
    - 8% publicly held corporations – success rate 33%
Where a shareholder/officer/director brings a claim, it must be the interest in their capacity as a
shareholder/officer/director that they are seeking to protect (i.e. not as employee)
Clitheroe v Hydro One 2002 OSCJ
Clitheroe was CEO of Hydro One. Her employment K contained a provision that if she was terminated
without cause, she would get 3 years of severance pay. After this K was signed, Ontario passed legislation
demanding Hydro One negotiate new Ks with employees including Clitheroe, which would reduce pay
and benefits. It also said that no employee covered in this legislation could bring a claim about
termination until the new contracts were in place. Clitheroe was terminated. She brought a request for an
order under the oppression remedy compensating her for termination .
Court
   - Oppression remedy is designed to protect interest of security holders, creditors, directors,
      or officers, not for employees to bring an action for wrongful dismissal (this is subject of
      an action)
   - Nature and purpose of oppression remedy – to redress oppressive conduct in relation to
      the claimant’s position as shareholder, etc – does not provide remedy to employees
   - Wrongful dismissal claims can be included if termination is part of pattern of oppressive
      conduct
   - There are many employees who are also shareholders or directors. To allow oppression
      here would be to open the oppression remedy to a variety of claims

                                                 - 110 -
Proper Person to bring the Application
First Edmonton Place v 315888 Alberta 1988
First Edmonton Place provided incentives to 315888 (controlled by 3 lawyers) to sign a 10 year
lease. They gave them 18 months rent free and $140126. The lawyers took the money and stayed
in the premises for 21 months without signing a formal lease, then left. First Edmonton Place
seeks an oppression action.

Court
   - Shareholder oppression actions – The minority of shareholders should be protected from
      unfair treatment, but the role of directors in governing the company shouldn’t be usurped,
      nor should the exercise of control by the majority

Creditor Oppression Actions
   - Very few decisions
   - Same approach as with shareholders should be taken
   - Bank of Montréal v Dome Petroleum – agreement between Dome and Amoco restricting
      sale of Dome shares was said to prejudice Bank of Montréal. The court found that since
      the agreement couldn’t go forward without the consent of Bank of Montréal, there was no
      oppression or unfair prejudice
   - Must balance the protection of the creditor’s interest against the management’s freedom
      of action and right to prejudice the interests of the creditor as long as this is not done
      unfairly

Oppression remedy available where –
  - act/conduct of managers/corporation amounted to using corporation as a vehicle for
      committing fraud upon a director

Criteria to look at
   - History and nature of corporation
   - Essential nature of relationship between corporation and creditor
   - Type of rights affected
   - General commercial practice
Test for unfair prejudice should look at the considerations of (not exhaustive)
   - Protection of the underlying expectation of a creditor in its arrangement with the
       corporation
   - Were the acts unforeseeable or could the creditor have protected himself from
       them?
   - Detriment to interests of creditor




                                            - 111 -
Is the applicant a complainant (proper person)?
    - Not a definition, but a grant of broad power of court to do justice and equity where
            o A person who would not otherwise be a complainant ought to be permitted to
                bring an action
            o To right a wrong done by the corporation which would not otherwise be righted
            o Or obtain compensation himself where his interests have suffered from
                oppression/prejudice/disregard by the majority controlling the corporation
            o And the applicant is a security holder/creditor/officer/director
    - Criterion for Proper Person – applicant must show that in the circumstances of the case,
        justice and equity require him to be given an opportunity to have the claim heard
Creditor can be a Proper Person in 2 non-exhaustive circumstances
    - Corporation used as vehicle for committing a fraud upon the applicant
    - Conduct was a breach of underlying expectation of the applicant arising from the
        relationship between the applicant and the corporation
            o Was the expectation reasonable?

   -   There must be at least a prima facie case an injustice would be done to the lessor or there
       would be inequity if the lessor was not allowed to bring its action, leave should not be
       granted
   -   It’s not that ANY person can be a Proper Person. The legislature gives the court broad
       power, but a line must be drawn

Can the lessor be considered a creditor?
   - The applicant must have had an interest as a creditor at the time the acts complained of
      occurred
   - Creditor does not include lessor at a time when rent is not owed

Inducement money
   - Might have been fraud upon the corporation
   - Leave is granted to bring a derivative action for this wrong
   - This was later stayed by the CA




                                             - 112 -
Downtown Eatery v Ontario 2001 CA
Alouche was the manager of For Your Eyes Only, which was owned by Grad and Grossman. His
contract gave him health care and insurance benefits from “our sister organization.” He received
paycheques from Best Beaver. He started a wrongful dismissal action against Best Beaver, and
was awarded damages at trial (in August 1996). However, by this time there was a
reorganization and Best Beaver no longer existed (it ceased operations in March 1996). The trial
judge did not find oppressive or unfairly prejudicial conduct.
    - Alouche says the reorganizations were oppressive or unfairly prejudicial. He brings the
       oppression action as a “Proper Person.”
    - The reorganization that ended Best Beaver was done because of union activities. It was
       not done to deprive Alouche of his settlement. Also, it was done before Alouche was
       awarded the settlement and became a judgement creditor.
    - However Grad took advantage of Best Beaver being a non-operating company when he
       discharged counsel and didn’t pay the judgement
    - The trial judge erred in not granting an oppression remedy – there was oppressive
       conduct
           o Intention to harm the P is not essential to an oppression claim, not is bad faith, or
                lack of probity
           o Complainant must have a reasonable expectation that a companies affairs will be
                conducted with a view to protecting his interests
           o A creditor does have status to bring an oppression claim. Test of Unfair Prejudice,
                not exhaustive (from First Edmonton Place v 315888)
                     Underlying expectation of the creditor
                     The extent to which the acts were unforeseeable or the creditor could have
                        reasonably protected himself from these acts
                     Detriment to the interests of the creditor
    - Oppression remedy has been made against directors –
           o Usually in closely-held corporations with one controlling director (sole and
                directing mind of the corporation) who benefited from the oppressive conduct in
                question

Here Grad and Grossman in shutting down Best Beaver affected a result that was
oppressive/prejudicial to Alouche. Best Beaver was profitable at the time it was shut down and
could have satisfied claims.
   - Alouche was entitled to have his interests protected. Grad and Grosman were obligated to
       protect these interests (in keeping a reserve for claims after Best Beaver was shut down).
       They did not
   - Alouche had a reasonable expectation that Grad and Grosman would keep a reserve for
       claims
   - In not keeping the reserve, Grad and Grosman, the sole controlling owners of the
       company, did benefit. They were able to insulate their assets from being paid to Alouche
   - Thus the oppression remedy goes forward

Notes
   - Differs from First Edmonton Place – there the court found the landlord was not a
      creditor at the time of the conduct and thus not entitled to an appeal

A potential creditor can bring an oppression remedy application about actions that
occurred before the creditor was actually owed any money
                                             - 113 -
West v Edson Packaging Machinery Ltd 1993 OCGD
Application by West for an oppression order ordering
   - Edson to buy back all their shares
   - Edson to pay interest on shares
   - Appointment of an expert evaluator to value the shares
   - Edson to pay Dallas and West’s fees
West and Dallas were employees of Edson Packaging, owned by Edson Holdings. They
purchased shares in 1990 and were dismissed in 1992.
   - They allege they only purchased the shares because President Trevar Gibson pressured
       them into doing so, and said there would be a shareholder agreement within 6 months,
       and that the company would buy back the shares when they left the company or died.
   - Gibson says he always refused a repurchase agreement.
   - Edson ways West and Dallas are not “complainants” – they were not shareholders at the
       time when the alleged coercion took place and the alleged misrepresentations were made
Court
   - The course of conduct giving rise to their reasonable expectations covers a period both
       before and after they became shareholders – thus they are qualified to be complainants
   - Reiterates definition of Complainant/Proper Person in First Edmonton Place
           o Not a definition, but a grant of broad power of court to do justice and equity
              where
                    A person who would not otherwise be a complainant ought to be permitted
                      to bring an action
                    To right a wrong done by the corporation which would not otherwise be
                      righted
                    Or obtain compensation himself where his interests have suffered from
                      oppression/prejudice/disregard by the majority controlling the corporation
                    And the applicant is a security holder/creditor/officer/director
           o At least 2 criteria –
                    Using a corporation as a vehicle to commit fraud upon the applicant
                    Breach of the underlying expectation of the applicant arising from the
                      applicant’s relationship with the corporation
   - The First Edmonton Place criteria shouldn’t be limited to creditors only
   - Thus the West and Dallas are proper persons




                                            - 114 -
What is Covered by Oppression Remedy? – oppression, unfair prejudice, disregard
(Breach of Director’s Duties to Corporation)

Scottish Co-Operative Wholesale Society v Meyer 1959 HL
Scottish Coop wanted to get involved in the Rayon trade. They wanted the expert assistance of
Meyer and Lucas. So they incorporated a subsidiary and issued 3900 of its shares to Meyer and
Lucas and issued the other 4000 shares to itself. They also made Meyer and Lucas directors
along with 3 of Scottish Coop’s own nominees. Eventually the help of Meyer and Lucas was
deemed not to be needed. Scottish Coop offered to buy Meyer and Lucas’s shares but they
refused because the price was too low. Scottish Coop set up a department of themselves that
entered into the rayon trade, which cut into the subsidiary’s market. Meyer and Lucas seek an
order under 210 of the Companies Act ordering Scottish Coop to buy their shares at a price
determined by the damage suffered.
     - Here the directors of Scottish Coop who were also directors of the subsidiary were in a
         conflict of interest – their duties demanded that they seek the highest price of shares for
         repurchase, and the lowest. They chose to do their duty to Scottish Coop in doing nothing
         when they set up a competing business – this was conducting the affairs of the subsidiary
         in a manner oppressive to the other shareholders, Meyer and Lucas
     - Winding up the company would unfairly prejudice Meyer and Lucas as it would give
         them a low share value
It is ordered that their shares be bought by Scottish Coop



Oppression, Unfairness, and Reasonable Expectations
Equity in the Oppression Remedy – Lord Wilberforce 1973 HL
   - Origin as a remedy in equity
   - Justice and Equity recognize that the corporation is more than just a legal entity – that
       there are people behind it
   - Justice and equity do not entitle one party to disregard obligations assumed in law or the
       court to dispense him from them
   - It enables the court to subject the exercise of legal rights to equitable considerations –
       considerations of a personal nature which make it unjust or inequitable to insist on legal
       rights or exercise them in a particular way




                                              - 115 -
Ferguson v Imax 1983 ONCA
Imax was founded in 1967 by Mr. and Mrs. Ferguson, Mr. and Mrs. Kerr, and Mr. and Mrs.
Kroiter. Each husband was issued 700 common shares and each wife was issued 700 class B
preferred shares. Some shares were eventually issued to others, but the number of common
shares and the number of preferred shares was always equal. The husbands, and Mrs. Ferguson,
all participated in the company. She was a film editor and entirely responsible for Imax’s New
York office. In 1974 Mr. and Mrs Ferguson got divorced. She alleges that he, with the
cooperation of the shareholders, sought to force her out of the company. She was fired from the
company. He wanted to buy out her shares, but they were undervalued due to a new accounting
system adopted in 1978. He also blocked the issue of dividends because he didn’t want her to get
the same amount that he did. Finally, a resolution was passed freezing the value of class B shares
and forcing their redemption in a set period of time.

Court
   - When dealing with a close corporation, the court may consider the relationship between
      the shareholders and not just legal rights
   - The court must consider whether the act of the corporation acted in good faith to
      determine whether the act creates a result which is unfairly prejudicial to the minority
      shareholder
   - Each case turns on its own facts

Here when the relationships are taken into account, because the shares are owned by each couple
as a unit, Ferguson is the only one who holds only Class B shares. Thus the resolution was
proposed for the sole purpose of getting Ferguson out of the company. The court issues an order
forever preventing the company from implementing the resolution.




                                             - 116 -
Naneff v Con-Crete Holdings Ltd. 1993 OCGD
Nick Naneff owned a concrete company and wanted his sons Alex and Boris to be involved in the
business so he gave them each 50% of the common shares and maintained control by keeping preferred
voting shares for himself. Both sons were officers and directors. Alex started dating a woman they didn’t
approve of, so they fired him without severance and changed from a bonus payment system (which was
how the sons got paid) to a salary system and didn’t give Alex a salary. Dividends were only declared on
Nick and the other son’s shares. Alex brings an action under the oppression remedy.
Court
    - Powers of the court in the oppression remedy are very broad – may make any order they
        see fit
    - Bad faith not essential
    - Protection of reasonable shareholder expectations
            o Not outlandish expectations, i.e. not wish list
            o But expectations which could be considered part of the compact of the
                shareholders
                     For example, when amicable business partners incorporate, then have a
                       falling out, the rigidity of the corporate form may become tools for
                       dictatorship of the majority
                     Here some disinterested judicial activism is useful
Here the shareholder expectation on the part of Alex was reasonable
    - The business was organized with a view toward the result of the sons eventually taking
        over the business
    - The sons both worked in the business for many years
Oppression
Alex was a shareholder, officer, and director. The other family members, constituting a majority,
in removing Alex from office are exercise of majority power in a way that is oppressive. Their
familial motivations are no excuse for breaking their business obligations.
Alex was given compensation for dismissal and an opportunity to buy control of the family
business.

Naneff v Con-Crete Holdings 1995 ONCA
Reasonable expectations
Alex did expect eventually to be an equal co-owner – but there are 2 other considerations
   - Alex knew Nick would control the business while he was alive – thus Alex could not
        have reasonably expected immediate control of the business
   - Alex knew this was a family business – Alex’s interest in it came out of his father’s
        generosity. Alex should have expected his father’s generosity to end when he started
        drinking, partying, and doing other things he knew his father wouldn’t like
This remedy is more than rectifying oppression
   - The court should interfere as little as possible and only to the extent necessary to redress
        the unfairness
   - Even up the balance, not tip it in favour of the hurt party
This remedy is punitive toward Nick Naneff.
Also, the remedy protects Alex’s interest as a son and not just as a shareholder
And it was unfair to Nick, who had put 40 years of his life, as well as capital investment, into the
business.


                                                 - 117 -
Good Faith, Reasonable Expectations, and Business Judgement

Brant Investments v KeepRite 1991 ONCA
KeepRite was a cooling business whose majority shareholder was ICG. It was having financial
trouble. Management proposed that KeepRite acquire heating assets from another of ICG’s
subsidiaries, so they would become a heating and cooling business. In order to afford this
purchase, KeepRite would need to issue more shares. KeepRite set up an independent committee
to review the transaction, consisting of independent directors. They approved the transaction. A
shareholder’s meeting was called to approve the creation of the new shares. The minority did not
approve. Keeprite offered to buy back their shares and they refused. Keeprite went to the SCC to
get the shares valued. The minority brought an oppression action which was dismissed.

Court
Is there a fiduciary duty owed to minority shareholders by majority shareholders? No
     - This could be inimical to fiduciary duty in 122(1)(a)
     - Imposing a fiduciary duty to any group of shareholders as well as the one to the
        corporation would create conflict for directors, especially where the corporation is not
        doing well economically
     - Oppression remedies are so broad that the specific evidence required to establish breach
        of fiduciary duty would be subsumed by it
Does there need to be bad faith or want of probity in order to find oppression?
     - Trial judge found that wherever a remedy was granted, there has always been bad faith
     - Here the court finds mixed judicial opinion
     - Bad faith was necessary under the old UK statute which required conduct of the corporate
        actors to be oppressive. It has since changed to a requirement of unfair prejudice. Cases
        since the change have not required bad faith – Re Bovey Hotel Ventures
     - Test for unfair prejudice – objective – a reasonable bystander would regard the
        conduct as having unfairly prejudiced the petitioner’s interests – Re Bovey Hotel
        Ventures
     - If the impugned conduct was in bad faith (improper purpose or motive) then this could be
        a consideration in establishing the conduct was unfairly prejudicial
     - CBCA 241(2)(a) refers to a result of corporate conduct, and (b) and (c) refer to the
        manner in which the business affairs are carried on and the directors powers are
        exercised. This distinction is unimportant except where a plaintiff can’t establish an
        oppressive result but can establish unfair conduct
             o No bad faith requirement exists under 241
     - Unfair Disregard or prejudice will likely turn up some bad faith, but it is not required
             o In finding interests were disregarded or prejudiced unfairly, bad faith in motive
                could be relevant but in other cases there can be an unfair result with no bad faith
                – Palmer v Carling O’Keefe Breweries
             o Malice or intent to do harm is not a necessary ingredient but there can be cases
                where the purpose of the acts is relevant to determining if they were oppressive




                                              - 118 -
Onus of Proof in Oppression
  - Brant asserts that where a transaction benefits one group of shareholders and is to the
      detriment of another group, the burden automatically shifts to the minority to show the
      transaction was at least as fair to the minority as all available transactions, no undue
      pressure, and intrinsic fairness of the transaction to the minority. There is no such
      requirement in law, and such is not the case here
  - Brant also asserts that the burden shifts in non arms-length transactions. That is also not
      the case

Independent Committee
Brant alleges the committee was not independent and gave advice that was not in the best
interests of Keeprite and its shareholders
    - The court finds the committee was independent – they felt free to deal with the
        transaction on its merits
    - They were aware this was not an arm’s length transaction, were aware of their mandate,
        and correctly assessed the benefits of the transaction to Keeprite

Business Judgement and The Oppression Remedy
Brant argues that the judge improperly deferred to the business judgement of the directors.
   - Court – he properly deferred to the business judgement rule
           o A judge does not know enough to make the business decision required
           o But he is well equipped to assess the transaction for the factors required in
               oppression
   - Here the judge carefully scrutinized the transaction for oppression and found none




                                             - 119 -
Ford Canada v Ontario Municipal Employees Retirement Board 2006 ONCA
Ford US owned 94% of Ford Canada. OMERS was a minority shareholder. Ford US decided to privatize
the entire company. The minority dissented, but minority shareholder approval was not required because
Ford US owned more than 90% of the shares of Ford Canada. Ford US offered the minority shareholders
$185 per share. The shares were valued at between $170 and $200 a share. Ford brought an action to fix
the fair value of the shares. OMERS brought an oppression action because the transfer pricing system
Ford Canada and Ford US use to buy parts from each other caused Ford Canada to record losses from
1985 to 1995. Ford US claims the losses were due to the low Canadian dollar and recession in Canada.
    - The transfer pricing system adjusts prices for parts sold between Canada and US divisions to
         match the prices that would have been paid had the transactions been at arm’s length
    - If the system is unfairly skewed to record losses of Ford Canada, this can deprive the minority
         shareholders of their profit

Oppression – The fairness of the Transfer Pricing System
   - The transfer pricing system was found by experts to be skewed and unrealistic and would not be
      seen by 2 actual arm’s length parties – it is unfair and oppressive to the minority shareholders
          o Ford claims there was nothing management could do to remedy the situation – economic
              forces, also the suggestions of OMERS were unrealistic. The court rejects this argument
              – Ford Canada could have negotiated a fair agreement (like they did with Mazda or Kia,
              or like Chrysler and GM do with their Canadian subsidiaries)

The Business Judgement Rule
   - Business judgement that in hindsight has been shown to be mistaken or imperfect will not give
      rise to liability under the oppression remedy
           o Unless there is bad faith or improper motivation
   - Ford Canada’s directors didn’t understand the transfer pricing system – there was little discussion
      of it on the board and they did not conduct an independent review – they simply accepted the
      system determined by Ford US – there was no attempt to negotiate an arm’s length system
   - Thus there is no deference under the Business Judgement Rule because the board decision was
      not made reasonably – CW v WIC
   - Directors are only protected to the extent that actions actually evidence their business judgement
      – UPM Kymmene

Oppression and Shareholder’s Reasonable Expectations
   - CA –
          o It is not clear that the actions must be reasonably foreseeable as oppressive. The only
              thing that must be oppressive is the result
          o Expectations are a question of fact – Evidence doesn’t have to be called as to what the
              shareholder’s expectations were. It can be established through direct evidence but also
              through reasonable inferences
          o Reasonableness of the expectations – not a shareholder wish list but expectations arising
              from the shareholder compact – Naneff
          o It is reasonable for a shareholder to rely on written and public pronouncements of what
              the corporation will do – Themadel Foundation v Third Canadian General Investment
              Trust
   - Here it was found at trial that prices would be negotiated based on arm’s length standards (from
      Ford’s financial statements), and management would act in the best interests of the corporation.
   - Also a board acting in the best interests of the company would renegotiate the agreement when
      the Canadian dollar dropped
   - Thus, the trial judge did not make an error and his finding of oppression stands


                                                - 120 -
Derivative Action and the Oppression Remedy
Pasnak v Chura 2003 BCSC
Pasnak and Chura are in a business relationship with each other and want to bring the
relationship to the end. Pasnak wants to buy Chura’s shares in their 4 companies. The issue is the
price Pasnak will pay. Pasnak wants to pay less because Chura’s breach of fiduciary duty and
duty of care to Fleetwood led to its shares being worth nothing. Pasnak says this conduct was
oppressive or unfairly prejudicial to the shareholders of Fleetwood. Because of this oppression,
the courts should establish any purchase price it sees fir to the shares.
Court
Oppression
     - Designed to bring relief to members who are being oppressed or treated prejudicially
     - And who do not have control over the company and cannot bring about a change in the
        oppressive behaviour on their own
Chura says the claims are rightfully those of only Fleetwood and thus Pasnak should have
obtained leave of the court to make a derivative claim in the name of Fleetwood
Derivative action
     - Gives member or director the right to bring a claim on behalf of the corporation
     - Where the member or director doesn’t have the internal authority to make the company
        bring the action
A company and its shareholders are distinct entities. Only the company can sue for a wrong done
to it
     - Company claims can be brought only by the company or through a derivative action
     - Oppression against an individual or group personally can be brought as an oppression
        claim
The issue is how to filter.
     - Pasnak claims remedies for oppression can be granted to shareholders even though their
        losses are consequences of all shares losing value
     - Chura claims that the oppression remedy is only available to a shareholder where they
        have suffered personal losses distinct to those suffered by the company
            o The loss to a shareholder of the value of a share, where it a consequence of all
                shares losing value, can only be brought by a derivative action

Defendant’s Authorities:
Furry Creek v Laad
    - A shareholder can bring an oppression claim for a company claim (an action that
       lowered share values for the whole company) provided they have been affected by
       the breach in a different or additional way
    - Here every shareholder except the defendant had been issue more shares, with the effect
       of proportionally lowering the one shareholder’s share value
What is a company claim (where only derivative actions and not remedies for oppression are
allowed)?
Brown v Menzies Bay Timber 1917
    - There was no direct damage to the P. his only loss resulted from wrongs alleged to have
       been done to the companies in which he was a shareholder and not him personally

                                            continued


                                             - 121 -
Prudential v Newman Industries 1982 England CA
   - A shareholder cannot recover damages just because the company has suffered damages
   - A shareholder cannot recover a sum equal to diminution in share value, because this loss
      is a reflection of company loss. There is no personal loss

Green v Victor Talking Machines 1928
   - When there are numerous shareholders, each shareholder suffers proportionally to the
      amount of shares he owns, but equally
   - Each shareholder will be made whole when the corporation obtains restitution from the
      wrongdoer
   - Only the corporation can bring an action because only the corporate or derivative right
      has been injured
   - The corporate form insulates the people of the corporation from those who deal with
      them
   - This rule holds even where the intention is malicious toward 1 shareholder, because that
      individuals corporate or derivative right are still the only rights injured

Also no oppression remedy available where
   - Appropriation of corporate assets by the majority
   - Wrongful transfer of corporation’s assets for no consideration resulting in
       destruction of share value
   - Company rents out its property to managers at improperly low rent
   - Appropriation of corporate opportunity resulting in loss of profit

Chura’s line of reasoning on what should be a derivative action should be followed as it is more
recent includes consideration of most up to date legislation
Here Pasnak cannot show Chura’s mismanagement caused any loss specific to him besides loss
in share value, which the whole corporation experienced. Thus this should be a derivative claim
on behalf of Fleetwood, not an oppression claim




                                             - 122 -
Right to a Remedy for Past Oppression

Ford Canada v OMERS 2006 ONCA
The oppression of Ford took place between 1985 and 1995. OMERS asserts that anyone who
was a shareholder on September 11 1995 was a complainant, no matter when they bought their
shares.
Court
    - Entitlement to a remedy for past oppression is a question of first impression
    - Some of the remedies specified in 241 are derivative in nature, and some are personal in
        nature
    - Here OMERS says the wrong done was one to all of Ford Canada and seek a remedy that
        is derivative in nature – the return to Ford Canada of the assets that were improperly
        diverted to Ford US
    - Nature of relief should be anchored in remedy sought – not distinction between personal
        and derivative causes of action
            o It would be a serious mistake to confine the court’s broad jurisdiction in the
                oppression remedy into a formal construct of causes of action
            o 241 is founded on principle of a wrong done to shareholders
    - OMERS seeks relief as an aggrieved person
    - A sale of shares from an oppressed holder to the next holder does not carry with it the
        right to collect damages from oppression. The oppression would have caused the value of
        the shares to decrease. The right to collect damages stays with the oppressed person –
        Royal Trust v Hordo
            o To award a present shareholder for past oppression would be a windfall
    - In Richardson Greenshields, the P only purchased shares after the oppressive conduct
            o But there Richardson Greenshields sought an injunction whereas OMERS seeks
                compensation
            o OMERS seeks personal compensation, not compensation for or to enforce rights
                of the company
    - Allowing a shareholder to obtain a remedy for past oppression is inconsistent with
        reasonable expectations
    - A remedy which rectifies cannot be a remedy which gives a shareholder something more
        than he reasonably expected

Notes
JG MacIntosh
Derivative action – Arises where the corporation is injured by the wrongdoing
   - When all shareholders are affected equally, with none experiencing any special harm

Personal or Direct action – the harm has a differential impact on shareholders (different classes
or different members of a single class)




                                             - 123 -
Winding Up
   -   Involves termination of the firm as a separate entity and surrender of the corporate charter
   -   Can be done voluntarily – at the instance of directors
   -   Can be done involuntarily at creditor displeasure
   -   Can also be done involuntarily by shareholders where
          o Under unanimous shareholder agreement, an event has occurred that entitles the
              complaining shareholder to demand winding up – 214(1)(b)(i)
          o It is just and equitable that the firm be wound up – (ii)
          o Conditions for oppression remedy have been met – (iii)

Ebrahimi v Westbourne Galleries Ltd 1973 HL
Ebrahimi is a shareholder who wants Westbourne to be wound up. The other 2 shareholders
don’t. Westbourne sells Persian carpets. Westbourne was founded by Nazar and Ebrahimi with
500 shares each. Later Nazar’s son joined and they each gave him 100 shares. Since all 3
shareholders were directors, no dividends were paid. The 3 were reimbursed through director
salaries. Nazar and his son removed Ebrahimi from his position as director. They seek an order
under UK Companies act 210 for the purchase of Ebrahimi’s shares. In the alternative they want
the company to be wound up.

Winding up – what is just and equitable?
  - There is no need to create categories – the definition of what circumstances are just and
      equitable for winding up should be kept general
  - The action need not only affect the applicant in his role as shareholder
  - Analogy to partnership – should winding up be granted only in situations where the
      controlling parties of the companies are like partners and there is a deadlock? No, this is
      an example of a good instance to grant winding up, but not a restrictive rule
  - Exclusion of the petitioner from management could be a factor in making it just and
      equitable that a company be wound up
  - Superimposition of equity typically requires
           o Organization formed on personal relationship
           o Understanding that each shareholder will have a say in governing the
               organization
           o Restriction on the transfer of shares – the member removed from
               management is stuck in the company and cannot take his interest elsewhere
  - It is lawful for a majority to remove a director. In making a case for winding up, the
      removed director/shareholder must point to an underlying obligation in good faith that he
      would be allowed to participate in management decisions as long as the company exists
      (i.e. a partnership-like arrangement)
  - Here such a relationship existed, then Ebrahimi was dismissed as a director and thus shut
      out of the decisions of the company and no longer in a position to be paid – this is a case
      for winding up
  - Even if the intentions are in good faith toward the best interests of the company, this does
      not mean equitable winding up cannot be found – bad faith is not required




                                             - 124 -
Minority
   - Also mentions the test for oppression
         o Oppression toward himself or others
         o Winding up would be available under the just and equitable clause
         o But winding up would unfairly prejudice the oppressed members
   - Then the corporation could make an order for the purchase of shares

Just and Equitable Winding Up
   - Upon winding up, the remaining shareholders will probably continue the business in the
       form of a new corporation
   - Winding up orders are often resisted. Why? The liquidation of the corporation is subject
       to tax on capital gains, then is used to form the new company. Also the price for minority
       shares may be too high

In past decisions, just and equitable winding up has fallen into 3 categories
    - Deadlock
           o Inability to elect directors
           o Equal split on fundamental policy so that the business cannot be carried on
           o Constant fighting and sabotage
    - Where the firm is like an incorporated partnership, and there has been a breakdown in
       mutual trust and confidence
           o Tempting analogy because in partnerships, one partner can decide to terminate
               unilaterally
           o However, a corporation is a different form of organization, where unilateral
               termination rights have been waived, and the decision to go from partnership to
               corporation can come from a variety of motivations
    - Management has demonstrated a lack of probity in the conduct of the corporation’s
       affairs
           o Loch v John Blackwood Ltd 1924 PC – A man died and instructed the executor,
               his brother in law, to incorporate a company with half of the shares to his sister, a
               quarter to his son, and a quarter to his daughter. The executor gave half to the
               sister/wife slightly less than a quarter to the son and daughter and the rest to his
               own nominees. Thus he and his wife had control of the company and never issued
               dividends to the son and daughter. The son died and the daughter’s winding up
               order was granted

If a minority shareholder wants out, it may be better for the corporation to simply buy him
out instead of having the corporation wound up, then having everyone pay tax on their
gains, then reincorporate a new company




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