Documents
Resources
Learning Center
Upload
Plans & pricing Sign in
Sign Out

Agent Duties LSA AED

VIEWS: 10 PAGES: 81

									                                                                                     Tufo, Camion, Niziblian
                                                                                              Summer 2010


    I. TYPES OF BUSINESS ASSOCIATIONS


    a.) Sole Proprietorship

       o    Single entity investor
       o    Unlimited liability
       o    Governance – mostly unrestricted
       o    No perpetual existence

Investment, Equity, Debt, and 
 Trade Creditor
      o     Investors in a business are persons who provide funds that are used to acquire assets that will
            be used in the business
      o     Equity investor - right to receive a “residual” amount.
      o     Creditors – i.e. Bank and trade creditors (persons who supplied goods or services on credit)
            -     Entitled to receive fixed payments
            -     Investments can be made in exchange for a virtually infinite variety of possible benefits

Agency – Two Concepts
     o    Legal Relationship
           -    An agent is a person who affects the legal relations of another person, the “principal”
           -    Can affect the legal relations by contract and by tort
     o    Agency costs
           -    A law and economics term referring to the costs that arise when the interests of the
                 investor and the interests of the agent do not align

    b.) Partnership

       o    Kramer has been operating the business for some time now. Many people come to the store and
            it is a success. Kramer wants to expand the business but all of his funds are tied up.
       o    His buddy Newman has an excess amount of funds and is interested in partaking in Bro’s Buys.
            But he wants a say in how the business is run, so Kramer agrees to let Newman make decisions
            jointly with him.
       o    The arrangement between Kramer and Newman is a partnership
       o    Partnership involves more than one equity investor, each equity investor being referred
            to as a partner

Default Rules
      o Rules in partnership are detailed in statutes but they represent default rules
      o Default rules are rules that the parties would have agreed to had they put their mind to the issue
           at hand
      o Statutory default rules thus minimize transaction costs by eliminating the need for parties to
           bargain for them
      o Parties are free, therefore, to contract out of the default rules
      o But where gaps exist in private contracts, default rules fill those gaps

Types of Partnerships
      o Limited partnership – comprised of one or more partners whose liability is limited to the
           amount of their investment and one or more “general partners” whose liability is not so limited
      o Limited liability partnership - partners are not liable for the acts of their fellow partners or
           employees unless they were directly supervising the activity that caused the loss
      o Undeclared partnership – the de facto partnership where parties fail to register for a general or
           limited partnership; available in Quebec only

    c.) Corporations

Key Features:
                                                                                                          1
    -    Separate existence
    -    Limited liability
              Allows for limited liability and management of business unlike limited partnership
    -    Perpetual existence
              i.e. If Kramer and Newman were partners and sold their partnership interests to Elaine and
                 Jerry, the Kramer/Newman partnership in the business would come to an end even if the
                 business itself might be carried on by Elaine and Jerry in exactly the same way; wouln’t
                 happen in a corporation

Investors in a Corporation
       o Shareholders
            - Equity investors
            - Entitled to residuals; do not own assets of corporation
            - Entitled to certain rights such as shares in distribution of profits, distribution of the net
                     proceeds of liquidation/dissolution, right to vote on important matters

        o      Do Shareholders “own” the corporation?

Management of a Corporation

Insert Image

    d.) Other Business Associations

               o   Limited liability companies (US)
               o   Cooperative associations
               o   Joint ventures
               o   Franchises
               o   Non-profit/societies
               o   Unincorporated Associations


    II. AGENCY AND MANDATE

Agency is the relationship that exists between two persons when one, called the agent, is considered in law to
represent the other, called the principal, in such a way as to be able to affect the legal position of the principal
Agency relationships are present in numerous transactions. It is hard to go through a day without
encountering an agency relationship.

CCQ 2130. Mandate is a contract by which a person, the mandator, empowers another person, the
mandatary, to represent him in the performance of a juridical act with a third person, and the mandatary, by
his acceptance, binds himself to exercise the power.

The power and, where applicable, the writing evidencing it are called the power of attorney.

Features of Agency

    1.) The agent must be under the control of the principal
      - The greater the power of control over the agent, the greater the likelihood that the principles of
        agency are applicable

    2.) Requires consent of principal and agent to the relationship
      - The parties can be held to have consented to an agency relationship "if they have agreed to what in
        law amounts to such a relationship, even if they do not recognize it themselves and even if they have
        professed to disclaim it."
      - Consent can be either express or by implication

                                                                                                                  2
                                                                                         Tufo, Camion, Niziblian
                                                                                                  Summer 2010



CCQ 2132. Acceptance of a mandate may be express or tacit. Tacit acceptance may be inferred from the
acts and even from the silence of the mandatory.

CCQ 2143. A mandatary who agrees to represent, in the same act, persons whose interests conflict or could
conflict shall so inform each of the mandators, unless he is exempted by usage or the fact that each of the
mandators is aware of the double mandate; he shall act impartially towards each of them.

Where a mandator was not in a position to know of the double mandate, he may have the act of the
mandatary declared null if he suffers injury as a result.


    3.) Authority is given by the principal to the agent
      - Authority consists of what an agent can and cannot do, and how he can affect the legal position of
        the principal.

Note: It is not necessary to use the term “agent” to describe the relationship. Likewise, a contract of agency
is not needed to define the relationship

Agency v. Employment
   o Agents have the right to enter into contractual relations on behalf of the employer.
   o An agent and an employee may not owe the same fiduciary duties to the employer.
   o A person who is an employee may also be an agent of the employer.
   o A person can be an agent without being an employee.

Creation of Agency
  -    Expressly by contract or mandate
  -    Implicitly by conduct
  -    Without a special contract
  -    Without a contract in writing
  -    Without anything having been expressly agreed as to terms of employment, remuneration, etc.
  -    By estoppel

   Note: Estoppel is based upon detrimental reliance. A person who by words or conduct has allowed
   another to appear to the outside world to be his or her agent, with the result that third parties deal with
   that other as the first person's agent, cannot afterwards repudiate this apparent agency, if to do so would
   cause injury or loss to such third parties.

Authority is the extent to which an agent can affect the legal relations of the principal. There are two types:

       1)      Actual
       2)      Apparent

       1. Actual Authority

       The authority which in fact the agent has been given by the principal under the agreement or contract
       which has been made between them, or by virtue of subsequent ratification.

                 - Can be express or implied
                 - Does not require consideration
                 - Two types: express actual authority and implied actual authority

                   Express Actual Authority
                 - The principal has stated either orally or in writing what the agent’s authority is
                 - Authority that can be inferred from the written or oral words expressing the scope of the
                    agent’s authority
                                                                                                              3
                       Implied Actual Authority
               -       The authority that the principal and agent would have expected the agent to have in the
                       circumstances
               -       This is part of an agent's actual authority, which the principal has consented, by
                       implication, that the agent should have
               -       Every agent has implied authority to do everything necessary for, and ordinarily
                       incidental to, carrying out his express authority according to the usual way in which such
                       authority is executed

CCQ 2136. The powers of a mandatory extend not only to what is expressed in the mandate, but also to
anything that may be inferred therefrom. The mandatory may carry out all acts which are incidental to such
powers and which are necessary for the performance of the mandate.

               -       Can be discerned from usual or customary authority
               -       The usual authority of an agent is determined by looking at what the agent has been
                       allowed to do in the past
               -       If the agent has done certain things in the past that are outside the express authority of
                       the agent, but the principal has allowed the agent to do those things, then the agent may
                       be said to have usual authority to do those things

                       Implied Actual Authority (Custom)

                   -    Determined by looking at the kind of authority agents of that type normally have
                   -    An agent can argue if there is an accusation that he/she did not have authority that
                        agents of his kind customarily have the authority on which the agent acted

CCQ 2137. Powers granted to persons to perform an act which is an ordinary part of their profession or
calling or which may be inferred from the nature of such profession or calling, need not be mentioned
expressly.

                   -    The custom must be:

                           Known to the principal, or be so notorious that the principal cannot say that he has
                            no knowledge of it
                           Reasonable and lawful

     2. Apparent Authority

     In Freeman and Lockyer v. Buckhurst Park Properties (Mangal) Ltd., Diplock L.J. explained that an "apparent"
     or "ostensible" authority was a legal relationship between the principal and the contractor created by a
     representation, made by the principal to the contractor, intended to be and in fact acted upon by the
     contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind
     within the scope of the "apparent" authority, so as to render the principal liable to perform any
     obligations imposed on him by such contract.

                       Establishing Apparent Authority

            1.) The alleged principal must have made a representation, or permitted a representation, that
                the alleged agent had authority to act on behalf of the alleged principal
            2.) A third party reasonably relies on the representation to her or his detriment.

Note: The representation by the alleged principal can be express or implied from words, conduct or the
circumstances.



                                                                                                               4
                                                                                           Tufo, Camion, Niziblian
                                                                                                    Summer 2010



           Consequences Once Authority is Established

CCQ 2157. Where a mandatary binds himself, within the limits of his mandate, in the name and on behalf of
the mandator, he is not personally liable to the third person with whom he contracts.

The mandatary is liable to the third person if he acts in his own name, subject to any rights the third person
may have against the mandator.

CCQ 2158. Where a mandatary exceeds his powers, he is personally liable to the third person with whom he
contracts, unless the third person was sufficiently aware of the mandate, or unless the mandator has ratified
the acts performed by the mandatary.


Obligations of the Mandator Towards Third Persons

CCQ 2160. A mandator is liable to third persons for the acts performed by the mandatary in the
performance and within the limits of his mandate unless, under the agreement or by virtue of usage, the
mandatary alone is liable.

The mandator is also liable for any acts which exceed the limits of the mandate, if he has ratified them.

CCQ 2163. A person who has allowed it to be believed that a person was his mandatary is liable, as if he
were his mandatary, to the third person who has contracted in good faith with the latter, unless, in
circumstances in which the error was foreseeable, he has taken appropriate measures to prevent it.

CCQ 2164. A mandator is liable for any injury caused by the fault of the mandatary in the performance of his
mandate unless he proves, where the mandatary was not his servant, that he could not have prevented the
injury.


Ratification
Where the agent acts beyond his or her authority the principal may nonetheless choose to accept what          the
agent has done by “ratifying” the act of the agent. Ratification means that the principal agrees with         the
performance of the action undertaken by the previously unauthorized agent. When this occurs,                  the
ratification relates back, and the previously unappointed agent is treated as having been authorized at       the
time the act in question was performed.

       Circumstances in Which Ratification Can Occur

       A person can ratify a contract entered into by another person on their behalf if:

         a.    The other person purported to act on behalf of the person who seeks to ratify
         b.    The person who seeks to ratify was in existence and was ascertainable at the time the agent
               acted
         c.    The person who seeks to ratify must have had the legal capacity to do the act both at the time
               the agent acted and at the time of the ratification.

       Requirements for Ratification

         o Ratification can be express, by conduct, or by acquiescence
               - An express ratification can be oral or in writing, by the conduct of the principal (any
                    performance or part performance) or by acquiescence
         o Ratification must be based on a knowledge of all the relevant facts

       Consequences of Ratification

                                                                                                                5
          o The ratification relates back to the time of the offer and acceptance between the agent and the
            third party.
          o The principal can sue the third party and can be sued by the third party.
          o The agent is no longer liable for a breach of warranty of authority.
          o The agent is no longer liable to the principal for exceeding his authority.
          o The principal will be liable to the agent for reasonable remuneration and to indemnify the agent
            for expenses reasonably incurred by the agent in effecting the contract.

Duties of Principal to Agent
        o Pay remuneration
                 But generally requires an express agreement (since an agency relationship can be
                  gratuitous) or circumstances in which the agent would not have been inclined to act
                  gratuitously
                 Requirement to pay the agent’s expenses and indemnify the agent against losses

Duties of Agent to Principal
The agent is said to owe certain fiduciary duties to the principal. These duties are implied terms of the
relationship between the principal and the agent (and can be varied by express agreement/circumstances).
These duties include:

      To perform/to obey: an agent, having been given definite instructions and agreeing to the terms of
       the instructions and the manner in which the instructions are to be carried out, has to follow them.
     Not to delegate: cannot employ another to perform his tasks.
     To perform with care and skill: not merely that which the agent in fact possesses, but rather such
       as is reasonably necessary for the due performance of his undertaking.
     Loyalty

        - An agent owes a duty of loyalty to the principal. The agent is obliged to act in the interests of the
          principal, not in his own interests (he can put his interests first only with consent of the principal).
        - Unless an agent has the consent of the principal, the agent may not make use for his own personal
          benefit the assets of the principal or info garnered from the principal. If anything of the
          principal’s is used, the profits thereof must be disgorged.

CCQ 2146. The mandatary may not use for his benefit any information he obtains or any property he is
charged with receiving or administering in carrying out his mandate, unless the mandator consents to such
use or such use arises from the law or the mandate.

     Not to make secret profits (ex. a stockbroker is asked to sell shares for $10 per share but sells them
       for $12 per share and pockets the difference)
     To keep proper accounts

CCQ 2147. The mandatary may not, even through an intermediary, become a party to an act which he has
agreed to perform for his mandator, unless the mandator authorizes it or is aware of his quality as a
contracting party. (to avoid conflict of interest and delegation)

Remedies for the Breach of Agent’s Fiduciary Duties
    Transaction is void
    Agent is required to account to the principal for /disgorge any profits made in the transaction.
    Damages/injunction available to compensate for the losses caused by a conflict of interest (usually
       necessary against former renegade agents)

CCQ 2146. If the mandatary uses the property or information without authorization, he shall, in addition to
the compensation for which he may be liable for injury suffered, compensate the mandator by paying, in the
case of information, an amount equal to the enrichment he obtains or, in the case of property, an appropriate
rent or the interest on the sums used.

                                                                                                                6
                                                                                          Tufo, Camion, Niziblian
                                                                                                   Summer 2010



Undisclosed Principal
o A principal of whose existence the third party is unaware so that the third party does not know that the
    person with whom he is dealing is somebody’s agent.
o An undisclosed principal can sue in his own name on an contract duly made on his behalf as long as the
    agent intended to act on the principal’s behalf.
o BUT the third party may argue that the contract was made with the agent for personal reasons which
    induced the third party to contract with the agent to the exclusion of his principal or anyone else.
o An undisclosed principal is bound by, or can claim under, a contract entered into by an agent acting
    with express authority (so if an agent exceeds his authority, no binding/claim possible)


    Principal




    Agent                     3rd Party
                       K


CCQ 2165. A mandator, after disclosing to a third person the mandate he had given, may take action directly
against the third person for the performance of the obligations he contracted towards the mandatary, who
was acting in his own name. However, the third person may plead the inconsistency of the mandate with the
stipulations or nature of his contract and the defenses which can be set up against the mandator and the
mandatary, respectively.

If proceedings have already been instituted against the third person by the mandatary, the mandator may
exercise his right only by intervening in the proceedings.

Liability of Principal for Agents’ Torts

CCQ 1463. The principal is liable to reparation for injury caused by the fault of his agents and servants in the
performance of their duties; nevertheless, he retains his recourses against them.

Under the common law, principals are responsible for torts committed by their agents under the doctrine of
vicarious liability. A principal is liable for a tort committed by his agent if the agent committed the tort while
acting within the scope of his authority. The act in question must fall inside the express, implied or apparent
authority of the agent.

Lloyd v. Grace, Smith & Co.

A clerk employed in the law firm of Grace, Smith & Co. defrauded a client, Emily Lloyd, of her sole
remaining assets. Mrs. Lloyd owned two cottages and had loaned 450k to a Mr. Rushworth secured by a
mortgage on a house. Mrs. Lloyd was dissatisfied with the income she was receiving from these investments.
She called at the law firm of Grace, Smith & Co. to consult on this. She dealt with Mr. Sandles who was the
firm’s conveyancing manager and managing clerk, and who conducted the conveyancing work of the firm
without supervision. Although the name of the firm was Grace, Smith & Co., Mr. Smith was the only
remaining lawyer of the firm and his time was largely taken up attending to his duties as an alderman. Mr.
Sandles convinced Mrs. Lloyd to sell the cottages and call in the mortgage. Sandles left the room and
returned 20 minutes later with two documents that he asked Mrs. Lloyd to sign. Mrs. Lloyd signed the
documents without reading them over, believing they were something she had to sign before the sale could
be proceeded with. The documents were in fact a conveyance by Mrs. Lloyd to Sandles of the cottages and a
transfer of the mortgage. Sandles mortgaged the cottages to a bank for a loan from the bank and transferred
the mortgage using the funds so raised to pay off personal debts. Mrs. Lloyd sued Smith.


                                                                                                                7
Ernst & Young v. Falconi

Falconi was a lawyer in the firm of Klein, Falconi and Associates (KFA). Falconi pleaded guilty to a charge
under the Bankruptcy Act of assisting persons who were adjudged bankrupt in making fraudulent
dispositions of their property. Klein had no personal involvement with the transactions. Each of the
transactions involved the use of the legal services of KFA in the preparation of mortgage documents,
documents transferring title to assets, corporate minutes, reporting letters and other services normally
performed by a law firm in the course of a real estate or commercial practice. Klein argued that the acts of
Falconi in assisting clients in making fraudulent transfers could not be considered within the ordinary scope
of the business of the law firm.

Policy Reasons for the Liability of the Principal for Torts Committed by the Agent

     Deterrence / Least Cost Avoidance
            - If a particular activity can cause harm then imposing the cost of the harm on that activity
                can serve to deter it.

     Allocation of the Loss to the Activity Causing the Loss
             - Increases the price of the goods or services provided through the particular activity that
                 covers for the added cost of harm prevention and the cost of compensation for losses that
                 are not avoided

     Concern for Compensation of the Victim
           - A plaintiff may have suffered a loss that a judge may feel is deserving of compensation. A
                particular defendant in the case may be the only source for compensation available. This
                may have an affect on the judge’s view of whether the defendant should be made liable.

Termination
 o    An agency relationship can be terminated by the act of the parties or by operation of law.
 o    By Act of the Parties:
          - By the act specified in the agency agreement.
          - If not specified in the agreement, it is unilaterally terminable on notice (no concept of
               reasonable notice as in employment law)
 o   Termination by Operation of Law:
          - Bankruptcy
          - Frustration (where the purpose of the relationship no longer exists)
          - Death

Exercises

Alfred is starting his own law firm. In preparation, he hires Bertha, an assistant to help put together the firm.
A tells B to “go out and hire three associates”. What is B’s authority?

Ted, a former associate at Anna’s old firm hears she is starting her own firm and calls to ask for a job. Anna
tells Ted that Brad is taking care of hiring and immediately after, screams at Brad never to hire Ted, the
biggest moron she ever worked with. Two weeks later, Brad is still having trouble finding associates. By
chance, he runs into Ted who hands him a copy of a stellar resume and assures him how much he and Anna
got along at the old firm. Brad hires Ted. Anna refuses to honour the offer to Ted. Did Brad have authority
to hire Ted, and if so, what kind?

What if Ted spoke only to Brad and not to Anna? Anna still tells Brad not to hire Ted, but doesn’t tell Ted
that Brad is in charge of hiring. Ted hears about this nonetheless and Brad and Ted meet. Brad gives Ted
his card which states his name and title, “Hiring Agent”. Brad hires Ted, Anna refuses to honour the offer to
Ted.
Anna decides starting her own firm is too much trouble. Instead, she becomes a silent, controlling partner in
a two partner (including her) firm. A makes the other partner, Xavier, managing partner, but tells X not to
                                                                                                               8
                                                                                          Tufo, Camion, Niziblian
                                                                                                   Summer 2010


hire any associates from Harvard Law school because she thinks they are too pretentious and make lousy
lawyers. X meets Yola, a Harvard Law grad, at the bar he frequents and hires her. Shortly thereafter, X finds
out he will be arrested for insider trading and skips town. Accordingly, Y loses her job, but finds out about
A’s involvement. Y sues A. Who wins?


    III.PARTNERSHIPS

Partnerships are a basic and essential form of business organization and are founded on trust. Their
simplicity, tax treatment, and lack of formality make them an attractive option for individuals and small
businesses.

CCQ 2186. A contract of partnership is a contract by which the parties, in a spirit of cooperation, agree to
carry on an activity, including the operation of an enterprise, to contribute thereto by combining property,
knowledge or activities and to share any resulting pecuniary profits.

Partnership v. Other Business Associations
o    Like a sole proprietorship, partners carry on their business directly
o    Unlike a sole proprietorship, more than one individual is involved
o    Unlike a corporation, the partnership does not have a separate legal personality
o    Partners are agents for each other and share unlimited liability

Partnership Law
o    Governed by statutes, (Partnership Act in Ontario, Civil Code in Quebec)
o    The structure, management, rights, and obligations of the partners and the partnership are all a matter
     for agreement between the partners
o    In the absence of any agreement, the rules of statute govern
o    One of the matters that may not be contracted out of is the existence of the partnership itself

Formation of a Partnership

      Civil Law

CCQ 2187. The partnership or association is created upon the formation of the contract if no other date is
indicated in the contract.

Partnerships register at the Ministère du Revenu (Direction du registraire des entreprises)

      Common Law
       Cox & Wheatcroft v. Hickman
       A right to participate in profits affords cogent, often conclusive evidence that the trade in which
         the profits have been made was carried on in part for, or on behalf of, the person setting up such a
         claim.
       Nevertheless, the real ground of liability is that a trade has been carried on by persons acting on
         one’s behalf. When that is the case, one is liable to the trade obligations and entitled to its profits,
         or to a share of them.

Cox & Wheatcroft v. Hickman (1860)
Jurisdiction UK (HL)
Facts         An iron foundry, Smith & Sons, developed financial problems and could not pay off its
              creditors. Rather than force the business into bankruptcy, the creditors accept an
              arrangement whereby the assets of the business were transferred to trustees who were to run
              the business, pay off the creditors, and then return the assets to Smith & Sons. The creditors
              had access to the books, could elect and replace trustees, and make rules for the conduct of
              the business. Some goods were supplied to the business on credit and an invoice in favor of
              Hickman was not paid. As the business was insolvent, Hickman sought recovery not by
                                                                                                               9
                becoming another creditor, but by claiming against two of existing creditors, Cox and
                Wheatcroft, arguing that they were partners in the business because they were sharing in its
                profits.
Issues          Are the creditors partners in the business?
Holding         No.
Ratio               o The correct mode of stating the proposition is to say that the same thing that entitles
                         one to profits makes one liable to debts, i.e. that the trade has been carried on on
                         one’s behalf.
                    o The real ground for liability is not the mere sharing of profits but that a trade is
                         carried on on one’s behalf.
                    o An arrangement under which creditors permit their debtor or trustees for the debtor
                         to continue his trade applying the profits in discharge of their demands does not
                         make them partners with their debtor. The debtor is still the person solely interested
                         in the profits. The trade is not carried on by or on behalf of the creditors.

Pooley v. Driver (1876)
Jurisdiction UK
Facts             Borrett and Hagen entered into a partnership agreement to carry on a business of
                  manufacturing grease, pitch and manure. The agreement provided for the division of capital
                  into 60 parts. Profits were to be distributed in accordance with the number of parts attributed
                  to each person. 17 parts were attributed to Borrett, 23 to Hagen, and the rest to persons who
                  advanced funds by way of loan. The parts allocated to B & H were allocated to them as a
                  means of compensating them for their work in the business. They did not provide any
                  capital. The Drivers advanced L2500 on the terms of a separate deed that detailed the
                  arrangements under which the loan was advanced to B&H. The loan agreement deed
                  incorporated the terms of the partnership agreement between B&H and required B&H to
                  observe the terms of the partnership agreement. The agreement also provided that the
                  bankruptcy of the lender would result in the termination of the loan agreement. On
                  liquidation of the partnership, the loan was to be repaid out of the assets of the partnership
                  remaining after the payment of the other creditors of the partnership. The plaintiff, Pooley,
                  was the holder of several bills of exchange drawn, indorsed, or accepted by B&H, which had
                  been put into circulation for the purpose of raising money for the firm. When the firm went
                  into liquidation, Pooley applied to Driver for payment of the money due on the bills on the
                  ground that the above mentioned deeds constituted them partners in the firm. The Drivers
                  claimed that they were mere lenders.
Issues            Are the Drivers partners in the firm?
Holding           Yes.
Ratio                  o Partnership is the association of two or more persons for the purpose of carrying on
                           a business together and dividing the profits between them. Normally, each partner
                           contributes something, but dormant partners also exist.
                       o Must always look at surrounding circumstances and what sort of intentions they
                           point to.
                       o It is a question of substance, not form.
                       o The deeds gave the Drivers the same rights as would be had by dormant partners
                           liable to a limited extent to loss, and with a guarantee of their capital from the active
                           partners.
                       o The intention was clearly to give the contributors all the benefits of partnership and
                           to secure them from suffering the liabilities.
                       o They intended to take the profits and they intended that the business be carried on
                           on their behalf. The only thing they didn’t intend was to take on the liabilities - but
                           tough luck.
                       o Bovill’s Act stipulates that the advance of money by way of loan, even if the lender
                           receives a rate of interest varying with the profits, or a share of the profits, shall not
                           in and of itself constitute the lender a partner. But the person advancing the money
                           must be a real lender.
                       o The present case is not a transaction of loan as intended by Parliament. The true
                           relation between the parties was that of active and dormant partners, not creditors
                                                                                                                 10
                                                                                          Tufo, Camion, Niziblian
                                                                                                   Summer 2010


                       and debtors. It was an ingenious device to shield them from the consequences of
                       being partners, but it must fail.
Comments       The following factors indicate partnership and not simply a loan:
               - The alleged lenders were said to have an interest in the capital of the partnership.
               - The ability of the alleged lenders to enforce the terms of the partnership agreement
               - Having the return on the lender’s investment vary with the amount loaned
               - Terminating a loan agreement when a lender goes bankrupt
               - Having the term of the loan agreement coincide with the term of the partnership
                 agreement was very unusual for a loan agreement


Types of Partnerships

CCQ 2188. Partnerships are either general partnerships, limited partnerships or undeclared partnerships.
Partnerships may also be joint-stock companies, in which case they are legal persons.

CCQ 2189. A general or limited partnership is formed under a name that is common to the partners.

It is bound to make declarations in the manner prescribed by the legislation concerning the legal publication
of partnerships; failing that, it is deemed to be an undeclared partnership, subject to the rights of third
persons in good faith.

CCQ 2190. In every declaration of partnership, the object of the partnership shall be set forth, together with
the information prescribed by the legislation concerning legal publication of partnerships, and an indication
that no person other than the persons named therein is a member of the partnership.

In a declaration of limited partnership, the name and domicile of each of the known partners at the time the
contract is entered into shall also be set forth, distinguishing which are general partners and which are special
partners, and specifying the place where the register containing up-to-date information on the name and
domicile of each special partner and all information relating to the contributions of partners to the common
stock may be consulted.


The Undeclared Partnership Agreement is the legal instrument used to evidence the operation by which people,
called for the purpose of this operation the "participants," unite their efforts to successfully complete a
commercial transaction.

CCQ 2250. The contract by which an undeclared partnership is established may be written or verbal. It may
also arise from an overt act indicating the intention to form an undeclared partnership.

Mere indivision of property existing between several persons does not create a presumption of their intention
to form an undeclared partnership.

See CCQ 2250 – 2266 for Undeclared Partnerships.

Undeclared Partnership
  o Each partner retains ownership of the property constituting his contribution to the undeclared
     partnership.
  o Each partner is liable for the debts and obligations of the other partners on an unlimited basis
     provided the debts have been contracted for the use or operation of the common enterprise.
  o The death of a partner leads to the end of the partnership for all partners

Elements of Partnership (Ontario Partnership Act)
    A relationship between persons
           - Includes corporations
    Carrying on a business
                                                                                                              11
          - Includes every trade, occupation or profession
          - Does not necessarily include holding land together
    In common
          - Imposes an obligation on all partners to take responsibility for the authorized actions of their
             partners (silent and otherwise)
    With a view to profit
          - Doesn’t include non-profits

Rules for Determining the Existence of a Partnership

   o   The sharing of gross returns does not in and of itself create a partnership.
   o   The receipt by a person of a share of the profits of a business is proof, in the absence of evidence to
       the contrary, that the person is a partner in the business, but the receipt of such a share or payment,
       contingent on or varying with the profits of a business, does not in and of itself make him or her a
       partner in the business
   o   The advance of money by way of loan to a person engaged or about to engage in a business on a
       contract with that person that the lender is to receive a rate of interest varying with the profits, or is to
       receive a share of the profits arising from carrying on the business, does not in and of itself make the
       lender a partner with the person carrying on the business or liable as such, provided that the contract
       is in writing and signed by or on behalf of all parties thereto
   o   A person receiving by way of annuity or otherwise a portion of the profits of a business in
       consideration of the sale by him of the goodwill of the business, is not by reason only of such receipt
       a partner in the business or liable as such

LePage v. KamexDevelopments (1977)
Jurisdiction Ontario (CA)
Facts          The appellants purchased property and incorporated a corporation to hold the property in
               trust for them in proportion to their interests. The corporation was to pay revenues and
               profits to them and they were liable to the corporation for any deficiencies. It was agreed that
               the sale or transfer of the interest of the appellants in the property to third parties could take
               place only after the others had been given a first opportunity of refusal. Any decision
               regarding the sale or other dealings with the property was to be made by majority vote. The
               appellants met monthly to discuss the operation of the property and the possibility of its sale.
               At some stage, the property was listed for sale via open listing. A decision was made by the
               appellants as a group that there should be no exclusive listing. Employees of the respondent
               then approached one of the appellants and he executed an exclusive listing agreement with
               them, signing on behalf of the other appellants as if they were a partnership. He had not,
               however, been authorized to do so.
Issues         Were the appellants a partnership?
Held           No, they were co-owners of the property.
Ratio               o Whether or not co-owners become partners depends on their intention as disclosed
                        by all the facts of the case.
                    o Must determine whether the intention was to carry on a business or simply to
                        provide by an agreement for the regulation of their rights and obligations as co-
                        owners of a property.
                    o There is no intention to carry on a business in this case.
                    o Each was at liberty to deal with his undivided interest in the land as his own.
                    o They also kept their beneficial interests in the property separate for tax purposes.
                    o Right of first refusal does not affect their rights to deal with their respective interests
                        in the property.
                    o The mere fact that co-owners intend to acquire, hold, and sell a building for profit
                        does not make them partners.
Comments Intent matters!

Volzke Construction v. Westlock Foods (1986)
Jurisdiction Alberta (CA)
                                                                                                                12
                                                                                        Tufo, Camion, Niziblian
                                                                                                 Summer 2010


Facts         The appellant, Volke, a general contractor, was building an extension to the Westlock
              Shopping Center. The final bill was not paid. Volke sued the respondent, Westlock Foods,
              claiming it was in a partnership with another firm, Bonel Properties, and therefore liable for
              the debt.

              Bonel Properties had approached Horne&Pitfield, an IGA franchisee, for H&P take space in
              the expanded Shopping Center. H&P’s main shareholder, Shefsky, did not want to be a
              tenant but an owner. He made an offer to Bonel for a 20% interest in the shopping center
              and Bonel accepted. A bank account was opened in the name of Bonel Properties and
              Westlock Foods. Only the principals of Bonel had signing authority. All accounts were
              submitted to Bonel and Volke was paid until Shefsky died. His wife carried on but was
              refused signing authority on the bank account. She sent tenants to Bonel, and Bonel
              negotiated the leases. Tenants made complaints about repairs and such to the manager of
              Westlock Foods. Bonel arranged to complete the repairs and paid the bills on the checks of
              Bonel Properties and Westlock Foods. The interim financing of the additions to the
              shopping center was secured through a mortgage signed by both companies.
Issues        Were Bonel and Westlock partners or co-owners?
Holding       They were partners.
Ratio             o Letter indicating purchase of a 20 per cent interest in the Westlock Shopping Centre
                  o Shared costs of developing business of shopping center.
                  o Spoke of each other as partners
                  o Westlock and Mr. and Mrs. Shelfsy sent tenants to Bonel, received complaints, etc.
                  o Division of profits
                  o Bank account and printed checks
                  o Financing for expansion
Comments      Control has nothing to do with the existence or non-existence of a partnership.


Backman v. Canada (2001) SCC
Jurisdiction
Facts        In 1985, a limited partnership was created by a number of US residents called the Commons.
             The Commons acquired land and constructed an apartment building, but the costs far
             exceeded the market value of the property. The appellant, a Canadian, sought to acquire
             these losses so that he could use them as a deduction in computing his Canadian taxable
             income. The appellant, other Canadians, and an Alberta corporation (the Canadians)
             arranged to become assignees of the interest of the original American partners in the
             Commons. In addition to becoming partners in the ongoing Commons partnership, they also
             purchased a one per cent interest in a Canadian oil and gas property.
Issues       Are the Canadians partners in the Commons?
Holding      No.
Ratio             The sole purpose of the Canadians in entering into the transaction was to acquire a
                     tax loss. After they took up their assignments, no further business was carried on by
                     the Commons, and there was no view to a profit.
                  The entry of new persons and the departure of existing partners constitutes the
                     creation of a new partnership provided the requisite conditions are satisfied.
                  The oil and gas property was window dressing. The Canadians knew virtually
                     nothing about it. It had no ancillary profit-making purpose.

              Carrying on a Business
              - Black’s Law Dictionary: to hold one’s self out to others as engaged in the selling of goods
                and services.
              - Alternately: i) the occupation of time, attention, and labor ii) the incurring of liabilities to
                other persons, and iii) the purpose of a livelihood or profit.
              - Business need not have been carried on for a long time - even a single transaction is
                sufficient.
              - The passive receipt of rent is also sufficient.
                                                                                                             13
               In Common
               - The fact that the management of the partnership rests with a single partner does not mean
                  that the business was not carried on in common.
               - Can entail the contribution of skill, knowledge or assets to a common undertaking; a joint
                  property interest in the subject matter of the adventure; the sharing of profits and losses;
                  the filing of income tax returns as a partnership; financial statements and joint bank
                  accounts; correspondence with third parties, etc.

               View to a Profit
               - Requires inquiry into the intentions of the parties entering into an alleged partnership
               - Important to distinguish between motivation and intention
               - Motivation: that which stimulates a person to act
               - Intention: person’s objective or purpose in acting
               - A tax motivation does not derogate from the validity of a partnership where the essential
                   ingredients of a partnership are otherwise present.
               - It is sufficient to show that there was an ancillary profit-making purpose.
               - The law of partnership does not require a net gain over a determined period in order to
                    establish that an activity is with a view to profit
Comments       Not a mechanical test, all factors must be considered in context. Whether a partnership has
               been established in a particular case will depend on an analysis and weighing of the relevant
               factors in the context of all the surrounding circumstances.

Note: Strangely, the Court did not look into the issue of the assignment of the partnership interest in this
case. Usually, this is not the way to become a partner because it gives one no say in the management of the
firm, etc. Partners normally have to agree to someone new becoming a partner.

CCQ 1525. The carrying on by one or more persons of an organized economic activity, whether or not it is
commercial in nature, consisting of producing, administering or alienating property, or providing a service,
constitutes the carrying on of an enterprise.

Relationship Between Partners
Statutory partnership rules can act as a type of standard-form contract. This facilitates the formation of
partnerships by reducing transaction costs. The ability of partners to create their own set of rules to govern
the relationships between them makes partnership a very flexible form of business association. Flexibility is
viewed as one of the key advantages of partnership.

Note: This is more true for common than for civil law.

Contracting Out of the Civil Code Provisions on Partnership

    o   It becomes a matter of interpretation whether this is permissible
    o   Definitional provisions (CCQ 2186-97), provisions dealing with third parties (CCQ 2219 et seq.)
        likely cannot be contracted out of
    o   Provisions governing relations between partners can likely be contracted out of, although some
        articles specifically contemplate it (CCQ 2202, 2212, 2215), while others forbid it (CCQ 2203 para 1,
        2216 para 1, 2218)

Note: One would still want a partnership agreement so as to delineate the roles of the partners and to
perform a channeling function so that everyone knows what they are getting themselves into.

Partnership Property

        Common Law

    o   Defined as property brought into the partnership, property acquired on account of the firm, or

                                                                                                           14
                                                                                          Tufo, Camion, Niziblian
                                                                                                   Summer 2010


          property acquired for the purposes of and in the course of the partnership business (OPA s. 21).
      o   Partnership property must be held and applied by the partners exclusively for the purposes of the
          partnership
      o   Property bought with money belonging to the firm is deemed to be partnership property.

          Civil Law

CCQ 2198. A partner is a debtor to the partnership for everything he promises to contribute to it.

CCQ 2199. A contribution of property is made by transferring rights of ownership or of enjoyment and by
placing the property at the disposal of the partnership.

A contribution consisting in the enjoyment of property that would normally be required to be renewed
during the term of the partnership transfers ownership of the property to the partnership, which becomes
liable to return property of the same quantity, quality and value.

CCQ 2200. A contribution consisting in knowledge or activities is owed continuously so long as the partner
who undertook to make such a contribution is a member of the partnership; the partner is liable to the
partnership for any profit he realizes from the contribution.

CCQ 2208. Each partner may use the property of the partnership, provided he uses it in the interest of the
partnership and according to its destination, and in such a way as not to prevent the other partners from
using it as they are entitled.

CCQ 2215. Each partner may compel the other partners to incur any expenses necessary for the preservation
of the common property but one partner may not change the condition of that property without the consent
of the others, regardless of how advantageous such changes may be.

CCQ 2217. A partner without powers of management may not alienate or otherwise dispose of common
property, subject to the rights of third persons in good faith.


Note: Trust is not without its limits. It does not extend to the making of unilateral decisions.

Day to Day Running of a Partnership

              Common Law OPA s. 24

  o       Partners share equally in capital, profits, and losses. Can be altered based on amount of investment
          brought in, expertise, labour/time investment
  o       The firm must indemnify every partner for payments made and personal liabilities incurred in the
          ordinary and proper conduct of the business
  o       Every partner may take part in the management of the business
  o       Partners are not entitled to remuneration for working in the partnership business.
  o       No new partner can be admitted to the partnership without the consent of all existing
          partners
  o       Decisions on ordinary business matters are to be determined by a majority of the partners.
          However, no change in the nature of the partnership business is permitted without the consent of all
          existing partners
  o       Partnership books are to be kept at the principal place of business and every partner may have access
          to the books to inspect or copy them.

                  Civil Law

  o       Partners share profits and losses equally if not fixed in the contract (CCQ 2202). Participation in the
          profits of a partnership entails the obligation to share in the losses (CCQ 2201). Partners cannot be
          excluded from participation in profits and cannot be exempt from sharing in losses vis-a-vis third
                                                                                                              15
        persons. (CCQ 2203)
  o     All partners manage the business equally (CCQ 2215), but the partners may enter into agreements
        detailing their respective powers in the management of the affairs of the partnership (CCQ 2212) or
        can appoint someone, including a third person, to manage the partnership (CCQ 2213) (ex. in
        complicated family partnerships, the third person can step in to take the lead)
  o     CCQ 2213. The manager, notwithstanding the opposition of the partners, may perform any act
        within his powers, provided he does not act fraudulently. The powers of management may not be
        revoked without a serious reason during the existence of the partnership, except where they were
        conferred by an act subsequent to the contract of partnership, in which case they may be revoked in
        the same manner as a simple mandate.
  o     Unless otherwise stipulated, decisions are taken by the vote of a majority of the partners, regardless
        of the value of their interests in the partnership. However, decisions to amend the contract of
        partnership are taken by a unanimous vote. In addition, partners are entitled to participate in
        collective decisions (CCQ 2216), i.e. those that affect fundamental aspects of the business.
  o     Any partner may inform himself of the affairs of the partnership and consult its books and records
        even if he is excluded from management (CCQ 2218)

CCQ 2201. Participation in the profits of a partnership entails the obligation to share in the losses.

CCQ 2202. The share of each partner in the assets, profits and losses is equal if it is not fixed in the contract.

If the contract fixes the share of each partner in only the assets, profits or losses, it is presumed to fix the
share for all three cases.

CCQ 2203. Any stipulation whereby a partner is excluded from participation in the profits is without effect.

Any stipulation whereby a partner is exempt from the obligation to share in the losses may not be set up
against third persons.

CCQ 2204. A partner may not compete with the partnership on his own account or on behalf of a third
person or take part in an activity which deprives the partnership of the property, knowledge or activity he is
bound to contribute to it; any profits arising from such competition belong to the partnership, without
prejudice to any remedy it may pursue.

CCQ 2205. A partner is entitled to recover the amount of the disbursements he has made on behalf of the
partnership and to be indemnified for the obligations he has contracted or the losses he has suffered in acting
for the partnership if he was in good faith.

CCQ 2212. The partners may enter into such agreements between themselves as they consider appropriate
with regard to their respective powers in the management of the affairs of the partnership.

CCQ 2213. The partners may appoint one or more fellow partners or even a third person to manage the
affairs of the partnership.

The manager, notwithstanding the opposition of the partners, may perform any act within his powers,
provided he does not act fraudulently. The powers of management may not be revoked without a serious
reason during the existence of the partnership, except where they were conferred by an act subsequent to the
contract of partnership, in which case they may be revoked in the same manner as a simple mandate.

CCQ 2215. Failing any stipulation respecting the mode of management, the partners are deemed to have
conferred the power to manage the affairs of the partnership on one another.

Any act performed by a partner in respect of the common activities binds the other partners, without
prejudice to their right to object, jointly or separately, to the act before it is performed.



                                                                                                               16
                                                                                         Tufo, Camion, Niziblian
                                                                                                  Summer 2010


CCQ 2216. Every partner is entitled to participate in collective decisions, and he may not be prevented from
exercising that right by the contract of partnership.

Unless otherwise stipulated in the contract, decisions are taken by the vote of a majority of the partners,
regardless of the value of their interests in the partnership. However, decisions to amend the contract of
partnership are taken by a unanimous vote.

CCQ 2217. A partner without powers of management may not alienate or otherwise dispose of common
property, subject to the rights of third persons in good faith.

CCQ 2218. Notwithstanding any stipulation to the contrary, any partner may inform himself of the affairs of
the partnership and consult its books and records even if he is excluded from management.

In exercising this right, the partner is bound not to impede the operations of the partnership unduly nor to
prevent the other partners from exercising the same right.

Removal of Partners

             Common Law

    o   No majority of partners can expel any partner “unless a power to do so has been conferred by
        express agreement between the partners and (s. 25 OPA)

             Civil Law

CCQ 2229. The partners may, by a majority vote, agree on the expulsion of a partner who fails to perform
his obligations or hinders the carrying on of the activities of the partnership.

A partner may, in similar circumstances, apply to the court for authorization to withdraw from the
partnership; the court grants such a demand unless it considers it more appropriate to order the expulsion of
the partner at fault.

CCQ 2230. A partnership is dissolved by the causes of dissolution provided in the contract, by the
accomplishment of its object or the impossibility of accomplishing it, or by consent of all the partners. It may
also be dissolved by the court for a legitimate cause.

CCQ 2231. Any partnership constituted for an agreed term may be continued by consent of all the partners.

CCQ 2232. The uniting of all the shares in the hands of a single partner does not entail dissolution of the
partnership, provided at least one other partner joins the partnership within 120 days.


Note: No difference between removal and expulsion.

If there are only two partners, majority may depend on the number of shares, contribution, etc. Or: get an
arbitrator involved.

Fiduciary Duties

             Common Law

    o   Partners are bound to render true accounts and full information of all things affecting the
        partnership to any partner or the partner’s legal representatives (OPA s. 28)
    o   Every partner must account to the firm for any benefit derived by the partner without the consent of
        the other partners from any transaction concerning the partnership or from any use by the partner of
        the partnership property, name or business connection (OPA s. 29(1)) Similar to prohibition of
        secret profits in agency.
                                                                                                             17
    o   If a partner, without the consent of the other partners, carries on a business of the same nature as
        and competing with that of the firm, the partner must account for and pay over to the firm all profits
        made by the partner in that business (OPA s. 30) Duty of Loyalty

             Civil Law

CCQ 2204. A partner may not compete with the partnership on his own account or on behalf of a third
person or take part in an activity which deprives the partnership of the property, knowledge or activity he is
bound to contribute to it; any profits arising from such competition belong to the partnership, without
prejudice to any remedy it may pursue. [If you want to compete, simply disclose]

Note: Same sort of duty that directors owe to corporations.

Assignment of Partnership Interest

             Common Law

    o   A partnership interest can be assigned, but this does not result in the assignee becoming a partner:
        (OPA s. 31)
    o   An assignee of a partner is entitled to a share of the profits and a share of the partnership assets on
        dissolution. However, the assignee is not thereby entitled to participate in the management or
        administration of the partnership business.

             Civil Law

CCQ 2209. A partner may associate a third person with himself in his share in the partnership without the
consent of the other partners, but he may not make him a member of the partnership without their consent.
Within 60 days after becoming aware that a person who is not a member of the partnership has acquired the
share of a partner by onerous title, any partner may exclude the person from the partnership by reimbursing
him for the price of the share and the expenses he has paid. This right lapses one year from the acquisition of
the share.

Note: Any liability of the assignee would not reflect on the partnership.

Dissolution of the Partnership

             Common Law

    o   By setting a fixed term (OPA s. 32(a))
    o   By specifying that the partnership will be dissolved at the end of a particular venture for which the
        partnership was created (OPA s. 32(b))
    o   By notice of the intention to dissolve (OPA s. 32(c))
    o   A partnership is dissolved automatically upon the death, bankruptcy, or dissolution of a partner
        (OPA s. 33(1)). This requires the remaining members to put together a new partnership if they wish
        to continue the business.

        Civil Law

CCQ 2230. A partnership is dissolved by the causes of dissolution provided in the contract, by the
accomplishment of its object or the impossibility of accomplishing it, or by consent of all the partners. It may
also be dissolved by the court for a legitimate cause.

CCQ 2258. A contract of undeclared partnership is terminated by consent of all the partners or by the
expiry of its term or the fulfillment of the condition attached to the contract, by the accomplishment or
impossibility of accomplishing the object of the contract.

It is also terminated by the death or bankruptcy of one of the partners, by his being placed under protective
                                                                                                             18
                                                                                             Tufo, Camion, Niziblian
                                                                                                      Summer 2010


supervision or by a judgment ordering the seizure of his share.

    o   The death of a partner does not lead to the same outcome as in the common law, unless it is an
        undeclared partnership (but see exceptions under CCQ 2259)
Liability of Partners in Contract

         Common Law

    o    Every partner is an agent of the firm and of the other partners for the purpose of the business of the
         partnership, and the acts of every partner who does any act for carrying on in the usual way business
         of the kind carried on by the firm of which he or she is a member, bind the firm and the other
         partners unless the partner so acting has in fact no authority to act for the firm in the particular
         matter and the person with whom the partner is dealing either knows that the partner has no
         authority, or does not know or believe him or her to be a partner (s. 6 OPA)
    o    An act or instrument relating to the business of the firm and done or executed in the firm name, or
         in any other manner showing an intention to bind the firm by a person thereto authorized, whether a
         partner or not, is binding on the firm and all the partners (s. 7 OPA)
    o    If it is agreed between the partners to restrict the power of any one or more of them to bind the
         firm, no act done in contravention of the agreement is binding on the firm with respect to persons
         having notice of the agreement. (s. 9 OPA)
    o    Every partner in a firm is liable jointly with the other partners for all debts and obligations of the
         firm incurred while the person is a partner, and after the partner’s death the partner’s estate is also
         severally liable (s. 10, OPA)

         Civil Law

CCQ 2219. Each partner is a mandatary of the partnership in respect of third persons in good faith and
binds the partnership for every act performed in its name in the ordinary course of its business.
No stipulation to the contrary may be set up against third persons in good faith.

CCQ 2220. An obligation contracted by a partner in his own name binds the partnership when it comes
within the scope of the business of the partnership or when its object is property used by the partnership.
A third person, however, may cumulate the defences which may be set up against the partner and the
partnership and claim that he would not have entered into the contract if he had known that the partner was
acting on behalf of the partnership.

CCQ 2222. A person who gives reason to believe that he is a partner, although he is not, may be held liable
as a partner towards third persons in good faith acting in that belief.

The partnership is not liable towards third persons, however, unless it gave reason to believe that such
person was a partner and it failed to take measures to prevent third persons from being mistaken in
circumstances that made such a mistake predictable.

CCQ 2223. Silent partners are liable towards third persons for the same obligations as declared partners.
CCQ 2224. A partnership may not make a distribution of securities to the public or issue negotiable
instruments, on pain of nullity of the contracts entered into or of the securities or instruments issued and of
the obligation to compensate for any injury it causes to third persons in good faith.

In such a case, the partners are solidarily liable for the obligations of the partnership.

CCQ 2225. A partnership may sue and be sued in a civil action under the name it declares.


Liability for Tort

         Common Law

                                                                                                                 19
OPA 11. Where by any wrongful act or omission of a partner acting in the ordinary course of the business of
the firm, or with the authority of the co-partners, loss or injury is caused to a person not being a partner of
the firm, or any penalty is incurred, the firm is liable therefor to the same extent as the partner so acting or
omitting to act.
OPA 12. In the following cases, namely,
       (a) where one partner, acting within the scope of the partner’s apparent authority, receives the money
       or property of a third person and misapplies it; and
       (b) where a firm in the course of its business receives money or property of a third person, and the
       money or property so received is misapplied by one or more of the partners while it is in the custody
       of the firm,
the firm is liable to make good the loss.
This liability is joint and several

CCQ 2221. In respect of third persons, the partners are jointly liable for the obligations contracted by the
partnership but they are solidarily liable if the obligations have been contracted for the service or operation
of an enterprise of the partnership.

Limited Partnerships
There has to be one general partner.

   o     Why have limited partnerships?
            - Aimed at shifting the default rule from personal liability to limited liability with notice to
                 creditors
   o     Limited partners:
            - Cannot be involved in management of the partnership
            - May not be directly liable for torts committed in carrying on the business
            - May be vicariously liable for the acts of agents or employees engaged in carrying on the
                 business (but again limited to the amount of one’s investment).
   o     The limit of their liability is the amount of their investment.

See LPA 2, 7-13
See CCQ 2236-2249.

Limited Liability Partnerships (LLPs/CMN) / Joint Stock Companies (CVL)
There does not need to be a general partner.

Why should partners who are not involved in a negligent act be personally exposed to liability arising from
the activities of their negligent partners? Why must traditional professions such as law, accounting and
medicine continue to face exposure to personal liability for the activities of their negligent partners while
other professionals can limit their exposure through incorporation or some other limited liability structure?

   o     LLPs adopted in Ontario in 1998
   o     Found in the Professional Code of Quebec, s. 187.11-187.20
         - Governed by the rules concerning general partnerships contained in the Civil Code
         - Must self-designate as LLP

         Common Law
         See OPA 44.1 – 44.3

         Civil Law

187.14. (Professional Code): A member of an order carrying on his or her professional activities within a
limited liability partnership is not personally liable for obligations of the partnership or of any other
professional arising from fault on the part of the other professional or the other professional's servant or
mandatary in the course of their professional activities within the partnership.


                                                                                                             20
                                                                                              Tufo, Camion, Niziblian
                                                                                                       Summer 2010


            See Professional Code of Quebec 187.11-187.16

Question: Why not simply allow incorporation?


      IV.      INTRODUCTION TO THE CORPORATION

Function and Place of the Corporation in Society

  o    Who should decide corporate policy?
  o    How should decision makers be chosen?
  o    What matters or interests ought to be considered in making corporate decisions?
  o    If the matters or interests that are required to be considered conflict, how and by whom should the
       conflict be resolved?
  o    What are the appropriate methods of accountability for corporate decisions and what are the grounds
       on which decisions can be reviewed and overturned?
  o    Corporate law is about designing the rules for organizing the collective efforts of the participants in the
       enterprise

I. Wealth Maximization Theory

Law and Economics (Richard Posner 2007): The economic analysis of law tries to explain and predict the
behavior of participants in and persons regulated by the law. It also tries to improve law by pointing out
ways in which existing or proposed laws have unintended or undesirable consequences on economic
efficiency, the distribution of income and wealth, or other values. The basis of the theory is walth
maximization as the rationale for using the corporation as a vehicle for economic activity. Its normative
basis is utilitarianism. The free market is paradigmatic of how utility is promoted non-coercively by utility-
seeking individuals. Institutions should facilitate, or where that is infeasible approximate, the operations of a
free market and thus maximize autonomous, utility-seeking behaviour. Because utility seeking in a market
requires inducing others to enter into transactions advantageous to them, wealth is automatically transferred
to those who have productive assets, whether goods or time. By the same token, those who have no
productive assets have no ethical claim on the assets of others.

Problems: The market is not perfect, nor does it have perfect information. Players are not equal.

The Nexus of Contracts (William Bratton 1989)

 o
 o    Corporation exists to maximize the wealth of shareholders and corporate management ought to act as
      the SHs’ agent in pursuing that end.
 o    The neoclassical variant’s central point is that the firm is a legal fiction that serves as a nexus for a set of
      contracting relations among individual factors of production
 o    The model of the corporation is drawn from the parties and terms for their firm of contracts
 o    Economists rely on basic assumptions about the behaviour of marketplace actors and the nature of
      marketplace contracts. The actors are rational economic actors—self-interested individuals with
      divergent interests
 o    A corporation exists to maximize the wealth of its shareholders, and the corporation’s management
      ought to act as the shareholders’ economic agent in pursuing this end. The ability of employees,
      suppliers, and customers to control corporate management’s decisions will be set by the terms of their
      contracts with the other parties in the nexus of contracts that is the corporation
 o    Limited role for corporate law: it does not invest and legitimize power in hierarchical superiors but
      appears as just another term of the contract governing equity capital input. Since the fittest
      arrangements survive, the contract effects an optimal sharing of risk.
 o    No basis for intervention by government for the protection of shareholders

                   Customers

                                                                                                                  21
Banks            The Corporation          Creditors


               Employees
Problems:
    - Directors’ power to bypass shareholders
    - Where are the shareholders in this theory? They rely on implicit contracts because they receive the
       residual interest of the corporation (But why is the shareholders’ contract implicit? They’ve bought
       shares in the company and that is a contract!)
    - This model does not take into account the context in which the corporation operates (community,
       environment, etc.)
    - This model also assumes that everyone is on an even playing field, which is simply not the case.

II. Team Production Theory/Corporation as Mediating Hierarchy (Blair and Stout 1999)

 o   Assigning control rights not to shareholders, nor to any other stakeholder in the firm, but to a third
     party—the board of directors—which is largely insulated from the direct control of any of the various
     economic interests that constitute the corporation.
 o   An essential but generally overlooked “contract” fundamental to the nature of public corporations is the
     “pactum subjectionis” under which shareholders, managers, employees, and other groups that make
     firm-specific investments yield control over both those investments and the resulting output to the
     corporation’s internal governing hierarchy
 o   The directors are “mediating hierarchs”
 o   Corporate law is designed to protect the corporate coalition by allowing directors to consider the
     interests of a variety of stakeholders
 o   The mediating hierarchy accounts for (and supports) shareholders’ limited voting rights, and suggests
     that shareholders should be allowed to sue directors only when this serves the interest of the
     corporation as a whole, rather than serving shareholders’ interests at the expense of other stakeholders
 o   The corporation has a fundamentally political nature
 o   How to explain emphasis on shareholders? Corporate directors enjoy considerable discretion in terms
     of who receives what portion of the economic surplus resulting from team production. The minimum
     demands of each team member must be met, but nothing more. The returns to any particular corporate
     stakeholder will be determined not only by market but also by political forces (rise of institutional
     investors/decline of labor unions has tipped the balance in favor of SH OR globalization has exerted
     downward pressure on US wages while investors can seek opportunities abroad = SH have more
     bargaining power and the adjustment is necessary to keep the coaltion together)

 Note: Profit is not necessarily the overriding concern here.

 Problems:
 o Model ignores agency costs (directors may simply pursue their own interests)
 o Under Canadian law, fiduciary duties can be owed to other stakeholders, not only the shareholders (i.e.
    directors can really do whatever they want and the agency costs can be enormous). Under US law, only
    the shareholders can bring action and the fiduciary is owed only to them.
 o Only shareholders can vote the directors in and out

A duty to a range of stakeholders is meaningless unless stakeholders have some way of enforcing that duty.

 III. The Corporation as a Public Institution

 o   Greenfield argues against the idea that corporate law, because it is contract law, is private and that it
     should be shielded from the political and legal processes. Corporate law should be a source of public
     policy initiatives
 o   Contract and property law are no more neutral, private, or pre-legal than statutory law. Contract and
     property rights are correctly seen as essential to economic development and, in many respects, to social
     justice. These rights are not best perceived as natural, pre-legal, or non-political, but rather should be
                                                                                                            22
                                                                                          Tufo, Camion, Niziblian
                                                                                                   Summer 2010


     seen as tools to be utilized in furtherance of social good. Applied to the setting of corporate law, the
     language of rights may be used as a descriptive matter but is out of place in a normative discussion.

Greenfield’s New Principles of Corporate Law
 1) The ultimate purpose of corporations should be to serve the interests of society as a whole: a company
     cannot be considered a success if the total social value it creates is less than the social costs it throws
     off
 2) Corporations are distinctively able to contribute to the societal good by creating financial prosperity
 3) Corporate law should further principles one and two or else a small group of elites will reap the
     benefits
 4) A corporation’s wealth should be shared fairly among those who contribute to its creation (equity
     investors, debt creditors, consumers, government, labor – would increase behavior beneficial to firm)
 5) Participatory, democratic corporate governance is the best way to ensure the sustainable creation and
     equitable distribution of corporate wealth:
    a. To make possible for a corporation to serve its stakeholders by creating wealth in a sustainable way
       and then equitably share that wealth, the management of the firm needs to be subject to different
       constraints than at present. These changes are simple, yet profound.
    b. For example, directors need to be held to a fiduciary obligation to all the firm’s stakeholders. Allow
       non-shareholder stakeholders to bring suits in court for violations of the duties of care and loyalty,
       and providing some mechanism for non-shareholder stakeholders to elect their own representatives
       to the board


Note: In Germany, all stakeholders sit at the table. Some believe that this model reduces transaction costs.

Scope of the Discretionary Decision Making of Directors (People’s)
   o      Insofar as the statutory fiduciary duty is concerned, it is clear that the phrase the “best interests of
          the corporation” should be read not simply as the “best interests of the shareholders.”
   o      From an economic perspective, the “best interests of the corporation” means the maximization of
          the value of the corporation
   o      In determining whether directors are acting with a view to the best interests of the corporation it
          may be legitimate, given all the circumstances of a given case, for the board to consider, inter alia,
          the interests of shareholders, employees, suppliers, creditors, consumers, governments and the
          environment.


    V.       THE CORPORATION AS A LEGAL PERSON

Salomon v. Salomon & Co. Ltd (1896)
Jurisdiction UK (HL)
Facts         Salomon was a leather merchant and boot manufacturer. Together with his wife, four sons,
              and a daughter, he formed a limited company under the English Companies Act. Under the
              company’s articles of association, the company had capital of 40,000 shares, with each share
              having a value of L1. In return for selling his business to the new company at a price of
              L38000, Salomon was to be issued 20,000 shares and a payment of L16000 in cash or
              debentures. The Companies Act required that each company have seven shareholders.
              Salomon’s wife, sons, and daughter each held one share, and he the rest. The company
              eventually failed and was wound up. It turned out that if the money obtained from the sale of
              the company’s remaining assets was to be applied to the payment of Solomon’s debentures,
              nothing would be left for the other creditors. The liquidator of the company claimed that the
              company was merely an agent or alias of Solomon, that Salomon should be personally liable
              to the other creditors, and that no payment should be made on his debentures until these
              creditors were paid.
Issues        Is the company Salomon in another form?
Holding       No, it is a corporation.
Ratio          - Salomon wanted to extend his business and make provisions for his family. Not unusual.

                                                                                                               23
                - Salomon had met the requirements of the Companies Act: the memorandum of association
                  was signed by seven shareholders. The Act says nothing about them having to have no
                  connection with one another or having to have a mind and will of their own.
                - The company is a different person from the subscribers to the memorandum, even though
                  the business and managers remain the same, and the same hands receive the profit.
                - A company can raise money on debentures, which an ordinary trader cannot do. Any
                  member of the company acting in good faith is as much entitled to take and hold the
                  company’s debentures as any outside creditor.
                - The motives of those who incorporated the company are irrelevant to the company’s
                  rights and liabilities as a separate legal person.
                - The fact that a company carries on on behalf of its shareholders does not create a
                  principal/agent relationship
                - The creditors were aware of the incorporation of the company but did not take measures
                  to protect themselves. Too bad for them.

Comments        Was it fair for Solomon to both make himself a priority creditor AND to protect his personal
                assets by means of incorporation? Yes.

Unlike corporations, partnerships do not have a legal existence separate from their owners, and general
partners have personal liability for firm debts. What is the rationale for corporations to have a separate legal
personality and limited liability?

     Corporations can sue and be sued.
     Can sign contracts & enter into transactions.
     Can hold property.

Separate Legal Personality and Limited Liability of Shareholders

     Common Law (CBCA)

     Capacity of a corporation
     o 15(1) A corporation has the capacity and, subject to this Act, the rights, powers and privileges of a
        natural person.

     Shareholder immunity
     o 45(1) The shareholders of a corporation are not, as shareholders, liable for any liability, act or
         default of the corporation except under subsection 38(4), 118(4) or (5), 146(5) or 226(4) or (5).

    Civil Law

QCA 41. The shareholders of the company shall not, as such, be responsible for any act, default or liability of
the company, or for any engagement, claim, payment, loss, injury, transaction, matter or thing relating to or
connected with the company, beyond the amount unpaid on their respective shares in the capital stock
thereof.

QCA 123.16. From the date indicated in the certificate of constitution, the company is a legal person.

QCA 123.29. A company has the full enjoyment of civil rights in Québec and outside Québec, except
respecting what is proper to the human person and subject to the laws applicable in any particular case.

QBCA 10. A corporation is constituted as of the date and, if applicable, the time shown on the certificate of
constitution issued by the enterprise registrar in accordance with Chapter XVIII.

The CORPORATION is a LEGAL PERSON as of that time.

QBCA 224. Shareholders are not, as shareholders, liable for any act of the corporation.

                                                                                                             24
                                                                                         Tufo, Camion, Niziblian
                                                                                                  Summer 2010



HOWEVER, they are DEBTORS to the corporation for any UNPAID AMOUNT ON SHARES THEY
HOLD in its share capital.


CCQ 301. Legal persons have full enjoyment of civil rights.

CCQ 303. Legal persons have capacity to exercise all their rights, and the provisions of this Code respecting
the exercise of civil rights by natural persons are applicable to them, adapted as required.

They have no incapacities other than those which may result from their nature or from an express provision
of law.
CCQ 304. Legal persons may not exercise tutorship or curatorship to a person.

They may, however, to the extent that they are authorized by law to act as such, hold office as tutor or
curator to property, liquidator of a succession, sequestrator, trustee or administrator of another legal person.
CCQ 309. Legal persons are distinct from their members. Their acts bind none but themselves, except as
provided by law.

CCQ 314. A legal person exists in perpetuity unless otherwise provided by law or its constituting act.
CCQ 317. In no case may a legal person set up juridical personality against a person in good faith if it is set
up to dissemble fraud, abuse of right or contravention of a rule of public order.


Questions

     There is a great deal of discussion in Salomon about the “one-man company.” The English
      Companies Act of 1862 contained a requirement that a company have at least seven shareholders.
      What was the rationale for that requirement? The CBCA contains no such requirement.
     Part of the consideration Salomon received on incorporation was an issue of £10,000 in debentures.
      A debenture is evidence of indebtedness, like a promissory note. Debentures are often secured with
      an interest in a company’s assets, or collateral. In Salomon, the debentures were pledged as security
      for an advance of £5,000, so that they were still valuable to Salomon to the extent that the business
      even in bankruptcy was nevertheless worth more than that amount. Should Salomon have been able
      to protect his own investment this way while shielding himself from the claims of other creditors
      because of the limited liability of the corporation?
     What do you think about Lord Macnaghten’s statement that “[t]he unsecured creditors of Salomon
      & Co, Ltd may be entitled to sympathy, but they have only themselves to blame for their
      misfortunes. They had fair notice that they were no longer dealing with an individual, and must be
      taken to have been cognizant of the memorandum and of the articles of association”? If the
      corporate form permits limited liability, what should a creditor do to try to protect his or her
      interest? Should government protect creditors? How?

Consequences of Incorporation and Separate Legal Identity
Consequences that flow from the conception of the corporation as a separate legal personality include: a)
limited liability, b) perpetual succession of a corporation, c) the distinction between a corporation and its
controlling shareholders, and d) separate ownership by the corporation of its own property.

Lee v. Lee’s Air Farming Ltd. (1961)
Jurisdiction New Zeland / PC
Facts            Lee formed Lee’s Air Farming Ltd. for the purpose of carrying on the business of aerial top-
                 dressing. He held 2,999 of the company’s 3,000 shares. He was the company’s sole director,
                 officer, and manager. He was also employed as the company’s chief pilot at a salary he
                 arranged. He was killed in a flight accident. His widow claimed compensation under the NZ
                 Workers’ Compensation Act according to which an employer is liable to pay compensation if a
                 worker suffered injury in the course of employment.

                                                                                                             25
Issues         Was Lee a worker?
Holding        Yes.
Ratio          - The aerial operations were performed because Lee had been in a contractual relationship
                  with the company. Lee was one legal person who made a contract with the company as
                  another legal person.
               - The company was not a sham or a simulacrum. It was a proper legal person.
               - The fact that Lee was the company’s agent in the negotiation of the employment contract
                  is not a problem
               - One person may function in dual capacities as per Solomon.
               - It was not Lee who was giving himself orders whilst an employee, it was the company who
                  gave the orders.

Macaura v. Northern Assurance Co Ltd. (1952)
Jurisdiction UK (HL)
Facts        The appellant was the owner of an estate, the respondents were five insurance companies
             with whom he contracted insurance against fire on timber which he kept on the estate. The
             appellant had assigned all of the timber to a company: Irish Canadian Saw Mills Ltd. The
             company paid L42000for the timber and issued the appellant with 42,000 shares at L1 per
             share. No further shares were ever issued. The timber was destroyed by fire and the
             appellant sought the insurance payment.
Issues       Did the appellant have any insurable interest in the goods subject to the insurance policies?
             Were the respondents at liberty to raise the contention that he held no such interest?
Holding      No. Yes.
Ratio         The appellant could only have insured as a creditor or shareholder of the company, but
              neither of these avenues is available: no creditor can ensure the furniture of his debtor, and
              no shareholder has any right to property belonging to the company. Neither a simple creditor
              nor a shareholder has any insurable interest in a particular asset which the company holds.

Kosmopoulos v. Constitution Insurance Co. (1987)
Jurisdiction SCC
Facts           Kosmopoulos entered into a lease for premises in Toronto. From there he operated a
                businesses under the name of Spring Leather Goods. It was carried on as a sole
                proprietorship and eventually incorporated. K, however, continued to think that he owned
                the store and its assets. Documentation pertaining to the business made no reference to the
                company but only to “K carrying on as SLG.” The lease also remained in his name. K went
                on to obtain insurance for the contents of the business premises. Even though the insurer
                knew that the insurance was intended for the company, the insured was described as “K
                operating as SLG” on the policy. Naturally, a fire broke out causing damage to the assets and
                premises. K sought the insurance payment and the insurance company refused to pay him
                saying he had no legal or equitable interest in the company’s assets. K claims that the
                corporate veil should be lifted as, when this is done, it becomes clear that that the company’s
                property was K’s property.
Issues          Should the corporate veil be lifted?
Holding         Yes.
Ratio
                - The separate entities principle is not enforced when it would yield a result too flagrantly
                    opposed to justice.
                - Wilson J expands the concept of insurable interest: K, as sole shareholder of the company,
                    was so placed with respect to the assets of the business as to have benefit from their
                    existence and prejudice from their destruction. He therefore had an insurable interest in
                    them capable of supporting the insurance policy.
                - McIntyre J does not agree to overly expand the concept of insurable interest. Instead, he
                    notes that modern company law now permits the creation of companies with one
                    shareholder, so that the identity between the company and the sole shareholder and
                    director is such that an insurable interest in the company’s assets may be found in the sole
                    shareholder.
                                                                                                             26
                                                                                       Tufo, Camion, Niziblian
                                                                                                Summer 2010


Comments       “The doctrine laid down in Salomon v. Salomon & Co. … has to be watched very carefully. It
               has often been supposed to cast a veil over the personality of a limited company through
               which the courts cannot see. But that is not true. The courts can and often do draw aside the
               veil. They can, and often do, pull off the mask. They look to see what really lies behind.”


Where Courts Have Disregarded the Separate Legal Personhood of the Corporation
  o Cases that involve allegations of fraudulent conduct or objectionable purpose on the part of a
      company’s principals
  o Cases where a company existed as a “shell” and was clearly undercapitalized to meet its reasonable
      financial needs
  o Cases that involve tort claims against the company, particularly those where a director, shareholder,
      or employee has committed an intentional tort, or the tort of inducing breach of contract
  o Cases where the company was not incorporated for bona fide business reasons but for other
      purposes, often to avoid taxation
  o Cases that involve non-arm’s-length transactions between parent and subsidiary companies; and
  o Cases where courts determine that equity or the interests of justice are better served by disregarding
      the corporate form

Big Bend Hotel v. Security Mutual Casualty Co. (1980)
Jurisdiction British Columbia (SC)
Facts            Kumar was the president and sole shareholder of BB Hotel. He previously operated and was
                 the sole shareholder of another hotel which was destroyed by fire. There were some
                 suspicions of arson at the time, possibly involving Kumar. When Kumar purchased the
                 insurance policy for BB Hotel, he did not disclose this information. BB Hotel was destroyed
                 in a fire. Kumar claimed that as BB was a separate legal entity from himself and the company
                 he previously operated, he could not have been expected to disclose the previous losses - and
                 that the corporate veil should not be lifted.
Issues           Should the corporate veil be lifted?
Holding          Yes.
Ratio            - It is obvious that Kumar did not disclose the previous loss because he knew that he would
                     have trouble obtaining an insurance policy for BB.
                 - Kumar was aware of the materiality of the information he concealed.
                 - Courts have previously lifted the corporate veil in cases of fraud and improper conduct of
                     individual company members.
                 - Equity will not allow an individual to use a company as a shield for improper conduct or
                     fraud.

Questions
   o Was it necessary to lift the veil in order to reach this result? Was the failure to disclose itself not a
       “material misrepresentation” sufficient to void the claim for insurance?
   o Why should the insurance company not be responsible for making further inquiries into the relevant
       history? Who should bear the risk of limited liability?

Parent-Subsidiary
An exception to the Salomon principle arises where the corporation is simply an agent of the shareholder:
(Smith, Stone and Knight Ltd. v. Birmingham Corporation):
     - Were the profits treated as profits of the parent company?
     - Were the persons conducting the business appointed by the parent company?
     - Was the parent company the head and brain of the trading venture?
     - Did the parent company govern the trading venture, decide what should be done, and what capital
         should be embarked on the venture?
     - Did the parent company make profits by its skill and direction?
     - Was the parent company in effectual and constant control?

The difficulty with these tests is that the answers are positive in virtually every parent–subsidiary company
                                                                                                           27
relationship. Yet the corporate entity of subsidiaries is not disregarded in every affiliated company case.

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

Walkovszky v. Carlton (1966)
Jurisdiction NYCA
Facts          The plaintiff was injured by a cab owned by the Seon Cab Corporation. The defendant,
               Carlton, was a stockholder of ten corporations, including Seon, each of which had two cabs
               insured by the minimum auto liability insurance required by law ($10,000). Although
               seemingly independent of one another, the corporations were alleged to have operated as a
               single entity with regard to financing, supplies, repairs, employees, and garaging, and all were
               named as defendants. The plaintiff asserted that he was also entitled to hold their stock
               holders personally liable for the damages sought because the multiple corporate structure
               constituted an unlawflul attempt to defraud members of the public who might be injured by
               the cabs.
Issues         Should the corporate veil be pierced? / Can the defendant Carlton be held personally liable?
Holding        No. No.
Ratio          - Courts will pierce the corporate veil whenever necessary to prevent fraud or achieve
                   equity.
               - Liability should be extended to reach assets beyond those belonging to the corporation,
                   only when one uses control of the corporation to further his own rather than the
                   corporation’s business. Such liability extends not only to the corporation’s commercial
                   dealings but to its negligent acts as well.
               - In this case, it is one thing to assert that a corporation is a fragment of a larger corporate
                   combine which actually conducts the business, and another to claim that the corporation is
                   a dummy for its individual stockholders who are in reality carrying on the business in their
                   personal capacities for purely personal rather than corporate ends.
               - Either circumstance would justify piercing the corporate veil but with different results.
               - In the first case, only the larger corporate entity would be held financially responsible.
               - In the second case, the stockholder would be personally liable.
               - The corporate form may not be disregarded merely because the assets of the corporation
                   together with the mandatory insurance coverage of the vehicle are insufficient to assure
                   the recovery sought. If Carlton were to held individually liable on those facts alone, the
                   decision would apply to all cabs owned by their individual drivers who conduct business
                   through corporations and carry the minimum insurance required.
               - If the insurance coverage required by statute is inadequate for the protection of the public,
                   the remedy lies not with the courts but with the Legislature.
               - The principle relied upon to sustain the imposition of personal liability is fraud. Such a
                   cause of action cannot withstand analysis. If it is not fraudulent for the owner-operator of
                   a single cab corporation to take out only the minimum required liability insurance, the
                   enterprise does not become illicit or fraudulent merely because it consists of many such
                   corporations. Whatever rights the plaintiff may be able to assert against parties other than
                   the registered owner of the vehicle come into being not because he has been defrauded
                   but because, under the principle of Respondent superior, he is entitled to hold the whole
                   enterprise responsible for the acts of its agents. The complaint falls short of adequately
                   stating a cause of action against the defendant Carlton in his individual capacity.

               Dissent:

               - The corporations were intentionally undercapitalized for the purpose of avoiding
                 responsibility for acts which were bound to arise
               - The issue is whether the policy which affords those desiring to engage in a business
                 enterprise the privilege of limited liability through the use of the corporate device, is so
                                                                                                              28
                                                                                        Tufo, Camion, Niziblian
                                                                                                 Summer 2010


                    strong that it will permit that privilege to continue no matter how much it is abused.
                -   If a corporation is organized and carries on a business without substantial capital to meet
                    its debts, it is inequitable that shareholders should set up such a flimsy organization to
                    escape personal liability.
                -   It could not have been intended to shield those individuals who organized corporations
                    with the specific intent of avoiding responsibility to the public when the operation of the
                    enterprise yielded profits sufficient to purchase additional insurance.
                -   It is reasonable to assume that the Legislature believed that those individuals and
                    corporations having substantial assets would take out insurance in excess of the minimum
                    in order to protect those assets from depletion
                -   A shareholder of a corporation vested with a public interest, organized with capital
                    insufficient to meet liabilities which are certain to arise in the ordinary course of the
                    corporation’s business, may be held personally responsible for such liabilities.


    VI.       DIRECTORS AND OFFICERS

The General Structure of a Corporation




                                    QuickTime™ and a
                                      decompressor
                              are neede d to see this picture.




Role of Directors

    o     Subject to any unanimous shareholder agreement (can take place after formation of corporation), the
          directors shall manage, or supervise the management of, the business and affairs of a corporation.
              - CBCA s. 102(1), QBCA s. 112,

          Common Law

CBCA 102(1)
(1) Subject to any unanimous shareholder agreement, the DIRECTORS shall manage, or supervise
the management of, the business and affairs of a corporation.
Number of directors
(2) A corporation shall have one or more directors but a distributing corporation, any of the issued securities
of which remain outstanding and are held by more than one person, shall have not fewer than three
directors, at least two of whom are not officers or employees of the corporation or its affiliates.
CBCA 103.
(1) Unless the articles, by-laws or a unanimous shareholder agreement otherwise provide, the directors may,
                                                                                                            29
by resolution, make, amend or repeal any by-laws that regulate the business or affairs of the
corporation.
Shareholder approval
(2) The directors shall submit a by-law, or an amendment or a repeal of a by-law, made under subsection
(1) to the shareholders at the next meeting of shareholders, and the shareholders may, by ordinary
resolution, confirm, reject or amend the by-law, amendment or repeal.
Effective date
(3) A by-law, or an amendment or a repeal of a by-law, is effective from the date of the resolution of the
directors under subsection (1) until it is confirmed, confirmed as amended or rejected by the
shareholders under subsection (2) or until it ceases to be effective under subsection (4) and, where the
by-law is confirmed or confirmed as amended, it continues in effect in the form in which it was so
confirmed.
Idem
(4) If a by-law, an amendment or a repeal is rejected by the shareholders, or if the directors do not submit a
by-law, an amendment or a repeal to the shareholders as required under subsection (2), the by-law,
amendment or repeal
CBCA 121. Subject to the articles, the by-laws or any unanimous shareholder agreement,
(a) the directors may designate the offices of the corporation, appoint as officers persons of full
capacity, specify their duties and delegate to them powers to manage the business and affairs of the
corporation, except powers to do anything referred to in subsection 115(3);
(b) a director may be appointed to any office of the corporation; and
(c) two or more offices of the corporation may be held by the same person.
CBCA 146
       (1) An otherwise lawful written agreement among all the shareholders of a corporation, or
       among all the shareholders and one or more persons who are not shareholders, that RESTRICTS, in
       whole or in part, the powers of the directors to manage, or supervise the management of, the
       business and affairs of the corporation is VALID.
Declaration by single shareholder
       (2) If a person who is the beneficial owner of all the issued shares of a corporation makes a
       written declaration that restricts in whole or in part the powers of the directors to manage, or
       supervise the management of, the business and affairs of the corporation, the declaration is
       deemed to be a unanimous shareholder agreement.
Constructive party
       (3) A purchaser or transferee of shares subject to a unanimous shareholder agreement is deemed to be
       a party to the agreement.
When no notice given
       (4) If notice is not given to a purchaser or transferee of the existence of a unanimous shareholder
       agreement, in the manner referred to in subsection 49(8) or otherwise, the purchaser or transferee may,
       no later than 30 days after they become aware of the existence of the unanimous shareholder
       agreement, rescind the transaction by which they acquired the shares.
Rights of shareholder
       (5) To the extent that a unanimous shareholder agreement restricts the powers of the directors to
       manage, or supervise the management of, the business and affairs of the corporation, parties to the
       unanimous shareholder agreement who are given that power to manage or supervise the
       management of the business and affairs of the corporation have all the rights, powers, duties
       and liabilities of a director of the corporation, whether they arise under this Act or otherwise,
       including any defences available to the directors, and the directors are relieved of their rights, powers,
       duties and liabilities, including their liabilities under section 119, to the same extent.
Discretion of shareholders
(6) Nothing in this section prevents shareholders from fettering their discretion when exercising the powers
of directors under a unanimous shareholder agreement.

         Civil Law

CCQ 334. Legal persons assuming a juridical form governed by another title of this Code are subject to the
rules of this chapter; the same applies to any other legal person if the Act by which it is constituted or which
applies to it so provides or indicates no other rules of functioning, dissolution or liquidation.
                                                                                                              30
                                                                                          Tufo, Camion, Niziblian
                                                                                                   Summer 2010



They may, however, make DEROGATIONS in their by-laws from the rules concerning their functioning,
PROVIDED the rights of the members are safeguarded.
CCQ 335. The board of directors manages the affairs of the legal person and exercises all the powers
necessary for that purpose; it may create management positions and other organs, and delegate the exercise
of certain powers to the holders of those positions and to those organs.

The board of directors adopts and implements management by-laws, subject to approval by the members at
the next general meeting.
QCA 123.72. The affairs of a company shall be managed by a board of one or more directors.
However, the affairs of a company that has made a distribution to the public of its securities shall be
managed by a board of not fewer than three directors.
QCA 123.91. The SHAREHOLDERS, if ALL OF THEM CONSENT thereto and make a WRITTEN
AGREEMENT to that effect, may RESTRICT THE POWERS OF THE DIRECTORS.
Sole shareholder. The sole shareholder may also restrict the powers of the directors if he makes a written
statement to that effect.
QBCA 112. Subject to a unanimous shareholder agreement, the board of DIRECTORS exercises ALL THE
POWERS NECESSARY to MANAGE, or SUPERVISE the MANAGEMENT of, the business and affairs
of the corporation.

Except to the extent provided by law, such powers may be exercised without shareholder approval and may
be delegated to a director, an officer or one or more committees of the board.
QBCA 213. All the shareholders of a corporation, whether or not their shares carry voting rights, may agree
in writing among themselves or among themselves and one or more third persons to restrict the powers of
the board of directors to manage, or supervise the management of, the business and affairs of the
corporation, or to withdraw all such powers from the board.

A sole shareholder may make a written declaration that restricts the powers of the board of directors or
withdraws all powers from the board. The declaration is equivalent to a unanimous shareholder agreement.
Note:
                Shareholders can be directors and vice-versa.
                Senior managers can have the same responsibilities as directors. Some directors can also be
                 senior managers.
                Directors may or may not be employees of the corporation.

What Do Directors Really Do?
Directors appoint the officers or just the senior officers.

        o     Myles Mace
              Directors do not manage the corporation, don’t have much of a role in setting corporate
              strategy or in monitoring the performance of the management, but can discipline the president
              and give him/her useful advice.

        o     Conference Bd of Cda
            - Management often controls the board rather than the other way around and the board’s
              effectiveness is often a function of the president’s desire for or tolerance of its informed input.
            - Boards are excessively hesitant to fire top management (who will fill the gap and when?)

Director Obligations
   o Directors owe fiduciary obligations and a duty of care (to whom?)
   o Directors are AGENTS and must put the interests of the corporation first.

Peoples Department Stores Inc. V. Wise (2004)
Jurisdiction SCC
Facts           In the context of determing an insolvency law question, the SCC discussed the scope of duties
                of directors and officers both for the financially healthy and distressed corporation.
                                                                                                              31
Issues    To whom do the directors and officers owe a fiduciary obligation?
Holding   To the corporation, and not merely the shareholders. From an economic perspective, the
          best interests of the corporation means the maximization of the value of the corporation.
Ratio     - CBCA 122(1) (a): The fiduciary duty: requires directors and officers to act honestly and
             in good faith with a view to the best interests of the corporation.
          - CBCA 122(1) (b): The duty of care: imposes a legal obligation upon directors and
             officers to be diligent in supervising and managing the corporation’s affairs.

          The Statutory Fiduciary Duty
          - Directors and officers must avoid conflicts of interest with the corporation. They must
            avoid abusing their position to gain personal benefit. They must maintain the
            confidentiality of information they acquire by virtue of their position.
          - There may be situations where a profit must be disgorged although not gained at the
            expense of the company, on the grounds that a director must not be allowed to use his
            position to make a profit even if it was not open to the company to participate in the
            transaction.
          - Liability to account does not depend on proof of an actual conflict of duty and self-
            interest.
          - However, it is not required that directors and officers in all cases avoid personal gain as a
            direct or indirect result of their honest and good faith supervision or management of the
            corporation. In many cases, the interests of directors and officers will innocently coincide
            with those of the corporation, especially if they are also shareholders.
          - In so far as the statutory fiduciary duty is concerned, the phrase “the best interests
            of the corporation” should be read not simply as the best interests of shareholders.
          - Various other factors may be relevant in what directors should consider in soundly
            managing with a view to the best interests of the corporation.
          - This includes employees, the community, shareholders, suppliers, creditors,
            consumers, governments, and the environment
          - In resolving competing interests, it is incumbent upon the directors to act honestly and in
            good faith with a view to the best interests of the corporation
          - In assessing the actions of directors, it is evident that any honest and good faith attempt to
            redress the corporation’s financial problems will, if successful, both retain value for
            shareholders and improve the position of creditors. If unsuccessful, it will not qualify as a
            breach of the statutory fiduciary duty.
          - The fact that creditors’ interests increase in relevance as a corporation’s finances
            deteriorate is relevant to the exercise of discretion by a court in granting standing to a
            party as a complainant under s.238(d) of the CBCA as a “proper person” to bring a
            derivative action in the name of the corporation under ss. 239 and 240 of the CBCA, or to
            bring an oppression remedy claim under s.241 of the CBCA.

          The Statutory Duty of Care
          - Three elements of art. 1457 of the CCQ are relevant to the integration of the director’s
            duty of care into the principles of extra-contractual liability: who has the duty (every
            person), to whom is the duty owed (another), and what breach might trigger liability (rules
            of conduct).
          - Directors and officers come within the expression “every person”
          - The word “another” can include creditors.
          - The interpretation can be harmoniously integrated with the wording of the CBCA. Unlike
            the statement of the fiduciary duty which specifies that directors and officers must act with
            a view to the best interests of the corporation, the statement of the duty of care does not
            refer to an identifiable party as the beneficiary of the duty. Instead, it provides that every
            director and officer shall exercise the care, diligence and skill that a reasonably prudent
            person would exercise in comparable circumstances.
          - If a breach of the standard of care, causation, and damages are established, creditors can
            resort to 1457 to have their rights vindicated.
          - S. 122(1)(b) requires more of directors and officers than the traditional common law duty
                                                                                                       32
                                                                                            Tufo, Camion, Niziblian
                                                                                                     Summer 2010


                   of care. It is an objective standard, which means that the factual circumstances
                   surrounding the actions of the director or officer are relevant (contextual approach), while
                   their subjective motivations pertain to the statutory fiduciary duty.

                The Business Judgment Rule
                - It might be tempting for some to see unsuccessful business decisions as unreasonable or
                   imprudent in retrospect. Because of this risk of hindsight bias, Canadian courts have
                   developed a rule of deference to business decisions: the Business Judgment Rule.
                - The court looks to see that the directors made a reasonable decision, not a perfect one.
                - Decisions must be reasonable in light of all the circumstances about which the directors
                   and officers knew or ought to have known
                - In order for a plaintiff to succeed in challenging a business decision, he has to prove that
                   the directors acted a) in breach of the duty of care and b) in a way that caused injury to the
                   plaintiff
Comments        Choudhury: The extra-contractual duty of care should not be applied to the duty of care in
                corporate law. There is no gap in the CBCA here AND we are not dealing with a provincially
                incorporated company. In corporate law, the duty of care simply entails following certain
                processes in reaching decisions. Therefore, the duty of care is owed exclusively to
                shareholders. (Ontario has changed its relevant legislation to reflect this: art. 14 of the
                OBCA). According to the SCC, the duty of care is now owed to everyone (customers,
                creditors, shareholders, environment, etc.).

CBCA 122(1) Every director and officer of a corporation in exercising their powers and discharging their
duties shall:
    a) Act honestly and in good faith with a view to the best interests of the corporation; and
    b) Exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable
        circumstances.

o   The first duty has been referred to as the “fiduciary duty.” It is better described as the “duty of loyalty.”
o   The second duty is commonly referred to as the “duty of care.” Generally speaking, it imposes a legal
    obligation upon directors and officers to be diligent in supervising and managing the corporation’s
    affairs.

Nielsen Estate v. Epton (2006)
Jurisdiction Alberta QB
Facts             A corporate employee, Nielsen, was killed while operating a hoist to lift a spreader beam at
                  the shop of his employer, Fabtec. The beam was designed in a manner in which it could not
                  safely latch onto the type of hoist used, and the beam fell and struck Nielsen. Epton, Fabtec’s
                  president had previously issued specific instructions to Fabtec’s onsite supervisor to install the
                  beam. The company did not have a safety policy with regard to operating the hoist. Nielsen’s
                  estate sought to hold Epton personally liable in negligence for acts and omissions in his
                  capacity as director. Epton had not purchased coverage for himself as a director under
                  Alberta’s Workers’ Compensation Act.
Issues            Does a corporate director owe a duty of care to corporate employees?
Holding           Yes.
Ratio             - The fact that the Workers’ Compensation Act provides for a scheme whereby directors can
                      purchase coverage indicates that the Legislature contemplated that there would be cases in
                      which there would or should be director liability personally to employees
                  - The Legislature also addressed director liability respecting worker safety under the
                      Occupational Health and Safety Act.
                  - There is a duty on the part of directors to take such measures as are reasonably within
                      their capacity to ensure that where the corporation employs others in hazardous activities,
                      the directors will in good faith establish corporate policies that are reasonably oriented
                      towards having the corporation meet its legal requirements as to worker safety and public
                      safety. Serving the “best interests of the corporation” would involve ensuring that the
                      corporation does not run afoul of laws binding upon it.
                                                                                                                 33
                - A personal duty of care of corporation directors toward corporation employees should be
                   found in circumstances where:
                    a) The director has or ought to have personal factual awareness of serious and avoidable
                        or reducible danger to which the corporation’s employees are exposed in relation to
                        corporation-related activities
                    b) It is within the authority of the director to envision, establish and enforce corporate
                        policies which could reasonably avoid or reduce such serious danger and
                    c) It is within the reasonable capacity of the director to envision, establish and enforce
                        the actions necessary to carry out such policies and to reasonably avoid or reduce
                        such serious danger.
Comments        “This obligation falls to the director personally because all the characteristics giving rise to the
                duty of care by the director are personal, not vicarious. The obligation is realistic to impose
                on the directors because the danger must be serious, i.e. it foreseeably threatens life, limb or
                psychological health, not that transitory or trifling perils await.”

Note: This is closer to a tort-type duty of care.

CCQ 321. A director is considered to be the mandatary of the legal person. He shall, in the performance of
his duties, conform to the obligations imposed on him by law, the constituting act or the by-laws and he shall
act within the limits of the powers conferred on him.

Recall that:
CCQ 2138. A mandatary is bound to fulfill the mandate he has accepted, and he shall act with prudence and
diligence in performing it.

He shall also act honestly and faithfully in the best interests of the mandator, and avoid placing himself in a
position that puts his own interest in conflict with that of his mandator.

CCQ 322. A director shall act with prudence and diligence. He shall also act with honesty and loyalty in the
interest of the legal person

QCA 123.83. Directors, officers and other representatives of a company are mandataries of the company.
QCA 123.84. A director is presumed to have acted with appropriate skill and with prudence and diligence if
he relies on the opinion or report of an expert to take a decision.
QBCA 119. Subject to this division, the directors are bound by the same obligations as are imposed by the
Civil Code on any director of a legal person.
Consequently, in the exercise of their functions, the directors are duty-bound toward the corporation to act
with prudence and diligence, honesty and loyalty and in the interest of the corporation.

In their capacity as mandataries of the corporation, the OFFICERS are bound, among other things, by the
same obligations as are imposed on the directors under the second paragraph.

Duty of Skill

Re City Equitable Fire

    o   A director need not exhibit in the performance of his duties a greater degree of skill than may
        reasonably be expected from a person of his knowledge and experience.
    o   A director is not bound to give continuous attention to the affairs of his company. His duties are of
        an intermittent nature to be performed at periodical board meetings and at meetings of any
        committee of the board upon which he happens to be placed.
    o   In respect of all duties that having regard to the exigencies of business and the articles of association
        may properly be left to some other official, a director is, in the absence of grounds for suspicion,
        justified in trusting that official to perform such duties honestly.
   o
Query: What level of skill did the common law require and what are the repercussions of this?

                                                                                                                34
                                                                                        Tufo, Camion, Niziblian
                                                                                                 Summer 2010




Note: This case has been overruled by the legislature.

Duty of Skill, Care, and Diligence

    o   Because the common law was not strict, section 122 of the CBCA was enacted requiring directors
        and officers to exercise care, diligence, and skill that a reasonably prudent person would exercise in
        comparable circumstances
    o   Compare the standard to that required in Quebec - A director shall act with prudence and diligence
        (CCQ 322; QBCA s. 119)

Smith v. Van Gorkom (1985)
Jurisdiction Delaware
Facts          Trans Union was struggling with its inability to use all its investment tax credits because its
               profits were insufficient. Its stock had been trading between $29 and $38 over the previous
               year. Management discussed a number of alternatives including a leveraged buy-out by
               management itself. A rough calculation by Romans, the CFO, indicated that at a share price
               of $50 the debt could easily be paid off by the corporation’s tax flow, but that at $60 it would
               be difficult to retire the debt. Van Gorkom was the CEO and chairman of the board. He was
               nearing the mandatory retirement age of 65 and indicated he would be willing to sell his
               75,000 shares at $55 a share. He decided to approach the head of another corporation,
               Pritzker, with a proposal that Pritzker purchase all the outstanding shares of Trans Union for
               $55 per share. He presented Pritzker with calculations indicating that most of the debt
               required to purchase all the outstanding shares could be retired over five years from Trans
               Union’s cash flow. Pritzker showed interest and proposed that if Van Gorkom made an offer
               of $55 per share, he would receive 1,000,000 shares of Trans Union stock at $38 per share.
               He also insisted that the board of Trans Union accept the merger agreement within three days.
               For 90 days after the merger agreement was accepted, Trans Union could receive but not
               solicit competing bids. The board met and heard presentations from Van Gorkom, the
               corporation’s vice-president, outside counsel, and the CFO over a period of two hours before
               agreeing to the merger. The CFO made it clear that the calculations leading to the $55 price
               were not the result of trying to determine the value of the shares, but the price at which the
               cash flow of Trans Union would allow the debt incurred in a buyout to be repaid over five
               years. He did, however, express the opinion that the $55 price was in the range of a fair price,
               but at the beginning of that range. The board members did not have an opportunity to review
               the merger agreement in detail before they agreed to it. A few weeks later, after a rebellion
               against the merger by senior management of Trans Union, Pritzker agreed to amendments to
               the merger agreement, including one permitting Trans Union to solicit bids. Trans Union
               began to solicit bids, but none were finalized and the shareholders of Trans Union voted to
               accept Pritzker’s bid.
Issues         Application of the Business Judgment Rule / Duty of Care
Holding        The rule does not apply here / Duty of care not met.
Ratio          The Business Judgment Rule
              - The rule is a presumption that in making a business decision, the directors of a corporation
                 acted on an informed basis, in good faith, and in the honest belief that the action taken was
                 in the best interests of the company. The party attacking a board decision must rebut that
                 presumption.
              - The fulfillment of the fiduciary function requires more than the mere absence of bad
                 faith or fraud. Here there are no presumptions of fraud, bad faith or self-dealing. It is
                 presumed that the directors reached their decision in good faith and considerations of
                 motive are thus irrelevant.
              - The director’s duty to exercise an informed business judgment is in the nature of a
                 duty of care, as distinguished from a duty of loyalty.
              - The concept of gross negligence is the proper standard for determining whether a business
                 judgment reached by a board of directors was an informed one.

                                                                                                            35
               - As far as the defense of the shareholder approval is concerned, only an agreement of merger
                 satisfying the statutory requirement of duty of care to act in an informed and deliberate
                 manner may be submitted to the shareholders.
               - The directors:
                   a) Did not adequately inform themselves as to Van Gorkom’s role in forcing the sale of
                         the company and in establishing the per share purchase price
                   b) Were uninformed as to the intrinsic value of the Company
                   c) Given these circumstances, were grossly negligent in approving the sale of the
                         company upon two hours’ consideration, without prior notice, and without the
                         exigency of a crisis or emergency.
               - Few members of senior management were present and those present had only just learned
                 of the proposal. They had no documents before them but relied on Van Gorkom’s 20-
                 minute oral presentation.
               - The Board accepted without scrutiny Van Gorkom’s presentation as to the fairness of the
                 share price – a matter that the board had never previously considered.
               - There was no market test as to the share price because Trans Union could not solicit bids
                 and the public announcement of the agreement did not indicate that it could receive
                 unsolicited bids. The text of the subsequent amendment did not permit recission of the
                 agreement with Pritzker unless another merger was consummated. Other provisions of the
                 amendment had the effect of reducing the period for the market test.
               - Collective experience and sophistication does not turn what seems to be a hasty and ill-
                 informed decision into an informed and reasonable one.
               - The fact that Delaware law did not require a fairness option or an outside valuation did not
                 justify the directors’ failure to ensure that they had adequate information about the value of
                 the company before accepting the offer.

               Dissent:
               Given the experience and expertise of the directors, they were not helpless victims unable to
               assess the transaction. They were qualified to make an on-the-spot informed judgment
               because they knew the company like the back of their hands.

Note: Effects of Van Gorkom

    o   Made it harder to interest people in serving as outside directors
    o   Pushed up rates for director and officer insurance.
    o   Encouraged excessive risk averse behaviour by directors which could inhibit firm growth
    o   Del. 102(b)(7) – Compare CBCA s. 122(3) (eliminates personal liability of directors for failing to
        meet DOC in good faith – the corporation would indemnify directors when they failed to meet their
        duty of care. This is only the case in the US. In Canada, you cannot limit the breach of DOC by a
        director. A corporation can indemnify you or give you insurance but there are a lot of restrictions.
        Even in the US, courts now consider the DOC to be a subset of the duty of loyalty which makes it
        virtually impossible for one to be protected under 102 (b)(7). In Canada, the distinction between
        DOL and DOC remains.

Duty of Care (BCE v. 1976 Debentureholders (SCC))

    o   The duty of care is not owed solely to the corporation, and thus may be the basis for liability to other
        stakeholders in accordance with principles governing the law of tort and extra-contractual liability
    o   Section 122(1)(b) of the CBCA does not provide an independent foundation for claims. However,
        courts may take this statutory provision into account as to the standard of behaviour that should
        reasonably be expected



Note: Confirms decision in Peoples. DOC reformulated as standard of care. The standard is owed to more
than just the corporation. Cannot sue on the basis of this standard. Could try to slot it in under the duty of

                                                                                                             36
                                                                                             Tufo, Camion, Niziblian
                                                                                                      Summer 2010


loyalty, i.e. if this standard was breached, you could say that it indicates a breach of the duty of loyalty as well.
(Irony: broadening the scope of DOC but narrowing the possibility of suing under it). This is best used in
the context of oppression claims. In Quebec, one can still bring a claim under the DOC because of the 1457
reference. Can also sue under DOC in Ontario for provincially incorporated companies.

Choudhury: It doesn’t matter so much because it’s so hard to bring a DOC case anyway. (Can go via Nielsen
if it’s a tort).

    o    The content of this duty is highly dependent on the facts
    o    The duty of care sets an objective standard by referring to the care, diligence and skill of a reasonably
         prudent person
    o    The duty of care is not an obligation owed to the corporation, at least not exclusively, but represents
         a standard of behavior to be observed in relation to creditors and other stakeholders as well


Criticisms of the SCC’s Approach to the Duty of Care
    o The SCC’s approach to DOC conflates the traditional conception of DOC as a standard of
        competence that is owed to the corporation by directors and officers in carrying out their duties on
        behalf of the corporation with the standard of care required by tort law that is owed to anyone who
        under tort principles is owed a duty of care
    o The content of the resulting standard will likely be the subject of substantial litigation
    o Already, the OBCA has been amended in s. 24 to hold that the duty of care is owed only to the
        corporation.

The Business Judgment Rule
Meant to encourage efficiency

    o    Deference by courts to decisions made by the directors where they have been duly diligent and
         where the decision was informed in all the circumstances
    o    BJR is permitted because courts do not have the business or commercial expertise to assess all
         decisions made by directors and officers, and because their review of the decision is made with the
         benefit of hindsight
    o    This is very unique to the business context. Courts rarely give deference to individuals.


Note: Clashes with Peoples, which is yet another reason why Choudhury believes Peoples was wrongly decided.

Reasons for the Business Judgment Rule
   o A failure to give deference to business judgments made in good faith and on a duly diligent basis
      could encourage shareholder or creditor actions where they are unhappy with officers’ decisions in
      hindsight and could create inappropriate incentive effects for such stakeholders
   o Directors and officers may be unwilling to act or to make decisions out of fear that those decisions
      will be overturned by the courts, in turn creating an ineffective or paralyzed governance structure

Review of Decisions by Courts Under BJR
   o Courts undertake a process inquiry and assess the substantive decision based on a standard of
       reasonableness in the circumstances.
   o If directors have acted within a range of reasonableness, the court will not substitute its own opinion
       for that of the board, even though subsequent events may have raised doubts about the validity of
       the decision

BJR in a Nutshell
o    If a business decision has been made honestly, with due care, and on an informed basis, then the
     substance of that decision will be protected by BJR
o    Directors who wish to rely on BJR will need to ensure that the above pre-conditions have been
     established.
o    Directors will need to demonstrate only that the process they followed was appropriate; they are not
                                                                                                                  37
      required to justify the substance of their business decisions
o     Finally, perfection is not required


    VII.     FIDUCIARY DUTY / DUTY OF LOYALTY

Duty of Loyalty

             Common Law

CBCA 122. (1) Every director and officer of a corporation in exercising their powers and discharging their
duties shall (a) act honestly and in good faith with a view to the best interests of the corporation.

             Civil Law

QCA 119. ... in the exercise of their functions, the directors are duty bound toward the corporation to act
with ... honesty and loyalty and in the interest of the corporation.

CCQ 322. A director shall act ... with honesty and loyalty in the interest of the legal person


Conflicts between corporate duty and personal interests
   o At its core, the duty of loyalty speaks to the obligation of directors and officers to put the interests of
        the corporation they serve ahead of their own interests
   o The potential for this conflict arises in instances of:
      - Self dealing
      - Directors’ and officers’ remuneration
      - Corporate opportunities
      - Hostile takeover bids

    Self-Dealing
    o Involves contracts or transactions concluded between the directors and officers of a corporation,
        either directly or through their interest in another entity, and the corporation itself
    o Dangers entailed by self-dealing: possible diversion of corporate wealth
    o Example:
                 - Sale of an asset to the corporation by a director at a price that exceeds the asset’s fair
                     market value
                 - The price differential at the corporation’s expense constitutes an “unbargained for”
                     diversion of wealth from shareholders to the interested party and an agency cost

Aberdeen Ry. Co. v. Blaikie Brothers (1854)
Jurisdiction UK (HL)
Facts        The Railway contracted to purchase chairs from Blaikie Brothers. Thomais Blaikie, chairman
             of the Railway, was also a partner in Blaikie Brothers. Some of the chairs were delivered but
             the railway refused the delivery (unknown reasons). BB was sued for specific performance.
             The railway defended itself on grounds that it could avoid the contract because its chairman
             had a pecuniary interest in it as a partner in the vendor firm. At trial, the defense was
             rejected.
Issues       Is a director precluded from dealing on behalf of the company with himself or with a firm in
             which he is a partner?
Holding      Yes.
Reasoning         o No one with a fiduciary duty is allowed to enter into engagements in which he has a
                       personal interest conflicting with those whom he is bound to protect.
                  o A corporate body can only functions through agents, and these agents must act in the
                       best interests of the corporation.
                  o The inability to contract depends not on the subject matter of the agreement, but on

                                                                                                             38
                                                                                             Tufo, Camion, Niziblian
                                                                                                      Summer 2010


                       the fiduciary character of the contracting party who is acting as a manager of a
                       business for the benefit of others.
                   o   Here, Blaikie was not only a director but the chairman of directors; he was to make
                       make the best bargains he could for the benefit of the company
                   o   His personal interest would lead him in an entirely opposite direction, inducing him
                       to fix the price as high as possible. This is the very evil against which the rule is directed.

Question: Should there be a prophylactic rule for self-dealing?
   o A rule voiding all contracts in which directors and officers have an interest, such as that set forth in
       Aberdeen Ry., will impose costs on corporations
   o But in the case of interested directors’ contracts, the fear is that management will cause the firm to
       enter into bargains that transfer wealth to the directors

North-West Transportation Co. v. Beatty [1887]
Jurisdiction Ontario / Privy Council
Facts        Beatty, one of the directors of North-West Transportation, had a boat he wanted to sell to the
             company [what a smart alec!]. In order to effect the sale, he became the owner of more than
             half the shares of the company, a few of which he transferred to the other defendants, Rose
             and Laird. At the first annual meeting thereafter, the three of them were elected directors
             and constituted a majority of the board, which was composed of five. The board passed a by-
             law authorizing the purchase of the boat by the company. At the meeting of the shareholders
             where the by-law was confirmed, Beatty voted for the confirmation. Without his vote the
             resolution could not have been passed as he voted on nearly half the stock of the company.

               The plaintiff, one of the shareholders of the company who voted against the resolution, took
               proceeding on behalf of himself and other dissentient shareholders to have the sale of the
               boat to set aside. The chancellor[3]ordered it to be set aside. The Court of Appeal reversed,
               holding that though the by-law was illegal, the action of the shareholders was lawful, and
               effected a valid contract of sale. The plaintiff appealed to the Supreme Court of Canada
               which annulled the sale.
Issues         Should the sale of the boat be aside for reason of self-dealing?
Holding        No.
Reasoning          o Unless some provision to the contrary is found in the charter by which the company
                       is incorporated, the resolution of a majority of the SHs duly convened, upon any
                       question which the company is legally competent to deal, is binding upon the
                       minority, and the company. Every SH has a right to vote on such questions,
                       including when they have a personal interest opposed or different to that of the
                       company.
                   o A director of a company is precluded from self-dealing, but any such dealing or
                       engagement may be affirmed or adopted by the company, provided such affirmance
                       or adoption is not brought about by unfair or improper means, and is not illegal or
                       fraudulent or oppressive towards those shareholders who oppose it
                   o The transaction was fair because the purchase of the steamer was:
                            - Essential to the efficient conduct of the company’s business and well
                                adapted for that purpose;
                            - It was not within the power of the company to acquire any other steamer
                                equally well adapted for its business; and
                            - The price of the steamer was not excessive or unreasonable.

                   o   There would normally be no reason to set the sale aside, except for the fact that the
                       resolution was brought about by unfair and improper means: the same day the
                       purchase was agreed upon, Beatty was transferred 101 shares, making him a
                       controlling SH, and during the same meeting, he became a director. The by-law that
                       ratified the purchase was passed and confirmed in the meeting of the directors due to
                       the votes of Beatty
                   o   The Supreme Court of Canada ruled that the interested director’s contract could be

                                                                                                                  39
                       ratified only by a disinterested majority of the SHs
                    o  The House of Lord says that although the majority of the directors was not
                       disinterested, it was the competency of the SHs to adopt or reject the purchase. The
                       SHs did adopt in due form and terms at the SHs meeting
                    o The constitution of the company allowed Beatty to have SH voting rights, which he
                       could use to secure the election of directors who agreed with his views.
                    o The Supreme Court of Canada held that the use of Beatty’s SH voting powers was
                       oppressive, but the House of Lords disagrees: Beatty had acted within his voting
                       rights, though he could have done so in a manner less likely to give rise to an
                       objection.
Comments       I say Beatty had friends in the House of Lords!

Gray v. New Augarita Porcupine Mines
(example of individual dominating board of directors)
    o Self dealing by a director can be ratified by the board of directors if:
            - The self-interested director does not vote on a resolution dealing with the contract and
            - The nature of the director’s interest is disclosed to the board, the onus being on the director
                to establish that he has satisfied these conditions.
                     Whilst there is no precise formula that will determine the extent of detail that is
                         called for when a director declares his interest, if it is material to their judgment, he
                         must enlighten his fellow directors fully as to the real nature of his interest and how
                         far it goes. When his interest consists of the fact that he stands to gain a great deal
                         by a transaction wherein only he has the means of knowing how much, it is
                         imperative that his declaration make his colleagues fully informed of the real state
                         of affairs.

Legislative Response

              Common Law

CBCA 120. (1) A director or an officer of a corporation shall disclose to the corporation, in writing or by
requesting to have it entered in the minutes of meetings of directors or of meetings of committees of
directors, the nature and extent of any interest that he or she has in a material contract or material
transaction, whether made or proposed, with the corporation, if the director or officer
(a) is a party to the contract or transaction;
(b) is a director or an officer, or an individual acting in a similar capacity, of a party to the contract or
transaction; or
(c) has a material interest in a party to the contract or transaction.

              Civil Law

QBCA 122. A director or officer of a corporation must disclose the nature and value of any interest he or
she has in a contract or transaction to which the corporation is a party.

For the purposes of this subdivision, “interest” means any financial stake in a contract or transaction that
may reasonably be considered likely to influence decision-making. Furthermore, a proposed contract or a
proposed transaction, including related negotiations, is considered a contract or transaction.

QBCA 123. A director or an officer must disclose any contract or transaction to which the corporation and
any of the following are a party:
(1) an associate of the director or officer;
(2) a group of which the director or officer is a director or officer;
(3) a group in which the director or officer or an associate of the director or officer has an interest.

The director or officer satisfies the requirement if he or she discloses, in a case specified in subparagraph 2,
the directorship or office held within the group or, in a case specified in subparagraph 3, the nature and value
of the interest he or she or his or her associate has in the group.
                                                                                                               40
                                                                                         Tufo, Camion, Niziblian
                                                                                                  Summer 2010



        Safe-Harbor

        Common Law

CBCA 120. (1) A director or an officer of a corporation shall disclose to the corporation, in writing or by
requesting to have it entered in the minutes of meetings of directors or of meetings of committees of
directors, the nature and extent of any interest that he or she has in a material contract or material
transaction, whether made or proposed, with the corporation, if the director or officer
(a) is a party to the contract or transaction;
(b) is a director or an officer, or an individual acting in a similar capacity, of a party to the contract or
transaction; or
(c) has a material interest in a party to the contract or transaction.
(7.1) Even if the conditions of subsection (7) are not met, a director or officer, acting honestly and in good
faith, is not accountable to the corporation or to its shareholders for any profit realized from a contract or
transaction for which disclosure is required under subsection (1), and the contract or transaction is not
invalid by reason only of the interest of the director or officer in the contract or transaction, if
(a) the contract or transaction is approved or confirmed by special resolution at a meeting of the
shareholders;
(b) disclosure of the interest was made to the shareholders in a manner sufficient to indicate its nature before
the contract or transaction was approved or confirmed; and
(c) the contract or transaction was reasonable and fair to the corporation when it was approved or confirmed.

        Civil Law

QBCA 132. A contract or transaction for which a disclosure required by section 122 or 123 was made may
not be declared null if the contract or transaction was approved the board of directors and the contract or
transaction was in the interest of the corporation when it was approved.

Nor may the director or officer concerned, in such a case, be required to account for any profit or gain
realized or to remit the profit or gain to the corporation.

Note: The difference between the QBCA and the CBCA is that under the QBCA, one can still vote. Safe
harbors can also be provided by SH ratification (CBCA s. 120(7.1)), but in the QBCA it must come from
disinterested shareholders (QBCA s. 133.: the contract or transaction was approved by ordinary resolution by
the shareholders entitled to vote who do not have an interest in the contract or transaction).

SH ratification of directors’ breaches is not necessarily decisive (CBCA, s. 242 / QBCA, s. 440)

Note: It seems upon reading that the director would also be able to vote but is probably not the case once
litigated.

UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc. [2002] Ontario
In the context of a director-corporation transaction, there are duties of disclosure. The director must make
his colleagues “fully informed of the real state of things”; it’s not just a mere “I remind you that I have an
interest here.” Saying that the directors could have found out some info by themselves is not an excuse
CBCA s. 120 does not set out any procedural standards to establish the fairness of a contract; but major
interested contracts will often be approved by a committee of independent directors, and certified as
independent by securities firms or investments bankers. The scope of the review by firms or banks is
generally specified by the independent committee but since it bears the costs of an inadequate review, the
scope of the review might be left to the determination of the firm.

How Interested Does a Director Have to Be?
  o Does not have to be a pecuniary interest
          - i.e. Transvaal Lands Co. -where a director of a corporation holds shares in another
              corporate party to a contract as trustee, rather than beneficially, that interest is sufficient to
              attract the conflict of interest prohibition
                                                                                                             41
   o Can be an interest based on a close personal relationship with the principal of the counterparty
   o Can include a directorship in another corporate party to the transaction

Perlman v. Feldman (1955)
Jurisdiction Ontario / Privy Council
Facts           - Newport (corporation)
                - Feldmann (family and friends owned 37 percent, effectively controlled corp.)
                - Minority stockholders
                - Wilport (bought Feldmann Group shares)

              Newport Steel was a steel manufacturer. Plaintiffs and Defendants were shareholders. Due to
              the Korean War, steel was at a premium and it turned Newport Steel into a more profitable
              venture. The Truman administration imposed price controls, limiting the maximum price
              firms could charge for steel. A consortium of end-users called Wilport Co, bought the
              Defendants’ shares in an effort to secure more steel output. The over-the-counter price for
              the shares was $12 and the book value was $17.03, but Wilport paid $20 per share. The
              Plaintiffs, a minority, sued to receive the same premium (attributable to the sale of corporate
              power) for their shares, and the trial court denied their claims. The trial court ruled that the
              premium was an inherent benefit of having a controlling ownership, and alternatively, that the
              burden was on the Plaintiffs to prove the lesser value of the stock.
Issues        Are the Plaintiffs entitled to a share of the premium paid by Wilport attributed to the sale of
              corporate power?
Holding       Yes.
Reasoning     A majority shareholder - particularly when also president and chairman of the board -
              who sells his shares to a third party who then obtains a controlling interest, owes the
              minority shareholder their share of the premium paid by the third party for the
              controlling interest.

              o Feldmann was the president and dominant shareholder, and in both positions he owed a
                fiduciary duty to minority shareholders not to let a personal interest override the interests
                of all the shareholders.
              o The burden is on the shareholder to prove that this is not the case. The court is not
                holding that the dominant shareholder is not able to sell his shares. But Feldmann did not
                meet his duty in the sale of his shares. The court noted that there only had to be a
                possibility that the Defendants misappropriated a corporate opportunity and not an
                absolute certainty. The facts demonstrate that there was a shortage of steel and that the
                Defendants took advantage of this to obtain a market premium for their shares.
              o We do not mean to suggest that a majority stockholder cannot dispose of his controlling
                block of stock to outsiders without having to account to his corporation for profits or
                even never do this with impunity when the buyer is an interested customer, actual or
                potential, for the corporation's product. But when the sale necessarily results in a sacrifice
                of this element of corporate good will and consequent unusual profit to the fiduciary who
                has caused the sacrifice, he should account for his gains. So in a time of market shortage,
                where a call on a corporation's product commands an unusually large premium, in one
                form or another, we think it sound law that a fiduciary may not appropriate to himself the
                value of this premium. Such personal gain at the expense of his coventurers seems
                particularly reprehensible when made by the trusted president and director of his
                company.

              Dissent. The dissent does not argue that Feldmann owed the Plaintiffs a fiduciary duty, but
              that Feldmann did not violate any duty. As a majority shareholder, he was entitled to sell his
              shares for the best price he could receive. There was no evidence that Wilport was going to
              abuse their control or not act in the best interests of the other shareholders.

Peoples and the Duty of Loyalty


                                                                                                           42
                                                                                           Tufo, Camion, Niziblian
                                                                                                    Summer 2010


It is not required that directors and officers in all cases avoid personal gain as a direct or indirect result of
their honest and good faith supervision or management of the corporation. In many cases the interests of
directors and officers will innocently and genuinely coincide with those of the corporation. If directors and
officers are also shareholders, as is often the case, their lot will automatically improve as the corporation’s
financial condition improves. Another example is the compensation that directors and officers usually draw
from the corporations they serve. This benefit, though paid by the corporation, does not, if reasonable,
ordinarily place them in breach of their fiduciary duty. Therefore, all the circumstances may be scrutinized to
determine whether the directors and officers have acted honestly and in good faith with a view to the best
interests of the corporation.




    VIII. CORPORATE OPPORTUNITIES

Instances in which directors and managers of corporations have appropriated business or investment
opportunities that might have gone to the corporations they serve are known as corporate opportunity cases.
A corporate opportunity is more significant than self-dealing as it actually takes something away from the
corporation.

Regal (Hastings) Ltd. V. Gulliver (1942)
Jurisdiction UK (HL)
Facts            Regal was a corporation that owned and managed a cinema called… the Regal. One day,
                 Regal’s board decided to try to acquire the lease of two other cinemas from a company called
                 Elite through a subsidiary, Amalgamated, whose shares would be 100% owned by Regal.
                 Regal’s solicitor carried out the negotiations and Elite accepted. Because Regal could afford to
                 put up only L2000 in Amalgamated and because one of the directors objected to Regal
                 guaranteeing its rent, it was resolved that the individual directors would be invited to
                 subscribe for 500 shares of Amalgamated each. At the same time, Regal was considering
                 selling all of its assets including the leases acquired from Elite. An offer was received, with
                 L77500 allotted as the price of Regal’s cinema, and L15000 as the price of the two leasehold
                 cinemas. The board accepted the offer. The proposed sale and purchase of the Regal cinema
                 and the two leaseholds fell through, but another proposition took its place: a proposal for the
                 purchase from the individual shareholders of their shares in Regal and Amalgamated. The
                 proposal was accepted and 3,000 shares in Amalgamated held otherwise than by Regal were
                 sold for a sum of L3 per share (at a profit of L2 per share over the issue price). After the sale
                 of the shares in Regal, the company came under the management of a new board of directors
                 which initiated litigation seeking to recover from Regal’s five former directors and its solicitor
                 the sum of L8142 either as damages or as money had and received to the plaintiff’s use.
Issues           Are the directors of Regal liable for the profits they made by reason and in the course of their
                 fiduciary duty to Regal?
Holding          Yes.
Ratio              o The rule of equity which insists that those who by use of a fiduciary position
                       make a profit are liable to account for that profit in no way depends on fraud or
                       the absence of bona fides, or upon whether the profit would or should have
                       otherwise gone to the plaintiff, or whether the profiteer was under a duty to
                       obtain the source of the profit for the plaintiff, or whether he took a risk or acted
                       as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been
                       damaged or benefited by this action.
                   o The liability arises from the mere fact of a profit having, in the stated
                       circumstances, been made. The profiteer, however honest and well-intentioned,
                       cannot escape the risk of being called upon to account.
                   o In the present case, the effect of the change of scheme which only the Regal directors
                       could bring about had a profound effect upon the company and its shareholders: Regal
                       would no longer control Amalgamated or own the whole of its share capital; Regal
                       shareholders would only receive a largely reduced proportion of the sale price of the two
                       leased cinemas. The Regal directors and solicitor would receive the money of which the
                                                                                                                43
                     shareholders were thus deprived.
                o    The directors obtained the shares by reason only of the fact that they were directors of
                     Regal and in the course of the execution of that office.
                o The argument that Regal itself lacked the funds to buy the shares and that the directors,
                     in buying the shares, were presumably acting as members of the public cannot be
                     accepted. They should have protected themselves by a resolution of the Regal
                     shareholders.
                o The solicitor is let of the hook as the directors had instructed him to purchase shares.
Comments       The reason why courts pay little heed to the impossibility argument is probably because the
               defendants are usually in control of the corporate possibilities. If directors could thus justify
               their conduct, there would be a temptation to refrain from exerting their best efforts on
               behalf of the corporation so that the opportunity to profit would open to them personally.

Note: Think about this from the law and economics perspective.
Minority shareholders will probably not bring suit because they were not damaged, however, the
duty of loyalty has nevertheless been breached.

Peso Silver Mines Ltd. V. Cropper (1966)
Jurisdiction SCC
Facts            This was an action by Peso Silver Mines against Cropper, one of its founding directors, for a
                 declaration that shares owned by Cropper in Cross Bow Mines and Mayo Silver Mines were
                 held by him as trustee for Peso or, in the alternative, that Cropper was liable to account to
                 Peso for the proceeds of those shares. The shares had been purchased by Cropper, together
                 with a few other individuals who established a new corporation, after Peso’s board of
                 directors had turned down the opportunity. It was found at trial that that decision had been
                 honest and considered.
Issues           Is Cropper accountable to Peso for the shares?
Holding          No.
Ratio             o There is no suggestion in the evidence that the offer to the appellant was accompanied
                       by any confidential information unavailable to any prospective purchaser or that
                       Cropper as director had access to any such information by reason of his office
                  o When he had been approached to purchase the shares it was not in his capacity as Peso’s
                       director but as an individual member of the public.
Comments There is no prohibition at common law or by statute against a person being the
                 director of a competing corporation. Cropper was involved in a number of different
                 mining ventures simultaneously, a common pattern in the junior mining industry. The
                 decision in Peso is thus consistent with the accepted norm in that industry. Also note that the
                 purchase of a mining stake is speculative so that Cropper could not have known that his
                 purchase would actually lead to profits (he took a risk which Peso didn’t want to take).

Abbey Glen Property Corp. v. Stumborg (1978)
Jurisdiction Delaware
Facts          The Stumborg brothers were officers and directors of Abbey Glen’s predecessor corporation,
               Terra Developments. Terra was a land developer in the Edmonton area. Certain syndicates
               in which other Stumborg-controlled corporations were substantial participants owned two
               large parcels of land in Edmonton. The Stumborgs approached Traders Financial Corp. of
               Toronto on behalf of Terra in order to try to arrange a joint venture between Terra and
               Traders for the development of the two parcels. Traders refused to deal with Terra because
               Terra was publicly held. The Stumborgs and Trade then formed a new corporation, Green
               Glen, to develop the parcels, and the venture was a great success.
Issues         Are the Stumborg’s accountable to Abbey Glenn for their profits from Green Glen?
Holding        Yes.

Robinson v. Brier (1963)
Jurisdiction ?
Facts            Brier, together with the Robinsons, owned all shares of L Corp. Brier was also the director

                                                                                                             44
                                                                                            Tufo, Camion, Niziblian
                                                                                                     Summer 2010


                and manager of L’s wholly owned subsidiary, M Corp., the business of which was the
                assembly of soft luggage. Brier had various other business interests, as was known to the
                Robinsons. Brier determined that the price paid by M Corp. for the wooden frames for
                luggage were excessive. He convinced the frame suppliers to reduce the prices but eventually
                concluded that S Corp., of which he was the sole owner, could produce the frames still
                cheaper. S Corp. began to manufacture and sell frames to M Corp. at a price lower than M
                Corp. had been able to obtain anywhere else. The Robinsons sued on behalf of M Corp. to
                recover Brier’s profits from S Corp.’s frame sales.
Issues          Is Brier accountable to M Corp. for the profits of S Corp’s frame sales?
Holding         No.
Ratio             At the time when S Corp. started manufacturing frames, all of M Corp’s available space was
                  being used for luggage assembly and M Corp was behind in filling orders from various large
                  customers. Therefore, there was no usurpation of corporate opportunity.

Note: Can you really take away an opportunity that the corporation was unable to pursue? If the director
doesn’t pursue the opportunity, someone else will!

Canadian Aero Service Ltd. V. O’Malley (1974)
Jurisdiction SCC
Facts          Canaero was a subsidiary of a US corporation and was in the business of topographical
               mapping and geophysical exploration. O’Malley was its president and CEO until he resigned
               in 1966. Zarzycki was executive VP and director until he resigned in 1965. Wells was a
               director who ceased to be director in 1965. Wells suggested that the three form a company of
               their own due to their discontent on the limits placed on Canaero by the US parent, and their
               concerns about job loss if Canero failed to get contracts. In 1965, they formed Terra Surveys
               Limited, a company through which they could pursue the same contracts as Canaero. The
               contract at issue was the topographical mapping and aerial photographing of Guyana to be
               financed by the Government of Canada. Canaero had been working on promoting the
               project since 1961, and both O’Malley and Zarzycki had been involved. Canada’s external aid
               policy was to give preference to Canadian incorporated companies that were managed and
               operated from Canada and employed Canadians. Canaero and Terra both bid for the project
               and Terra’s bid was successful.
Issues               1) What was the relationship of O’Malley and Zarzycki to Canaero?
                     2) Do they owe any duties of Canaero by virtue of this relationship?
                     3) Was this duty breached?
                     4) Is there liability for this breach of duty?
Holding             1) They were president and vice president of Canaero for two years prior to their
                         resignation, i.e. top management as opposed to mere employees.
                    2) They owed a fiduciary duty to Canaero.
                    3) Yes.
                    4) Yes.
Ratio         -       It does not matter whether the two were directors of Canaero or not. By virtue of being
                      senior managers, theirs was a larger and more exacting duty than that of mere
                      employees, similar to that owed by directors.
              -       They stood in a fiduciary relationship to Canaero, which calls for loyalty, good faith, and
                      the avoidance of a conflict of duty and self-interest. They were thus precluded from
                      obtaining for themselves any property or business advantage either belonging to
                      Canaero or for which Canaero had been negotiating, especially as they themselves had
                      been involved in these negotiations.
              -       The fact that the two slightly varied the project in their own bid is irrelevant. It was still
                      the same project.
              -       Whether or not Terra was created to intercept this particular project is also irrelevant.
                      Honesty of purpose is no defense.
              -       There is a huge gulf between this case and Peso where the company’s interest in the
                      claims acquired by its director had already ceased.
              -       There was... no certain knowledge at the time O’Malley and Zarzycki resigned that the

                                                                                                                45
                     Guyana project was beyond Canaero’s grasp
Comment        Things to be taken into account in ascertaining whether there has been a usurpation of a
               corporate opportunity: position held, the nature of the opportunity, its ripeness, its specificity,
               the director or manager’s relationship to it, the amount of knowledge possessed, the
               circumstances in which it was obtained, whether it was private, the factor of time in the
               continuation of the fiduciary duty where the alleged breach occurs after termination of the
               relationship with the company, and the circumstanced under which the relationship was
               terminated.

Note: Should the fiduciary duty extend beyond the director’s employment with the corporation? Maybe it
depends on the circumstances, i.e. did the director quit the corporation just so that she could pursue the
opportunity? Also, note that this is not the same as simply leaving to go and work for someone else. If the
corporate opportunity belongs to the corporation, you cannot take it with you. Would these guys have even
come across this opportunity had they not worked for Canaero?


Gravino c. Enerchem Transport inc. (2008)
Jurisdiction Quebec (CA)
Facts        Having learned that a certain oil company had excess shipping capacity, three officers of
             Enerchem Transport Inc. (ETI), a provider of marine transportation services, commenced
             negotiations to have ETI sub-charter certain tankers from that oil company. Two of these
             officers were also directors and shareholders of ETI at the time. In February 1996, the two
             officers in question exercised their put-call options under ETI's unanimous shareholder
             agreement,[2] thereby liquidating their interest in ETI, and subsequently terminated their
             employment with ETI. After they left ETI, they formed a new business - Petro-Nav - and
             began negotiations to have Petro-Nav sub-charter the same tankers. In the spring of 1997,
             Petro-Nav succeeded in sub-chartering the tankers. After the tankers were chartered out to
             Petro-Nav, ETI instituted legal proceedings against its two ex-officers, contending that they
             had breached their duties toward ETI.
Issues
Holding
Ratio         The reasons for judgment deal with the following three issues: a) the application of the non-
              competition clause b) the duty to act with honesty and loyalty and c) the concept of a
              maturing business opportunity.

              Non-Competition Clause
              The Court of Appeal confirmed the trial judge's findings on the question of the application of
              the non-competition clause between ETI and its ex-officers, and reaffirmed that the lifting of
              such a clause operates to allow free competition as long as the general rules of the Civil Code of
              Québec are respected. Those that are supplementary in nature can be overridden by contract,
              but rules that are of mandatory application, such as the duty of loyalty of a corporate officer
              or director, cannot. Among other things, the Court relied on the decision in Marque d'Or inc. v.
              Clayman,[3] which was handed down under the rules of Quebec's old Civil Code.

              Duty to Act With Honesty and Loyalty
              The Court of Appeal confirmed in part the trial judge's findings on the question of the duty to
              act with honesty and loyalty. The Court explained that in order to determine the scope of the
              duty to act with honesty and loyalty, it was necessary to consider the applicable provisions of
              the Civil Code of Québec along with the principles laid down by the Supreme Court of Canada in
              Canadian Aero Service Ltd. v. O'Malley[4] and the cases that had followed in its wake. The Court
              concluded that the duty of loyalty owed to ETI by its ex-officers in this case was all the
              greater given the high level of responsibility of the positions they had held with the company.

              Maturing Business Opportunity
              - The Court began its analysis of this question by noting that the concept of a "maturing
                business opportunity" as such was not found in the Civil Code of Québec. Rather, it was
                                                                                                               46
                                                                                      Tufo, Camion, Niziblian
                                                                                               Summer 2010


               incorporated in the prohibition, found in article 323 C.C.Q., that bars a director from using
               for his own profit or that of a third party any information he obtains by reason of his
               duties, unless he is authorized to do so.
           -   However, the Court went on to point out that this prohibition was not a substitute for a
               negotiated non-competition clause, and that in the absence of any conflict of interest,
               borrowing what was merely a business idea would be without consequence.
           -   The Court identified four main factors that had to be weighed in order to determine
               whether misappropriation of a maturing business opportunity had taken place: i) the
               degree to which the interests of the director and the interests of the company were in
               conflict, ii) the degree to which the business opportunity had, at the time in question,
               acquired its own specific and identifiable character, iii) the proximity in time between the
               emergence of the business opportunity and its exploitation and iv) the proximity in
               character between the business opportunity pursued by the company and the contract or
               business concluded by the director for his own profit or the profit of a third party.
           -   In the Court's view, apart from a situation where property had been misappropriated or
               clientele diverted, a business opportunity had to have acquired a level of specificity or
               identifiability sufficient to be almost autonomous" in order to be a maturing
               business opportunity subject to the prohibition of article 323 C.C.Q.
           -   Among the criteria cited by the Court in support of its finding that the situation in this case
               did not amount to Petro-Nav or its principals usurping what was a maturing business
               opportunity for ETI, the following are worthy of note:
                  the fact that the existence of the opportunity in question was generally known in
                     business circles (as opposed to being confidential);
                  the fact that the project was exploratory and hypothetical in nature (as opposed to
                     being in an advanced state of completion;
                  the fact that the defendants had had knowledge of the business opportunity even
                     before a new shareholder acquired its interest in ETI (as opposed to learning about it
                     specifically by reason of their duties);
                  the absence of a continuing conflict of interest (the directors concerned having
                     resigned from the board); and
                  the fact that the opportunity that was ultimately exploited differed in its execution
                     from the one that ETI had been pursuing.
           -   In addition, the Court emphasized that in a market as limited as the one in which Petro-
               Nav and ETI were operating, a vague commercial purpose (in this case, that of acquiring
               the ability to operate ships) did not amount to a maturing business opportunity. Even
               though the opportunity exploited by Petro-Nav was consistent with the general goals ETI
               had been pursuing, the negotiations that had taken place between ETI and the third parties
               involved were too preliminary to serve as a basis for finding that a real business
               opportunity had existed.
           -   In concluding its analysis, the Court noted that the criterion of elapsed time could not be
               dissociated from the analysis of a situation where a breach of the duty to act with honesty
               and loyalty was alleged.
Comments   -   The Quebec Court of Appeal has confirmed that a contractual provision, even an explicit
               one, cannot override the duty of loyalty owed by a director or officer. The duty of loyalty
               survives the resignation of the director or officer, and the resulting prohibition against
               appropriating a business opportunity for his or her own benefit also survives the departure
               of the director or officer from the company, although the period of time for which the
               prohibition continues to apply will vary, depending on the circumstances of each case.
           -   The tests developed by the Court of Appeal for determining the circumstances in which
               competition engaged in by a director or officer will result in the duty of loyalty being
               compromised (the degree of conflict of interest that existed, the degree of specificity of the
               project, the proximity in time and the degree of resemblance between the business
               opportunity being pursued and the one ultimately concluded) would indicate that the Court
               is sensitive to the fact that, in a free-market economy, freedom of competition is the basic
               rule.
           -   Consequently, ex-directors or officers may, in certain circumstances, fulfil the duty of
                                                                                                           47
                   loyalty owed to their former company while still pursuing, for their own or others' benefit,
                   business projects that were started by them while they held office with the company.

CCQ 323. A director cannot use for his own profit or that of a third party any information he obtains by
reason of his duties, unless authorized to do so.

Peoples
It is not required that directors in all cases avoid personal gain as a direct or indirect result of their honest and
good faith supervision or management of the corporation. In many cases the interests of directors and
officers will innocently and genuinely coincide with those of the corporation



U.S. Test for Corporate Opportunity (no equivalent in Canada)
   1) The corporation is financially able to take the opportunity
   2) The opportunity is in the corporation’s line of business
       (Is the opportunity one in which the corporation has fundamental knowledge, practical experience
       and the ability to pursue, logically and naturally adaptable to its business having regard for its
       financial position, and consonant with its reasonable needs and aspirations for expansion?)
   3) The corporation has an interest or expectancy in the opportunity
   4) By embracing the opportunity the officer or director would create a conflict between his or her self-
       interest and that of the corporation

The Director of Many Corporations (Johnston)

Johnston v. Greene (1956)
Jurisdiction Delaware
Facts            The plaintiff, a shareholder of Airfleets, sued Odlum, Airfleets’ president and “dominant
                 director” alleging that Odlum had diverted to his personal benefit a corporate opportunity
                 belonging to Airfleets. At the relevant time, Airfleets was flushed with cash and looking for
                 investment opportunities. Odlum was the director of Airfleets, of Atlas (Airfleets’ largest
                 single shareholder), and various other corporations. Huston owned patents for the
                 manufacture of self-locking nuts used in the manufacture of airplanes, as well as all the
                 outstanding shares of Nutt-Shell, the exclusive licensee of the patents. He approached
                 Odlum to offer him both these assets as he knew Odlum to be a prominent financier.
                 Odlum’s solicitor advised Odlum that for tax reasons, it would not be good for both assets to
                 be held in common. Odlum caused the stock to be offered to Airfleets. The board decided
                 to buy the stock but not the patents. Odlum refrained from voting. He subsequently bought
                 the patents for a syndicate of 35 individual investors including himself.
Issues           Did the opportunity to purchase the patents belong to Airfleets?
Holding          No
Reasoning         o It is one thing to say that a corporation with funds to invest has a general interest in
                      investing those funds; it is quite another to say that such a corporation has a specific
                      interest attaching in equity to every business opportunity that may come to any of its
                      directors in his individual capacity.
                  o The offer came to Odlum not as director of Airfleets but in his individual capacity.
                  o If it was Odlum’s fiduciary duty to offer this opportunity to his corporation, the question
                      arises: which corporation? He was the director of many.
                  o There is nothing inherently wrong in a man of large business and financial interests
                      serving as a director of two or more investment companies, and both Airfleets and Atlas
                      must reasonably have expected that Odlum would be free either to offer to any of his
                      companies any business opportunity that came to him personally, or to retain it for
                      himself—provided always that there was no tie between any of such companies and the
                      new venture or any specific duty resting upon him with respect to it.
                  o The mere fact of having funds to invest does not ordinarily put corporations “in
                      competition” with each other, as that phrase is used in the law of corporate opportunity

                                                                                                                 48
                                                                                         Tufo, Camion, Niziblian
                                                                                                  Summer 2010


                o   The business of Nutt-Shell had no connection to any business of Airfleets. Its
                    acquisition by Odlum’s syndicate was thus not essential to the conduct of Airfleets’
                    business. Airfleets had no interest or expectancy in the Nutt-Shell business.


    IX. SHAREHOLDER AND CORPORATE REMEDIES - DERIVATIVE ACTIONS

Types of Remedies

    o   Derivative Actions
                - Actions initiated by a complainant for a wrong done to a corporation. Called
                   “derivative” because it derives from the rights of the corporation. The corporation
                   collects any damages that are awarded.
    o   Oppression Remedy
                - Initiated by a complainant where acts or omissions of a corporation or the exercise of
                   directors' powers effect a result that is "oppressive or unfairly prejudicial or that
                   unfairly disregards the interests of any security holder, creditor, director, or officer.
    o   Dissent and Appraisal Rights
                - Available to dissenting shareholders when certain specified fundamental changes have
                   been undertaken by the corporation; the appraisal remedy refers to a requirement that
                   the corporation purchase the dissenting shareholders' shares for fair value.
    o   Compliance Orders
                - Available to a complainant, as defined by statute, or to a creditor, when certain
                   fundamental corporate documents or the provisions of the corporate statute itself are
                   not being complied with by the corporation
    o   Liquidation or Dissolution (winding-up orders):
                - Action can be taken by a shareholder seeking dissolution of the corporation in cases
                   where an "oppression" remedy would be available, where a unanimous shareholder
                   agreement permits the shareholders to demand dissolution, or where it is otherwise
                   "just and equitable" to do so.

Derivative Actions
   o When directors or officers act in breach of their duties, it is the corporation, as a matter of law, that
        has been wronged. But who speaks for the corporation in such cases?
   o Wayward managers, who have already shown no compunction in violating their fiduciary duties, are
        unlikely to repent at once and authorize the corporation to launch a legal action against themselves.
   o It is for situations such as these that the derivative action was principally designed
   o A lawsuit initiated by a shareholder on behalf of the corporation, in cases where a wrong has been
        done to the corporation, but where, for some reason, the usual corporate decision makers have
        declined to initiate proceedings on the corporation's behalf
   o Described as "derivative" because the complainant derives his or her right to bring the action from
        the corporation itself
   o The corporation is really the proper plaintiff as it is the corporation that has been directly harmed,
        not the complainant
   o Corrects the common law rule from Foss v. Harbottle
                 - The directors caused the company to purchase land from the defendants themselves at
                      inflated prices, and to finance this purchase by mortgaging the very lands purchased.
                 - The court found that, even if the company itself had a right to sue the directors in
                      respect of these transactions, the plaintiffs (as shareholders) were not entitled in their
                      individual capacities to bring this action.

Foss v. Harbottle Rule

  Where a corporation has been wronged, the corporation alone-may sue in respect of that wrong
  Where a wrong is done to a corporation, that wrong may be cleansed if it is, in effect, "waived" (or perhaps
  confirmed) by the shareholders in a general meeting

                                                                                                             49
Note: Legislation was needed to overcome this rule.

Statutory Derivative Actions
    o CBCA ss. 238-240 and 242 codify the rules governing shareholder derivative actions; they require
        leave of court
    o The court will only permit the action to be brought under s. 239(2) if:
            a. The complainant has given reasonable notice to the directors of his intention to apply to the
                court for leave (requires simply one or two letters to the corporation’s solicitor to complain
                about the transaction),
            b. If the directors do not bring or diligently prosecute the action
            c. The complainant is acting in good faith
            d. The action appears to be in the best interests of the corporation

     Preconditions for Bringing a Derivative Action

Primex Investments Ltd. v. Northwest Sports Enterprises Ltd. (1995)
Jurisdiction British Columbia
Facts           Northwest owned a hockey team and began pursuing a basketball franchise for a new arena
                they were building. Arena Corp, a wholly owned sub of Northwest was building the arena.
                Griffiths, the majority SH of Northwest had formed another partnership in order to get a
                basketball franchise. He had confirmed to the board that the basketball franchise would rent
                space in the new arena. He and his partners had agreed to take over the arena from
                Northwest once it was built. They succeeded in a takeover bid. The outcome was that
                individual share value in Northwest diminished and minority SH sought leave to commence a
                derivative action against Griffiths and other directors.
Issues          1) Does the petitioner have grounds for leave?
                2) Was he acting in Good Faith?
                3) Is the derivative action in the interest of the company?
Holding         Yes. Yes. Yes. (Oh Baby!)
Reasoning 1) Leave: Petitioner satisfies art 225(3), (a) and (d) of BCBCA
                2) Steps necessary to bring forward derivative action. Court looks into a) and b)
                a) Good faith:
                     1) Not out of spite
                     2) Is the petitioner trying to force the corporation to purchase stocks at a higher price
                          (self-interest)?
                     3) Does the petitioner have a valid claim against the defendant?
                     4) Exception to 3) SH interest and those of the corporation align

               b) Interest of the corporation (Canada specific) as per First Edmonton Place.
               Is there an arguable case against the defendant/interest of the corporation: does the proposed
               action have a reasonable prospect of success? “Legal cost (of the derivative action) may be a
               factor but is not an important consideration when the Court is considering whether it is prima
               facie in the interests of the coporation to allow a member to pursue a derivative action under
               s. 225”. ***the corporation is the one that pays for the cost of the derivative action.

Comments       Mr. Justice Tysoe appears to tie the requirement of "good faith" to the test of the "interest of
               the company." He stated that where there is an arguable case, the applicant cannot be said to
               be acting in bad faith because he wants the company to pursue what he genuinely considers to
               be a valid claim. He also indicated that an applicant advancing self-interest is not necessarily
               acting in bad faith.
               The analysis discounts shareholder approval on the ground that there can be a difference
               between the interests of the shareholders who accept the bid and the interests of the
               corporation (in that case represented by the interests of the opposing minority of
               shareholders)

                                                                                                            50
                                                                                          Tufo, Camion, Niziblian
                                                                                                   Summer 2010



        Who Can Bring an Action?

    o    CBCA s. 238 includes:
               - A registered or beneficial owner of a security (not just shares) of the corporation or any
                   of its affiliates (option holders, debenture holders, etc.)
               - A former owner (someone who previously owned shares in the corporation, i.e. at the
                   time of the alleged offence)
               - A director or officer, present or former, of the corporation or of any of its affiliates
               - The Director of Corporations appointed under CBCA s. 260
               - Any other person the court deems “proper”

        Demand
        CBCA s. 239(2)(a) [See also s. 446 QBCA] provides that leave to bring a derivative action shall not
        be granted unless the plaintiff has “given reasonable notice to the directors of the corporation … of
        his intention to apply to the court under subsection (1) if the directors of the corporation … do not
        bring, diligently prosecute or defend or discontinue the action.

                  Demand Requirements in the United States
                  o Requires demand unless futile
                  o Bases for excusing demand as futile:
                         (1) a majority of the board has a material interest in the challenged transaction; (2) a
                         majority of the board is dominated or controlled by the alleged wrongdoer; or (3)
                         the challenged transaction was not the product of a valid business judgment.
                  o But where demand is excused, the corporation may still move to dismiss the suit as not
                    in the best interests of the corporation
                  Why Demand?
                  o If a shareholder has a beef against the corporation, why not provide a day in court?
                  o A decision to sue or not to sue is ordinarily a matter of business judgment
                  o But can a business judgment standard be applied uncritically to decisions to absolve a
                    fellow member of the board of directors?

     Settling
    o A derivative action may not be settled except upon the approval of the court (CBCA s. 242(2)).
        This is to prevent blackmail and to obviate the possibility of collusive settlements between a
        derivative plaintiff and the corporation whereby the corporation might buy off the plaintiff to settle a
        nuisance suit or even a meritorious suit for less than the total damages by offering the plaintiff more
        than the loss to his particular investment, but less than the total loss for all shareholders.

    SH Ratification
    o The rule in Foss v. Harbottle is changed by s. 242(1) of the CBCA which provides that derivative
       litigation shall not be dismissed by reason only that the conduct complained of has been or may be
       ratified by the shareholders (this is because directors may also be shareholders)
    o CBCA 242 (QBCA s. 440) - An application made or an action brought or intervened in under this
       Part shall not be stayed or dismissed by reason only that it is shown that an alleged breach of a right
       or duty ... has been ...approved by the shareholders ... but evidence of approval by the shareholders
       may be taken into account by the court...
    o Ratification may, however, be taken into account by the court as a factor in determining whether the
       proposed litigation would be in the best interests of the corporation. The value of shareholder
       ratification is that it may be evidence of the fairness of the transaction or of the desirability of
       forgiving a breach
    o The only kind of shareholder approval that would likely bar a derivative plaintiff would be approval
       by a disinterested shareholder majority

Northwest Forest Products Ltd. (1975)
Jurisdiction British Columbia
Facts            SHs want to bring an action against the five directors of Northwest Forest for the sale of
                                                                                                              51
               Fraser Valley to Green River Log Sales. On the day of the initial sale for $200,000 Green
               River sold Fraser Valley assets for $300,000. Huge jump in value on the day of the sale
               without a reasonable explanation. Mr. Ross (SH) sent a letter to the board asking that they
               initiate an action (for the undervaluation of the shares of the company in the course of the
               first sale) but got no response. The majority of the SHs had approved the sale, however, two
               of the directors owned a significant number of shares and the minutes of the SH meeting do
               not indicate how many SH voted at the meeting, whether there was voting by proxy, etc.
Issues         Should the minority SH have leave to commence a derivative action?
Holding        Yes.
Reasoning      Where the minority SHs make reasonable effort to cause the directors to commence an
               action, the directors should act.

               The requirements of subs (3) of section 222 of the BC Companies Act are:
                  1) That the applicant had made reasonable effort to cause directors of the company to
                      commence action
                  2) That the appellant is acting in good faith
                  3) That it is shown that it is a prima facie in the interests of the company that the action
                      be brought; and
                  4) That the applicant was a member of the company at the time of the transaction
                      giving rise to the cause of action.

Comments       Cashman J. stated that he would not take into account th apparent approval of the members
               of the company of the challenged conduct in the absence of evidence as to whether the SH
               majority included shares voted by the defendant directors. The inference is that the only kind
               of SH approval that would bar a derivative action would be approval by a disinterested
               shareholder majority.
                                       Derivative Actions in Quebec

Past/Present
   o The Superior Court, in the exercise of its superintending and reforming power under Article 33 of
       the Code of Civil Procedure (CCP), laid down a set of conditions limiting the circumstances where
       this type of remedy could be used. Under Article 33, the remedy was available only to a
       shareholder able to show that the persons controlling the corporation had committed acts
       that were fraudulent, ultra vires or unlawful.

Future (CBCA / January 2011)
   o The derivative action will be available to current or former shareholders, current or former directors
       or officers, or to any other person with a sufficient interest.
   o The applicant must seek leave of the court in order to act in the name and on behalf of the
       corporation or its subsidiary.
   o Leave may be obtained where it is established that: (i) the applicant is acting in good faith; (ii) 14
       days' prior notice of the applicant's intention was given to the directors of the corporation; (iii) the
       board of directors of the corporation has not brought, diligently prosecuted or defended or
       discontinued the action; and (iv) it appears to be in the interests of the corporation or its subsidiary
       that the action be brought, prosecuted, defended or discontinued.
   o See QBCA, s. 439, 445, 446

Innovations
   o Once a derivative action has been authorized, the court may, if it deems necessary for purposes of
       the proceeding and after giving interested persons the opportunity to be heard, order
       communication of any relevant information or document held by the corporation or any document
       held or prepared for the corporation by any person, including a mandatary or service provider - See
       QBCA, s. 449.
           - No comparable provision in the CBCA
   o A shareholder or other holder of securities of a corporation may apply to the court for an order
       directing an investigation to be made of the corporation that will allow the applicant, if necessary, to

                                                                                                            52
                                                                                       Tufo, Camion, Niziblian
                                                                                                Summer 2010


         bring a derivative action or a claim for oppression – See QBCA, ss. 421 et seq. (for those who do
         not have the means to bring a derivative action)

 Auerbach v. Bennett (1979)
Jurisdiction NY (CA)
Facts           Bribes and kickbacks - directors personally involved
                Independent committee formed to look into these issues. Committee says we should not sue
                the faulty parties. S/h angry and want to bring derivative action.

Issues         Should the court inquire as to the independence of the committee making the decision?

Holding        NO basis has been shown to warrant either inquiry by the court.
Reasoning      Courts do not look into the decision of committee (BJR), but the process used by the
               committee. Was there good faith inquiry into Directors actions, or is it a sham? Courts may
               inquire as to the disinterested independence of the members of that committee and as to the
               appropriateness and sufficiency of the investigative procedures chosen and pursued by the
               committee.
Comments       Gives courts substantial deference to the decisions of SLCs to terminate derivative actions

Zapata v. Maldonado (1981)
Jurisdiction Delaware
Facts        A shareholder filed a derivative action against the board of directors and certain officers of
             Zapata Corporation alleging breaches of fiduciary duty. In order to save themselves taxes, the
             directors had caused the date on which some options could be exercised to change. Since all
             directors were named as defendants, a committee was named four years later when two new
             directors were appointed. The committee moved to have the case dismissed. The court of
             chancery denied that request. This is an appeal from that decision.
Issues       Does the Special Committee have the power to cause the SH derivative action to be
             dismissed?
Holding      No.
Reasoning The court should undertake a two-step determination:
             (a) Ask whether the committee acted independently, in good faith, and with reasonable
             investigation (with the burden of proof on the corporation)
             (b) Undertake an independent inquiry into whether the suit should be dismissed
Comments - The second step is intended to thwart instances where corporate actions meet the criteria
                 of step one, but the result does not appear to satisfy its spirit, or where corporate actions
                 would prematurely terminate a stockholder grievance deserving of further consideration
                 in the corporation’s interest.
             - The court must consider and weigh how compelling the corporate interest in dismissal is
                 when faced with a non-frivolous lawsuit, while giving special consideration, when
                 appropriate, to matters of law and public policy in addition to the corporation’s best
                 interests.

Questions
    o Should the decision of an independent committee of directors conclusively determine whether the
       derivative action should proceed?
    o Are outside directors truly “independent”?

Costs in Derivative Actions
    o Who should bear the legal costs of the leave application for a derivative action?
    o The issue arises because although the basis for the derivative action is that the wrong is done to the
        corporation and any damages would be paid to it, the plaintiff bears the legal costs of pursuing the
        claim
    o CBCA s. 242(2) provides the court a discretionary power to order that the corporation pay the
        plaintiff’s legal costs prior to the final adjudication of the action
    o Where the company pays the costs, shareholders indirectly bear those costs as the resources are
                                                                                                           53
       directed away from other uses, either within the corporation or in the form of dividends
     o In some circumstances, allowing the costs permits shareholders to indirectly benefit from any
       damages paid to remedy wrongs to the corporation
     o On the other hand, there is a public policy concern that the corporation could be required to finance
       too many actions, frequently against its own directors and officers, out of the corporation’s assets –
       some of which may not have merit

       Interim Costs
     o CBCA s. 242(4); QBCA s. 443
       - In an application made or an action brought or intervened in under this Part, the court may at
           any time order the corporation or its subsidiary to pay to the complainant interim costs,
           including legal fees and disbursements, but the complainant may be held accountable for such
           interim costs on final disposition of the application or action.
     o Generally, the courts have found that applications for interim funding at the time of the leave
       application are premature on the basis that the complainant with conduct of the derivative action
       should make litigation decisions bearing in mind that legal costs will not necessarily be reimbursed.
     o They have also held that declining to order interim costs early in the action will better discipline the
       complainant in respect of conduct of the action

Martel

There is not an equivalent to derivative action or an oppression remedy in the CCQ. Art. 33 of the Code of
Civil Procedure may, however, allow courts to take the action necessary in the absence of legislative statutes.
         - Derivative actions are permitted ‘in the name of the corporation’ and not the individual SH name.
           Quebec courts are still hesitant to allow “personal claims.”
         - But a larger interpretation of s.33, has thus far allowed courts to “supervisory” power over moral
           persons could allow courts to go further.

Three more recent developments have permitted such an interpretation:
1) Martineau the court found that it could intervene in cases of illegal activities or intentional harm
2) Laurent c. Buanderie Villeray Quebec courts had inherited the principles of British Courts of Equity and
could tie s. 33 to s. 241 of the CBCA
3) Magil Construction: the court affirmed that it could apply s. 33 to SH rights

1. Le Code civil du -Québec et le Code de procédure civile

a) Le pouvoir de révision de la Cour supérieure
L'article 33 C.p.c. soumet les « personnes morales de droit privé au -Québec », ce qui inclut les compagnies,
au « droit de surveillance et de réforme de la Cour supérieure ». Cet article a jus-qu'à maintenant donné
ouverture à -l'action dite « dérivée », mais peut-être pourrait-il recevoir une portée encore plus vaste.

1) L'action dérivée
   o En principe, un actionnaire -n'a pas de recours personnel contre -l'auteur -d'un dommage causé à la
       compagnie.
   o Dans -l'affaire Silverman c. Heaps, -l'actionnaire ne peut à la fois limiter sa responsabilité en investissant
       dans une compagnie ET considérer comme un dommage personnel tout dommage causé à cette
       compagnie. Le dommage de -l'actionnaire (c'est-à-dire la baisse de valeur de ses actions) est indirect.
   o En -l'absence -d'un lien direct entre le tiers et -l'action-naire 110 , c'est à la compagnie elle-même, et
       non à ses actionnaires, -qu'il appartient de poursuivre les tiers qui lui causent un dommage 111 .
   o L'action dérivée (derivative), comparable à -l'action oblique du Code civil du -Québec, permet à un
       actionnaire de poursuivre au nom de la compagnie -l'auteur -d'un dommage, pour faire établir un tort
       causé à celle-ci. Le recours doit être pris par -l'actionnaire en son nom personnel, et mettre la
       compagnie en cause.
   o Ce recours sera accueilli -lorsque les personnes coupables du tort causé à la compagnie contrôlent
       celle-ci, et empêchent donc -qu'elle réclame la réparation du dommage.
   o La décision Lagacé c. Lagacé 113 en constitue le prototype. Ce jugement a établi que, pour réussir dans
       un cas semblable, le demandeur doit démontrer:
                                                                                                               54
                                                                                             Tufo, Camion, Niziblian
                                                                                                      Summer 2010


            1) sa qualité -d'actionnaire;
            2) le contrôle absolu de la compagnie par les auteurs du préjudice et des irrégularités;
            3) le refus -d'agir, exprès ou présumé de la part de la compagnie;
            4) l'élément frauduleux ou -l'équivalent des actes reprochés.
   o   L'action dérivée peut donc être utilisée -lorsque, par suite -d'acte frauduleux de la part de ceux qui
       contrôlent la compagnie, celle-ci subit un dommage
   o   L'action dérivée peut servir non seulement à faire recouvrer certaines sommes à la compagnie mais
       aussi, par voie -d'injonction, à empêcher que la compagnie ne verse ces sommes.
   o   Il nous semble toutefois que -l'action dérivée devrait être permise non seulement dans le cas où
       -l'auteur des irrégularités contrôle la compagnie, mais aussi -lors-qu'il est en mesure de provoquer une
       impasse au conseil -d'administration et -d'empêcher celui-ci de faire intenter des poursuites par la
       compagnie.

2) L'action personnelle
   o L’article 33 C.p.c. peut-il permettre une action personnelle autant -qu'une action dérivée?
   o A priori , les termes « surveillance et réforme » utilisés à -l' article 33 C.p.c. sont si larges que rien
       -n'empêche la Cour supérieure -d'accueillir une action personnelle -d'un actionnaire. La cour -n'est
       restreinte que par sa propre appréciation des vastes pouvoirs qui lui sont conférés, et elle pourrait fort
       légitimement, enhardie par la latitude dont elle dispose en vertu de la loi fédérale, décider -d'exercer
       ces pouvoirs de manière à protéger tout aussi efficacement les actionnaires des compagnies
       québécoises. C'est là -l'opinion de certains de nos auteurs, que nous partageons entièrement.
   o Toutefois, nos tribunaux ont toujours fait preuve, jus-qu'à présent, -d'une réticence marquée à
       intervenir dans les affaires internes des compagnies provinciales.
   o En droit administratif, les tribunaux -n'exercent leur pouvoir de révision que pour contrôler la légalité
       (caractère ultra vires ) des décisions prises par les organismes, et non leur opportunité (utilité, sagesse,
       nécessité économique, etc.).
   o En droit corporatif, la « règle de la majorité », fondée sur la décision Foss c. Harbottle , empêche
       -l'inter-ven-tion judiciaire sauf dans des circonstances exceptionnelles ( ultra vires, fraude manifeste).
   o Au fédéral, le législateur a écarté ces précédents en créant un recours qui vise expressément des actes
       injustes, et non seulement des actes illégaux, et en écartant expressément, quant à -l'exercice de ce
       recours, la règle de la majorité (art. 242 L.c.s.a.).
   o L'absence dans nos textes législatifs de dispositions similaires peut expliquer la -réticence de nos
       tribunaux à affranchir leur pouvoir -d'intervention en vertu de -l' article 33 C.p.c. de -l'influence de ces
       précédents.
   o Il serait néanmoins possible pour la Cour supérieure, si elle le désirait, de surmonter cette réticence,
       puisque celle-ci -n'a pas de support législatif et prend sa source hors du -Québec. Il suffirait -qu'un
       juge plus audacieux et épris -d'équité ouvre le bal. Chose certaine, la nouvelle notion -d'abus de droit,
       telle -qu'elle est codifiée aux articles 6, 7 et 1375 C.c.Q. , pourrait être invoquée pour justifier
       -l'intervention de la cour.
   o On peut se demander toutefois si -l' article 33 C.p.c., appliqué plus libéralement, confère à la Cour
       supérieure une latitude aussi grande que celle de -l' article 241 de la loi fédérale et son éventail
       révolutionnaire -d'ordonnances.
   o Quelques décisions récentes laissent entrevoir une vive lueur -d'espoir quant à - l'application de -l'
       article 33 C.p.c. à des situations de simple abus de droit.

       1)    Dans -l'arrêt Martineau, Provencher & Associés Ltée, le juge Beauregard, de la Cour -d'appel, a fait le
             rapprochement entre le « recours pour oppression » de la loi fédérale et les recours civils: il a
             reconnu que le juge saisi -d'une procédure en vertu du Code de procédure civile ne dispose pas
             -d'autant de pouvoirs -qu'en vertu de -l' article 241 de la loi fédérale, mais il a déclaré que ce juge
             peut intervenir « -lors-qu'il constate -qu'il y a eu violation -d'un droit ou abus -d'un droit », tout
             comme en vertu de -l' article 241 L.c.s.a.
       2)    Dans -l'affaire Laurent c. Buanderie Villeray Ltée, le juge Lévesque a affirmé que les cours
             supérieures possèdent les pouvoirs de tribunaux -d'equity en Angleterre et peuvent appliquer la
             théorie de -l'« attente légitime des actionnaires » retenue en liaison avec le recours de -l' article
             241 de la loi fédérale pour justifier leur intervention en vertu de -l'article 33 C.p.c. Il a ajouté que
             les recours se rattachant à -l'obligation de loyauté et de la bonne foi et à la répression de -l'abus
             de droit que -l'on trouve aux articles 6, 7, 322, 324, 329, 1375, 2138 et 2218 C.c.Q. peuvent être
                                                                                                                 55
               invoqués à -l'appui de -l'intervention de la Cour supérieure en vertu de -l' article 33
         3)    Dans -l'arrêt 9022-8818 -Québec Inc. (Magil Construction Inc.) (Syndic de), la Cour -d'appel du
               -Québec a réitéré que le pouvoir de surveillance et de réforme de -l' article 33 C.p.c. peut viser
               les situations -d'abus de droit à -l'endroit -d'un actionnaire.

    o     À ces décisions -s'ajoute une série en expansion -constante de jugements sur des mesures
          préliminaires dans lesquels le tribunal déclare la porte ouverte à un « recours pour oppression »
          provincial, dans certains cas avec comme conclusion demandée -l'achat forcé des actions du
          demandeur



    X.        SHAREHOLDER AND CORPORATE REMEDIES - THE OPPRESSION
              REMEDY

     o Protects the interests of security holders, directors, officers, and creditors from conduct by the
       corporation and/or its directors that is oppressive or unfairly prejudicial
     o Allows the court to make any order it thinks fits
     o Different from other remedies because it protects the interests (or reasonable expectations) of
       certain stakeholders, rather than rights or duties owed to the corporation
     o 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

        Common Law

Who Can Seek the Remedy?
CBCA s. 238

“Complainant” means:

(a) A registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security
of a corporation or any of its affiliates
(b) A director or an officer or a former director or officer of a corporation or any of its affiliates
(c) The Director, or
(d) Any other person who, in the discretion of a court, is a proper person to make an application under this
Part.


Application of the Remedy
CBCA s. 241
(1) A complainant may apply to a court for an order under this section.
(2) If, on an application under subsection (1), the court is satisfied that in respect of a corporation or any of
    its affiliates
      a) any act or omission of the corporation or any of its affiliates effects a result
      b) the business or affairs of the corporation or any of its affiliates are or have been carried on or
           conducted in a manner, or
      c) the powers of the directors of the corporation or any of its affiliates are or have been exercised in
           a manner
      that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security
      holder, creditor, director or officer, the court may make an order to rectify the matters complained of.
(3) In connection with an application under this section, the court may make any interim or final order it
      thinks fit.

Civil Law

Oppression Remedy in Quebec

                                                                                                              56
                                                                                         Tufo, Camion, Niziblian
                                                                                                  Summer 2010



    o No real oppression remedy available under the Quebec Companies Act
    o However, under s. 450 QBCA, a shareholder, director or officer, and in the case of a corporation that
      is a reporting issuer, any holder of securities, including a (former or current) holder of debentures or
      bonds, may apply to the court for a curative order where
      1) Any act or omission of the corporation effects or threatens to effect a result,
      2) The business or affairs of the corporation have been, are or are threatened to be conducted in a
           manner, or
      3) The powers of the board of directors of the corporation have been, are or are threatened to be
           exercised in a manner
           that is or could be "oppressive" or "unfairly prejudicial" to such person.

How the QBCA Oppression Remedy Differs from the CBCA
o Oppression remedy available where conduct by a corporation or its directors could be oppressive or
  unfairly prejudicial - possibility of oppressive conduct not sanctioned by CBCA
o Creditors of a corporation governed by the QBCA, with the exception of holders of debt securities of a
  reporting issuer, cannot seek an oppression remedy
o The QBCA permits the court to intervene in the presence of oppressive conduct or unfair prejudice
  while the CBCA permits intervention where there is an "unfair disregard" of interests (this is the lowest
  threshold)


Compared to Derivative Actions
o Derivative Actions
   - Require leave
   - Court exercises a statutory supervisory jurisdiction over the derivative action that enables it to issue
      orders concerning issues such as the manner in which the action is conducted, which party will have
      conduct of the action, and who will receive any damages awarded in the action.
   - Damages go to the corporation

o    Oppression Remedy
     - No leave required
     - Court has no statutory power to intervene in the conduct of the application, except for court
        approval of any settlement, discontinuance, or abandonment of an oppression remedy application
        (can do this for derivative action too)
     - Claimant can pursue a claim for personal compensation for harm to the complainant’s interests from
        the oppressive actions

Note: If the harm is clearly to the corporation, then it might make more sense to go ahead with a derivative
action, but given the leave requirement, it is still good to have the oppression remedy in one’s back pocket.

Is the Oppression Remedy Necessary?
o In a number of cases where the courts have found that directors were acting in good faith in the
    corporation’s best interests (i.e. in compliance with their duty of loyalty) they have also found that the
    effects of their actions on the complainant’s interests gave rise to a successful oppression claim (although
    they did not find against the directors personally)
o It is a very attractive tool for fashioning creative solutions to situations in which relations between a
    small group of shareholders have broken down
o Used because courts are reluctant to find that majority SHs owe fiduciary duties to minority SHs
o More recently, debt holders, creditors, and employees have looked to the remedy as a vehicle to advance
    claims against shareholders or the corporation

Can an Employee Officer Bring an Oppression Claim?

Clitheroe v. Hydro One (2001)
Jurisdiction Ontario

                                                                                                             57
Facts          Employee and Director of company loses CEO job due to Legislature adopting new
               legislation reducing governmental expenses.
Issues         Does plaintiff have standing to bring an oppression remedy claim?
Holding        No, the termination was not part of an oppressive pattern.
Reasoning      The oppression remedy is meant to redress oppressive conduct in relation to the claimant’s
               position as a security holder, creditor, director or officer of a corporation. It does not operate
               to provide a remedy to employees, UNLESS the termination is part of a pattern of oppressive
               conduct.
               There is another remedy (wrongful dismissal claim).
Comments       The oppression remedy protects expectations (here of employment).


                                  A “Proper Person” to Bring the Application

o   The basic formula for establishing unfair prejudice or unfair disregard of the interests of the creditor
    should reflect as a goal the desire to seek to balance protection of the creditor’s interest against the policy
    of preserving freedom of action for management and the right of the corporation to deal with a creditor
    in a way that may be to the prejudice of the interests of the creditor or that may disregard those interests
    so long as the prejudice or disregard is not unfair.
o   The oppression remedy would be available if the act or conduct of the directors or management of the
    corporation which is complained of amounted to using the corporation as a vehicle for committing fraud
    upon a creditor


First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988)
Jurisdiction Alberta
Facts          A landlord (FED) provided a package of inducements to get a company controlled by three
               lawyers to sign a ten-year lease. The package included an 18-month rent-free period, a
               leasehold improvement allowance, and a cash payment. The lawyers distributed the cash
               amongst themselves, made use of the space during the rent-free period, and then for a further
               three months without the company having entered into a formal lease. They then vacated the
               premises and no rent was paid. FED sought leave to bring an oppression action under s. 234
               of the Alberta Business Corporations Act or a derivative action under s. 232, alleging that the
               actions of the lawyers as directors of the company were unfairly prejudicial to, or unfairly
               disregarded, the landlord’s interests.
Issues         Can FED bring an oppression remedy claim under s. 234?
               Can FED bring an action under s.232?
Holding        No. Yes.
Reasoning S. 234 can be used to protect the interests of a creditor.

               The remedy would be available if the conduct of the directors or management of the
               corporation had amounted to using the corporation as a vehicle for committing fraud upon a
               creditor. There are two situations in which justice and equity would allow a creditor to be
               regarded as a proper person:

               1)     The conduct of the directors amounts to fraud
               2)     The conduct breached the underlying expectations of the applicant arising from the
                      circumstances in which the applicant’s relationship with the corporation arose (but such
                      expectations must be reasonable).
                    o In this case, there is no evidence showing that there was an expectation on the part of
                      the lessor that the lessee corporation would retain the funds in its hands for any set
                      period of time. Nor is there evidence that there was an expectation that the lessee
                      corporation would grant a lease for a term of 10 years or any other term beyond the rent-
                      free period. There is no evidence of inequality of bargaining power.
                    o The applicant must have had an interest as a creditor at the time that the acts complained
                      of occurred. At that time, however, there wasn’t any rent due. The word “creditor” in s.
                                                                                                               58
                                                                                         Tufo, Camion, Niziblian
                                                                                                  Summer 2010


                    234 does not include a lessor in respect of rent not owing at the time of the acts
                    complained of.

               S.232

               There is evidence that the cash inducement money was not used for the purposes of the
               corporation and that its use might have been a fraud upon the corporation. If it was a fraud
               upon the corporation, and if the corporation was entitled to recover the money, the applicant
               may have a genuine interest in advancing the claim to such recovery because the corporation
               might be liable in damages to the applicant. The applicant is therefore a proper person to
               make an application under s. 232.

Comment        A statutory representative action is the minority s/h sword to the majority’s twin shields of
               corporate personality and majority rule!

Downtown Eatery Ltd. v. Ontario (2001)
Jurisdiction Ontario
Facts        Grad and Grossman owned and operated two nightclubs.One day, Grad offered the
             appellant, Alouche, a position as manager of one of the nightclubs. The contract provided
             that Alouche would receive the health care and insurance benefits available in the “sister’s
             organization” which was not identified by name. He received his paychecks from Best
             Beaver, a company controlled by Grad and Grossman. He was eventually dismissed and
             commenced a successful wrongful dismissal claim. However, Grad and Grossman had since
             reorganized their corporate entities and Best Beaver was no longer operating at the time that
             Alouche became entitled to receive his damages.
Issues       Did the trial judge err in failing to find that the conduct of Grad and Grossman was
             oppressive or unfairly prejudicial?
Holding      Yes
Reasoning The trial judge had accepted Grad and Grossman’s statement that the corporate
             reorganization did not take place so as to preclude Alouche from obtaining his damages in
             part because it had taken place before Alouche had obtained the status of a creditor.
             Oppressive conduct that causes harm to a complainant need not be undertaken with the
             intention of harming the complainant. Provided that the complainant has a reasonable
             expectation that a company’s affairs will be conducted with a view to protecting his interests,
             the conduct complained of need not be undertaken with a view to harming the plaintiff.
             What the OBCA prescribes is “any act or omission” on the part of the corporation which
             “effects” a result that is unfairly prejudicial to or that unfairly disregards the interests of the
             complainant.
             When Best Beaver went out of business it was profitable and could have satisfied the claims
             arising from employment contracts. Moreover, Grad and Grossman knew that Alouche’s
             claim could be successful.

Comments       Note that just like FED, Alouche was not a creditor at the time of the action complained of.
               But the judge treats this situation differently here.

Note: Instead of using OR, they could have simply pierced the corporate veil. This way they coud have gone
after the personal assets of the directors or the other companies they held.

West v. Edison Packaging Machinery Ltd. (1993)
Jurisdiction Ontario
Facts        The applicants were management employees of Edison who were dismissed. Prior to the
             dismissal, they had purchased shares in Edison and were told that a SH agreement would be
             executed and that Edison would buy back the shares when an employee left the company. A
             shareholder agreement was not executed and after the dismissal, Edison refused to buy back
             the shares. The applicants claim that Edison had engendered a reasonable expectation that a
             shareholders agreement would be executed within six months of the purchase of the shares,

                                                                                                             59
               and that the shares would be bought back if they left Edison.
Issues         Are the applicants (although employees) proper persons to bring the claim?
Holding        Yes.
Reasoning      The course of conduct which the applicants maintain gave rise to their reasonable
               expectations covers a period of several months, both preceding and following their purchase
               of shares. This is sufficient to qualify them as “complainants” under the Act.
Comments       Judge refers to the test laid out in FED (two conditions under which a creditor can bring a
               claim) and says that he sees no reason why this reasoning should be limited to creditors.

Questions
1. In your view, were the plaintiffs really complaining in their capacity as shareholders or were they
complaining in their capacity as former management employees? Put another way, was the complaint one
about their “legitimate expectations” as shareholders or as employees who had agreed that as part of the
employment relationship they would purchase shares that were to be repurchased upon the termination of
their employment?

2. The definition of “complainant” is open-ended and employees will quite often be able to characterize
themselves as being not only employees but also shareholders as in West v. Edson, or creditors as in
Downtown Eatery. Should an employee have to proceed in this rather circuitous manner or should the
oppression remedy be amended to simply say that an employee may bring an application under the
oppression remedy? Would this open the floodgates to endless claims by employees? Should business
corporations statutes avoid becoming a vehicle for dealing with issues that you might more typically see
raised through labour or employment law, or would this merely be an exercise in reinforcing an unnecessarily
artificial distinction?

3. The “proper person” issue is one means through which the courts may express their views about which
kinds of relationships and what kinds of acts by the corporation can be the subject of an oppression remedy
application. What factors do you think ought to make the courts reluctant to construct a high threshold for
being considered a “proper person”?

 BCE v. 1976 Debentureholders (2008)
Jurisdiction SCC
Facts        At issue is a plan that contemplates the purchase of the shares of BCE Inc. by a consortium
             of purchasers (the “Purchaser”) by way of a leveraged buyout. An auction process was held
             and offers submitted by three groups. All three offers contemplated the addition of
             substantial new debt for which Bell Canada, a wholly owned subsidiary of BCE, would be
             liable. BCE’s board of directors found that the Purchaser’s offer was in the best interests of
             BCE and BCE’s shareholders.

               The plan of arrangement was approved by 97.93 percent of BCE’s shareholders, but was
               opposed by a group of financial and other institutions that held debentures issued by Bell
               Canada. The debentureholders sought relief under the oppression remedy under s. 241 of the
               CBCA. They also alleged that the arrangement was not “fair and reasonable” and opposed
               court approval of the arrangement under s. 192 of the CBCA. Their complaints was that,
               upon the completion of the arrangement, the short-term trading value of their debentures
               would decline by an average of 20 percent and could lose investment grade status.

               The Quebec Superior Court approved the arrangement as fair, the Court of Appeal set aside
               that decision, finding that the arrangement had not been fair. It held that the directors had
               not only the duty to ensure that the debentureholders’ contractual rights would be respected,
               but also to consider their reasonable expectations (i.e. the adverse impact on the
               debentureholders’ economic interests). Since the requirements of s. 192 of the CBCA were
               not met, the court found it unnecessary to consider the oppression claim. BCE and Bell
               Canada appealed the overturning of the trial judge’s approval of the plan of arrangement, and
               the debentureholders cross-appealed the dismissal of the claims for oppression.

Issues             1. Oppression remedy (s. 241)
                                                                                                         60
                                                                                       Tufo, Camion, Niziblian
                                                                                                Summer 2010


                     (1) Does the evidence support the reasonable expectation asserted by the
                          claimant? NO
                     (2) Does the evidence establish that the reasonable expectation was violated by
                          conduct falling within the terms “oppression”, “unfair prejudice” or “unfair
                          disregard” of a relevant interest? NO
               2. Approval process of the plan of arrangement (s. 192)
                     (1) Have the statutory procedures been met? Not relevant, but yes.
                     (2) Has the application been put forth in good faith? Not very relevant, but yes.
                     (3) Is the arrangement “fair and reasonable”? YES

Holding   Appeal allowed, cross-appeal dismissed.
Ratio     The s. 241 oppression action and the s. 192 requirement for court approval of a change to the
          corporate structure are different types of proceedings, engaging different inquiries. The Court
          of Appeal’s decision rested on an approach that erroneously combined the substance of the
          s. 241 oppression remedy with the onus of the s. 192 arrangement approval process, resulting
          in a conclusion that could not have been sustained under either provision, read on its own
          terms. [47] [165]

          1.       The Section 241 Oppression Remedy

                    The oppression remedy focuses on harm to the legal and equitable interests of a wide
                     range of stakeholders affected by oppressive acts of a corporation or its directors.
                     This remedy gives a court a broad jurisdiction to enforce not just what is legal but
                     what is fair. Oppression is also fact specific: what is just and equitable is judged by
                     the reasonable expectations of the stakeholders in the context and in regard to the
                     relationships at play. [45] [58-59]
                    In assessing a claim of oppression, a court must answer two questions: (1) Does the
                     evidence support the reasonable expectation asserted by the claimant? (2) Does the
                     evidence establish that the reasonable expectation was violated by conduct falling
                     within the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant
                     interest? For the first question, useful factors from the case law in determining
                     whether a reasonable expectation exists include: general commercial practice; the
                     nature of the corporation; the relationship between the parties; past practice; steps
                     the claimant could have taken to protect itself; representations and agreements; and
                     the fair resolution of conflicting interests between corporate stakeholders. For the
                     second question, a claimant must show that the failure to meet the reasonable
                     expectation involved unfair conduct and prejudicial consequences under s. 241. [68]
                     [72] [89] [95]
                    Where conflicting interests arise, it falls to the directors of the corporation to resolve
                     them in accordance with their fiduciary duty to act in the best interests of the
                     corporation. There are no absolute rules and no principle that one set of interests
                     should prevail over another. In each case, the question is whether, in all the
                     circumstances, the directors acted in the best interests of the corporation. Where it is
                     impossible to please all stakeholders, it will be irrelevant that the directors rejected
                     alternative transactions that were no more beneficial than the chosen one. [81-83]
                    Here, the debentureholders did not establish that they had a reasonable expectation
                     that the directors of BCE would protect their economic interests by putting forth a
                     plan of arrangement that would maintain the investment grade trading value of their
                     debentures. The trial judge concluded that this expectation was not made out on the
                     evidence, given the overall context of the relationship, the nature of the corporation,
                     its situation as the target of a bidding war, the fact that the claimants could have
                     protected themselves against reductions in market value by negotiating appropriate
                     contractual terms, and that any statements by Bell Canada suggesting a commitment
                     to retain investment grade ratings for the debentures were accompanied by warnings
                     precluding such expectations. The trial judge recognized that the content of the
                     directors’ fiduciary duty to act in the best interests of the corporation was affected by

                                                                                                            61
        the various interests at stake in the context of the auction process, and that they
        might have to approve transactions that were in the best interests of the corporation
        but which benefited some groups at the expense of others. All three competing bids
        required Bell Canada to assume additional debt. Under the business judgment
        rule, deference should be accorded to the business decisions of directors acting in
        good faith in performing the functions they were elected to perform. [96-100]
       The debentureholders had also argued that they had a reasonable expectation that the
        directors would consider their economic interests in maintaining the trading value of
        the debentures. It is apparent that the directors considered the interests of
        debentureholders, and concluded that while the contractual terms of the debentures
        would be honoured, no further commitments could be made. This fulfilled the duty
        of the directors to consider the debentureholders’ interests and did not amount to
        “unfair disregard” of the interests of debentureholders. What the claimants contend
        is an expectation that the directors would take positive steps to restructure the
        purchase in a way that would provide a satisfactory price to shareholders and
        preserve the high market value of the debentures. There was no evidence that it was
        reasonable to suppose this could be achieved, since all three bids involved a
        substantial increase in Bell Canada’s debt. Commercial practice and reality also
        undermine their claim. Leveraged buyouts are not unusual or unforeseeable, and the
        debentureholders could have negotiated protections in their contracts. No
        representations had been made to debentureholders upon which they could
        reasonably rely. [96] [102] [104-106] [108-110]
       With respect to the duty on directors to resolve the conflicting interests of
        stakeholders in a fair manner that reflected the best interests of the corporation, the
        corporation’s best interests arguably favoured acceptance of the offer at the time.
        The trial judge accepted the evidence that Bell Canada needed to undertake
        significant changes to be successful, and the momentum of the market made a
        buyout inevitable. Considering all the relevant factors, the debentureholders failed to
        establish a reasonable expectation that could give rise to a claim for oppression.
        [111-113]

2. The Section 192 Approval Process

       The s. 192 approval process is generally applicable to change of control transactions
        where the arrangement is sponsored by the directors of the target company and the
        goal is to require some or all shareholders to surrender their shares. The approval
        process focuses on whether the arrangement, viewed objectively, is fair and
        reasonable. Its purpose is to permit major changes in corporate structure to be made
        while ensuring that individuals whose rights may be affected are treated fairly, and its
        spirit is to achieve a fair balance between conflicting interests. In seeking court
        approval of an arrangement, the onus is on the corporation to establish that (1) the
        statutory procedures have been met; (2) the application has been put forth in good
        faith; and (3) the arrangement is “fair and reasonable”. [119] [126] [128] [137]
       To approve a plan of arrangement as fair and reasonable, courts must be satisfied that
        (a) the arrangement has a valid business purpose, and (b) the objections of those
        whose legal rights are being arranged are being resolved in a fair and balanced way.
        Whether these requirements are met is determined by taking into account a variety of
        relevant factors, including the necessity of the arrangement to the corporation’s
        continued existence, the approval, if any, of a majority of shareholders and other
        security holders entitled to vote, and the proportionality of the impact on affected
        groups. Where there has been no vote, courts may consider whether an intelligent
        and honest business person, as a member of the class concerned and acting in his or
        her own interest, might reasonably approve of the plan. Courts must focus on the
        terms and impact of the arrangement itself, rather than the process by which it was
        reached, and must be satisfied that the burden imposed by the arrangement on
        security holders is justified by the interests of the corporation. Courts on a s. 192

                                                                                             62
                                                                                         Tufo, Camion, Niziblian
                                                                                                  Summer 2010


                        application should refrain from substituting their views of the “best” arrangement,
                        but should not surrender their duty to scrutinize the arrangement. [136] [138] [145]
                        [151] [154-155]
                       The purpose of s. 192 suggests that only security holders whose legal rights stand to
                        be affected by the proposal are envisioned. It is the fact that the corporation is
                        permitted to alter individual rights that places the matter beyond the power of the
                        directors and creates the need for shareholder and court approval. However, in some
                        circumstances, interests that are not strictly legal could be considered. The fact that
                        a group whose legal rights are left intact faces a reduction in the trading value
                        of its securities generally does not, without more, constitute a circumstance
                        where non-legal interests should be considered on a s. 192 application.
                        [133-135]
                       Here, the debentureholders no longer argue that the arrangement lacks a valid
                        business purpose. The debate focuses on whether the objections of those whose
                        rights are being arranged were resolved in a fair and balanced way. Since only their
                        economic interests were affected by the proposed transaction, not their legal rights,
                        and since they did not fall within an exceptional situation where non-legal interests
                        should be considered under s. 192, the debentureholders did not constitute an
                        affected class under s. 192, and the trial judge was correct in concluding that they
                        should not be permitted to veto almost 98 percent of the shareholders simply
                        because the trading value of their securities would be affected. The arrangement did
                        not fundamentally alter the debentureholders’ rights, as the investment and return
                        they contracted for remained intact. It was well known that alteration in debt load
                        could cause fluctuations in the trading value of the debentures, and yet the
                        debentureholders had not contracted against this contingency. It was clear to the
                        judge that the continuance of the corporation required acceptance of an arrangement
                        that would entail increased debt and debt guarantees by Bell Canada. Recognizing
                        that there is no such thing as a perfect arrangement, the trial judge correctly
                        concluded that the arrangement had been shown to be fair and reasonable. [157]
                        [161] [163-164]


Note:
  o Oppression is an equitable remedy. It seeks to ensure fairness — what is “just and equitable”.
  o Oppression is fact-specific. What is just and equitable is judged by the reasonable expectations of the
      stakeholders in the context and in regard to the relationships at play. Conduct that may be oppressive
      in one situation may not be in another
  o The concept of reasonable expectations is objective and contextual. The actual expectation of a
      particular stakeholder is not conclusive. In the context of whether it would be “just and equitable” to
      grant a remedy, the question is whether the expectation is reasonable having regard to the facts of the
      specific case, the relationships at issue, and the entire context, including the fact that there may be
      conflicting claims and expectations
  o Even if reasonable, not every unmet expectation gives rise to a claim under s. 241. The section
      requires that the conduct complained of amount to “oppression”, “unfair prejudice” or “unfair
      disregard” of relevant interests.
  o Oppression carries the sense of conduct that is coercive and abusive, and suggests bad faith
  o Unfair prejudice may admit of a less culpable state of mind that nevertheless has unfair
      consequences.
  o Unfair disregard of interests extends the remedy to ignoring an interest as being of no importance,
      contrary to the stakeholders’ reasonable expectations.

What is a Reasonable Expectation?

Factors that emerge from the case law that include: general commercial practice; the nature of the
corporation; the relationship between the parties; past practice; steps the claimant could have taken to protect
itself; representations and agreements; and the fair resolution of conflicting interests between corporate
stakeholders.
                                                                                                             63
                                                  Commercial Practice
   Commercial practice plays a significant role in forming the reasonable expectations of the parties. A
   departure from normal business practices that has the effect of undermining or frustrating the complainant’s
   exercise of his or her legal rights will generally (although not inevitably) give rise to a remedy.

                                            The Nature of the Corporation
   The size, nature and structure of the corporation are relevant factors in assessing reasonable expectations.
   Courts may accord more latitude to the directors of a small, closely held corporation to deviate from strict
   formalities than to the directors of a larger public company.

                                                  Relationships
   Reasonable expectations may emerge from the personal relationships between the claimant and other
   corporate actors. Relationships between shareholders based on ties of family or friendship may be governed
   by different standards than relationships between arm’s length shareholders in a widely held corporation.

                                                      Past Practice
   Past practice may create reasonable expectations, especially among shareholders of a closely held corporation
   on matters relating to participation of shareholders in the corporation’s profits and governance. It is
   important to note that practices and expectations can change over time. Where valid commercial reasons
   exist for the change and the change does not undermine the complainant’s rights, there can be no reasonable
   expectation that directors will resist a departure from past practice.

                                                 Preventive Steps
   In determining whether a stakeholder expectation is reasonable, the court may consider whether the claimant
   could have taken steps to protect itself against the prejudice it claims to have suffered. Thus it may be
   relevant to inquire whether a secured creditor claiming oppressive conduct could have negotiated protections
   against the prejudice suffered.

                                       Representations and Agreements
   Shareholder agreements may be viewed as reflecting the reasonable expectations of the parties. Reasonable
   expectations may also be affected by representations made to stakeholders or to the public in promotional
   material or in a company’s public statements and the shared expectations about the way in which a public
   company should be run.

                                    Fair Resolution of Conflicting Interests
   Conflicts may arise between the interests of corporate stakeholders inter se and between stakeholders and the
   corporation. Where the conflict involves the interests of the corporation, it falls to the directors of the
   corporation to resolve them in accordance with their fiduciary duty to act in the best interests of the
   corporation, viewed as a good corporate citizen.

   Note: To determine shared expectations, one can look at the articles of incorporation, the corporate culture

The cases on oppression confirm that the duty of the directors to act in the best interests of the corporation
comprehends a duty to treat individual stakeholders affected by corporate actions equitably and fairly. There is
no principle that one set of interests — for example the interests of shareholders — should prevail over another
set of interests.

Scope of the Oppression Remedy

   Ferguson v. Imax (1983)
   Jurisdiction Ontario
   Facts           The appellant seeks relief under CBCA s. 234, alleging that Imax Corp. attempted to
                   reorganize its capital by a special resolution amending its articles, thus disregarding her
                   interests as a security holder. She seeks an injunction to restrain the company from holding a
                   special meeting to vote on the resolution.

                                                                                                              64
                                                                                        Tufo, Camion, Niziblian
                                                                                                 Summer 2010



               Shares of the company had been issued and divided among three couples. Each husband
               received 700 shares and wife 700 class B shares (non-redeemable & non-voting unless the
               company failed to pay a 5c dividend for two consecutive years). The class B shares entitled
               the holder to receive dividends in priority over the common shares. Unlike the two other
               wives, the appellant worked hard in the company’s interest and was one of its founders. She
               was not compensated for her work and efforts.

               In 1974, the appellant and her husband divorced. That year, the company made $72,000$ in
               profits, and up to $210,000$ in the following years. Mr. Ferguson did everything to evince his
               ex-wife from her SH status. During their separation, he tried to have the shares transferred.
               He then put pressure on the company not to declare dividends, which his partners accepted.

               The contested resolution aimed at converting all of the class B shares into class A shares, that
               is, non-voting and limited to 9% cumulated dividends for five years, after what the company
               would redeem them at the fixed price of $175 per share. There was no reason explaining the
               resolution.
Issues         Can the SHs of a closed-held corporation vote a resolution to convert class B shares into class
               A shares, thereby forcing the holders of such shares to eventually sell them to the
               corporation?
Holding        No.
Reasoning           o [Goldex Mines Letd v. Revill et al, 1974] “The principle that the majority governs in
                        corporate affaires is fundamental, but its corollary is also important – that the
                        majority must act fairly and honestly.”
                    o Case law establishes that each case turns on its own facts: what’s oppressive or
                        unfairly prejudicial varies from case to case.
                    o S. 234 must be interpreted broadly when considering the interests of minorities.
                        When dealing with a close corporation, the court may consider the relationship
                        between the SHs and not simply legal rights as such.
                    o In addition, the court must consider the bona fides of the corporate transaction in
                        question to determine whether the act of the corporation or directors effects an
                        oppressive result.
                    o The resolution authorizing the change in the capital of the company is the
                        culminating event in a lengthy course of oppressive and unfairly prejudicial
                        conduct to the appellant. The company has not acted bona fide in exercising
                        its power to amend its articles.
                    o The appellant is the only one affected by the resolution. She cannot be considered as
                        a newbie minority: the appellant’s work in the company is important.
Comments       The court contrasts the position of Ms. Ferguson as the holder of Class B shares with that of
               someone who might have purchased a similar number of Class B shares after the corporation
               became established and implies that the latter would not be entitled to an oppression remedy
               claim with respect to a similar resolution.

Naneff v. Con-Crete Holdings (1993)
Jurisdiction Ontario
Facts           Alexander Naneff was one of two sons of Nick Naneff, a successful entrepreneur in the
                concrete industry. Nick wanted his two sons to be involved in his business and implemented
                an estate freeze that gave each 50% of the common shares of the company. He retained
                control through special voting preferred shares. Both sons were directors and officers
                involved in running the business. Alex’s lifestyle worried his family and when he became
                involved with a woman they did not approve of, the rest of the family excluded him from
                business. He was terminated from his employment without any severance payments. His
                father and brother caused the family corporation to cease the payment of bonuses (which was
                how the two brothers were given access to the profits) and instead began giving salaries to
                themselves. They also refused to pay Alex any amounts from his past bonuses, which had
                been returned to the corporations as SH loans. Finally, when dividends were declared, they
                were declared only on the shares held by the father and brother. Alex sought relief under the
                                                                                                            65
              oppression remedy.
Issues        Is Alex entitled to the oppression remedy?
Holding       General Division: Yes. / Court of Appeal: No.
Reasoning     General Division

                   o   OBCA s. 248(2) applies [241.3 now]. When an oppressive conduct is found, the
                       court may make any order it thinks fit.”
                   o   Evidence of bad faith or want of probity is not essential to a finding of
                       oppression.
                   o   The emphasis in the case law is rather on SHs’ reasonable expectations. These
                       are not an individual wish list, but expectations which could or should have been
                       considered as part of the compact of the SHs.
                   o   Lord Wilberforce in Ebrahimi: “The foundation of it all lies in the words “just and
                       equitable”… the words are a recognition of the fact that a limited company is more
                       than a mere judicial entity… that there is room in company law for recognition of the
                       fact that behind it… there are individuals, with rights, expectations, and obligations
                       inter se which are not necessarily submerged in the company structure.”

                   o   The two brothers were led to believe that they would eventually have complete
                       ownership and control of the Rainbow Group of companies of their father. They
                       took a greater and greater part in the running of the companies.
                   o   Alex holds 50% of the shares. It is clear that the intention of his father was that his
                       sons would have full ownership and control of the companies.
                   o   The “gift” cannot be reversed at this stage at the whim of the father in order to
                       discipline a disappointing son.
                   o   Alex is a director and has been an officer, on a full-time basis for his entire adult life.
                       He was viewed and respected by third parties as an effective owner
                   o   His removal from his position as an officer and his exclusion from the day-to-day
                       business and participation as a director constitutes an “oppression” within the
                       meaning of s. 248 OBCA.
                   o   Alex’s worrying conduct (a.k.a. Wendy) was not linked to his positions as an officer
                       and director; the intention of his parents was to correct him on a personal
                       rather than professional basis; his lifestyle did not impair his professional
                       performances

              Court of Appeal (Reversed)
                 o The determination of a reasonable expectation is important.
                 o Alex must have understood that his father, until his death or retirement, would retain
                     control of the company. He could not have expected to control the company while
                     his father was alive and active.
                 o He could have expected to inherit control of the company only to the extent that his
                     father would continue to be bountiful to him. He could not expect that bounty to
                     continue if his father, for whatever reason, no longer considered him a good son.
                 o Granting the oppression remedy is punitive to Nick Naneff. It puts him in a position
                     equal to that of Alex even though he had devoted 40 years of his life to building up
                     his business.
                 o In addition, granting the remedy protects Alex’s interests as son AND as shareholder.


Note: In “Dealing With Unfairness: Some Observations on the Role of the Courts in Designing a Fair
Solution,” Raymon Crete suggests that in dealing with an oppression remedy case involving a closely held
corporation, courts should adopt a hypothetical bargaining model in attempting to decide whether a remedy
should be granted and in what form. In a hypothetical bargain model, the court attempts to construct the
terms of a bargain between the participants concerning the contentious matters under ideal conditions. This
understanding of the oppression remedy is consistent with the nexus of contracts theory of the corporation
in which the oppression remedy serves to fill in the gaps in actual agreements reached when a corporation
was formed. This approach may be effective when a corporation is small but becomes less meaningful when
                                                                                                              66
                                                                                       Tufo, Camion, Niziblian
                                                                                                Summer 2010


dealing with large corporations (separation of share ownership and the control of the corporation).

Bad Faith or Unfair Effects?

Question: Must a shareholder seeking an oppression remedy in a publicly traded corporation prove that the
directors are acting in bad faith or for improper purposes?

Brant Investments v. KeepRite Inc. (1991)
Jurisdiction Ontario (CA)
Facts            KeepRite, a company involved in the cooling business, was facing financial problems. Its
                 management proposed that the company acquire assets from a subsidiary of KeepRite’s
                 majority SH, Inter-City Gas Corporation (ICG), having to do with the heating business. The
                 proposal was to combine heating and cooling to diversify and stabilize the company’s
                 revenues. It was also a strategy to make KeepRite more attractive on the equity market.
                 Because the purchase was from a related company, KeepRite set up an independent
                 committee to review the proposal (made up of directors independent from management in
                 KeepRite and ICG). The committee recommended the adoption of the proposal. A SH
                 meeting was called to approve the creation of new shares. Some minority SH were unhappy
                 with the proposed transaction. They voted against and dissented under the appraisal remedy.
                 The dissenting minority refused KeepRite’s offer for their shares and so KeepRite applied to
                 the Supreme Court of ON to fix the fair value of the shares. Meanwhile, the dissenting SH
                 brought an oppression action under CBCA. At trial, the oppression claim was dismissed. The
                 SHs appealed.
Issues                1) Does the board of directors or an independent committee owe a fiduciary duty to
                          minority SH? NO
                      2) Does a finding of oppression require a want of probity, or is the result sufficient?
                          Result suffices.
                      3) When there is a benefit to the majority, with a corresponding detriment incurred to
                          the minority, and the minority dissented, does the burden of proof that there is no
                          oppression rest on the majority? NO
                      4) Can the courts use the Business Judgment rule where the rule dictates deference to
                          the decisions of the very party under scrutiny? YES if the decisions were made
                          honestly (no bad faith).

Holding        Appeal dismissed.




                                                                                                           67
Reasoning   1) Fiduciary duty
                - Does the board of directors or an independent committee owe a fiduciary duty to
                    minority SH?
                - Any argument broadening the categories of relationships in the corporate context are
                    inappropriate, considering the coming into force of CBCA (s. 234) and OBCA (s.
                    247.2). To import the concept of fiduciary duty into s.234 would complicate its
                    interpretation and application and be inimical to the statutory fiduciary duty
                    imposed upon directors in s. 122.1 (used to be 117.1)
                - To impose on directors and officers a fiduciary duty to the corporation as well
                    as to individual groups of SH could place directors in a position of
                    irreconcilable conflict, particularly when the corporation is faced with adverse
                    economic conditions. [contradicted in BCE]
                - Such a duty is imposed only where there is a relationship based on trust.

            2) Bona Fides
                 -   Does a finding of oppression require a want of probity (conduct inconsistent with
                     good faith), or is the result sufficient?
                 -   Mixed judicial opinion; there is no statutory requirement of bad faith to find
                     oppression. There has been a change in UK law, from conduct to mere result; the
                     statutory requirement of an oppressive manner of conducting the affairs of a corporation,
                     became a requirement that the conduct be “unfairly prejudicial to the interests of some
                     part of its members”.
                 -   Unfairly prejudicial has been expressed through an objective rather than subjective
                     test
                 -   Conduct may be considered in order to show bad faith, but it is not required
                 -   CBCA s. 234.2 makes specific reference to a) the wrongfulness of the result of
                     corporate conduct [now s. 241], b) to the manner in which the business affairs are
                     carried on, and c) to the manner in which the powers of the directors have been used.
                          o So, evidence of bad faith is unnecessary
                          o The difficult question is whether the rights of minorities have been unfairly
                               disregarded.
                          o It may happen that some acts made in good faith lead to unfair results
                          o In Low v. Ascot Jockey Club, “what is at issue is the effect of the conduct or
                               acts complained of. Nothing is to be gained by importing notions of malice
                               into this branch of the law… malice or an intent to do harm is not a
                               necessary ingredient.”

            3) Onus of proof
            When there is a benefit to the majority, with a corresponding detriment incurred to the
            minority, does the burden of proof that there is no oppression rest on the majority? It is
            alleged that the majority must prove that a) the transaction was at least as advantageous to the
            company and SHs as any other alternative; b) that no undue pressure was applied to the
            company, its officers, directors, to accept the transaction; c) that the transaction and the
            process leading to its acceptance were intrinsically fair. Totally rejected by the court since no
            authority cited!

            Independent committee does not pose any problem according to the judge.

            4)       Business Judgment Rule and the oppression remedy
            Can the court use BJR where the rule dictates deference to the decisions of the very party
            under scrutiny?
               - The underlying justification of the rule still applies: the judge is no expert and
                    cannot substitute his views for those of the directors
               - Business decisions made honestly should not be subject to examination (the
                    judge makes several arguments to show that the decisions were made honestly)


                                                                                                           68
                                                                                          Tufo, Camion, Niziblian
                                                                                                   Summer 2010


Business Judgment and the Oppression Remedy
o Although the minority shareholder must be protected from unfair treatment under the oppression
   remedy, the court ought not to usurp the function of the board of directors in managing the company,
   nor should it eliminate or supplant the legitimate exercise of control by the majority.
o Business decisions, honestly made, should not be subjected to microscopic examination. There should be
   no interference simply because a decision is unpopular with the minority.

Questions

o   Do you think that McKinlay JA’s understanding of how the oppression remedy should interact with a
    board’s fiduciary duties to the corporation is satisfactory? Why would imposing a fiduciary duty on a
    majority shareholder with respect to minority shareholders put a board of directors in a position of
    conflict with respect to its obligation to act in the best interests of the company? Does the answer to this
    question depend on one’s vision of the corporation: that is, one’s views about whether the board is
    acting as agent of the shareholders/“owners” or whether its job is to foster the interests of a broader
    range of constituencies? Does the interpretation of the directors’ statutory fiduciary duty in Peoples being
    owed to the corporation rather than shareholders assist in defining the vision of the corporation in
    Canadian corporate law?
o   Would imposing a fiduciary duty on majority shareholders with respect to minority shareholders really
    give rise to an obligation that was any different from the obligation that has effectively been imposed
    through the oppression remedy? McKinlay JA thought that there would be a difference and it would
    appear that he was after a legal structure that would give the board room to manoeuvre as it considers
    how best to deal with competing interests in the corporation. Has he crafted a structure that is
    compatible with the business judgment rule?

Note: Does the fiduciary duty impose a higher duty than that under the oppression remedy? Does it require
more than simply taking someone’s interest in consideration and actually going so far as to advance that
group’s interests or to make them foremost? (In the US, the fiduciary duty means not thwarting their
interests).

Conduct Giving Rise to the Oppression Remedy
o Only some kinds of conduct may be oppressive, but all such conduct is likely to meet the standard of
   "unfairly prejudicial" or "unfairly disregards," so the real threshold for relief is "unfair disregard," the
   lowest of the three standards
o Unfair prejudice” is generally seen as involving conduct less offensive than “oppression”.
       - Examples include squeezing out a minority shareholder, failing to disclose related party
            transactions, changing corporate structure to drastically alter debt ratios, adopting a “poison pill”
            to prevent a takeover bid, paying dividends without a formal declaration, preferring some
            shareholders with management fees and paying directors’ fees higher than the industry norm.

Indicia of Oppressive Conduct
o In Arthur v. Signum Communications Ltd., the following non-exhaustive list was set out:
        - Lack of a valid corporate purpose for the transaction (e.g., paying excessive salaries, directors
            taking corporate assets);
        - Failure on the part of the corporation and its controlling shareholders to take reasonable steps to
            simulate an arm's-length transaction
        - Lack of good faith on the part of the directors of the corporation
        - Discrimination among shareholders, with the effect of benefiting the majority shareholder to the
            exclusion or the detriment of minority shareholders
        - Lack of adequate and appropriate disclosure of material information to minority shareholders
        - A plan or design to eliminate a minority shareholder

Derivative or Oppression?
o Previously, it was thought that where an injury was an injury to the corporation, and any injury to the
   shareholder was only incidental to the corporate injury (such as where a breach of fiduciary duty was
   alleged) relief could be claimed only by the corporation itself or by a shareholder with leave of the court
   in a derivative action.
                                                                                                              69
o   In BCE, the Supreme Court confirmed that there is no barrier to bringing an oppression claim in relation
    to actions that are a breach of fiduciary duty. In fact, a director's fiduciary duty and other duties are
    relevant to a finding of oppression. In BCE, the Supreme Court made clear that compliance with
    the fiduciary duty is a reasonable expectation, and, consequently, that a breach of fiduciary duty
    can be invoked by a complainant in support of an oppression claim.
o   The Court also clarified that sometimes the impact of a fiduciary breach contrary to reasonable
    expectations may not rise to the standards set in the oppression provisions, but at the same time,
    compliance with the fiduciary duty does not mean that no oppression may be found

Remedies
o The court may make "any interim or final order it thinks fit: CBCA, s. 241
o This can include share purchases (purchase by a corporation or a majority shareholder of the applicant's
   shares); liquidation and dissolution; orders against SHs at the request of creditors; compliance orders;
   amendment of by-laws and the replacement of management, appointment of receivers, amendment of
   shareholder agreements

    XI.     CORPORATE GOVERNANCE

o   Corporate governance is the structure by which corporate decisions are made so that capital can be
    raised cost-effectively, assets are used in the efficient generation of wealth and with a view to the
    sustainability of the corporation, and corporate decision makers are held accountable to those who have
    direct investments in the firm
o   Three key issues in thinking about governance structures. a) Who is the corporation to be governed for?
    b) What are the respective rights and duties of corporate directors, officers, shareholders, creditors, and
    other corporate constituencies? c) What should be the role of the state in regulating corporate
    governance, and are corporate and securities laws aimed at the same purposes?

                                            Berle & Means (1932)
Grown to tremendous proportions, there may be said to have evolved a “corporate system” (as there once
was a feudal system) which has attracted to itself a combination of attributes and powers, and has attained a
degree of prominence entitling it to be dealt with as a major social institution.

                                                Mitchell (1995)
No institution [the corporation] other than the state so dominates our public discourse and our private lives.
In our world, corporations make most everything we consume. This awesome collective power also leads to
the problems created by corporations. The very power that corporations have over our lives means that,
intentionally or not, they profoundly affect our lives.

Corporate Theories

                                        Nexus of Contracts Theory

Markets and contractual relations should govern. Public regulation should only facilitate, not restrict
corporate activity. Shareholders have primacy as residual claimants to corporation’s assets and party least
able to contract to protect their inputs to the corporation. Gains and losses are their lot as they are last in
line (creditors have fixed claims, employees negotiate terms of employment, etc.) See p. 23

Managers are agents of the corporation. Corporate officers need only act in the SH interests. Shareholders
need to control agency costs.

Problem: Fails to take into account others who are unable to fully contract their relationship. Does not align
with Canadian position that a duty is owed to multiple stakeholders.

                          Fischel (The Corporate Governance Movement 1982)
Those who argued that corporations have a social responsibility and, therefore, that managers have the right,
and perhaps the duty, to consider the impact of their decisions on the public interest assume that
corporations are capable of having social or moral obligations. This is a fundamental error.
                                                                                                            70
                                                                                        Tufo, Camion, Niziblian
                                                                                                 Summer 2010



A corporation … is nothing more than a legal fiction that serves as a nexus for a mass of contracts which
various individuals have voluntarily entered into for their mutual benefit. Since it is a legal fiction, a
corporation is incapable of having social or moral obligations much in the same way that inanimate objects
are incapable of having these obligations. Only people can have moral obligations or social responsibilities,
and only people bear the costs of non wealth-maximizing behaviour.

Social reformers are focusing on the rules of corporate governance because they have failed to achieve their
aims through the political process.

Viewed as a contract issue, the question can be analyzed in much more concrete terms. Do investors, as long
as corporations lawfully may be formed for profit, have any duty to sacrifice profitable opportunities to
benefit some other parties? And do managers, acting as agents for investors, have any right or duty to
sacrifice profitable opportunities to benefit some other party?
                                Team Production Theory (Blair and Stout 1999)

The primary job of directors is not to act as agents who ruthlessly pursue shareholders’ interests at the
expense of employees, creditors, and other team members. Rather, directors are trustees for the
corporation itself – mediating hierarchs whose role is to balance team members’ competing interests so as to
keep everyone happy enough for the productive coalition to stay together.

                               Power Coalition Theory (Lynne Dallas 1988)

The power model depicts the firm as an institution with its own internal structure that seeks to decrease its
uncertainty by increasing its own autonomy and discretion over its environment. It utilizes various strategies
to decrease its dependence on its environment, thus muting the effects of market constraints. According to
the power model, not only are organizations constrained by the political, legal and economic environment,
but, in fact, law, legitimacy, political outcomes, and economic climate reflect, in part, actions taken by
organizations to modify these environmental components for their interests of survival and growth. Thus the
firm is not merely reactive with respect to its environment but proactive.
                                 Progressive Approaches to Corporate Law

                                Feminist Legal Theory (Kelly Testy 2004)

Corporate decisions should consider a wider range of constituents without the hierarchy of the SH primacy
model. Feminist insight into concepts of care and connection can and should give increased substantive
context to director and officer duties.
                                 Interest Group Theory of Corporate Law

What makes legislators adopt one approach of corporate statute over another? Interest groups influence that
outcome. Rules are the output of political processes in which politicians maximize political advantage and
interest groups compete for rules that transfer wealth to themselves, resulting in the transfer of wealth from
less to more powerful coalitions. Political contributions buy corporate managers considerable political
influence.
                                          Laurence Snider (2004)

Key elites in the new world economy have heavy vested interests in getting some interpretations accepted
and others rejected (interpreting the laws of the market with neo-liberal tenets; interpreting scientific data;
funding scientific research) Criminal law is expensive and does not work when it comes to the crimes of the
powerful (marketing unsafe products, maintaining unsafe workplaces, defrauding workers, dumping toxic
waste, etc.). The powerful better respond to reasoned persuasion and rewards or tax breaks and market
incentives.

Agency Costs and Governance
   o Agency cost theory assumes that directors and officers are the agents of undiversified shareholders,
      and that governance can be measured by control of agency costs as a means of enhancing economic
      efficiency
                                                                                                            71
    o   Governance strategies can be viewed as harm prevention devices that reduce agency costs by
        attributing monitoring duties to claimholders or related parties; for example, granting voting rights to
        one set of claimholders, or imposing gatekeeping responsibilities on directors and auditors (liability
        strategies, governance structures, compensation)
    o   Agency costs can also be reduced by way of compensation decisions – i.e. agent misbehaviour may
        be minimized ex ante through special forms of executive compensation, such as bonus plans, which
        tie the manager’s salary to firm performance

Agency Cost Strategies and Efficient Capital Markets
   o If capital markets are efficient, then the firm will bear all agency costs and it would voluntarily agree
      to adopt optimal harm prevention strategies. If capital markets are informed of the agency costs of a
      particular firm, then that firm will bear them itself in its cost of capital and debt. As a consequence,
      the firm will wish to take efficient preventive measures to reduce agency costs
   o However, the firm may lack an adequate incentive to do so if capital markets are inefficient and the
      probability of manager misbehaviour is not fully known by investors.
   o Nevertheless, even in an inefficient market the firm’s choice of governance structures is more likely
      to be reflected in stock prices, making choice of governance important

Questions

1. What approach to corporate governance do you believe makes the most sense and why?
2. What elements should be contained in a corporation’s statute to advance your vision of corporate law?
   Keep in mind the need to minimize agency costs.

Directors

    What is Needed to Become a Director?
    o Natural persons
    o Over 18 years of age
    o Not bankrupt
    o Not of unsound mind
      - See CBCA s. 105(1), QCA ss. 123.73, 86(4), 179; QBCA s. 108; CCQ, 327 – See generally,
        QBCA, CHAPTER VI
    o Do not have to be shareholders of the corporation
      - Québec corporations require shareholding in some circumstances (QCA ss. 86 and 179) but will
        not under the new QBCA (s. 109)
    o Publicly held corporations must have at least three directors, while closely held corporations may have
      as few as one: QBCA s. 106
    o 25% of directors must be Canadian, but no QC residency requirements: CBCA 105(3)

     Election of Directors
     One of the best ways to minimize agency costs
    o First directors hold office from the date of incorporation to the date of the first meeting of
      shareholders (within 18 months)
    o Thereafter, directors are elected by an “ordinary resolution” of the shareholders. (i.e. majority vote)
    o Shareholders must elect directors at each annual meeting of the corporation, which is held at least
      every 15 months
    o The election of directors is one of the most important matters on which the shareholders vote. Since
      the directors have oversight of the corporation, the election of directors is a significant method by
      which shareholders can exercise some control over the way in which the corporation is managed. It
      can even be a useful control mechanism for shareholders whose shareholdings are too small to
      influence the outcome of the election of directors. This is because their right to vote can be acquired
      by others who can accumulate sufficient voting rights to influence the outcome of an election of
      directors and thereby replace directors where the corporation is not being effectively managed. The
      potential for such a change in control of the voting rights gives management an incentive to act in the
      interests of shareholders.

                                                                                                             72
                                                                                        Tufo, Camion, Niziblian
                                                                                                 Summer 2010


    Term
    o 3 year term, but directors may be re-elected without limit
    o If no directors are elected at a meeting where directors should be elected, the incumbents remain in
      office until successors are chosen.
    o The corporation’s articles may provide that directors’ terms are staggered. This ensures that there is
      continuity on the board after any given election, and also serves as a benefit to existing management
      because it prevents the complete ousting of a board by shareholders in one meeting
    o However, in a number of corporations, the constituting document now requires annual election of
      the entire board as a means of providing another accountability check on the activities of directors.

    Powers of Directors
    o Authority to manage or to oversee management of the corporation
    o Directors cannot delegate their powers with respect to certain matters
    o Can adopt, amend, or repeal bylaws (subject to SH ratification)
    o Can borrow
    o Declare dividends
    o Designate and appoint officers of the corporation, determine their compensation, delegate
      management powers to them and remove them

    Outside Directors
    o CBCA s. 102(2), QBCA s. 106 requires that at least two directors of a publicly traded corporation be
      outside directors
    o “Independent” outside directors now comprise the majority of board memberships in Canadian
      public corporations, and only one-quarter of board members of firms of all asset sizes are employees
      of the firm
    o While, arguably, more diverse boards can enhance decision making, there is some debate about just
      how effective outside directors are in monitoring corporate management
    o Professors Gilson and Kraakman have recommended reinventing the outside director as a full-time
      professional director who would have the requisite expertise and would serve on the boards of
      perhaps six corporations. As full-time directors of a limited number of corporations, they would have
      a focused mandate and the time to familiarize themselves with the corporations on which they serve
      as board members. These professional directors would be chosen by institutional investors who might
      organize a separate clearinghouse to coordinate action among institutional investors for the selection
      of directors.
    o Professors Rock and Coffee have questioned the effectiveness of having institutional investors
      choose and monitor professional directors. Institutional investors also have managers who are
      separate from the owners of the institutional investor’s funds. The managers of institutional investors
      may thus not have a sufficient incentive to monitor the professional directors effectively. The
      institutional investors would also face a conflict of interest because the corporations on the boards of
      which professional directors would serve would often be clients or potential clients of the institutional
      investor.

    XII.    CORPORATE GOVERNANCE – SHAREHOLDERS

Shareholder Governance

o    SHs have important financial interests in the corporations in which they hold shares. They occupy a
     unique position in the corporate governance structure
o    They have the power to elect and remove the corporation’s directors, and they hold the residual
     economic interest in the corporation - a “claim” to whatever value might remain in the corporation
     after the corporation’s fixed claimants have been paid

The Power to Manage

Automatic Self-Cleaning Filter Syndicate Co. v. Cunninghame (1906)
Jurisdiction
Facts        The company was incorporated in 1896. Its memorandum provided that the company could
                                                                                                            73
                remove any director before the expiration of his term and appoint another person in his stead,
                that management and control were vested in the directors, and that they could exercise all
                powers that the company could exercise itself. Directors were entrusted to purchase for the
                company and enter into negotiations and contracts in the name or on behalf of the company.
                A majority of SH passed a resolution presented by the plaintiff to sell the assets of the
                company. The directors thought this not in the best interest of the company and refused to
                carry it out. The plaintiff asked for a declaration that the directors were bound to carry into
                effect a resolution passed at a meeting of SH. At trial, Warrington J held that the majority
                could not impose that obligation upon the directors, and that on the true construction of the
                company articles, the directors were the persons authorized to effect the sale. Unless the
                other powers given by the memo were invoked by a special resolution, it was impossible for a
                mere majority of SH at a meeting to override the views of the directors.
Issues          Can a majority of SH override the views of the directors despite the provisions of the
                incorporation memorandum of the company?
Holding         No. Appeal dismissed
Reasoning        o The formal grant of authority to directors removes that authority from shareholders.
                   Directors have absolute power to do all things subject to such regulations as may
                   from time to time be made by extraordinary resolution.
                 o To alter the powers of directors requires not a resolution by a majority of SH at an
                   ordinary meeting, but an extraordinary resolution.
                 o Directors are not agents of the SH, but of the company. It is by consensus of all
                   individuals in the company that they become agents of the company, and it is not fair to
                   say that a majority of SH can alter the mandate of these agents. The minority must be
                   taken into account. The minority can be overborne, but only by a special resolution.
                 o The trial judge notes that directors can only be removed by a special resolution : why
                   would you have such an article if you could eliminate the directors by simple majority-
                   passed resolutions.
Comments        In practice, senior officers manage rather than directors. Directors have a general oversight
                role, though this has started to change after Enron. The ratio here is still of importance today.

Unanimous Shareholder Agreements
o Shareholders can agree to remove authority from the board of directors and give primary managerial
   responsibility to shareholders: CBCA s. 146 /QBCA s. 213
o The requirement that the shareholder agreement be unanimous effectively restricts its scope to small
   companies
o By taking decision making powers away from directors, SHs acquire all the responsibilities and liabilities
   of the directors in respect of those decisions
o Mechanisms needed to resolve disputes when there is not unanimity among the shareholders

CBCA 146.
(1) An otherwise lawful written agreement among all the shareholders of a corporation, or among all
the shareholders and one or more persons who are not shareholders, that RESTRICTS, in whole or in part,
the powers of the directors to manage, or supervise the management of, the business and affairs of
the corporation is VALID.

Rights of shareholders
(5) To the extent that a unanimous shareholder agreement restricts the powers of the directors to manage, or
supervise the management of, the business and affairs of the corporation, parties to the unanimous
shareholder agreement who are given that power to manage or supervise the management of the
business and affairs of the corporation have all the rights, powers, duties and liabilities of a director
of the corporation, whether they arise under this Act or otherwise, including any defences available to the
directors, and the directors are relieved of their rights, powers, duties and liabilities, including their liabilities
under section 119, to the same extent.

QBCA 213.
All the shareholders of a corporation, whether or not their shares carry voting rights, may agree in writing
among themselves or among themselves and one or more third persons to restrict the powers of the board of
                                                                                                                  74
                                                                                          Tufo, Camion, Niziblian
                                                                                                   Summer 2010


directors to manage, or supervise the management of, the business and affairs of the corporation, or to
withdraw all such powers from the board.

A sole shareholder may make a written declaration that restricts the powers of the board of directors or
withdraws all powers from the board. The declaration is equivalent to a unanimous shareholder agreement.

Shareholder Proposals
o Shareholders can bring shareholder proposals to meetings of shareholders: CBCA s. 137; QBCA s. 194
o They must have held the shares for at least 6 months and own either 1% of the outstanding voting
    shares or $2,000 worth of voting shares
o The proposals, even if accepted by the majority of shareholders, are not binding on the directors.
o They may, however, be normatively persuasive, given that directors failing to act on a proposal that
    receives majority support of shareholders may leave themselves vulnerable to not being re-elected by
    shareholders
o Management is obligated to give notice of such a proposal in its proxy soliciting materials and to include
    a brief statement in support of the proposal if a shareholder supplies such a statement.
o However, management can refuse to include a shareholder proposal in its proxy soliciting materials,
    under one of the grounds in CBCA 137(5)
       - i.e. if the proposal:
                    Relates to enforcing a personal claim or redressing a personal grievance against the
                        corporation or its directors, officers, or security holders.
                    Does not relate in a significant way to the business or affairs of the corporation
                    Rights are being abused to secure publicity
o    These days SH proposals can relate to the promotion of political, racial, religious, social, or other causes
o    Previously, these types of proposals were not permitted
o    Was the legislature correct in permitting a broader class of SH proposals?

Varity Corp. v. Jesuit Fathers of Upper Canada (1987)
Jurisdiction Ontario (CA)
Facts        This was application for an order permitting Varity not to include in its mailing for the annual
             SH meeting a proposal that the company end its investments in South Africa. Varity was a
             federal company. CBCA s.131 thus applied and provided that SH may require the company
             to circulate proposals and supporting statements. The only objection raised was with regard
             to the content of the proposal, as there was no issue on the status of SH to require
             circulation, nor on the timing to do so.
Issues       Can Varity omit to forward a political proposal to its SH?
Holding      Yes.
Reasoning CBCA s. 131(5)(b) provides that a corporation is not required to comply with a SH’s request
             if the proposal is submitted primarily for the purpose of:
                           o Enforcing a personal claim or redressing a personal grievance
                           o Promoting general economic, political, racial, religious, social or similar
                               causes
             The language of the proposal and the supporting statement leave no doubt that the primary
             purpose of the proposal is the abolition of apartheid in South Africa. The fact that there may
             be a more specific target does not make the primary purpose different. Thus, the company
             cannot be compelled to distribute the proposal.

Shareholder Rights and Powers
o    To elect directors (don’t have to be at the meeting / can cast vote through proxies).
o    To amend by-laws (normally a prerogative of directors, but subject to articles, bylaws, and unanimous
    SH agreement. SH can initiate changes in the bylaws)
o    To amend the articles (by way of special resolution)
o To approve fundamental changes: CBCA s.173(1) requires a 2/3 majority to change the articles. That
    includes changing the name of the corporation, restricitons on the business, changing the registered
    office, creating a new class of shares. SH usually get a right to vote on these matters even when their
    class of shares does not carry a right to vote.

                                                                                                              75
Class Voting Rights
o Some changes in the corporation require approval from individual classes of shares or, in some
     instances, a particular series of shares.
o These class voting rights generally apply where the proposed change is a change in the rights or
     restrictions attached to a particular class of shares or series of shares, or where the change can have a
     significant impact on the particular class of shares.
o The reasoning is the same where a change affects a particular series of a same class of shares. See
     CBCA 176, BCBCA s. 61. Class voting rights can also be exercised in the event of an amalgamation. SH
     who are entitled to vote separately may be entitled to a right to have the corporation purchase their
     shares at an appraised value where they dissent a resolution.
o CBCA s. 176, QBCA s. 191

Exercise:
o When Quick Buys incorporated, Aya had 50,000 common shares, Tomi had 10,000 common shares;
    Anjala Marshall, Ken Biway, and Maria Toscana each had 25,000 common shares; and Enrico Slate had
    25,000 preferred non-voting shares.
o Assume for a moment that the board of directors decides that the business should expand further by
    leasing another 20 stores and raising capital through the sale of another 50,000 common shares and
    50,000 preferred non-voting shares to three friends of the original investors.

Would the common shareholders have a vote on such a change?
Would Enrico Slate have a vote? Why or why not?

Shareholders’ Meetings
   o Annual Meetings (every 15-18 months) Directors choose the date, so they have a strategic advantage.
       - Elect directors
       - Appoint auditors
       - Receive the financial statements of the corporation
   o Special Meetings
       - To approve transactions not in the ordinary course of business which require SH approval and
            to approve fundamental changes
   o SH can requisite meetings if they hold 5% of voting shares or can make an application to the court to
     requisition a meeting
   o Quorum: Minimal representation of SH required to start a meeting - not required that quorum be
                maintained throughout the meeting to pass resolutions unless otherwise provided. Absence
                of quorum leads to adjournment.
   o The principle of notice: Directors must give notice of a meeting from (50-21 days) prior to the
                meeting. The notice must include the subjects to be discussed. Notice inviting nominations
                must be given 56 days before the meeting. Where the shares are in the name of a brokerage
                firm, the firm’s customers do not receive notice of the meetings. However, there are
                instruments regulating communication to beneficial non-registered owners.

Ordinary and Special Resolutions
o Used to describe the quantum of majority approval required for different shareholder votes
o Ordinary resolution is one for which the requisite approval is a simple majority
o Special resolution requires the affirmative vote of two-thirds of the votes cast
o Generally, matters dealt with at the annual meeting call for an ordinary resolution, and matters
    customarily the subject of a special meeting of shareholders require special resolutions

Conduct
o Run by chair, generally CEO or president of the corporation.
o Concerns about the conduct of meetings will arise only where control is disputed
o Because control at a shareholders’ meeting in a public corporation will vest in the party that has secured
    the most proxies, the chair’s conduct has most often been challenged where he or she has rejected
    proxies.

                                                                                                           76
                                                                                       Tufo, Camion, Niziblian
                                                                                                Summer 2010


Re Marshall (1981)
Jurisdiction Ontario
Facts        Application under s.252 of the OBCA to tabulate the votes of 405,001 escrowed common
             shares in accordance with certain written directions of their beneficial owners, and not as
             voted by their registered owners. The vote related to the election of directors. If the written
             directions are taken into account in the tabulation of the vote, the directors are removed;
             otherwise they stay. There were 405,001 common shares held in escrow by the Royal Trust
             company. Raymond Marhsall had 202,501 and Charles Marhsall had 202,500. The beneficial
             ownership of the shares was divided among six directors of the company and five other
             persons. These shares could not be released without the ON or QC Securities Commission,
             pursuant to an agreement. The shares were recognized to be held in trust for the named
             persons in the acknowledgement.

               The applicant and two other beneficial owners gave written directions to R. and C. Marhsall
               and to the Royal Trust Company to the effect that the escrowed shares were to be voted in
               favor of the slate of directors nominated by the applicant. This direction was delivered to the
               chairman at the meeting. C. Marshall voted in favor of the applicant’s candidates, with
               202,500 shares. R. Marshall voted for the existing board with 202,501 shares, omitting to
               execute a proxy in favor of the applicant’s candidate for 36,750 shares.
Issues         Is the chairman of the meeting required to go beyond the share register and to accept written
               directions from beneficial owners as to the manner in which their votes shall be cast?
Holding        No.
Reasoning       - Requiring the chairman to look beyond the books of the company during a SH
                    meeting is inefficient because he can never be certain that the votes are cast by
                    the ‘true’ beneficial owners of the shares.
                - To ignore the written directions would violate and disfranchise the vote of the beneficial
                    owners of the escrowed shares.
                - However, the persons entitled to vote are those registered in the company’s book (as
                    provided by the bylaws and the general rule).
                - To go beyond the books of the company would require the chairman to “enter into legal
                    questions of beneficial ownership and the question of the propriety of a trustee of a
                    private trust acting separately from his co-trustee”. A chairman does not have the
                    training nor the time to enter into such issues. A chairman at an annual general
                    meeting is not to be placed in the position of determining the legal rights of
                    beneficial owners of shares registered in the name of others. He is entitled to rely
                    on the votes as cast by the registered owner of those shares.


Blair v. Consolidated Enfield Corp. [1993]
Jurisdiction Ontario (CA)
Facts        Blair was the president of Enfield. He took legal advice with respect to proxies submitted by
             Canadian Express, and was told that they could only be voted for the existing/management
             slate of directors, and could not be voted to replace Blair. could be voted by proxies. Blair
             also asked if he could make a ruling affecting his own election and was told that he had a duty
             to do so. He then declared that he and the rest of the management slate of directors had been
             elected. Canadian Express brought an action for a declaration that their vote was cast in
             favor of the replacement slate of directors. The court found for Canadian Express. Canadian
             Express, now in control of Enfield, sought $165,000 against Blair for the recovery of costs,
             and Blair in turn sought indemnity from Enfield under OBCA 136(1) whereby a director can
             be indemnified against the costs of an action if the director acted honestly and in good faith
             with a view to the best interests of the corporation. The indemnity was refused. He then
             applied to the court for a declaration that he was entitled to indemnification, which was
             refused as the court found that he did not act in the best interest of the corporation. Blair
             appealed.
Issues       Was Blair’s ruling on the overall ballot made with the bona fide intent that the company have
             a lawfully elected board of director?

                                                                                                           77
Holding        Yes.
Reasoning      - OBCA s. 130-136: legal advice does not automatically sanctify conduct, but should be
                  considered
               - It is preferable to describe the duty of the chairperson as one of honesty and fairness to all
                  individual interests, and directed generally to the best interest of the company
               - A team of experienced lawyers gave advice to Blair and told him that he had to make a
                  ruling despite his interest in the outcome. Had he received a contrary opinion from
                  Canadian Express lawyers, he would have faced a complex legal problem. There was no
                  obvious error or oversight that would enable Blair to turn away from the advice of the
                  company’s solicitors.
               - He had to take a decision.
               - Should proxies have been returned to their representees to obtain new proxies given the
                  sudden nomination of a new candidate? No, it goes too far.
               - The 15% of the SH who did not come to the meeting also deserved fairness from the
                  chairman
               - But it goes too far to say that the duty of fairness means that Blair must have selectively
                  assisted those who attended to vote in the process leading up to the vote. His duty of
                  fairness relates to the decision-making process and the conduct of a proper corporate
                  meeting.

Note: Corporate management has several advantages in the SH meeting process itself. It can solicit votes in
the proxy solicitation process from apathetic shareholders who simply sign and return the proxy form in
favor of the management nominee. Management nominees also decide on the acceptance or non-acceptance
of proxies and tabulate the votes at SH meetings.

Shareholder Voice
o The chair of the meeting, acting in good faith and in an impartial manner, must allow shareholders to
    speak to the matters properly before the meeting, but need not allow more than a reasonable time for
    reasonable arguments
o However, control over the agenda and the power of the chair to recognize speakers can have a
    significant effect on the outcome of voting

Shareholder Meeting Powers
o SH can requisition meetings if they hold 5% of voting shares or can make an application to the court to
    requisition a meeting
o But does the right to request a meeting for a stated purpose reverse the division of powers between
    directors and SH, since the former has powers of management?
o If the view is that SH do not have management powers, they can only request meetings for removal and
    replacement of directors or to propose non-binding resolutions which request directors to consider a
    specific business decision


    XIII.   CORPORATE SOCIAL RESPONSIBILITY


 Dodge v. Ford Motor Company (1919)
Jurisdiction Michigan
Facts           Henry Ford, as the controlling director and shareholder of Ford Motor company decided not
                to distribute any dividends apart from the regular ones (despite huge profits) for a period of
                time so that he could invest that money in expanding the company’s production
                plant/capacity. "My ambition," said Mr. Ford, "is to employ still more men, to spread the
                benefits of this industrial system to the greatest possible number, to help them build up their
                lives and their homes. To do this we are putting the greatest share of our profits back in the
                business.“
Issues          Must Ford distribute dividends? What purpose should the corporation serve?
Holding         Yes. The purpose of the corporation is to benefit its shareholders.

                                                                                                            78
                                                                                        Tufo, Camion, Niziblian
                                                                                                 Summer 2010


Reasoning           The court does not purport to know Ford’s business better than he does and even
                       accepts that his stated ambitions might be sound in terms of the larger objectives for
                       the business.
                    Nevertheless, a business corporation is organized and carried on primarily for the profit
                       of the stockholders. The powers of the directors are to be employed for that end.
                       The discretion of directors is to be exercised in the choice of means to attain that
                       end, and does not extend to a change in the end itself, to the reduction of profits, or
                       to the non-distribution of profits among shareholders in order to devote them to
                       other purposes.


Interview with Ford in the Detroit News: “And let me say right here, that I do not believe that we should
make such an awful profit on our cars. A reasonable profit is right, but not too much. So it has been my
policy to force the price of the car down as fast as production would permit, and give the benefits to users
and laborers, with surprisingly enormous benefits to ourselves.”

 o   In Court, the following cross-examination took place:
        - Counsel for Dodge: [D]o you still think that those profits were awful profits?
        - Ford: Well, I guess I do, yes.
        - Counsel: And for that reason you were not satisfied to continue to make such awful profits?
        - Ford: We don’t seem to be able to keep the profits down.
        - Counsel: . . . Are you trying to keep them down? What is the Ford Motor Company organized
           for except profits, will you tell me, Mr. Ford?
        - Organized to do as much good as we can, everywhere, for everybody concerned. . . . And
           incidentally to make money.
        - Counsel: Incidentally make money?
        - Ford: Yes, sir.
        - Counsel: But your controlling feature . . . is to employ a great army of men at high wages, to
           reduce the selling price of your car . . . and give everybody a car that wants one.
        - Ford: If you give all that, the money will fall into your hands; you can’t get out of it.


Shlensky v. Wrigley (1968)
Jurisdiction Illinois
Facts           Wrigley is the president and majority SH of the Chicago National League Ball Club which
                operates the Cubs, a baseball team, and Wrigley Field where the Cubs play home games. The
                Cubs are not doing so well and a minority shareholder wants to bring a derivative action
                alleging negligence and mismanagement because Wrigley did not install the necessary
                infrastructure in Wrigley Field for the Cubs to be able to play night games. Other teams play
                night games and are more profitable than the Cubs, and the plaintiff asserts that Wrigley is
                precluding the Cubs from being more profitable by declining to introduce night games.
                Wrigley, on the other hand, claims that introducing night games would have a bad effect on
                the neighborhood.
Issues          Does the plaintiff’s complaint state a cause of action?
Holding         No.
Reasoning
                 o Court is not satisfied that the motives assigned to Wrigley and the other directors are
                     contrary to the best interests of the corporation and the stockholders.
                 o The effect on the surrounding neighborhood might well be considered by a director who
                     was considering the patrons who would or would not attend the games if the park were in
                     a poor neighborhood
                 o Furthermore, the long run interest of the corporation in its property value at Wrigley Field
                     might demand all efforts to keep the neighborhood from deteriorating.
                 o “We do not mean to say that we have decided that the decision of the directors was a
                     correct one. That is beyond our jurisdiction and ability. We are merely saying that the
                     decision is one properly before directors and the motives alleged in the amended
                                                                                                            79
                  complaint showed no fraud, illegality or conflict of interest in their making of that
                  decision.”
                o “While all the courts do not insist that one or more of the three elements must be present
                  for a stockholder’s derivative action to lie, nevertheless we feel that unless the conduct of
                  the defendants at least borders on one of the elements, the courts should not interfere.”
                o No evidence that night games would improve the corporation’s position.
                o Court uses BJR / reverse of Dodge. Defendants arguments, though not great, were
                  considered acceptable.


Is CSR a PR Move? (Cheryl Wade 2002)
    o Is CSR a public relations exercise or does it have substantive content?
    o Corporate reactions to the September 11:
       - Contractarian goals of shareholder wealth-maximization were achieved to the extent corporate
           managers made the right public relations moves. The right corporate response could engender
           favorable public sentiment for a company, leading to long-term profits derived from loyal
           consumers to whom the subliminal messages were aimed. Corporate managers used the broadest
           of communitarian goals—the healing of a nation—to accomplish the contractarian goal of eventual
           long-term shareholder wealth-maximization

CSR in Canada (Anne Golden 2005)
CSR is no longer just about corporate philanthropy. It is about sustainability. CSR is about the sound
governance of an organization, aiming to promote the long-term health and sustainability of both the
company and society at large. Business sense and ethical imperatives are present.

The case to be made for good governance and CSR does and should go beyond the appeal to the bottom
line. As entities with profound impacts on society, the economy and the environment, companies have an
intrinsic obligation to practice good citizenship in these spheres.

CSR – A Global View (Anne Golden 2005)
   o The malfeasance of a corporate division in one country has grave impacts on global operations. This
       tendency feeds into the wider crisis of trust in public and private organizations that has dangerous
       implications not just for disgraced organizations but for the social fabric as a whole. It is crucial that
       companies find ways to manifest their resolve to be good corporate citizens and not exploiters of the
       public trust.
   o A second major trend of the present era is the unprecedented power embodied in multinational
       corporations, which have a mind-boggling capacity to affect the social and economic well-being of
       hundreds of millions of people. For better or worse, how they choose to operate can have impacts
       that rival or even exceed the influence of national governments. That gives them an ethical
       responsibility to pursue profits in a way that does not harm and ideally helps those affected by their
       operations.
   o The very survival of our species will depend on the responsible behavior of individuals and
       organizations toward the environment, and our ability to get beyond short-sighted and self-
       destructive ways of acting.

Business and Human Rights
   o United Nations Global Compact: 10 principles in the areas of human rights, labor standards,
       the environment, and anti-corruption.
   o Business Leaders Initiative on Human Rights:
   o Businesses increasingly need a stable international environment in which to operate, with sustainable
       markets and a “level playing field” of opportunities. Human rights offer a common framework for
       businesses to understand societies’ expectations and deliver value to stakeholders in a more
       sustainable way.
   o In a business context, advancing human rights is as much about realizing new opportunities and
       managing risk as it is about meeting essential global standards. For business, human rights provide a
       universal benchmark for minimum standards of behaviour
   o In terms of the “business case” for human rights, although the precise logic can vary between each
                                                                                                              80
                                                                                      Tufo, Camion, Niziblian
                                                                                               Summer 2010


        business sector and country of operation, the following main benefits have been identified:
        - Improved stakeholder relations
        - Improved employee recruitment, retention, and motivation
        - Improved risk assessment and management
        - Reduced risk of consumer protests
        - Enhanced corporate reputation and brand image
        - A more secure license to operate
        - Strengthened shareholder confidence
        - More sustainable business relationships with governments, business partners, trade unions, sub-
           contractors and suppliers

Corporate Charity
   o Courts have consistently upheld the power of corporations to make charitable contributions on the
       basis of “enlightened self-interest.” The removal of legal obstacles to corporate donations need not
       result in a rise in corporate altruism. Low rates of corporate giving are a consequence of their
       accountability in competitive capital and product markets.
       - A.P. Mfg. Co. v. Barlow: There is no difficulty in sustaining, as incidental to their proper objects
            and in aid of the public welfare, the power of corporations to contribute corporate funds within
            reasonable limits in support of academic institutions ... such expenditures may be justified as
            being for the benefit of the corporation; indeed if need be the matter may be viewed strictly in
            terms of actual survival of the corporation in a free enterprise system.
   o Corporate charity is not simply a matter of donations, but also implicates “excessive precaution”
       costs incurred by a corporation to reduce anticipated harm.In defining charity, there is no reason to
       distinguish between outright gifts and corporate decisions animated by altruistic motives that reduce
       firm wealth by failing to extract all possible profits.

Corporate Constituency Statutes
   o More than 25 states in the United States have adopted corporate constituency statutes
   o These statutes allow directors to take into account interests of non-shareholder constituents.
       However, the statutes do not mandate consideration of these interests
   o They also do not give non-shareholder interests a legal right of action against the directors of a
       corporation for failing to consider their interests

Questions:
   1) Should there be statutory language in Canadian law that expressly allows directors and officers to
      consider employee and other stakeholder interests?
   2) If so, should there be enforceable remedies for those stakeholders where their interests are not taken
      into account?

Representation of Non-Shareholder Constituents
   o By way of other stakeholders representation on corporate boards.
   o i.e. German Aktiengesellschaften - which have a mandatory two-tiered board system consisting of a
       management board and a supervisory board of non-management directors
   o Participation on the board of directors may be an effective technique for protecting employees
       where they make firm-specific human capital investments. An employee representative on the board
       of directors may also assist in overcoming informational asymmetries between corporate
       management and employees




                                                                                                          81

								
To top