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BUSINESS ASSOCIATIONS

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					                                                                                           1

Leora Aster
Fall 1999
BusAssoc
Prof Janda
                            BUSINESS ASSOCIATIONS

1.   VALUATION THEORY
1.1. The Gagnon Computer story
1.2. Intro to financial statements: Balance sheets + Income statements
1.3. Tests of going concern = Tests of a firm's ability to stay solvent = Ratio analysis
1.4. Ways to evaluate the value/ assets of a business
         Market value
                  - EMCH
                  - CAPM
                  - Random Walk Theory
         Book value or asset value
                  - Replacement value
                  - Liquidation value
         Capitalized Earnings Value
1.5. Why do firms form?


2. ECONOMIC ANALYSIS OF CORPORATE LAW
2.1. Corporate law and efficiency
        Pareto efficiency
2.2. Bargaining & External Costs Imposed on TPs
        Kaldor-Hicks theory


3. INTRODUCTION TO PARTNERSHIPS
3.1. Corporate law & Risk indifference, Risk aversion, and Risk preference
3.2. Why the firm?
         The Coase theory
3.3. The firm as a nexus of Ks
3.4. Alternate forms of enterprise
3.5. Dimensions of the enterprise that the law is concerned about
3.6. Chart of comparison: Ps & Corps
3.7. Ps: Definitions
3.8. Ps: How to determine if P exists
3.9. Ps: Agency
         Actual authority
         Apparent/ ostensible authority
         Least Cost Risk Avoider (LCRA)
         Freeman & Lockyer v. Bucklehurst Park

4. LPs & LLPs:
4.1. Distinctions
        Joint & Several liability
        Martin v. Peyton
        Delhasse
4.2. Capital Structure Irrelevance Hypothesis [Mogdiliani + Miller]
        CDIC

5. LPs

6. LLPs
                                                                                              2


7. SUMMARY ON PARTNERSHIPS:
7.1. Van Duzen
        Chart: Ps v. LPs: 3 primary distinctions
        P liability
7.2. OPA: Summary
7.3. OLPA: Summary

8. CORPORATIONS:
8.1. Limited liability of shareholders in Corp
8.2. Air Can update illustrating the complex governance arrangements of the corp
8.3. Salomon & limited liability
8.4. Controls on Effects of LL in Corps, which are imposed by law (and specifically, the CBCA)
8.5. Piercing the Corporate Veil: An exception to the principle of limited liability
8.6. Underprotection of employees in Bankruptcy/ post-bankruptcy cases
8.7. Creation of a Corp: Process of Incorporation
        8.7.1. History of Creation of a Corp
        8.7.2. Documents of Incorporation
        8.7.3. Consequences if the corp has tried to do business before it has been incorp'd
        8.7.4. Consequ when a Corp acts ultra vires of its purpose/ pwr (in Articles of Incorp)


This table of contents is not complete; See below for more on Pships and Corps.
                                                                                                  3


Course purpose:

Intro to the basic legal principles governing the - creation of bus associations
                                                  - management of bus assocs.


Learning Objectives:

   1. To be able to draft basic articles of incorporation. [Gain this from chpt on Incorp.]

   2. To be able - to understand why rules are structured as they are;
                 - to recognize the main legal issues arising out of the creation and
                   management of business associations;
                 - to provide informed advice re how these issues should be addressed.

   3. To be able to identify the main features of typical statutory regimes governing
      partnerships and business corporations.


General Course Description:

- Must gain an understanding of two basic forms of business association:
a) the partnership and
b) the business corporation.

Partnership - can be understood as a conceptual precursor to the business corporation.
            - is an economically sig form of bus assoc, esp for the professions, incl law.

Business corp - BULK of the course is devoted to this
              - has become the predominant form of associatn enabling econ activity


The course will address six principal themes:

   1.   The theory of enterprise organization (Chpt 1)
   2.   The nature and function of partnerships (Chpt 1);
   3.   The process of incorporation (Chpt 2-5);
   4.   The operation, management and control of business corporations (Chpt 6, 9);
   5.   The scope of manager and shareholder duties (Chpt 7); and
   6.   The availability of shareholder rights and remedies (Chpt 10)


- EXAM: Lawyers are asked by clients: What form of enterprise makes most sense for me.
Think of risks involved, etc.


Sept 3, 1999

- in some ways, this is an advanced K course.
- this course also deals w/civil responsibility and liability; eg. re duties owed by corp directors.
- it's popular to incorporate in Delaware.

- business separates its personality from that of its owners.
                                                                                                   4




Sept 7, 1999

1. VALUATION THEORY:

1.1. The Gagnon Computer Story


- Note: We are studying this fact pattern in order to study partnership through it.


- Three people together have property that's more valuable than what is separate to each.

         Carol Gray, M.B.A.:                - wants to be part-owner of a business w/growth potential
         Don Smith, computer scientist:     - wants to commercialize home computer software
         Michel Gagnon, software manufctrr: - needs new software pckage to keep business afloat

 They come to your office, and ask: Should they set up a partnership?
 Start-up costs in the first year would be min $20,000.

 Qs to consider: 1) How to divide ownership & profits?
                 2) What form should the business take?


1.2. An introduction to financial statements:

- Firms present financial info in financial statements.

- Balance sheets must always balance!

- Balance sheets show the valuation of the business at a particular date. [3]

- IMP:    Assets = Liabilities + Equity / Proprietorship.

     ie. Equity = Assets - Liabilities

- Assets in the balance sheet are valued at their cost of acquisition, which may have
occurred many years previously.
  Fixed assets, other than land, are depreciated; i.e. a specific amnt is deducted each y.
  THUS, the stated value of the assets in the balance sheet may bear little relation to their
true value. [3]

- Liabilities = how much the firm owes - represents the ints of the creditors in the firm.

- Equity = Proprietorship - reps the ints of the proprietors/ shareholders in the firm.
                              - [what is due to shareholders if the business was sold today.]
                              = what the firm has less what it owes
                              = assets - liabilities

- Both liabilities and equity/ proprietorship are claims against the value of the firm, and are
thus on the same side [if you do assets on left & liabilities and equity on right] of the sheet. [4]
                                                                                                       5

- EXAMPLE: Gagnon balance sheet & income statement


                     Gagnon Computer Business Balance Sheet ($)



                                                                             199X

ASSETS
Current Assets
1) Cash
                                                                                    2,000

2) Accounts Receivable (net)
                                                                                35,000

3) Inventory and Work in Progress
                                                                                37,000

Total Current Assets
                                                                                74,000

Fixed Assets
1) Machinery and Equipment
                                                                                12,000

2) Furniture
                                                                                    4,000

3) Depreciation
                                                                                 -5,000

Total Fixed Assets
                                                                                11,000

TOTAL ASSETS
                                                                                85,000



LIABILITIES
Accounts Payable
                                                                                25,000

Expenses Payable
                                                                                17,000



PROPRIETORSHIP/ EQUITY [the interest of the shareholders in the firm.]
                                                                                43,000



TOTAL LIABILITIES AND PROPRIETORSHIP
                                                                                85,000




So, we see that here:

- Assets = $85,000
- Equity = Assets - Liabilities.
  so if Assets are 85,000,
  and Liabilities are 42,000,
  then Equity must be 43,000.


- NB: Expenses payable = operating costs of firm that firm owes
      Accounts payable = costs firm K'd for which it owes (ie. being in someone else's balance sheet
as accounts receivable).
                                                                                                     6

      NOTE: not all balance sheets split the terms up like this. In the balance sheet in the Ebert
book, there are "accounts payable; wages payable; and taxes payable.


- For other exs of balance sheets, see appendix to this summary. ie. - Air Canada
                                                                     - CnadianAir [not on web]
                                                                     - Govt of Canada



- Assets = Liabilities - Shareholders’ deficiency

"Shareholders' deficiency" = not only is there NO shareholders' equity, but the shareholders'
                            equity is a NEGATIVE #.

 This concept of "shareholders deficiency" rarely comes into play in balance sheets, because
rarely are companies in such bad financial shape!

 An example of a company that does have a shareholders' deficiency is Canadian Airlines.
The company does not have enough assets to cover its liabilities.
Thus, "shareholders' deficiency" is included in the balance sheet


- Assets + Accumulated deficit = Liabilities

This is similar to the above equation.
But this equation can only be used by Governments.
The example in class to which we applies this was the balance sheet of the govt of Canada.

This equation can only be used by govts, and not by cos, b/c in cos, if there was such a sit,
the co would collapse financially. But govts are more secure, b/c they can maintain more
"credit".

The accumulated deficit reflects all of a govt's deficit.
[It is sort of like shareholders' deficiency, but in this situation there are no shareholders.]



- Balance sheets: - rep the valuation of a firm at a particular time.
  Income statements: - show business activity over a period of time[, usually one year].


In an income statement:

- the net income = the change in value in the firm over the fiscal period

- the net income is added to the equity on the balance sheet, after the dividends to shareholders/
proprietors are deducted. [5]



             Gagnon Computer Business Statement of Income ($)



                    (For the year ended January 31, 199X)
                                                                                                             7

Sales Revenues
                                                                                      128,000

Cost of Sales
                                                                                       44,000

GROSS PROFITS
                                                                                       84,000



Administrative Expenses
1) Employee's Wages
                                                                                       47,000

2) Rent
                                                                                       17,000

3) Depreciation
                                                                                        2,000

4) Travel
                                                                                        2,000

5) Office and General
                                                                                        4,000

TOTAL ADMINISTRATIVE EXPENSES
                                                                                       72,000



NET OPERATING INCOME
                                                                                       12,000




1.3. Tests of going concern/ test of a firm's ability to stay solvent:

WHAT: Accountants compare certain kinds of assets and liabilities
HOW: in the form of ratios
WHY: in order to provide a measure of the firm's ability to stay solvent.

i.e. This is done through ratio analysis.

Examples of such test ratios are:
             1) current ratio (current assets : current liabilities)
             2) quick (acid-test) ratio (cash + accounts receivable : current liabilities) [4-5]
             3) debt : equity ratio (debt : equity)

- [A high Debt: Equity ratio suggests instability, since the firm may have difficulty meeting the interest
payment on the debt.] [5]


1.4. Ways to evaluate the value/ assets of a business:

[ie. How are contributions valued?]

- To determine property interests in a firm, valuation will be key. ie. who gets what shares,
future earnings estimate,…



- Market value                - best way to value         = snapshot of value as       - useful where
                              contributions               reflected in the price of    publicly traded
                                                          a market share               shares


- Book value                  - probably the third best   = snapshot of how            - useful e.g. in
                              way to value contributns    assets enter the firm;       Gagnon case but
                                                                                                                        8

                                [12]                            how they were                 reflects historical
                                                                purchased                     cost (vs. replacemnt
                                                                                              or liquidation value)
                                                                                              = shows value of
                                                                                              property that might
                                                                                              arise from this
                                                                                              enterprise.


- Capitalized                   - probably the second           = investors look at            - most complex of
  earnings value                best way to value               future value,                 the three methods
                                contributions [12]              and try to predict a rate
                                                                of return                     - generally considrd
                                                                                              to produce the best
                                                                                              est of the worth of a
                                                                                              business in the
                                                                                              absence of a
                                                                                              reliable market val.



Market Value Method:

= look at market to see value of shares.
- ie. a share's current value as reflected in the market.

Efficient Capital Market Hypothesis (EMCH) or Random Walk Theory:

Corps may be valued thru the share price, with equity equal to the value of all issued shares.
Prices reflect all that goes into figuring out the value of those securities.
Historical values are not relevant to the efficient capital market hypothesis.
Equity of a firm can be traded in the market.

If there is a lot of (ie. competitive) demand for the shares, the resulting market price will
provide [the beginning of] a reliable measure of the firm's value.
- When a competitive market exists for firm securities, all public information about prospects for the firm will be
fully and virtually instantaneously reflected in the market price of the securities. [5]
- Only those with insider, non-public info about the firm are likely to be able to predict future stock movements for
most widely traded shares beyond an extremely brief period,
since virtually all public info will almost immediately be fully impacted in share prices.
  Future movements in share prices are then unrelated to past history and are entirely random, such that the
EMCH is also known as the "random walk" theory. [5] [See below for better def of Random Walk.]
  What this means is that lay investors may generally trust market prices for widely traded firms, while distrusting
the analyst who claims he can chose stocks on any basis other than inside information. [5]

BUT just b/c shares are publicly traded doesn’t mean the market is giving an efficient price.

 Yes, the efficient market hypothesis underlies market valuation, BUT
The ECMH provides only the beginning of a benchmark/ measure of market valuation.
 It's likely that markets do not provide a view of the entire valuation of a firm.

 WHY? Because, to apply the efficient well-est capital market, you need a transparent well-
established tradable securities market. But this doesn't exist.

 Thus, it is hard to test the ECMH b/c need benchmark against which to test it, and there is
no obvious one which exists.
                                                                                                 9

- The ECMH is of great interest to lawyers b/c it suggests a method of testing the efficiency
of legal rules or corporate decisions. [6]

One can test the reaction of the market to a scenario such as:
  A province announcing that it will pass a law to benefit shareholders; ie. All firms in the
province.
  One can test the reaction of the market to such a scenario through an event study, which
examines whether, in the days after the announcement, the stock price of the affected firms
is significantly different from that of similar firms not affected by the news.
  To do this, one must be able to estimate what a firm's stock price would be on the
assumption that it is unaffected by the announcement.
  If the stock price declines, we might reasonably suppose it to be inefficient. [7]

 To perform an event study, ie. to test expected price of a stock, one requires a stock price
model. The most common such model is the Capital Asset Pricing Model [CAPM].

CAPM:

= An econ model for valuing stocks in an efficient market, by relating/ comparing risk &
expected return.
  Based on the idea that investors demand additional expected return (called the risk
premium) if asked to accept additional risk.

- Under CAPM, the rate of return on investing in a firm is a function of
(1) the riskiness of the firm's earnings, based on historical data
(2) the expected return of the market as a whole, and
(3) the risk-free rate of return from the most secure investments.
Other factors are irrelevant. [7]

- Early tests of CAPM found that it had considerable predictive power.
  However, more recent studies find that it does not have such good predictive power.


ECMH:
- Under the ECMH, information is reflected almost immediately after its release, in the price
of widely traded shares. Thus, the market has adjusted to the info, by using the info.
  However, prices may be relatively efficient in this sense and still incorrect for all firms.
  One example of this might be stock market "bubbles" = where prices quickly reach very
high levels, only to fall precipitously. [8]


Random walk theory/ Theory of the random walk of share price:

- Theory that stock price changes from day to day are random and independent of e/o,
making it impossible to accurately predict which direction the market will move at any point.

- [[Prof: If there's an efficient market, share price should be bumped along by accumulation of
share prices. ]]


Book Value or Asset Value Method:

- Book value = the equity figure (Assets less liabilities) = net worth.
                                                                                                             10

- The net dollar value at which an asset or security is carried on a balance sheet. In portfolio
accounting, bk value generally refers to the price paid for the security, as opposed to its
current worth or market value.

- Usually refers to a business' historical cost of assets (acquisitn) less liabilities (depreciatn).

 Looking at a balance sheet is sig for book value b/c balance sheets reflect historical costs.

- The book value of a stock is determined from a company's records by adding all assets (generally excluding
such intangibles as goodwill), then deducting all debts and other liabilities, plus the liquidation price of any
preferred stock issued. The sum arrived at is divided by the number of common shares outstanding and the result
is the book value per common share.

- Book value may have little or no sig relationship to market value.

- An objection to bk value is that assets may not be carried on the bks at their true present
value, but only at the historical cost of acquisition less any depreciation.
  The company may therefore value its assets according to replacement value.
  Replacement value = This normally involves adjusting book value upward to account for
increases in prices of machinery and equipment.

- Bk value is often misleading b/c

 1) it lacks an adequate time frame, with long-term debts ranked on the same basis as
debts due tomorrow.

  2) it ignores/ can not predict a business' ability to generate earnings in the future, which is
the true source of a business' value. The resale value of the firm's assets is not of great
relevance if it does not propose to sell them. If the firm is profitable, it will instead retain its
assets to carry on business. The assets will then be valuable only to the extent that they can
be used to earn profits, and valuing a going concern will require a valuation of the anticipated
future earnings stream. [9]


- Liquidation value:

           = The estimated amount of money that an asset or company could quickly be sold
for, such as if it were to go out of business. Ie. the amnt that would be realized on a
piecemeal sale of the assets on a liquidation.

           - The sale of assets assumes the withdrawal of the firm's productive capacity. [This
                                                                 However, liquidation value will
will be of diminished importance if the firm is likely to continue in operation. ]
at least est a min asking price for the firm.

            - This type of valuation is similar to an adjusted book value analysis. Liquidation value is
different than book value in that it uses the value of the assets at liquidation, which is often less than
market and sometimes book. Liabilities are deducted from the liquidation value of the assets to
determine the liquidation value of the business. Liquidation value can be used to determine the bare
bottom benchmark value of a business, since this should be the funds the business may bring upon
valuation. [Net]


Note: - Book value method is most directly relevant to the Gagnon situation, b/c:
              - here there are assets which have been acquired and liabilities,…
              - here no shares are traded on the market, so can't apply market val method.
                                                                                              11

      - In the Gagnon problem, $17,000 liquidation value provides the baseline.
        $17,000 is the amount which Gagnon estimates "that he would obtain on a
piecemeal sale of the assets, after paying off creditors." [3]


Capitalized Earnings/ Going Concern Value Method:              [Sept 10]

- Best way, of the three methods, to value contributions.

- This is b/c book value is often misleading b/c
  1) it lacks an adequate time frame, with long-term debts ranked on the same basis as
debts due tomorrow.
  2) it can't gauge a firm's future ability to earn income. [9]


- If you're looking at the present value of a business entity, you want to have some
understanding of the amount of income you'll get. Thus, formula:


- Variables: - PV = present value
             - A = future amount of income
             - r = rate of return


 The present value of $100 received one year from now must be less than $100 received
today. This is b/c the $100 available today can be invested to produce more than $100 a
year from now.
  Money received in the future must then be discounted if its present value is to be given.
This is done by applying a discount factor to the amount of income (A) to be received. [9]

Present value = Future amount of income  [discount factor].

- The discount factor, ie. that which is translated into the multiplier, would have to be applied
even with a 100% certainty of the firm's making the anticipated earnings each year, b/c of the
risk-free returns available through other investment opportunities.
  These other earnings represent an opportunity cost, in the sense that turning down such an
investment for an equivalent one promising a lower reward is equivalent to absorbing a loss.
The opportunity cost of a risk-free investment is referred to as the time value of money. [11]


- Suppose that for the particular period of time during which the future amount of income (A)
is not yet received, investors demand a rate of return of 'r'. [What this means is that they will
be indifferent as btw PV (1 +r) and A.] For example, at a 10% rate of return, the investor is
indifferent as btw $110 and 10% income on $100.

PV (1+r) = A

PV = A  (1 + r )


Implications: Capitalization of earnings method:

      When the rate of return is expected to continue in perpetuity, the rate of return/
discount factor can be represented as 'r' instead of '1 + r'.
                                                                                               12



         PV = A  r.

If we assume a stable stream of income into the future, ie. where the income stream is
expected to continue in perpetuity, then the discount factor is usually referred to as a
capitalization factor:


      A = future amount of income = E = earnings = the firm's anticipated earnings each year

      PV = E (earnings)  r (rate of return) [OR k (capitalization rate)].

      The discount/ capitalization factor is then translated into a multiplier of earnings.


      ie. PV = M(multiplier) x E

      When M goes up, E goes down, and v.v.

M = effort to give you a figure for the risk associated with the investment.

- This gives you a sense of how risky the investment is!

- The higher the multiplier, the greater the possibility that the stock is overvalued.

ie. M (the risk-free capitalization/discount rate) is adjusted upward to account for the
presence of risk in the firm's expected earnings. [11]

  The greater the risk, the less valuable the investment.
  The higher the M, the lower the PV (present value) - but only b/c risk is greater. [11]

- The multiplier reflects:
       a) the current rate of interest for risk-free investments, and
       b) the risk attributes of the firm. [11]


Example 1:

Figure out how risky is the $20,000 investment in the Gagnon computer business.

- If Gagnon anticipates making a $20,000 investment, what return would be needed?
Assume 10% risk-free return ($2,000) would be needed.

[If 20% risk of $0 return, needs 80% probability of >$2,500 to justify investment .???]

***

Example 2: Air Canada shares:

Currently $0.02/share earning = E = the firm's anticipated earnings each year.
Ie. The firm anticipates earning $0.02/ share each year.

M = PV  E
                                                                                                13

Onex offer of $8.75, which represents last year's value.
At $8.75 / share, M = 8.75  0.02 = 440

Today the shares are worth $10.70.
At $10.70 / share, M = 10.70  0.02 = 540

 - The greater the M, the greater the risk, the lower the present value/ the less valuable the
investment - but only b/c of the greater risk. Also, the higher the probability the stock is
overvalued.

   Thus, this is the sit at Air Can when the shares were $10.70. The risk was greater, and
there was greater probability that the stock was overvalued.

[Implication: higher expected earnings. ]

- It is impossible to est an appropriate capitalization rate (discount factor on a rate of return)
with any degree of precision. Two evaluators may differ substantially on how the risk should
be assessed, and even a slight difference of opinion on the capitalization rate may result in
enormous variances in the valuation of the firm, in terms of numbers.

This lack of precision explains why going concern (business) values are not reflected on the
balance sheet of the firm. Asset/ book valuation may not measure the right thing, but at least
it measures it fairly objectively. On the other hand, when a measure of firm value is sought, it
may be better to be approximately right (in measuring through Capitalized earning value)
than certainly wrong (in measuring through asset / book value). The capitalized earnings
value is generally considered to produce the best estimate of the worth of the business in the
absence of a reliable market value. [12]



2. ECONOMIC ANALYSIS OF CORPORATE LAW:


We must ask ourselves: What relevance, if any, economic theories have/ ought to have for
corporate law.

2.1. Corporate law and efficiency:

- Hunch: Corporate law is critical to markets.
         Markets should be "efficient".
         Thus corporate law should be efficient.

- We should ask ourselves - which rules of corp law are efficient?
                          - what is efficiency?

- Student definitions:

 Efficiency = max output per min input                     - A demand-oriented conception
            = goods + services allocated to users
              who place the highest value in them          - A supply-oriented conception

             [These two defs are really the same; but opposites of e/o.]

              = the set of rules that facilitates… [fill in; was on screen***.]
                                                                                                        14



- Coase's theory: Markets are efficient, except for transaction costs. Thus, transaction costs
should be reduced. In the absence of transaction costs, the law (of efficiency?) is relevant.

- Pareto efficiency = Pareto superiority = a change in resource distributn/ a transactn is
       efficient when at least one party is made better off and no one is made worse off. [15]


Pareto optimality = pt at which no one can be made better off w/o making smone wrse off.
                    ie.= pt at which no further Pareto superior transformations are possible.
                    - doesn't necessarily affect the relative distribution of resources. [We see
                      this in the Air Canada example, below.]

                    - does NOT mean that this is the best possible outcome. [Prof]

                    = one you've reached that end point in bargaining, there's no end point in
                      bargaining that would allow you to better meet the parties' preferences. [Prof]



Ben and Jerry example:

- Ben is indifferent as between vanilla and chocolate (1V = 1C)
  Jerry prefers vanilla to chocolate (1V = 2C)

- Where Ben (who is indifferent to C or V) has 2V
     and Jerry (who prefers V) has 4C [which is the same to him as 2V],
  then a trade of 1V for 1C would achieve Pareto superiority.

Then Ben would have 1V and 1 C. He'd be in the same sit, still having 2 units of = val to him.
     Jerry would have 1V and 3C. He'd be in a better sit, b/c it would be as tho he has 5C.

This is Pareto superiority b/c one person is better off, and no one is worse off.

- A further trade of 1V for 1C would produce Pareto optimality.
  If Ben gives Jerry 1V
  and Jerry gives Ben 1C,

 then Ben would have 2C [which is the same to him as 2V]
 and Jerry would have 2V + 2C. [which is the same to him as 3V or 6C.]

Thus, Ben is in the same position as when he started,
 And Jerry is better off. [He now has 6C; but he started w/only 4C].

 This is the point of Pareto optimality. Hereafter, no further Pareto superior transformations
are possible. I.e. At this point, no one can be made better off w/o making someone worse
off.


BUT NOTE: A transformation to a Pareto optimal state need not be Pareto superior.
            For example, if the initial set of commodities were transferred to J, the result
would be Pareto optimal, but the transformation would not have been Pareto superior.

Ie. Start w/B has 2V;
           J has 4C.
                                                                                                                             15



B gives J his share; now B has 0, and
                         J has 2V and 4C, which = 8C = 4V.


Applicable to Air Canada/CAIL?: [all from screen]:

- Is there a Pareto superior transaction possible? Won’t there necessarily be losers?
- Is there a price at which AC will sell (i.e. be indifferent as btw control and being controlled)?
- What about TPs?
- Preference curves.


2.2. Bargaining & External Costs Imposed on TPs (ie. externalities):
- Pareto efficiency is difficult to operationalize, thus we use Kaldor-Hicks efficiency theory.

- Problem: The Pareto assessment is about bilateral bargaining, but there are often TP effects to transactions. How do you
figure out the state of the sit if TPs aren't involved?


- One may refuse to enforce a K where the K imposes external costs on TPs. [16]
  External costs are also called / = externalities.

- Certain externalities may be desired by TPs = positive externalities
  Certain externalities may harm TPs = negative externalities.

- In most of the cases where Ks are not enforced b/c of illegalities, in K law, this is b/c of
probable negative external costs to TPs. [16]

Kaldor-Hicks theory:

          - Ks should be upheld so long as net gains to the Kors (the winners) exceed
          external costs to TPs (ie. losses to losers).

          - Such a sit, which involves a change in resource distribution, would be K-H efficient.
          [Ie. Kaldor-Hicks efficiency: - a change in resource distribution is efficient if gains to winners exceed
          losses to losers.]

          - All parties with an interest in a K might reasonably not agree to uphold it unless it's
          K-H efficient. [17]

          - The winners could compensate the losers, but there is no such requirement in K-H
          theory. Thus, the test is sometimes described as "potential Pareto superiority." [17]

          [Remember - Pareto superiority is where one party is made better off and no party is made
          worse off.]

          - On the K-H standard of enforceability, a K would be upheld even if not Pareto
          superior b/c of its external costs, provided that it could be made Pareto superior if the
          winners chose to compensate the losers. [17]

_________

- NB: When externalities (costs and benefits of transactions) affect TPs, it is hard to do an
analysis of the firm.


[[Is the following rule efficient?
                                                                                                              16

        CBCA s. 122(1)(a): Every director and officer of a corporation in exercising his powers and discharging
         his duties shall act honestly and in good faith in the best interests of the corporation.
        Corporation and charity
        Corporation and non-shareholder stakeholders ]]




3. INTRODUCTION TO PARTNERSHIPS:

Sept 14      [Reading: pp.22-45]

3.1. Corporate law & Risk indifference, Risk aversion, and Risk preference:

- Example: Deal #1: 100% probability of $100 return
           Deal #2: 50% probability of $200 return; 50% probability of $0 return
           Equivalent?

              Prof prefers #1 to #2.
              Others might prefer #2 b/c of poss of v. high return.

- Under what circs should law 1) have a risk-minimizing type of rule?
                              2) be silent, + leave it to parties to figure out what they please.

 ie. Under what circs should the law control the allocation of risk?


- The law tries to ID the least cost risk avoider.

 Re partnership, the law is that: All partners are liable to TPs unless TPs have notice of
some dif regime and accept it.
 Here, the least cost risk avoider = partners. There's joint liability on part of partners.

[We will further discuss the idea of least cost risk avoider later.]


[[- Role of law: to reduce uncertainty and costs of gathering information and monitoring [screen]
  - Should corporate law be obligatory, default or absent? [screen] ]]



3.2. Why the firm?:

- The Gagnon problem assumed that the contribution of the three parties were worth more
when united in a single firm than when held apart. As such, the organization of the firm
created new wealth. But this does not explain why it was efficient to form a firm, since the
parties might instead have sought to provide for the management of the enterprise through
sepatate Ks. [22]

 Why would Gray, Smith and Gagnon form a firm?
 Why did they not simply provide for the managemnt of the enterprise thru separate Ks? [22]

- We are trying to find an econ theory to answer why people get involved in business assocs.

- Economists discuss the costs associated with bureaucratic structure.



The Coase theory:
                                                                                               17


- Point A: There are costs to using the markets: ie.

  1) transaction costs: - a firm requires that fewer transactions will have to be entered into
than an open market would require. The firm will save the transaction costs associated with
negotiating each K separately.

       Transactn costs incl a) information costs = re info about the prices of commodities, and
                            b) opportunism costs = costs of opportunistic behaviour; ie. when
                                                  parties do not act in GF or avoid (br) their Ks.


  2) agency costs: = costs associated w/allowing agents to bind the firm (incl making
decisions for the firm) ; ie. allowing the firm to operate through others

                    - agency here = authority to manage a firm which passive investors (as
principals) delegate to firm managers (as agents) of publicly held firms.

                     - NOTE: The term 'agency' is here used broadly, and extends beyond the
legal def of principal and agent, to incl all cases where one party in a firm can make
decisions affecting another party.

                   - There are agency costs insofar as the agent's incentives are to
maximize his own rather than firm interests. [23]


- Point B: Firms can serve to decrease some of these costs.
  For example, the firm can decrease information costs by redistributing info.
eg. prefer to have a central supply distribution place.



- Agency costs are the flip side of transaction costs, and especially opportunism costs. [Prof]
  Why? Because in sits of opportunism people try to avoid their Ks - ie. tries to avoid activity;
                 in sits of agency the agent acts as a manager - ie. activity. [Me]

- Agency costs exceed the savings of transaction costs the firm will provide.


NB: This is all an explanation for why a firm might arise.



3.3. The firm as a nexus of Ks:

- Can see a firm as a nexus of contracts. Thus, the idea of a firm becomes a fiction.
It's nothing less than a series of long relational Ks btw - shareholders - managers
                                                          - creditors    - employees
                                                          - customers    - suppliers.

- Thus, can think of the firm as:
1) an entity distinct from bi-lateral Ks in the market
2) a fictional entity which is just a nexus of Ks.

- The fact that this view has arisen may reflect a change to the character of the firm. The firm
                                                                                                       18

today may look more like networking rather than an entity with a bureaucratic structure.

- It is useful to analyze the terms by which each class of K'or contributes to the firm's joint
production in order to determine how the wealth of all participants may be maximized. [23]


3.4. Alternate forms of enterprise:

- Enterprise organization = what type of enterprise to form; ie. P or Corp?

- "Complete contingent contract" [screen]

- If you're comparing dif kinds of enterprise organization, you can also structure rels as
debtor-creditor rels. Ie. investors in firm.

- Mixtures of debt and equity is what corporate finance is about.

- In this course, we will look at:
      partnership
      limited partnership
      corporation

- [Trust can also be used as a form of business association.]


Sole Proprietorship: [24-5]:
- The person carrying on the business (the sole proprietor) is directly resp for the performance of all Ks
and liabilities of the business.
- All of his personal assets are available to satisfy his business obs
- All of the business income is his.
- Must register the business w/in 60 d of use of the name, or of operating the business.
- Must renew registration every 5 y, and whenever there's any change in the ownership/ name.


3.5. Dimensions of the enterprise that the law is concerned about:

There are 4 dimensions:

1) Relations w/TPs: - who is liable to TP if things go wrong?
                    - who can enter into Ks on behalf of TPs?
                    - does this firm have perpetual existence on its own?
                    - what triggers its - creation?
                                        - dissolution?

                      - They key distinction [re P and Corp] is btw limited liability for corp re
obs of firm, but there are limits on liability of partners - they are limited individually for the
firm's debts.
                     - Both Ps and Corps act through agency relationships, tho.

2) Internal governance: - Ps: partners are all engaged in management.
                         There is no distinction btw managers and partners.
                       - But there is such a distinction in a corp.

3) Legal personality: - Ps do NOT have legal personality.
                       Partnerships only consist of the partners that comprise the firm.
                                                                                                            19

4) Duration: - A Corp in principle has no pre-ordained finishing point to its existence; no time-
bounded quality to it.
             - Partnership IS time bound. P's existence depends on the partners.
P must be re-created when a partner - leaves the firm/ goes bankrupt/ dies.
Ie. must register changes in partnership for it to remain as such.

Each of the four dimensions is governed in the OPA.
    Internal Governance: Each partner is given equal role in management subject to
       contract to participate in business. The owners are the managers, and equally so,
       unless agree otherwise.
    Legal Personality: The P is not distinct from its individual partners. It is not a legal
       personality separate from its membership.
    Relations with TPs: Each partner is an agent + can bind the firm + is personally liable
       for the firm.
    Duration: Ps can be entered into for a term of time. CAN have a time-bound rel. If a
       partner gives notice, then the firm will be dissolved. Ps come into and go out of
       existence with its members.
       Any partner can pull the plug by death/ insolvency.
       Ps change in their composition over time. Continue w/same name of P whenever
       someone leaves/ comes into the P.
       Corp does NOT change as an entity with the comings and goings of the dif members.

- There are sig institutional choices made in the way these institutions function.

- [OPA - now, added idea of LLP].

3.6. Chart of Comparison: Ps and Corps:

                                       Partnerships                             Corporations

Creation                     - No formalities to create P;
                             but must be doing business in
                             common with a view to profit.

How to know if it exists     - P is default regime, if you don't
                             create another business form.

Relations w/TPs              - Each partner is an agent.              - Each firm-member is an agent.
                             ie. P can ONLY act thru agency           Ie. C can ONLY act thru agency
                             rels/ agents.                            rels/ agents.
                             - Each partner can bind the firm
                             unless acting outside scope of
                             authority and known to be so or
                             not known to be partners.

                             - Not limited liability:                 - Limited liability.
                             Each partner is (personally) jointly     A shareholder's liability to the
                             liable for the (debts and obs of         creditors of the corp is limited to
                             the) firm, to the full extent of their   the amnt of his investment.
                             personal assets. [OPA, s.10]

Internal Governance:         - No distinction btw managers +          - There is a division of
                             partners. Partners are all               management.
                             engaged in management [but this
                             may be dif as per the P contract].

Legal Personality:           - No, P is not a legal personality.      - Yes, C is a legal personality.
                                                                                                           20

                                Ie. it is not a legal entity separate   ie. it is a legal entity separate from
                                from its partners.                      its shareholders.

                                - Its partnrs can not K with/ sue it;   - Its shareholders can K with/ sue
                                must sue the partners individually.     it.

Duration:                       - Yes, is time bound;                   - Not time bound.
                                ie. P can be entered into for a set     Ie. Continues to exist even if its
                                time. Also, P's existence               members die/ leave firm/ become
                                depends on the partners.                insolvent.
                                  P must be re-created when a              Can have perpetual existence.
                                partner leaves the firm/ goes
                                bankrupt/ dies; but the P's name           Dissolution of a C is more
                                can continue.                           complex than dissolution of a P.
                                                                        [p.46]

                                  Must register changes in the P
                                for it to remain as such.
                                  Ie. P's composition changes
                                over time.

Registration:                   - Must reg under the P Registratn       - A C which is a P must reg under
                                Act. [p.47]                             the P Registration Act or
                                                                        the Corp Information Act, or
                                                                        possibly both. [p.47]

Profits:                        - P profits are payable regularly to
                                the partners. [p.47]


- NB: OPA, ss.2-44: p.26-33.

3.7. Partnership: Definitions:

Ontario Partnerships Act s. 2:

- "Partnership is the relation that subsists between persons [including Corps] carrying on a
business in common with a view to profit, but the relation between the members of a
company or association that is incorporated by or under the authority of any special or
general Act in force in Ontario or elsewhere, or registered as a corporation under any such
Act, [ie. shareholders] is not a partnership within the meaning of this Act." [p.26, Screen]

- Ie. P is the does not incl the rel btw the shareholders of a corp.

- NB: The underlined part can apply both to Ps and Corps.
      The bold part is IMP.

- Joint ventures and syndicates are often Ps entered into for specific purposes. [p.25]
  [A joint venture will not be a P if it is so structured to be merely two business entities working side by
side on the same project or one party has a guaranteed return and the other takes all the risk and
standards to make all the profit over the guaranteed return.]

s.4 states that must be engaged in a business tog.

Art. 2186 C.C.Q.:

- "A contract of partnership is a contract by which the parties, in a spirit of cooperation, agree
                                                                                                 21

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 profit."

- "A contract of association is a contract by which the parties agree to pursue a common goal
other than making of pecuniary profits to be shared between members of the association."


The CCQ definition is more complete than the OPA definition.
The first two lines of the CCQ, -> activity, are consistent w/OPA s.2.

Commentary on a.2186 CCQ: As a result of the activities in common, you get some share of
the profit.

CCQ elaborates on the Q of doing business in common.


3.8. How to determine if a P exists?:

- See OPA, s.3, p.27.

- The true intention and effect of the K btw the parties is the determining factor in whether or
not a partnership exists, not merely the fact that they call themselves partners. [25]

- Joint O of prop and sharing of gross returns do not of themselves create a P. [s.3]

- Receipt of a share of profits is evidence that a person is a partner, but does not make that
person a partner. [s.3]

- IMP: Partnership can be understood as the form of bus enterprise you enter into by default
unless you choose something else.

- Thus, understand four dimensions, b/c that will help you understand the changes -> if you
enter a corp.

- Partners will probably want to write their own partnership agreement, to stress/ modify
those in the Partnerships Act. "Most partners will desire terms of P differing from those
presumed by the Act." [26]

- While it is true that each partner has an = role in management, this is all subject to K; to
change.

- [[The P rel is quite flexible and open-ended re what can govern it. ]]

- [It is possible to form Ps btw corps.] [OPA, s.2]


Sept 17, 1999

3.9. Partnerships: Agency:

- OPA ss.6-13 are based on agency principles.
  Re when an agent may bind his principal to a TP.
  ie. The agent agrees to act for the principal in such a way as to bind the principal and a TP.

 Disputes about such obligations are most likely to be litigated when the existence of the
                                                                                                         22

Kual bond btw principal and TP is denied by one of them.
 Such problems are resolved by determining whether an agency rel existed and what the
scope of the agent's authority was.
 If the agency rel is normally consensual, it need not be Kual. It may be implied. [34]

 Implied authority fills in the gaps of what is expressly stipulated in the K.
[For more on express/ implied, see p.34, mid page.]


- s.6: Each partner is an agent of the firm and his other partners for P business.

- Actual authority vs. ostensible / apparent authority/ agency by estoppel: eg. OPA, s.8:

  s.8: Where one partner pledges the credit of the firm [to a TP] for a purpose apparently not
connected with the firm's ordinary course of business, the firm is not bound, unless he or she
is in fact specially authorized by the other partners, but this section does not affect any
personal liability incurred by an individual partner.

  The principal may give the agent                - actual authority, or
                                                  - ostentible/ apparent authority   to act on his behalf.

Actual authority:

- Arises by agreement of principal and agent, express/ implied, to which they alone are
parties.
- The TP is a stranger to this agreement.
- The scope of the authority depends solely on the terms of the agency agreement.
- The authority need not relate to the principal's ordinary course of business. [s.8]

- Does not matter if the TP thinks he is K'ing w/the agent, and is not aware of the principal's
existence. Such an undisclosed principle may take the benefits and is subject to the burdens
of such a K. For example, in a four-person firm, all partners may be liable even if the TP only
knew of three of them. [34; also 39]

Apparent/ Ostensible authority:

= Arises through the rel btw principal and TP; NOT by agreement of principal and agent.

- The agent is a stranger to this agreement. "He need not be (although he generally is)
aware of the existence of the representation but he must not purport to make the agreement
as principal himself. [39]

= The principal holds out (presents) the agent as possessing the actual authority to bind the
principal, and the TP Ks w/the agent in reliance on this representation. The principal creates
an appearance of actual authority for the agent. Thereafter, the principal is estopped from
denying the agent's authority. [34]

- Sometimes, the ostensible authority may fairly be described as consensual on the part of
the principal.
  But the principal's behaviour may often seem less consensual than negligent.

- For more on ostensible authority - ie. what makes it so - see 4 princples in Freeman, below!

 ie. 1) Representation to this authority must be made, and can be made thru conduct.
     2) The representation must be made by persons w/actual authority to manage the co.
     3) The K'or must be induced to enter K by agent's reps; ie. must have relied on the reps.
                                                                                                                                23

       4) The Corp [not a P] must have pwr to enter into K/ to delegate auth'rty to enter into K
          ie. not limited by Corp's constitution.

- The distinction btw actual & apparent authority is not always clear! [35]


Least cost risk avoider [LCRA]:

- Idea/ Purpose: To impose liability on the party best able to prevent the loss [p.35]/
                 To discover for whom is the cost of avoiding the risk lowest, and then to
        frame rules accordingly.

- This idea is Kaldor-Hicks efficient. [p.35]

- The party best able to prevent the loss may be - the principal - as it often is [p.35]
                                                - the TP

 There are 3 examples of this "least cost risk avoider" idea: OPA, ss. 6, 8, 24.
 Let us see whether these ss. Identify the LCRA:

Ex #1: s.6:
"Every partner is an agent of the firm and of the other partners for the purpose of the P's business, 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 [TP] person w/whom the partner is dealing either - knows the partner has no authority, OR
                                                           - does not know / believe he is a partner."


- s.6 - re agency - every partner is an agent of firm.
                  - firm is bound by acts of each of the partners.

     - Here, the firm is being ID'd as a LCRA by the world: We know this b/c the firm is
being bound - ie. the section is saying that the firm is in the best position to avoid the risk.

      - [[[Idea here - the firm is in a better position than TPs to be in position to discover who might be defaulting among people
doing business. ]]]

      - [[The absence of authority has to be based on agreement btw the partners.]]


Ex #2: s.8: Can we explain the dif btw s.6 and s.8 re LCRA re who is in a better position to
avoid risk?

- s.8: "Where one partner pledges the credit of the firm for a purpose apparently not
connected with the firm's ordinary course of business, the firm is not bound, unless he is in
fact specially authorized by the other partners, but this section does not affect any personal
liability incurred by an individual partner."

 ie. Where one partner binds the firm, the firm is NOT bound, UNLESS he is authorized.
     This section does not affect any personal liability incurred by an individual partner.

 Here, obviously LCRA is not the firm. I think it is probably the partner.

Ex #3: s.24: Re partnership governance.

"The interests of partners in the partnership property and their rights and duties in relation to
                                                                                                24

the partnership shall be determined, subject to any agreement express or implied between
the partners, by the following rules:
        1) equal share of capital and profits             2) indemnification
        2) 5% interest on advances otherwise none         4) management
        3) no remuneration                                6) unanimity on new members
        7) majority vote except change of business        8) consultation of books"


- NB: - s.6 is mandatory
      - s.24 is presumptive: It's "subject to any express/ implied agreement".
        ie. It's a default rule which you're free to K around.

- s.24 discusses the rel btw partners and partners, as opp to partners and the world.

- The LCRA here is the partner: The partner is in the best position to avoid the risk;
                              The partners can K around this rule as they please.

Summary of the 3 ex:
Gives us perspective on why law sets up default rules and sets up risk avoidance in way it
does.

[We began to discuss the limited P'ship & the LLP here, but I put it after Freeman, below.]

Freeman & Lockyer v. Buckhurst Park: [Eng CA 1964] [pp.36-42]:

- This case is really re corp, but we are looking at in P.

- This case is re - the role of agency in a Corp, and more specifically,
                  - ostensible agent authority, as opp to actual agent authority.

- Ptlf = architechts
  Def = corp

FACTS: This is a case re a corp where certain architectural plans were done; the corp had
been dealing through their corp director, Kapoor, who didn't pay the architect.
          Then, the corp said that Kapoor entered arrangement w/o actual authority. Said
that the corp never approved the renovations.
          The pltf architects argue that 1) Kapoor had actual authority, or, in the alternative,
                                         2) Kapoor had ostensible authority, so the def Corp is
estopped from denying resp for his acts. [36-8]

ISSUE: Did K have authority to act? If so, what kind? Did K's actions bind the firm?

HELD: "K had ostensible authority to employ the pltfs, and was acting within the scope of
this auth." [38] Thus, Corp is estopped from denying resp for his acts. The firm is bound.

RATIO: Although K was never appointed managing directed, he had long acted in such
capacity, in employing agents and taking other steps to find a purchaser. His acting in this
capacity was well known to the corporate Board of Directors. Ie. The Board has actual
authority, and can thus give agents ostensible authority. [see pt 2 below.] [39]

PRINCIPLE:
  Q - If you're a TP, how do you figure out you have level of authority requisite to deal w/?
      How do you know if someone has ostensible authority?
                                                                                                                                25

   A - To have ostensible auth, 4 "principle of agency law" points must be met: [Only
pts 1-3 are relevant to P.]:

1) Representation that the agent had authority to enter into K on behalf of the co was made.
   This can be through conduct; not nec in writing. ie. if firm allows agents to act for them -
eg. if Kapoor had access to firm's letterhead/ business cards, and is allowed to use them.

2) Representations must be made by persons with actual authority to manage the co's
business.
The law treats the Board of Directors as place where actual authority resides. They can
then delegate actual authority to agents.

3) The K'or must be induced to enter K by agent's representations; ie. that the K'or relied
upon the agents reps.
   [s.6 of OPA reflects this gen principle of P law.]

4) That the co [Only applies to Corp; not P] was not deprived of the capacity
                - to enter into a K, OR
                - to delegate authority to enter into a K.
   ie. That the Corp had the power to delegate this authority; No ultra vires problem.
   ie. Not limited by Corp's constitution.
       ["Under the doctrine of ultra vires, the limitation of the capacity of a corporation by its
constitution to do any acts is absolute." [p.40]]


   NB: Point 4) only applies to Corp b/c idea of ultra vires is really only applicable to corp.
       [Old rule: corp v. P - if you didn't have power to do something, you couldn't do it. This doesn’t apply to P as we've seen.]



[[Doctrine of ratification: [p.42-3]
  - If an agent, w/o actual or apparent auth, purports to act on behalf of a principal when dealing w/the TP, the
principal may subsequently ratify the K.
  - As btw principal and TP, the doctrine of ratification operates uniquely for the benefit of the principal: if the
bargain turns out to have been a good one for him, the can ratify; if it is bad, he can walk away.
  - The doctrine of ratification may be defended as efficient.
  - The principal will normally bear all risk of wrongful K'ing by agents acting in the usual course of their authority,
and the TP will normally take the risks in all other cases.



4. THE LIMITED P'SHIP & THE LLP:

4.1. Distinctions:
     Distinguish the limited partnership (société en nom collectif vs. société en
        commandite): limited partners not involved in management and have limited liability
     Distinguish limited liability partnership (some parallel to undeclared partnership
        société en participation): partners not liable for claims against the firm arising from
        future malpractice of other members of the firm (only firm assets and the assets of
        partners committing acts available)

- NB: OPA limited liability provisions state that there's distinction btw LLP and undeclared
partnership.

Problem 1:
     Assume Gagnon, Gray & Smith decide to work together to produce Smith`s program at Gagnon`s plant.
        Do the parties become partners and if so what are the default terms of the partnership? Can those terms
        be varied by oral agreement?
Partnerships Act
                                                                                                                 26

        s. 2: Partnership is the relation that subsists between persons carrying on a business in common with a
         view to profit

    What constitutes proof of P?
     s. 3 rules including: 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 of itself make him or
       her a partner in the business .

So we get a sense of the workings of P legislation and what P means.
Gray - business expert
Smith - programming expert
Gagnon - has the cash.

Q - Do they magically become partners?
We want to see the formalities associated with the creation of P and what the indicia of P are.

Is P the ability to carry on business and hold yourself out as a P that creates a P?
Is registration nec for P?

IMP: Don't have to register to have a P.
Case for today - "P is a K, express/ implied".
Registration - has significance, but not nec for creation of P.

IMP: Once the firm is formed around a common business project,
     the sharing of profits = the first prima facie test of wh you have a P.

RULE: No formalities in creating a P.
      P - default regime for the bus enterprise, if you don't make another bus form.


Problem #2:

Sit: Suppose Gagnon is charged by the 2 others to be managing partner and do ordinary bus decisions. But the
other 2 want also to ensure that they have some control over large investments. Assume Gagnon represented
himself as purchasing on behalf of firm, and say a large investment = 1000$.
P - a) no auth
    b) seller does not personally know / believe him to be purchasing as a partner.

Q - Is the firm bound by a $1500 K for computer equipment Gagnon enters into w/o approval? Is Gagnon liable?
Is the firm - Gray and other partners liable for this?

A - This will have to be treated as a purchase in the ordinary course of business, thus partners ARE liable. [s.6]

If not purchase in ordinary course of business, and no authority, partners are NOT liable.

A longer purchase must be approved in a different fashion.

A - s.6 would apply to this sit and partners WOULD be liable, unless seller was informed that there was no
authority / that they had no knowledge/ belief that they were dealing w/partners.

s. 6 OPA
      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.


Problem #3:

- Prob #3 follows from Prob #2.
  Sit: By virtue of Smith`s negligence the program is defective and causes $500,000 damages.

- Q: Is the firm liable for this? Can Gagnon be sued for the entire amount?
                                                                                                                                   27

- A: If Gagnon is the deep pocket here, litigant can choose to go after Gagnon to get his $.
- Ration: OPA, s.10: Provides for joint liability.


- s.10 OPA:
        Except as provided in subsection (2), every partner …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 his estate is also severally liable in a due course of
    administration for such debts and obs so far as they remain unsatisfied, but subject to the
    prior payment of his separate debts.

- s.10 raises Q re distinction btw joint and several liability. What does several add to joint?

- Joint liability = all are liable together. Sue one, sue them all.
                 ie. "shared liability that results in the right of any party sued to insist that the
                 other defs be sued with him." [Spetz]
                     - CivL : each resp for your portion, in proportion.: ie. 50-50% or


- Several liability = each is separately liable for the entire debt.
                    - thus, can choose to sue only one.

- Joint and several liability = "liabilities are shared among a group of persons collectively
and also individually. If defendants in a civil suit are held to be jointly and severally liable, all
may be sued together and any one may be required to pay full damages to the injured party."
[Spetz]

In CivL, CCQ a.2221: "Re TPs, the partners are jointly liable for the obs K'ed for by the P,
                          but the partners are solidarily liable if the obs have been K'ed for the
                       service/ operation of an enterprise of the P."

In CL, rule is always joint liability.

- In OPA s.10, the estate is also severally liable - The estate will be liable for the piece, in
addition to what the other partners will be liable for jointly. ie. the estate will come into
picture , in distinction to partner…Estate has other kinds of obs to pay off & fulfill……


- NB: You always want to gage what your potential liability exposure might be.
[This is the kind of thing that takes us back to shares and the valuation exercise.]

- Is P too risky? If so, pursue incorp strategy.

- P Act, s.10(2) refers to a new exception for LLPS. LLPs are treated w/dif rules, esp re mis
and mal feasance of partners.


Sept 21, 1999

- For today: Read pp. 45-65 with particular attention to the consequences of limited liability of partnership. Do you agree with
Delhasse? Contrast w/Martin v. Peyton, and w/CDIC case.


- There are three ways one can limit liability re partnership:
       - deal w/firm not as partner
       - become limited partner
       - become limited liability partner
                                                                                                 28

Martin v. Peyton: [NYCA, 1927] [p.48-51]:

- This case suggests an alternative to P:

 The creditors stipulated to receive a share of the firm's profits while securing a degree of
control over its business. [ie. got profits + control.]
 They had therefore many of the advantages of membership in a firm, w/o having the
unlimited liability of general partners. [51]

- Whether a P exists depends on the parties' intentions and actions; not on the written K. [49]

FACTS: The creditors stipulated to receive a share of the firm's profits while securing a
degree of control over its business. [ie. got profits + control.]
         The intention of the parties to avoid liability as partners is clear.
         They say their interest in profits should be constructed merely as a measure of
compensation for loans; not an interest in profits as such.

ISSUE: Despite all of the above, the Q still remains whether a P exists?
        ie. Whether the parties "agree to so associate themselves with the firm as to 'carry
on as co-owners a business for profit'."

HELD: NO P exists.

RATIO: "There is no hint that the transaction is not a loan of securities with a provision for
compensation…The trustees may not initiate any transaction as a partner may do. They
may not bind the firm by any action of their own…No other distribution of profits is to be
made…Again we conclude there is nothing here not properly adapted to secure the interest
of the respondents as lenders…" No P.

Delhasse: [Eng CA 1878] [[p.53]:

- Interesting: May be instances where creditor wants to gain access to income and use that
to pay debt. Does his use of profit transform him instantly into a partner? This is the
situation in Delhassie. Yes, court holds that this transforms him into a partner.

FACTS: Delhasse was a partner in firm A, when it was dissolved. Its assets were sold to
firm B, who continued to carry on the business under the old firm name.
           Delhasse agreed to lend the new firm $. The agreement stated that the $ was
advanced by way of loan, and would not render D liable as a P. He was to receive a share of
the profits, and had a right to examine the firm's books at any time. He could elect to
dissolve the firm on the death of a partner …
           After the firm's liquidation 7 y after the agreement, D sought to prove as a creditor.

ISSUE: P?
HELD: Yes P. Delhasse could not prove as a creditor b/c he was really a partner.
RATIO: "There is every element of P in [this arrangement]. There is
        - the right to control property,
        - the right to receive profits, and
        - the liability to share in losses.
The loan is a mere pretence, the object being to enable the so-called lender to be, not only a
dormant partner, but the real and substantial owner of the business, for whom and on whose
behalf it is to be carried on, and yet to provide that he shall not be liable for the loss, in case
loss shall be incurred… In my opinion, this was really Delhasse's business."
                                                                                                            29

- Do you agree w/Delhasse? YES!!!
- Contrast w/Martin v. Peyton. Distinguishable? Yes.
Prof: In Martin v. Peyton, the party isn't actually receiving a share of the profits. He's
receiving a payment of the loan. But Dalhassie was getting 25% of the share of the profits.

- In Delhasse, the court is not prepared to say that taking a share of profits limited the liability
of the former partner. [? Why should they?]

- Is there still a management role on the part of the former partner? [ME: It appears to be
the case!!]
  General concern: This person might still be involved in management. Why would that make
such a big dif? [Me: B/c then it's closer to a P!!]

- Are we saying that smone who's just a lender should not be involved in management?
[Answer this when I have the answer!]
- [The risk is lower for a lender, b/c as a creditor they rank ahead.]
- [The equity holder is understood to be the more active managerial person. ]



4.2. Capital structure irrelevance hypothesis [Modigliani & Miller]: [p.54-7]

= hypothesis put by economists named Modigliani & Miller, to figure out why firms vary their
capital structure and chose dif combos of debt.

Why might a limited liability structure emerge?

- Their hypothesis: Assuming perfect competition, the market value of any firm
                                  - is indep of its capital structure (debt/ equity), &
                                  - depends only on earnings payout and risk features.

NB: Ownership = equity
    Credit = debt

[What gives value to the firm is its anticipated earnings, and not how those earnings are to be
distributed among claimholders. [54]

ie. An asset's value is indep of the kinds of claims issued against it. However it is sliced, the size of
the pie is constant. [55]]

- Implication: A firm cannot affect value through a creative capital structure (debt/equity)
decision unless (a net bias for one financing strategy arises when) the assumption of perfect
capital markets is relaxed. [55]

ie. can't fiddle around w.the combos of debt and equity and affect the firm.
    Also, whether you have limited/ unlimited liability shouldn't matter for shareholders.

If this is a reasonable hypothesis, - to what extent do rules have effect on limited liability?
                                    - why does the law care wh firms have LL arrangements?

Would a person who is a debtholder/ partner of firm have dif access to management of the firm?
Why would the status of smone shifting from debt-> equity and vv. give rise to dif in way they're
treated re management of the firm.

If M and Miller is right, why should we come up w/dif ways of treating debt and equity?
                                                                                                        30

Testing this hypothesis:

- The difference between unlimited and limited liability should simply be reflected in different
costs of capital (lower interest rate for unlimited liability). [screen]

If capital structure irrel hypothesis is right, the only dif btw lmtd and unlmtd liability should be
cost of capital. ie. pay lower int rate so can have smone take on unlimtd liability.
ie. if want unlimited liability, pay less int. Shouldn't make a dif to the structure of the firm.
If want limited liability, pay more int.
If you have unlimited liability, the cost of capital will be lower [you'll have to pay more ins].
[???]

Q: Why care about the shift from O (equity) to credit (debt) as separating the debt-holder
from the management of the firm?

It is the char of the LLP that the limited liability partner who is only involved in offering a
certain line of credit to the firm, is able to maintain status of liability b/c the limited liability
partner doesn't involve himself w/management. When he begins to do so, there is no
longer this access to the limited liability regime. [???]

Csbk: Tries to come up w/explanation for all this.

Prof: If there are dif incentives facing debt-holders and equity-holders, there may be gd
reason the law gives better incentives to debt-holders… [What incentives is he talking
about??]

Why might the incentives for these two groups of people be different? See examples in
'adverse incentive costs' section. This is q we are trying to answer.

Adverse incentive costs: [For more on this, see pp.72-4]

3 ex of investment.
Equity holders will prefer investment #2.
Debt holders will prefer investment #1.

#1: Stable, low risk investment. Invest 10,000; Get 10,000, w/100% probability that would
be income.
    Expected value = 10,000.

#2: 10% possibility of winfall gain of 8,000. 90% probability of getting nothing.
    Expected value= 8,000.

Q - Which of these two investments will share/equity-holders prefer, and why?
A - #2 - b/c at least there's some possibility of getting a return.
Premise - Debt holders will be pd first.
Share/equity holders are no further ahead w/#1; But at least they have some chance of
making w/#2.
So that looks to be an adverse incentive on the part of equity of the shareholderst to engage
in risky activity - at least some possibiltity of getting a return.

Now lets contrast this w/#3:
#3: 50% probability of 4,000$ return.


Dif btw investment 1 & 2 is if you shift from 1 to 2, there's a transfer from debt to equity
                                                                                                  31

holders. [ie. from creditors to shareholders]/
Efficiency loss = dead weight loss of 2,000.

We should be thinking about wh the law should have some rule re what degree of control/
liability should be expected of owners in that circ.
In other words, would an unlimited liability rule solve this problem?

#3: 50% poss of poor return; 50% poss of good return.
   50% poss of 80,000 is 40,000.
   50% poss of 8,000 is 4,000.

- Consider decisions if debt claims of 10,000 have been issued. What is the expected value
of debt and equity claims?

Choice for debtholders: Would prefer #1. over #3 - could only get expected value of 9 from
#3.

For equity holders, #3 also looks like a better choice than investment #1.

Qs:
1) Why would the law chose lmtd/ unlmtd liability outcomes in effecting distribution of wealth
btw debtholders (creditors) and equityholders (shareholders)?
Ie. does it make a dif to the adverse incentive costs to have a limited liability regime?
Miller hyp said no.

2) Why would the law insist on debtholders staying out of management, certainly in the case
of LLPs, and also in the case where, as in Delhassie, where someone tries to stay out of the
firm altogether.

NB: The law treats the debtholder as ranking ahead of the equityholder.

Answers:
1) Unlimited liability is a risk-averse rule b/c could be resp for debts/ obs , so take least risk.

NOTE: LLP is dif than limited partnership!!!!

Rules re lmtd and unlmtd liability - policy of the law to control adverse incentives on part of
equity holders.

[Discussion about Delhasse was here, but I put it above, with the facts.]

CDIC [Canada Deposit Ins Corp v. Can Commercial Bank]: [1992 SCC] [57-65]:

Iacobucci J: "The fact that the transaction contains both debt and equity features does not, in
itself, pose an insurmountable obstacle to characterizing the [sum]…the arrangement is…of
a hybrid nature, combining elements of both debt and equity but which, in substance, reflects
a debtor-creditor relationship…
It is…often desirable for debt and equity to coexist in a given financial transaction without
altering the substance of the agreement. "

ISSUE: Was a loan made 'upon such a K as is mentioned in s.3 of OPA'?
       ie. Can a lender take a share of the profits???

HELD: Iacobucci: NO.
      - "A lender does not receive a share of the profits within the meaning of s.3(3)(d) and
                                                                                                                                    32

s.4, OPA [unless he or she is entitled to be pd amnts referable to profits other than in repayment of the principal
amount of the loan"]. [58, 61]
        - Any fixed debt [loan] to be repaid out of profits does not in itself constitute a 'share
of the profits' within s.3(3)(d) of OPA. [61]


- Do you agree w/the distinction drawn in CDIC btw share of profit going to principal v.
separate share of profit?
- The CDIC case tells us more about the interaction btw bankruptcy and P than it does about
P itself. So we are not doing it in depth. Tells us more about lender taking a share of profit
than it does about a partner taking a share of the profit.

- The case of CDIC is slightly tangential, b/c its more about recovery.
- The distinction Iacobbucci is drawing suggests that you have something that looks more
like equity than pure debt. Iacobbucci suggests in CDIC that we shouldn't be so formalistic in
drawing a distinction btw the two b/c…

We see in CDIC:
 As long as you are taking $ies (profit) to pay the debt (loan), you will NOT be
converted thereby into a partner.

 But if you take $ (profit) on speculation, then you look more like an share/equity-
holder, and you look more like a partner, for the purposes of the Partnership Act.

 CDIC: OUTCOME: Govt was off the hook as a partner.


Q: What does this say about the participant in the firm to stay out of being a partner and
remain a lender?
A:
The law seems to be reaching for some index of when you're involved in running the
business, and when your stake is more than the stake of a debtor.
It does this by drawing inferences re the way you have a stake in profit.

If you're not taking a profit, w/a view to the upside risk (ie. windfall returns), then you're treated by the
law as being passive, not involved in management, and therefore not resp in P.

Prof: CDIC case is somewhat problematic b/c doesn’t seem to prof obvious you can always
figure out the circs under which a profit is being drawn for upside risk.
     The overall calc the govt has made - small chance of a windfall.

      The court discounts the conversion of debt into equity as a sig part of the transaction.

- s.9, LPA states that a limited partner is not liable for the obs of the limited partnership.

                                                                LPA s. 9
    Subject to this Act, a limited partner is not liable for the obligations of the limited partnership except in respect of the value
    of money and other property the limited partner contributes or agrees to contribute to the limited partnership, as stated in
    the record of limited partners.


- s.10, PA - intros a new form of P -ie. LLP
           - states that a partner in an LLP is not liable for debts, obs, and liabilities of the
        partnership/ any partner arising from negligent acts/ omissions that another partner
        commits.

                                                      Partnerships Act, s. 10
                                                                                                                                     33

     (2) Subject to subsection (3), a partner in a limited liability partnership is not liable, by means of indemnification,
     contribution, assessment or otherwise, for debts, obligations and liabilities of the partnership or any partner arising from
     negligent acts or omissions that another partner or an employee, agent or representative of the partnership commits in the
     course of the partnership business while the partnership is a limited liability partnership.
     (3) Subsection (2) does not affect the liability of a partner in a limited liability partnership for the partner's own negligence or
     the negligence of a person under the partner's direct supervision or control.


___________________
Next class
    EXAM: Read pp. 65-74 with a view to giving policy reasons for the differences between the law governing
    ordinary and limited partnerships. Consult Web site for access to s. 44.1 ff. of the OPA on the limited liability
    partnership -- a good or bad idea?
Next class
    EXAM: Read pages 75 to 95 and ask yourselves why limited liability for shareholders of corporations
    emerged and what problems it raises. [Salomon case.]

Sept 24: Discussion of group project.

___________________

Sept 28:

Summary of last class:

- See screen.

- We went thru a comparison of dif transactions, going thru a comparison of equity holders
and creditors. They don't have same incentives to chose value-maximizing…
All this comes to 2 concl re who should have final say:
1) in near-bankruptcy should favour transition to creditor control
2) otherwise favour equity-holder control

Law is efficient on this point.

This may explain why in the case of limited P, the limited P should stay out of
management, if the limited P wants to maintain status as a lender to the firm.

[EXAM: Essay Q: Why, in the case of limited P, should the limited partner stay out of
management, if he wants to maintain his status as a lender to the firm?]

- The separation of creditors from managment should perhaps be contrasted w/other models
such as financial institutions, which do tend to get more directly involved in management.

[[In bank-centered finance schemes/ regimes, banks play a critical role in the overall access to capital, as compared to equity
markets [stock exchanges].]]


- So this may run counter to the adverse incentive costs we discussed in class.

- Are there strong implications to the adverse incentive cost model re wh limited liability
should/ should not be granted to those who have an O stake in the firm?
  Prof: There are not strong conclusions which can be drawn from this model. We will
discuss the answer to this further today.


- Re the concept of limited liability and the P, we can discuss both - limited Ps
                                                                     - LLPs


5. LIMITED PARTNERSHIPS:
                                                                                                            34


- The limited P has 2 kinds of partners in it:

1) General partner(s) = equiv to partners in an ordinary P

2) Limited partner(s) = 1) invest $ in P
                        2) stay out of control/ management.
                        3) have the right to consult the books.
                        4) takes a share of the profits (growth)
                        5) has a share of the liability, to the extent of the contribution
                        5) is a co-venturer.

- [[Can think of Martin v. Peyton sit as an alternative financing device to becoming a limited partner.]]




 Liability of the limited partner:

- LPA, s.9: The limited partner is not liable for the obs of the LP except re the value of the $
and property he contributes to the LP.
            ie. The limited partner is only liable to the extent of the contribution; [but??] he is
more resp than the lender. [[What does this mean? How resp is the lender?]]

- Sometimes limited partners are called "silent partners". This language is misleading, b/c
they still have the right to consult the books. And silent also suggests that they're kind of
hidden. But this is incorrect. Q: Just how far can they get involved in management before
they are no longer this type of partner?

- LPA s. 13 : A limited partner is not liable as a general partner unless…he takes part in the
control of the business [management].
               ie. The LP's liability is dependant upon the way the he behaves re managment.


 Incorporation of the general partner:
- What about incorp of the general partner ? What probs does the casebook indicate re this?
Yes, this is possible.

Why would incorp of the general partner look like a way to keep the gen partner in
management………?

Delaney v. Fidelity Lease Ltd. : [See p.71]
- "inadequately capitalized" incorporated general partner cannot shield director/ officer
limited partners from unlimited liability - see Frigid…
ie. This is a piercing the corporate veil case.
? was able to look behind the corp and see who the members were.

[NB: The limited partner is not the limited partner any more. ((Is he now director????))
Delaney has been interpr to mean that you can't do this if the firm is inadequately
capitalized.]

- Why would inadequate capitalization play a role?

- It would seem what the court is worried about is having at least 1 general partner. If the
gen partner is seen not to have any capital, this bothers the court.
Q is - does this make sense, tho?
                                                                                                      35



- The Fridgidaire case distinguished Delaney, and said:
  "We won't impose general liability on the limited partners, who are officers, directors, and
shareholders of the incorporated general partner."
  "The court here (Frig case), stated that corps that are adequately capitalized may serve as
general partners."

This is one way we might address the prob.

The policy of the law is to treat the corp as distinct from its officers etc.

Contrast limited P w/C.

LPA s.18: Look at these provisions, and ask : How does the assignment of rights and
interests differ btw the limited P and the Corp?
Ie. How freely transferable are the ints of the limited P and how freely transferable are the
ints of the shareholder?

We have the opposite default principle.
Shares are freely transferable…
So the shareholders would have to say - you can't just transfer shares as you please,
whereas limited partners would say - unless we agree, you can.

B/c these are default rules, there's a blurry line btw the limited P and the C on this score.


6. LIMITED LIABILITY PARTNERSHIPS:

- P Act, s.10 (2) Subject to ss. (3), a partner in a limited liability P is not liable, by means of
indemnification, contribution, assessment or otherwise,
    for debts, obs and liabilities of the P or any partner
    arising from negligent acts or omissions that another partner or an employee, agent or
representative of the P commits in the course of the P business while the P is a limited
liability P.

How does this differ from Ps and from limited Ps??

This is a different kind of P!!

LLP = a form of P under the P Act; distinct from the way you est a limited P under the limited
P Act.

Limited P - has its own registration procedure.
Limited liability P - similar procedure to P ??[CHECK]

LLP - focuses on the prob of misfeasance, malfeasance, and not wanting to be resp for
professional liability from the acts of your partners.

There is no rule re not being involved in mangement.

There are not of the restrictions re limited Ps.
This is a scope of liability that restricts…


P Act, s.10 [cont] s.(3)(2) does not affect the liability of a partner in a limited liability P for the
                                                                                                                                                     36

partner's own negligence or the negligence of a person under the partners direct supervision
or control.

The limited P:
The LLP: Are you liable for negligent acts/ omissions of your partners?

 This kind of provision (for LLPs) emerged after the savings and loan debacle in the US,
where the authorities who were winding up the savings and loan firms that had"gone bust"
were looking to see who could be resp for the losses. One of the ideas: All of the saving s
and loan firms were advised by lawyers and accntnts. If there was no capital left in these
institutions, couldn't one go after the acctning firms, and furthermore, the partners and the
partners personal possessions? In fact, that happened.
The prob was the size of these claims was so huge…

Ie. LLPs emerged as a response to the savings and loan crisis to deal in large multi-
discipline practices (accntnts and lawyers).
That was the idea behind creating limited liability partnerships.

Does this make sense from POV of professional firms and their clients and re protecting the
public?


 Act, s.5(2) : A person can be a P and a limited P at the same time…
Why? Sometimes a general partner is a promoter.
- ss.2 says that you will be resp as a general partner if you play both sides of the fence, but if
you are looking at the amnt that you've invested as a limited partner, you can treat that amnt
in the same way that other limited partners treat that amnt.

Q - What are the bens of being both a limited partner and a general partner?
A-

NB: You may be both b/c of the way rights are assigned under your agreement.
[This is analogous to ordinary shareholders who have voting rights, and also having preferred shares.]
                                                                        LPA s. 9
         Subject to this Act, a limited partner is not liable for the obligations of the limited partnership except in respect of the value of money
          and other property the limited partner contributes or agrees to contribute to the limited partnership, as stated in the record of limited
          partners.
         How does this contrast with the general partnership?
                                                                       LPA s. 13
         A limited partner is not liable as a general partner unless, in addition to exercising rights and powers as a limited partner, the limited
          partner takes part in the control of the business.
         Is incorporation of the general partner a way around this?
         Delaney v. Fidelity Lease Ltd. "inadequately capitalized incorporated general partner cannot shield director/officer limited partners from
          unlimited liability -- see Frigidaire (adequately capitalized firm)
                                                                       LPA s. 18
         18.--(1) A limited partner's interest is assignable.
         (4) An assignee may become a substituted limited partner,
         (a) if all the partners, except the assignor, consent in writing thereto; or
         (b) if the assignor, being so authorized by the partnership agreement, constitutes the assignee a substituted limited partner.
         How does this contrast with shareholding?
                                                            Partnerships Act, s. 10
         (2) Subject to subsection (3), a partner in a limited liability partnership is not liable, by means of indemnification, contribution,
          assessment or otherwise, for debts, obligations and liabilities of the partnership or any partner arising from negligent acts or omissions
          that another partner or an employee, agent or representative of the partnership commits in the course of the partnership business
          while the partnership is a limited liability partnership.
         Is this good public policy as applied to large professional partnerships?

         (3) Subsection (2) does not affect the liability of a partner in a limited liability partnership for the partner's own negligence or the
          negligence of a person under the partner's direct supervision or control
                              Summary of this class
         There are arguably adverse incentive costs associated with favouring creditor control vs. equity-holder control
                                                                                                                                     37

         (1) in near-bankruptcy should favour transition to creditor control
         (2) otherwise favour equity-holder control
         Implications:
         (1) generally separate creditors from management (contra German/Japanese models) Delhasse, CDIC
         (2) limited liability? Stay tuned for Easterbrook/Fischel



7. SUMMARY ON Ps, LPs, LLPs:


7.1. VanDuzen on Ps: [p.9-12]


Creation of Ps:         -No formalities to create.
                        -Created once persons start doing business in common with a view to profit. [OPA, s.2]


Creation of LPs: -Requires formality:
                         -Created only when you file, ie. register, with the appropriate govt authority.



Distinctions btw Ps & LPs:

                                       Ps                                                          LPs

1) Creation:       No formality required;                         Formality required;
                   Created when people do business in             Created when file with the appropriate govt agency.
                   common w/a view to profit.

2) Liability:      There are only general partners, who           At least one partner, the general partner, has unlimtd liability,
                   all have unlimited liability.                  & at least one partner, the limited partner, has limited liability.
                                                                                                           [Lmtd typically to his contributn]

3)Managmnt:        The general partner is involved in             The limited partners can not be involved in management w/o
                   mngment.                                       losing their limited liability.




Evolution of Ps: [Vz, 12:] "Most Ps involve only a small number of indivs, each being involved in the P on a daily basis. There
is no separation of O and mngmnt. Also, typically, there is a rel of trust and confidence among partners b/c they know e/o well.
In such circs, the likelihood of unauthorized activity is reduced at the same time as the opportunity to monitor the activities of
one's fellow partners is increased.
                             As a P gets bigger, these practical protections break down. Few partners are actively involved in all
aspects of the business of the P, and formal monitoring mechanisms must be est.
                             The law of P was developed to address small businesses, and so has little in the way of specific
provisions designed to address the needs of the large modern P."



In what way is a P NOT a legal entity separate from its partners? [Vz, 25]

a) Each partner is liable to the full extent of his personal assets for debts & liabilities of the P.
   [OPA, ss.10-13]
b) The continued existence of the P depends on the continuing participation of the partners
   who make it up.
c) A partner may not be an employee of the P.
d) A partner usually cannot be a creditor of the P, unless provided by statute.


P Liability:
- All partners (ie. general partners) are personally liable for the business' obs.
                                                                                                   38

- Each partner is liable to perform all Kual obs agreed to by the other partners re the P, even
if he did not consent to the ob.
- Partners are liable for e/o's torts committed re the business
- Partners are vicariously liable for P employees' torts committed during their employment.
- Once liability for an ob has been est, each partner is liable to the full extent of the ob.; ie. all
his personal assets may be seized to satisfy it.
- s.24: Each partner is liable to contribute equally to any ob owed by the P to a TP unless
they agree otherwise.


Policy reason for unlimited liability on partners in a General P: [Vz, 26]:
Agency: A TP should be able to rely on the personal creditworthiness of those who appear
to be rep'ing the business.


NOTE: In the case law, the issue of wh a person is a partner usually arises where the
P has become insolvent, and a creditor is looking for someone to claim against who
has assets. The creditor then argues that a particular person should be liable for the obs of
the business b/c he is a partner.


Q - How can the partners ensure that individual partners do not enter into obs that,
collectively, the P does not want?

A - 1) Each partner owes a fid duty to the others. This duty obliges each partner at all times
to act honestly and in GF. [Obs for which need fid duty: OPA, ss.28, 29, 30.]

  2) To expressly limit a partner's powers by allocating resp and est'ing formal control and
monitoring mechanisms in the partnership agreement.



7.2. OPA summary:

s.2: Creation: P is created when persons carry on business in common w/a view to profit.

s.3: Rules for determining the existence of partnership: (3) Intent is imp in determining if
P exists; not K.

ss.6-19: When a P is liable to TPs: MANDATORY provisions.

s.6: Each partner is the agent of the P, thus each partner may bind the P when acting in the
usual course of P business
UNLESS 1) the partner so acting has in fact no authority to act for the firm in the matter,
AND       2) the person with whom the partner is dealing EITHER
               a) knows the partner has no authority, OR
               b) does not know or believe him or her to be a partner.

s.10(2): LLPs: A partner in an LLP is not liable…for debts, obs, and liabilities of the P…

ss.20-31: Relations btw partners: NON-MANDATORY provisions. Can be K'ed out of.
But these are default provisions, if no other agreement.

s.21: Partnership property: (1) All property and rights and ints in prop originally brought
into the P or acquired on account of the firm… must be held and applies…exclusively for the
                                                                                                   39

purposes of the P…

s.24: Ints and duties of partners:
   (1) All the partners are entitled to share equally in the capital and profits of the business
    and must contribute equally to the losses
    UNLESS he is not liable under ss.10(2).

s.24(5): Management: Every partner may take part in the management of the P.

s. 28: Duty to render accounts: Partners are bound to render true accounts and full info of
all things affecting the P…

s.31: Assignment of share in P: An assignment by a partner of his share in the P does not
entitled the assignee to interfere in the management or admin of the P…but entitles the
assignee only to receive the share of the profits…

s.32-44: Dissolution of P.

s.44.1-44.4: LLPs.

s.44.1: Formation & Continuance of LLP.

s.44.2: Limitation on business activity of LLP.

s.44.3: Business name: Must contain designation of "LLP" or equiv thereof.



7.3. OLPA summary:

s. 2: Definition: Need at least one general partner + one limited partner.

s.3: Creation by Declaration: Must file declaration with Registrar.

s.5: Nature of Pship: A person may be a general and a limited partner at the same time.

s.7: Contribution of limited partner: A limited partner may contribute $ and other prop, but
not services.

s.9: Liability of limited partner

s.10 & s.12(2): Rights of limted partner

s.11: Share of profits

s.13: Management: A limited partner is not liable as a general partner unless…he takes part
in the control of the business (ie. management).

s. 15-16: Limited partner's contribution

s.18: Assigning interest/ becoming a substituted limited partner

s.19: Change of firm name

s.21ff: Dissolution of limited partnership
                                                             40


s.22: Death of limited partner

s.30: Effect of false statement

s.31: Mistaken belief as to ID of partner/ limited partner

s.32: Authority to sign

s.33: Access to docs
                                                                                                  41


8. CORPORATIONS:

- In contrast to Ps, Corps:
1) have a separate legal personality
2) have separate management
3) are of indefinite duration
4) its shareholders are NOT liable for the firm's debts/ obs. One of the main functions of the
corp is to limit liability.

- Like a P, the Corp can ONLY operate thru agents.


8.1. Limited liability of shareholders in Corp: [Txt, p.84-5]

Re a corp's reduction of stated capital:

- CBCA s.45(1): "The shareholders of a corp are not, as shareholders, liable for any liability ,
act or default of the C except under ss. 38(4), 146(5) or 226(5)."

      s.38(4): The creditor of a corp is entitled to apply for a court order compelling a
shareholder/ other recipient to pay the corp…
               = If the shareholder reduces the corp's capital, and thus causes the corp to
become insolvent, he is liable. [Stated capital is also discussed in s.26.]

         s.146(5): A shareholder who is a party to a unanimous shareholder agreement has
all the rights, powers, and duties of a director of the Corp…to the extent that the agreement
restricts the powers of the directors to manage the business and affairs of the corp…
                 = If the shareholder's don’t perform their duties under this s., they are liable.
They can't rely on having entered into a unanimous shareholders' agreement as a defense.

       s.226(5): A court may order an action of reimbursement by the shareholder to be
brought against the shareholder(s)…
              = If the shareholder takes a corp's property after its dissolution, he is liable.

These are narrow limits / exceptions to the principle of limited liability.

- Rules re s.146 place C on similar footing to P.
  If directors are relieved of their resp under terms of the unanimous shareholders
agreement, and shareholders take on this resp, they assume the liabilities that go with this.

- Rules re s.226(5) - analogous to s.38.
eg. Shareholders will attract liability for those payouts that bring the Corp to insolvency.

- s.118(5) = Corp may order shareholders to repay $/ property improperly distributed to them.



Re a Corp as a Legal Personality:

- C is the legal personality; NOT its shareholders.

- CBCA s.15: "A C has the capacity and, subj to this Act, the rights, powers and privileges of
a natural person."
                                                                                                                                    42

- Interpr Act s.21(1): restates the idea of limited liability:                       Words establishing a corp shall be construed
  (a) as vesting in the corporation power to sue and be sued, to contract, to have a common seal… to have perpetual
succession, to acquire and hold personal property…
  (c) as vesting in the majority of the members of the corporation the power to bind the others by their acts; and
  (d) as exempting from personal liability for its debts, obligations or acts individual members of the corporation who do not
contravene the enactment establishing the corporation.


- This is the legislative framework that est legal liability and legal personality of C.
Read to end of chpt 2 (p.152)




Oct 1 [Stephanie's notes]:

8.2. Air Can update illustrating the complex governance arrangements of the corp:

Timeline:
- Aug 13 Competition Act suspension until Nov. 10.
- By late Aug, Onex accumulates shares to requisition (demand) a meeting.
- Aug 24: Onex announces offer
- Aug 30: AC schedules meeting for Jan 7 [?] "to consider valid proposals" in record date,
Nov 18 (past susp deadline) [?]
- Onex offer is not formally submitted until Sept 9
- Nov 9: Onex offer formally will expire
AC wanted to stop the meeting - postpone until Jan 7.
Said that s.143 (1) allies unless a record date has been set pursuant to s.143(3)(b), which it
was.

s.143(1): The shareholders of at least 5% of the issued shares of a Corp, who carry the right
to vote at a meeting which is sought to be held, may force (requisition) the directors to call a
meeting of shareholders for the purposes stated in the requisition.

3 pieces of litigation re Onex:
1) Notice of shareholder meeting. Whether AC could call a meeting despite fact that 5% of
the shareholders wanted to requisition (demand) the meeting
2) Whether the Competition Act was properly suspended
3) Whether effort to get around the 10% rule amnts to an illegal act on the part of Onex -
class shares and ordinary shares.

- Onex wanted to force AC shareholders to hold a meeting.
- AC did not want to hold this meeting.

- AC public Partic. Act sets 10% shareholding limit. No AC shareholder is allowed to hold
over 10% of shares, so AC is trying to get them as a block of shares to prevent Onex from
bidding.

 Onex was trying to get around 10% shareholding limit by trying to change legislation.

 AC is also trying to time litigation so a decision just before meeting.

Can AC set another "record date"?
-s.143(3) On receiving the requisition referred to in ss. (1), the directors shall call a meeting
of shareholders to transact the business stated in the requisition, unless
 (a) a record date has been fixed under ss.134(2) and notice thereof has been given under
ss.134(4)
 (b) the directors have called a meeting of shareholders and have been given notice thereof.
                                                                                                                 43



2 ISSUES:
1) Meeting: AC had originally said proposals would be considered on Jan 7. But wants to
avoid a meeting.
2) Ownership of shares: AC said effort of Onex not allowed - too much ownership? Won't
discuss matter - 5% ownership.

Saving:
s.143(4) - If the directors do not, w/in 21 d after receiving the requisition referred to in ss.(1),
call a meeting, any shareholder who signed the requisition may call the meeting.

s.175 (1) Subject to ss(2), a director or a shareholder entitled to vote at an annual meeting
can, in accordance with s.137, make a proposal to amend the articles.
       (2) Notice of a meeting of shareholders at which a proposal to amend the articles is to
be considered shall set out the proposed amendments…[NB: Doesn't have to be an annual
meeting…]

AC's final argument: There was no valid business for an Onex shareholder meeting, based
on notion that there were legislative limits as to how AC could be owned.
Valid business for AC to discuss at meeting so board was right not to follow requisition.

AC argued that this was takeover protection and thus there was no valid business.

Purpose of Onex's scheme was to circumvent legislation. Onex wanted to create class B
shares to create voting rights.

Interesting litigation pending.

Thus, this case - has to do w/notice req for shareholder meetings and wh AC was able to call
its own meeting.

Thus, we see that there are complex rules surrounding corporate governance.


8.3. Salomon & Limited Liability:

How is the issue of the legal personality of the corp as separate and indep of its members'
(shareholders') personality raised?

FACTS: Salomon was sole proprietor in boot trade. He set up a corp, and issued secured debentures to
himself, so that he could stand ahead of other creditors.

ISSUE: Is this a Corp? Why law would give LL protection to a single person corp? Is it a problem that Salomon
was a secured creditor of his own company and issued debentures to himself?

HELD: This is a Corp. Presumption in favor of LL.

RATIO: - Salomon signed debentures to one of the principal creditors of the firm, so wasn't trying to defraud [put
additional $ into firm at sign of trouble…]
         - All of the formal procedures were followed for incorp.; thus not a case of holding out; Everyone knew
status of corp. No one dealing w/firm could claim its status was being misrepresented.
        - Salamon was a pauper. He was concerned about his protection. HL felt that Salomon was in GF.

Q: Why was the Salomon case so contentious as to be litigated all the way to the HL?
A: Ct of Appeal thought this would open things up to fraud.
   But HL felt that Salomon was in GF.
                                                                                                                                    44

If CA was right, would have to examine every operation.


Salomon principle: 1) The corporation is a separate legal entity/ personality. This
limits liability to the corp members.
                        2) Individuals may incorporate (as Mr. Salomon did.)


- The Salomon principle is codified in the CBCA s.5: Individuals can incorporate.
This expands the scope of closely-held (ie. small) companies.

- Salomon encouraged investment and limited risk (because allowed indivs to incorporate).
- Limited liability was not a straightforward conclusion in the case of the 'one person'
company, until Salomon. [Prof asks: Why is limited liability not a straightforward conclusion in the case of the "one
person company"?]

- After Salomon, it is difficult to police wh it's instrumentality of one person or if its about a lot of people getting together that
raises an impossible monitoring job for courts. So hand this over to people doing business in the firm - to figure out if they like
doing business in the firm. [For more on this, see Easterbrook and Fishel article, below.]



Explanations to Salomon principle, ie. to why the law gives strong protectn to Corps
and why there is now a strong presumption in favour of LL:

1) Pragmatic explanation: The principle is one of public policy; it channels investment into
enterprise by circumscribing risk. This is a legal fiction. [Dartmouth College per Marshall J.]

2) Realist explanation: A Corp takes on separate existence and continuity. [Raddin, Pollock]

3) Contractarian explanation: A Corp is a nexus of Ks, decreases monitoring costs, improves
manager incentives, clarifies market signals, allows portfolio diversification and choice of
efficient transactions [Easterbrook and Fischel - reflected in Halpern, Trebilcock & Turnbull,
who say that shares need to be fungible to produce liquid markets.]

- Prof: The contractarian explanation is most useful.


Easterbrook & Fischel article on the Benefits of Shareholders' Lmtd Liability: 1985. [p.87-95]:

- The separation of O (shareholders) and control (directors and officers) in widely held corps introduces an
agency cost problem, since firm managers (as agents) have imperfect incentives to maximize the interest of all
claimholders (as principles).

   Such agency costs are ultimately borne by the Corp, which will seek to minimize them. One strategy that it
may rely on is by claimholder monitoring of Corp managers' behaviour.
   But this monitoring has costs too. One way to minimize these costs is the selection of a limited liability regime:
Investors' potential losses are limited to the amnt of their investment as opposed to their entire wealth.

   LL permits a firm to lower its cost of capital, enabling it to raise more $ when it issues claims against itself than
it would under unlimited liability. [93]

Benefits of LL: [88-90, 93]
1) Because investors' potential losses are lmtd to the amnt of their investorment, investors spend less to protect
their positions. LL thus decreases the need to monitor.

2)   LL reduces the costs of monitoring other shareholders. [? I don't get this.] And it reduces information costs.

3) LL reduces the costs of purchasing shares. Shares are fungible; they trade at one price in liquid markets.
Under a rule of LL, shares would not be fungible (as Halpern, Trebilcock, and Turnbull emphasized.). LL reduces
                                                                                                                                  45

agency costs.

4) LL reduces information costs. LL facilitates a broadly based equity market, characterized by investors with
relatively small stakes in the firm. Thus, with such markets for equity claims, better information about equity and
firm value will result. [93]

5)   LL allows for more efficient diversification and dissipates the effects of risk aversion.

6)   LL facilitates optimal investment decisions and dissipates the effects of risk aversion.


- [[Limited liability allows you to create fungible (transferable) shares - don't need to know
how much value shareholders bring to firm. Thus, this creates a fungible markets for
shares. This improves manager incentives. ]]

- [[The market becomes able to value shares according to the value of co, instead of
according to the deep pockets of investor, so the market becomes a better indicator of the
Corp's value.]]


Oct 5

8.4. Controls on Effects of LL in Corps, which are imposed by law (and specifically,
the CBCA):

1) Req to hold out publicly the LL nature of the Corp:
        - This is usually done through the firm name [CBCA s.10]. Business has to be done
under the name of the corp.
        - s.10: "The word Lmtd/ Corp/ Inc. must be part of the Corp name, but a Corp may
use either the full or the abbreviated form."
        - See also Wolfe v. Moir: [1969 Alta SC] [106-8]: Company fails to do business under
corporate name; Director/owner is held personally liable for injury. "If a person chooses to advertise
and to hold himself out to the public w/o identifying the name of a co w/which he is associated, he runs the risk of being held
personally liable."


2) Req re public filing for shareholders and for creditors of certain corp docs: [ss.20-21]:
       - This makes it poss for a creditor to decide wh to deal w/the firm, tho it has LL.
       - Must file articles, by-laws, USAs, minutes, securities register.

3) Req to file annual financial statements: [ss.155-160]:
       - This is another way creditors get info about the corp.

4) Directors have a duty to act in the best int of the corp: [s.122]:
        - Directors are liable if they fail to act honestly and in GF with a view to the best
        interests of the corp, or to exercise care, diligence, and skill.
        - There are also controls on the ability of the directors to abscond with funds.
          - McFadden v. 481782 Ont Ltd [1984 Ont HC] [in annotated CBCA, ref to in powerpnt]:
          Where the two directors, officers, and shareholders of a Corp strip the corp of all funds with the intention
          of enriching themselves and defeating any claim that a former employee might have against the corp,
          the directors and officers act in their own best ints and not in the best ints of the corp. ie. Induced br of K.

5) The oppression remedy: [s.241]:
        - This is the most dramatic remedy available, and is available to creditors in addition
to shareholders.
        - "A complainant may apply for a court order under this section if the court is satisfied
that any act effects a result/ powers are used in such a way that is oppressive/ unfairly
prejudicial to any shareholder, creditor, director, or officer. The court may then make an
order to rectify the matters complained of."
                                                                                                                               46


6) There are specific statutory rems for unpaid wages: [s.119]:
        - These remedies ensure that in a near bankruptcy setting, directors act in the
interests of the corp.
        - Mesheau v. Campbell [1982 Ont CA] [In annotated CBCA, ref to in powerpnt]: on unjust dismissal.
        - There are also statutory rems for unpaid taxes in the Income Tax Act but there is a
due diligence defense in CBCA s.250(3): "No person is guilty…if the untrue statement or
omission was unknown to him and in the exercise of reasonable diligence could not have
been known to him." [Pwrpnt.]

7) Bankruptcy Act holds directors liable also if can be said that directors provoked bankrptcy:
          - The law is concerned re emptying a corp of its value in such a way as to provoke liability.

8) Liability in tort where there is intentional or reckless misconduct:
        - eg. Mentmore; Spitebrand (re copyright).

9) s.118: Directors who agree that shares can be issued for consideration other than $ are
liable to make good any amnt by which the consideration received is less than fair market
value.

[[- Note: The casebook interconnects all issues at once.]]


                                             Lines of cases following Salomon:

         Corporation can employ "owner-manager": Lee’s Air Farming
         Corporation’s assets must be insured in its name, not in name of shareholders: Macaura, Aqua-Land, Wandlyn
          Motels. But note Lucena on "insurable interest" (benefit from existence, prejudice from destruction) and analogous
          U.S. approach (Southern Missionary College) now followed in Kosmopoulos [1987] 1 S.C.R. 2.



8.5. Piercing the Corporate Veil: An exception to the principle of limited liability:

- Exceptions to the idea that the Corp's has a sep legal personality is primarily re Lifing the
Corp Veil.

- Prof will suggest a way of org'ing the case law here.
  There isn't a standard way for ID'ing the exceptions to the presence of a corp veil.


Sask Econ Devel (SEDCO) case, [1981 Sask] [p.95-100]: [not done sooo thoroughly.]
FACTS: Firm was involved in custom manufacturing and in pumps. Custom man aspect was doing well.
        So incorped another co, PB Fabricators.
        SEDCO lent $ to PB. Borrower was not to pay principle / int on any loan made to it by a shareholder/ associated co.
        Eventually, SEDCO was in position of having to go after PB for diversion of funds to another firm. Ie. Another firm got
the money in advance of SEDCO. SEDCO now sues PB.

ISSUE: Here - assessment on part of lender SEDCO that it wanted to protect itself from non-arms-length agreements…And the
subsidiary, PB tries to do exactly what the K is trying to avoid. ISSUE: Was P-B Fabricators an 'associated co' of P-B
Manufacturers? If so, br of K; if not, lifting of the corp veil. [Pwerpnt]

HELD: You're not going to be able to avoid doing what the loan agreement contemplated.


Q: Do we think this case is about the lifting of the corp veil, and if so, why?
   Is all the talk about lifting the corp veil obiter in this case?

A: This case isn't so much about lifting the corp veil. It is prob best understood as being
about enforcement of a K and the br of its implied term.
                                                                                                                         47



  There is language in the case re allowing a departure from LL of the corp and lifting the
corp veil if it is in the service of doing what agreement [[[avoided]]]… [Csbk notes this.]

  Prof: This means that crts will interp Ks in such a way as to make sure their terms make
sense and are enforceable. You don't need to add much of a gap to this K to come to
conclusion court came to.

- Tunstall v. Steigman [1962 Eng] [99]: "If there has been any departure from a strict observance of the principle
of Salomon, it has only been made to deal with special circs where a limited co might be a façade concealing the
real facts."

- Gilford Motor Co. v. Horne [1933 Eng] [99]: HELD: A person can not incorp a co as a cloak / sham to enable
him to br the terms of his individual K.



Four injustices re lifting the Corp veil & Corp as a legal fiction: [Prof's suggestions]:

- The corp veil prob, in prof's view, does not arise in cases where corps haven't undergone
proper formalities. ie. you don't get the benefit of LL if you don't follow the rules.
Eg. Wolfe, Tato, Roydent.

- Also, just b/c you're operatng in a corp envir doesn't mean you can't attract liability for your
own fault. Eg. Berger: sued employer. Crt held there had been fault committed by that indiv.
Prof thinks this is a straightforward application of tort principles. Still liable for own personal
torts.


My interpr:

- On the one hand, sometimes the crt WILL lift the corporate veil.

- On the other hand, sometimes the crt has a POLICY AGAINST LIFTING THE CORP
VEIL:
The court will not lift the Corp Veil and create another "Corp" (ie. the indiv) when:

1) there is fraud/ misappropriation/ misrepresentation.

2) parties attempt to undermine the Kual regime in place btw creditor and debtor. Instead,
the courts will attempt to protect the Kual regime.

3) parties want to undermine the Statutory regime. Instead, courts will attempt to protect the
statutory intent and regime.

4) a party attempts to impose an unwarranted penalty on those who set up corps and are
directly involved with the corp (as opp to TPs). Instead, courts attempt to protect such
parties from unwarranted penalties.

                                                     Why pierce the veil?
        SEDCO: Was P-B Fabricators an "associated company" of P-B Manufacturers: If so, breach of k; if not lifting
         corporate veil -- justified?
        Implied breach of k better rationale?
        limited company might be a facade concealing the real facts (Tunstall) cloak, sham (Gilford)
        What about assistance to party (Nedco, DHN Foods, Kosmopoulos)?
        Is Wolfe (Fort Whoop-Up) a veil-piercing case? Tato, Roydent? Berger? Contrast Scotsburn cannot claim against
         deep pocket affiliated corporation where no reliance on credit
                                                                                               48


1) Courts' policy against fraud and misappropriation/ misrepresentation:

- Courts attempt to defeat fraud and misrepresentation. This is seen in the following cases:
[Tho court did not find fraud/ misrep in Frankel (and Wilcosky?)]


a) Frankel case:

FACTS: A law firm P had a side business as a lender. 3 of the partners set up a corp to
lend $, which they did to one of their clients. Client was in turn doing business w/ another
firm . Wanted $ to go directly to a creditor. Law firm did in fact transfer the loan $s to its
client. Client went bust. Creditor was unable to recover against the firm. The creditor said it
would go after corp set up by firm, but also go after the partners individually. The partners
argued it couldn't go after them.

Does misrep explain this particular case, or is it impossible to square this case w/Salomon?

This case - inadequate rep of true status.


b) Costello:

FACTS: US case in which a firm was stripped of its stated capital. That provoked
bankruptcy before the former partners of the firm took the capital out.
Facts are similar to Salomon.
Firm is not doing so well ;offers both shares and ventures to former partners.
Firm says there was inadequate capitalization.
Comes to conc that on any test, the issue of venture was from a firm that was
undercapitalized.

LESSON: The casebk is rightly critical of Costello and suggests it can't be squared
w/Salomon. [ie. Can NOT lift Corp veil [??]].

Stated capital is simply the amnt of capital assoc w/the issuance of shares.
To say that the ventures get issued in excess of stated capital and therefore there is
something like fraud is a conc that is difficult to draw, and it really dependson what the
creditors decided re the current financ state of the co to extend credit or not.

[[[Undercapitalization = when you minimize assets in corp so
You add a purpose element.
When you say - this corp is close to bust/ undercapitalized - if you have misreped the state of
affairs…..]]]]

Costello may be difficult to explain as a case of straight out fraud/ misrep.
It's cast that way by the court, and criticized by csbk eds as being inconsistent w/Salomon.
It's a US case, and may be interepr dif'ly in Salomon.


c) Walkovsky v. Cartlon: [US case] [p.119]:

FACTS: Sep firms were incorped for each taxi. Does this create an incentive to underinvest
in safety? This was created so that if taxi was in accident, would be limit on amnt of liability,
and that taxi's corp would go bust.
                                                                                                 49

Pltfs were to go after not the indiv firm, but the owner of the entire network of corps who own
a whole fleet of taxis, and to say that should be liable as well.

HELD: Dismissed. The court would NOT lift the Corp veil.

RATIO: There was no evidence that this was simply a shell co dif from firm.
The separate legal personality of the taxi firm was respected here; the Salomon principle was
applied in this case. The reason this case is here is b/c seems to be a q why the court
wouldn't lift the veil here - might you not expect it to?

The whole purpose of the scheme is to "subvert" tort liability.

Prof thinks that the simple and persuasive answer to this is that legislators should insist on
min insurance levels for the operation of certain kinds of businesses that are open to certain
tort claims, etc.

Ie. Prof thinks that NY court's approach is right - don't lift corp veil - do respect the separate
existence of dif corp entities, but then ask what the conditions for entering into a particular
business might be. That's how we should think about this prob, prof says.

This case provides an answer to the temptation to lift the corp veil.

It isn't fraud, so it doesn't meet the threshold.



2) Interpretation of K cases: Courts' policy of protecting a Kual regime:

- In such cases, the interpretation of a K is at issue. The court will not allow the creation of a
separate Corp to undermine the Kual regime that was in place btw creditor and debtor.

- The problem is that the parties want to undermine the Kual regime.

- The courts attempt to PROTECT the Kual regime.

- In SEDCO and Gilford cases, the court tries to uphold the intention of the parties in their K.

a) SEDCO case: See above.


b) Gilford case:

FACTS: Involved a valid non-competition clause. Someone who was previously working
w/firm agreed not to compete w/the firm. In order to get around this non-comp cl, the
employee…..and tried to rely on the corp form to say that this is dif from me doing business.

HELD: Corp veil was "lifted".

NB: Can say this is a case about lifting the corp veil, Or - and prof says this is better - better
to classify as case re interpr of Kual clauses.



3) Problem of undermining a statutory regime:
   Cases where the court has a policy of not allowing a Corp to be established to
                                                                                              50

undermine the statutory regime:

- The courts attempt to protect statutory goals.

- In such cases, 2 statutory policies conflict:
i) statutory limited liability
ii) general anti-tax avoidance rules of Income Tax Act.

a) De Salabery case:

b) Ames:

Re rules under Ont Securities act re disclosure requirements. Was the intersection of 2
disclosure regimes. US residents had to disclose separately the … of shares…
So as to get around this ob, the US residents incorped a Canadian entity held by US res,
which issued shares to US res. The Ont Sec commission said tha the purpose of the stat
regime is to ensure there is sep disclosure re shares re US res, and this use undermines the
statutory policy.

c) Adco:

FACTS: Case involving the application of a regulatory regime to a public utility. The leg as it
was framed applied to the owners of public utility. There was a parent corp which was the
formal owner of the utility which was in turn held by another entity. Set up in this way in part
so that the top of the pyramid wouldn't be under regulartory rules.

HELD: Can't undermine the stat regime in Q. So the true owner was found to be …

d) Daimer:

FACTS: Irrelevant. [WWI. Taken to be subj to trading re Indian Acts.]


PRINCIPLE: When there is an ID'd legislative policy which seems to conflict w/ the sep legal
personality of the corp, courts are fairly good at lifting the corp veil.


4) Cases where in effect those who set up/ face corps are protected by the courts from
the imposition of unwarranted penalties:

- In these cases, the person who encounters the corporate form is not forced to bear a
penalty associated w/….?

- The Goal here is to protect those involved in corp, as opp to those involved re TPs.
  Courts exercise discretion in your favour if you are in control.


a) DHM Food :

Re expropriation where the munic auth was only going to pay dmgs for val of land, saying the
co that owned the land was sep from the going concern, and b/c these were sep cos, the
exproriation of the land didn't affect the food/ transp business.
Court disagreed. Said should compensate.

Could be cast as lifting the corp veil,
But better to see as protecting the corp machine.
                                                                                                                                                51


b) Kosmopolous:

Mr. K did not lose his ins co b/c he took ins out in his own name rather than corp's name.
Can be seen as consumer protection case.
Mr. Kos didn't see that taking out ins in his own name didn't extend to his corp.


- Issue for all these cases under these 4 headings: Issue of LL is bumping up against
other zones in law. These cases aren't a cohesive unit/ don't have a cohesive theme.

- There is no general rule against "under-capitalization".

- For next class: Read chpt 3: ID shift from letters patent regime to articles of incorp.


Oct 8


8.6. Underprotection of employees in Bankruptcy/ post-bankruptcy cases:

- PRINCIPLE: Can't hide behind a corp and push it into bankruptcy by having it lose value.

- The CBCA is explicit on this.
  CBCA, [[[s.119?-No, wrong s. Better is s.38]]]: The CBCA does not protect shareholders when there's
issuance of dividends which pushes co toward bankruptcy.

- The Bankruptcy Act (1997) is also explicit on this.

  s.101: (1) "Where a Corp that is bankrupt has paid a dividend, other than a stock dividend,
or redeemed or purchased for cancellation any of the shares of the capital stock of the Corp within the period beginning on the day that is one y
                                                                         the court may, on the
before the date of the initial bankruptcy event and ending on the date of the bankruptcy, both dates included,
application of the trustee, inquire into the transaction to ascertain whether it occurred at a
time when the Corp was insolvent or wh it rendered the Corp insolvent."

         (2) "Where a transaction referred to in (1) has occurred, the court may give jmnt
against the directors of the corp…where the court finds that
(a) the transaction occurred when the Corp was insolvent/ it rendered the Corp insolvent, or
(b) the directors did not have reasonable grounds to believe that (a) was not true.

ie. The BOP is on directors to show they had reasonable grounds.

- Point: The Bankruptcy Act now has established a clear rule respecting what might be called
the Under- Captialization prob in a pre-insolvency situation.

- Circ where this might occur:
  Where, within a y of declaring insolvency, a Corp has given a payout to shareholders.
  However, if it looks like the Corp will actually become bankrupt, this is not a good time to
pay the shareholders! It looks bad and may be dangerous, as per the above ss.


8.7. Creation of a Corp: Process of Incorporation:

Qs to think about:
- What legal implications are there re what was done before firm came into existence?
                                                                                                                                               52

- Can one limit the powers that are given to the management of the firm?
- What are the implications for TPs re the way the internal governance/ management of the
corp was set up?
- Thought of the day: Early [state]-imposed constraints on what corporations could do help remind us just how artificial being
the corporation is and may help point the way re-establishing sovereign authority over corporations in the future… Corporate
charters were routinely denied because the corporation failed to prove it would serve a clear public purpose... The revocation of
charters was commonplace. [Murray Dobbin, The Myth of the Good Corporate Citizen (1998)]

- [[[see Brandeis J. in Liggitt ]]]



8.7.1. History of Creation of a Corp:

- The idea of creating a Corp was, in the 18th-19th c, an outgrowth of Crown privilege
(perogative) to grant charters.

- There were 2 dif modes of creation of Corps til the 1970s, when the CBCA was created:

1) Creation by use of letters patent:
       - This was a matter of executive (ie. Crown) discretion (after royal perogative). ie. a
person would apply for letters patent, and it was up to executive to decide if it was granted.
       - There was no req to file by-laws publically.
       - This is the precursor to current regime.

2) Creation by memorandum of association & articles of association:
        - This became the Eng CL approach.
        - This created a bifurcated constit. Had:
a) The memorandum set out only the most general terms of the corp.
b) Articles of assoc, made public, and sent to registrar. [Incl info on name, capital structure,
statement of proposed business.]

- The contemporary regime in Can grows out of the 2nd approach.
- The CBCA is modeled much more closely on the American Model Business Corporations
Act than on any English precedent. [p.155]


8.7.2. Federal v. Provincial Incorporation: [156-163]:

- The Constitution Act 1867, gives incorp power to both prov and fed govts.
- Constit, s.92(11) gives provs the power to incorp cos with "prov objects", but this is a territorial, rather than a functional limitation.
Ie. Provs can carry out its activities w/in the province of incorporation.


- By virtue of liberal provisions, provincially incorp'ed cos commonly do business thruout Can.

- Constitutionally, there is no reason why a fed incorporation is better than a provincial one.
  You can incorp EITHER fed'ly OR prov'ly.
  Practically, either type of corp can do business throughout Canada.

However, some firms will find minor advantages in a federal incorporation:

1) Fed corps enjoy a limited immunity from provincial extra-provincial licensing.
2) Fed incorp may be useful in preserving the corporate name for use throughout Canada.
   [John Deere]
3) Fed incorp may be more prestigious; this may be imp if you do int'l business.
                                                                                                                53

- Outside of its prov of incorporation, a provincially incorp'ed co may exercise such power as
the host province allows it to exercise.


Extra-Provincial liscencing requirements; ie. licensing reqs for Corps that are not of
that province: [161-3]:

- There are provincial licensing and filing requirements, and the req to appoint a local agent
for service of process, for:

a) Federally incorped cos which "carry on business" in a province
b) Provincially incorped cos which "carry on business" in a prov other than that of their incorp
c) Corporations organized outside of Canada that "carry on business" in a Canadian province

- Q: What does "carry on business" mean?

  A: This does not mean merely selling goods manufactured by the Corp in that province.
     Dif provs have definitions of this term in their statutes. [See p.161-2 for more on this.]

     - Does this include "taking orders" eg by internet? No ans yet.

- If the corps don't fulfill the licensing and filing requirements, they are subject to sanctions
such as fines and an inability to maintain legal actions in the prov or possibly to own land in
the prov.

- Continuance in another jdctn generally is not problematic, but note litigation in Re CBCA concernity Varity Corp.
[Pwrpnt]



8.7.3. Documents of Incorporation: [163-169]:

- Under the CBCA, the corp is formed by
1) filing articles of incorp
2) filing a notice of the registered office of the corp
3) filing a notice of directors
4) paying the prescribed fee
5) doing a computer-based name search if it is not a #ed name. [For more on names, see p.164]
[ss.7, 19, 106] [p.163]

- After the corp is formed, the directors will pass organizational resolutions under s.104(1).
[p.167]

- [[No longer restrictions on # of shareholders you need to incorp. In days of Salomon, you
needed 7 shareholders to incorp.]]

- The main docs for setting up a corp:
a) Articles of incorporation.
b) By-laws.
c) Shareholder's agreement.


- CBCA s.5: Explains that there is a single doc to file: Articles of incorp.
            "One or more bodies may incorp a Corp by signing Articles of Incorp…"

Articles of incorporation:
                                                                                                               54



See handout from Industry Canada:
Incl things you must set out at min , as per a.6(1) of CBCA:

a) Name of the Corp: - With LL indication in it; ie. Ltd/ Corp./ Inc. [s.10]
                     - Must do search as to wh the name is valid. Can now do this on-line.

b) Address of registered office: - You need not put a specif address b/c it might change.
           Just city. [s.6(1)(b), s.19(1)]
            [The street address must only be given in the notice of the registered office, to be filed w/the
           articles of incorp under CBCA s.19(2).]

c) Info on classes of shares and max # of shares the Corp is authorized to issue:
         - When our co goes public, it will have at least 2 classes of shares. Think about wh
this will give us flexibility to maintain control i) in the parent corp
                                                  ii) in hostile takeover setting

d) Restrictions on issue, transfer, or ownership of shares.

e) # of directors. Cumulative voting?

f) Other restrictions on the business of the corp, eg. voting?
Here, none.

g) Other provisions. [s.6(2)]
Can incl. many pps.
Here - only provision incl is to allow borrowing for this entity.

h) Names of incorporators: s.6(4): "An incorporator shall send to the Director articles of
incorporation and the documents required."


- Articles of incorp may be amended to change any of the above issues/ other provisions, but
only by a "special resolution". [a.173]
  eg. Can amend the articles of incorp to create a new class of shares.

- s.9: A Corp only comes into existence on the date shown in the certificate of incorp.

- Can incorp anywhere, but must file for a provincial permit to set up shop in other provinces.
Possibility of fed and prov incorp raises constitutional difficulties.


Articles of Incorp & By-laws:

- What is rel btw by-laws and articles of incorp?
By-laws = internal regulations and business and affairs of corp.
Articles = describes the corp.

- There are many things you could put in articles that can also be put in bylaws.
  Can overlap.

- Main dif: By-laws - can simply be changed by the board of directors. [a.103(1)]
   Articles of incorp - can only be amended by a special resolution of 2/3 maj [a.173]
                                                                                                55

[Special resolution = a resolution passed by a majority of at least 2/3 of the votes cast by the
shareholders [Def in s.2(1)]]

- By-laws are also to be distinguished from resolutions of directors or shareholders, which
are usually more restricted in scope. [p.167]

- The by-laws are usually a fairly length doc, since many of their sections merely repeat
provisions in the CBCA. If these were eliminated, the by-laws would only be a few p long.
[167]

Notice of Directors:

- s.106(1): "At the time of sending articles of incorporation, the incorporators shall send to the
Directors a notice of directors in prescribed form and the Director shall file the notice.

- The names and addresses of directors must be listed in the notice of directors. [csbk, 167]


Shareholder agreements:

- Shareholder resolutions may be passed by the unanimous consent of shareholders, rather
than having them hold a meeting. [s.142(1)].

The shareholder agreement can provide various things:

s.146(2): Unanimous shareholder agreement: An otherwise lawful written agreement
among all the shareholders of a corp, or among all the shareholders and a person who is not
a shareholder, that restricts, in whole or in part, the powers of the directors to manage the
business and affairs of the corp is valid.

       ie. Shareholders may agree to restrict powers of the directors to manage the
Corp. But only valid if a) in writing, and
                        b) unanimous among shareholders.

- Ordinarily, directors are the agents of the corp for the purpose of managing its affairs.
  They in turn appoint officers who will conduct the business of the corp.
- However, under a unanimous agreement, the shareholders may decide that they want to
assume the powers of the directors and run the corp themselves.
  But this means they can't hold the directors liable for any decision they themselves are
taking.

- The agreement is a Unanimous Shareholder Agreement even if there is only one
shareholder (who is the beneficial owner of all the issued shares). [s.146(3)]
  The single shareholder may be, for example, a Parent Corp.



8.7.4. Consequences if the corp has tried to do business before it has formally been
incorp'd:

- Prof can ID at least 4 classes of sits:

Sit 1: Both parties know no corp exists when they enter into K. Q then is wh putative agent
for corp not yet in existence is then resp personally, b/c can't claim to have been acting as
someone's agent.
                                                                                                                               56



Sit 2: Both parties think corp exists, when it doesn't . This might happen when docs weren't
accepted, etc. Can the corp then avoid performance of its K? Black, Newborne: No K
exists b/c no Corp exists, but promoters are not personally liable. [p.147] BUT CBCA s.14: K
exists if Corp is ratified reasonably soon after.

Sit 3: Only one of two parties knows that a corp is not yet in existence, and one variation on
this is that the corp tries to ratify.

Sit 4: Agent believes Corp exists, it doesn't , and the TP with whom the Corp's agent is
dealing w/ relies on agent, and corp doesn't ratify the agreement. Is agent now resp?

- Sits 3 & 4 are dealt w/by legislation.

- We will look at 2 cases that explore the first 2 sits.

Kelner v. Baxter: [1866 Eng] [p.141-3]:

FACTS: There was a stock of wine sold on behalf of a hotel co. The K was entered into on Jan 7; payable on Feb
28. The co was incorped as of the 20th of Feb, ratifies the K on the 11th of April. Then the co goes bust.

ISSUE: Was the agent acting on behalf of the hotel personally liable, or is the corp liable?
HELD: Agent is liable.
RATIO: Ratification by the co was not acceptable to get the agent off the hook, b/c:

PRINICIPLE: Normally a principal can ratify what the agent does, but if there was no principal at time K was
entered into, there is no possibility of ratification.

                 ie. the agent will be bound for Ks he entered into on behalf of the Corp before the Corp was in
existence, if there is no principal at time K was entered into.

- There are all kinds of tricks that were attempted to get around the problem. ie. s.14, below.
Kelner reasons:
- ratification can only be by a person ascertained at the time the act was done (Willes J.)
- where a k is signed as "agent", there is no principal and the k would otherwise be inoperative, the "agent" is personally bound.
   (Erle J.)
- assume intention to be held liable personally (Willes J.; see Dairy Supplies contra)

- Prof: Ultimately there had to be a statutory solution to this probl. This is underlined by the
Black v. Smallwood case.


Black v. Smallwood: [1966 Aust] [p.144-6]:

FACTS: Directors believed their Corp was in existence, but it wasn't properly incorporated.
They signed a K. The co then tried to say it wasn't a valid K b/c corp wasn't in existence at
time K was signed.

HELD & PRINCIPLE: There is no K here b/c there is no entity which has been formed;
Signature does not bind Corp b/c Corp wasn't properly incorped when directors signed the K.
But directors are not personally liable.

Newborne v. Sensolid: [1953 EngCA] [p.146]:
Also presents this strange result.
Failed attempt to enforce a K in pltf's own name when co is not yet in existence.
Pltf is not personally liable
                                                                                                                      57

Re pre-incorp of K:

- Sometimes a person, typically referred to as an agent or promoter, will purport to enter into
a K w/a TP on behalf of a corp that has not yet come into existence. [Vz, 140]
  [For def of promoter, see vocab.]

This arises where a "promoter may feel it imp to get the other party to commit to a K before
they have an opp to change their mind." [pwrpnt] In this sit:

s.14(1): A person who enters into a written K in the name of/ on behalf of a Corp before it
comes into existence [ie. an agent/ promoter] [with a TP] is personally bound by the K.

s.14(2): A Corp may, within a reasonable time after it comes into existence,…adopt a written
K made before it came into existence….

- ie. s.14(1) restates the Kelner proposition that the agent will be bound for Ks he entered
into on behalf of the Corp before the Corp was in existence
  and s.14(2) adds UNLESS K was ratified (accepted) by the Corp within a reasonable
time after it came into existence.

ie. a Corp may adopt written pre-incorporation Ks.

- Under s.14(2) If the Corp ratifies the K later, a) the agent ceases to be liable
                                                  b) the Corp is resp for the K.

- [[A position similar to s.14 applies specifically in Ont; OBCA.]]

- Built into the ratification (approval) regime are two probs:
1) What is a reasonable time?
2) It has to be a written K. Statute of Frauds kind of concern here.

- OBCA (Ont legislation) doesn't have these 2 reqs/ provisions.
- BC and Que are silent on this subject.

8.7.5. What happens when a Corp acts ultra vires of its purpose/ pwr (in Articles of
Incorp)?:

ie. What happens if you set up the articles so as to restrict the power of a corp, and then corp
does not act within this restriction?
    What happens if the corp doesn't act within the ambit of its declared purpose?
    How does this affect TPs?

Ashbury RR v. Riche: [1875 HL] [170-4]:

FACTS: Co had a power to set up a RR plant ,,, to construct rolling stock.
Corp entered into a K that was related to purpose of corp, but wasn't precisely w/in ambit of the purpose.
Shareholders were not pleased about this. Wanted to build RR instead.

HELD: The shareholders were successful in voiding the K to construct the RR, b/c it was ultra vires of the corp's
purpose. = OLD law of the ultra vires doctrine.

- VanDuzer: "Under the CBCA, it is not nec for the corp to describe the activities in which it will engage. The
corp has all the capacity, and subject to certain limitations in the corp statute, the rights, pwrs, and privileges, of a
natural person. [s.15]
  In order to avoid the risk of ultra vires activities, it is common not to incl in the articles any restrictions on the
business the corp may carry on.
  In any event, the rule that ultra virest obs were unenforceable against the corp has been largely mitigated
                                                                                                                   58

under the CBCA. If a restriction is included in the articles, the CBCA provides that the corp is forbidden to act in a
manner contrary to the restriction. [s.16(2)]

- The ultra vires doctrine has been eradicated by s.16(3). NOW:
s.16(3): No act of a Corp is invalid just b/c the act is contrary to the Corp's Articles of Incorp
or to the CBCA.

- s.16(3) is a remarkable and sweeping eradication of the ultra vires doctrine, [[at least as far
as TPs.]]

- There used to be idea of constructive notice to TPs; ie. notice of contents of articles of
incorp used to be implied to TPs. This has now been reversed completely under s.17 - no
longer any constructive notice to TPs re articles of incorp.

  s.17: - No person is affected by or is deemed to have notice or knowledge of the contents
of a document concerning a corporation by reason only that the document has been filed by
the Director or is available for inspection at an office of the corp.
        = TPs don't have due diligence re the nature of those docs.


Indoor management rule:

- s.18: INDOOR MANAGEMENT RULE:
        = A Corp/ a guarantor of a Corp [i.e a TP] can't assert that the Corp is ultra
vires, unless the person asserting so has / ought to have knowledge to the contrary.

        = Indoor management rule for corp itself; TPs do not have to be concerned w/this.
         But this means that Corp may not assert against TPs that Corp's articles/ bylaws apply to TP, except
where TP had/ ought to have knowledge of such provisions.
       = The corp can't assert re TPs that its internal by-laws/ articles/ docs aren't valid, UNLESS you know/
ought to have contrary knowledge.

- s.18 codifies the holding in Turquand [1856 Eng] [csbk p.181].

- In Turquand, the TP was affixed with constructive notice of the statute and the corp's deed
of settlement. While it likely remains the case that TPs will be held to know the provisions of
the incorporating statute, since 'every man is presumed to know the law'. TPs are no longer
obliged to read the corp's articles or by-laws, under s.17. [Csbk p.182]
[See s.17 above.]


- s.16(2): "a corp shall not carry on any business or exercise any power which it is restricted
by its articles from carrying on or exercising."

- s.247: If nec, anyone assoc w/the Corp can ask court to impose court order re forcing
someone to comply with/ be restrained re the Corp.

- Pre-Incorp K, Ultra vires doctrine, Indoor management rules = all work out issues re articles of incorp at a
specific time.


Defective appointments of director / officer:

- s.116 is a compelementary provision to s.18.
  s.116: "An act of a director or officer is valid notwithstanding an irregularity in his election or
appointment or a defect in his qualification."
                                                                                                 59

- The provision of s.116 "amounts to a deemed actual authority to bind the Corp in dealings
with TPs." [Csbk, p.180]

- Morris v. Canson [1946 Eng] [p.180-1]:
FACTS: Here, the pltf attempted to rely on s.116 s. to validate the act of a fraudulently
appointed director.
HELD: Can't rely on s.116 to ignore or override the substantial provisions relating to the
appointment of a director. S.116 deals with slips or irregularities in appointment, not with a
total absence of appointment, and still less with a fraudulent usurpation of authority.
[Annotated CBCA Act.]
Prof: Crt rightly drew distinction btw irregularity and fraudulent appointment.

____


- Where it is desired to restrict the object/ purpose of a small corp, this can be done:
a) by amending the articles of incorp by special resolution with a 2/3 majority [s.173]
b) through a USA [s.142, 146]
[p.178]


Dissolution of a Corp: [p.152]:
- s.212: A Corp may be dissolved if in default for 1 y of any of the fee or notice requirements.
         Directors must be given 120 d warning in such cases.
- s.228: On dissolution, undistributed assets of the Corp vest in the Crown.
- s.209: A creditor may apply for an order to revive the Corp.
- s.228(2): On revival of the Corp, non-cash assets revest in the Corp.
- s.209(4): On revival, the Corp is liable for obs it would have incurred had it not been
           dissolved.
Next: Chpt 4, p.185-231: Qs to think about:
What is the nature of a share?
What are the formalities assoc w/share issuance?
What is the fair value of consideration for a share?




Oct 12

8.7. The Nature of a Share: [Csbk, Chpt 4] [We are not doing Chpt 4 thoroughly]

Corporate Management:

- How does shareholder function relate to mngmnt function?

- Burle and Means on Corporations:
  In 1930, they wrote and were concerned that corp didn't seem to be run by its owners.
  They said that as corps expanded, and the number of shareholders grew, the shareholders
"were slowly but surely surrendering control of the corp to its professional managers. [p.185]
  Prof thinks this accnt is still relevant.

- It is often seen as problematic that Corp's owners are sep from mngmnt b/c the
manager may have incentives to pursue gain or advantages that differ from the
intersts of the owners.


- In order to control this problem, there are 3 dif kinds of corp management schemes:
                                                                                                                                                  60

a) Single owner manager/ closely held firm [like Salomon] - one extreme.
b) Manager is a non-owner; has no shareholding int in the firm - another extreme.
c) Manager is a part-owner/ has some shareholding incentive - middle ground.

- Just b/c a co is closely held doesn't mean it nec performs better.

- Alignment btw O and mngmnt is often seen as a good thing for performance b/c people try
to maximize self-int; so if they own part of co, they will try to make it perform better.
  This sounds logical on its surface, but actually doesn't work universally.

- The notion that owners don't have the skills; might not be able to manage complex
structure, is actually what led mngmnt schools and theorists to suggest the need for
professionalization of mngmnt.

- The professional manager was seen as problematic, b/c it split the commercial aspect from
management.

- Are there contexts in which the Burle-Means concern about sep of O and Mngmnt seems
more appropriate or less appropriate?
  Yes; this has to do w/the complexity of the bureaucracy at issue:

In a small corp setting [closely-held], u might have close alignment btw mngmnt + O.
In more complex corps [widely-held], u might accept that professnal mngmnt is more
appropr.

- [In a closely held sit, you may have a single class of shares.]

- There might actually be a point at which the incentives of professionals to control Corp mngmnt work against
professionalism - "Hubris factor". Does the CBCA allow for this "Hubris factor"? [Hyp Q]

- Does the CBCA reflect the hypothetical alignment of mngmnt and O ints in the small corp?
Does it provide an ans to Burle-Means by saying: we can't provide for a role associated w/shareholding that is
much more directly connected to mngmnt in an adverse setting.

- What is it that would allow shareholders to maintain managerial control in sits where it might be most approp to align ints of shareholders and ints
of managers.


- Prof: CBCA has flex built into it which allows firm to have a close manager -O rel
where approp. -> This is thru USAs! [s.146]

- USAs - provide that shareholders can take some resp from the board.
       - operate as a check on agency costs.
      - even a single shareholder can declare that they are bound by the terms of a USA.

Vanduzer, Chpt 7: Management and the Control of the Corp: [Vz, p.182-190]:

- Directors = those who are officially resp for managing the business and the affairs of
the corp, but basically they delegate this power to the officers and specify the officers'
duties.
     - s.102: "Subj to any USA, the directrs shall manage the Corp's bus and affairs."
     - s.121: The directors a) appoint officers. This is the directors' real power.
                             b) specify the officers' duties, and
                             c) delegate to them the pwr to manage the Corp's bus + affairs,
                                except pwrs to do anything in s.115(3).
     - For the most part, directors determine what goes on the agenda for meetings. [p.186]
     - The directors control the proxy solicitation process. [ss.137(4), 149, 150]
                                                                                                                                                   61



       - NB: It is a FICTION that the directors manage the Corp. This fiction is built into CBCA.
[In practical terms this looks like saying the Gov Gen runs Canada. That may be the way the law is structured under the Constit Act, but in fact
Cabinet runs Canada. ] [Prof.]


- Officers = those who actually (in practice) exercise the power to manage, which is
delegated to them by the directors, and serve at the pleasure of the board.

- Shareholders
        - they elect directors and may replace the board if nec, either
a) at the next annual meeting, by ordinary resolution [s.109], or
b) by requisitioning a special meeting for this purpose [s.143]

        - they only have power to initiate action, to control managemnt, or to act in relation to
the ordinary business of the corp, as specifically provided in the articles or by-laws.

           - their approval is required before certain sig changes can occur to the Corp.

- The situations in which the CBCA specifically provides for shareholder approval include
approval of the following fundamental changes to the Corp:
a) amendment of articles [s.173]
b) initiation, amendment, and repeal of by-laws [s.103]
c) dissolution of the corp [s.211]
etc.

- Shareholders may agree to a different structure of management, either by provision in the
a) articles
b) by-laws
c) USA.
This more flexible arrangement is especially apt in the case of a closely-held corporation.

- The possibility of using a USA to transfer directors' powers to shareholders was intro'd into
the CBCA as a way of permitting closely-held corps to adopt a legal structure that more
closely reflects their practice of direct management by shareholders. [187]

- In large corps, the BOD seldom exercises the role traditionally ascribed to it. These BODs
tend to be dominated by full-time professional managers of the Corp.

- s.115(3) sets out the limits on the authority of directors: Subject to a USA, there are certain
limits on Directors' authority.


- As the number of shareholders in a Corp rises, and the separation btw managemnt and
share O widens, the incentive for managers to engage in opportunistic behaviour also rises.

Class: How the CBCA reflects the role of professional managers:

- Q: In the contemp corp, what is the role of the BoD, and how does it relate to professional
managers?

   A: The Board does not actually run day to day business.
      The BoD is not the team of professional managers.

- In CBCA, no explicit mention of role of those to whom we assoc w/Management.
- In a takeover sit, there is an effort to substitute a new managing team for an old managing team.
                                                                                                                 62


Class:

- The real nub of power of the BoD is to appoint the officers.
  The real nub of power of the officers is to manage.

- Shareholders vote to appoint directors (BoD).
- The BoD in turn appoints officers who act as managers (They have delegated power to
manage).

- CBCA control mechanism: Shareholders can dump the board.

- The market is another mechanism which might constrain agency costs on the part of
managers who are able to control the board. This manifests itself in the following way:
If managers are not getting share value up, then corp raiders [eg Onex] can take advantage
of the undervalued assets of the Corp, and say: We'll buy you out, and that will allow us to
get a better management team in place.

- Int and complex debate re takeover protection mechanisms.
          Some say that businesses should be allowed to pursue legislative strategies and have shareholders
agree… This translates into policy favoring making takeover bids expensive. This is effected thru a variety of
means.
          Counter arg: This is terrible and wipes out the market for corp control. It is a way of entrenching
management; makes managers look at share prices and try to outperform potential bidders.



In what respect is the share a measure of O?:

- We could assume that shareholding = O.
  But, on the other hand, one might say it's kind of abstract to think of the person who owns
one share as being a part-owner. They seem more to be trading on future value of the
Corp.

Sparling v. Caisse de depot: [1988 SCR] [p.186-190]:

- One interesting judicial statement of what the share means is in the Sparling case, where
LaF refers to the share as not being an isolated piece of prop, but as a "bundle of interrelated
rights and liabilities. A share is not an entity independent of the statutory provisions that
govern its possession and exchange." [p.188].

- Why did LaF J. say this about shares in Sparling?

FACTS: The Caisse owned more than 10% of the shares in Domtar, thus it was an insider
w/r/t Domtar, as per s.126(1)(d) CBCA. Under s.127 of the CBCA, an insider has to submit
an insider report to the director of the Corp of which it is an insider. The Caisse refused to
submit this report, because it argued that it was outside the purview of the provisions of the
CBCA. It made this argument based on s.16 of the Interpretation Act, which provides for
Crown immunity (for certain sits.)

ISSUE: May the Caisse invoke Crown immunity, or must it file the insider report?
HELD: The Caisse may not invoke Crown immunity. It must file the insider report.

RATIO: The Caisse owns shares in a Corp governed by a statute, the CBCA. Thus, the
Caisse must follow this statute. The Caisse is a Crown Corp. "The Crown (ie. the Caisse)
cannot pick and chose btw the provisions (of the CBCA) it likes and those it does not.
The very act of purchasing a share is an implicit acceptance of the benefits of this statutory
                                                                                                               63

regime (the CBCA). The benefits (of purchasing a share) are indissolubly intertwined with
the restrictions attendant upon them (the benefits).

ie. Can't sep out all the statutory req assoc w/the share from the share. The share is a
bundle of rights and obs, and it incl statutory req that if you own a certain % of shares, you
have to make a filing.
____

- s.126(1): Definition of insider.
- s.127(2): Insider trading reporting req: A person who becomes an insider must send an
insider report to the Director of that Corp w/in 10 d of the end of the month in which he becomes an insider.

- Q: In what way does this characterization of the share reflect/ depart from the Burle-Means division btw
shareholding and management?
  A: It doesn't assume that a share is merely ownership.

- NB: "At no point does the CBCA state that in purchasing a share, a shareholder is
acquiring a right of O w/r/t the Corp. The CBCA simply tells us that a shareholder may be
entitled to certain rights relating to things such as:
      - voting for directors,
      - the receipt of dividends, and
      - the receipt of a portion of the Corp's capital if and when that Corp is wound up.
[s.24(3)]". [csbk, p.190]
- Is this case supposed to shed light on the nature of the share as a property? How does it do so?

- The idea of bundles of rights is now commonly assoc w/property as a whole.

- IMP: Share is not that it is part title to Corp, but better to think about it as a bundle of
rights and obs defined thru leg and thru the Corp, which allows the holder thereof to
do things as they arise.

 ie. The share is best understood as what you can do w/it given the legislation, and not part title to Corp.

Next: Read to end of chpt 4, 231-246.


Oct 15

Atco v. Calgary Power Ltd.: [1982 SCR] [194-8]:

- Addresses the Q of whether shareholders own the Corp. [The B-M idea presumes shareholders are owners.]

ISSUE: Was a parent co, which had a controlling int in a public utility, itself a public utility?
       Ie. are shareholders

HELD: Does not object to dissent, below, but said that a holding corp does not necessarily control its
subsidiary's assets.
Dissent, Wilson J: A holding company does NOT necessarily own its subsidiary's assets.
        Control of a public utility means control of its assets. Thus, are shareholders of a
controlling corp also shareholders of the assets? Answer, No.

  Prof says Wilson J is saying that shareholders are not owners of the Corp;
  Csbk says that Wilson J does not provide us with a clear answer as to whether the
shareholders are owners/ titleholders to the Corp. [198]

Prof on Wilson:
                                                                                                                                       64

- Shareholders are not owners of the Corp. Corp owns assets; shareholders do not.

- Here, the owner of the assets is a corp itself, and the shareholders can achieve apparent
control over the corp. That doesn't mean they have a stake directly in the assets of the Corp.
Shareholders are not title holders.

- Prof: If we are uncertain as to whether shareholders have title over the Corp, one of the
ways you might characterize it is that Shareholders are passive investors; i.e. playing the
market.

- [[Does somebody have to own the Corp? We don't say who owns natural persons, so why should we say who owns Corps?
This is a very non-traditional approach. Tho there are probs to the concept of someone owning the Corp.]]



Rights attributed to classes of shares: [The s.24 issue and Bowater]:

Bowater v. Crain Inc.: [Ont CA 1987] [p.191-4]:

FACTS: Bowater purchased shares in Crain Inc. Bowater now challenges the provisions
contained in Crain's articles of incorporation re the voting rights for common shares. [[Bowater
also challenged the fact that the provision stated that the Corp wants shares to go public, but the Corp wants control to remain
in the parent. [?]]] The contested clause stated:

         "Special common shares shall carry ten votes per share at all meetings of the shareholders of the Corp
so long as such shares shall be held by the person or Corp to whom such shares were issued originally...
          In the event any such special common shares cease to be held by the Corp to whom such shares were
issued, then such special common shares shall carry and be entitled to one (1) vote only per share."

This contested clause provides that within the same class of shares, some people have 10
votes and some people have one vote. = a 'step-down' provision.

HELD: This clause was invalid under the CBCA, but NOT because there were difs in the #
of votes. [This clause can be severed from the articles of incorporation, and the special common shares will now carry 10 votes each
regardless of which group holds them.]


- What the Ont CA attacks is that the condition works unequally; not the condition itself.

HELD: Although there is no prohibition in the CBCA against a step-down provision,
s.24(4) should be interpreted to mean that the rights which are attached to a class of
shares must be provided equally to all shares of that class.

       This interpretation is founded on the principle that rights, including votes, attach to
the share and not to the shareholder.


- Thus, the court applies the principle: Shareholders should be treated equally w/in the class
of shares. Where does this emerge in the CBCA? Ans: s.24.

s.24(1): Shares of a Corp shall be in registered form and shall be w/o nominal or par value.
         Par value = the value printed on the face of a stock = face value of a share, which is set by the Corp's
board. But this arbitrary accounting value has almost nothing to do with the real value of a share.
         The real value of a share is its market value, ie. the current price of a share in the stock market. [Ebert bk.]

s.24(3): Where a Corp has only one class of shares, the rights of the holders thereof are
equal in all respects and include the rights
  (a) to vote any meeting of the shareholders of the Corp;
  (b) to receive any dividend declared by the Corp; and
                                                                                                                                    65

   (c) to receive the remaining prop of the Corp on dissolution.

 This [s.24(3)] seems to announce a principle of equality where there's a single class, and
equality of rights.

s.24(4): The articles may provide for more than one class of shares and, if they so provide,
   (a) the rights, privileges, restrictions and conditions attaching to the shares shall be set
out therein; and
   (b) the rights set out in ss. (3) shall be attached to at least one class of shares but all such
rights are not required to be attached to one class.

  Bowater: s.24(4) should be interpreted to mean that the rights which are attached to one
class of shares must be provided equally to all shares of that class.


- The court applies the principle, through s.24: Shareholders should be treated equally w/in
the class of shares. [Many people, incl the prof, infer this principle from the case, but some
disagree.][194]

- The court continues: "If there was not equality of rights within a class of shareholders, there
would be great opportunity for fraud, even though that is not a problem in this case."
Prof: Have all the shareholders pd the same thing to get the shares? If not, can be fraud.

- The court cites s.24(4), and then cites the Alta Bus Corp Act s.24(5) as the applicable
principle:
"If a Corp has more than one class of shares, the rights of the holders of the shares of any
class are equal in all respects."

 The court is saying: The CBCA doesn't have a clear statement on this; the ABCA does, it's
a gd statement of law, so we'll accept it.

  Yes, this is problematic, but it indicates the way prov statutes work tog in a seamless web.

  ___________

- Q: Why should the AltaBCA s.24(5) - that if a Corp has more than one class of shares, the rights of the
shareholders of any class are equal - be manadatory as opp to a default rule?

 A: Easterbrook and Fischel may explain this: ie. if you want to reduce monitoring costs and create a liquid
market and make the shares as fungible as poss, you have to create a class of shares.

- Variations on Bowater cl:   Would this now apply?

#1: "…In the event any such special common shares cease to be held by the shareholder [changed from Corp]… "

If we made this cl shareholder-neutral, would it now be acceptable? Is it now valid?

#2: "cased to be held by the shareholder to whom such shares were issued, then such special common shares shall be converted into
common shares on the basis of one common share for each special common share."

Is this valid? Some students say invalid b/c ….
No prob re # of shares issued here.
Might there be less likelihood of fraud this way?
Prof believes that these small difs make a dif in the determination of a class.


- Whether or not we infer that Bowater stands for the principle that all shareholders of a class must be treated
equally has important implications for the law re mergers and acquisitions.
  If we hold that Bowater stands for this principle, it will be harder for a Corp to treat its shareholders differently
when pursuing a given objective. [No kidding.] [194]

- One's views on the q whether shareholders can be considered the owners of a Corp is likely to have some
effect on the equality principle that one believes should govern rels btw the Corp and its shareholders.
                                                                                                                    66


  If one thinks that shareholders are owners, then one may feel that in addition to the bundle of rights that are a
share, shareholders are entitled to additional rights such as the right to equal treatment.

   If one does not view shareholders as owners, then one may be more open to the suggestion that in certain
circs it may be necessary for a Corp to discriminate btw its shareholders. [194]



Common v. Preferred shares: [201, Ebert]:

- Common shares = shares whose owners have last claim on the Corp's assets, (after
creditors and owners of preferred stock) but who have voting rights in the firm.
           - have no rights/restrictions re voting, dividends, + distributions on liquidation.


- Preferred shares = shares whose owners have first claim on the Corp's assets and profits
(are generally paid dividends before common shares), but who usually have no voting rights
in the firm. [Ebert]
         - have special rights/ restrictions re voting, dividends, + distributions on liquidation.

- The rights attached to preferred shares must be stated in the articles of incorp under CBCA
s.6(1)(c)(i). If the directors wish thereafter to issue a class of shares not provided for in the
articles, they must cause the articles to be amended.


The prohibition against watered stock: [The s.25 prob]:

- This addresses the issue of what kind of consideration has to be given for shares.
[All Ks require exchange of consideration.]

- s.25(3): A share shall not be issued until the consideration for the share is fully pd in
money or in prop or past services that are not less in value than the fair equiv of the money
that the Corp would have received if the share had been issued for money.

 s.25(4): In determining wh prop or past services are the fair equiv of a money
consideration, the directors may take into account reasonable charges and expenses of
organization and reorganization and payments for property and past services reasonably
expected to benefit the Corp.
       ie. The value of shares may change over time.

- Also related is s.118: Provides that directors of Corp are resp if they have issued
shares for less than the fair equivalent $. Refers explicitly to s.25. ie. If s.25 hasn't been
observed, directors can be resp.

  s.118: "Directors of a Corp who vote for or consent to a resolution authorizing the issue of a share under s.25
for a consideration other than $ are jointly and severally liable to the Corp to make gd any amnt by which the
consideration received is less than the fair equivalent of the $ that the Corp would have received if the share had
been issued for $ on the date of the resolution."

- The ISSUE here is: Is the Corp getting the fair val of share?

- "Watered stock" = stock issued that doesn't reflect the true value that was raised. Eg.
Diluting the value of the stock by issuing more shares. Can raise issues of misrep and fraud.

- An issue of shares for inadequate consideration can prejudice existing shareholders by diluting their interest.
                                                                                                                                               67

See v. Heppenheimer: [NJ, 1905] [219-224]: [Review if I want.]


FACTS: The purchaser of paper manufacturing plants purchased the plants for more than 5 million, and then issued shares for
a val of 4 million and debentures for a val of 1 million.
Ie. They watered the stock…Fill in.

Q: How could they justify that?
ISSUE: stated capital amount seemed to be out of whack b/c x was half of what was given…



- Stated capital accnts may have little bearing on the val of shares in the market today b/c
shares sold 10 y ago may have been sold at dif val they are at today.

- It does not necessarily make any dif to the ability of a creditor/ future shareholder that
stated capital is out of whack with true value, because issue is not stated capital amnts, but
fiddling w/transactions that favor one party/ another.

- CBCA has found solution - says to directors - you have to justify val you sell shares at,
otherwise you yourself are resp. [s.118]

- Watered stock can raise issues of misrep and fraud, so one can see cases re watered stock
more in ambit of directors than in ambit of the value of shares.


NEXT:
Skim chpt 5 w/emph on the general mechanics of the continuous disclosure system of the securities regime. [257-367] Skip cases in this chpt.
This is a subj for securities regulation course as well.
Focus on disclosure elements of securities regime.




Oct 19

- A parent corp who has 100% of shares of the subsidiary has control; can name managers,
etc. But you don't have to have 100% of shares to have control.

Air Canada update:

- Press release on Air Can's counter-offer. [Get screen. Not so imp.]:

- AirCan offers to buy back (from Onex) 35% of shares at $12.
  AirCan wants to aquire a 35% block of shares thru a consortium of shareholders. ie.
Enough to block Onex in a vote to be held on Nov 8.

- Watering stock = diluting value of the shares by issuing more shares.
Here, you're doing the opposite. You're issuing less shares.

- Air Can offers to buy Canadian Airlines at 2$/ share.


Pre-emptive rights: [p.231ff, Vz, 173-4]:

= rights to pre-empt the offer of issuance of shares to others unless they have been offered
to you as well. Unless the shares are offered first to the existing shareholders, the Corp
cannot issue shares.

- Under the CBCA, the pre-emptive right only permits shareholders to purchase shares in
proportion to their existing holdings.
  Under the OBCA, there is no such restriction.
                                                                                             68



- A pre-emptive right may be attractive to shareholders for three reasons:
1) Avoiding dilution of existing shareholders' proportionate interest in the Corp
2) Constraining inappropriate issuance of shares
3) Preventing issuance of shares at under value.

- Pre-emptive rights may render takeover difficult. [Prof.]

- Issue: Ways in which shareholders can control who gets into the Corp; who has rights of
first refusal; and who is able to block new issues.


- s.28 creates a default (non-mandatory) rule which allows articles to provide for pre-
emptive rights (ie. offer of new shares to existing shareholders).
[NB: In some US jdctns, this is a mandatory rule.]

 s.28(1): If the articles so provide, no shares of a class shall be issued unless the shares
have first been offered to the shareholders of that class, and those shareholders have a pre-
emptive right to acquire the offered shares in prop to their holdings of the shares of that
class.

 NB: s.28(2)(a): Shareholders have no pre-emptive right re shares issued for a consideration
other than money.

 This means that shareholders could insist that there shall be no issuance of new shares
unless such an offer is made to existing shareholders on similar terms….

- wide variety of jdctnal approaches, from denial of pre-emptive rights to express grant.


- Oppression remedy, s.241: A complainant may apply to the court for an order he has been
oppressed or unfairly prejudiced or if there's been disregard of the interests of any security-
holder, creditor, director, or officer.
  There is a range of remedies available for this "unfair prejudice or disregard".


Beauchamp case: [Que SC, 1979] [p.238-244]:

NB: This is a Que case; not a CBCA case, thus no par value for shares.

- This case addresses the q of whether the owners of shares were able to ensure that their
stake in the corp was preserved over time thru the mechanism of free enterprise.
  Under s.28 CBCA there is a default rule on free enterprise; not mandatory - States that the
articles of incorp can provide for pre-emptive rights (ie. the issuance of new shares to
exsiting shareholders first).

ISSUE: Should pre-emptive rights be inherent to share-holding?

HELD: NO. Even in the absence of a pre-emptive right in the articles, the court has
the power at CL to set aside an issuance of shares at less than market value where the
directors act not in the interests of the Corp, but with the aim of maintaining their own
control. [From Annotated CBCA, s.28(1).]
       Further, if a corp does not require capital, the directors cannot issue new shares with
the aim of maintaining their control. [From Annotated CBCA, s.25.]

          ie. There is a limit on free enterprise.
                                                                                                                             69


FACTS: There were initially only three shareholders in a closely held corp. The principal shareholder initially had a 51% share
in the co.; another had a 42% int; a third had a 7% int.
            Prob arose when new shares were issued by the corp to the 51% owner. The new shares were issued for three
purposes, acc to the testimony of the corp:
1) to add equity to the corp to reassure the bank re the corp's debt
2) to assure unopposed administration of the corp
3) to resist takeover
            The prob arose b/c the 51% shareholder no longer saw eye to eye w/the 42% shareholder. After a point, they were
no longer on speaking terms.
            This is how the issuance of shares worked out:
New shares were issued at 10$.
Value of all shares, acc to evidence of pltf, diminished from $27.70 to $18.90 after the issuance of these shares.
            The main prejudice that the 42% shareholder was claiming was that he was faced this diminution in value, w/o being
able to participate in the purchase of the shares.


___________

We now should think about:

1) Q: Why is it desirable or undesirable to grant a remedy to minority shareholders in this sit?
   A: Majority of students says desirable, minority says undesirable.
      Generally, it's desireable.
      It's undesirable to grant pre-emptive rights:
     a) when co is near insolvency
     b) when smone is making a stated bid for control.
  This is b/c if you grant rigid pre-emptive rights, it makes it more difficult, prof says.

2) Q - If it is undesirable, what should the remedy be?
   A - Stop/ setting aside the transaction. See s.241.

3) Q - Should minority shareholders always have pre-emptive rights, systematically?
   A - Prof: Generally, yes. But this has led to a # of difficulties (exceptions), eg. where
you want to offer shares to managers in bonus arrangements.

4) Q - Would the absence of pre-emptive rights mean that there is no ownership?
       ie. Does this mean they don't have partial ownership of the corp?
   A - The more you favor pre-emptive rights, the stronger is your view that there's an O
interest attached to shares.



Promoter's duties and Gluckstein:

- Promoter = agent = A person (may be a manager/ shareholder) who acts for a corp. We
discuss promoters in the context of their inappropriate behaviour, eg. One who enters into a
K in the name of a Corp before it comes into existence (with themselves/ with outside TPs),
or One who acts like Gluckstein, and does not disclose material facts to investors.


Gluckstein v. Barnes: [HL 1900] [p.247-251]:

- In this case, L. Macnaughton was biting in his denunciation of the acts of the promoter.
Ask yourself how bad this action was on the part of the promoter.

FACTS: Promoter buys debentures and mortgage of bankrupt theatre company.
Then buys theatre for 140,000 pounds.
Then incorporates co and sells the theatre to it for 180,000 pnds. [171,000 pnds cash + shares.]
Then pays for theatre, debentures and mortgage, making 20,734 pnds on the debt.
                                                                                                                          70

Shares in this co are sold to the public.
In the prospectus outlining this investment opportunity, the flip was disclosed, but the was
profit on the debt was not disclosed.
Co then goes bankrupt.

ISSUE: One of the creditors of the co sues the promoter, saying there was fraud, robbery,
misrep here b/c investors didn't know the terms on which they were coming into the co, and
thus the undisclosed amnt of profit should be used to reimburse the creditors.

HELD: The promoter committed robbery.                      [[McNaughton says he doesn't shed too many tears for the promoter,
and alludes to the fact that u should make use of the honour that should exist among a lower class of robbers in seeking
recourse of his lower thieves. ]]


RATIO: There's a material fact here that isn't being disclosed, so investors do not
know what they're purchasing. In fact, they're being fleeced, b/c this transaction didn't add
value to co; rather, it put $ in someone's pocket. U can do this if investors are informed, but
if investors are not informed, this amounts to robbery.

- Prof: Can look at facts of Gluckstein as robbery (as did McNaughton) or can see that here's
a smart investor who figured out a smart way to finance the business.

- This is the antecedent of disclosure rules. This is the basis for the modern req to
disclose.


Oct 22 [I took down all the screens.]

- www.aircanada.ca - see questions and answers on the disclosure regime
- Quiz: On material from chpt 2 to chpt 5.


DISTRIBUTION OF SECURITIES: [Csbk, Chpt 5]:

- We are looking at the securities regime not to give us a full accnt of the securities regime.
Rather, it's to introduce us to the corporate form rather than the ways in which securities get traded.

- We will look at the disclosure regime and disclosure requirements re securities investments.

- "Security" (as opp to a share) = any tradable right in debt or equity of a Corp, eg.
stocks, bonds, debentures. ie. It is a broad term that incl debt and equity.

- The purpose of securities is to seek investment from the public.

- Partnership stakes fall w/in the definition of securities, in principle. But they are exempt
when associates/ connected venturers are involved. [There is an exemption in the Securities
Act.]

- Trade (re securities) = any exchange/ sale of securities for valuable consideration. Trade
is a broader term than distribution.

- Distribution (re securities) = trade (ie. exchange/ sale of securities for valuable
consideratn) generally to the public. Distribution is a narrower term than trade.
                               - can be sale or exchange of previously unissued securities or
resale of redeemed or returned securities.
                               - Even a small group of the public can be the subj of a distrbutn.
The def of distribution here is designed to catch as many issue of shares as poss, and then
to provide exemptions to certain issues.
                                                                                                                                 71



- The disclosure regime is designed to build confidence in the market and bring investors into
the market.


Elements of the prospectus process:

- The prospectus issuance is highly regulated because:
a) there is a theory that the only way you can have a secure and reliable and liquid stock
market is if you have lots of info re the stock, and
b) there is a notion that you have to justify using other people's $ in way you will use it.

- NB: There is no req to issue a prospectus when you are not selling shares to the public.

- Preliminary prospectus = the doc filed for inspection [vetting] by Securities Commission
prior to final prospectus. This does not state the quantity or price of shares. It is prepared
for the Securities Commission.

- Q: What's the purpose of the inspection (vetting) by the Commission?
  A: The Commission is not resp to vouch for the quality of the prospectus, but will block
the prospectus if it believes it is not a sound business proposition. The Commission
comments on the doc before it goes public.
     If there is a prob w/the prospectus, can not sue the people at the Commssion.
     Once the prospectus has been inspected by the Commission, it has a legal status upon
which you can rely.

- Q - How do we handle prob of getting inspection for multi-jdctn distributions/ prospectuses?
  A - The inspection of multi-jdctn distribution/ prospectuses in Canada is handled by National Policies #1 [for
multi-jsdctn in Can] and #45 [for transborder distribution, ie. US-> Can or v.v.]. [Check Web]

- "Blue Sky" discretion = merit discretion = Discretion (of securities administrators/
regulators) to assess the merits of the securities being distributed. eg. if unconscionable
consideration has been/ will be given for services, or if the issuers can not be expected to act in the best ints of
securities holders, or if the issuance is inconsistent with public interest.

  [This discretion is known as 'blue sky' because it was said to be intended to protect investors from 'industrialists selling
everything, including the blue sky'.] [csbk, 275]


- Upon receipt of the final prospectus, the security can be sold and the dealer must
deliver a copy of the prospectus to the purchaser.
  The prospectus is part of the sale arrangement. You must accompany the sale of a
security by a prospectus.


Consequ of not observing prospectus regime properly: Liability and Remedies: [276-7]

- Q - What is the sanction for failure to deliver a prospectus to an investor?
  A - Full range of crim, administrative, and civil remedies. eg.
        - penal sanctions incl fine or imprisonment;
        - admin sanctions incl orders such as cease trade, or a denial of exemptions under
        the security act/ rules;
        - civil sanctions incl recission (one of the main remedies) or dmgs (which is time-
        barred - ie. can't say 'where's the prospectus' after five years. Can only impose
        remedy w/in a certain time.)
     [See Jones, below.]
                                                                                                                             72

- Trying to sell shares w/o filing a prospectus is a failure to file sit.

- Q - What is the sanction for failure to file/ obtain a receipt situation? How does this differ
from failure to deliver a prospectus, at the level of liability and remedies?

  A - Can have penal sanctions, such as fine or imprisonment;
     Can have admin sanctions, such as admin orders to cease trading the security until the
prospectus is filed, or a denial of exemptions under the security act/ rules;
     There are no specific statutory civil sanctions for failure to file a prospectus, unlike for
failure to deliver a prospectus. However, there may still be a CL action for recission.


- The Jones case illustrates the issue of CL action for recission where there was failure to file
a prospectus (with the OSC).
HELD: When a prospectus is not filed, the transaction is void.
        When a prospectus is filed but not delivered to the investor, the transactn is voidable.
[277-286]


- Q - What is the remedy for misrepresentation in the prospectus (untrue statement or
omission of material fact affecting value)? [287]
   A - Civil remedies such as recission or damages against the issuer, selling security holder,
underwriter, director, expert adviser, signatory (can be CEO), even in absence of reliance
(see BarChris case). Don't have to show reliance.
      These civil remedies are stated in most Canadian securities acts.
       [Misrepresentation is one area where the securities act will trump the general principle
of limitations on liability.]

- Material fact = a fact is material if it affects, or could reasonably be expected to affect, the
value or market price of a security.


Continuous Disclosure Regime: [318-322]

- We are talking about disclosure regime process b/c we are talking about process of capitalization - ie. once you’ve created a
co, how do you get $ to it? The intersection btw securities law and corp legislation relates to capitalization.


- One must continuously disclose periodic reports (in financial statements/ in press releases)
of material changes affecting the reporting issuer. Eg. financial reports, proxy circulars, and
insider trading reports.

Under US securities regulation, this concept has expanded to include material information -
that is, not just change in the bus affairs of the co, but also changes in the envir in which the
company operates that will affect the firm.

- Reporting issuer = Generally, one who has issued securities under a prospectus or has
listed stock on the stock exchange. ie. once you're in the system, you're caught.

- One must disclose the material reports as soon as practical upon a material change, as
they arise. Otherwise you are liable. Why? Concern of insider trading; that insiders will act
on info before the public.

- If there is misrep, one can be held liable in an action for negligent misrep.
  [Case law in US suggests there is a very minimal test for reliance.]
                                                                                                                  73



Proxies:

- Proxy = a) a doc by which a shareholder has designated another person to exercise his
votes at a shareholders' meeting.
          b) also, the person who is designated in such a document. Such a person, who is
also sometimes referred to as a proxy holder, must act in accordance w/the instructions of
the shareholder. [PROF: NO; this is a proxyholder]

- Until a proxy doc is executed by the shareholder, it is called a form of proxy. [s.147-8]

- Solicitation of proxies = seeking the votes of shareholders in favor of a resolution or the
election of directors at a meeting of shareholders.

- Mngmnt of a Corp with more than 15 shareholders must solicit proxies. [s.149(1)(2)]
  Management must send to shareholders:
 (a) a "management proxy circular" in a form prescribed by regulation and
 (b) a form of proxy.

- Management proxy circular = an information doc that management of a Corp with 15 or
more shareholders must send to shareholders/ security holders in advance of votes.
                                 - its form is prescribed by regulation
                                 - it includes general disclosure about the Corp, as well as
specific disclosure about the items of business to be dealt with at the meeting.

- One cannot solicit proxies without sending out a management proxy circular (where
solicitation is on behalf of Corp's management) or a dissident proxy circular (in the case of
any other solicitation). [s.150]
NEXT: Chpt 6 on Corp Governance p.367-> p.390.




Oct 26

Control of a Corp:

- Control (of a Corp) = ability to have material effect on decisions of Corp [ie. this is a loose
and open-ended def.] [Securities Act definition.]
                      - So there is no rule that you have to have, eg. 50% + 1 for control.

- One might argue you want 66% of shares for control so you can effect changes to articles of incorp. ie. there
could be dif degrees of control exercised by shareholders.

- NB: There are a # of cos that are successfully controlled w/less than 50% ownership of
shares. eg. Teleglobe Inc.


Disclosure exemptions and their nature:

[NB: What is in csbk is based on an older rule where distributions to the public are not always
exempt.] [But then prof said: Distributions to the public are also not always exempt today.(?)]

- Unless provided by legislation, all distributions are subject to the disclosure regime.

- There are 2 categories of exemptions to the disclosure regime, provided by legislation:
                                                                                                                                     74

  1) "No need to know" category:
       This includes Private placement = when there's a certain, very large, legislatively est
amnt of $ that can be spent; and any investor who investing this doesn't have to comply with
the exemptions, b/c it's assumed the investor is sophisticated enough [not to need the
prospectus? - see Vz].
       Also incl. large volume purchaser; seed capital; private issuer; earlier prospectus (stock
dividend, rights offering, conversion privileges).

 2) Friends and associates/ common bond exemption.

- Some distributions to the public are exempt, but for this, you have to find a specific narrow
exemption.
  Also, there isn't a basket exemption for distributns that are not open to the public. [Correct?]

- We had a closed system of exemptions from the SEC regime; now they are specific
exemptions rather than general.

- If you have purchased through an exemption to the disclosure regime, you can only trade/
re-sell to others who purchased thru an exemption. ie. there is a closed market/ closed
system. [One who purchases securities pursuant to an exemption can only re-sell within a closed market of person who are also exempt.]


Accelerated Prospectuses: The POP system, shelf offerings, & the PREP system: [343-6]

- The Accelerated Prospectus rules create a less onerous regime for sophisticated issuers
who have been in the market (trading on the stock exchange) for years (and for others as
well?), to allow them to respond to market changes quickly.

- The purpose of these rules is to allow issuers to do what the system is designed not to do; ie. to put things out
in dribs and drabs.

- There are 2 options:
1) POP system - Prompt Offering Prospectus
2) Shelf offering.

1) POP = to reduce vet (inspection) time of securities regulators using continuous disclosure
docs, and to come up w/a simplified prospectus that draws on the continuous disclosure
docs.
         - So the prospectus is not just a snapshot in time of your co at date x, but is info
that's being put to the public over a longer time.

This is kind of thing that could lead to a shelf offering.

2) Shelf offering - to be eligible to offer through a shelf offering, the issuer must be eligible to
                  use the POP system
                  - a system of offering securities which uses a two year window to distribute
                  the securities
                  - only requires the issuance of a prospectus supplement (not a full
prospectus), usually using the post-receipt price procedure (PREP).

PREP - the PREP procedures allow the issuer to issue a final prospectus that does not set
out the price and any price related information.
        - these procedures are intended to reduce the risk of fluctuations in the market price
of securities btw the time the final prospectus is filed and the time a receipt is given for the
final prospectus. [345]
                                                                                                                               75

      - an issuer is eligible to use the PREP procedures if it is eligible to use the POP
system.
        - allows you to ID the price after you have issued a prospectus on this system w/in a short period of time w/in your
announcement of your decision to enter the market.

- So we see that there's a way of having the prospectus system applied w/less bureaucratic weight to it, if you
have a track record. If you have a track record, you may opt into this system.



Interplay btw bus law and securities law (and sum of disclosure regime):

- Bus corp law, as reflected in the CBCA and parallel legislation, does not purport to govern
confidence in the market for the securities that would be created by incorporation, and at the
same time, securities law does not purport to govern how those who are issuers of securities
are structured internally and what the rules applicable to their bus decisions might be.

- So bus law and securities law are in 2 sep corners, but come into contact b/c of sits like, eg.
private issuer v. public issuer.

- In the market, the most imp thing is not respecting bus law, but respecting securities law.

- We regulate the market thru securities law by ensuring that those who want to invest have
adequate info to make those choices.
  This may be an indication that there's no such thing as deregulation; there's only
displacement of regulation.

- From securities regulation, we see that there's an intersection btw corporate law and the
ways in which capitalization is allowed thru offerings to public; the eq side.


Legal model of the corp:

- s.102(1): Subj to any unanimous shareholder agreement, the directors shall manage the
bus and affairs of a corp. = overarching section.
            - In some measure this is a legal fiction b/c the BOD often delegates its authority.

- s.103(2): Shareholder approval of by-laws at next meeting and amendments.
- s.103(5): A shareholder entitled to vote at an annual meeting may make a proposal to
make, amend, or repeal a by-law, subj to s.137.
- s.109: Re removal of directors by shareholders.

- s.115, s.121, discuss powers of delegation of authority.
- s.115: Delegation of authority to managing directors or committee.
- s.121: Power of directors to create officers and delegate to them.

BUT s.115(3): There are limits on what powers the directors may delegate, subj to a USA.
              This includes: power to submit to shareholders, fill vacancy, issue securities,
purchase redeem shares, declare dividends, pay commission for sale of shares,
management proxy circular, takeover bid circular, annual financial statements, by-laws.
                                                                                                                             76


Directors = appoint officers, delegate mngmnt pwr to offs, and specify offs' duties EXCEPT
            pwrs in s.115(3). [s.121]
          - Control the proxy solicitation process. [See p.60; s.137(4), 149, 150]

Officers = management (in practice)

Shareholders = owners. They elect directors. For powers, see p.61 of sum!
             - rather than think of it as O, think of it as bundle of rights and obs; also
               passive investors. [p.63-4 sum]

Thus, control is held by Directors and Officers.
[Issue - those in control don't nec have incentives to maximize the ints of owners.
So monitor Corp managers' behaviour. Minimize costs by a LL regime. Investors' potential losses are limited to the amnt of
their investment, as opp to their entire wealth.]

- CBCA has flex built into it which allows firm to have a close manager-O rel where appropriate -> This is through USAs. [s.146]


- Directors may also remove officers. [p.380]

- Under the CBCA, the corp is formed by
1) filing articles of incorp
2) filing a notice of the registered office of the corp
3) filing a notice of directors
4) paying the prescribed fee
5) doing a computer-based name search if it is not a #ed name. [For more on names, see p.164]
[ss.7, 19, 106] [p.163]

- After the corp is formed, the directors will pass organizational resolutions under s.104(1).
[p.167]

- The main docs for setting up a corp:
a) Articles of incorporation. - For what it must incl, see p.54 of sum.
                                - Describes the corp.
b) By-laws. - Internal regulations and business and affairs of the corp.
c) Shareholder's agreement.


- By-laws - can simply be changed by the board of directors, OR by shareholders if such a
provision is included in the bylaws, articles, or a USA. [a.103(1)]
  Articles of incorp - can only be amended by a special resolution of 2/3 maj [a.173]


Common v. Preferred shares: [201, Ebert; sum, p.66]:

- Common shares = shares whose owners have last claim on the Corp's assets, (after
creditors and owners of preferred stock) but who have voting rights in the firm.
           - have no rights/restrictions re voting, dividends, + distributions on liquidation.


- Preferred shares = shares whose owners have first claim on the Corp's assets and profits
(are generally paid dividends before common shares), but who usually have no voting rights
in the firm. [Ebert]
         - have special rights/ restrictions re voting, dividends, + distributions on liquidation.

- The rights attached to preferred shares must be stated in the articles of incorp under CBCA
                                                                                                    77

s.6(1)(c)(i). If the directors wish thereafter to issue a class of shares not provided for in the
articles, they must cause the articles to be amended.


CBCA summary:
s.5: Incorporators must be 18+, not bankrupt. Individuals can incorp. (Salomon)
    You incorporate by signing articles of incorp.

s.6: Articles of incorp, and req of what it must include.

s.7: Delivery of articles of incorp.

s.8: Certificate of incorp.

s.9: Date of creation of Corp is the date shown in the Certificate of Incorp.

s.10: Corp name must incl the LL nature of the corp.
      See p.45 of sum.

s.11: Reserving corp name.

s.12: Prohibited names.

s.14: Written pre-incorp Ks may be adopted by Corp as long as they are ratified (accepted)
by Corp within a reasonable time after corp comes into existence.
      See p.57 sum.

     Also, if a promoter seeks to avoid liability, he must provide so under s.14(4).

s.15: Capacity of natural person.

s.16(2): "a corp shall not carry on any business or exercise any power which it is restricted by
its articles from carrying on or exercising."

s.16(3): No act of a Corp is invalid just b/c the act is contrary to the Corp's Articles of
Incorp or to the CBCA.

s.17: No person is affected by or is deemed to have notice or knowledge of the
contents of a document concerning a corporation by reason only that the document has
been filed by the Director or is available for inspection at an office of the corp.
      ie. notice of contents of articles of incorp used to be implied to TPs. (constructive
notice). This has now been reversed under s.17.
      = TPs don't have due diligence re the nature of those docs.
      Sum p.58.

s.18: A Corp/ its guarantor [ie TP] can't assert the Corp is ultra vires, unless the person
asserting so has / ought to have knowledge to the contrary. [Indoor management rule.]
     Sum p.58.

s.19-23 : Registered office and records.

s.20, 21, 155-160: Filing reqs: Must file articles, bylaws, USAs, minutes, securities
        register, annual financial statements.
                                                                                                                                                     78

             See p.45 of sum.

s.24(3): Where a Corp has only one class of shares, the rights of the holders thereof are
equal in all respects and include the rights
  (a) to vote any meeting of the shareholders of the Corp;
  (b) to receive any dividend declared by the Corp; and
  (c) to receive the remaining prop of the Corp on dissolution.

s.24(4): Bowater: the rights which are attached to a class of shares must be provided
equally to all shares of that class.
        This interpretation is founded on the principle that rights, including votes, attach to
the share and not to the shareholder.
        Sum p.64

s.25(3): A share shall not be issued until fair consideration for the share is fully pd.
        Sum p.66]

s.28: Articles may provide for pre-emptive rights (ie. offer of new shares to existing
shareholders). [Default (non-mandatory) rule]
[ s.28(1): If the articles so provide, no shares of a class shall be issued unless the shares have first been offered to the shareholders of that class,
and those shareholders have a pre-emptive right to acquire the offered shares in prop to their holdings of the shares of that class.]


s.28(2)(a): Shareholders have no pre-emptive right re shares issued for a consideration
other than money.
    - It's undesirable to grant pre-emptive rights when a) co is near insolvency, & b)
someone is making a bid for control.

s.38: Underprotection of employees in Bankruptcy: The CBCA does not protect
shareholders when there's issuance of dividends which pushes co toward bankruptcy.
      Sum p.51.

s.45(1): Liability of shareholders, or lack thereof. Also s.38(4), 146(5), 226(5)
         See p.41 of sum.

s.102(2): A corp must have at least one director; A public corp must have at least 3 dir.
          At least two directors of a public corp must be outsiders, ie. "not officers or
employees of the corp or its affiliates." [s.102(2)]
         p.85 sum.

s.103(1): The directors may, by resolution, make, amend, or repeal any by-laws that regulate
the business/ affairs of the corp.
           But this is only a default allocation in favour of the dirs since this power is subj to
the articles, by-laws, or a USA. [p.379] ie. if there's provision in the docs for shareholders to
change the by-laws, this overrules the director's power.

 s.103(2): Shareholder approval of by-laws at next meeting and amendments.

s.103(5): A shareholder entitled to vote at an annual meeting may make a proposal to
make, amend, or repeal a by-law, subj to s.137.

s.104(1): Directors can pass organizational resolutions after the Corp is formed.

s.106(1): Notice to directors must be sent from the incorporators, at the time of sending
articles of incorp, and must incl names and addresses of directors.
                                                                                                            79

s.106(2): Dirs hold office from date of incorp to date of first shareholders meeting.
First shareholders meeting must be held w/in 18 mos of incorp. [s.133(a)]

s.106(3): Shareholders must elect directors at each annual meeting. Can't waive this,
even by a USA. [B/c since dirs manage the corp, the election of dirs is a sig way the shareholders
can exercise some control over the corp management.] Dirs are usually elected for a year, from
one annual meeting to the next. Articles of incorp may provide for dir's terms of up to 3 y.

 Annual meeting must be called each 15 mos. [a.133(1)]

s.106(5): If dir's term is not stated, it's til the next annual meeting.

s.106(6): If no directors are elected at an annual meeting where dirs should be elected, the
incumbents remain in office until successors are chosen.

s.108: A director ceases to hold office when he dies, resigns, is disqualified, or is removed
from office by shareholder resolution.

s.109: Removal of directors by shareholders.
s.109(1): Shareholders may remove directors by ordinary resolution.

s.114(2): The quorum is a maj of the board/ of the min # of directors in the articles.
s.114(5): Notice to directors, but this can be waived under s.114(6).
s.114(8): Can have a one-person meeting.

s.115(3): Exceptions to what directors can delegate to officers.

s.116: If there's a defect in qualification of a director/ officer, his acts may not be valid.
      This s. amounts to a deemed actual authority to bind the Corp in dealings w/TPs.
      Sum p.58-9.

s.118: If directors haven't issued shares for fair consideration, they are liable.
       Sum p.66; also s.25(3).

s.119: Statutory rems for unpaid wages.

s.121: Director's powers; delegate to officers except powers in s.115(3).

s.122: Director's duty to act in best interest of corp.

s.126(1): Definition of insider.
s.127(2): Insider trading reporting req: A person who becomes an insider must send an
insider report to the Director of that Corp w/in 10 d of the end of the month in which he becomes an insider.

s.133: First shareholders meeting must be held w/in 18 mos of incorp, and subsequently
w/in 15 mos after the last annual meeting.
       Special meetings can also be called.

s.137: Shareholder proposal of discussing issues at a meeting. Also, circs in which a co
must handout a list of shareholders.

s.137(5)(b): If a proposal is submitted by the shareholder primarily to enforce a personal
claim/ redress a personal grievance against the corp, then the corp is not required to
circulate a shareholders proposal.
                                                                                                  80

s.139: Quorum for shareholders meetings.

s.142: USAs: Shareholder resolutions may be passed by the unanimous consent of
shareholders, rather than having them hold a meeting.
              Shareholders may agree to restrict powers of the directors to manage the
Corp. But only valid if a) in writing, and b) unanimous among shareholders. The
shareholders may decide they want to run the corp themselves (assume directors' pwr.)
       p.55, p.60 of sum.

s.143(1): Requisition (forcing) of a shareholders meeting by at least 5% of shareholders.
          See p.42-3 of sum.

s.144: On application by shareholders, a court may order a shareholder's meeting to be
called if it is "impracticable" to call/ conduct a meeting in another way/ for any other reason
the court thinks fit.

s.145: Application by shareholder / director for court order to resolve controversy re
election/ appointment of a director. The court may make any order it thinks fit.

s.146(2): The shareholders can strip the board of all authority and give primary managerial
resp to shareholders.
s.146(3): USA of single shareholder is okay.

s.149: Proxies: Management of a corp with more than 15 shareholders must solicit proxies.
         Must send to shareholders a) a management proxy circular, and b) a form of proxy.

s.150 -1: One cannot solicit proxies without sending out a management proxy circular (where
solicitation is on behalf of Corp's management) or a dissident proxy circular (in the case of
any other solicitation), with the exception of a director order.

s.152: Proxyholder attends meetings with same rights as shareholder and, unless conflicting
instructions, may vote by a show of hand. (s.152)
        If you hold conflicting proxies (conflicting instructions by more than one shareholder),
if you have a vote by hand, you're in trouble. [Exception to the exception.]

s.154: Interested person or Director may seek restraining order, or other remedies, for a
misleading circular.

s.173: Amendment of articles of incorp: can only be through a special resolution.
s.175: Amendment of articles of incorp: A director/ shareholder can make a proposal to
     amend.

a.176: Class votes [Also s.183]

Shareholder approval is required for:
a) amalgamation of the corp w/another corp [s.183(5)];
b) sale or lease of a corp's assets [s.189(3)(8)];
c) continuation of the corp under the laws of another jurisdiction [s.188];
d) liquidation or dissolution of the corp [s.211].

In these four cases of fundamental changes, shareholders are generally entitled to vote wh/
not their shares carry the right to vote. [s.183(3), 188(4), 189(6), 211(3).]

s.181-6: Amalgamation.
                                                                                                                81

s.181: Amalgamation def = where wholly owned by another or both corps are owned by the
same person and become one. [s.181]

s.183: Class votes [Also s.176]

s.184: Short form = amalgamations approved by a holding co, [ie. a co that owns subsidiaries].
                        - no shareholder is affected b/c these are wholly owned entities. The holding co makes cos
into single entities.

s.184(1): Vertical short form amalgamation = made btw a holding corp + one/ more of its
wholly-owned subsidiaries.

s.184(2): Horizontal short form amalgamation = made btw two / more wholly owned
subsidiaries of the same holding body.

s.186: There is a continuation of the rights, obs and liabilities of the amalgamated firms. i.e
Can't amalgamate just to get out of rights, obs, and liabilities of the firm.
[This was the holding in Black & Decker, Witco, p.998-9]

s.189(3): A sale/ lease of all/ substantially all of the corp's assets (to effect a takeover)
requires approval by special resolution (2/3 maj).

s.190(1): The appraisal rem: If a change is made that the shareholder does not want to
accept re this sections, the shareholder can seek to have the Corp buy them out at fair
market value, acc to a procedure est by law.

Process shareholders must follow if they don't want to lose their appraisal remedy:

1) must indicate your dissent or abstention at time of shareholders meeting
2) must make a written objection to the corp at/ before the shareholders meeting. [s.190(5)]
3) must make a demand for payment within the 20 d. period in s.190(7)
4) must return the share certificates within 30 d. [s.190(8)]

5) if an offer is made by the corp, the shareholder has 30 d. to accept it. [s.190(4)]
   If no offer is made, or if the offer is rejected, the corp can bring the matter to court, failing
which the shareholder has a 20 d period to do so. [s.190(16)]

6) must go to court to ensure valuation process is carried out.


s.194: Take-over bid = an offer to acquire shares that, if combined w/shares already owned
or controlled by the offeror…would exceed 10% of any class of issued shares of an offeree
corp. This is only when the offer is not an exempt offer. ie. involves 15+ shareholders.
       ie. Involves 15 + shareholders and more than 10% of a class of shares.

s.194: Exempt offer = less than 15 shareholders.

s.195: Where a takeover bid is for all the shares of any class, the buyer-offeror may take up
must not take up the shares until 10 days after the date of the takeover bid. = Cooling off
period.

s.196: Where a takeover bid is for less than all the shares of any class, the buyer-offeror
must not take up the shares until 21 d after the date of the takeover bid = Cooling off
period.
                                                                                                       82

s.206(2): If, w/in 120 d. after takeover bid, the bid is accepted by the holders of at least 90%
of the shares, the offeror is entitled to acquire the remaining shares [held by the dissenting offerees.]
            ie. The offeror can buy the dissenting shareholder's remaining shares in a takeover bid sit
if the bid is accepted by 90% of the shareholders of the co to be taken over.


Dissolution of a Corp: [p.152, sum p.59]:
- s.212: A Corp may be dissolved if in default for 1 y of any of the fee or notice requirements.
         Directors must be given 120 d warning in such cases.
- s.228: On dissolution, undistributed assets of the Corp vest in the Crown.
- s.209: A creditor may apply for an order to revive the Corp.
- s.228(2): On revival of the Corp, non-cash assets revest in the Corp.
- s.209(4): On revival, the Corp is liable for obs it would have incurred had it not been
           dissolved.

s.239: Conditions by which a corp can sue:
a) complainant must have given reasonable notice to corp's directors;
b) complainant must be acting in GF;
c) it's in the corp's ints that the action be brought, prosecuted, defended, or discontinued.

s.241: Oppression remedy.
       See p.45, 68 of sum.

s.247: Court order: If nec, anyone assoc w/the Corp can ask court to impose court order re
forcing someone to comply with/ be restrained re the Corp.

s.250: Due diligence defense: No person is guilty…if the untrue statement or omission was
     unknown to him and reasonably could not have been known to him.
                                                                                                                                                          83

___________
FOR QUIZ #3: Chpts 6 & 11:

Chpt 6 - Governance structures - p.369-574
Chpt 11 - Mergers & Acquisitions - p.981-1183


Chpt 6: Governanace Structures:
Agency costs:

Easterbrook & Fischel article on the Benefits of Shareholders' Lmtd Liability: 1985. [p.87-95]:

- The separation of O (shareholders) and control (directors and officers) in widely held corps
introduces an agency cost problem, since firm managers (as agents) have imperfect
incentives to maximize the interest of all claimholders (as principles).

  Such agency costs are ultimately borne by the Corp, which will seek to minimize them.
One strategy that it may rely on is by claimholder monitoring of Corp managers' behaviour.

   But this monitoring has costs too. One way to minimize these costs is the selection of a
limited liability regime: Investors' potential losses are limited to the amnt of their investment
as opposed to their entire wealth.

p.62 of this sum: The market is another mechanism which might constrain agency costs on
the part of managers who are able to control the board. This manifests itself in the following
way: If managers are not getting share value up, then corp raiders [eg Onex] can take
advantage of the undervalued assets of the Corp, and say: We'll buy you out, and that will
allow us to get a better management team in place.


p.369 ->:

- Agency costs arise when one person relies on another (a manager = the agent) to do
something on his behalf. [369]
- We can control agency costs by monitoring the agent. [370]
  The agent may try to assure the principal that he will not engage in activities that will be costly to the principal. ie. he will bond to the principal's
interests.


- The agents usually have the resp to make/ ratify decisions on behalf of a firm.
  Agents = managers (usually)
  Principals = shareholders, claimholders (usually).

- Agency costs will arise b/c of the difficulty in enforcing the claimholders' bargain over time.

- Governance strategies reduce agency costs by giving monitoring duties to claimholders/
related parties. [371]


- Directors = are officially resp for managing the corp, but basically they DELEGATE
this power to the officers and specify the officers' duties.
     - s.102: "Subj to any USA, the directrs shall manage the Corp's bus and affairs."
     - s.121: The directors a) appoint officers. This is the directors' real power.
                             b) specify the officers' duties, and
                             c) delegate to them the pwr to manage the Corp's bus + affairs,
                                                                                                                                                   84

                                  except pwrs to do anything in s.115(3).
       - For the most part, directors determine what goes on the agenda for meetings. [p.186]
       - The directors control the proxy solicitation process. [ss.137(4), 149, 150]

       - NB: It is a FICTION that the directors manage the Corp. This fiction is built into CBCA.
[In practical terms this looks like saying the Gov Gen runs Canada. That may be the way the law is structured under the Constit Act, but in fact
Cabinet runs Canada. ] [Prof.]


- Officers = those who actually (in practice) exercise the power to manage, which is
delegated to them by the directors, and serve at the pleasure of the board.


- Directors must be natural persons, over 18, of sound mind. [CBCA s.105(1)]

- A majority of directors must be "resident Canadians". [CBCA s.105(3)].
  The underlying notion appears to be that Canadians will be more responsive to Canadian national interests [p.374]




- s.106(1): Notice to directors must be sent from the incorporators, at the time of sending
articles of incorp, and must incl names + addresses of directors. ie. when corp is formed.

- s.106(2): Dirs hold office from date of incorp to date of first shareholders meeting.
  First shareholders meeting must be held w/in 18 mos of incorp, and subsequently w/in 15
mos after the last annual meeting.. [s.133(a)]

- s.106(3): Shareholders must elect directors at each annual meeting. Can't waive this,
even by a USA. [B/c since dirs manage the corp, the election of dirs is a sig way the shareholders
can exercise some control over the corp management.] Dirs are usually elected for a year, from
one annual meeting to the next. Articles of incorp may provide for dir's terms of up to 3 y.

  Annual meeting must be called each 15 mos. [a.133(1)]

- s.106(5): If dir's term is not stated, it's til the next annual meeting.

- s.106(6): If no directors are elected at an annual meeting where dirs should be elected, the
incumbents remain in office until successors are chosen.

- s.108: A director ceases to hold office when he dies, resigns, is disqualified, or is removed
from office by shareholder resolution.

- s.109: Removal of directors by shareholders.
  s.109(1): Shareholders may remove directors by ordinary resolution.


- s.145: Application by shareholder / director for court order to resolve controversy re
election/ appointment of a director. The court may make any order it thinks fit.

- Annual meetings: - to elect directors [s.106(3)]
                   - to appoint auditors [s.162(1)]
                   - to file the corp's financial statements [s.155(1)

- Re filling of vacancies: see p.375, and CBCA s.111(1) and 109(3).
                                                                                                                                            85

Bushell v. Faith: [HL, 170] [p.376-379]:

[We study this case to illustrate the majority vote idea.]

FACTS: There was a shareholding that was created by the shareholders that allowed the
directors to triple voting right if removal of a director was at issue.
          300 shares, 100 to each person. All votes were to be equal, except that when
voting to remove a director, the director's shares would carry 3 votes per share.

ISSUE: Is this valid?
HELD: Yes.

RATIO: "Parliament has never sought to fetter the right of a co to issue a share…as it may
think fit."

If you count the majority of votes, this appeared to respect the rule [under s.115 CBCA].
[NB: Must be cautious re differentiating btw # of shareholders and # of votes.]

In Bowater, shareholders in a class of shares had to have the same rights.
Can this case be reconciled w/Bowater? NO.

- Thus, which case is right? It's a balance issue.
- Bushell approach was in essence granting the greatest freedom to the corp to figure out
what the relevant modes re shareholders for the corp should be.

- Bowater - courts concern was w/fraud, and w/ensuring that all members of the class of
shares be treated equally. Here, the court said - no issue in fraud in this particular case, but
its such a big concern that we'll ensure equality of shareholdings in all sits.

- Prof: But in Bushell, it looks like were faced w/fraud, and yet court says the scheme is valid!
NB: In Bowater, everyone knew coming into the arrangement what its nature was.
Bushell - about trying to remove someone from control.

- If Bushell is right, and majorities can be pieced together, this creates difficulties.
  How would one understand which interests are attached to the share?
  This would involve great costs of monitoring the shares and for search costs.

- In Bowater, we're talking about a sit where shares are being sold to the public, but also sit where there's change
of O over long time, so this is no longer a closely held corp, so perhaps we should have a greater degree of
vigilance.

- Are rights attached to a share or to a person?


- There must be classes of shares. [CBCA s.6]
  If you have a single class of shares, it must have voting rights attached to it.
  If you have multiple classes of shares, there is no such req.
- Next: Read Par C on Shareholder Voting rights. [p.390-432.]
[[We will soon be finished creation of corp: we will look at accelerated prospectus regimes that have been added to securities framework.
And then role of directors and officers of corp. and shareholders - b/c we will be looking at internal governance.]]




Oct 29

Q of corp governance:
- We discussed a few wks ago this re what it is that creates incentives for investors to create corp form in the first place.
- Q now: Who, within a firm, has what roles and resps, and how do we insure they're followed?
                                                                                                                                86

- We discussed role of directors, in the context of the Bushell case.
  The prob of changing the composition of the board is critical to figuring out how the board
itself is controlled.

- Corp law has evolved to having a simple majority rule…Then issue becomes: what does
the idea of a majority mean?
  Does it incl the poss that you can try to change the composition of the board by playing
w/the # of votes shareholders/ directors have? That might seem to undo the purpose of the
rule, ie. to ensure that directors can't be entrenched, and that they're somewhat accountable
to shareholders.

- To what degree should one defer to the board investment decisions of shareholders who are prepared to accept the rights
attached to shares, and to what extent should corp law impose transparency to the rule of 1 share/ 1 vote, so as to put ev on
same fting.

- Should 'coattail' provisions be incl when you set up dif classes of shares?
ie. should preferred shareholders, who would not otherwise have voting rights, be allowed to ride on the coattails of other
shareholders when…

- Here we see the interconnection btw rule of shareholders and directors in orienting, if not managing the firm.


- s.103(1): The directors may, by resolution, make, amend, or repeal any by-laws that
regulate the business/ affairs of the corp.
            [But this is only a default allocation in favour of the dirs since this power is subj to the articles, by-
laws, or a USA. [p.379]]

- Power to borrow: see p.380, CBCA s.189(1).
- Declaration of dividends: see p.380, CBCA s.115(3)(d).
- Directors may also remove officers.


Remuneration/ employment of directors (and officers) (2 levels of
managers):
Re Paramount Publix: [1937, US] [381-384]

FACTS: K was entered into by corp w/an officer (manager in practice) and the directors now
want to exercise their auth to manage the corp so as to get out of that K.
         It looks, prima facie, that the broad discretionary pwers the directors have to
manage the corp are ample enough to put an end to the K of employment w/the officer,
despite an undertaking to employ the officer for a # of years.

HELD: Under s.60 of the NY State Corp Law, broad discretion is given to directors to
manage corp, [like s.102 CBCA], but we think that should be construed narrowly, and
shouldn't be interp to allow hiring and firing at will.

Prof thinks this is a good holding.

This raises 2 qs:

1) Is the court's interpretation of s.60 of the NY State Corp law convincing? (only gives the
pwr to directors that a principal would have w/r/t agents.)

2) Why does court go to such lengths to undo the effects of s.60 and limit a discretion of the
directors that otherwise looks v. broad?

Boards operate thru officers:
                                                                                                                 87

    It would make it v. difficult to organize the market for mngmnt and senior officers if there
wasn't some ability to make remuneration pckgs stick.
ie. So must make employment Ks/ remuneration pckgs stick.


Fact patterns re employment of managers (officers & directors):

Shindler:
FACTS: A firm negotiated a change in O. A special resolution approved removal of the managing director under
a 10 y K.
ISSUE: Should this give rise to br of case?
        Most of class thinks it should.
HELD: It was held to be br of K, b/c change of circs was at the behest of controlling shareholder.

Southern Foundries.
FACTS: An aquired co comes in, changes articles of incorp and basis for dismissal. Withholds discretion of the
board.

Prof: As a manager, your better off entering into a K and ensuring that the K is a long term K and has penalty cl in
it. (don't rely on doc of firm)

- Is it a gd idea to limit the ability of the board to bind executives? Prof thinks yes.


The purpose of boards:
If the BOD is even constrained in hiring and firing, what's the role of boards?
The management function of the BOD is actually quite limited. [No kidding. They delegate it.]
So what useful role should the board serve if it's not really management?

Summary of the purpose of boards: [M. Eisenberg of the American Law Institute]: [In rank order]:

1) select, evaluate, fix compensation of executives
2) oversee conduct of business to evaluate management
3) review financial objectives and major plans of the corp. [Boards can do 'friendly vetting']
4) review auditing and accounting principles.
5) Board can also, if they choose, exercise power to
        a) initiate and adopt plans
        b) changes in accounting principles
        c) provide advice
        d) instruct committee or executive
        e) make recommendations to shareholders
        f) mange the business of the corp

Prof sees first 2 elements as being closely connected.
Control of the proxy process is one of the things boards should be involved in.
[Proxy = permitting someone else to vote for you.]


- s.114(2): The quorum is a maj of the board/ of the min # of directors in the articles.
- s.114(5): Notice to directors, but this can be waived under s.114(6).
- s.114(8): Can have a one-person meeting.

Who should be on the board?:
- In order to fulfill the role of selecting and monitoring, Eisenberg believes
        - that the board should be controlled by non-management outsiders
        - that the board's audit committee be made up exclusively of outsiders, and
                                                                                                                                               88

           - that the outsiders on the board be in sole control of the corp's proxy machinery.
[p.387]

- s.102(2): A corp must have at least one director; A public corp must have at least 3 dir.

- What proportion of the board should be non-management outsiders?
  s.102(2): At least two directors of a public corp must be outsiders, ie. "not officers or
employees of the corp or its affiliates." [s.102(2)]
              This includes the corp's retired executives & outside counsel. Such people are
not wholly indep of management's influence. [389]

This is not a v. onerous rule. A min of 2 does not look like a lot.
But in Can and US, reality is that 3/4 of BODs of large corps are made up of indep directors.
So the practice favors indep directors.

- Why indep/ outsider directors? Partly to reassure investors; to be outside of
management's influence.

- How good a safeguard do indep directors provide? Prob limited safeguards.

- EXAM?: However, the most useful kind of outside dir is likely one w/some rel to the firm.
  Gilson and Kraakman have recommended reinventing the outside director as a full-time
professional director who would have the requisite expertise. [389]

- What about 'professional' indep directors appointed and monitored by institutional
investors? This accompanies the idea of monitoring agency costs by institutional investors.
= idea that we should have a group of directors who are employed to do nothing but monitor
the ints of shareholders. This has developed to some extent, but is not a sig part of the day
to day operation of boards.


Shareholders v. Directors: The extent to which directors control the corp:

- There are occasions on which shareholders want to wrest control of the corp back from the
BOD; they feel that they are the Os, they should be able to do this. They proceed by way of
majority vote.

Automatic Self-Cleansing: [1906 Eng] [p.390-4]:

FACTS:         Articles provided that "the management of the business and the control of the company shall be vested in the directors, subj ..to
such regulations…as may from time to time be made by extraordinary resolution (3/4 shareholders)."
              At a general meeting, a resolution approving the sale of assets was approved by simple majority and the dirs were instructed to carry
the transaction into effect. The dirs refused b/c they thought the terms wouldn't ben the co.


= Ex of where shareholders opposed the bus strategy of the BOD.
  Context: The articles included provisns which basically made it hard to get rid of the board.
  The board didn't want to do the bidding of the maj of shareholders; the shareholders
decided to act alone.

HELD: Tough, shareholders (you) are not resp for management of the corp; that's the role of
the BOD. ie. shareholders can't remove the board. If shareholders weren't happy, their
option was to sell their shares.

- But since this case, the law has evolved to a more equitable balance btw
shareholders and directors, to say that shareholder CAN get rid of directors by maj
vote.
                                                                                                                                     89


- Why are shareholders who want to sell assets greeted so coldly in Automatic Self-Cleansing? Notice that directors could only
be removed by special resolution. Notice the K theory of the corp in Cozens-Hardy LJ. Does this mean that shareholders can
enforce the K for any br of the articles? See CBCA s.239


s.239: Conditions by which a corp can sue:
a) complainant must have given reasonable notice to corp's directors;
b) complainant must be acting in GF;
c) it's in the corp's ints that the action be brought, prosecuted, defended, or discontinued.


Nov 5

- IMP: Air Can decided to treat Onex's bid as hostile b/c AC said Onex was undervaluing the shares.

- [Que Sup court is deciding on whether the Onex bid is legal. Why prov court?
  Constitutionally, there's no exclusive jdtn for fed courts; there's general superintending power of superior courts
to attend to legislation. ]



Powers of shareholders: [p.396 -8]:

Areas in which shareholders can make a difference:

1) Deadlock breaking- if there's deadlock on the board, s-holdrs may be called on to break it.

2) Election of directors.

3) Approval of by-laws [s.103(2)]
    Propose changes to bylaws. [s.103(5)]
    Actually change the bylaws, subject to the articles, by-laws, or USA. [s.103(1)]
If there are no provisions in the documents for shareholders to change the bylaws, the
directors have the power to change them. [s.103(1)] ie. Directors can adopt bylaws, but then
those bylaws have to be voted on in shareholders meeting.

4) Vote re fundamental changes in the Corp by special resolution - need 2/3 maj of
shareholders. [s.173(1)]

5) Shareholder approval is also required for:

a) amalgamation of the corp w/another corp [s.183(5)];
b) sale or lease of a corp's assets [s.189(3)(8)];
c) continuation of the corp under the laws of another jurisdiction [s.188];
d) liquidation or dissolution of the corp [s.211].

In these four cases of fundamental changes, shareholders are generally entitled to vote wh/
not their shares carry the right to vote. [s.183(3), 188(4), 189(6), 211(3).]
Voting shareholders - vote re adopting resolutions, but re takeover bid, all the classes of shareholders must be involved as well.


If a change is made that the shareholder does not want to accept re this sections, the
shareholder can seek to have the Corp buy them out at fair market value, acc to a procedure
est by law. = the appraisal remedy. [s.190(1)]

- If there are changes that affect class or series of share, there is the opportunity/ remedy for
shareholders to redeem themselves (sell their shares?) under s.176.
                                                                                                                                                     90

- Class votes: ss.176, 183.


Why coattail rights on takeover?:

- Coattail rights = When non-voting shareholders are granted voting rights in a takeover sit.
[Get more specific def?]

- Why are coattail rights given in takeover sits to preferred (non-voting) shareholders?

- There was famous litigation about 1 decade ago re Can Tire & this sit:

    Can Tire tried to takeover co where there was only a small # of voting shares, and a
huge block of preferred shares. The premium on takeover was going to go entirely to voting
shares so as to achieve control. People were angry. Why?

    Premium = some shares were getting more $ than others, tho they were all equal risk
takers in the Corp. Control of a Co has value, and if you distribute it among all
shareholders, all would get equal amnt. But here, to buy out the co, Can Tire offered voting
shareholders much more $ than non-voting shareholders.
                      = what you're getting over and above the val of the shares traded on the market. If all the cash goes to some of the
shareholders, that is unfair to the other shareholders.


- Behind this is the subject of duties of directors. Directors have a fid duty to all the
shareholders. The oppression remedy, which was invoked in the Can Tire case, is about
one group of shareholders being oppressed (in view of other shareholders).
- Will managers make optimal decisions on the allocation of voting rights to match investment in firm-specific human capital [ie. work people do /
skills they have that are only useful for a specific firm; if they go elsewhere, they will have to retrain]?


- Managers have the job of figuring out how many voting rights there should be and how to
apportion. When a firm is taken public, the managers have the greatest imput in allocation
of voting rights.

- Are there proper incentives for managers to apportion voting rights appropriately?
 [This q looks wrong b/c it looks like the managers (officers), and not the directors, allocate voting rights, but it is the reality of the Corp.]
 There is a sense in which the allocation of voting rights is interrelated to the incentives
managers themselves face.

- Note: it's not always just managers, tho managers may think of themselves as the most imp
human resource management.

- Can't investors simply pay for degree of participation and control they want?

- If managers make it difficult to get access to voting shares, they may structure it so that that
is the only investment vehicle…


- Is there a dif in the way voting rights are allocated in issuance, and they way they're allocated in recapitalization
of the firm? (OSC policy s.123 majority of the minority rule.)

The OSC policy in this respect is policy 123 - re majority of the minority rule - must respect the majority of minority
shareholders. That policy is reflected in the rules of the CBCA we saw a moment ago.



One share, one vote: [p.399->]
                                                                                                                 91

- Should restricted shares be prohibited? ie. Should we go further even than coattail rights,
and have a rule that would require one vote for each share?

- Arguments in favor of 'one share, one vote':
1) Avoid transaction costs (lawyers fees, disclosure reqs).
2) The dif btw being a gambler shareholder (no vote) and being a proprietary shareholder
(voting rights).
3) Underpinnings of confidence in market place.

- Arguments against 'one share, one vote':
Many (student says).
1) Firms should be able to structure themselves as they chose - if they want to issue shares
w/o one share one vote, they should be allowed to.

- Casebook is against one share, one vote.
- Prof: The one share one vote movement emerged out of complex rights.


- Class voting rights - see p.398


Jacobsen case: [1980, Alta] [p.404-9]:

- Illustrates where there might be limits on ability to structure voting rights.

FACTS: Was single class of shares that ran counter to default rule in CBCA that if there's
one class of shares, all votes must be attached to that class. [By-law: That no one person
was entitled to vote more than 1000 shares, notwithstanding actual # of shares.]
           So this kind of limit purported to change this scheme of the CBCA.

HELD: This was invalid.

RATIO: This violated the presumption that all shares confer equal rights and liabilities, and
that if voting rights are to vary, then separate classes of shares must be created so that the
dif #s of votes can be attached to the shares themselves and not to the holder.

- Suggests that, under the CBCA, rights must be attached to shares and cannot be made to
depend upon the identity of the owner of the shares. [p.409]

- Different voting rights may be attached to dif classes of shares.
Next class: Read Part E on proxy solicitation closely and part F and G with a light touch. [503-563]




Nov 9

- Friday's Que court decision on Onex v. AC.

FACTS: Onex wanted to have a bid that would allow it to convert existing voting shares in to class B shares
which would not have voting rights re the election of directors.

There were three steps Onex wanted to change to effect change in shares and directors.
1) wanted to tender shares. IF it achieved 66.6 % it would have proceeded w/a change in the articles of incorp
and a change to directors to corp.

a Change to articles would allow Onex to take common shares and turn them into class B shares, [this is rights]
and thus respect the 10% rule under the Air Can act.
                                                                                                                   92


Find this judgement on Quicklaw. READ THIS JMNT!!!

What was meant by tendering to a bid?

Does control pass from party A to party B on purchase of shares?

Tendering to a bid = …. Fill in

The moment at which Onex takes the shares and becomes a controller of those shares.

RATIO:

OBITER: Onex had advance notice of an order exempting…. And Onex started accumulating shares in advance
of this notice, and started purchasing shares in advance of this notice - unequal playing field.
Judge did not decide the case on this point.

[[Stikeman did the exam on discovery for Air Canada. ]]

See part of decision on violation..

Does AirCos' offer comply with the Air Can public participation act?
Main issue - re provisions of this act.
Judge interpreted this carefully: Judge says - this is a case in which reasonable and intelligent people can differ.

The relevant provisions of the act provide that in the articles of incorp, there should be provisions to prevent any
single pers, together w/associates, to beneficially own more than 10% of the votes, directly.
That's why Onex wanted to set up a class of shares that didn't have voting rights.

What is an associate?
A person is an associate of another if both are parties to an arrangement, the purpose of which is to act in concert
to their ints, direct or indirect.

We can't enter into an arrangement to act in concert so as to control more than 10% of the voting shares of the
corp.

J felt that the sit would change the BOD.

The j spent some time trying to figure out the purpose of the 10% rule. Held: It should be given a large and liberal
interpretation.

The idea of the shares falling into the hands of a small group was what j retained from the legislation.

J notes they propose to buy all of Air Can's outstanding shares, and Onex wanted to convert shares.

See what J identifies as steps, and how he reasons re these steps.

Airco argued it will never control more than 10% of the shares, b/c they'll have been transformed into class B
shares.
J char's AirCo's arg that they're trying to do indirectly what they can't do directly.

The orig bid Onex made was conditional on a change in the law.
The subsequent bid, when they raised the price to 16 ish $ per share, was NOT conditional on a change in the
law.

J says this changed the char that was being effected re the function of the bid, and it doesn't affect the object of
the bid.

J said: The object is to control 100% of the bid.
2) The dissection of the … also shows that the offer didn't comply with the 10% restriction.

He says - the shares are tendered and immediately prior to their acquisition, another class of shares, called the
special class of shares was put in place. The flaw is that Airco is offering to buy common shares, and ending up
buying something dif, so that there's no compatibility btw what 's being sold and what's being bought. Therefore,
there must be some moment, somehow, in which the control over the thing being sold reposed somewhere,
before it is transformed into the thing which is bought.
                                                                                                              93

He characterizes this 'magic moment' by saying: either control by Onex, or an arrangement among all of the
people who have desired to tender their shares to give the result that Onex wants. And this arrangement effects
the undermining purpose. See par 75.
They haven't yet entered into an agreement at the moment of tender.

Par 72 - Even if we were to accept the premise that….it's not only

He discusses the defense of the court intervening in this case.

See par 41 ish (g) - required to act in concert.

Was this a legal bid?
Is j's decision good? Prof thinks it’s a good decision - well argued - but ultimately, doesn't agree.

Prof's view is that there would never have been any moment in the transaction that Onex would have had more
than 10% of Air Canada's shares. Thus, prof thinks technically, this was a legal bid.


McClurg: [SCC, 1990] [p.410-426]:

- Although the case deals w/dividend rights, LaF (in his dissent) raises the q of equal
treatment re voting rights; equal treatment of shareholders holding shares of the same class.

FACTS: For tax purposes, the co decided to have income on some classes and not on
others. The min or rev said this was unfair.

ISSUE: Wh certain dividends received by McC's wife re Class B common shares should be
attributed in part to the respondent.
         What are the powers of a corp to define its classes of shares?

HELD: The law is facilitative; the law is not there to make rules. It's there to allow King
parties to figure out what they want; to exercise their business jmnt.
        Dickson doesn’t want rules of corp law to impede.

        Dickson: "The decision to declare a dividend lies w/in the discretion of the directors,
subj to restrictions in the articles…The declaration of dividends is limited legally in that it
must be exercised in GF and the best ints of a co."
                   Corp law is "facilitative - that is, it allows parties, w/in certain restrictions, to
structure corp bodies as they wish."

LaF (Dissent): More interventionist. "Corp law has not yet evolved to the point where
freedom of K is paramount to other concerns."

Prof: Thinks corp law should be facilitative and allow shareholders to achieve corp value
where they can find it.
      Thinks the McClurg orientation is the right orientation w/r/t corp transactions, generally.

Shareholder's meetings:

Shareholders meetings are structured according to very elaborate rules.

- Annual meetings: - to elect directors [s.106(3)]
                   - to appoint auditors [s.162(1)]
                   - to file the corp's financial statements [s.155(1)

         - Generally require ordinary resolution. [50% +1]

- Special meetings: can be called for other reasons, eg. "fund changes" [s.133(b)] [p.433]
                                                                                                                                        94

           - Generally require special resolution [2/3 maj]. [p.433]

- Quorum: [See p.433, CBCA s.139]

- Record date & principle of notice: [p.434]

- Conduct of meetings: [p.435]

Re El Sombrero: [1958, Eng] [p.444-6]:

s.144: On application by shareholders, a court may order a shareholder's meeting to be
called if it is "impracticable" to call/ conduct a meeting in another way/ for any other reason
the court thinks fit.

FACTS: Shareholder refused to show up. He was able to defeat having a meeting, b/c
quorum was not met.

HELD: Nothing you can do about it.

- One shareholder owned 900 of the 1000 issued shares. Is this shareholder w/900 shares
able to break the deadlock by going to court under s.144 and forcing a meeting? No.
  The deadlock-resolving mechanism seems at one level counterintuitive, b/c it seems to
defeat what's mentioned in the articles of incorporatn, ie. that the quorum for a meeting is 2.

- Court: People often enter into arrangements where they don't predict a breakdown of rels.


Pillsbury: [MinnSC, 1971] [p.454-8]:
FACTS: Pillsbury learned that Honeywell was manufacturing … and wanted to bring before the shareholders…
Shareholders/ Pillsbury [?] were concerned about the public perception of what Honeywell was doing and wanted to make Honeywell into a more
socially resp corp by …


ISSUE: Pillsbury wanted access to the Honeywell shareholder list in order to communicate
w/the shareholders.
HELD: It was denied access to the list.

- s.137: Shareholder proposals and the circs in which a co must handout a list of
shareholders.
  s.137(5)(b): If a proposal is submitted by the shareholder primarily to enforce a personal
claim/ redress a personal grievance against the corp, then the corp is not required to
circulate a shareholders proposal.

Issue - should people have a voice thru this mechanism?


Nov 12

Air Can:
- Clash btw notion that
          - the corp is dependant on def set by legislature & contrary efforts by private investors who treated this
w/diffidence by court v.
          - McClurg - courts should stay out and let investors come up w/schemes they want.

- Prof thinks the better arg is for allowing cos like Airco to do what they want. [McClurg]

- Courts should police public standards w/great care.
- If the j in Airco was taking a broad and liberal understanding of how articles of incorp work, and misinterpreting
                                                                                                                                                 95

the mechanics of a bid, the overall posture of the court may be justified in light of the privatization agenda. [Prof
is retreating from his position a bit.]



p.448-543: Skipped. Not resp for any cases here. Discussion of proxies between cases.
[Can skim if want.]

Social resp of the corp: [Exam]:                                       [p.543->] [Fill in w/text for exam!]

- Pilsbury, Greenpeace, Dodge Motor, Medical Committee for Human Rights (aka The
"napalm" case) - all have similar issues: the nature of corp citizenship and "corp
democracy".

- Corp plays social role. Corp depends on notion of public purpose set by legislation.

- Income tax roles now facilitate corp gifts to a certain degree.
  Asking courts to restrain their social involvement, unless it can be seen as furthering the
corp agenda - corps are notoriously stingy to charity .

- s.137: Shareholder proposal of discussing issues at a meeting. Also, circs in which a co
must handout a list of shareholders.

 s.137(5)(b): Exception re shareholder proposals: If a proposal is submitted by the
shareholder primarily to enforce a personal claim/ redress a personal grievance against the
corp, then the corp is not required to circulate a shareholders proposal.
 Argument in defense of this is that there are other vehicles/ remedies as well - go to your govt; or don’t invest, or invest smwhere else. Seems
to prof that this is a feeble understanding both of shareholder behaviour, and of corp behaviour.


 s.137(5) - The law is emphasizing corp democracy for the purposes of maximizing the
value of the corp and is restricting participation of broader int groups in the democratization
of the corp.

- Corps invest as heavily as they do in good will around their corp citizenship is b/c they want
you to think of this as a reasonable. But on the other hand, if you can't raise this issue in
shareholder meetings, seems to prof this is not reasonable.

- Is there an implicit disenfranchisement that occurs if we can not use the vehicle of shareholder meetings to raise issues of social concern?

Dodge: [MichSC, 1919] [p.543-8]:
- At turn of century, courts were saying that ….Ford [?] make $ by handing over…Decided to set up foundation, and also to set up policy for price
freezes and …


Medical Committee for Human Rights (aka The "napalm" case):
- Investor didn't get court to agree that raising the issue of napalm was a corp matter.


Proxy solicitation: [s.147-154]:

- has to do w/mechanics of corp democracy and manipulation of corp democracy.

- The reason for focusing on the Prox solic process is that it's the locus of shareholder
involvement in the corp.

- General observations:

1) In widely held corps, prox solicitation is the true voting mechanism. The meeting simply implements the result.
                                                                                                                  96


2) There is an overlap here btw securities and corp law.

OSA s.88 has a regime in place governing disclosure in the proxy solicitation process. It exempts substantially
similar rules in incorporating jdctn.
What this means in practice is that if you're a corp, the CBCA rules will govern.
The CBCA rules are substantially the same as the OSA rules.

3) Solicitation of resident US shareholders must comply w/1934 Securities Exchange Act.



- Regulations = where you find out what the detailed disclosure reqs are.

- Proxy = The form which gives your vote to someone. [NOT the person.] Proxy = The
document by means of which a proxyholder is appointed to attend a meeting and act on
behalf of a shareholder.

- The person = the proxyholder.

- Until a proxy doc is executed by the shareholder, it is called a form of proxy. [s.147-8]

- You can revoke a proxy in writing up to the time of the vote.

- Solicitation = includes activities leading up to the vote. ie. Includes any request for a proxy,
any request to execute or not execute a proxy, sending of communication leading to
procurement w/holding or revocation of proxy, as well as the sending of the form.
               - does NOT include sending a proxy out to an unsolicited request, performance
of services for person soliciting, documentation prepared for a beneficial owner (s.153) - ie. if
you own shares as a beneficial owner for smone else, then if you received the proxy
solicitation in turn, you yourself are not engaged in solicitation.

Thus, the exceptions are actually quite narrowly cast.

The proxy request may come from management or a dissident (dissident solicitation process
has dif rules than management solicitation process.)


Mechanics of the proxy solicitation process:

- Proxy is valid only at meeting and is always revocable (s.148)

- If more than 15 shareholders, management circular in prescribed form must be sent with
notice of meeting (s.149)

- Mngmnt of a Corp with more than 15 shareholders must solicit proxies. [s.149(1)(2)]
  Management must send to shareholders:
 (a) a "management proxy circular" in a form prescribed by regulation and
 (b) a form of proxy.

- Management proxy circular = an information doc that management of a Corp with 15 or
more shareholders must send to shareholders/ security holders in advance of votes.
                                 - its form is prescribed by regulation
                                 - it includes general disclosure about the Corp, as well as
specific disclosure about the items of business to be dealt with at the meeting.

- One cannot solicit proxies without sending out a management proxy circular (where
                                                                                                                                                    97

solicitation is on behalf of Corp's management) or a dissident proxy circular (in the case of
any other solicitation), with the exception of a director order. [s.150-1]

- Proxyholder attends meetings with same rights as shareholder and, unless conflicting
instructions, may vote by a show of hand. (s.152)

- If you hold conflicting proxies (conflicting instructions by more than one shareholder), if you
have a vote by hand, you're in trouble. [Exception to the exception.]

- Interested person or Director may seek restraining order, or other remedies, for a
misleading circular. (s.154).

- Must file. Generally the purpose is vetting by Sec Commission.


Part IV of CBC Regs:

- They go into some detail about the form of the circular so as to avoid interpretation..

- Note detailed content of regs, eg. that must state in bold - faced type that another person
may be appointed proxy and contain instructions about how to do this. (s.32(3)).

- Shares some characteristics of securities disclosure - eg. management circular includes
disclosure of material ints - s.35(w) - see Wotherspoon, Mills, TSC, Harris: substantial
likelihood that a reasonable shareholder would consider it imp.

  There's a report that's done about what the value of a bid is. It should be of int to a
shareholder wh a valuation is done by an indep evaluator or by someone who's not arm's
length.

- Note that there are related but sep rules re takeover circulars.
There are specific procedures that apply to circulars in a takeover sit.


Re Goldhar: [Ont, 1977] [p.466]:

FACTS: A misleading proxy solicitation was intentionally issued.
              Management proxy provides place for instruction to proxyholder to vote for or against resolution to remove board.
             Form states that if removal resolution is passed, proxyholder will vote all shares for which he held proxies in favour of relelection of
existing board.
HELD: The proxy form was null and void.

This shows us the kind of manipulation the law is designed to prevent.


Brown v. Duby: [Ont, 1980] [p.467-474]

- ISSUE: what counts as a solicitation.
- How far should the law stretch in covering a range of communications in advance of a
solicitation.

FACTS: A firm was in the business of assisting people in taking dissident proposals before a
shareholder meeting. The firm had a consistent strategy of sending its materials re
shareholder meetings and proxy solicitations out at the last moment allowed under law, ie. 30
d before. So a group of dissident shareholders got tog and said: we're worried; we want to
notify people that if they get a proxy solicitation, please don't send it in right away, b/c we
                                                                                                                    98

want to have enuf time to get one to you. They send a letter stating this to people.

ISSUE: Was the shareholders' committee letter [p.469-470] itself a solicitation?
HELD: YES. Prof thinks this is WRONG.

RATIO: In the result, there was no relief to Canco for the allegation that there was a proxy solicitation in violation
of the act.

ISSUE #2:
Management here was seeking to/ trying to say: b/c you did this improper solicitation, you
should be blocked from doing any solicitation, even valid form.

But the interloc injunction was not granted here. Why isn't injunctive relief granted here?

HELD #2: Even where there is noncompliance w/the statutory reqs for a proxy circular…
the court may not exercise its discretion to issue an interloc injunction if to do so would be
perceived by manyshareholders as a judicial decision favouring management over the
dissidents. [Annotated CBCA s.150]
           ie. If we grant interloc inj, it is like saying - there is some taint on your behaviour.
So it could actually unnecessarily undo a beneficial initiative on the part of these dissident
shareholders. [Prof].

- The casebk rightly points out that what the dissidents were preventing was something that was legal.
The sending out of a proper dissident proxy circular was not a problem.

- An appropriate proxy solicitation process entered into by shareholders will be absolutely fine.

- The whole case turned on the bal of .. w/r/t/ interloc relief.

- The lesson here is:
1) the net is cast v. widely. This kind of behaviour IS proxy solicitation, even tho on its face
its designed to set into motion proxy solicitation in the future.

2) at least one j is reluctant to grant interloc relief in such circs.
______


Q: Do we think the AirCanada and Airco ads were forms of solicitation, and if so, is there any
issue re proceeding in that way at the same time as proceeding in …?

A: It's an attempt to substitute partial info for full info. And it's that kind of undermining of the
disclosure regime that we might want to be worried about.
- NEXT subj: Takeovers. Read chpt 11 sections A-D with emph on B and D.




Nov 16

Intro to Mergers & Acquisitions (TAKEOVERS):
1) Econ considerations behind mergers
2) Formalities
3) Appraisal remedy

- Takeovers - illustrates the difficult case of director duties.

- The takeover setting is one in which managerial discretion is tested to the limit, and
                                                                                                                  99

directors of the corp will be called upon not only to communicate w/the shareholders, but to
make decisions re what the orientation of the co in the future should be. [Exam]

- If the duty of the directors is to maximize the val of the shareholders, and not entrench themselves/ their
management team, there can be a confl of int in deciding that, for ex, the Onex bid, although it looks lucrative for
shareholders, is a bad idea for the co.

= Test of fiduciary obs of the directors to the corp.

- On the other hand, the takeover context is one in which directors duties are tested strongly,
and there are specific features of those duties that get triggered in this sit. [Why is this 'on
the other hand'?] and in sits where directors can refuse a bid b/c they prefer a dif corp
strategy than the one that 's offered; duty would be to get max shareholder value.

We are also doing chpt 7.
Make link btw chpt 7 and 11 when review for exam.


Econ considerations behind mergers:
- Evidence seems to suggest that acquiree shareholders fare better in takeover sits than
acquirors. That is, you tend to see gains to shareholders [re share price] [in the pre-
acquisition period?] that exceed gains to acquirer in the post-acquisition period.

Q - Why do acquiree shareholders fare better than acquirers/ takeoverers?
A - B/c the target is not performing to its potential b/c of poor management; but why should
they be beneficiaries of that?

- The managerial prob is a variation on agency costs. We are discussing efficiency and
such.

- Scherer (author)'s conclusion: That there's an empire building tendency on the part of
acquirers to have a larger bureaucracy for their own authority w/in firms, and that these
incentives tended in some instances to make less clear the efficiency that's out there.
[Discussed at p.983]

- If the capital markets are in fact working efficiently, you would expect that there would be a
tendency to bid up price to an extent where there is only marginal value to be gained to the
transaction. This might explain quick inflation of value of a share.

- Efficiency gains in mergers are often used to explain why management teams are looking
to compete w/e/o for control of the corp.

- What kind of efficiency gains might explain mergers (and why management teams
are looking to compete w/e/o for control of corps)?

a) economies of scale. It might be more efficient, economy of scale-wise, to have one airline.
But what lies under this arg? How can you test wh there will be economies of scale? Is size
always relevant?

Economies of scale = "that your per unit costs decrease over the scale of production. So you
have ec of scale if you can show that by increasing production your per unit costs will be
lower." Best ex = automation by Ford. Ford said - I can decrease the per unit cost of
manufacturing cars. Once Ford got into business, the only auto manufacturers that could
afford to stay in bus were those that could manufacture similarly.
                                                                                                100



Ec of scale is not smthng one can take for granted re increased size.
If ec of scale are not there, there might be other kinds of efficiency gains.

b) economies of scope = ability to offer a wider range of products

c) Other kinds of dynamic efficiencies in the transactions.


- Horizontal mergers - re firms that are in same line of business.
  Vertical mergers - re firms that are related in chains of production [to a single product].

- Above, re efficiency gains, we are talking about horizontal mergers!


Conglomerate mergers:

- Conglomerate mergers = vertical mergers.

- Q: Can these efficiency gains explain conglomerate mergers (vertical mergers)?
  A: Not really. To the extent there are econs of scale/ scope, the two firms involved in the
transaction would have to be involved in similar lines of bus. Congl mergers are thus
suspect from an efficiency POV b/c they involve firms that are not in same line of bus.

- Horizontal mergers - re firms that are in same line of business.
  Vertical mergers - re firms that are related in chains of production [to a single product].


- Gains re horizontal mergers (cos in same line of business) are the most obvious and the
most problematic from standpoint of competition.

- Conglomerate mergers are thus the least problematic from the POV of competition review.
And they are the most problematic from the POV of shareholders.

- The strategy of conglomerate mergers = to improve value.


- Should the law assume that successful mergers are efficient and if so, what are the
implications of this?

- Prof thinks: The only way that people who are good at taking over firms will have incentive
to do so is if they can get smthng back. It is true that those who are good at taking over firms
are not nec good at managing them.

- The law is designed to ensure that shareholders have info re the bid and have a certain
cooling off period before they irrevocably transfer their rights to shares, but it tends not to be
taking sides. Prof. agrees.


Formalities re M&A:

- Takeovers may be facilitated either thru:
a) purchase of shares
b) purchase of assets
                                                                                                                  101

c) amalgamation of corp

- The CBCA structures purchase of shares & purchase of assets differently.

a) Purchase of shares: [p.990]:

- Take-over bid = an offer to acquire shares that, if combined w/shares already owned or
controlled by the offeror…would exceed 10% of any class of issued shares of an offeree
corp. This is only when the offer is not an exempt offer. ie. involves 15+ shareholders.
        - ie. Involves 15 + shareholders and more than 10% of a class of shares. [s.194]

- Exempt offer = less than 15 shareholders. [s.194]

- Where a takeover bid is for all the shares of any class, the buyer-offeror may take up must
not take up the shares until 10 days after the date of the takeover bid. = Cooling off period.
[s.195]

- Where a takeover bid is for less than all the shares of any class, the buyer-offeror must not
take up the shares until 21 d after the date of the takeover bid = Cooling off period. [s.196]

- Cooling off period: 10 d for all shares; 21 d for less than all - why the dif?
  They must live with the results, so they must be careful.

- Q - If there's a bid of less than 100% of shares, what must the shareholders do?
   A - All shareholders are equally entitled to tender to the bid, and they will all receive pro
rata to the shares they tendered. If you're going to purchase for 10%+ of a class of shares,
you must extend that offer to everyone, and then those that tender to a bid will have equal
rights under the offer to purchase.

  If we're dealing w/an offer to purchase all the shares, obviously we will not be faced w/that
prob, b/c the law will be bought out.

- There is a trigger point (like 10%) that pries the bid open and makes it available to anyone, b/c this is an attempt
by CBCA to say that when there is a premium, it should be spread out equally btw all shareholders.

ie. When a takeover bid is made, the offeror is required to make the same offer to all
shareholders of the class of securities sought, with special duties of disclosure in a
take-over bid circular.

- Re purchase of shares in context of takeovers, need directors' circular to be issued.


b) Purchase of assets: [p.990]:

- Two corps may amalgamate if one sells to the other all/ substantially all of its assets.

- A sale/ lease of all/ substantially all of the corp's assets (to effect a takeover) requires
approval by special resolution (2/3 maj), under s.189(3).

  In a widely held corp, this will require compliance with proxy regulation requirements,
including the mailing of an info circular to all shareholders.

 If a shareholder dissents from the special resolution, he may assert the appraisal rem - ie.
require the corp to repurchase his shares under s.190(1)(e).
                                                                                                                                     102

- Why do we want this kind of proection for special resolution as opp to the ordinary resolution?
  As the co sells off all of its assets, it is making itself less attractive for a takeover bid - it has less money. Tho this could also
be a defense to a takeover bid. [?]


- Q: Under what circs might a purchaser prefer the purchase of assets to the purchase of
shares as a mechanism for takeover?
  A: If you're going to be selling all/ subst all assets, this amnts to a takeover, and thus one should have a hight
threshold for approval that it could be that it's harder to sell … [?]

Gimbel: [Delaware, 1974] [p.991-6]:

FACTS: Sale of subsidiary. Oil and gas subsid of co had no where near 1/2 the assets of the
firm; Prob was that here, when a shareholder objected that there had to be a special
resolution to get this done b/c of the history of the co, the Delaware court had to look at what
does all/ substantially all mean.

ISSUE: Wh the sale of the firm's assets amounts to substantially all of its assets. [NB: This
is not always clear.]

HELD: Basically, its's a quantitative, not qualitative analysis.
      Although there's no % figure w/this, it was quantitatively suff here.


O&Y v. Hiram Walker: [Ont, 1986] [p.997]:

Similar.
FACTS: O&Y made takeover bid for HW. Not subj to shareholder ratification. Purchase and hire offer.
HELD: It was not all/ substantially all of the assets. It did not amnt to the sale of anything like quantitatively all the
assets.

ie. Hiram Walker board effected ratification w/o shareholders imput.

Prof: Not engaging the shareholders in a decision re the bens of these assets is useful for shareholders. It is a
ben b/c it facilitates an auction process.

1) O&Y makes bid
2) Management doesn't like the bid, sells those assets for a higher price than what x was prepared to pay.

What does it mean that not submitting the second counteroffer made it poss for the bid to come forward?



c) Amalgamation of corps: [s.181-6]:

= 2 firms owned by the same shareholder can be combined/ amalgamated.

= The third way to effect a takeover.

- Amalgamation = where wholly owned by another or both corps are owned by the same
person and become one. [s.181]

- Purpose of amalgamation - to freeze out minority shareholders who do not want to be part
of the transaction.

- There is a continuation of the rights, obs and liabilities of the amalgamated firms. i.e Can't
amalgamate just to get out of rights, obs, and liabilities of the firm. [s.186]
[This was the holding in Black & Decker, Witco, p.998-9]

- There are 2 kinds of amalgamations:
                                                                                                                                            103

1) Short form = amalgamations approved by a holding co, [ie. a co that owns subsidiaries].
              - no shareholder is affected b/c these are wholly owned entities. The holding
co makes cos into single entities.

       Vertical short form amalgamation = made btw a holding corp + one/ more of its
wholly-owned subsidiaries. [s.184(1)]

       Horizontal short form amalgamation = made btw two / more wholly owned
subsidiaries of the same holding body. [s.184(2)]
NB: Since the short-form amalgamations can affect only wholly-owned subsidiaries, they can't be used to squeeze out minority shareholders
[Annotated CBCA s.184.] But isn't this the purpose of amalgamation?


2) Long form = amalgamations which involve the vote of all shareholders (incl voting and
non-voting shareholders) and class vote if shareholding is affecting. = Default form of
amalgamation.

- Get last 2 screens.


Nov 19

Appraisal rem:
- Involves a complicated process. It's a rem of LAST RESORT.

- If a shareholder are not pleased w/what happens w/the buyout, possibly b/c they feel
they are not getting fair value for their shares, they can dissent from the special
resolution, and may assert the appraisal rem - ie. require the corp to repurchase his
shares under s.190(1)(e).

- Fair val = what would the val of those shares be if they were given….
The market will generally be a benchmark for this.
There is a rel btw fair value and the market.

- When does the s.190 rem arise and what does it involve?
- s.190 = a mini code, v. long. READ. 2.5 pp.

- This is a rem that will arise in a # of circs in a takeover setting.
  The amalgamation is one of the explicit reasons under subs. (c).

- Process shareholders must follow if they don't want to lose their appraisal remedy:

1) must indicate your dissent or abstention at time of shareholders meeting
2) must make a written objection to the corp at/ before the shareholders meeting. [s.190(5)]
3) must make a demand for payment within the 20 d. period in s.190(7)
4) must return the share certificates within 30 d. [s.190(8)]

5) if an offer is made by the corp, the shareholder has 30 d. to accept it. [s.190(4)]
   If no offer is made, or if the offer is rejected, the corp can bring the matter to court, failing
which the shareholder has a 20 d period to do so. [s.190(16)]

6) must go to court to ensure valuation process is carried out.

i.e. complex procedure.
                                                                                                                                      104



- Failure to perform one step in the allotted time may mean that appraisal rights are lost,
although sometimes courts do not interpret these reqs strictly.

- The appraisal right presents many difficulties from the shareholder's POV:
       - It is technical,
       - may be expensive,
       - it is uncertain in result,
       - in the case of a publicly held corp, it is unlikely to produce a better result than could
       have been obtained on the market
       - the ultimate award is taxable.

- Given these costs, the shareholder may simply prefer to sell his shares on the market,
rather than assert the appraisal right. [p.1002]

- The appraisal rem reveals some of the difficulties of treating shareholders as property holders.
- The App rem is a cumbersome rem. Although it looks to be anti-market advice, it is actually not used
that often, and it's cumbersome to use.
  The oppression rem is used more often.


Q. 1: Should the list of reasons in s.190 be a restricted list, or should it be read broadly - re generalized discretion?
      Ie. is the limited approach in s.190 approp, or should we take a broad approach like in the Farris case.?

What should trigger the rem: Farris and de facto merger

Answer/ discussion:

- The way s.190 is drafted implies it should be a narrow approach.
- This was a structural transaction that didn't look like a merger on its face.

Q - Why did it seem to have the effect of a de facto merger?
A-

Q - What would the effect on the dissenting shareholders re this transaction be
A - They had more assets, but had they increased their share issue, …The impact of the shareholding system is the…
Although the transaction moves , instead of from purchaser-acquiree, rather in opp direction, nonetheless there's an effect on
sh-holders of diluting their holdings and to allow control of the board to shift.
So the Delaware ct doesn't seem to stop in its tracks when it seems a transaction of this kind does not trigger the appraisal
rem. It seems to look more broadly to s.190.

The ct seems to think there must be a way of protecting minority shareholdings.
Idea - the share is not prop; rather should be seen as a bundle of rights = csbk approach.

Q - Is it approp for the D ct to find a way for an eq rem to blossom in the cracks of legislation, or is it better to take a narrow
approach, and say: this…attaches to your share, and
s-holders should calculate wh they llike the rights and rems that attach to it before they purchse.

A - Some say - If you maximize shareholder protection, you'll improve confidence in the market place…Prof agrees. If you can
build conf in the market, that will be to ben of the corp as well. Sense that there are protections assoc w/corp statute, and there
will be incentives for s-holders to invest.
Csbk takes opp approach and is somewhat critical of Delaware cts.


[Delaware legislation - seen to be leading edge legislation in corp law, and the D judiciary and bar is seen as the most
sophisticated, re corp statutes. It is their specialty.]
[They often take pro-shareholder approaches.]



Q.2:
How to value thinly traded shares: Raised in Re Wall & Redekop.

Re Wall:

Q - Why was it that in this case it became difficult just to look at the price of shares being traded?
A - B/c a v. low % of the shares of the co traded on the market, thus the price of shares was low compared to ….. dissenting
shareholder….
                                                                                                     105


Prof - Under what circs might you expect that a co will be trading at the low bk value?
Andrew - In principle, bk val is an accurate assessment of a co.



Valuation of dissenter's shares:

- Figuring out this value is not an easy matter.
- 4 ways of assessing value, in Neonex case: [p.1026]
1) market value
2) net asset value
3) investment value
4) combinations of these.


Buy-outs:            [p.1019]:

- Buy-out = when a firm acquirs all/ substantially all of its own shares from outside s-holders.
          - ie. when a co purchases back its own shares.

            - When would this arise?
                a) In a takeover sit, eg. Air Can sit.
                b) If you're trying to become a more closely held corp. eg. Eaton co, to keep
things in family - ie. tighter control.
                c) often in circs where you don't want specific shareholders to remain, eg. if
you want to amalgamate w/another firm and effect complete restructuring.

        - There's no general def b/c groups of shareholders may be able to exert infl over the
direction of the board, …
        - Control can be affected thru intricate modes of corp org.


- Freezeout - a related idea = squeezeout
       = when inside shareholders require outside ones to sell the shares so that the inside
ones are the only ones who own shares.

          - ie. = a more specific buy-out, describing compulsory acquisition techniques.

      - Q: How can you be required to sell shares? What lies behind the forced sale idea?
How can you force this by law?

            A: If shareholder has less than 10%, may be forced to sell. See s.206.

s.206(2): If, w/in 120 d. after takeover bid, the bid is accepted by the holders of at least 90%
of the shares, the offeror is entitled to acquire the remaining shares [held by the dissenting offerees.]
            ie. The offeror can buy the dissenting shareholder's remaining shares in a takeover bid sit
if the bid is accepted by 90% of the shareholders of the co to be taken over.

If you've reached that threshold, you can force the remaining shareholders to sell.
ie. If you've acquired 90% of the shares you can effect a freezeout.

          - Call option = right to buy
            Put option = right to sell
                                                                                                                              106

- Going Private Transaction = Taking a co that has been traded on the stock market and
putting it into a closely-held status.
                         = a buy-out that transforms a corp from a widely to a closely held firm.

- Management/ Leveraged Buyout = a buyout involving debt. [This is a generic term.]



- Next two cases: Neonex, Westeel: Ways of getting around a takeover which you might
have built into your articles of incorp.


Neonex:         [1978, BCSC] [p.1021]:

FACTS: Looked as if it was possible to effect a freezeout.

             N was a BC based conglomerate involved in many areas, ie. grocery business, real estate, etc. Jim
Pattison, a famous BC entrepreneur, had 46.5% shareholding in Neonex, and decided he wanted to get complete
control over it (100%), so he made an offer to purchase re another of his firms, JTL, that involved either giving
shareholders 3$ / share for shares trading just under that, or giving them a preferred share in the new Neonex
that would emerge out of this firm. He succeeded in getting a trade of JTL shares for N shares, such that at the
end of this transaction, the only voting shares that would be left would be his ,and he would amalgamate JTL + N.

         This would involve a special resolution, ie. 2/3 maj - which is below the req in s.206,
so it looked like this amalgamation technique was succeeding in freezing out minority
shareholders.

ISSUE: Is this legal/ ok?
HELD: NO. Judge objected to this. Why?

RATIO: An application by the corp to fix the fair value of its shares is inappropriate where:
   - the price the corp offers for the dissidents' shares is substantially below book value,
   - the method of calculating the price is not disclosed, and
   - the controlling shareholder of each amalgamating corp would, as a result of the
    transaction, emerge as the sole shareholder of the amalgamated corp.
The burden of proof rests on the corp to est that its assessment reps fair value for the
shares. [Annotated CBCA]

- J said: The shareholders' $ is being used by these interlopers. ie. J looked at shares as
property. Prof: This is too naïve.
  But can also look at this differntly: Look at shares not as ownership, but as bundle of rights.

- What is the rel btw this amalgamation technique and the technique of forced sale under
s.206? Peter - Neonex: Tried do by amalgamation what he wouldn't be able to do by s.206.


- If the director's duty is to the shareholders, it looks like a dir's duty is to get them max value.
  Takeover settings often look at what the best direction is for co to go in.
  So how much should dirs focus on shareholder's best ints (max value) v. focus on co itself.
  Tendency now: Toward shareholders.

- Notes: Buckley: Argues that the share is not property. That's his objection to Neonex.

- Even if the j misunderstood the nature of retained earnings, is there anything else that's problematic about the transaction,
apart from the way it's financed?
                                                                                                               107

- Bouk J.: "Blossoming thru the cracks and crevices of the legislation" -p.1026.

- N and Westeel are both happening right after the CBCA is introd.
CBCA - loosened amalgamation reqs/ etc….

- There seem to have been w/N and Westeel a concern by the judiciary that they didn't want to make it TOO
eassy to freeze out dissenting shareholders.

- In Neonex, J converted the petition into an action. Made Pattison and N into pltf.

- Also, in Neonex, it looks as if it cost Pattison nothing.
Pattison as director said - we have all this cash, we'll improve the value of the co.



Westeel-Rosco:
- Why was the injunction granted?
W is similar to Neonex, but W involved a prospective amalgamation.

- What is the purpose of s.206 and is it too restrictive?


Nov 23

Buy-outs:
- Concern that courts sometimes manifest re the interests of the outsider shareholder group.
- Prof believes that whereas Buk J. in Neonex is too naive re the char of the investment, the crts' preoccupation re
maintaining confidence in markets is not to be precluded entirely.
  Securities commissions have become active in intervening to protect the ints of the minority shareholders.

- Whereas deregulation hit a variety hit a number of markets v hard, you can't tell a story about markets generally,
b/c the chars of regulations in these markets are more in the nature of market building rather than market
intervention, ie. structuring what's charged, etc - That char is not really subject to the deregulation critique.

- If you need regulation to make the market function, you can make the same argument.
- Empirical observation: There has been increased regulation.


Teck, Producers Pipelines: Leading cases on the unfolding of directors' duties.

Teck: [1972, BCSC] [1059-1073]:

FACTS: Afton Co, in mining business, looked to develop its properties. It got 2 offers from 2 firms: One from
Canex, one from Teck. T make a richer/better offer than did Canex. However, the directors of Afton decided to
issue shares to Canex.

- What did Afton's issue of shares to Canex attempt to achieve?
Trying to bring Teck to a minority position.
It may be illegal for them to act in this way.
Rationale was: Preferred Canex, which was a reputable firm. Also, they had a way of assessing wh the Canex
bid would be valuable to Afton. They made a feasibility study to see if Canex wanted to actually put the property
into production. If C wasn't going to put it into production, Afton wouldn't make any $.

Rationale: We've got valuable prop which we want to have put into production. We want a partner.

Q: Why was this prima facie legally dubious?

A: BOD said: We're not going to issue shares to maj, but to smone else.
   This looks like self-entrenchment and a way of undermining the rights and ints of the maj
shareholders.
   Looks legally dubious b/c this seems clearly against the fid rel dirs owe shareholders.
                                                                                                                                                   108

If the dirs act in issuance of shares so as to entrench themselves, they've br'ed their duty.

- Berger J. rejects the traditional view in Hogg.
  Traditional view: Directors cannot use powers of issuing shares merely to entrench control.

- GOOD SUM: [Annotated CBCA under s.102, 122]: Berger J:
        "The power of the dirs to manage the affairs of a corp is complete.
        A maj of the shareholders, even if they pass a resolution at a meeting, cannot dictate
to the directors. Directors are not agents of shareholders. Directors can exercise the power
to manage acc to their best jmnt."
        "Where directors enter into an agreement to issue shares so as to prevent a maj
shareholder from controlling the corp, the dirs will not have breached their fid duty to the corp
as long as they act in GF in what they believe, on reasonable grounds, to be in the best ints
of the corp. The onus of proof is on the pltf who alleges that the dirs have breached their fid
duty."

Q: How does Berger J. depart from previous case law (Hogg)?

  Classic confrontation btw idea of maximizing shareholder value v. exercising bus jdgement
on behalf of firm.

A: Berger J adopts a test: Asks: Are there reasonable grounds to say that the Board was
acting in gd faith?.
- How much guidance does this test provide to BOD/ crt re figuring out when you're in br of your duties?
- Does the reasonable grounds for good faith test provide adequate guidance to the Board?
- If you apply this test to Teck, what would allow you to conclude that the Board was respecting its duties, and in particular how high was the BOP
on the Board to show that the measures taken were taken in GF?

MC: There's an aspect that a takeover will cause substantial dmg to a co. Must show that there will be a prob. If we take this aspect into accnt re
test, it's a little more stringent.
It's imp to take into accnt the thing re substantial int.
Prof disagrees.


HELD: "I find that the dir's object was to obtain the best agreement they could while they
were still in control. Their purpose in that sense was to defeat Teck. But it was not to defeat
Teck's attempt to control; rather, it was to foreclose Teck's opportunity of obtaining for itself
the ultimate deal. That was, as I view the law, no improper purpose.

       In seeking to prevent Teck from obtaining the K, the def directors were honestly
pursuing what they thought was the best policy for the co."

            "Here, the primary purpose of the drs was to make the best K they could for Afton."

       Berger J. rejects Hogg: "I do not think it is sound to limit the directors' exercise of their
powers to the extent required by Hogg… But the limits of their authority must be clearly
defined." [p.1065]

        "I think the ct should apply the rule in this way: The directors must act in GF. Then
there must be reasonable grounds for their belief. If the directors say that they believe there
will be substantial damage to the co's best interest, then there must be reasonable grounds
for that belief. If there are not, that will justify a finding that the directors were actuated by an
improper purpose." [p.1065]
- The if Q is not a substantial dmgs test. Rather, says that if you're exercising bus jmnt on behalf of firm, and it results in substantial dmg, must
show there are grounds for this.
  Prof doesn't think that substantial dmg is necessarily important.


- Peter: This is the wrong type of test for this sit. Here, the directors have to look to best ints
                                                                                                                 109

of shareholders. We should be looking for the conferral of discretion to the power.
        Deference is inapprop in a context of this kind. Peter prefers Hogg's approach.
        Adding more things into the basket which dirs can look at departs from gen rule that
dirs should look out for best ints of the shareholder.
        What shareholders are allowed to do: p.1062, first full par.
        Directors should be looking at shareholder value and shareholder val alone.

- Prof: It's not obvious to prof that Berger is drawing heavily on what stakeholders, other than
shareholders, would factor into decisions re directors.
         Do we see in the decision that the statement made by Berger factors into the result?




Unocal v. Mesa Petroleum: [Delaware, 1985] [p.1082-1094]:

- Re takeover sit.

- Unocal test: directors have burden to show GF and reasonable investigation (Cheff)
and defense must be proportional to the threat posed.

- Prof thinks the Unocal test is more burdensome for the board than the Teck case.

(1) "When a board addresses a pending takeover bid, it has an ob to determine wh the offer
is in the best ints of the corp and its shareholders.

(2) B/c of the poss that a board may be acting primarily in its own ints, rather than those of
the corp and its shareholders, there is an enhanced duty which calls for judicial examination
at the threshold before the protections of the business jmnt rule may be conferred.

(3) In the fact of this inherent conflict, directors must show that they had reasonable grounds
for believing that a danger to corp policy and effectiveness existed b/c of another persons
stock ownership.

(4) If a defensive measure is to come w/in the ambit of the business jmnt rule, it must be
reasonable in rel to the threat posed." [Pubdocs sum]


Sum: (a) GF belief in threat; (b) investigation; (c) proportionate response. [Pubdocs]
- For the Unocal Board, what was wrong w/the Mesa offer?
  The Board figured that by issuing junk bonds, the firm's capital structure would look funnier at the end of the day
than it did at the outset of the transaction.

- What was the Board's response? X said it didn't like the junk bond dimension of this deal.
Counter-bid here involved billions for the firm.

- Did Board fulfill their duties?

- In Cheff (Delaware case), the BOP had been on the Board to show that it had reasonable grounds to believe
that a share purchase posed a danger to corporate policy + effectiveness.
  How did Unocal modify this approach / test?
  Unocal: Onus now shifts to show that there's an entrenchment strategy involved, as compared to what seems to
be a burden on the other side.

- How would you characterize the burden on the directors? Do they simply have a straight
out presumption of GF?
  Unocal: The board is not simply there to look at price. The fact that they look to the long-
term ints of the co may seem counter-intuitive.
                                                                                                                                        110


Revlon: [Delaware, 1986] [1103-1114]:

PRINCIPLE: When a co's sale becomes inevitable (as in auction), directors have duty to find
best conditions of (method of) sale. [Prof]
               When the sale becomes inevitable, resistance under the aegis of Unocal's
proportionality test must end, and management's duty shifts from defending to spurring a
sale and determining how the sale should take place. [Pubdocs]

Logic to this - that can't keep on invoking your business strategy if you yourself are
participating in an option.


Paramount: [?]:

PRINCIPLES: (1) A bid is not suff to invoke Revlon duties
             (2) A deliberately conceived corp plan need not be abandoned in the face of
      takeover.

If the AirCan sit had gone forward, would the board have used Revlon duties, and if so, what
recommendations might they have made?

Poison Pills:
- "The poison pill is, in a sense, the ideal tool for insulating management from real accountability
because it works by giving existing shareholder a "right" they didn't previously have, namely the right
to buy a certain number of new shares - generally at a discounted price - once a hostile acquirer has
built up a sizeable stake of shares or announces intentions to do so." - Jim Surowiecki, "Tossing the
Poison Pill", The Motley Fool web site.

Take, as a simple example, Snyder Oil which recently adopted such a plan. If any person or group acquires 20% or more of Snyder's stock, each
shareholder - other than the acquirer - will have the right to buy for 70$ common shares worth twice as much.


- On the surface, this seems to represent a boon to shareholders, since they get to buy new
shares at essentially a 50% discount.

   BUT this plan also treats shareholders differently, and this is troubling b/c the potential
acquirer, who is a shareholder like any other, is the only one who doesn't get to buy the new
shares. For current shareholders poison pills often appear to be a license to print $.


Producers Pipelines: [1097]

- Under the Shareholder rights plan here, you could purchase 10 additional shares for 1/2
price at which the shares were traded.

- The shareholder rights agreement was objectionable.
The oppression rem here (old section) was invoked. Held that the directors acted contrary
to the min of shareholders.

- Was it appropriate to use National Policy 38 for the purpose of identifying director duties?


NEXT: Read chpt 7 parts ABC, p.578-639.
                                                                                            111



********************
Assignment:
Use the subsidiary's JV agreement if poss.
Summary exam and quiz due next wed [Nov 3 ish].

We should incl any changes to JV we think should be made.

QUIZ: Resp for things that we dealt w/ in class. Ie. chpts 2, 3, 4, 5 as we discussed in class.

Final exam: 2/5 Qs. 2 hours.
Can bring any texts but not notes.
1/2 fact pattern Qs
1/3 essay Qs.
We get Qs in advance. Closed book.
                                                                                                                           112



                   Corporations                  Partnerships                  Limited Liability       Limited Partnerships
                                                                                 Partnerships
Regime                                                                    - Under P Act                - Under Limited P Act
                                                                          - Under P regime             - Under Limitd P
                                                                                                       regime

Creation                                  -No formalities to create.                                   - Requires formality:
                                          -Created once persons                                        - Created only when
                                          start doing business in                                      you file, ie. register,
                                          common with a view to                                        with the appropriate
                                          profit. [OPA, s.2]                                           govt authority.

How to know                               - P is default regime, if
if it exists                              you don't create another
                                          business form.

Management                                - The general partner is        - The LL partner DOES        - The limited partner
                                          involved in mngmnt.             concern himself with         can not be involved in
                                          Ie. there is no separation      management.                  mngmnt w/o losing his
                                          of ownershp [partnershp]                                     limited liability.
                                          and management.                                              - [[He should stay out
                                                                                                       of managmnt if he
                                                                                                       wants to maintain his
                                                                                                       status as a lender in a
                                                                                                       firm. [Sept 21 & 28]]]

Relations      - Each firm-member         - Each partner is an
w/TPs          is an agent. Ie. C can     agent.                                                       ]
               ONLY act thru              ie. P can ONLY act thru
               agency rels/ agents.       agency rels/ agents.
                                          - Each partner can bind
                                          the firm
                                          unless acting outside
                                          scope of authority and
                                          known to be so or not
                                          known to be partners.

Liability:     - Limited liability.       - Not limited liability:        - The LL partner is NOT      - A limited partner is
               A shareholder's            Each partner is                 liable for debts, obs, and   NOT liable for the obs
               liability to the           (personally) jointly liable     liabilities of the P/ any    of the limited
               creditors of the corp      for the (debts and obs of       partner arising from         partnership. [LPA, s.9
               is limited to the amnt     the) firm, to the full extent   negligent acts/ omissions
               of his investment.         of their personal assets.       that another partner
                                          [OPA, s.10]                     commits. [PA, s.10(2).]



Internal       - There is a division      - N distinction btw
Governance:    of management.             managers + partners.
                                          Partners are all engaged
                                          in management [but this
                                          may be dif as per the P
                                          contract].

Legal          - Yes, C is a legal        - No, P is not a legal
Personality:   personality.               personality.
               ie. it is a legal entity   Ie. it is not a legal entity
               separate from its          separate from its
               shareholders.              partners.

               - Its shareholders can     - Its partnrs can not K
               K with/ sue it.            with/ sue it; must sue the
                                          partners individually.

Duration:      - Not time bound.          - Yes, is time bound;
               Ie. Continues to exist     ie. P can be entered into
               even if its members        for a set time. Also, P's
               die/ leave firm/           existence depends on the
               become insolvent.          partners.
                  Can have                  P must be re-created
               perpetual existence.       when a partner leaves
                                          the firm/ goes bankrupt/
                                                                        113

                   Dissolution of a C    dies; but the P's name
                is more complex than     can continue.
                dissolution of a P.
                [p.46]
                                           Must register changes
                                         in the P for it to remain as
                                         such.
                                           Ie. P's composition
                                         changes over time.

Registration:   - A C which is a P       - Must reg under the P
                must reg under the P     Registratn Act. [p.47]
                Registration Act or
                the Corp Information
                Act, or possibly both.
                [p.47]

Profits:                                 - P profits are payable
                                         regularly to the partners.
                                         [p.47]
                                                                                                                  114

VOCABULARY:

- Authorized capital = indicates how many shares the Corp is authorized to issue.
                     - its principle functn is to restrict the directors' discretn to issue shares.
                     - However, a substantial minority shareholder in a widely held corp may
              desire such a restriction to ensure that his interest in the corp is not diluted by
              a further public issue of shares.
  Issued/ outstanding capital = refers to the shares actually issued. [200]

- "Blue Sky" discretion = merit discretion = Discretion (of securities administrators/
regulators) to assess the merits of the securities being distributed. eg. if unconscionable
consideration has been/ will be given for services, or if the issuers can not be expected to act in the best ints of
securities holders, or if the issuance is inconsistent with public interest.

- Closely held corps = small corps. In a such a sit, you may have a single class of shares.
  Widely held corps = big corps

- Conglomerate mergers = Re vertical mergers - re firms that are related in chains of
production [to a single product].
  [As opp to horizontal mergers - re firms that are in same line of business.]

- Debenture = an evidence of indebteness, like a promissory note. Debentures are often
secured with an interest in the collateral of the debtor corp. [Txt, 84]

- Exempt offer = less than 15 shareholders. [s.194]

- Going concern = the idea that a co will continue to operate indefinitely, and will not go out
of business and liquidate its assets.

- Limited Pship = a business org w/
a) one / + general partners, who manage the business and assume legal debts and obs, and
b) one / + limted partners, who do not participate in day-to-day operations and are liable only
to the extent of their investments.

- Material fact = a fact is material if it affects, or could reasonably be expected to affect, the
value or market price of a security.

- Mergers:
  Horizontal mergers - re firms that are in same line of business.
  Vertical mergers - re firms that are related in chains of production [to a single product].

- "On hook" = responsible.

- Ownership = equity
  Credit = debt

- Pre-emptive rights = rights to pre-empt the offer of issuance of shares to others unless
they have been offered to you as well. Unless the shares are offered first to the existing
shareholders, the Corp cannot issue shares. [Vz, 173]
                     - Under the CBCA, the pre-emptive right only permits shareholders to
purchase shares in proportion to their existing holdings.
                     - Under the OBCA, there is no such restriction. [Vz, 173]

- Promoter = agent = A person (may be a manager/ shareholder) who acts for a corp. We
discuss promoters in the context of their inappropriate behaviour, eg. One who enters into a
                                                                                               115

K in the name of a Corp before it comes into existence (with themselves/ with outside TPs),
or One who acts like Gluckstein, and does not disclose material facts to investors.

- Proxy = a) a doc by which a shareholder has designated another person to exercise his
votes at a shareholders' meeting.
          b) also, the person who is designated in such a document. Such a person, who is
also sometimes referred to as a proxy holder, must act in accordance w/the instructions of
the shareholder.
       Until a proxy doc is executed by the shareholder, it is called a form of proxy.

- Reporting issuer = Generally, one who has issued securities under a prospectus or has
listed stock on the stock exchange.

- "Security" (as opp to a share) = any tradable right in debt or equity of a Corp, eg. stocks,
bonds, debentures. ie. It is a broad term that incl debt and equity.

- Special resolution = a resolution passed by a majority of at least 2/3 of the votes cast by
the shareholders [Def in s.2(1)]   NB: To be contrasted with:
  Ordinary resolution = a simple majority of 50% + 1

- Takeover bid = a bidder offers to buy some or all of the shares held by existing
shareholders, typically at a price in excess of the current market price, for the purpose of
acquiring enough new shares to replace the board of directors and have a new board put
new management in place. If this is successful, it will result in the board and the officers
losing their positions. [Vz, 189]

 Take-over bid = an offer to acquire shares that, if combined w/shares already owned or
controlled by the offeror…would exceed 10% of any class of issued shares of an offeree
corp. This is only when the offer is not an exempt offer. ie. involves 15+ shareholders.
        - ie. Involves 15 + shareholders and more than 10% of a class of shares. [s.194]

- Vet = to inspect, appraise, verify, check for accuracy. [ie. Securities Commission vets
prospectuses.]

- Watered stock = stock issued that doesn't reflect the true value that was raised. Eg.
Diluting the value of the stock by issuing more shares. Can raise issues of misrep and fraud.

				
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