Corporations I: Davis (2011)                                                                                            1


    1) Only 1 equity investor: entitled to all residual amounts (after creditors are paid)
    2) Unlimited liability of equity investor
                       Personal liability for business debts & torts
                       Employees = agents of proprietor (in the course of duties)  prop is liable for emp’ees torts
            Can only limit liability for debt relationship if you have a non-recourse loan agreement that says the
               bank won’t go beyond the business assets in collecting (rare, but possible)
    3) Sole decision maker: get to manage the business as you see fit
            However, when investors (bank) is involved, they can/do put restrictions on your decision making
    4) No perpetual existence: you die, it dies

       In law of K, one Ks with another to act as an agent
             o Agent gets authority to enter principal into binding Ks
       In course of business, every emp’ee = agent
       Other legal agents are partners – agents for each other whether they know it or not
       Economic concept of agency: if 1+ invests in the business, share investment, share losses
             o Agency costs: everyone pays for 1 person’s screw up
2                                                                                              Corporations I: Davis (2011)

PARTNERSHIP         pp 1-30, 59-130

    1) 3 legal requirements to find a partnership (Partnership Act, s. 2):
           a. At least 2 legal entities (no requirement that it be natural persons)
           b. Carrying on a business in common
           c. With a view to profit
    2) No separate legal entity: partnership can’t enter into Ks, assets are owned by the partners
            Partners are personally responsible for obligations/entitled to benefit from profits
            Partner dies  partnership dissolves (can make provisions for this in the Partnership Agreement) (s 36)
    3) Fiduciary obligation:
            Utmost good faith
            Act in the interests of your partner(s)
    4) Agency relationship:
            Partners are agents for each other (and can bind each other to Ks)
            Same emp’ee-agency issue is present
    5) Unlimited liability:
            Personally liable for acts of other partners/emp’ees in the scope of the partnership business (but not for
                acts outside the scope of the business, ex. Personal debts)
            A partner’s personal creditors can go after the partner’s individual share of the partnership interest
                         Should check to see if there are any outstanding claims against other partners
            Creditors of the partnership can go after the assets of the partnership OR the personal assets of any of
                the partners
                         Get insurance!
                         Partners are jointly and severally liable (partners can try to recover from other partners if they
                          pay the claim)
    6) Limited liability?
           a. Limited partnership  1 general partner has unlimited liability, however many other partners have
                liability limited to their investment in the partnership  limited partners do not participate in the mgmt.
                or control of the partnership
           b. Limited liability partnership  creditors can go after the partnership assets but not your personal assets
                 liability for acts of other partners is limited, unless you knew about it, or had a supervisory role
    7) Partnership Agreement:
            Structures the partnership as the members wish
            Equity distribution/compensation
            Must make a provision for the addition of new partners in agreement (otherwise have to dissolve the
                partnership every time you want to add)
            Partnerships were developed by the CL, now codified by the Partnership Act
                         Most are default rules, if the partnership agreement is silent on things
                         Just b/c it’s in the Act doesn’t mean it automatically applies – look @ the agreement – some of
                          the provisions cannot be contracted out of
                               1. whether or not you are a partnership – definition s. 2
                               2. fiduciary duty
                               3. unlimited liability (unless meet statutory criteria of ltd partnership or LLP)
    8) Benefits of Partnership (v Corporation)
           a. Tax benefits: common for start-up operations because any losses can be used to offset other sources of
                partners’ incomes
Corporations I: Davis (2011)                                                                                                  3

            b. Greater degree of flexibility than a corporation in terms of filing and registration requirements
            c. Ability to contract in respect of relationship between partners and important features of operation

Partnership Act (BC)
Section 2: Definition of a Partnership
       Legal requirements:
           1) Carrying on a business in common
                    a. Co-ownership of investment property is not enough (Lepage)
                    b. Need to actually carry on business (Lansing)
                    c. Real business, not a window dressing (Backman)
           2) 2+ entities
                    a. Look at the nature of the relationship
                    b. Degree of participation and control of each party/benefits (Pooley)
                             There can be a partner with no participation in mgmt. (Westlock)
                    c. OR are the parties independent of each other (Lepage)
           3) With a view to profit
                    a. Intention matters, not actual profit (Backman)

Section 4(c): Presumption that Sharing of Profits = Partnerships (w Exceptions)
       Statutory presumption that sharing in profits is proof in the absence of evidence to the contrary that he is a
        partner in the business
       EXCEPTIONS – this kind of sharing of profits does not of itself constitute a partnership:
            o Sharing in profits just until debt extinguished ≠ partnership (Cox & Wheatcroft)
            o K for remuneration of emp’ee that constitutes a share in profits (4(c))
            o Spouse or child of deceased partner who receives by annuity a portion of the profits in the deceased
                partner’s business (4(c))
            o Loan to a person for carrying on the business in which the rate of int varies with the profits OR in which
                the lender receives a share of the profits as long as the K is in writing and signed by both parties (4(c))
            o Person receiving a portion of the profits as consideration of a sale of goodwill of the business (4(c))


Factors suggesting Partnership: (Pooley v Driver)
    1. Duration – when/how will relationship end?
    2. Whether claims are fixed amounts or unlimited (Cox & Wheatcroft)
    3. Whether benefiting from operation of business – reasons for investing to carry on business?
    4. Can enforce the partnership agreement (Pooley)
    5. Degree of participation and control (not determinative, might have no control and still be a partner – Pooley)

Cox & Wheatcroft v Hickman (1860 HL) p. 62: Creditors Sharing in Profits until Debt is Paid ≠ Partnership
        - Trustees run business for the benefit of the creditors, upon the debt being repaid, business transferred back
          to the original partners
        - Hickman’s negotiable instrument was not repaid, sued the creditors as partners in the business
        - Are the creditors liable as partners?
4                                                                                               Corporations I: Davis (2011)

         -   This was a creditor-debtor relationship, not a partnership
         -   While sharing profits is an indicator of partnership, the claims here were fixed amounts
         -   Business not being carried on for the creditors’ benefit as principals, only from a purely creditor/debtor
         -   Sharing in profits of the partnership until debt is extinguished ≠ partnership.
         -   Sharing of profits creates a rebuttable presumption of partnership.

Pooley v. Driver (1876 ChD) p. 65: Look @ Substance of K – No Limit on Profit Sharing = Partnership
        - Loaned $ to partners. Profits to get share of profits in proportion to loan, for as long as partnership existed
        - Loan agreement to terminate only when partnership terminated.
        - On bankruptcy, lenders could get payment for amount in which they loaned
        - Did not take part in management
        - Were the investors partners?
        - Ct found the investors to be partners
        - The right to profits had no cxn to loan & right to repayment – creditors would only have a claim to the loan
        - Factors suggesting partnership:
            1. Capital interest – no fixed interest on loan or fixed duration  investment
            2. Benefiting from operation of business. Unlimited / not fixed
            3. Unlimited duration
            4. (Can still be a partner even if not participating in management)
        - Intention of not being a partner is not determinative; Ct will look at the substance of the arrangement

Section 4(a): Co-Ownership ≠ Partnership, even if Share Profits (Need More)
        4(a): Joint tenancy, tenancy in common, joint property, etc does not of itself constitute a partnership EVEN if
         they share in the profits
        Whether the asset is partnership property depends on whether the individual owners maintain control of their
         own interest or whether they have given that up to the partnership (Lepage) ie can they sell w/o prior approval?

Lepage v. Kamex (1977 ONCA) p. 77: Look @ Intention: Free to Sell Prop Interest = No Partner
        - Apt bldg. held in trust by Kamex, owners met regularly to discuss issues, paid expenses in proportion to int
        - One owner decided to sell, breached contract with real estate agent.
        - Agent wanted to recover from any of the owners (could only do so if partnership)
        - Was this a partnership?
        - Not a partnership  Carrying on a business, but NOT IN COMMON – owners could alienate their interest in
           the property without approval of others
        - K gave them the right to sell their interest to 3rd party after gave a right of 1st refusal to the other co-owners
Corporations I: Davis (2011)                                                                                              5

        -   Because of s. 4(a) you need more than just co-ownership. Ask: Was the INTENTION that the property be
            held as partnership property? If partnership property, owners would not be able to deal with their share
            separately from the others.
            1. Do the individual maintain control of the assets, or have they given it up to the partnership?
            2. Partnership property is not divisible. Only get right to division of remainder after liabilities paid on
                dissolution (PA, s 42)

Section 6: Defines Partnership Property
        -   Means property and rights and interests in property:
            1. Originally brought into the partnership stock
            2. Acquired, whether by purchase or otherwise, on account of the firm
            3. OR acquired for the purposes and in the course of the partnership business

Volzke v. Westlock Foods (1986 ABCA): Can be a Partner w No Active Mgmt.
    - Property owned by 1  offer from another to buy a 20% share of the business and share in 20% of the profits
    - Got financing in both names (joint + severable loan), mortgage in both names but Westlock had no signing
    - TJ: no partnership because Westlock has no control
    - Was the property partnership property?
    - When the offer was accepted it became partnership property under s. 6(a)
    - CA: control is a factor, but not determinative, shared costs/profits
            o Fits into s. 4(c); there was no contrary proof to the existence of a partnership
    - Control is a factor, but not determinative of a partnership: look at shared costs/profits
            o Common bank account, agreement to share in costs of development and profits, participation in
                financing, printed cheques, right to be consulted about new tenants  indicative of partnership

Lansing Building Supply v. Ierullo (1989 ONTC) p. 83: Express Intent No Matter – Look@Nature of K – rights restricted?
    - Agreement stated the parties were not partners
    - Shotgun provision: you could be forced to sell your property at a price named by another person  contrary to
        having a separate interest in the property (which is what co-owners would have)
    - Another co-owner entered into an agreement with Lansing, Lansing was never paid
    - Lansing wants to go after others in partnership to recover for breach of one of co-owners in agmt with him
    - Was there a partnership?
    - Yes, there was a partnership
    - Carrying on business IN COMMON - Co-owners’ rights in dealing with their interests in the land were severely
        restricted (unlike in Lepage)
    - Intention can be inferred from the facts, despite what was explicitly stated
            o Carrying on a business in common? Indicators include:
                      Involved in the business?
                      Sharing in the profits?
6                                                                                            Corporations I: Davis (2011)

                       Free to deal with their interests independently?

Backman v. Canada (2001 SCC): Need Intention to Carry on Biz for Profit (No Actual Profit Req’d)
    - Formed a partnership, bought property at > MV and sold for a loss in order to realize tax benefits personally
    - Invested nominal amount of money in oil comp to “carry on business”
    - Was there a partnership?
    - No partnership
    - The real contract was to realize a loss and claim it on their individual income taxes
    - SCC: does not fit the partnership criteria
    - Don’t need to actually make a profit, but must intend to carry on a business AND intend to make a profit
          o Express intention is relevant but not determinative  look at contextual factors to determine whether a
              partnership exists
    - Even the passive receipt of rent is carrying on a business

Legal Status of Partnerships
Re Thorne and NB WCB (1962 NBCA) p. 97: Partner ≠ Employee
    - Partner suffered injuries in course of duties pursuant to partnership agreement and applied for WCB benefits
    - Can a partner get WCB? Is a partner an emp’ee?
    - No  partnerships are not distinct legal entities from the partners
    - A partner cannot also be an emp’ee

Consequences of Partnership:
      1) Each partner is liable to the full extent of his personal assets for debts of the partnership
      2) Debtors can pursue another partner’s interest in the partnership to cover their personal debts, so need to
         check liabilities of partners before you enter into partnership with them (s. 26)
      3) A partner cannot be an employee of the partnership
      4) A partner cannot be a creditor of the partnership

Section 3: Shareholders of a Corp ≠ Partners

Section 21: Default Rules of PA Can be Altered w Consent of All Partners

Section 22; 31-33: Partners’ Duties to Each Other – FIDUCIARY DUTY and examples
       s. 22: Partner must act in fairness and good faith to the others (fiduciary duty)
       s. 31: Must be honest and inform other partners of anything affecting the partnership
       s. 32: Partner must account for (pay to the partnership) and disclose any benefit derived by the partner from a
        contract involving the partnership, or from any use of the partnership name or property that was made
        without the consent of the others
Corporations I: Davis (2011)                                                                                              7

       s. 33: If a partner carries on any business of the same nature as and in competition with the partnership without
        the consent of the other, the partner must account for and pay over any profits made by him in that business
Basis for strict enforcement = relationships are based on trust & confidence.
-Cannot contract out of FD

Section 23; 24; 25; 26; 42: Partnership Property Obligations
       s. 23: Partnership property will be held in trust for the others AND applied exclusively for partnership purposes
       s. 24: Anything that is bought with partnership $ is presumed to be partnership property
       s. 25: Partnership property is not heritable unless contrary intention appears
       s. 26: Need special hearing at SC to access partnership property after successful lawsuit against a partner.
             o (1) You cannot execute a writ of execution against partnership property UNLESS the judgment has been
                 made against the partnership…partner has been a party to the legal proceeding
             o (2) You can charge your judgment against the partner’s portion of the partnership profits and assets
       s. 42: On dissolution, debts and liabilities paid, and remainder of assets divided among partners

Section 27: Default Rights of Partners (Can K Out)
       Equality in division of profits (& cost & capital)
       Mgmt. by majority (for ordinary business)
       No fundamental changes unless unanimous

Section 28: Partner Cannot Be Removed w/o Partner’s Consent

Section 29; 35(c): Dissolution of Partnership on Notice

Section 36: Dissolution on Death, Bankruptcy (Can K Out)

Section 11: Partners are Personally Liable for Partnership Debts
       Partners jointly (and personally) liable for debts and obligations of firm incurred while he/she is a partner
       After death, partner’s separate debts paid out first and then estates still liable for partnership obligations

Section 7; 8, 9; 10: Ability to Bind Partnership – Ordinary Course of Biz
       s. 7(1): partner as agent for others: Partner is the agent of the firm and any other partner for the purpose of the
        business of the partnership (liability for Ks)
             o ***(2) Any of the acts in the usual/ordinary course of business bind the firm and partners UNLESS:
                        (a) The partner has no authority to act in that particular matter, and
                        (b) The person with whom he is dealing knows that he has no authority to act, OR doesn’t
                           know/believe him to be a partner
       s. 8: All acts or instruments relating to the business of the firm and done in the firm name, by any person
        authorized to do so (both actual and ostensible authority of partners and agents), is binding on all partners.
       s. 9: pledge credit: Partner cannot pledge credit of the firm for a purpose not connected with the ordinary
        course of business of the partnership  firm is not bound UNLESS the partner was specially authorized
       s. 10: Must give notice to third parties of any restrictions on power of a partner (if third party doesn’t know
        powers have been constrained, that partner can still bind firm)

Section 12; 13; 14: Partnership liable for wrongful acts of other partners – ordinary course of biz
       s. 12: tort liability: Firm is liable for any torts committed by a partner in the ordinary course of business
8                                                                                                 Corporations I: Davis (2011)
 IS THE PARTNERSHIP BOUND BY THE CONTRACT? (Limits to agency and liability) s 7(2)

 Question 1: Was the agreement in the usual course of business?

 If in the usual course of business, partnership liable UNLESS:
      1) The partner had no authority to act for the firm in that particular matter, and
      2) The third party either knew he had no authority, or did not know/believe him to be a partner.

       s. 13: Firm must make good any loss where partner acting within scope of apparent authority misapplies money
        received from a third party or misapplies money in the custody of the firm
       s. 14: Joint and several liability of partners for all firm liabilities incurred under ss 12 & 13 while he is a partner


Question: Was the tort committed by a partner in the ordinary course of business?  yes = partnership liable.
Improper acts / acts made for an improper purpose can still be in the ordinary course of business (Falconi)

Ernst & Young Inc v Falconi (1994) OR Gen Div, p. 110: Improper Acts can still be in the Ordinary Course of Biz
    - Lawyer involved in fraudulent activity involving the legal services of the firm
    - Was this in the ordinary course of business?
    - YES  If the person was acting as a lawyer, even if not in the way contemplated when the partnership was
         formed, then the act was done in the usual course of business and all the partners are liable.
    - Acts made for an improper purpose can be found to be in the ordinary course of business
Policy: Incentives for partners to monitor each other. Discourage wilful blindness (but now we have LLPs).

Section 16: Held Out as Partner = Can Bind
A person who represents himself or knowingly allows himself to be represented as a partner is liable as a partner to a
third party who gave credit to the firm on the faith of such representation
     The person held out must knowingly permit it
     To establish liability, the person who advanced credit to the firm must have relied on the holding out in doing so
        (ex. Rely on the creditworthiness of one who has retired… retiree should have given notice of retirement)

Section 19: New Partner + Retiring Partner Liability
       (1) New partner is not liable for debts incurred before he became a partner
       (2) Retiring partners are still liable for debts incurred / contract entered into before retirement.
             o Ways to avoid: (first 3 not in statute)
                      Providing actual notice to all those with whom the firm had prior dealings
                      Placing a notice of retirement in the Gazette
                      Filing a revised registration statement, removing retiring partner’s name from the partnership
                      Statute allows for agreement between retiring, current partners, and creditors to remove
                         retiring partner from liability
                               Agreement with creditors from the get-go that retired partners will not be liable
                               Partnership agreement could require partnership to take certain steps to reduce
                                  continuing liability of retiring partners
       (3) UNLESS discharged by agreement
Corporations I: Davis (2011)                                                                                                 9

Sections 29-47: Dissolution
s. 29 Any partner can end P by giving notice to all other partners
s. 30 If expired P is later continued, rights and duties same as before if no new express agmt
s. 35 P dissolved (a) at expiration of set term; (b) after single adventure / undertaking P was entered into for; (c) upon
notice if entered into for undefined time (date of diss 35(2))
s. 36 Ps with more than 2 partners can continue after dissolution
s. 38 Court can decree dissolution in the enumerated cases.
s. 39 change in constitution of firm
s. 40
s. 41 auth continues after dissolution to wind up affairs of P
s. 42 assets pay debts and liabilities first and then amounts due to partners
s. 43 return of premium paid by on partner to another
s. 45 rights where partnership dissolved by death or outgoing partner
s. 46 debts at date of dissolution or death
s. 47 SETTLEMENT OF ACCOUNTS ON DISSOLUTION / Property divisible on dissolution

Limited Partnerships
Limits the liability of the limited partner(s) only  general partner still has unlimited liability

Partnership Act Features: Created by Statute – Must File Certificate
    1. Can only be formed by filing of certificate (BCPA s. 51) – creature of statute (not intention like regular
    2. Is composed of both general (unlimited liability ss 11, 57) and limited partners (limited liability s. 57) (s. 50)
            a. A person can be both a general and a limited partner (s. 52)
    3. Protection of Third Parties
           Name must end in “Limited Partnership” and must not have name of general partner (s. 53)
           Limited partners NOT to take part in MGMT (s. 64)
                   i. Liability of Limited Partner limited to investment (s. 57)
                  ii. A LP is not liable as a GP unless he/she takes part in mgmt. of business (s. 64) (Nordile)
                             1. limited partner cannot contribute services (s. 55)
                             2. Reality: LPs can maintain limited personal liability by running partnership in capacity as
                                  directors of GP corp if they make clear they are managing in capacity as director/officer
                                  of GP corp (ie look to business cards, signatures, etc.) (Nordile, law in BC, not Zivot)
                 iii. Cannot be liable for torts committed in carrying on the business BUT can still be vicariously liable
                      for actions of agents or emp’ees engaged in carrying on the business
    4. Governance issues because of separation of ownership from control
            a. Owners/investors are LPs, whereas control rests with GP, who probably has no money in P, and no
               assets because GP is likely a corp
                      Problem: GP has nothing at stake and is managing – Economic “agency costs”
                      Problem: even less incentive to monitor GP because investors potentially liable as GPs if they
                        take part in mgmt. of business (s. 64)
                      Places LPs at mercy of GPs, so some governance provisions in statute
                              GP cannot perform an act that makes it impossible to carry on the P business or consent
                                  to a judgment against the P. Cannot possess P property or dispose of it for other than a
                                  P purpose. (s. 56) – varying these provisions requires consent of all LPs.
                              LP same right as GP to obtain dissolution by court order. (s. 58, 38)
10                                                                                           Corporations I: Davis (2011)

                               Right to inspect and take extracts from ltd partnership books (s. 58) (subject to agmt
                                between the partners)
                               A GP has no auth to admit a person as a GP or a LP unless the right to do so has been
                                given in the certificate (s. 56(d)) (also see s. 51(4)(c))
                               LPs share in the profits and return of capital in proportion to contributions unless
                                partnership agreement provides otherwise or would result in insolvency (s.59, 61)

Haughton Graphic Ltd. v. Zivot (1986 ONHC): Not LP if Take Part in Control of Biz thru Corp. BC = mgmt, not control
    - Had corporation as general partner
    - Controllers of GP corp also individual ltd partners
    - Z = partner & president | Marshall = vice prez
    - Gave cards saying members of the partnership & signatures for ltd partnership
    - Held selves out as partnership, not a separate legal entity
    - Can you manage a ltd partnership though a general partner corporation and maintain the benefits of being a
        limited partner?
    - NO. Z & M are liable
    - If you take part in control of the limited partnership then you lose the benefit of being a limited partner
NOTE: this is NOT a BC case and is NOT THE LAW IN BC  BC = management, not control.

Nordile Holdings v. Breckenridge (1992 BCCA): Managing through GP Corp OK for LPs
    - Breckenridge was director and officer of GP corp, and also individual limited partner in limited partnership.
    - Nordile wanted to obtain $ from Breckenridge despite being an LP bcos he managed through GP corp
    - Is it managing a limited partnership if you are a director of the corporate general partner?
    - Not liable  he managed the limited partnership in the capacity of director of the general partner corporation,
        NOT in his capacity as limited partner of the partnership
    - In BC, limited partner is not liable UNLESS he takes part in the management of the business as a limited partner
    - If an individual makes it clear he is taking part in management in his capacity as officer / director of GP corp
        and not in his capacity as LP, he is not personally liable for liabilities of limited partnership.
NOTE: in AB control was required, in BC management is required.

Partnership Act Features: Created by Registration
        s. 96: LLP can only be created by registration
        s. 97: Professional LLPs must be authorized under that profession’s Act
        s. 99: Original partnership is not dissolved by becoming LLP
        s. 104(1): Partners are not personally liable for partnership obligations (creditors can only access the
         partnership’s assets)
              o (2): Partners are still personally liable for:
                       (a) Partner’s own negligent or wrongful acts
                       (b) Wrongful acts of emp’ees are other partners IF you knew of the wrongful act AND did not
                          take reasonable steps to prevent it
Corporations I: Davis (2011)                                                                                       11

             o (3) Your interest in the partnership is still subject to a claim against the partnership
       s. 106: Still liable for any previous obligations of the firm (before it became a LLP)
       s. 107: Must notify all clients of change to LLP

Partnership Summary
Conceptual framework:
    Relationship: carrying on business together
           o Internal relationship: governance
                   K or stat default rules
           o Internal relationship: trust & confidence
                   Fiduciary duty: strict duty to avoid CoI  accounting for profits
                   Must disclose everything relevant to partnership
           o External agency
                   K and tort liability for partners’ actions
                           Exception: not in ordinary course of business or claimant aware of lack of authority
    3 elements in statute:
           o Biz in common, 2+ entities, view to profits
    Co-ownership (can deal w prop as you like) vs. partnership (requires permission to deal with prop)
    Creditor (loan agreement, fixed amt of pymt) vs. partner (ongoing pymts, sharing of profits)
12                                                                                              Corporations I: Davis (2011)


     1. Separate legal entity, distinct from its members
            a. Sell, own Ks, own property, commit crimes…
            b. Must determine what actions are corporate actions/what actions are actions of those behind the
                corporation (directors, officers)
     2. Limited liability – liability of SH is limited to their investment
            a. Creditors/emp’ees can only claim against the corporation’s assets, not the SHs’ assets
            b. Corporation liable for its emp’ees acts (emp’ees = agents of the corporation)
            c. SH’s personal creditors have no claim on corp.
     3. Perpetual existence

     4. Created by statute
     5. SH are the equity holders of the corporation (they receive a bundle of rights)
            a. 3 rights. At least 1 class has:
                      i. Residual claim over assets (not title to them) after creditors are paid
                     ii. Right to certain amt of dividend IF the decision is made to declare (director’s discretion)
                    iii. Right to vote in SH meeting (select directors, but not control their decisions)
            b. Not always involved with the corporation (different from sole prop/partners)
            c. Not capable of binding the corporation or making it liable
            d. Elect directors but cannot exercise control over them
            e. Not entitled to a share of the profits, but only a share of the dividends
     6. Directors/mgmt. control the corporation
            a. Shirking? Where to draw the line between reasonable effort and not?
     7. Benefits:
            a. Separate legal personality;
            b. Possible tax advantage if you qualify for a small business tax rate;
            c. Name protection
     8. Disadvantages
            a. Closely regulated / Extensive record keeping necessary
            b. Most expensive form of business to organize
            c. Possible double taxation of profits
            d. Directors may be held legally responsible in certain circumstances
            e. Personal guarantees undermine limited liability advantages

Benefits of separate legal personality:
    Limited liability
            o Insulates investors from business claims (Salomon)
            o Insulates corp from investors’ personal liabilities
    Perpetual succession – ownership is transferable
    SH can K with or sue the corporation (Lee v Lee’s Air)
            o Contrary to partner who cannot be creditor or employee, cannot contract with or sue the partnership
    Ease of transfer of shares
            o Contrary to difficulty of changing personnel in a partnership
    Ease of raising capital – people are not afraid to invest
    SH cannot bind the firm
    Separate ownership by corp of its own property
Corporations I: Davis (2011)                                                                                              13

            o   For corp to hold insurance for property, requires property interest in corp. Moral hazard if an individual
                were allowed to be insured for corporate property – receipt of insurance without corresponding loss
                and corresponding duty to creditors (Macaura)

Disadvantages of separate legal personality
     Separation of ownership and control – directors control investors’ money
           o Economic agency costs
                    “Shirking” - underperform because loss of inefficiency not borne by them
                    Divert assets - from corp’s profitable activity to own benefit
           o Corporate law addresses economic agency costs:
                    General parameters for behaviour by insiders
                    Governance structure part of statutory scheme
                    Regulates relations between insiders and outsiders
                    Objective – protect legitimate interests of participants while retaining advantages of the firm

Theories of the Corporation pp 31-57
Who should the beneficiaries of corporate decision making be?
Issue: what does “best interests of the corporation” mean? SH? Stakeholders?

Nexus of Contract / Wealth Maximization: Autonomy of Actors that K w Each Other (Posner, 38)
       The corporation is just a convenient location for parties to contract. All actors K with each other through the
        legal fiction of the corporation about their participation in the business. All regulated through private law (K)
       Purpose of corp: Benefit SHs. Reduce agency costs and maximize value.
            o Emphasis on SH interests: Since the SHs are equity/residual claimants, the directors and officers should
                  act to advance the economic interests of the SH over everyone else, because that benefits everybody in
                  the corp. (creditors have fixed claims, emp’ees can K)
            o Emphasis on individual autonomy and FREE MARKETPLACE
            o Agency cost reduction
                        SH are rational actors - will k to reflect the economic agency costs of shirking by paying less for
                        Managers try to decrease economic agency costs to allow purchasers to buy closer to real value
                                Monitoring devices: Auditors/elections/director supervision of mgmt.
                                Pay mgmt. in shares (options) to avoid economic agency costs have been ineffective 
                                   creates an incentive to inflate the price of shares (Enron effect)
       Corporate law should:
                        Advance the accountability of the directors and officers directly to the SHs of the corporation.
                                If sale will maximize SHs’ wealth, decision-makers must sell
                        Facilitate negotiation between the parties. Should be enabling  should just contain the terms
                          that people would have negotiated in their Ks with the firm if they were fully informed, self-
                          interest people with no transaction costs
       Limitations to theory:
            o Assumption that SH have uniform interests over time that can be reflected and negotiated (but corps
                  are widely-held – SH do not have a single identifiable interest)
            o Assumption that SH are rational actors – do not always have all the information
            o Assumption of equality of bargaining position – not reality
            o Fails to take into account other stakeholders that may not be able to K for themselves

Mediating Hierarchy / Team Production: Directors Mediate b/t Different Actors (Stout & Blair, 43)
       The corporation is about team production, which is much more efficient than lots of contracts
14                                                                                             Corporations I: Davis (2011)

             o The corp is fundamentally political. Pressure groups have diff abilities to exert pressure on cash flow
             o Closer to reality  understands that there is a hierarchy (doesn’t presume equal bargaining power)
             o Emphasis not only on SH
        Purpose of corp: maintain & promote the coalition of the team in the productive enterprise
             o mediate amongst various interests to keep them together
             o Maximize payouts to various stakeholders, not just SHs
             o Wealth maximization but this achieved through cohesion corporate coalition
        Corporate law should: fill the gaps when the indivs have found it difficult or impossible to K with each other /
         directors unable to mediate between pressure groups in a politically acceptable way to keep them producing
             o Still in the realm of private law (like the K theory)
                      The K is to commit decisions to the director
                      The K is the corp statute and constitution AND the deal is that the corp will be kept together as
                         long as the directors don’t side too much with one stakeholder over another
        Limitations to theory:
             o Assumption that directors will be fair
             o No one has participation rights in the debates made by directors (presumes incumbency)
             o Various stakeholders compete to strike the best bargain with the Board (vulnerable members remain as
                 such)  no underlying inherent notion of fairness

The Corporation as a Social Enterprise (Greenfield, 48)
        The corporation contributes to society by creating financial prosperity. Can exist as long as it does not create
         more social harm than good.
        Purpose of corp:
             o (1) To serve society.
             o (2) To create more social good (financial prosperity) than social harm.
        Corporate law should: Further the above 2 goals.
             o Wealth should be distributed fairly to those who contributed to its creation
             o Participatory democratic form of governance (representative of various stakeholders) best ensures
                 sustainable creation and equitable distribution of wealth
             o Private law has no pre-existence  Ks have no greater claim than a statute that was created to govern
                 the corp
        Limitations to theory:
             o Difficult to measure social good ($ is much easier to count)

Peoples Department Store v Wise [2004] SCC – Best interests of corp – Can consider interests of other stakeholders
Directors must act in best interests of the corporation 
     SH interests do not trump those of other groups
     Best interests of the corporation means the maximization of the value of the corporation
     In determining whether acting in best interests of corp, directors can consider the interests of other
        stakeholders (“SHs, emp’ees, suppliers, creditors, consumers, governments, and the environment.”)


Canada Business Corporations Act, Section 5: 1+ Persons can Incorporate
        Must be > 18, of sound mind, and not bankrupt
        Incorporate by signing the articles of incorporation
Corporations I: Davis (2011)                                                                                          15

Incorporation Process: Start to Finish
Must create “articles of incorporation” which include:
   1. s. 6(1)(a) name OR s. 11(2) numbered corporation
            a. Name must identify you as a corporation -- s. 10(1)
            b. Name must be used for all Ks, invoices, etc. s. 10(5)
   2. Province of registered office – s. 6(1)(b)
            a. Notice of address of registered office must be sent but can be separate from articles – s. 19
   3. Set out the share structure of the corp/max number of shares to be issued – s. 6(1)(c)
            a. Important because in looking to the articles a SH can see to what extent their share claim can be diluted
            b. Can change the number but requires amending the articles
            c. Where there is more than 1 class of shares, the rights & restrictions attaching to each class must be
                specified – s. 6(1)(c)(i), (ii)
            d. At least one must be voting; one must carry the right to dividends; one must carry right to receive
                remaining property upon dissolution) – s. 24(4)(b)
            e. Each share w/in a class has to have the same rights equally
   4. Any restrictions on the ownership, issue, transfer of shares – s. 6(d)
   5. Number of directors (or minimum and maximum) – s. 6(e)
            a. Requires at least 1 if private corp – s. 102(2)
            b. At least 3 if public – s. 102(2)
   6. Any restrictions on the type of business the corporation can carry on – s. 6(f)
            a. Cannot carry on any business restricted by its articles – s. 16(2)
   7. Articles can provide for a higher number of votes for special majority or USA than required by the Act – s. 6(3)
            a. Generally requires 2/3 special resolution – s. 173(1)
            b. Cannot require greater # of SH votes than ordinary resolution (s 109) to remove a director – s. 6(4)
   8. Decide who the first directors are – s. 106(1)
   9. Articles of incorp/by-laws cannot change the minimum requirements of the Act – s. 6(2)
   10. File the articles of incorp – s. 7
            a. Also send notice of directors who will hold office from issue of certificate to first SH mtg – s. 106(1)
            b. Also send notice of address – s. 19
   11. If no problems  Director will issue a certificate of incorporation – s. 8
            a. Corp comes into existence on the date shown on the certificate – s. 9
   12. Once this process is complete and certificate is filed  directors take over & hold a directors mtg – s. 104(1)
            a. Make by-laws/ issue shares/ adopt form of security/ appoint officers/ banking arrangements/ set out
                records and their form (corp must maintain records – s. 20)/ appoint auditor etc…
   13. Directors need to be elected at first SH meeting– s. 106(3)
                      i. Term of office cannot be for more than 3 years – s. 106(3)
                     ii. Meetings to be held within 18 months and annually thereafter – ss. 133
   14. Directors have the duty to manage/ supervise mgmt. of the corporation – s. 102(1)

CONSTITUTIONAL ISSUES          PP 230-249; CBCA SS 15(2), 187, 188; BCBCA SS 302-311; 375-377

Both federal and provincial governments have constitutional authority to create corporations
    Provinces s. 92(11)  authority over “incorporation of companies is w/ provincial objects”
           o Can carry on business inside the particular province
                     Deemed to carry on business in BC if name listed in ph directory for any part of BC, or name
                       announced in an ad with contact info in BC, or has resident agent or warehouse in BC. Banks or
                       business constructing railways not considered to carry on business in BC. (BCBCA s 375)
           o If you want to carry on business outside of your home province you can:
                     (1) extra-provincial license: License to carry on business in that province; or
16                                                                                                  Corporations I: Davis (2011)

                            Maintain home province’s corporate law internaly
                     (2) continue into province or federally
                            Adopt new province’s corporate law regime or CBCA as of date of continuation
                            Need permission from home and transfer province to transfer incorporation
        Federal POGG Power  authority to create corporations and enact CBCA
            o CBCA corps can carry on business throughout Canada – s. 15(2)
            o Provincial regulation cannot deny you right to carry on business in their prov BUT they can regulate you
            o CBCA statute has heavy restrictions on corporate activities

Salomon v. Salomon (1899 HL): If Corp Validly Formed = Separate Legal Entity
    - Sole prop (unlimited liability) incorporated a company after the Companies Act was enacted
    - Sold his sole prop to the corp for shares and debentures in exchange
    - Debentures took priority of creditors & personal assets were no longer available
    - Corp failed and creditors tried to sue saying the corp was a fraud to avoid liability
    - Was this corp the same business but now disguised as a limited liability corporation? Was the share valuation
        too high (therefore misleading to the creditors)?
    - Salomon abided by the requirements/formalities of the statute
    - Valid corporate form = separate legal personality EVEN though the business was the same as before
    - Personal assets are insulated from creditors
    - As long as you abide by the requirements of the corp statute in forming the corp the corp entity will be valid
        AND will be a separate legal entity which confers limited liability on its SH
            o It’s up to creditors to take steps to protect themselves (K around limited liability)
                     Easier now with s. 10(1) that requires corporations to identify themselves as such

Section 15(1): Corp has Rights of Natural Person
        Corp has the capacity, rights, powers & privileges of a natural person
            o Can own prop, sue/be sued, is liable for its own debts

Section 45: Limited Liability of SH (w Exceptions)
        SH of a corp are not, as SH, liable for any liability, act or default of the corp [except under s. 38(4), 118(4) or (5),
         146(5) or 226(4) or (5)]
             o SH liability is limited to amount invested
             o s. 146(5): in cases of USA where they take on mgmt. duties – liable as directors would be

Section 118: Directors Personally Liable for Some Corp Acts
        (1) Issuing shares for consideration other than $ that is less in value than fair equivalent of $ for shares
        (2) Voting for any of the following – liable for payments where insolvency tests are not met:
              o Purchasing, redeeming or acquiring shares contrary to ss 34, 35, 36
              o Paying commissions contrary to s. 41
              o Paying dividends contrary to s. 42
              o Payment of indemnity contrary to s. 124
              o Payment to SH contrary to ss 190 (dissent rights), 241 (oppression remedy)
        (3) Entitled to contribution from other directors who voted for the unlawful act
Corporations I: Davis (2011)                                                                                              17

       (4) Director held liable under s. 118(2) can apply to court to recover from SH or other recipients of the funds
        paid out

Section 119: Directors Joint & Severally Liable for Wages
       Directors are jointly & severally liable to emp’ees for up to 6 months of unpaid wages – 119(1)
       UNLESS – 19(2):
            o Sued for debt more than six months after it became due
            o Claim for debt proved more than six months after earlier of date of commencement of liquidation and
                dissolution proceedings, and date of dissolution
            o Claim for debt proven more than six months after date of assignment of bankruptcy order

Reasons Why Limited Liability is Good – Easterbrook Article
    1. Reduces costs of monitoring managers by investors
           a. If SH had unlimited liability they would invest too much to monitor IRT their shares
    2. Don’t need to watch other SH
           a. If unlimited liability you would have to worry about the wealth of other SH – so they could pay liabilities
    3. Shares are easily transferable – defined only by their price
           a. If unlimited liability people wouldn’t be able to readily trade their shares b/c they wouldn’t know the
                level of risk attached
           b. The easy transfer of shares controls managers through the possibility of takeovers
    4. Price of the share reflects information about the business of the company NOT the wealth of the particular SH
    5. Possible to diversify your risk with limited liability b/c each investment doesn’t equal potential ruin if the
       company goes under

Lee v. Lee’s Air Farming Ltd (1961 PC) p. 157: Corp can K with Directors/SH - can be Emp’ee
    - Lee formed a corp & was the sole director & SH
    - Lee K with corp to fly the planes & died on the job
    - Wife wants to collect spousal benefits under WCB – only employees are eligible
    - Can Lee k with own corp and thus be an emp’ee?
    - Corporation is a separate legal entity (Salomon)
    - As a director, Lee can K on behalf of the corporation with himself, as an emp’ee
    - SHs and directors can enter into contracts with the corporation (as employees or contract of purchase and sale)
             o Contrasted with Thorne where a partner could not be an emp’ee (no WCB)

Macaura v. Northern Assurance (1925 HL) p. 160: SH / Creditor Cannot Insure Corp Property
    - M formed limited corporation and assigned his right to the timber to the corporation for shares
    - M took insurance out for the timber; there was a fire and M tried to make insurance claim
    - Can an individual SH take out insurance against corp property?
    - M had no insurable interest because transfer of timber to corp took it away from him (Salomon)
    - Cannot allow individual SH / creditor to take out insurance against a corporation’s assets (would have an
        incentive to burn the goods)
18                                                                                            Corporations I: Davis (2011)

    - Not lifting the corporate veil
    - Corporation is a separate legal entity and individual SH cannot take out insurance against the corp’s assets
          o Creates a moral hazard in cases of widely-held companies (more beneficial to burn than not)
          o SH / creditors don’t own the property, they can’t insure it

Kosmopolous v. Insurance (1987 SCC) p. 162: SH Can Insure if Big Interest in Corp
    - Owner of shoe repair corp and took out insurance
    - Insurance in Kosmo’s name, not the corporation (due to mistake by insurance broker)
    - Fire destroyed business & Kosmo made a claim
    - Is the claim valid?
    - Kosmo was the sole SH, and would have been prejudiced by destruction of assets, so there is no moral hazard
    - He had a moral certainty of advantage from the existence of the assets – therefore had an insurable interest
    - While allowing him to collect on the insurance personally, not lifting corporate veil allowing creditors to collect
        from him because creditors who freely choose the corporate form must bear the risks that go with that.
    - Insurable interest is not based on ownership but on moral certainty
Note: The more SHs involved, the weaker the arg that the SH benefits from the assets but for the fire.
Corporations I: Davis (2011)                                                                                             19

Piercing the Corporate Veil pp. 167-216
Courts can pierce the corporate veil and impose liability on SH despite s. 45 guarantee of limited liability for SH
    General rule: courts won’t pierce the corporate veil unless there are extreme circumstances such as fraud and
        protecting innocent 3rd parties such as in tort

       Corp incorporated for or used for bad purposes: fraud, concealment of assets, deliberate harm, evasion of K
       Organizing enterprises through separate corps to mislead/defeat public policy
       Equitable jurisdiction of the Cts - circumstances where it would be unfair to allow the result

   1. Incorporated for an illegal, improper (642947, Big Bend), unjust, fraudulent (Big Bend) or akin to fraudulent
       (In-trans) purpose.
            a. Or when incorporated, those in control expressly direct a wrongful thing to be done and use the corp
                as a shield for the improper conduct (642947)
            b. Allegations of fraudulent conduct or objectionable purpose on the part of a company’s principals (Big
            c. Cases where a company existed as a shell and was clearly undercapitalized to meet its reasonable
                financial needs
            d. Cases that involve tort claims against the company, particularly those where a director, SH, emp’ees has
                committed an intentional tort, or the tort of inducing breach of K
   2. Using the corporation to evade public policy
            a. Organizing enterprises through separate corporations to mislead or to defeat policy (De Salaberry)
            b. Cases where the company was not incorporated for bona fide business purposes but for other reasons,
                often to avoid taxation (De Salaberry)
            c. Cases that involve non-arm’s length xactions between parent and subsidiary companies (De Salaberry)
   3. Use of the corporate form to escape equity and fiduciary obligations.
            a. Equitable jurisdiction of courts will lift corporate veil where unfair to allow result of sep legal entity -
                justice better served by disregarding the corporate form (Wolfe v. Moir [Whoop-Up])
Should be able to convince court to / not pierce by reference to the legitimate/illegitimate actions of the individuals

Clarkson v. Zhelka (1967 ONHC) p. 169: If No Evidence of Misuse of Corp Form/Fraud, then No Pierce
    - Selkirk had property, transferred to his corporation which sold half to his sister for cheap
    - Selkirk became bankrupt, personal creditors tried to claim corporate property, saying the corp was just an agent
        of Selkirk
    - Was this a valid use of the corporate form?
    - Refused to lift the veil:
            o Corp validly incorporated + “kept alive”
            o Little leakage of corporate assets into Selkirk’s personal pockets
            o Dubious intra-corp dealings did not prejudice personal creditors
    - No evidence when Selkirk transferred the prop that he was trying to evade his liabilities to creditor
    - If some evidence that Selkirk hid $ in the corp the creditors would be ok, but no such evidence
    - Absent fraud / illegitimate use of the corporate form, veil will not be pierced
    - One-person corporations are legitimate, but hiding personal assets in a corporation is not.
20                                                                                                   Corporations I: Davis (2011)

 “If a company is formed for the express purpose of doing a wrongful or unlawful act, or, if when formed, those in control
expressly direct a wrongful thing to be done, the individuals as well as the company are responsible to those to whom liability is
legally owed.
  In such cases, or where the company is the mere agent of a controlling corporator, it may be said that the company is a sham,
cloak or alter ego or his mere agent for the conduct of his personal business…” (174)

Big Bend (1980 BCSC) p.174: Lied on Insurance App for Corp = Fraud = Pierce Veil
    - 2 separate corporations controlled by Kumar; hotel owned by first corp (Fort Hotel) burnt down
    - Hotel owned by second corp had difficulty retaining insurance
    - Kumar knew first fire was material matter to insurers – omitted info on insurance application
    - Was the sole SH obligated to report the first corporation’s loss on the new corp’s insurance app?
    - Yes, he deliberately misled the insurance company  fraud
    - Equity will not allow an individual to use a company as a shield for improper conduct or fraud
    - If you use the corp and commit fraud you are subject to a piercing of the corporate veil regarding the liabilities
        that arise from that fraud

Rockwell v. Newtonbrook (1972 ONCA) p. 179: Careless record keeping / Breach of K not enough – Need Fraud
    - Lawyer’s corporation (RW) made an offer to purchase land from NB corp
    - Purchase was funded directly by SH of RW; never on corp books, no director resolution to authorize purchase
    - When purchase didn’t close, NB sued RW but they had no assets
    - Trial J said clear case of sham corp and held Kelner liable for costs against the corp
    - Is the sole SH of RW liable for the K damages for failure to close?
    - No veil lift. Poor record keeping is a wrong against the SH only  not a wrong against 3p
    - No serious allegation of fraud
    - NB was not deceived – they knew they were dealing with another corp, and limited liability present
    - Need more than carelessness or shoddy record keeping to pierce the corporate veil
            o Need fraud
    - Just because a SH benefits and carries out a contract doesn’t justify piercing the corporate veil

642947 v. Fleischer (2001 ONCA) p. 182: Undertaking to Pay When No $ = Fraud/Improper Conduct = Pierce Veil
    - # corp wants an injunction; undertook to pay the damages resulting from the injunction if the trial finds the
        injunction to be unmerited
    - F tries to sue corporation but it had no assets
    - Can the SH of the corp be liable to pay the damages?
    - If the reason for the loss had been the injunction, veil would have been lifted
    - When the # corp made an undertaking to the court to pay the damages resulting from the injunction they were
        representing that the corporation had assets when they knew it did not.
Corporations I: Davis (2011)                                                                                             21

    - Ct will lift the veil where applying Salomon principle would be “flagrantly” unjust
    - Typically, pierced when the co is incorporated for an illegal, fraudulent, or improper purpose. But it can also be
        pierced if when incorporated those in control expressly direct a wrongful thing to be done… Veil lifted where
            o (1) Controlling corp and
            o (2) Using corp as a shield for fraudulent or improper conduct.
Different than Rockwell where there was a breach of K but no fraudulent reps by the corp/SH

       Corporations permit businesses to be divided
       You can integrate operations through the majority SH, as corps can own shares of other corps
       Enterprise liability is when you hold a parent corporation (as a SH) liable
       Again, lifting is justified if:
            o Subsidiary engages in fraud in ways controlled by parent; or subsidiary is just an agent for the parent –
                 put assets in subsidiary to avoid impending liability (main test: extensive control; contrary to public
       To avoid piercing: find some authentic reason for its existence, and some independent decision making in the

De Salaberry Realities Ltd v MNR (1974 FCTD, aff’d FCA) p. 188: Corp Structure Solely to Avoid Taxes = Pierce (TEST)
    - Steinberg set up subsidiary and sub-subsidiary companies to hold land solely for tax avoidance
    - Was this a valid corporate structure?
    - Pierce the veil  the only reason for this structure was for tax avoidance
    - There was no valid business purpose to the structure, only tax avoidance
    - (1) Sub-subsidiary only an instrument in carrying on business for parent and grandparent companies
    - (2) Conduct of sub-subsidiary is as a member of a horizontal and vertical business group
    - (3) Thin capitalization and dominance by parent companies suggests not valid business purpose
    - Ct will pierce the corporate veil when public policy requires it
    - The business of one company can embrace the apparent or normal business of another where it can be said
        that the second company is in fact the puppet of the first and the first takes the entire benefit of all the assets
            o 1. Sub-subsid are thinly capitalized
            o 2. $ to buy assets comes from parent co / Profits treated as profits of parent co
            o 3. Sub-subsids are “instruments” of parent co
                     persons conducting business appointed by parent co
                     same directors and officers at all levels
                     parent co in effectual and constant control

The following tests are suggested by Smith, Stone and Knight [1939] All ER. Problem is that almost every parent-
subsidiary company relationship will meet these tests.
            a. Were the profits treated as profits of the parent company?
            b. Were the persons conducting the business appointed by the parent company?
            c. Was the parent company the head and brain of the trading venture?
22                                                                                            Corporations I: Davis (2011)

           d. Did the parent company govern the trading venture, decide what should be done, and what capital
                should be embarked on the venture?
           e. Did the parent company make profits by its skill and direction?
           f. Was the parent company in effectual and constant control?
The cts depart from this criteria in Alberta Gas & Intrans-Corp where the subsid arrangements were found to be LEGIT.

The question is whether there were legitimate business reasons to organize business in this way. (Intrans; Alberta Gas)

Intrans Corps (1984 ONCA) p. 195: Subsid = alter ego of parent if under complete control of parent and nothing more
than conduit to avoid liability. To prevent conduct akin to fraud / unjust deprivation.
      Individual who bought truck tried to make Paccar Canada Ltd liable for negligent manufacture as it was the
         subsidiary of the US manufacturer, Paccar Inc. ONCA did not disregard the corporate entity of the subsidiary.
      Separate mgmt./independence/control over profit by subsid (parent company doesn’t have complete control)
             o Not being used as a conduit to avoid liability
      A subsidiary will not be found to be the alter ego of its parent unless the subsidiary is under the complete
         control of the parent and is nothing more than a conduit used by the parent to avoid liability.
      The alter ego principle is applied to prevent conduct akin to fraud that would otherwise unjustly deprive
         claimants of their rights.
             o What is “akin” to fraud? (eg De Salaberry)
             o When is a claimant “unjustly” deprived?
Different from De Salaberry because Intrans = no improper purpose or conduct || De Sal = mere agency – arrangement

Alberta Gas (1989 FCA) p. 194: If Legitimate Business Reasons to Organize Corp in this way = Don’t Pierce
     Don’t pierce. They had a reason for creating a completely controlled subsidiary in the US because the insurance
        companies they were going to borrow from charge lower interest rates to US corporations.
    - 6 criteria not sufficient to pierce the veil if all present / tax benefits not sufficient to pierce corporate veil
    - Look at context and purpose of subsidiary: If you can show there are legitimate business reasons for organizing
        the corp in this way, then the courts should respect the separate legal personality.

Walkovsky v. Carlton (1966 NYCA): Creating Sep Corps to Lower Liability ≠ Fraud / Illegal. Rules of agency apply.
    - Person run over by taxi cab. Tried to claim but owner (1 SH) had 6 corps, each owning only 2 cabs and having
        minimum statutory insurance of $10,000
    - Enterprise liability? Proper use of the corporate form?
    - Not piercing corporate veil. There was no fraud and nothing illegal – SH just took advantage of the scheme
        allowed by the statute – complied with minimum statutory insurance.
    - Without fraud or some use of the corporation beyond its legit use  characterizing the setup of separate
        corporations to minimize liabilities is not agency or fraud, it’s legal
    - For both enterprise liability and personal liability, the rules of agency apply. If you want to make a claim against
        an individual, rules of agency apply where their control is being used to further their own and not the
        corporation’s interest  liability in both tort and contract under the respondiat superior doctrine.
Corporations I: Davis (2011)                                                                                            23

Dissent / POLICY (Keating):
    - Abuse of corporation to intentionally under-capitalize / corps ought not be allowed to deny compensation by
        creating “flimsy shells”
    - TORT claimants should be treated differently than contractual claimants because they didn’t make a choice to
        contract with the corp, cannot diversify risk, cannot ensure they do not suffer loss, cannot get personal

Wolfe v. Moir (Whoop-Up) (1969 ABSC): If You Hide That You’re a Corp – No Ltd Liab – Must use corp name
    - Documents had Moir’s name, not the corporation’s name
    - Corporation but not being held out as such
    - Public thought they were dealing with unlimited liability when roller skating accident at Fort Whoop-Up
    - Personally liable. Didn’t comply with CBCA so cannot claim limited liability.
    - If you don’t abide by s. 10(5) (corp name must be printed on all docs) then you cannot claim the protection of
        limited liability
    - Salomon only applies if the usual formalities of the CBCA have been complied with


        General rule: (AGDA v Valcom)
          - Officers, directors and employees of corps are responsible for their tortious conduct even though that
             conduct was directed in a bona fide manner to the best interests of the company. (Scotia McLeod)
                - Said v Butt exception: if a servant acting bona fide within the scope of his authority procures or
                    causes the breach of a contract between his employer and a third person, he does not thereby
                    become liable to an action of tort.

        Statutory provisions for personal liability of directors:
          - s 118: Issuing share for consideration that is less than fair value in money (1) unless did not know / could
                        not reasonably have known (6);
                -     Allowing payment out of corp treasury for acquisition of shares, commission, dividends, indemnity
                         or payment to SH that would make the corp insolvent
          - s 119: Unpaid wages of employees up to 6 months

ADGA v. Valcom (1999 ONCA) p. 206: Directors Personally Liable for Torts They Commit – Not About Piercing
    - Valcom stealing emp’ees from ADGA; committed tort by inducing them to breach their duty of loyalty
    - Does this case require that the corp veil be lifted to sue the directors and employees that committed the tort?
    - Directors are personally liable for their tortious actions even though actions were in best interests of Valcom
          o Said v. Butt exception does not apply because Valcom was not a party to the K – induced breach btw
              two 3ps
          o NOTE: VEIL REMAINS INTACT. This is a question of separate causes of action against individual
    - 2 types of cases:
24                                                                                                       Corporations I: Davis (2011)

             o    Claim that the corporation did wrong (no independent claims against individuals)
                       Salomon usually applies to shield SH from liability BUT might warrant lifting the veil in special
                          circumstances (fraud, public policy, equity)
             o    Cases where there is an independent cause of action against a SH or director for actions they
                  committed in the course of their duties  No need to lift the veil
                       General liability: Officers, directors and employees of corps are responsible for their tortious
                          conduct even though that conduct was directed in a bona fide manner to the best interests of
                          the company. (Scotia McLeod)
                               Said v Butt exception: if a servant acting bona fide within the scope of his authority
                                  procures or causes the breach of a contract between his employer and a third person,
                                  he does not thereby become liable to an action of tort
                               BUT you need to allege personal acts that they committed were tortious
                                      o Cannot just rely on the fact that the corporation committed a wrong and they
                                          are the directors: that’s piercing the veil
*Note: Ct goes on to say that a director acting in a fraudulent manner to increase the revenue of that body cannot be said to be
bona fide in its best interest. (212) Thus, if you step over the boundary of the law (other than breaching k), you are no longer acting
in the corp’s best interests.
Corporations I: Davis (2011)                                                                                                        25

Pre-Incorporation Contracts pp 263-290
Business reasons for pre-incorp Ks:
     Opportunities are time-sensitive. Eliminate risk of future price increase.
     Corporate organization takes time – promoter must act now to set up ks for legal services, assets, etc.

Now we have statutory provisions on pre-incorporation ks, but CL still useful:
      1. Provides context for statute
      2. Useful in places that don’t have statutory provisions for pre-incorp ks
      3. Applies to oral contracts for CBCA corps
Existence of contract not easily predictable:
     Formalistic analysis – depends on how signed
     Intention of the parties
            o Both know non-exist: easiest to find k binding on promoter
            o Only one knows:
                      perhaps Newborne applies – is Sensolid’s defence based on technicality?
                      Gives non-performance option to both parties (UNCERTAINTY)
            o Neither knows: Both want k with corp – unlikely to achieve promoter liability
     Only way to have k with the corp is for corp to be in existence (Newborne). Corp must enter into new k, so no
        certainty (risk p change).
            o No certainty about effects of signing pre-incorp contract
            o No certainty about type and amount of post-incorp activity equivalent to new contract with corp
                 (conduct by both parties must be enough to show new k)
     Would have to write individual’s name and “on behalf of” corp and clearly indicated to be incorp’d in future to
        show intention was not for promoter to be personally liable
     If no contract because corp did not exist, but promoter held corp out as existing, tort claim (breach of warranty
        of authority) available to P but based on loss suffered, so difficult to recover (Wickberg v Shatsky)
     Reverses the risk assigned to the parties in the k. [Whereas CBCA s 14 allows the risks assigned by the k to stay
        where they are, adding some CERTAINTY to the process.]

Kelner v Baxter (1866) Common                Newborne v Sensolid [1953] All            Blacke et al v Smallwood & Cooper
Pleas                                        ER CA                                     (1966) HCA
K sold wine to B, who signed “on behalf      S signed k as purchaser for 200 cases     S&C signed as vendors for sale of land.
of” non-existent corp. Both parties          of ham then refused delivery. Signed      Signed as directors of co. Neither side
knew corp not in existence. Corp later       with corp name. Only promoter             knew corp not in existence.
ratified. K never paid as corp bankrupt.     knew corp not in existence.
K w/ promoter, so B personally liable.       No contract.                              No contract, so no personal liability
 Agency law – agent of non-existent          Form of signature = creation of          Both did not know corp didn’t exist so
  principal liable. Potential liability of     agency or not.                            no intention to bind promoter
  promoters on pre-incorp ks (parties         Only way to have a k is for corp to      Form is just a factor in determining the
  intended enforcable)                         be in existence (unless somebody          intention in document to act as agent
 A corp cannot ratify a k that came into      acting personally as agent like in        and be personally liable or not
  being before its existence                   Baxter and taking personal liability)

Wickberg v. Shatsky (1969 BCSC) p. 275: If D Misleads w K of Non-Exist Corp – Breach of Warranty – But Causation
    - P wants damages for breach of warranty (tort)  individuals held out employment K to be with corporation they
       knew did not exist
26                                                                                                 Corporations I: Davis (2011)

    - Cannot recover. No valid k because corp did not exist  Although liable for breach of warranty of authority,
        damages were caused by failure of the business, not the breach of warranty.
    - While Ds can be personally liable for the tort of breach of warranty where they k’d as a corp they knew didn’t
        exist, P must be able to show causation – damages based on the warranty

        Only ways to have a K with corporation:
            1. Corp must be in existence – wait to make K until corp is created
            2. Must enter into a new K with the other party
                     Exposes each to risk of changes in the interim
            3. Evidence of post-incorp conduct by both parties evidencing intent to K
                     Uncertainty about what conduct is suitable


CBCA s. 14 - K in Writing Binds Promoter Even if                  BCBCA s. 20 – No k; Warrant by facilitator
Corp Doesn’t Exist
        Applies only to written k - If K is oral = CL applies     Applies to both written and oral contracts

Promoter liability based on contractual obligation                 Facilitator liability based on tort of breach of warranty
                                                                   of authority (not bound by k but made warranties)

If in writing, k is created                                        No k formed upon signing of pre-incorp k (2)(a)
   Binds and entitles promoter and other party (1)               Warrant of auth by facilitator that co will come into
Promoter can exclude liability by express words in k (4)           existence w/in reas time and adopt purported k w/in
                                                                   reas time (2)(a)
                                                                  Facilitator liable for breach of warrant (2)(b) if fails to
                                                                   live up to promises. Amount as per (2)(c)
                                                                  Facilitator can be excluded from liability if expressly
                                                                   agreed in writing (8)

After incorp, new corp can adopt or not                            After incorp, new corp can adopt or not
  Adopts by action / conduct signifying intention to be          Adopts by act / conduct signifying intention to be
   bound (2)                                                       bound (3)
  Corp becomes bound and promoter ceases to be                    Corp becomes bound (& entitled) and facilitator ceases
   bound                                                           to be liable (4)
  If corp does not adopt, promoter is bound
Court can vary obligations even if k adopted by corp (3)           Court can order new company to restore to applicant
                                                                   any benefit received if co does not adopt (5); court can
                                                                   apportion liability or set obligations to joint & several
                                                                   even if k adopted by corp (6)

Sherwood Designs v. 872935 Ontario Ltd. (1998 ONCA) p. 279: Any Authorized Act (even small) Can Bind Corp to K
     Indivs agree to buy assets on behalf of corp to be named later. Miller Thomson LLP assigned shelf company and
       sent letter to other party enclosing draft docs and saying this is the corp that would complete the purchase. Sale
Corporations I: Davis (2011)                                                                                               27

        did not go through. Shelf company assigned to another party later on and has great assets – are they subject to
        claims from previous agmt?
     What constitutes an act signifying intention to adopt a K; was the shelf corporation bound to the K?
Decision (Abella JA):
     The corporation was bound  lawyers had authority from their client to signify intention to be bound & did so
        in the letter that was sent to the sellers
     All partners had the authority to use the shelf-corp, partner had delegated the authority to all lawyers to act on
        behalf of the corporation
Dissent (Borins JA):
     Director must know of K to signify an intention to be bound by it  in this case the director of the shelf
        corporation was the partner at the law firm who had no idea of the K
     Any action or conduct that can signify an intention of the corporation to be bound by the K is sufficient to adopt
        the pre-incorp K
             o Does not require much of an act to bind the corporation to a pre-incorp K; as long as it falls w/in the
                 valid delegated authorities that does the act

THE COMMON LAW          Is there a K?              Is yes, with who?       Does corp have a K?        If no, how can it?
Type 1: Both parties    Yes: if Ct finds parties   Promoter – individual   No, corp did not exist @   Corp must enter into
know corp is non-       intended to have an        signing on behalf of    time of K                  new K with 3 party
existent                enforceable K              corp                                               after incorp – conduct
                                                                                                      by both parties may be
                                                                                                      enough for new K
Type 2: Only promoter   No: common intent to K     No, K is a nullity      No, K is a nullity         Must enter into new K –
knows OR nobody         is absent – contract a                                                        conduct must = offer &
knows corp is non-      nullity                                                                       acceptance

STATUTORY REGIME        Is there a K?              Is yes, with who?       Does corp have a K?        If no, how can it?
CBCA s. 14              Yes, if it is in writing   Promoter                Not yet                    Adopt K by resolution of
                                                                                                      directors or actions
                                                                                                      signifying intention to
                                                                                                      be bound)
BCBCA s. 20             No                         No one, but promoter    Not yet                    Adopt purported K by
                                                   liable for breach of                               resolution or actions
                                                   warranty                                           (act/conduct signifying
                                                                                                      intention to be bound)

       Certainty of outcome after agreement
       Lower threshold than CL for adoption of k (don’t need new contract as in CL, just need to signify intention to be
        bound, Sherwood)
       Allows risks to fall where the k places them
       But 3p now takes risks in granting corp the option of adoption.
            o May have relied on promoter’s solvency and then promoter sets up thinly capitalized company.
            o Promoter will be liable if the corporation does not adopt, but they may not have many assets
28                                                                                                Corporations I: Davis (2011)

Agency: Authority to Bind Corp/Make Liable
The effect of restrictions on mgmt.’s authority
     How can you tell who has the authority to act and bind the corporation?

Pre-CBCA, Articles and Memorandum companies required that the Memorandum of the company stated all the
business of the corp. Everything not stated was ultra vires the corporation’s powers.

Ashbury Railway v. Riche (1875 HL): Corp Cannot Enter into K o/s of Charter
     Corp was incorporated to make and sell railway carriages
     Then they decided to actually build a railway, so they ordered parts for a railroad track
     SH objected that this business was not set out in the Memorandum of Association
     Was this within the corp’s scope of business?
Decision (HL):
     K to buy the parts was ultra vires the corp because Memorandum did not state building a railway as biz of corp
     So company does not have to pay for parts – supplier suffered!
     A corporation has no power to make a K outside the activities permitted in the Memorandum
     Rationale: to protect the SH & creditors from changing the risks associated with the business

Very expensive & risky for 3p dealing with Articles and Memorandum companies (didn’t apply to letters patent cos)
People tried to get around the problem by having broad Memoranda or saying that the company could do any business
the directors thought appropriate  many were successful in evading the requirements

Abolition of ultra vires doctrine
A corp has the rights, powers and privileges of a natural person, subject to the Act (s 15(1)) but is not to carry on
business restricted by the Articles (6(1)(f), 16(2)). But 3ps are protected from having acts of corp declared invalid (16(3))

Section 15(1): Corp Has Powers of Natural Person (no more UV)
        Corporation has the right to carry on any business that you can lawfully carry on in the jurisdiction in which it is

Section 6(1)(f): Any Restrictions on Business Must be in Articles

Section 16: Biz Banned in Articles is not a Defence to a Valid K
        s. 16(2): corporation shall not carry on any business or powers that are prohibited by its articles of incorporation
        s. 16(3): corporation cannot raise ultra vires defences against anyone who has a K with the corp (K still valid)
              o 3rd parties get to keep contractual benefits

Section 247: SH/Dirs can seek Injunction to Stop Corp from entering a K
        Puts the burden on the SH and directors of the corp to monitor mgmt. to ensure they are acting w/in articles
        Can seek an injunction when the corp is carrying on a business contrary to its articles
             o Corporation would breach K, 3rd party could seek damages – directors could be held personally liable
        Not as good protection for SHs as in Ashbury because the k is still in place. Best used prior to signing of k or if the
         k can be stopped in the middle w/o further risks. Both unlikely.
Corporations I: Davis (2011)                                                                                               29

Risk regarding the current regime:
     SH have to monitor mgmt., as opposed to 3ps to the K, to determine whether corp is acting outside the articles
     This regime protects the rights of directors to decide what risks to take irrespective of what they told the SHs
        when they bought shares.
            o SHs are protected by the mechanism that punishes directors if the risk turns out to not be worth it –
                  disincentives to take crazy risks.
     Bottom line: Should not restrict business of the corp in the articles w/o a very good reason.
     Creditors now have to worry about whether the directors/corp have enough $ to reimburse damages for breach
        of K if acting outside the articles and SH seek an injunction / Lawyer’s ins company may pay based on opinion,
            o RESULT: people are still asking for lawyer’s opinion as to whether corp has auth to enter a transaction
                  and lawyer doesn’t want their ins to pay, so lawyers want to see articles of incorp/directors auth
                       Why? Prevents s. 247 application, good legal practice, legal assurance

       Corps are treated as having the capacities of a normal person (s. 15(1)) but they can only act through agents

Section 102: Directors Manage General Affairs of Corp (ARE NOT AGENTS)
       Directors have the power to manage the general affairs of the corporation
            o But they have to act collectively
            o Their collective decision is the decision of the corporation  they are not agents

Section 115: Delegation of Directors’ Power to managing director or committee of directors
Section 121: Directors Appoint Officers and Delegate Power to Manage
       Directors have the power to delegate their mgmt. of the business and affairs of the corp to officers and others
       These individuals can have authority to bind the corp BUT it is not always obvious to those outside who really
        has the power to bind the corp
            o Limited by s. 115(3) certain things require all directors such as declare dividends or fill director vacancy

    1. Actual authority  codified in s. 18
          a. Express authority: delegations of authority (statute, articles, terms of employment, notice of directors)
          b. Implied authority: from conduct & circs  person is performing duties that are normal for his position
    2. Ostensible authority
          a. Rep’n to outsiders by one w/ actual authority (e.g. sitting in room w/ salesman, allowing him to sign K)

Royal British Bank v. Turquand (1856 Ex Ct): Indoor Mgmt. Rule – No Need to Look Behind Articles/Act
     Memorandum said that directors could take out loans but they needed to be authorized by SH res
     Directors borrowed $ w/o authorization
     Upon collection, directors said no real debt b/c no resolution
     How could the bank tell if the act was authorized?
     Valid K  bank was entitled to assume that the directors received authorization
     Indoor mgmt. rule: contracting parties are deemed to have notice of the statute AND the memorandum
        (articles) of incorporation  you do not have to look inside the corp to see if the SH authorized the particular
30                                                                                                Corporations I: Davis (2011)

         action (you can infer that the directors have abided by the memo as long as the directors actions are consistent
         with the authority structure set out in the memo)
             o s. 17 has done away with the deemed notice of articles provision

Section 17: Abolishes constructive notice / deemed notice of articles
        Don’t have to read the articles just b/c they are filed
        The corporation cannot use their articles as an excuse (s. 18(1)(a))

Section 18(1): Stat Indoor Mgmt. Rule (Corp Can’t Use These Defences)
        s. 18(1): no corporation can assert against a person dealing with the corporation that:
              o (a) the articles, by-laws, unanimous SH agreement haven’t been complied with
              o (b) named directors ≠ directors
              o (c) place named as address ≠ address
              o (d) person held out by a corporation as having authority ≠ person with authority
              o (e) doc issued by director, officer, or agent with actual or usual auth to issue the doc ≠ valid / genuine
              o (f) sale, lease, exchange of property ≠ valid
        s. 18(2): exception: does not apply if person knows or ought to have known of the situation by virtue of their
         relationship with the corporation (knowledge can be imputed because of their relationship with the corp)

To rely on indoor management rule, need to establish:
    1. The agent had the following customary duties and
    2. It was usual for an agent with that title to have that authority.
    (don’t rely on 18(1)(d) for unusual authorities or non-customary duties)
Note exception s 18(2) where person knew / ought to have known there was no authority.

Canadian Laboratories Supplies (1979 SCC) p. 298: Goals for Indoor Mgmt. Rule
Argument for the rule:
    Efficiency/Security: Reducing contract costs by reducing need for investigation of internal arrangements
    Corp needs to be able to delegate / employees need authority to deal

Section 116: Directors Acts are Valid even if Election = Irregular
        An act of a director or officer is binding despite an irregularity in their appointment or defect in qualification
         (bankrupt, insane, under 18…)
             o But there must be a good faith attempt to comply w/ requirements (Morris v Kanssen)

Morris v. Kanssen (1946 HL): Must Attempt to Comply w Elections Reqs to Use s. 116
     2 SH start company as directors  1 decides to get rid of the other
     Appointed another director by making up a minute in the records of the corporation & voted Kanssen out
     The director was not appointed at all  had no authority to vote
     There needs to be a good faith attempt to comply with requirements to give the director office before the
        court will apply s. 116
            o There is a difference between NO appointment and DEFECTIVE appointment

Sherwood Design (1998 ONCA) p. 299: Held Out to Have Authority/Firm/Client Acquiesced
Corporations I: Davis (2011)                                                                                         31

     Miller Thomson re-used a shelf corporation which had adopted a pre-incorp K
     Was Nicholls held out by the numbered company?  Ostensible authority?
Decision (Carthy JA):
     Even though Nicholls held himself out, Indoor mgmt. rule applies – gets rid of the need for confirmation of
        authority where the act is USUAL.
     Confirmation not necessary in a solicitor-client relationship.
Dissent (Borins J):
     The other company should have made inquiries in light of the unsigned directors’ res (s 18(2) exception – ought
        to have had knowledge of the lack of authority – that those held out as directors were not yet directors)
            o Pushes back to Ashbury or Royal British Bank where you would require notice
            o Not consistent with the purpose of the statute, which is to protect 3rd parties

Theory of criminal liability for corporations = vicarious
    People with authority can commit crimes that will implicate the corporation
            o Attribution of the mental state of the actor’s action to the corporation, when they are acting within the
                scope of their authority

Canadian Dredge: Corp Liable for Crim Acts of Emp’ees/Officers
     Rigged bids for federal Ks
     Corp = criminally liable
     Culpability for acts and mental states of a corporation can be represented by emp’ees and officers on the basis
        that they are the “directing mind” of the corporate entity
            o Actor’s MR & AR are those of the company itself

Defences to Liability:
    Person acted wholly for their own benefit (not that of the corp)
           o If corp gets some benefit  no defence
    Operating mind intentionally defrauds the corporation
32                                                                                        Corporations I: Davis (2011)


PP 303-349; 365-380; CBCA SS 24, 25, 26(1), (2), 27, 28, 34, 35, 36, 42, 45

Nature of SH: 2 theories…
    Contested issue
    Proprietary view: something like ownership of a corp & its assets
           o REJECTED
                    United Fuel Investments Ltd v. Union Gas of Canada- SH have no claim to corporate assets
                             SH argued against the liquidation of the company, wanted enough shares to pay the
                                 debts of the company, the rest to be distributed to the SH
                             Held: as a SH you have no claim over corporate assets or the right to have them
                                 distributed to you
                                     o Only entitled to a pro-rata share of remaining value of assets
                                     o Corporation and corporation alone owns the assets of the corp
    Bundle of Rights theory (CANADA)
           o Sparling v. Quebec
                    Dispute over whether QB (who owned more than 10% in Sparling) had to submit an insider
                        report pursuant to the CBCA
                    Q: argued that they were just buying property, and that they could have purchased the shares
                        w/o the existence of the CBCA
                    Held: (LaForest): “a share and thus a SH are inseparable from the comprehensive bundle of
                        rights and liabilities created by the Act”
                             Must look at the nexus between the right claimed and the burden assumed

Sparling v. QC (1988 SCC): Shares are Bundle of Rights – Look to Act & Articles for Protection
     QC gov’t claims Crown immunity regarding filing an insider trading report
     Cannot claim Crown immunity  by buying a share you have subjected yourself to the requirements of the
     Shares are a bundle of rights not property  you get the rights created in the Act and the Articles of
        incorporation – no rights outside of those
             o Purchasing a share subjects you to the benefits AND burdens that come with those rights
Note: the only protection against watered stock is in the CBCA and the articles:

Protections for SHs:
    i. Dissent rights (s. 190)
   ii. Right to access corp records (s. 21(1)) & access to list of SH (s. 21(3))
  iii. Fundamental change vote

Section 6(1)(c): Articles Must Describe Authorized Share Structure
        Authorized share structure must be set out in the articles of incorp
            o to issue shares that deviate from this structure  must amend articles, 2/3 SH approval
            o Allows investors to determine the extent of their possible dilution

Share Structure Consists Of:
   1. Classes: (common shares/pref shares)  Must have @ least 1 class of shares
Corporations I: Davis (2011)                                                                                                     33

           a. Rights and restrictions attaching to classes of shares must be set out in articles (s. 6(1)(c)(i))
           b. If you want to issue new shares with new rights that aren’t in the articles  requires amending the
               articles with a 2/3 vote
    2. Series of shares within a class: (s 27)
           a. Auth of directors to fix rights and restrictions of each series must be set out in the articles (s. 6(1)(c)(ii))
                     i. Directors can determine the rights of a series at the time of issue (s. 27(1)(b))
                            1. Directors cannot give greater privileges/priorities/rights to LATER series within the
                                same class! (s. 27(3))
                            2. Protects investors’ reasonable expectations when they invest

Section 24(3): 3 Basic Share Rights
    1. Residual claim to the assets of the corporation upon dissolution
           a. Subject to prior payment of all debts and liabilities
           b. Directors may change landscape by increasing debt (189(1)(a)), diluting shares, superior rights new shs
           c. No right to specific property owned by corp. Rather a pro rata share in proceeds from sale of that
                    i. United Fuel Investments and Union Gas, Ont CA: SH wanted corp on windup to only sell enough
                        shares to pay liabilities, and then distribute actual shares to SHs. Directors didn’t want to. Court
                        held: the right to dist is not a right to specific assets but only to a pro rata distribution of the
                        proceeds of the sale of those assets
    2. Right to receive dividends declared by the corporation
           a. At total discretion of directors
           b. To object to not being paid dividends must show that the directors are ignoring your right with respect
               to the dividend OR that you are being prejudiced
    3. Participate in voting @ SH meetings
           a. Some shares vote on all matters (directors, by-laws, articles, etc.)
           b. Others can only vote on particular issues (fundamental changes)
           c. Corporation can issue shares that have more than 1 vote/share

Section 24(4): If >1 Class – Each Class Needs Min. 1 Right
       s. 24(3): single class structure  all shares must have at least the same 3 basic rights
       s. 24(4): multiple class structure  all 3 rights need to be represented, but not all within the same class
             o Each class needs at least 1 of the rights

Section 27(2): Rateable Distribution of Dividend w/in a Class
       If you can’t pay the total dividend entitlement of all the shares in a class  shares of all series in the class split
        the amount available rateably (in proportion to their entitlement to the dividend) (subj to series w priority)

Section 140(1): Each Share = 1 Vote Unless Articles Say Otherwise


Section 25: Director Can Issue Shares (For $/Prop/Past Services)
       Gives directors the power to issue shares from authorized capital after the incorporation (up to the max, if any,
        set out in the articles) (25) subject to offering to SHs of that class with a pre-emptive right (28(1))
       s. 25(1): director must set price (determine consideration)
       s. 25(3): share can only be issues after consideration is paid in full in either 1) $ 2) property or 3) past services
        that are not less in value than the fair equivalent to what the corp would have received in cash
             o Protection against watered stock
34                                                                                           Corporations I: Davis (2011)

             Section 118(1): Directors Personally Liable if Issue Shares for < FMV
                    Directors would be personally liable to make up the difference
                 o   Defences
                     s. 118(6): could not have reasonably known that share was issued for less consideration
                     s. 123(4): good faith reliance on opinion of office/professional
    s. 25(5): cannot issue shares in exchange for promissory notes (but can take a LoC from a bank (arm’s length
Note: This provision gives the director broad powers to issue shares within the limits of the articles AND the
requirements of the CBCA
    Contrasted with old par value share system (number inserted into your articles which was the minimum price
       at which you could sell a share)
            o If shares were sold for below par value  court would find buyer liable for the unpaid part (creditors
                could pursue SH for the unpaid amount)  they were entitled to rely on the amount of outstanding
                shares as the paid-up position of the company (Oorgeum Gold Mining [1892] HL) – this rationale is
                faulty because the directors could have spent the $ invested  doesn’t reflect the amount of money
                on hand in the corporation)

Section 24(1): No More Par Value Shares
        Means that future SH can buy shares for less than the price that you paid for them
        Problem of watered stock  yes, if you consider shares as having ownership of the company attached to it
         (ownership rights would be diluted by the directors’ decision to issue more shares for a lower price)
            o This was the case in the US in the 1900’s (case below)
        No problem of watered stock if you see the share as a bundle of rights (not ownership)
            o Whatever protection you get can be found in the articles or the CBCA

Watered Stock:
    Selling shares for less than adequate consideration
    If they sell a bunch of shares for less than they are worth then the corporation looks like it has more $ then the
      capital they actually have
    So if they were to dissolve, the SH wouldn’t get the money they thought out of the corporation

Protection against watered stock:
          1. Articles set out the share structure/rights/max allowable shares
                a. Directors must set out right, priorities, max # shares in Articles (s. 6)
                b. Might allow for pre-emptive rights (gives the SH the right to buy shares to maintain their respective
                    position before an issuance) (28(1))
          2. The Act places certain limits on directors powers
                a. Must receive property or services equal in value of $ for shares before issuing (s. 25)
                b. Cannot issue a subsequent series that has better privileges than an existing series within a class (s.
                c. Potential for oppression remedy if price for shares is too low

Remedies for watered stock:
     1. Liquidator to go after SH to pay difference between price paid and value
     2. Derivative action for corporation to go after SH
     3. Personal claim by SH to go after directors for misrepresentation/dilution
Difficult to estimate without MV or some measure of value.
Corporations I: Davis (2011)                                                                                               35

See v. Heppenheimer (1905 NJCC) p. 325: Future Profits cannot be consideration for shares (not followed)
     Company bought all paper mills, worth $2.5mill by issuing $4mill worth of shares
     Claimed that the price of the shares was justified by the future price of stock of the business (prop they bought
        would allow them to have a monopoly so they were justified in issuing so much stock for the prop)
     Can prospective benefits be considered property?
     What you believe about the future prospects of the business is not property
     The company wouldn’t have paid $4mill in cash for the prop, so they shouldn’t be allowed to issue that much in
        shares for it
     Problem is that FMV estimate of future profits ≠ property
     Future profits/services are not property  cannot be used as consideration for shares (not followed…)
     TEST for whether property appraised at actual cash value: Instead of issuing shares, if company had $5 million in
        bank, would they have paid $5 million for these paper mills?
Note: Subsequent cases did not follow view that future earnings not property. Subsequent cases also allowed non-
tangible property such as patent rights and goodwill to be property exchanged for shares.

Section 26: Corp Must Keep a Stated Capital Acct for All Class/Series
       s. 26(2): corporation will enter the full amount of consideration it receives for any shares issued into that class’
        or series’ stated capital account
Note: there is likely nothing behind the stated capital account  just a #  $ has likely been invested
    Appears on the ‘asset’ side of the b/s

       CBCA permits the articles to state pre-emptive rights… s. 28 CBCA
            o Pre-emption could be unfair: assumes existing SH have the $ to purchase
            o No pre-emptive rights in respect of shares to be issued for a consideration other than money, as a share
                dividend, or pursuant to the exercise of conversion options previously granted by the corp. (28(2))
       The balance sheet:
            o When cash dividend paid, amount must come out of both sides of the b/s (cash and cash equivalents
                account; SH’s equity account)
            o When dividend in specie is distributed, the accounts on the b/s reduced are inventory and SH’s equity

Stokes v. Continental (1906 NYCA): Presumption of pre-emptive rights in U.S. - Right to Prevent Dilution
     Par value of share = $100  company is issuing the same rights for $400  existing SH wants their pro-rata
        share of the rights (new issue) for $100 instead of $400
     Do the existing SH have a right to maintain their position in the company for the same price as they had
        originally paid (par value) even when the price has gone up?
     Yes.
     Existing SH have a right to maintain their proportional claim on the assets by paying the same amount that they
        had originally paid  takes prop rights of shares to the max
36                                                                                               Corporations I: Davis (2011)

In Canada, pre-emptive rights do not exist in legislation  must be bargained for the in articles

Re Bowater (1987 ONCA) p. 340: All Shares w/in a Class Must Have Same Rights
     CS had a right of 10 votes/share  there was a step-down provision (if original holder sells his share, the right
        becomes 1 vote/share)
     Step-down provision not allowed
     Rights which are attached to a class of shares must be provided equally to all shares of that class (subject to
        different rights to series within class)  Rights attach to shares, not people.

Atco v. Calgary Power (1982 SCC) p. 344: Ownership of Shares ≠ Ownership of Assets
     Atco was the majority SH of Canada utilities, wanted to merge with another company
     Utilities Act provided that anytime a utilities company merged it needed approval of the utilities board
     Did Atco own its subsidiary so as to make it a utility company under the Act?
     The corporation did not control the subsidiary as meant under the Act
     Didn’t have control over the assets, just because they held a majority of the shares doesn’t mean control over
        the assets
     Ownership of shares is not ownership over the assets / Majority SH does not mean control over the assets

     Generally have first preference (1st claim) in the payment of dividends
          o Generally involve a commitment to pay out regular dividends
     Any special rights must be set out in the articles (s. 6(1)(c)(i))

International Power Co. (1946 QBCA) p. 374
Courts use some presumptions (set out in International Power):
    1. All classes are equal unless modified by the Articles
    2. Return of investment and the sharing of surplus are different rights. If you want to exclude them, you need
        different language to exclude them.
    3. Only right to dividends are those specified in the articles

Courts concede that drafting can create preferential rights that are exhaustive or additional. The question: Is there an
express/implied condition which limits or adds to the rights that are attached to particular shares?

So if the language is silent, the presumption is:
     1. Every share has a right to participate in the surplus distribution on liquidation in addition to the return of their
     2. But NO right to participate in dividend distribution beyond that which is specified

Cumulative dividend on preference shares: every year if you don’t pay it, accumulates and due from next div pymt.
Corporations I: Davis (2011)                                                                                                 37

Rights to arrears o cumulative dividend applies on liquidation if the language “priority as to dividend and capital” is used
to describe the right on dissolution.

Other than issuing shares that dilute share value, Corporate Debt Affects Income from Shares:
    After sale of shares, directors can borrow $ w/o SH approval (s. 189)
           o Creditors’ interest takes priority over declaring dividends (s. 42)
           o Creditors take priority in payment over SH on dissolution or bankruptcy (s. 211(7)(d))
           o Directors are liable for improper payment to SH (s. 118(2)(c))

Section 189: Directors Can Borrow $ w/o SH Approval
       Directors only need Board approval to borrow $ (189(1),(2))
       Important because creditors take priority over SH when it comes to access to the assets
            o Debt means you have less of a claim than you did before
       BUT a sale/lease/exchange of all/substantially all the property of a corp other than in the ordinary course of
        business of the corp requires 2/3 res of each class affected, including non-voting (189(3-8))

Section 211(7)(d): Creditors have Priority Over SH on Dissolution
       Creditors have priority on bankruptcy or dissolution
       Increased risk of no surplus for SH on dissolution
       If corporation goes bankrupt  SH interests are “underwater”

Section 42: Insolvency Test for Paying Dividends to Protect Creditors
       Directors can only declare or pay a dividend IF they meet BOTH:
            o Insolvency test: Whether the corp could pay all its liabilities and return all capital contributed by SHs if
                the corp were liquidated, based on the “realizable value” of the corp’s assets
            o Liquidity test: Whether they are still able to pay their liabilities as they come due

Section 118: Directors Liability for the Payment of Dividends despite Insolvency
       s. 118(2)(c): directors are personally liable if they pay dividends contrary to s. 42
       s. 118(4): directors can apply to a court for an order compelling a SH to pay or deliver to the director any $ or
        property that was paid or distributed contrary to s. 42
       s. 118(5): ability of court to make any order it sees fit in relation to the SH and directors in undervaluation of
        shares being issued

Section 43(1): Dividends Can be Paid in $, Property, Shares

Section 115(3): Declaring Dividends is w/in Directors Power Only
       Declaration of dividends cannot be delegated, subject to unanimous SH agreement

Section 241: Oppression Remedy were oppressive or unfairly prejudicial to not pay dividends

R. v. McClurg (1990 SCC) p. 562: Diff Share Classes Do Not Have to be Treated Equally
     Corp had 3 classes of shares; each class entitled to receive dividends exclusive of the others, as per the articles
     Dividends were paid to 1 class 3 years straight, MNR tried to reassess for tax purposes
38                                                                                         Corporations I: Davis (2011)

     It is the discretion of the directors to decide when to pay dividends
     Creation of different classes creates unequal rights
     Corp law there to facilitate – no need to add restrictions not set out in statute – ss 42, 122(1)(a), 241
     Need to protect SHs from discrimination
            o Critique: Can be solved by OppRem. No need to add restrictions and prohibit inequality of classes.
     Shares classes can create unequal rights  the fact that one class of shares is continuously given dividends over
        another is not a breach of equality (subject to the oppression remedy)
            o Director’s discretion to issue dividends and to whom

Ferguson v. Imax (1983 ONCA) p. 371: Directors Must Pay Dividends if Oppressive Not To
     Ferguson is SH in corp; marriage broke down and ex-husband used his position to ensure no dividends were paid
        to his wife (preferred SH)
     Oppression Remedy granted. Refusal to pay dividends = oppressive / unfairly prejudicial in this case.
Corporations I: Davis (2011)                                                                                            39


SH are not:
     Legal owners of the assets
     Managing business (unless also directors)
     Object of FD

Automatic Self Cleansing (1906 CA) p. 545: Board Doesn’t Have to Follow Most Ordinary SH Resolutions
     Majority of SH made a SH reso to sell the assets of the corporation  directors didn’t think that it was in the
        best interests of the corporation
     Are the directors bound by SH resolutions?
     No, the directors have the power to manage the company as they see fit, subject to the FD and DOC
     If SH don’t like the way the Board manages, hire new directors who follow what you want
     Directors are not bound to manage the company in accordance with SH resolutions
            o They are free to manage as they wish (s. 102(1))  subject to FD (BIOC) and DOC


Section 24(3): Right to Vote
Right to participate in meetings, by person or proxy
     Can also make SH proposals to try and get other SH to vote for your cause (may trigger proxy circular reqs)
     Can requisition a meeting (by SH request)
     # of votes per share defined in the articles
     2 types of resolutions require majority
            o Ordinary reso = counts votes cast by SH who voted (50%+1)
            o Special reso = majority not less than 2/3 of SH who voted
                       Limits power of directors to change corporation
                       SH minority can veto certain changes

SHs can affect Corp Directly by ORDINARY Resolution when:
       E LECTING DIRECTORS (106(3)
       APPOINT AUDITOR (162(1))

Section 146: USA = SH Act as Directors
       Must be written/restricts powers of directors to manage the corporation
       s. 146(3): agreement is binding on all subsequent purchasers if disclosed to them as per s. 49(8)
       s. 146(5): if USA restricts the powers of the directors to manage the business of the corporation, the parties of
        the agreement who are given the power to manage and supervise get all the rights and liabilities of the directors
             o No more limited liability for those SH

Sections 173, 176, 183, 188, 189: Fundamental Changes Require Approval by Special Majority
       Amend Articles – special majority by voting SHs (s. 173)
40                                                                                            Corporations I: Davis (2011)

        Amalgamation – Voting & Non-Voting (s 183(5, 3)) & sep class vote if affected differently (4)
             o Does not apply if amalgamating with a subsidiary corporation (s. 184)
        Continuation – Voting & Non-Voting (s 188(4, 5))
        Sell/lease/exch all/substantially all assets not in ordinary course of business – Voting & Non-Voting (189(8, 6))
         & sep class vote if affected diff (7)

        Separate class vote also for Non-voting SHs (ss 5) if s. 176 applies
                      (a) increase/decrease max # shares in class A, or increase max # authorized of a class having
                         rights = or superior to class A
                      (b) exchange, reclassify or cancel all or part of shares in class A
                      (e) create new class = or superior to class A
            o Always additional class/series A vote: (1)
                      (c) change rights of class A
                      (d) increase rights of class = or superior to class A
                      (f) make inferior class = or superior to class A
                      (g) exchange or create right of exchange of shares of another class into shares of class A
                      (h) constrain or change or remove constraint on issue, transfer or ownership of class A

Section 190: Dissent rights
Exit – return of capital on certain fundamental change rights
      Entitled to be paid fair value of shares if affected (3) subject to solvency test (26)
      Must dissent with all shares of a class if at all (4)
      Can act as a veto if enough dissent that it would be too expensive for corp
      Better 2/3 + dissent rights than old CL requiring unanimous vote, leading to more dissolutions/liquidations
Dissent rights where (s. 190)
    o (1)(a) amend articles to change provs constraining issue, transfer or ownership of shares of that class (173/4)
    o (1)(b) amend articles to change restriction on business (173)
    o (1)(c) Amalgamation (184)
    o (1)(d) Continuation (188)
    o (1)(e) Sell/lease/exchange all/substantially all property (189(3))
    o (1)(f) Carry out a going-private / squeeze-out transaction
    o (2) Amendment affecting class/ series (176)
    o Notice of right to dissent  SH notice of objection @ or before meetings – s. 190(5)
    o Notice to objectors that reso has passed  must have voted against it and not withdrawn – s. 190(6)
    o Objector sends demand for payment – s. 190(7)  immediately no longer considered a SH: no rights – s. 190(11)
    o Corporation makes offer – s. 190(12)  SH can accept or go to court for FMV – s. 190(16)

Distribution of Voting Rights

Section 24(3): At least one class must have the right to vote

Section 140: 1 Vote per Share Unless Stated Otherwise in Articles
        Shares within a class are equal

Jacobsen v. United (1980 ABQB) p. 557: If Only 1 Class of Shares, Each Share = 1 Vote
Corporations I: Davis (2011)                                                                                              41

     By-law said each SH could vote a maximum of 1,000 shares
     Is this restriction valid?
     The company cannot restrict votes when there is only 1 class of shares
     CBCA s 140 presumption that all shares are equal: 1 vote/share
           o Presumption can only be displaced where there is more than 1 class of shares

R. v. McClurg (1990 SCC) p. 562: Diff Share Classes Do Not Have to be Treated Equally
     Corp had 3 classes of shares; each class entitled to receive dividends exclusive of the others, as per the articles
     Dividends were paid to 1 class 3 years straight, MNR tried to reassess for tax purposes
     It is the discretion of the directors to decide when to pay dividends
     Creation of different classes creates unequal rights
     Corp law there to facilitate – no need to add restrictions not set out in statute – ss 42, 122(1)(a), 241
     Need to protect SHs from discrimination
            o Critique: Can be solved by OppRem. No need to add restrictions and prohibit inequality of classes.
     Shares classes can create unequal rights  the fact that one class of shares is continuously given dividends over
        another is not a breach of equality (subject to the oppression remedy)
            o Director’s discretion to issue dividends and to whom

Can be called by directors (133), requisitioned by SHs (143), or ordered by court (144)

Section 133(2): Directors may at any time call a special meeting
Usually done to approve some transaction not in ordinary course of business and for which the statute of the corp’s
constitutive documents requires SH approval; to address fundamental changes like changing the capital structure
    s. 135(1): notice of the meeting must be sent to SH between 21-50 days before the meeting is to be held
    s. 135(6): the notice must specify the nature of the business in sufficient detail; and if the notice is defective
        then the action taken at the meeting can be set aside at the instance of a dissenting SH

Section 143: SH Can Requisition Meeting Anytime (REQs)
    1. Need at least 5% of outstanding voting shares (can include multiple SH) to requisition a meeting for the
       purposes stated in the requisition
    2. Requisition must state the business of the meeting
    3. On receiving requisition directors must call meeting of SH to transact the business in the requisition (subject to
       some exceptions)
    4. If directors do not call mtg w/in 21d after receiving requisition any SH who signed can call the meeting (143(4))
    5. Meeting should be called as soon as possible
    6. Corporation will reimburse the SH expense that were reasonably incurred UNLESS otherwise resolved at the

Section 144: Court Can Order Meeting to be Held
       On the application of director, SH who is entitled to vote at SH meetings
            o Order meeting to be conducted in the manner that the court directs
42                                                                                           Corporations I: Davis (2011)

Re Routley’s Holding (1960 OWN) p. 588: Biz not handled properly – Court Order Meeting & Set Out Process
        - Director disallowed valid proxies of other SH and conducted meeting without quorum
        - Court ordered another meeting with a different chair
        - If directors do not conduct business properly, the court will order a meeting and set out how it will be run

Re Canadian Javelin Ltd (1976 QBSC) p. 589: Court Ordered Meeting – Protective Intervention / Ensure Fair
       - Directors split 6-5  each acted as the Board; was impossible to tell who was in charge
       - Court will hold meeting to sort out confusions
       - Court to ensure meeting is fair.

Charlebois v. Bienvenu (1968 ONCA) p. 593: Court Can only call meeting SHs can call
        - Previous election flawed but Articles said meeting to elect directors only held annually
        - ONCA refused to call another meeting
        - Court said even though previous election flawed, they did not have the power to call mtg because their
            power under s 144(3) is ltd to ordering meetings that SHs can call.
        - May not still be the law: s 145: allows court to order a new election among other remedies if they find a
            previous election flawed.

Blair v. Consolidated Enfield (1993 ONCA): Getting Legal Advice Not Determinative but Good Idea
Court may need to determine if Chair conducted business in proper manner
     Duty of fairness
     Got legal advice – helped his case

Conduct of Meetings

Section 135: Notice of Meeting
        Notice must set out nature of any special business to be transacted at the meeting (135(6))
             o Special business includes all business at AGM except: consideration of financial statements, auditor’s
                report, election of directors, re-appointment of incumbent auditor (135(5))
             o To ensure meaningful participation / Allow SHs to instruct / vote via proxy

General business conducted @ AGMs:
            o s. 106: vote for slate of directors
            o s. 162: approve choice of auditors
            o s. 103(2): ratify changes to by-laws
            o s. 155: must show SH the financial statements & auditor’s report
        General rights: vote, speak to resolution, move a resolution, nominate directors
        Note: process subject to director’s control:
Corporations I: Davis (2011)                                                                                             43

            o    timing of meeting/agenda/nomination of directors for re-election/proxy solicitation powers
            o    The more numerous and dispersed the SHs, the more the director control is relevant – first mover
                 advantage increased by proxy solicitation and voting process rules. Extreme effort to elect new directors
       Rational apathy: Cost for SH to monitor mgmt. greater than the benefit they would receive  free riding on
        institutional investors monitoring of mgmt.
       Irrational apathy: Don’t monitor although benefits would exceed the costs.

Section 137(1.1): SHs can submit proposals
or discuss at meeting any matter they would have been entitled to submit as a proposal (137(1)(b))

Section 140: SH Have Right to Vote @ Meetings, Unless Articles Provide Otherwise

Section 145.1: SHs can have written agreement to vote in a particular way – not binding on share
Ringuet v Bergeron (1960 SCC) p. 613: SH can agree to vote in a specified manner BUT any such agreement is not
binding on subsequent purchasers (they would not be a party to the K) – USA is an exception (s 146(4))

Section 146: USA to reallocate powers – binding on share – must give notice
       s. 146(2): explicit authority for a USA to reallocate directors powers and liabilities to SHs
       s. 146(4): BINDING ON THE SHARE if notice is given
             o if notice not given, can rescind transaction w/in 30d of becoming aware of USA

Section 153(1): Intermediaries to vote as per instructions from beneficial owner
Securities law NI54-101 requires them to send the proxy and proxy circular to the beneficial owner.

Re. Marshall (1981 ONHC): If Registered SH Doesn’t Send Proxy – No Re-Vote Note: not good law!
        - Beneficial SH said vote A; instead, registered SH voted B
        - Do you count the votes in favour of the beneficial holder?
        - No re-vote where registered SH doesn’t send proxy or vote as per instructions of beneficial SH
        - The chair of the meeting does not need to go behind the register to determine whether the registered SH is
           voting as per the instructions given by the beneficial owners – entitled to rely on corporate register
        - You can get a common law right of action for breach of fiduciary duty AND they may be subject to criminal
           liability but no re-vote
Now s 153 (since 2001): Corp law provides that intermediary must not vote w/o written instructions from BO!

       Person is deemed to be an insider on the acquisition of 10%+ of the voting securities of a corporation
             o Creates both new disclosure requirements and triggers insider reporting obligations
       If the institution acquires 20%+ of a class of shares of a corporation, it is then subject to takeover bid
       If an institutional investor acquires 20%+ or more of the voting shares of a corporation, it is deemed to be a
        “control person” and will be subject to rules that constrain the sale of the shares
44                                                                                             Corporations I: Davis (2011)

Closely Held Corporations
        (1) relatively few SH
        (2) most or all of the SH participate actively in the mgmt. of the corporation
        (3) no established market
        (4) frequently, a restriction on the transfer of shares of the corporation

Re Barsh and Feldman (1986 ONHC): Courts Reluctant to Interfere in Mgmt. Decision of Small Corps
        - F, B and B’s son had a corporation and each had one share
        - Last SH meeting was on April 1966, now it’s 1986; Quorum was 3 = all had to be present
        - B dies and in his will he transfers his shares to his son in trust
        - F initially refuses to attend the meeting so the son applies to the court for an ordered meeting
        - Should the court interfere with the closely-held corporation?
        - No, court is reluctant to intervene because it would only be favouring B’s son in battle for control
               o If opposite held, court would violate purpose of setting quorum at 3
        - Therefore, facts here don’t support the exercise of discretion to change the quorum requirements, as it
           would be effectively locking one of 3 equal SHs into a company in which he has no control
        - When ordering a calling of a meeting or directing the conduct of a meeting, the court should do as little as
           possible to corporate articles or regulations

        (1) waiver of notice to SH meetings (136)
        (2) resolutions by unanimous consent in lieu of meeting (142)
        (3) avoiding proxy solicitation requirements (149(2))
        (4) dispensing with an auditor (163)  there are limits on p. 613
        (5) financial disclosure: don’t have to publicly file financial statements (139(4))

         -   Pg. 618 – absolute; consent; first option; buy-sell agreements; buy back rights
         -   Reasons:
                 o Because greatly interested in identity of other embers
                 o Because of heightened possibility of hold-out strategies
                 o Make it possible for owners to maintain their relative share ownership and power
                 o Make it possible to take advantage of securities law private issuer exemptions
Corporations I: Davis (2011)                                                                                              45

Proxy Solicitation & Corporate Governance
Sections 147, 148: SH may appoint a proxy to vote for them at the meeting

Section 149(1,2): Public Corp Mgmt. Must Solicit Proxies from SH
       Failure leads to liability on summary conviction (149(3))
       Exception: Don’t need to send if not a distributing corporation AND has less than 50 SH
       Proxy must have choice: for or against mgmt.’s resolutions (Re Goldhar and D’aragon (1977 Ont) p. 649)
       Must include a place for the SH to put their own nominees in

Section 150: Must send “proxy circular” with notice of meeting
       Management solicitation of proxies requires a proxy circular (150(1)(a))
            o form that sets out information about the vote, including a slate of directors & auditor
       Non-mgmt solicitation of proxies requires a dissident’s proxy circular stating purposes for solicitation (150(1)(b))
            o Exceptions: Some SHs can solicit proxies w/out a proxy circular:
                      (1.1) soliciting fewer than 15 proxies; or
                      (1.2) soliciting proxies over public broadcast
       Copy must be sent to Director
       Must be in sufficient detail. Omission of material fact – can apply to court (s. 154)
            o problematic if substantial likelihood that reasonable SH would consider it important in deciding how to
                 vote (Harris v Universal Explorations (1982) Alta CA)
       Failure to comply leads to liability on summary conviction (150(3))

Section 148(1), 152(1): Proxyholder must attend & vote according to SH instrxns/get replcmt

NI 54-101: Registered SH Must Send Proxy to Beneficial Owner (BO)
       Ex. CDS: they are the reg owner  corp law only requires the directors to send out proxies to the reg owners,
            o BUT: Sec law requires that the registered owner send the proxy to the BO

Section 153: Intermediary must only vote according to written instrxns of beneficial owner
Beneficial owner can:
    1. Send written instrxs  intermed must vote / appoint proxyholder to vote as per BO’s written instrxns (153(4))
             a. Cannot vote w/o written instructions (153(3))
    2. Request to become the proxy-holder  intermediary must appoint BO/nominee as proxyholder (153(5))
Failure to comply leads to liability on summary conviction (153(8))

Section 154: apply to court for a restraining order, order requiring correct, or adjournment of mtg
…Where a form of proxy or a mgmt. or dissident proxy circular “contains an untrue statement of a material fact or omits
to state a material fact required therein or necessary to make a statement contained therein not misleading”

       3 options:
            o (1) include in mgmt. proxy circular (make proposal if meet requirements in s 137(1.1))
                    can incl nomination of directors IF you own at least 5% of outstanding voting shares in a class
                    Much cheaper than soliciting a SH reso through your own dissident proxy circular
            o (2) solicit SH resolution through your own dissident proxy circular
            o (3) simply move resolution on the floor of the meeting (must meet reqs to make proposal 137(1.1))
46                                                                                              Corporations I: Davis (2011)

Section 137: Eligibility to submit proposal or raise from the floor
       Either registered OR beneficial owners of shares that are entitled to vote at a meeting can submit proposals on
        any matter that they propose to raise at the meeting
     (1.1): to be eligible the person must:
            o (a) be the owner of the shares for at least 6 months as of the date of submitting the proposal AND be
                 the owner of at least 1% of the outstanding voting shares OR shares with a FMV of at least $2000
            o or have the support of persons who in the aggregate meet the criteria
     (2): the proposal is then included in the mgmt. proxy circular at expense of corporation
     (4) can include nomination for directors if proposal signed by SHs representing in the aggregate at least 5% of
        shares of a class of shares entitled to vote at the meeting
     (8) if corporation refuses to include proposal, you can apply to court to have it included
NOTE: this requirement is supposed to demonstrate a commitment to the corporation (prevent annoying people from
disrupting meetings)

Section 137(5): Corp Doesn’t Need to Include Resolution IF…
        not submitted w/in time period permitted (a)
        appears primary purpose to enforce personal claim/grievance against corp/directors (b)
        does not relate in a significant way to business and affairs of corp (b.1)
        not more than prescribed period earlier, failed to present proposal at SH mtg that was incl’d in proxy circular (c)
        substantially same proposal submitted w/in prescribed period and did not receive minimum support at mtg (d)
        submitted to secure publicity (e)
        only remedy to rejection is to apply to ct to have incl’d (8)

    If SH receives majority support, director not obligated to implement its terms (Automatic Self Cleansing)
           o Mgmt. + directors of corps still their responsibility (s. 102)
           o Exception for amendment to by-laws – s. 103(4) + (5), remove/elect directors, appoint auditors
           o Director’s FD is to the corp, not SHs (Peoples)
           o SH corp governance tools are indirect in nature, and at best they can influence result or veto particular
              course of action

        SH have right to participate in SH meetings
             o Participation ≠ control
             o Directors ctrl timing of mtg, agenda, proxy process, nomination of directors – signif barriers to change
             o Possible to effect change, but significant effort required to elect new directors
Corporations I: Davis (2011)                                                                                           47


Types of Directors:
   1. Inside: both managers & directors of the business – run day-to-day operations
   2. Outside: do not run day-to-day business, are not managers, not employed by corporation BUT still have a
       business relationship (ex. lawyer, accountant)
   3. Unrelated: only contact w corporation is at Board meetings

Board of Directors Qualification Requirements:
    s. 105(1): must be a natural person, 18+, not bankrupt and not of unsound mind
    s. 102(2): publicly held corporation must have at least 3 directors (2 of which must be outside directors: not an
       officer or employee)  private may have as few as 1 director
    s. 118(3): at least 25% of the directors of a corp other than a resident corporation must be resident Canadians

Election & Removal
     s. 106(1): the first directors hold office from the date of incorporation to the date of the 1st meeting of SH,
        which must be held w/in 18 months of incorporation (s. 133)
     s. 106(3): SH must elect directors at each annual meeting of the corporation by ordinary resolution
            o Directors may have terms up to 3 years
     Cease to hold office when:
            o Close of first annual meeting of SHs following election if term not stated (106(4))
            o Die or resign (108)
            o Become disqualified – no longer a natural person, 18+, not bankrupt and not of unsound mind (105(1))
            o Removed by ordinary SH resolution (s. 109) - the articles can’t require higher vote, s. 6(4)
     Vacancy filled at SH meeting where removed (s. 109(3)) or filled by directors (s. 111)
     s. 133: directors must call an annual meeting no later than 15 months after the last preceding annual meeting
     s. 145: a corporation, SH, or director may apply to court to resolve any controversy with respect to an election or
        appointment of a director, and the court may make “any order it thinks fit” including restraining that person
        from serving, and ordering a new election

Bushell v. Faith (1970 HL): Articles Upheld Attached Special Weight to Certain Shares in Private Corp
    - P and sister voted brother out; D (brother) said Art. 9 of company’s articles made the removal of him impossible,
        as the agreement changed share rights when voting on removal of directors
    - Is this section valid and applicable and the brother therefore not removed, or is it overridden by s. 184 of the
        Companies Act which provides that a director may be removed by an ordinary resolution notwithstanding
        anything in the articles?
    - Held: clause valid & brother was removed from Board
    - In BC, default position is a simple majority needed to pass ordinary resolutions (at AGMs) but a 2/3 majority
        needed to pass a special resolution regarding fundamental change in the corporation (usually at special
        meetings) but it can be modified by the articles
             o Here, Act required ordinary resolution to oust a director, so that removal of directors = easier
    - Court won’t interfere with articles, as Act has no prohibitions regarding attaching special voting rights shares, so
        therefore they were ok
    - Corporation statutes do not operate to fetter the rights of corporations to deal with matters such as voting
        rights unless the statutory provision explicitly says so
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Directors’ Powers

Director Governance Powers: Govern Subject to Unanimous SH Agreement (USA)
     s. 102(1): manage or oversee mgmt. of the corporation subject to any unanimous SH agreement
     s. 103(1): default rule: power to adopt, amend, or repeal by-laws (subject to articles, by-laws, or a USA)
           o Any change must be put before the SH at the next AGM (BUT change is effective until that time, and
               only effective thereafter if approved) (s. 103(2-4))
     104: organize corporation upon incorporation
     s. 121: power to appoint officers and delegate powers (and remove them)
     s. 133: organize and conduct SH meetings
     s. 115: delegate some directors’ functions
           o s. 115(3): directors cannot delegate their powers with respect to certain matters
           o Ex. filling vacancy among them, issuing securities, declaring dividends, purchasing, redeeming, and
               acquiring shares issued by the corporation, adopting, amending, or repealing the by-laws)

Director Capital Structure Powers:
     s. 6(1)(c): set share structure
     s. 25(1): issue shares from authorized share capital
     s. 27: fix maximum # and rights attaching to series of shares
     s. 115(3)(d): power to declare dividends (can’t delegate)
            o Limits:
                      s. 42: can’t pay dividends if insolvency tests aren’t met
                      s. 241: cannot unfairly prejudice the interests protected in s. 241 (oppression remedy)
                      s. 122(1)(a): must be in BIOC
     s. 171(1): set record date for dividend
     s. 189(1): power to borrow $, subject to articles, by-laws, USA
            o (2): can delegate this power…

Directors’ Duties
Governance: Powers & Duties
    Duty of loyalty / FD: Act honestly and in good faith in the best interests of the corporation (122(1)(a))
    Duty of Care: Exercise care, diligence & skill of reasonably prudent person (122(1)(b))
    Duty to Comply: with the Act, regs, by-laws, Articles, any USA (122(2))
    Duty of Disclosure: to disclose any conflict of interest (120)

Directors’ Statutory Liabilities – Personal Liability
        Issuing shares in exchange for property at less than fair value (25, 118(1))
        Making payments from corporate assets when corporation is insolvent (118(2)
             o Purchase/redemption/acquisition of shares (34-36)
             o Declare or pay dividend (42)
             o Pay indemnity (124)
             o Pay SH for dissent rights (190)
             o Pay where court orders comp for OR (241(6)(3(f),(g))
        Unpaid employee compensation up to 6 months (119)
             o Directors are jointly & severally liable to emp’ees for up to 6 months of unpaid wages – 19(1)
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            o  UNLESS – 19(2):
                     Sued for debt more than six months after it became due
                     Claim for debt proved more than six months after earlier of date of commencement of
                        liquidation and dissolution proceedings, and date of dissolution
                     Claim for debt proven more than six months after date of assignment of bankruptcy order
           o Incentive to be careful and take unsecured creditors into account when close to
       Oppression / unfair prejudice to protected interests (s. 241)
       Only USA (s. 146(5)) can relieve directors from liability (122(3))

Directors’ Defences
Section 123(1):Dissented on record (s 123(1); Joint Stock Discount v Brown)
            o   Deemed to consent if not @ mtg UNLESS within 7 days of becoming aware of res, the director: (123(3))
                    (a) requests dissent to be entered into minutes of meeting
                    (b) sends dissent by registered mail OR delivers it to the HO of the corporation

Section 123: Reasonable Diligence/Good Faith Reliance
       118, 119, 122(2)  s. 123(4): not liable under s. 118 (issuing shares for prop less than FMV) or s. 119 (liability for
        wages) if director exercise the care, diligence and skill that a reasonably prudent person would have exercised in
        comparable circumstances
            o ex. relying on financial statements of the company, written report of auditor, other professional who
                 lends credibility to a statement made
       122(1)(a),(b)  s. 123(5): reliance in good faith on:
            o (a) financial statements of the corporation presented by an officer or written report from auditor
            o (b) report of a person whose profession lends credibility to a statement made by the professional person
       But: In Peoples: directors tried to raise defence, good faith due to guy’s BA in commerce. Not enough:
            o Financial statements or professional opinion requires regulatory oversight by professional body
            o AND independent insurance for errors and omissions

Section 118(6): Issued shares for property less than fair equivalent $ value  knowledge defense
Defense for s 118(1): Did not know and could not reasonably have known were issuing for less than FV
    Helpful to get appraisal – s 123(4)

Section 122(1)(b): Duty of Care
Exercised the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances
(professional opinion – s 123(4))

Business Judgment Rule
Decision was reasonable (prudent and informed) in the circumstance. Court should be deferential. (not really a defense)
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Duty of Care

Section 122(1)(b): Duty of Care
Policy re Personal liability of director for failing to use the appropriate skill and care for decisions made w/in their
discretionary power; failing to act in interests of corporation (misuse of corporate form = pierce veil)
     Personal liability so that they will exceed minimum standards
     Too much liability = overly cautious directors

Theories of the Corporation
   1. Nexus of Ks: if the SH and the directors were contracting  how would they want to define the line between
       recklessness & acceptable risk-taking (where would directors decide to accept personal liability)
   2. Mediating hierarchy: liability is there to protect against self-dealing by directors (make sure they don’t divert too
       much of the rent to themselves)
   3. Social enterprise: liability is a deterrent from directors appropriating value that should be going to society (or
       reducing net value in the total societal wealth)

Types of Managerial Self-Dealing
   1. Shirking: not putting forward sufficient skill, care & diligence in performing duties
   2. Excessive risk aversion: directors want to protect their position; more risk averse than SH
           o Reality: few directors pay out of pocket for risks taken
           o People who invest are assumed to be risk-neutral; shown that often this is untrue
   3. Looting: fraud & appropriation of corporate opportunities
   4. Change of control: where concerns of negligence & conflict of interest come forward
           o Ex. managers inhibiting M&A due to fear of job loss; M&A may be beneficial to SH

Directors and officers must exercise the care, diligence and skill that a reasonably prudent person would exercise in
comparable circumstances – duty owed to all stakeholders, not just corp. (Peoples)
     Action under s 122(1)(b) must establish 3 things (Peoples)
            1. Must establish DOC – Statutory duty only owed if DOC is established first (BCE)
                    Owed DOC in s 122(1)(b) if you are a neighbour within the meaning of tort law (BCE)
                    owed to EEs (Neilsen) – had personal factual awareness and capacity to do sth. (Nielsen)
                    owed to creditors (Peoples) – “neighbour principle” and reasonable foreseeability
            2. SOC: Objective with contextual element – must be reasonable decision, not perfect. (Peoples)
                    Only protected to the extent their actions actually evidence their business judgment! UPM
                       Kymmene – not reasonable or informed.
                    BJR = deference where directors act in a prudent and informed way
                          (1) avoids hindsight bias
                          (2) reflects relative expertise of courts vs. directors
                          (3) directors must only make reasonable, not perfect, decisions  range of reasonableness
                                 o Canada BJR: directors may need to show how their decision was reasonable, and
                                      what they did as far as steps towards making the decision go  must show
                                      diligence and that it’s reasonable to prevent court involvement
                                 o USA BJR: courts won’t involve themselves unless there is fraud, illegality or conflict
                                      of interest
                    Cannot lower the SOC in the articles or relieve director for breach of duty to act in accordance
                       with the act, except by USA (s 122(3))
            3. Causation: It was director’s unreasonable decision that gave rise to P’s damages (Barnes v Andrews)
                    If was a contributing cause, not s. 237: D responsible to P only for the portion of damages that
                       corresponds to their degree of responsibility for the loss. (note not applic to unsecured creditors)
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       Very difficult to be successful on a DOC claim because other stakeholders usually do not have access to the
        evidence about the decision-making process, showing BJR should not be extended. UPM was special circs.

       122(1)(a), (b)  s. 123(5): good faith reliance: ok if you reasonably relied on financial statements, auditor’s
        report, professional opinion
            o But: In Peoples: directors tried to raise defence, good faith due to guy’s BA in commerce
                      SCC: professional requires regulatory oversight by professional body
                      AND independent insurance for errors and omissions
       Dissented on record (s 123(1); Joint Stock Discount v Brown)
            o Deemed to consent if no attendance UNLESS within 7 days of becoming aware of res, the director:
                      (a) requests dissent to be entered into minutes of meeting
                      (b) sends dissent by registered mail OR delivers it to the HO of the corporation
       118, 119, 122(2)  s. 123(4): reasonable diligence:
            o not liable if director exercised the care, diligence & skill that a reasonable prudent person would have
                exercised in comparable circs, incl good faith reliance on financial statements or professional opinion
       118(1) 118(6)

People’s Department Store (2004 SCC): Creditors Can Sue Under Neighbour Principle (DOC)
    - Inventory scheme, as above
    - No breach of fiduciary duty, but creditors could sue for breach of DoC under s. 122(1)(b)
    - HOWEVER, SoC was met  decision to run inventory through 1 set of books was to keep track of their
        inventory, not to deprive the other company
    - S 122(1)(b) does not name the corp as recipient but rather imposes an EXPECTATION OF CARE, DUE DILGENCE
            o DoC can be owed to creditors or anyone else IF they can characterize themselves as neighbours
            o Harm must be reasonably foreseeable
    - Objective standard taking into account the context ((used to be subjective but defence that person was
        unqualified was not sufficient)
            o A reasonable, not a perfect decision
            o Prudent action (reasonable in light of context of decision) Informed decision (knew or ought to know)
            o Deference to expertise if prudent and informed (Business Judgment Rule)
     An action under s 122(1)(b) – need only establish:
            1) Duty of care (“neighbour” principle – directors owe a DOC based on the proximity of the decisions they
               make which may harm you;
            2) Breach SOC (set out in s 122(1)(b)); and
            3) In a way that caused injury to P (Causation, Damages)
                     (a) Unless the plaintiff can point to director’s negligence as the sole cause of the loss, it will be
                          very difficult to sue directors when things fall apart due to bad business decisions
NOTE: Decision based on QB Civil Code s. 1457; likely applies to CL provinces

Nielson Estate v. Epton (2006 ABQB) p. 529: Director Owes EE Reasonable Safety Duty
    - EE killed at work from unsafe hoist thing
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    - There was no WCB coverage
    - Was the director liable for his death because he owed him a duty of care?
    - Directors owed EE a duty of care - must take measures reasonably within their capacity to protect EE when they
        are involved with dangerous activities:
            o (1) knew or ought to have known that EE was involved in serious dangerous activities
            o (2) was within director’s authority/capacity to establish and enforces policy which could reduce the risk
                      If you delegate authority you must still supervise reasonably
    - DOC owed where:
            1. Director has / ought to have personal factual awareness of serious and avoidable or reducible danger
            2. Personal capacity or authority to do something about it (establish policies, enforce them)
    - Directors owe employees a DOC
Note: Not veil piercing  personal liability for personal negligence / tortious wrong (Agda v Valcom)

Barnes v. Andrews (1924 USDC): Director Must Inquire/Corp Loss Must be Caused by Breach
        - Director accepted position, never inquired about the company
        - Friend of manager, went to 1 meeting; had casual convo later “how’s the comp”
        - No liability because No evidence that his presence @ meetings would have changed anything
               o Although he failed in his duty to the corporation, by not exercising diligence
               o Not going to meetings ≠ diligent & prudent
        - Breach of DoC not enough CAUSATION necessary: losses must actually stem from the breach

Joint Stock Discount v. Brown (1869): If Know of Mismanagement, Dissent on Record
        - Fraudulent scheme to issue stock that would fool creditors and allow others to recoup their losses
        - Some directors knew about this and dissented at the meeting
        - A simple dissent at the meeting was not enough
        - When directors are aware of mismanagement, there is a higher standard regarding the actions that you
            must take  must at least dissent on record
        - Directors have an active responsibility to keep themselves informed of the affairs of the corporation, but are
            only negligent in fulfilling their duties if the loss flowed from the director’s negligence

BCE Inc. v. 1976 Debenture Holders (2008 SCC): s. 122(1)(b) not Independent Action (Must Prove Duty Owed)
    - s. 122(1)(b) is not an independent foundation for claims!
             o Must establish you are owed a DoC
             o Statutory duty sets out the SoC, it is not a cause of action in itself
             o Duty is not owed solely to corporation
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UPM Kymmene (2002 ONSC): Ct Reviews Evidence re: Decision Process – BJR must ev actual BJ!
        - Berg invests in company, allies w strong SH and gets elected to Board
        - Negotiates own compensation package w HUGE bonuses/severance
        - Board approved the package with only 7 minutes discussion
        - SH suing for breach of DoC
        - Did the directors meet the SoC under s. 122(1)(b)?
        - No, they did not make a reasoned business decision  expert’s opinion was qualified AND directors only
          considered the report for 7 minutes
        - Decision was uninformed; there was an independent obligation to understand the terms of the agreement
        - Berg also failed to disclose his interest in the K under s. 120(1) – invalidated K via s. 120(8)
        - DoC requires duty to be informed; act on reasonable grounds; can rely on pro advice but if given with
          adequate info; time spent on decision must reflect the impact on corporation
        - BJR could not be applied; decision not informed or reasoned
        - BJR protects directors to the extent that their actions actually evidence their business judgment  courts
          are entitled to consider the content of their decisions and the extent of the info on which it was based and
          to measure this against the facts as they existed @ the time of the impugned decision
              o Need evidence of how decision was made – informed??
              o Must prove to judge before they will adhere to BJR (different in US; more deference to BJR)
              o Entitled to rely on expert opinion if you have informed yourself of the info on which the opinion is
                  based to allow you to make reasonable judgment

Smith v. Van Gorkum (1985 Del): Decision Must be Informed & Deliberate
        - Company was being sold by way of a cash-out merger to Pritzker (all SH sell for price in agreement)
        - VG = chairman & inside manager; approaching mandatory retirement
        - Company had a huge pile of income tax credits it couldn’t use  makes company worth much more $$
        - Market price = $30-40, Pritzker offering $55
        - In market, VG could only get $40/share upon retirement, so pushing for Pritzker’s offer of $55 immediately
        - Other SH thought $55 was undervalued, wanted a leveraged mgmt. buyout  requires faith in long term
           company success… VG wasn’t interested because would have to retire before realizing benefit
        - So… Pritzker’s deal put to SH, had 3 days to accept, not allowed to solicit bids or provide info to new buyers
               o Was amended, allowed to actively solicit bids
               o Restrictions made it very unlikely there would be another bidder; had to recommend purchase to SH
        - Was the director’s decision to take Pritzker’s offer legit?
        - Directors did not exercise informed business judgment: acted totally in reliance on VG’s presentation
           regarding price of shares, but he wasn’t even that informed, no prof. advice, short mtg to sell business
        - Company said its > MV, it’s legit
               o Court said not enough, the share price was depressed in relation to its real value; there was no
                   intrinsic valuation done; VG set the price
        - Directors claimed they reasonably relied on VG
               o Directors should have asked where the price was from; VG didn’t know anything
        - Claimed there was a market test of the offer by allowing other bids
               o No announcement of the opportunity, no active solicitation (at first), no public info made available
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         -   Decision must be informed and deliberate  the amendment to the deal which allowed them to seek
             additional offers was ineffective b/c would have been unable to close the deal w/in timeframe

Delaware s. 102(b)(7): Corp Can K Out of DoC Breach
        Delaware corps can K out of DoC breaches; but not to breaches of loyalty (fiduciary duty) or dividend payments
        Not the case in Canada  cannot K out of duty of care!! (122(3))

        Objective standard of conduct; must evidence care, skill & diligence
        Statutory duty ≠ independent foundation for claim  statute only tells you the standard
             o Must use neighbour principle to determine whether it’s actually owed to you
        Courts review decisions based on BJR
             o Defer to business judgment; wary of hindsight bias
             o Concentrate on the court’s ability to assess accurately levels of prudence & diligence
                      Ok to accept < perfect results, if decision is reasonable
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Fiduciary Duty (Duty of Loyalty)

Section 122(1)(a): Honestly & in Good Faith w Best Interests of Corp
Directors and officers have the duty to act honestly and in good faith with a view to the best interests of the corp
     Avoid conflicts of interest – allowing their interests to conflict with their duty to further others’ interests. This
        issue is raised where both are pursuing the same opportunity.
     Must not profit from office
            o Exceptions: s. 120
                       Director not accountable if (120(7):
                                disclosed according to (1)-(6),
                                directors approved k / transaction, and
                                the k/transaction was reasonable and fair to the corp when approved
                       Director required to make disclosure not to vote on the k / transaction unless it relates primarily
                          to his remuneration, is for indemnity or insurance under s 124, or is with an affiliate (120(5)).
                       s. 120 has own remedial procedure (s. 120(8))
                                Important because alternative = expensive derivative action
                          o What must be disclosed? RULE: all information that would make a difference to
                               whether/not the director would vote for or against the contract (UPM Kymmene)
            o Can’t profit from position even in situations w/o a demonstrable loss to the corporation (must always
                 disclose)  @ CL, remedy for any conflict of interest was to account for profits (Regal Hastings) or to
                 void all Ks (Aberdeen Railway, 740)
     View to best interests of the corporation
            o Maximize corporate value, not maximizing SH value (Peoples)
                       Dodge v Ford Motor – Director breached FD by expanding plant to benefit society, not for profit,
                          thus not acting in BIOC.
            o May consider wide range of stakeholder interests (Peoples)

       If you are a SH:
             o You have no right to bring a personal action for breach of fiduciary duty
             o Generally limited to the derivative action
                      Duty of loyalty is owed to the corporation (Peoples)
                      BUT oppression remedy: characterization of your loss allows you to bring either an oppression
                         remedy OR derivative action
                             If the breach of fiduciary duty harms your status as a SH  oppression

Ford v. Dodge (1919 Mich): Social Responsibility Needs Connection w Corporate Purpose, or not in BIOC
        - Ford wanted to keep prices low and employ lots of people  said these were his purposes
        - Didn’t pay dividends, was going to better the communities in which the warehouses were situated
        - Not in the best interests of the corporation  not allowed
        - CSR has to have a connection with a legitimate corporate purpose. Decision solely to benefit society rather
           than for profit is not made in BIOC.

Peoples Dept Stores Inc v. Wise (2004 SCC): FD; BJR
    - Wise = dept. store directors decide to buy from other sister company
56                                                                                              Corporations I: Davis (2011)

    - Financed through bank + original owner | held security
    - Walmart came to QB; couldn’t integrate Wise & Peoples
    - Peoples to buy Christmas inventory + transfer to Wise store
    - Secured creditors paid off, non-secured creditors got nothing
    - Was inventory buying scheme legit? Did Peoples directors owe fiduciary duty to creditors?
    - When determining if directors are acting in the best interests of the corporation, it may be legitimate to for the
        Board to consider, inter alia, the interests of SH, EE, suppliers, creditors, consumers, governments and the
    - s. 121 gives directors the ability to manage the corporation; SH can't make directors do anything unless USA
    - Held: Directors won, was a reasonable decision re: inventory || BJR: no liability for directors
    - FD owed to corporation itself - can take other stakeholder interests into consideration, but not binding
    - 2 components of FD:
            o 1. Act honestly and in good faith – avoid conflicts of interest; no profits from position (except s 120
                disclosure, don’t vote, transaction fair to corp)
            o 2. With view to BIOC – this means maximizing corp’s value, not maximizing SH’s value. May consider
                wide range of stakeholders’ interests
    - Business Judgment Rule: a willingness to defer to the business expertise of directors, the ppl put in charge by
        corp, and not to judge them with hindsight bias. Ct does not look to outcome, but to whether directors/officer
        acted honestly and in good faith with a view to the best interests of the corp..
            o Director’s must have gathered all the info they can in the time they have and to consider all the facts

Anything that would interfere with judgment must be disclosed (UPM Kymmene)
Will not be personally liable if: (s. 120(7))
    1. Disclose as per ss 120(1-6)
    2. Directors approve the transaction; and
    3. Transaction/k was reasonable and fair to the corp when it was approved
Or transaction can be approved by special resolutions of the SHs (s 120(7.1); Northwest Transportation)

Section 120: Procedure to Deal with Conflict of Interest
        s. 120(1): a director or officer shall disclose to the corp in writing OR otherwise the nature & extent of any
         interest that he has in a material K or material xact, whether made or proposes, with the corporation, if the
         director or officer
              o (a) is a party to the K or xact
              o (b) is a director or officer, or an individual acting in a similar capacity, of a party to the K or xact
              o (c) has a material interest in a party to the K or xact
        s. 120(2): must disclose as soon as you become aware of it (at the latest, when it is talked about)
        s. 120(5): directors must abstain from voting on the resolution regarding the K UNLESS:
              o (a) it relates to his own remuneration as an EE/director/officer
              o (b) is for indemnity or insurance
              o (c) the xact is with an affiliate of the corporation
        s. 120(6): requirement of continuing disclosure
        s. 120(7): the director/officer is not accountable to the SH for profit IF:
              o (a) disclosure of the interest was made pursuant to the procedures
              o (b) directors approved the xact
              o (c) AND the K or xact was reasonable and fair to the corporation when it was approved
Corporations I: Davis (2011)                                                                                              57

       s. 120(7.1): even if (7) conditions are not met  SH can approve the xact by special reso; disclosure of interest
        must be made to SH and K must be reasonable and fair to corporation
       s. 120(8): SH can apply to the court to set aside the xact or require the directors/officers to account for profits.
        This is a self-executing action – no need to go via deriv action (Churchill Pulp Mill Ltd v Manitoba [1977] (CA))
       What must be disclosed? RULE: all information that would make a difference to whether/not the director would
        vote for or against the contract (UPM Kymmene)

Policy: s. 120 softens rules that directors cannot profit at all, or it would be impossible to attract good directors
     Q of whether it’s fair to have directors abandon any opportunities; they are often part time

Aberdeen Co v Blaikie Brothers (1854) HL p. 740: Rule against all interested directors’ contracts
     Thomas Blaikie was a chairman of Aberdeen Railway and also a partner of Blaikie Brothers. The railway
        contracted to purchase a quantity of chairs from Blaikie Brothers.
     Aberdeen could either enforce or avoid the contract on the grounds of the prohibition on allowing its director to
        have a conflict between his personal duty and his personal interests.
     Interested directors contracts not allowed.

Northwest Transportation (1887 PC): Majority SH Ratify K = No Breach of Duty
        - Director selling steamship to corporation; Board in favour of the purchase
        - SH vote 306-289
        - Transaction was ratified by the SH
        - If the transaction = ratified by majority of SH = transaction is not a breach of fiduciary duty
               o BUT allows majority SH to impose losses on minority SH if xact benefits only the majority
               o Does not have to be a disinterested majority.
               o s. 120 deals with this problem (xact must be approved by disinterested directors)

UPM Kymmene (2002 ONSC): Have to Disclose all Material Facts – Not Just Broad Interest
        - Board was considering Berg’s K of employment
        - It wasn’t enough to simply say that you were interested in the employment K  must disclose details
        - K was rejected by other directors, directors resigned because of the pressure, etc.
        - If you don’t meet the disclosure requirements, can’t rely on s. 120 & therefore didn’t meet duty of loyalty
        - Anything that would affect the judgment about the particular transaction of the other directors is
          material and must be disclosed
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Taking of Corporate Opportunities:

Regal Hastings (1942 HL): Profit from Position = Account $ to Corp (No Bad Faith Req’d)
        - Regarding a lease of movie theatre; landlord wants more capital before allowing the lease
        - Decided that the corporation couldn’t raise any more capital, so the directors made personal guarantees in
           exchange for shares
        - Corporation was bought out later and directors received a premium on their shares (profited)
        - Was this a breach of fiduciary duty?
        - Directors acquired their shares in subsid solely by virtue of their fiduciary position  must account for profit
        - Even though there was no allegation of misconduct, was a breach of loyalty
        - Good/bad faith is irrelevant. Profiting from office as director  must account for profits. Focus on question
           of how the information came to the director (Canaero goes further than this)
        - EVEN if the corporation couldn’t capitalize on the opportunity and despite the fact there was no bad faith
               o They could have saved their profit IF the SH had ratified the deal, abide by s. 120 & keep $

CanAero v. O’Malley (1974 SCC): Can’t Resign to Take Opp (Fairness Test, Look @ All Factors)
        - Subsidy of a US aerial survey company; Canadian gov’t to fund survey in Guyana
        - CanAero had been working with the Guyanese people and forged relationships
        - It was Canada’s choice to pick the contractor, preferred wholly owned Canadian companies
        - Directors who had been working with the project a long time quit their jobs and formed a new (Canadian)
           company to get the opportunity – they knew CIDA would prefer to give to purely Cdn corp.
        - Was this taking a corporate opportunity even though the directors had quit?
        - Breach of fiduciary duty; they were top level mgmt. & the DoC persists even after resignation
        - Must account to the corporation for profits
        - Cannot resign to take advantage of a corporate opportunity (but if you resign for other reasons, can take
           advantage of new opportunities)
              o Loyalty disqualifies a director or senior officer from usurping for himself a maturing business
                  opportunity which his company is actively pursuing
              o Even after resignation, where the resignation may fairly be said to have been prompted or
                  influenced by a wish to acquire for himself the opportunity sought by the company
        - Fairness doctrine: must look at all the factors to determine whether there was a misappropriation:
                        Position held, nature of the opportunity, role in pursuing it, ripeness, amount of knowledge
                          possessed, circumstances in which it was obtained, special or private opportunity, how long
                          the fid duty been owed to the corporation, why was the relationship with the company
                          terminated and how long ago
              o Must illustrate the relationship to the opportunity and why it’s fair that the corporation get the
                  benefit of that opportunity
        - Resigning doesn’t make taking the corporate opportunity ok; look at all factors of the fairness test
Corporations I: Davis (2011)                                                                                            59

Difference from Peso: Peso the corp had various opportunities open to them; and the acquisition of that opportunity
could not be said to be essential to the success of the company.

Canaero (p 781-2) – The general standards of loyalty, good faith and avoidance of conflict of duty and self-interest to
which the conduct of a director or senior officer must conform must be tested by many factors: [This list is non-
    Position or office held
    The corporate opportunity
            o It’s nature
            o Its ripeness
            o Its specificness and the director’s / managerial officer’s relation to it
    Knowledge
            o The amount of knowledge possessed
            o The circumstances in which it was obtained
            o Whether it was special or even private
    Where the alleged breach occurs after termination of relationship with company:
            o The factor of time in the continuation of fiduciary duty
            o The circumstances under which the relationship was terminated (retirement / resignation / discharge)

Leaving office does not necessarily end the duty
            o Canaero eg of fiduciary obligation carried over in relation to a particular opportunity being pursued
                actively when you are a director
                  o 1. How you left
                  o 2. Why you left
                  o 3. The time elapsed since leaving
                  o Even though Canaero seems to say you could compete right away if there is no non-compete
                      agreement, because you have a right to a living

Rejection of opportunity by board. Peso - Relevant factors there will be:
            o 1. Quality of the board decision (thorough consideration of all relevant facts)
            o 2. No secret knowledge (full disclosure of all relevant facts)
            o Also, Peso differs from Canaero in that:
                 o The board chose to reject
                 o There were other opportunities open to them
                 o They did not need this opportunity for the survival of the corp
                 o The claim was speculative – it was not sure to profit. If an opp is sure to profit, need to do all you
                     can to come up with a structure (AbbeyGlen) or financing (Irving) so corp can benefit.

Zwicker v Stanbury (1953 SCC) p. 771: Corp’s ability to take the opportunity is not relevant
        - Corp did not have the $ to buy the bonds so the directors bought them personally
        - Then the business became profitable and the SHs sued
        - Directors liable for taking a corporate opportunity?
        - Directors liable for taking opportunity
        - The corporation’s ability to take the opportunity is not relevant (complicated later by Peso)
60                                                                                             Corporations I: Davis (2011)

Irving v. Deutsch (1934 2d Circ): If Central to Corp’s Biz – Board Must Take ALL Steps to Get Opportunity
         - Acoustic company wanted patent right to make a radio; company needs the rights to make a profit
         - Director said corp couldn’t get funding, then formed a company to buy the right and leased it to the corp
         - Directors had to give the profits to the corporation (misappropriation)
         - Contrast with Peso: court didn’t believe in this case the reality of the rejection of the offer, Acoustic needed
            the patent to make a profit – Peso was a risky venture from the beginning
         - Cannot take corporate opportunity just because of a claim that the corporation cannot afford it (too much
            chance that the directors will just not do enough to secure additional funding)
         - Theory that you can always find $ if the opportunity is really that valuable

Abbey Glen v. Strumborg (1978 ABSC): Must Make Attempts to Let Corp Get Deal if Know Profitable
        - Proposed JV development of real estate; private company didn’t want to deal with public company, so corp
           could not take opportunity
        - Directors formed new private corporation and took the opportunity
        - Directors personally liable for taking the opportunity  accountable for profits
        - They knew there would be profits AND they didn’t even attempt to come up with a structure that would
           allow the public company to take part in the deal


Peso Silver Mines v. Cropper (1966 SCC): Director Can Take if Board Rejects 1st – Sometimes.
        - Mine stake was not pursued by the Board of Peso
        - Directors decided to form company and stake the claims in the neighbouring mines: didn’t affect Peso’s biz
        - It was a risky investment, Peso Board had rejected it (with full consideration)
        - Directors that pursued the claim were forced to resign from the Peso Board
        - Was this the taking of a corporate opportunity?
        - Because the directors rejected the opportunity in good faith, subsequent decision to take the opportunity
            was not taking the opp away from the corporation
        - In this case, the stake was blind, there was no additional info between Peso’s rejection and directors’
            investment that “sweetened” the deal
                o If new info had come to light, would have to bring offer back to Peso
        - If you learn of an offer through the course of your directorship, must offer it to the corporation first  if
            corporation rejects it then you can pursue it privately (in some circumstances)
Difference from Regal: Regal had an offer for 3:1 profit. In Peso, the claims were speculative. Calling something an
opportunity may depend on the kind of risk or speculation involved in the opportunity.
Corporations I: Davis (2011)                                                                                         61

Robinson v. Brier (1963 Pa): Impossible for Corp to Take Opp = Factor to Consider
        - No room in warehouse for luggage assembly corp to make wood frames, director decided he could do it for
           cheaper than any other supplier
        - Sold frames to his own corporation
        - No usurpation of corporation opportunity
        - There was no room in the warehouse for the corporation to make the frames themselves; they were already
           behind on orders
        - Corporation couldn’t have possibly taken the opportunity themselves
        - Impossibility of the corporation being able to take the opportunity is a factor to consider when thinking
           about whether director breached loyalty by taking corporate opportunity – here not an issue of financing
           but practicality


Johnston v. Greene (1956 Del): If Opps Given to Director in Personal Capacity = No Breach
        - G was a director of many companies, buys a patent for nuts in planes, and redirects it to one of his
        - Opportunity came to G as an individual investor, wasn’t in the line of business of any of the corporations he
        - Wasn’t under an obligation to give the patent to any of them
        - There must be a tie between the company and the opportunity to engage the fiduciary duty to the corp
62                                                                                             Corporations I: Davis (2011)

Derivative Actions

Harm to corp must be pursue by corp as separate legal person (Salomon; Peoples) except under s. 120(8)

        In CL, if you are going to sue someone for an alleged breach of rights, MUST affect YOUR rights
             o This would mean that only the directors could take legal action for the corporation through a Board
                   resolution  only the corporation has standing to sue
             o BUT directors may be involved in the wrongful conduct  refuse to sue because of self-interest

Foss v. Harbottle (1843): If Wrong Can Be Ratified by SH, Only Corp Can Sue
        - 2 minority SH sued various directors to recover damages for the company
        - Directors alleged to have committed a variety of wrongs (ex. secretly purchased for themselves certain lands
            essential to the corporation’s purposes, then sold to corporation at exorbitant profit)
        - If the wrong done to the corporation can be ratified by an ordinary majority of the SH, the lawsuit can only
            be brought by the corporation themselves (through a Board resolution) = no derivative action
                o Any decision of the court could be repealed
        - Rationale: so SH can’t decide no it’s ok after court judgment

Exceptions to the Foss v. Harbottle Rule (aka times when derivative actions are allowed):
    1. Ultra vires transactions
    2. Actions that could validly be taken only with the approval of a special majority of SH
    3. Actions in contravention of the personal rights of SH
    4. “fraud on the minority” by a majority that was still in control at the time of the proposed litigation and that
       therefore would not cause the corporation to sue

        Overrules Foss v Harbottle and Northwest v Beatty – now SH ratification is only a consideration in leave decision
        Nature of action: legal action in name of corporation for a wrong done to it = derivative action
            o Since duty of loyalty owed solely to corp, can only be pursued by corp – Peoples decision
            o Function:
                      Accountability of corporate decision makers
                      Prevention of managerial/director self-dealing or abuse of authority
                      Recovery of damages or assets belonging to the company
                         o Not appropriate for solely personal remedies  must involve interests of the corporation
                              AND a remedy that will benefit the corporation
                         o Damages won go to the corporation
            o If the remedy sought is solely personal in nature, derivative action = dismissed  pursue personal action

1. Need to be a complainant: Section 238, 239(1): Statutory Reform: Broad Standing
        Defines complainant:
             o (a) registered OR beneficial security holder of corp or affiliates;
             o (b) current OR former director or officer of corp or affiliates;
             o (c) the Director; or
             o (d) any other person the court thinks is proper
Corporations I: Davis (2011)                                                                                            63

                       difficult for creditors to get standing under the discretionary class for a DA because they could
                        use the debt-collection regime and don’t need access to the courts. (this is diff under OppRem)

2. Need to seek leave: Section 239: Leave of Court/Notice to Directors/Good Faith/In Corp Interest
       (1) complainant requires leave of the court to bring action on behalf of the corporation (must bring application
        for leave – not a trial on merits of claim)
       (2) requirements for leave:
             o (a) 14 days notice to directors: allows them to consider whether to sue in the corporation’s name – use
                expertise to see if in corporation’s interests BUT problem of director self-interest
                      Notice must have sufficient information about the cause of action so they can make a reasoned
                         decision whether to sue or not (Northwest Forest)
             o (b) Complainant must be acting in good faith: concerns about personal actions (vendettas & nuisance)
                      Action can have a personal element IF aligned with a rational business reason for case. It is only
                         when using the suit as a vendetta or nuisance suit that there will be lack of good faith. (Primex)
             o (c) Best interests of corporation: Legal cost/benefit analysis
                      P must show arguable case OR reasonable prospect of success. In this, court will also assess any
                         defenses raised by D (Primex)
                      Attempts to prevent suits to harass, embarrass mgmt. where mistake is not material

Primex v. Northwest Sports (1995 BCSC) p. 788: Leave App not Trial on Merits: P Must Prove Reas Prospect of Success
        - Partners told Board that they would buy NBA franchise and rent the arena from the corporation
        - Griffiths then took over the corporation via takeover (SH approved)
        - Allegations that Griffiths took the corporate/misled directors/undervalued shares/undervalued shares
        - Is this an appropriate case for a derivative action?
        - Yes, partner did not make full disclosure of the fact that he intended to take over the arena immediately
        - Board decision to approve his purchase of the NBA franchise was based on misinformation (doesn’t meet
           Peso requirements)
        - Ratification by SHs was not determinative of standing because their ints did not align with those of the corp
        - The claim that the corporation couldn’t have pursued the opportunity was for the TJ to decide
        - There was a reasonable prospect of success to the misappropriation of corporate opportunity claim
        - For standing, P must show case has a reasonable prospect of success. Ct considers D’s defenses as well.
        - SH ratification of a xact does not mean it is in the best interests of the corporation  can still be a breach
           of fiduciary duty (s. 242(1)) where the SH’s interests do not align with the corp’s interests.

           Simpler approach  absent allegations of a breach of fiduciary duty, any derivative action suit that is
            rejected by an independent committee of directors will not be allowed to proceed
                o Strict application of BJR to any allegation that does not include conflicts of interest
                o Problems: directors appoint independent directors (may not eliminate conflicts)
                o Difficult to pursue derivative actions in the US
           Court made rule that requires that SH demands the directors to sue; if futile to demand (ie suit is against all
            the directors), demand excused and can just start suit
64                                                                                             Corporations I: Davis (2011)

Auerbach v. Bennett (1979 NYCA): Independent Directors w Reasonable Process = No DA
       - US court held that it was enough that the directors be independent and that the process that they use to
           investigate the allegations are reasonable
       - If they are satisfied after this that the action should be discontinued the court should abide  respect BJR
       - Courts will only intervene if not independent or was half-hearted decision making

Zapata v. Maldonado (1981 Del. SC): Court Should Look @ Independent Committee Decision
        - Alleged that the directors changed the date of their options to take advantage of an increase in stock price
           resulting from an announcement of a merger
        - Directors formed an independent committee to look at the situation (took 4 years to form)
        - Every director at the time was involved in the action
        - Directors tried to argue Auerbach and BJR
        - Suit can proceed  court was not satisfied the independent committee’s decision should stand
        - Court must do a balancing act in applying the BJR, a 2-step test:
               o (1) independence and good faith
                         Onus on committee to establish they acted in good faith
               o (2) independent business judgment
        - Even if a group of directors and its committee convince the court that it acted in good faith and followed a
           proper process in reaching its decision, it will not necessarily be determinative that the courts will deny
           granting leave to pursue the derivative action

        Concerns about DA initiators becoming unjustly enriched after obtaining leave (getting personal settlements
         from directors to quit pursuing the action instead of the corporation getting the benefit of a successful DA)
        So court continues to supervise the action post-leave (need leave to settle/discontinue; order for interim costs)

Section 240: Court Can Make Any Order it Sees Fit
Court can make any order it sees fit in relation to the DA
    240(a) authorizing complainant or any other person to control the conduct of the action
    (b) order giving directions for the conduct of the action
    (c): ordering amount payable to former/present security holders
           o alleviates concerns about unjust enrichment of new SH that didn’t suffer the wrong (s. 238(a) and 240(c)
               together allow court to pay to former SHs rather than to corp, thereby benefiting current SHs
           o AND can remove the $ from the control of the directors
    (d): allows court to order the corporation to pay the complainant’s legal fees (only after getting leave)

Section 242: Court Approval needed to discontinue/settle
        s. 242(2): need court’s approval to discontinue the action (to avoid director pay-offs to complainants) or to
         settle - must be made on terms the court thinks fit
        S. 242(3): complainant not required to give security for costs
        s. 242(4): court can order interim costs to the complainant during the leave application; complainant MAY be
         held accountable for these costs on final disposition
              o overcomes problem of rational apathy and of P not having enough $ to pursue after getting leave
              o case law in Jannis Sarra article: seems to be creating barriers for awarding of interim costs, requiring not
                  only financial eligibility but also connection between financial eligibility and alleged harm suffered.
Corporations I: Davis (2011)                                                                                           65

Oppression Remedy Summary
    1) Standing to bring a claim
           a. Defined or discretionary class (s 238)
           b. Is the interest asserted a protected interest? (s 241(2))
    2) Sources of reasonable expectations (closely / widely held corp?)
           a. Personal/family – trust & confidence / Nature of corporation / Past practice/statements /
              Promises / Commercial practice / Ability to utilize steps to protect oneself
    3) Sources of unfairness
           a. No one group has claim to exclusive consideration (reasonable to expect consideration of interests, but
              not protection. Not every reasonable expectation not met is entitled to OR)
           b. Duty to treat those affected in a fair manner = part of duty to act in best interests of corporation
    4) BJR
           a. Applies only where directors actually exercised their business judgement - decisions made honestly,
              prudently, in good faith and on reasonable grounds (UPM Kymmene, Ford v OMERS)
           b. Reasonable expectation that directors will err
           c. How much consideration of interests is required? Will depend on amount of deference due to BJR
    5) Remedies
           a. Remedy should be tied to reasonable expectations / protected rights (Naneff, Ford v OMERS)
           b. Look at the nature of the remedy sought: SHs claiming for past oppression when they were not a SH
              entitled to OR for corp remedy but not for personal

       Equitable remedy; Court has broad power to give remedies that they see fit (discretionary power)
       There is no requirement for leave
       Protects personal interests (as opposed to corporate); Remedies can be derivative or personal
       All about relationships & reasonable expectations against unfair/oppressive actions
       No court supervision of application EXCEPT supervision of discontinuance of the action (242(2))
       Court can order remedy EVEN if actions of directors are within their legal powers
             o Way of preventing abuse of director’s broad powers
NOTE: If acting consistently with fiduciary duty, it may still give rise to an oppression remedy
NOTE: If acting consistently with the duty of care, cannot give rise to an oppression remedy

     Only remedy available to minority SH whose interests were being unfairly prejudiced was to wind up (drastic)
     So 1948 UK Statute: Oppression Remedy
          o Remedies actions not serious enough to justify winding up business
          o Remedies both unfair and oppressive acts
          o Expands interests protected beyond just SHs – now includes creditors, directors, officers…

1. Need to be a complainant: Section 238, 241(1)
       Defines complainant:
            o (a) registered OR beneficial security holder of corp or affiliates;
            o (b) current OR former director or officer of corp or affiliates;
            o (c) the Director; or
            o (d) any other person the court thinks is proper
                    “proper person” test in First Ed Place – may constrain creditors who can apply to special circs
66                                                                                               Corporations I: Davis (2011)

Section 241: Oppression Remedy for Unfair Treatment
        s. 241(1): complainant applies to court (“complainant” defined in s. 238)
        s. 241(2): court must be satisfied that any act or omission/business or affairs/powers of the directors of the
         corporation, the corporation, or any of its affiliates have been carried on in a way that is oppressive or unfairly
         prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer
              o Court may make any order to rectify the matters complained of
        s. 241(3): court may make any order it sees fit - non-exhaustive list of remedies

        Court can dismiss claim if the substance of the complaint is not about an interest protected in the provision
        Courts have been treating s. 241(2) as limiting the right to receive an oppression remedy

        OR is not a substitute for WD claims (Clitheroe) unless
             o pattern of oppressive conduct (Naneff, West Edson);
             o reasonable expectation (e.g. that corp not re-organizes so as not to pay you after filing stmt of claim)
                 (Downtown Eatery, West Edson); or
             o claim is actually in dealings as SH (West Edson)
        must have a protected interested at time of act complained of (First Edmonton)
             o but if reas expectations / promise to induce you to become a SH, court will not let technical fact that at
                 the time this was going on, you weren’t yet a SH stand in the way of OR (West & Edson Packaging)

Clitheroe v. Hydro One (2002 OCA): OR ≠ Substitute for Wrongful Dismissal
        - C was a director of Ontario Hydro, worked there for 6 years then it was divided into 5 companies
        - After employment K signed, ON gov’t passed new legislation requiring Board to negotiate new Ks with
             officers with express purpose of reducing remuneration & benefits received
        - C was fired by the corporation, but didn’t believe it was for a valid reason (wrongful dismissal)
        - Did C qualify as a complainant to initiate an OR claim?
        - She was a classified complainant (director) but was bringing her claim as an EE (not enumerated)
        - Can get a remedy through another avenue (Employment Standards Act)
        - Wrongful dismissal is generally not appropriate for an OR
        - OR only available for wrongful dismissal if there is a pattern of oppressive conduct in wrongful dismissal
             cases (ex. Naneff)

Downtown Eatery v. Ontario (2001 ONCA): OR if Reorganize Corp to Escape Involuntary Creditor (EE Creditor)
        - EE was dismissed, brought a wrongful dismissal action
        - Corporation was reorganized 2x before judgment and company ceased to exist by the time EE entitled to
          collect wrongful dismissal award
        - Corporation argued restructuring was for a business purpose, not to avoid payment
        - Was the conduct of the corporate directors oppressive or unfairly prejudicial?
        - Yes, reorganization was oppressive to the EE in his capacity as a potential creditor bcos it took place after
          the stmt of claim for WD was filed. (OR for actions that occurred before creditor actually owed $)
Corporations I: Davis (2011)                                                                                                67

         -    It is contrary to reasonable expectations that a corporation would reorganize itself to prevent you from
              recovering judgment damages
                    o Conduct does not need to be undertaken with an intention to harming one’s interests, but if that is
                       the result.
Dist fr First Edmonton: Liability arose prior to reorganization so reorganization unfairly prej’d his interests as a creditor

West v. Edson Packaging (1993 ONTC): EE Frame Interest as SH: OR Granted
        - EEs were persuaded to buy shares on the understanding that the corporation would repurchase those
           shares when they left, pursuant to a SH agreement that was to be created
        - SH agreement never materialized, EEs were fired and company refused to buy back the shares
        - EEs suing under OR
        - Was the conduct of the corporation oppressive?
        - Yes, course of conduct complained of was pattern of oppressive conduct, they were induced into
           purchasing shares based on a promised SH agreement that was never created
        - Reasonable expectation that the SH agreement would materialize and shares would be re-purchased
        - EEs were dealing in the capacity of a SH, not EEs, so included in enumerated class in s. 238

Naneff v. Con-Crete Holdings (1995 ONCA): WD claim under OR okay if part of pattern of oppressive conduct
        - Son was given ½ of CS of the corporation (but father retained all voting control until his demise)
        - Son wasn’t behaving as father wanted, so father and brother removed him as an officer and excluded him
            from participating in mgmt. and cut off his income from the business
        - At trial, Ct found family’s conduct oppressive and ordered the fam business be sold publicly to both sons or
            whichever one wanted to buy it
        - Can he bring a claim as an employee for WD under the OR?
        - Yes
        - While OR can normally not be substitute for WD claim, exception for people complaining about termination
            of employment as director/officer that is part of a pattern of oppressive conduct.

        Creditors to be protected under OR
             o must attempt to protect selves in credit arrangement (BCE);
             o must establish there was a breach of reasonable expectations and
             o contemporaneity of having a protected interest and the act complained of (First Edmonton Place)
        On the other hand, courts have granted creditor’s standing (under s 238 discretionary class) where:
             o Unforeseeable actions render creditor’s remedies worthless (Piller)
             o Creditor status involuntarily (Piller)
             o Legitimate interest in how corporation is governed (analogous to minority SH)
                      Peoples: corporate financial distress  creditor can protect interests from unfairly prejudicial
                         conduct by mgmt.
68                                                                                            Corporations I: Davis (2011)

First Ed Place v. 315888 Alberta (1988 ABQB): OR ok for Creditors but Must Try to Protect Interests First
         - Lawyers rented building through a corporation, were given 3 months rent as inducement but then never
             signed the lease
         - Lessor brought a derivative action and OR claim
         - Is the lessor (as a creditor) a complainant for an OR?
         - Creditor could not have had an expectation that the $ would be kept in the corp; could distribute to SH
         - Creditor should have protected himself by asking for security
         - Landlord wasn’t actually a creditor @ the time of the act complained of, so no OR available
         - Creditors’ interest can be protected under the OR but they must attempt to protect themselves in their
             credit arrangement and must establish there was a breach of their reasonable expectations
         - In order to classify as “a proper person” (s. 238(d)):
                 o (1) did the act or conduct of the directors/mgmt. constitute using the corporation as a vehicle for
                     committing a fraud upon the applicant?
                          Factors: nature of corporation, nature of relationship, corporate practice
                 o (2) act or conduct of the directors/mgmt. constituted a breach of the underlying expectation of the
                     applicant arising from the circumstances in which the applicant’s relationship with the corp arose

BCE Inc v. 1976 Debenture Holders (2008 SCC): Standing of Bond Holders?
        - What are the reasonable expectations of bond holders?
                o SCC: similar to creditors, could have protected themselves in the bond agreement
                o No reasonable expectation that corp will uphold the investment grade of their bonds forever

Piller v. Cobb (2003 ONCA): Cred Can be Proper Person if Unfairly Disregarded
          - Piller bought machine but never delivered, got judgment on creditor remedy
          - Corp had retained earnings prior to machinery purchase  then dividends declared & mgmt. paid bonus
          - Emptied cash out of corporation by the time P was entitled to collect
          - P given standing for OR claim because although dividends and bonuses were legit exercises of corp power, it
             was oppressive conduct (prej to ints of jdgmt creditor) that the creditor couldn’t protect themself from

What Constitutes Oppression/Unfair Prejudice or Disregard (last line s 241(2))
        OR has a remedial fxn, it extends protection beyond legal rights to complainant’s reasonable expectations…
            o It is a remedy in equity – depends on the circumstances of the case (BCE)
        While FD requires bad faith / motivation, OR is about the effects of the decision
        Remedy only protects your interests if it would be inequitable to let the directors disregard them
            o Cannot forget the inherent risks that people have undertaken when investing in a corporation
            o Nature of investment in public company = company is always for sale

2 step process to determine whether to grant OR (reject strict reading of s. 241): (BCE, 2008 SCC)
(1) Look for evidence of reasonable expectations (BCE) --- for small corps, look to personal relationships (Imax)
      Sources of Expectations (protection goes beyond legal rights to reasonable expectations):
        - Relationship between individuals involved in the company
        - Legal structure and duties of a corporation’s officers/directors: FD, DOC
        - Conduct must affect interests of the person as a member of a protected group
Corporations I: Davis (2011)                                                                                          69

        -   Promises – implicit / explicit
               o Public statements (OMERS v Ford)
       - Articles!
       - Nature of corp
       - Past practices / Commercial practice
       - Utilization of available steps to protect oneself
      Are the activities of the corporation being carried out in a way that fairly deals with the protected interests of
      Recognition that some interests conflict with others BUT all must be treated fairly
(2) Oppression or unfairness in breach of expectations? (BCE)
      NOTE: Not every reasonable expectation that is not met = oppression or unfair prejudice** (BCE)
            Reasonable to expect consideration of your interests but not the protection of your interests
            The manner in which your reasonable expectation is not met has to be unfair/unjust
      BJR: If decision made reasonably and informed, BJR applies to avoid OR claim (Keeprite)
            Good process yields more deference (less scrutiny of fairness of transaction) but court will still consider
               substance of the decision: nature of act & method in which carried out (Keeprite)
            Hallmarks of good decision making process include: (Keeprite)
                  - No conflicts of interest
                  - Relevant information was considered
                  - There is evidence of deliberation
                - Decision made honestly, prudently, in good faith and on reasonable grounds (UPM Kymmene)
     - Oppressive = conduct that is burdensome, harsh and wrongful or lacks probity and fair dealing resulting in
         prejudice to some portion of its members (Scottish Coop)
               o no bad faith requirement: Downtown Eatery & Keeprite
                o In public cos, look for diligence failure, conflict of interest, failure to consider interests
     - Unfairly prejudicial/disregard = damage or injury to rights or interests in a manner that is not fair and
               o No requirement for intent or malice: Downtown Eatery & Keeprite
               o Focus on the impact/effect of the conduct
               o Protects underlying expectations in your relationship with the company
               o 241(2) unfairly prejudicial to or unfairly disregards the interests protected by OR. Keeprite
               o FD breach can give rise to OR claim where difference in impact to diff groups. (Scottish Coop)

             Small/Family Held Corporation                                  Large/Widely Held Corporation
   - Founded on personal relationships that form              -   New purchaser expects minority SH are not
      part of the compact of SH (Imax)                            oppressed
   - Understanding @ time corp formed (Imax)                  -   Manager’s duties to the corp
   - Court protects reas expectations based on                     - FD
      trust & confidence because leads to                          - DOC/due diligence  BJR only applic where evid
      incomplete contracts (Prof Crete, Imax)                          business judgment was exercised (UPM, Ford)
   - Invest in co’s success – RE of partic in future          -   Public statements = promises
      (Naneff, Imax)                                               o BCE: said would keep bond standing
   - Evidence to lead: tell story, why circs/what was              o Ford: said would be arms-length contract
      said between parties results in reasonable              -   Evidence: Existence of reasonable expectation is a q
      expectation to be treated in a particular way,              of fact so can be proved by direct evidence (ie public
      why they weren’t treated in that way (tied to               stmts, prospectus) or inferences from circumstantial
      business reasons? Naneff).                                  evid (ie SH testimony, conduct btw parties) (Ford)
70                                                                                          Corporations I: Davis (2011)

Section 241(3): Wide Ranging Remedy
        Tie to effect on protected interests – because OR is a remedy in equity and designed remedy reasonable
         expectations, not to go beyond that and punish (Naneff)
        Depends on nature of remedy sought: personal or derivative (Naneff, Ford v OMERS)

Scottish Co-Op v. Meyer (1959 HL): Breach of FD Can = OR if SH Suffer Individually
        - Subsidiary company set up to make rayon; parent company has significant Board representation
        - Parent ended up wanting to buy the subsidiary out, minority Board members wanted a higher price
        - Parent forms their own rayon division and drives subsidiary out of business and worthless
        - Can a breach of FD be the foundation of an oppression claim?
        - Yes, the breach impacted the minority SH of the subsidiary individually from the other SH
        - Appropriate for OR because of the difference in impact between minority and majority SH (majority SH were
            profiting through the parent company; minority SH were losing their entire investment in the subsid)
        - Breach of FD can give rise to an OR claim where difference in impact among different groups.
NOTE: Minority SH could have undertaken a derivative action if they were able to get leave, BUT the damages would
have gone to the corporation (which was controlled by the parent…)

Ferguson v. Imax (1983 ONCA): Wife @ Corp from Beginning has Reasonable Expectation to Stay
        - Several couples set up Imax corporation, men as Common SH and wives as Pref SH; Mr. & Mrs. F split
        - Mr. F used dominant position in corp to suspend dividend payments to Pref SH, and put further res to SH
            which had the effect of diluting ex-wife’s holding by changing the class to redeemable and forcing a buyback
        - Was Mr. F’s conduct oppressive?
        - Yes! Shares structured in the beginning such that spousal unit would control shares, no other group was
            effected by the changes because as an economic unit, their holdings would not change
        - Mrs. F had a reasonable expectation from the outset that she would participate in the growth of the corp.
        - Decision to change the share classes was motivated by an improper purpose and desire to squeeze Mrs. F
            out of the corporation
        - This was oppressive… therefore injunction from implementing resolution
        - To benefit from the OR you must have a reasonable expectation  this expectation can flow from the
            understanding amongst the founders at the time the shares were created
                o If someone purchased these class B shares recently there would be no reasonable expectation that
                    they could never be redeemed… this was a unique expectation to the formation of the company

Naneff v. Con-Crete Holdings (1995 ONCA): Prior Relationship of Parties Can Give Expectations; Need to tie reasonable
expectations to the REMEDY
       - Son was given ½ of CS of the corporation (but father retained all voting control until his demise)
       - Son wasn’t behaving as father wanted, so father and brother removed him as an officer and excluded him
            from participating in mgmt. and cut off his income from the business
Corporations I: Davis (2011)                                                                                             71

         -   At trial, Ct found family’s conduct oppressive and ordered the fam business be sold publicly to both sons or
             whichever one wanted to buy it
        -    What was the reasonable expectation of the SH?
        -    Son had invested in the company’s success, had a reasonable expectation that he would participate in the
             future of the company
         -   Cannot deny him future participation for reasons unrelated to the company after he contributed so much
         -   However, receiving control of the company now was not in his reasonable expectations
                 o Proper remedy is not for the son to gain control of the corp, but for the corp to buy the son out
         -   Allowing the son to purchase the company away from the father is a punishment, not a remedy
                 o OR only meant to restore the position that the person would have been in given their reasonable
         -   OR can be granted even though the director’s acts are within their legal powers

Public Companies & BJR in Oppression
Brant Investments v. KeepRite (1991 ONCA) p. 891: No Bad Faith Requirement for OR Claim / BJR Can Avoid Claim
         - Widely-held A/C corporation, wanted to buy heating business from another company which required shares
              to be authorized to finance the purchase
         - Resolution was passed by SH BUT minority dissented (did not want shares diluted) & began OR
         - Claimed that mgmt. had failed to consider other claims that wouldn’t have diluted their holdings
         - Board set up an independent committee. The decision-making process a board follows is extremely
              important in ensuring that a decision withstands judicial scrutiny. (See hallmarks of good process below.)
         - They made a reasonable business decision that should be subject to BJR
         - No FD to minority SHs. OR used to address dispute between majority SH and group of minority SHs. Using
              BJR, no oppression or unfairness found in transaction.
         - BJR applies to the OR
         - OR still available where directors acting in good faith in best interests of corp / not nec to show bad faith
         If decision was made reasonably and informed, BJR applies…
         hallmarks of good decision making process include:
          No conflicts of interest
          Relevant information was considered
          There is evidence of deliberation
          Decision made honestly, prudently, in good faith and on reasonable grounds (UPM Kymmene)
If these factors are present, can avoid OR via BJR, but court will look into substance of the inquiry

Where not shielded by BJR, decision made on whether system/decision oppressv to grp w/ reas expect’n (Ford v OMERS)

POLICY: Challenge of harmonizing the OR with FD… may be that the OR can be viewed as adding a requirement that
directors consider the impact of actions that are in the best interests of the corporation on the protected interests, and
if that impact is oppressive or unfair, the directors must take steps to avoid or ameliorate that unfair impact

REMEMBER: There is no bad faith requirement for the OR
72                                                                                              Corporations I: Davis (2011)

Ford v. OMERS (2006 ONCA) p.906: Public Statements of Company Give Rise to Expectations
        - Transfer-pricing agreement between Ford CAN and Ford US; Ford US held 90%+ of Ford CAN shares
        - Ford CAN consistently lost $
        - Minority SH (OMERS) brought OR claim against Ford CAN because share valuation was bad; notes to
            financial statements said transfer prices were set at arms-length
        - Ford had in prospectus that pricing was based on arm’s-length transactions.
        - Was the transfer-pricing scheme oppressive to OMERS?
        - OR granted because Ford CAN made public statements / said in prospectus that they were negotiating at
            arm’s length when they weren’t  public statements can give rise to reasonable expectations
        - BJR doesn’t apply because there was never an attempt to renegotiate the prices
        - Since not shielded by BJR, decision made on whether system/decision oppressive to group w reas expctn
        - Public statements of a corporation can give rise to reasonable expectations
                o Directors can only rely on BJR in the OR if there is evidence that they actually exercised their
                    business judgment (UPM Kymmene). BJR only shields from court intervention where business
                    decisions made honestly, prudently, in good faith and on reasonable grounds.
NOTE: In a public company, when looking for oppression, look for: diligence failure, conflicts of interest, failure to
consider interests

BCE Inc v. 1976 Debenture Holders (2008 SCC): 2 Step Test: Must Take Interest in Account, but Not Protect
        - SH were getting a premium for shares, bondholders not happy because the purchase of shares being funded
            by large debt and their bonds were no longer investment grade
        - Not reasonable to expect directors would protect investment-grade of bonds forever  could have
            protected their own interests when the bonds were issued (have change of control clauses)
        - Directors considered their interests and told them they would uphold their legal rights  this was enough
        - 2 step process to determine whether to grant oppression remedy (reject strict reading of s. 241):
                o (1) Look for evidence of reasonable expectations
                         Are the activities of the corporation being carried out in a way that fairly deals with the
                            protected interests of “complainants”?
                         Recognition that some interests conflict with others BUT all must be treated fairly
                o (2) Oppression or unfairness in breach of expectations?
                         The manner in which your reasonable expectation is not met has to be unfair/unjust
                         Reasonable to expect consideration of your interests but not the protection of your
                         BJR will apply to directors’ consideration of interests protected by OR
                         Nature of investment in public company = company is always for sale
NOTE: Not every reasonable expectation that is not met = oppression or unfair prejudice** (OR is remedy in equity –
depends on facts of the case)

Difference between Derivative Action & Oppression Remedy
        DA: in name of corporation; requires leave of court, IF settlement = must give notice to 3rd parties that it affects
         AND courts must approve the settlement, IF NO settlement but successful DA = damages go to the corporation
        OR: personal action, no leave requirement, court only has to approve settlements, damages can flow personally
Corporations I: Davis (2011)                                                                                            73

Pasnak v. Chura (2003 BCSC): OR = Personal Harm of P
        - 2 friends in a business relationship running 4 corporations
        - C mismanages and 1/4 fails
        - P wants to buy C out, but at a discount due to C’s mismanagement and breaches of FD & DOC
        - P brings an OR claim (under BC Company Act) saying the mismanagement was oppressive
        - No standing for OR action. OR is designed to provide relief to members who do not have control over the
           company and who are being oppressed or being treated prejudicially by the operation of the company 
           relief where applicant cannot bring about change internally
        - OR can only be brought if the P has suffered some personal harm  cannot be brought if SH suffers equally
           with all others; loss must be independent of the loss of all share value
                o Must have personal loss different than the company’s: IF not, derivative action = more appropriate
                        [This is going too far. But there must be a different impact to diff groups, Scottish Coop]
                o Loss doesn’t have to be unique, can involve all members of a class

POLICY: When there is a reasonable case that it was an exercise of BJR and not trying to profit from their position (unfair
or prejudicial to a certain group), then you should make people go through the leave application (DA)
    1) Avoid giving SH control over the corporate decision making process
    2) Derivatives at least require leave
    3) Court should prevent unfairness, not take over mgmt.

Looking at Past Cases:
Ford v. Omers: Does this pass the Pasnak test?
         Yes, because detriment suffered by minority SH of Ford (8% loss) corresponding to benefit enjoyed by
            majority SH (Ford US 90%+) for value increase in the US
UPM Kymmene: Does this pass the Pasnak test?
         Is some part of SH receiving loss? Technically Berg is a SH, so all other SH losing  debatable argument

Ford v. OMERS (2006 ONCA): Entitlement to Remedy for Past Oppression
        - Minority SH brought OR claim against Ford CAN because transfer-pricing agreement between Ford CAN and
           Ford US; Ford US held 90%+ of Ford CAN shares
        - Were SHs who acquired shares after time of oppression entitled to remedy?
        - To award a SH for past oppression would not be compensation but windfall. Only SHs at time of oppression
           entitled to remedy.
        - SHs sought personal remedy of compensation rather than to enforce rights for the corporation.
        - Entitlement to OR remedy depends on whether remedy sought is personal or derivative in nature.
        - Where the remedy sought is personal compensation, entitled individual must have been oppressed. (Need
           to tie reasonable expectations to the remedy, Naneff)
        - But SHs can seek remedy for past wrongs where remedy sought will benefit corporation as a whole.
74                                                                                                Corporations I: Davis (2011)


Functions of director personal liability:
        Incentive to ensure socially desirable level of care  personal liability
        Remove incentives to breach FD
                o Must account for profits
                o Liability for damages (equity)
        Incentives to prevent actions that undermine corporate existence  personal liability
                o Shares exchanged for overvalued property
                o Transfer of corporate assets that make corporation insolvent
                o Exercise of corporate power in unfairly prejudicial ways (oppression)

Problems with director personal liability:
    Risk averse directors may lead to less than socially optimal level of risk taking
          o Failure to take profitable risks
          o Benefit from risk goes to the corp – if no benefit to directors, why take the risk?
        Nexus of Ks: let the contracting parties take care of liability and potential for risk aversion in their Ks
               o In US, can K out of liability (Van Gorkum) – not available in Canada
        Social enterprise: the costs resulting from no liability at all vs. the benefits of some sort of liability for the
          total of society

Section 124: Scope of Indemnity
         Broad indemnity that shifts the obligation to pay to the corporation
         Civil, criminal, administrative, investigative, or other proceedings which an individual is involved in by way of
          their association with the corporation
        s. 124(3): requirements for indemnity:
               o (a) MUST comply with FD (cannot receive indemnity if breach FD)
               o (b) IF criminal/admin or enforced by monetary penalty  need reasonable grounds to have believed
                    that your actions were lawful (but can be mistaken)
NOTE: Breach of DOC is clearly indemnifiable (as long as you acted in good faith)

     1) Permissive: s. 124(1)
     2) Action by or on behalf of corp: s. 124(4) (with court’s approval)
     3) Mandatory: s. 124(5)
All 3 types require compliance with conditions in s. 124(3)

Section 124(1): Permissive Indemnity (“MAY”)
           Totally dependent on good will of directors – no obligation to pay interim legal costs in legislation, merely
            permission to pay (124(1)) subject to 124(3)
           Can K with corporation in employment K to turn “may” into “shall”  put it in the articles or in your
            employment K
           EXCEPTION: 124(4)

        Section 124(2): Advance Funds – Undertake to Repay
           You can get funds advanced to you to cover your legal costs as soon as the action, investigating, proceeding
            begins and you ask for indemnity
           Director has to pay back any advanced funds IF they don’t meet the requirements of s. 124(3): FD &
            reasonable belief actions were lawful
Corporations I: Davis (2011)                                                                                             75

Section 124(3): Corp MAY NOT Indemnify unless:
           (a) Fulfilled FD; and
           (b) Reasonably believed conduct was lawful

        Section 118(2)(d): Directors that Vote to Indemnify if No Meet s. 124(3) = Personally Liability
        To avoid this risk when giving permissive indemnity, corp can:
           Get legal opinion that there appears to be no breach of FD
           Go to court under 124(4) and get an order approving the indemnity
        Indemnity payment subject to solvency test (??)

Section 124(4): If Action by or on behalf of corp:
           MUST go to court and get APPROVAL before they can indemnify the individual
              o Reason: Corp prima facie alleging breach of FD or actions not in BIOC
              o Qualification for indemnification is that there is no breach of FD (s. 124(3))

Section 124(5): Mandatory Indemnity if No Fault
           Entitled to indemnity from corporation IF:
                o 1. Not found by court to have committed any fault or negligence (settled w/o admitting
                    wrongdoing; or judged by court to not have been at fault or negligent); and
                o 2. Fulfilled conditions of s. 124(3))
           Timing: You have to wait until the end of proceedings to get indemnity (wait to determine fault)

Section 124(7): Corp or Person Can Apply to Court to Order Indemnification
           If court orders indemnity under this section, then directors are not personally liable under s. 118(2)(d) if the
            director is subsequently found to have breached the conditions of s. 124(3) and not able to repay
            obligations under s. 124(2)
Blair: Presumption that director acted in good faith. Must displace this to deny indemnification
Manitoba v Crocus: Need evidence to displace the presumption of good faith.

NOTE: Courts will not defer to BJR of directors when deciding whether to indemnify under s. 124(1) because there is no
business issue

Section 124(6): Corporation May Buy Director/Officer Insurance
           Corporation can purchase insurance for directors and officers
           No statutory conditions  left to insurer
           Realization that indemnification is of no use if the company is insolvent
           Insurance is not unlimited (deductible) and has frequent renewal periods
           WILL insure negligent acts (unlike lack of indemnification in s. 124(5))

Blair v. Consolidated Enfield (1995 SCC): Presumption = Director Acted in Good Faith
         - B was a director, chair of meeting in which he was on the slate to be re-elected
         - Coalition tried to replace him with proxies, but were last minute
         - Got advice from 6 lawyers and announced that proxies were illegal; SH suing
         - Corporate by-laws made permissive indemnity mandatory, but Board refused
         - B applied for court ordered indemnity
76                                                                                             Corporations I: Davis (2011)

        -    Does B get indemnification?
        -    Chair had conflict of interest, BUT so does every chair in election for Board  wasn’t his choice
        -    B’s conduct shows good faith: relied on advice from lawyer, consulted before ruling
        -    Fulfilling obligation to act in good faith  court ordered indemnity
        -    There is a rebuttable presumption that directors have acted in good faith with a view to the best interests
             of the corporation AND had reasonable grounds to think they were acting lawfully (if a Board refuses to
             indemnify, must displace this presumption)
                 o IF Board wants to deny indemnification, must prove bad faith, dishonesty, not in the best interest of
                     the corporation OR that the director didn’t have reasonable grounds to think he was acting lawfully
         -   The court will only deny application for indemnity in cases of bad faith because:
                 o 1) Want to attract qualified people to serve on boards
                 o 2) Allow reasonable reimbursement for good faith behaviour (should be supported)
                 o 3) Indemnity against exercise of business judgment – reasonable risk taking (not corp self-dealing)

Manitoba v. Crocus Investment (2007 ManCA): Need Evidence to Rebut Presumption of Good Faith
        - Reports by security commission and AG that directors acted in bad faith
        - Directors asking for pre-judgment indemnification (s. 124(1)) – permissive indemnification was made
          mandatory by the by-laws BUT Board refusing to indemnify due to allegations of bad faith
        - Directors applying to court for order of indemnification
        - Who decides whether the good faith condition has been met?
        - Since by-laws make pre-judgment indemnification mandatory, granted to director with undertaking to repay
          depending on judgment.
        - Reports of the securities commission & AG are not evidence of bad faith: only allegations
        - Court says there’s a presumption of good faith and only proof can displace that… allegations ≠ proof
        - Presumption of good faith can only be rebutted with evidence not allegations

Bennett v. Bennett Environmental (2009 ONCA): If You Believe Action = Legal – Get Indem Even if Plead Guilty
        - B got K from army to remove soil but was eventually cancelled
        - B didn’t disclose this to the public, when it became public knowledge the share price dropped
        - Not reporting was a violation of law; B pled guilty to not reporting
        - By-laws had made permissive indemnification mandatory
        - Can be indemnified: The wrongdoing on B’s part was a mistake, not a conscious unlawful act (despite
            pleading guilty later) so not blocked by s. 124(3)
        - Just because a person pleads guilty in court does not mean that when they did it at the time they didn’t
            think they were acting lawfully
                o If you have convincing evidence that your actions weren’t a conscious or reckless decision to
                    violate the law, you will have a right to indemnification if the by-laws have made indemnification
                    a requirement
Corporations I: Davis (2011)                                                                                                77


Strategies: Asset Sale, Amalgamation, Share Purchase
             Selling all or substantially all of the business assets other than in the ordinary course of business (s 189(3))
              Cogeco tests not very clear or helpful, so argue on the facts loosely based on Cogeco.
                    1. Other than in the ordinary course of business? (s 189(3))
                    2. All or substantially all? Quantitative test ~ 75% value of assets (Cogeco)
                            o Valuation Issues
                                    Book value / market value / net asset value / investment value / gross revenue /
                                        impact on net income / value as going-concern?
                                    Value of corp as a going concern can be subject of dispute and controversy
                                              How to value totality of business / all assets working together - whole is
                                                  greater than sum of the parts
                                              How to value goodwill – human effort, skill, knowledge applied to business
                                                  that increases value as going-concern
                                    Some assets are hard to value: license, patents, long-term ks – need to estimate
                                        future events
                    3. Qualitative test – fundamental change striking @ heart of the biz? (ARGUE HOW/NOT - facts)
                            o Must take qualitative criteria into account. More assets sold, more likely striking @ heart
                            o Issues
                                    Not a clear test – argue on the facts
                                    Different tests available at p 971
             Transferring employment Ks, mgmt. structures, sales forces, goodwill, expertise, knowledge, etc…

Section 189: Selling Business Assets (2/3 SH Approval Req’d)
             Requires a K, from 1 party to sell the assets to another
             (1) Both companies require a directors resolution to enter into the K of sale (SH cannot initiate)
             (2) Vendor corporation 2/3 total SH vote (3, 6, 8) (unless articles require more: Cogeco)
             (3) Vendor corp 2/3 class vote (incl non voting) if sale affects classes differently (7)
             s 190 Dissent & appraisal rights

             Directors don’t want to require a SH vote because:
                  o 1. There will be dissenting SH and the requirement for appraisal & purchase of shares  this takes
                       money away from the deal and to the dissenting SH
                  o 2. Directors believe the transaction is in the best interests of the corporation
             2 tests from Cogeco re: how to determine whether it’s all or substantially all of the assets

Cogeco Cable v. CFCF Inc (1996 QBCA) p. 956: Quantitative/Qualitative Test for Substantially All Assets
        - Company wanted to sell cable division (historically the business of the company AND most valuable) and
          expand to TV division. Directors don’t want to hold SH vote…
        - Was this selling substantially all of Cogeco’s assets?
        - Look at the qualitative & quantitative test to determine…
        - Quantitative: cable was 61% of assets and contributed 75% of profits
78                                                                                               Corporations I: Davis (2011)

         -   Qualitative: cable division was keeping them afloat  proposed transaction was a fundamental change that
             struck at the heart of the company: SH vote & dissent rights
         -   1. Quantitative analysis (how much does the sale represent of the business or assets ~ 75% threshold)
         -   2. If necessary, Qualitative analysis: Does the sale “strike at the very heart of the company and… would
             substantially affect the corporate existence and purpose”?

After Assets are Sold:
         S 102 - Directors have discretion regarding what to do with the money (subject to FD & DOC)
                o might issue dividends; might dissolve corp
         SH can apply to have the corporation wound-up
         Directors might need to disclose their plans in the proxy circular in cases of publicly-held corporations
         (SHs may want assurances from directors On what they plan to do before voting for the asset sale)

            Two companies decide to join up; must create an amalgamation agreement which sets out: terms in which
             they are to form, what the articles of the new corp will be, share structure, exchange for shares from the
             existing corporations to the new
            Valuation issues in amalgamation: If shares in one corp undervalued in relation to shares in another corp,
             SHs in other corp received disproportionate share of amalgamated corp’s assets

Section 181-183: Amalgamation (2/3 Vote Unless Subsidiary Amalg)
            Requires an amalgamation agreement
            (1) Both companies pass directors’ resolution to propose merger
            (2) Agreement must contain new articles of amalgamated corporation (s 182)
            (3) Agreement accepted through directors’ resolution from each corporation (SH can’t initiate)
            (4) Both companies require a SH vote
                  o 2/3 including non-voting (s 183(3,5)) UNLESS it involves a wholly-owned subsidiary (s. 184)
                  o Class votes if class/series affected differently (s. 176; s 183(4))
                  o Dissent rights (s 183(2)(b); 190(1)(c))
            (5) Director issues a certificate of amalgamation (new company formed as of that date) (ss 179, 180)

            2 corporations merged into 1
            SHs of each corp trade in their shares for shares of the amalgamated corp
            Both corporations’ obligations and liabilities continue: R. v. Black & Decker [1975 SCC] p 972

            Offer to buy another corporation’s shares; usually accomplished by trying to buy other SHs’ shares
            (1) Requires directors’ resolution on behalf of the bidding corporation
                  o Does not require a directors’ resolution on behalf of the target (SH can choose to accept alone)
            (2) Bidder wants to control enough to be able to elect own Board
            (3) Corporate law protections are minimal in this case: SH can dispose of shares as they wish
                  o Directors can attempt defensive tactics
                  o Could be subject to take-over bid regulation under Securities law. An offer to purchase 20% + of
                     target’s outstanding voting securities is a takeover bid under provincial securities leg – the offeror is
                     required to make same offer to all SHs of class sought, with special duties of disclosure in a takeover
                     bid circular (OSA)
Corporations I: Davis (2011)                                                                                            79

Section 193: Going-private transaction
Subject to applicable provincial securities laws: Multilateral Instrument 61-101
        o (1) disclosure
        o (2) independent valuation,
        o (3) approval by majority of minority - Everyone who is having their securities taken from them (and not
        getting an interest in the new company) must vote… & require a majority of them in order for deal to pass

Section 194: Squeeze-out
Squeeze-out transaction would require amendment to articles and would result in interest of holder of a class
terminated w/o being given equivalent shares in corp. Requires:
     Any approval by SHs required by Act/Articles (to amend articles)
     Ordinary res of SHs of each class affected, both voting and non-voting (affiliates and those with = or superior
       rights than those available to others of the same class do not get to vote)

          Buyout (a type of take-over, CBCA def)                                          Takeover
  - Going private (widely  closely held corp): s. 193        - Public bid: displace current mgmt. – buy control from
       o Must comply with provincial securities law (MI           public SH
       61-101)                                                      o Friendly takeover: get confidential info, better
       o (1) disclosure: circular                                        pricing that potential rivals; supported in
       o (2) independent valuation,                                      mgmt. proxy circular
       o (3) approval by majority of minority - Everyone            o Hostile takeover: no warning to mgmt.: no
       who is having their securities taken from them                    initial negotiation; price based on publicly
       (and not getting an interest in the new company)                  available information and more likely to be
       must vote… & require a majority of them in order                  opposed by mgmt
       for deal to pass                                       - Contrast: can displace current mgmt. by proxy fight
  - Stat compulsory acquisition power: If 90% accept                o Seeking voting support to change mgmt.
    w/in 120 d, offeror can acquire shares of dissenting            o Can be combined with takeover when defensive
    offerees s. 206                                                      measures such as staggered board have made
                                                                         it difficult for proxy fight to succeed
                                                                    o If mgmt. is fighting your public share purchase,
  - Squeeze out (closely held corp  don’t dist to public,               you can start a proxy fight to replace those
    so Sec Law does not apply): s. 194                                   directors
       o Not public, but can still squeeze out another SH     - Stat compulsory acquisition power: If 90% accept
       o Applicable when there is an amendment to the             w/in 120 d, offeror can acquire shares of dissenting
          articles that would terminate an interest for a         offerees s. 206
          class, w/o giving an int of equiv value in issuer  Ont Securities Act: Offer to purchase 20%+ = takeover bid
       o Need vote under Act for amalg/amendment to           o Offer must be made to all Ont SHs of same class
          articles and                                        o Must be open for min. 35 days
       o Ordinary res of each affected class (but no vote     o SH can withdraw their tendered shares w/in first 10 d
          for those privileged by squeeze-out)                    of bid
                                                              o Bid can be conditional on the receipt of a minimum %
                                                                  of shares tendering to it
  - Price/valuation concern for minority appraisal rights   - Requires disclosure when you hit 10% and then every
                                                                2% up to 20%
                                                            - Once 20% target hit, price goes up significantly for each
                                                                add’l share bcos of possible takeover bid
80                                                                                           Corporations I: Davis (2011)

Section 190: Dissent & Appraisal Rights for Merger/Asset Sale
           Can dissent (s. 190(1)) and force the corporation to buy back shares for FMV as of the close of business on
            the day before the resolution was adopted (s. 190(3)) (by that time, market price would have reacted)

Section 190(15): Apply to Court to Set Value of Dissenting Shares
           Valuation can be an issue in these transactions…
                o Market can undervalue shares (Van Gorkum)
                o When managers involved in transaction, want to know their motivations (what info they have)
                o Value of corporation as going-concern must be considered
                o Value of goodwill must be considered in addition to assets (totality of business)
                         Concerns are applicable in all transactions (asset sale, amalgamations, share purchase)

Neonex v. Kulasa (1978 BCSC) p. 984: Dissent & Appraisal Rights for the Minority – VALUATION
        - Jim Pattison owned 46.5% of shares of [Old] Neonex, held meeting to approve amalgamation with another
             company to form [New] Neonex
        - JP voted his shares to approve the deal, 2/3 was achieved; shares would be repurchased from ON holders
             for $3/share
        - Minority SH dissented and dispute the valuation offered to them – book value was $4.10 but only offered $3
        - SH had no choice – sell shares for $3 or dissent and corp valued shares at $3.
        - What is the dissenting SH remedy for being forced out?
        - VALUATION: Difficult to tell whether the value of $3 was adequate or not
        - But amalgamation process was accurately followed, thus the amalgamation was legit; 2/3 approved
        - If SH don’t like the price offered, they are able to apply to the court to have fair value assessed – J
             converts it into an action.
                  o Should have a hearing because nobody has explained why fair value only $3 when book value $4.10.
                      The market value, net asset value and investment value, or any combination thereof were not
                      discussed in the amalgamation information circular.
        - If a SH dissents, they have the ability to have their shares repurchased by the corporation at fair value
NOTE: Cannot wind-up or prevent amalgamation if majority of SH have approved it  can only get FV for shares
Since this decision, securities law has intervened to allow minority SHs to veto a going-private transaction: for SH that
want to stay involved in the business after the amalgamation, not just be bought out

2 extreme views on valuation:
     1. Court concerned about valuation disadvantaging minority SHs. There should be a premium for forcible taking
        without a discount for them being minority shares because of the nature of the transaction, (Domglas p 984)
     2. Court worried about people trying to get bonus over market price, so just give market price. (Shell)
-This prob is partially addressed by s. 94 requiring maj of min vote to accept the deal on the grounds in squeeze-outs.

MI 61-101: Public Corps Need Valuation Prior to Squeeze/Majority of Minority Vote (if publicly traded)
           Must prepare formal valuation with sufficient detail for readers to understand underlying reasons etc
           In order to squeeze out minority SH: require majority of minority to approve the transaction
                o Requirement waived if controllers hold 90%+ of shares & min SHs have appraisal rights
Corporations I: Davis (2011)                                                                                              81

           Any affiliates or anyone “getting a better deal” or equal deal to others in their class cannot vote their shares
            as part of the majority of the minority

Section 206: If Get 90%+ of Shares in Takeover – Can Force Buyback
           If you get 90%+ of the outstanding shares, you can squeeze out the rest of the SH at the same price that was
            accepted by the 90% of SH
                 o The minority has the option to accept that price OR demand fair value for their shares (s. 206(9))
                 o Doesn’t require vote of majority of minority  it’s compulsory acquisition (s 206)
           Public bid to SH
           Seek to buy controlling shares from voting SH
           Displace current mgmt. (usually)

Friendly: Negotiate with mgmt., receive confidential information (better pricing information than potential rivals),
supported in mgmt. takeover bid (FD Question – Why giving confidential info?)

Hostile: No warning to mgmt., offer to SH directly, price based on publicly available information, more likely to be
opposed by mgmt.

Regulation: CBCA sucks, mostly governed by securities law: Ontario Securities Act
        Offer to purchase > 20% = takeover bid
                o Offer must be made to all Ont SHs of same class
                o Must be open for min. 35 days
                o SH can withdraw their tendered shares within first 10 days of bid
                o Bid can be conditional on the receipt of a minimum % of shares tendering to it
        Require disclosure of your position when you hit 10% and then every 2%, because potential takeover big
        Once 20% target hit, price goes up significantly for each additional share
        Create an auction otherwise valuable bids will not be made: protects consumers, controls the use of
            defences by mgmt.
                o Note some defensive measures will reduce value by making auction impossible
                o Van Gorkum: At least should have done market test. The things they agreed to shut down auction:
                   not allowing anyone to get confidential info, not soliciting bids, short window before deal done,
                   agreeing would not accept offer unless would be complete w/in 90d of offer (not possible).

FD in M&As: Decision must be made solely in the BIOC - Always a FD Q in a takeover (whether friendly or hostile)
        2 potential conflicts of interest
              o (1) Personal interest
                       retaining employment or position
                       concern about managerial reputation (offering premium implies somebody else can do
                          better job with the assets)
              o (2) conflict between BIOC & desires of SH
                      o Not always highest take-over bid that wins; lower bid can win if you can explain why it’s in
                          the BIOC (SH lose) (Teck v Millar; Time v Paramount)
                              Teck didn’t have the record in developing mines. They gave bid to lower bidder bcos
                                 better value to corp if mines are developing.
                      o SHs want highest price but that is not always in corp’s best interests
82                                                                                           Corporations I: Davis (2011)

                        o Corporate law is more open to defensive tactics, conflicting with securities law auction
                          theory, which says that a takeover bid requires a search for a higher bid and there is really
                          no other option that to try and get an auction started (the heart of securities regulation)
Arguments directors can make for interfering with takeover bids:
       SH not receiving full value – concern about pressure to sell before offer ends, or
              o Despite that it is a difficult Q: What is the real value of the corp? Still, this argument is used.
       Acquirer will diminish the corporation’s value as a going concern (based on bidder's past practices or
          announced policy intentions)

TAKEOVER DEFENCES       (P. 1003-1005; 1030-1033)
    (1) Make target seem attractive to SHs: ex. Dividen payout or share repurchase that eliminates free cash flow;
        appeal to loyalty of existing SHs through propaganda campaigns (not highly effective because of credibility)
    (2) Sell Crown Jewel: Sell most valuable asset to make company less attractive as bidding corp loses control of
        those assets. Or increase debt until the corp has little surplus value left.
    (3) Shark Repellent: Require super majorities for second-step transactions such as freeze-outs & to amend the
        articles: bidder won’t be able to gain control OR do a going-private transaction unless they get 95% of the vote
    (4) Staggered Board: Only a certain number of directors come up for election each year; could take years for bidder
        to gain control (not very effective in CAN because easier to gain control of co and replace board)
    (5) Poison Pill: Acquisition of control in a takeover triggers contractual rights that may decrease firm value -
        Directors can issue shares OR rights to new shares on the occurrence of triggering events (“SH rights plan”)
                       i. Ex. Target co issues new securities that convert into voting shares on change of control
                      ii. Provisions in relational ks such as bank loan agmts that they terminate on change of control
                     iii. Contractual arrangements in which mgmt may treat change of control as constructive dismissal
                          with large monetary compensation payments required
                     iv. Allows purchase of shares at half price BUT not applicable to the bidders’ shares
                      v. SH plan by which SHs receive right to be bought out by corp at substantial premium on
                          occurrence of a stated triggering event (Revlon)
             b. Comes into effect when bidder obtains a certain percentage of shares
             c. Will not come into force for certain permitted bids (extends the 35 day minimum open bid period, gives
                 SH extra time to withdraw their tendered shares)
             d. Bidders will usually pursue a takeover bid conditional on these rights of the director being removed
                 (unattractive to proceed w bid w/o having convinced target co’s directors to do away w rights plan)
                       i. ex. securities comm places cease trade orders on the rights plan after a certain amount of time
    (6) White Knight: Issue shares to a friendly company, someone that mgmt. favours over the other bidder
             a. Deal must be consistent with FD (full value to SHs; corp’s value as going concern)
             b. Teck; Revlon: after hostile bid, mgmt. went and found co they liked better.
    (7) Lock-up Agreement: Agreement to pay White Knight a break fee IF other bid is successful  denies the other
        bidder access to assets that are used to pay the White Knight their break fee
             a. Cts may ask: Is brk fee so high its going to shut whole thing down? Nec in 1st place to start an auction?
    (8) Defensive Share Re-purchases
OVERARCHING Q is whether such interference is ever consistent with the directors’ FD  conflict between securities
law (best price for SH) and corporate law (best interests of corporation)
     White Knight, Lock-up Agmt, and Crown Jewel sale not subject to Sec Law because contractual agmts.

Teck Corp v. Millar (1972 BCSC) p. 1006: Defensive Measures okay if reas grounds to believe takeover not in BIOC
       - Teck wanted to takeover Afton Mines to exploit their mines; couldn’t get Afton to agree to a deal
       - T had never been in mine production (engaged in flipping mines); A preferred to deal with Canex (well
            known for producing mines)
Corporations I: Davis (2011)                                                                                         83

         -   When Teck learned that Afton would rather sell to Canex with a lower offer, they doubled Canex’s offer and
             bought 62.5% of issued shares on the open market. Afton issued shares to Canex  Teck had 45%.
         -   Teck argued breach of FD: abusive use of director power to issue shares to Canex for an improper purpose (T
             offer was higher than P)
        -    Were the directors’ defensive tactics valid?
        -    Yes, the directors have FD to act in the BIOC, not to get the highest price for SH
        -    Primary purpose was best interests of corp by making deal with Canex (who would actually develop the
             mine) rather than Teck; not motivated by desire to retain control of the company
             - Where directors have carried out reasonable enquiries to inform themselves as to where their co’s best
               interests lie and are bona fide of the belief, based on reasonable grounds, that a proposed takeover
               will run contrary to those interests, they are entitled to use their powers to take defensive measures.
                o The primary purpose for defeating takeover bid must be the BIOC
                o Reasonable to consider ability of various bidders to achieve the corp goals (not just highest bid)
                o Directors are not the agents of the SH; not bound to serve SH interests IF not aligned with BIOC
Note: Not consistent with securities law auction theory – that should be up to auction between Teck and Afton.

Unocal Corp v. Mesa (1985 Del) p. 1018: Defend corp if Reas Grounds/Proportionate Response – Poison pills valid
        - T. Boone Pickens would greenmail: buy shares and then sell back to co for more than market price
        - His company, Mesa, makes offer to buy shares of Unocal: a) SH that went along with step 1 would get
           $54/share cash; b) SH that did not get in on “front end” of offer, in step 2 would get junk bonds
        - Unocal directors had meeting w presentation about legal options and inadequacy of Mesa bid; advised
           Board to reject and take defensive measures
        - Defensive measure was that if Mesa gets 64 million shares, buyback proposal of $72/share (more than Mesa
           bid) for back-end SHs, but offer not made to Mesa for its shares. Financed by taking $60m in debt (bad for
           Mesa & other bidders… made company worth less). Mesa would have majority but $3,400 million debt,
           subordinate to back-end SHs senior debt.
        - Mesa trying to stop proposal
        - Unocal argued (1) they were stopping a coercive bid: coercive b/c SHs had to tender right away if wanted
           cash – inadequate two-tiered offer, and (2) threat posed by corp raider w/ reputation as a “greenmailer”
        - Was this defensive tactic valid?
        - Yes, court examines if the Board has the legal power to adopt this kind of defensive measure
           - TEST: Directors can defend against takeover bids IF:
                           o (1) They have reasonable grounds to believe that the offer is not in the best interests of
                               the corporation
                                    BJR is applicable if (a) in good faith perceived threat to corp & (b) acted after
                                        reasonable investigation
                                             (but because of likelihood of conflict of interest, there is enhanced
                                                judicial examination at the threshold… recognition of conflict of
                                                interest of directors)
                           o (2) Their response is proportional to the threat (this part added, not in Teck)
                                    Includes constituencies outside SH interests
                           o Allowed to discriminate between SH (the debt offer was not made to M) b/c Mesa
                               reputation as “greenmailer”. IF it is consistent with your FD  the corporation’s offer
                               was discriminatory BUT necessary
84                                                                                            Corporations I: Davis (2011)

                                       SEC has banned this, also not allowed in Canada  tender offer must be
                                        extended to ALL SH
             Where coercive/unfair (eg inadequate two-tiered offer), cts allow fairly broad discretion to corp to defend.
         -  Directors are entitled to defence takeovers bids as long as they have reasonable grounds to believe the bid
            is not in the best interests of the corporations, and their response is proportional
*Decision of considerable interest as to validity of poison pills in general (but Teck is the BC case)

Revlon v. MacAndrews (1986 Del) p. 1036: If Company Put into Sale Mode: SH Max Price – DIFF TO CAN APPROACH!
        - Pantry Pride plans to takeover Revlon and sell off its assets, so Revlon adopts a poison pill – no purchase
            rights plan entitling SHs to exchange 1 CS for a principal w 12% int  would suck up all $$
                o The no-purchase rights were tradable. When word got around that R might cancel them, ppl making
                     noises about suing directors. Part of last deal w Forstmann was that Forstmann would support face
                     value of note, getting directors out of litigation (personal conflict of interest)
        - R promised an option granted to Forstmann to purchase R assets (lock-up agreement), to deal exclusively
            with F in the event of any takeover (no-shop provision), and would pay a break fee if they didn’t
        - SH are arguing breach of duty of care by effectively ending an active auction for the company
        - Was this a breach of duty of care?
        - Yes; once a corporation is put into sale mode (when directors’ started to elicit other offers) then the duty of
            the directors shifts to obtaining the best price for the SH
        - Lock-up agmt and no-shop provs ended auction = breach of duty to get highest price  no BJR deference
        - There are 2 duties:
                o (1) Corporation is not for sale: Directors can preserve the corporate enterprise (Unocal) 
                     defensive tactics are justified IF
                          (a) Based on reasonable belief that in best interests (burden satisfied by showing good faith
                             and reasonable investigation) &
                          (b) Are proportional
                 o (2) IF corp for sale (Revlon duty): Duty shifts to obtaining the best price for SH (active duty)
                          Revlon duty: Must transform selves from defenders to auctioneers
        - Directors’ duties can change throughout the course of a takeover bid
Note: Would have to be a very very persuasive reason to not sell to the highest bidder.
**Maple Leaf points out that Revlon is not the law in Ontario. (presumably same for BC). Maple instead focuses on the
Directors’ duty to get the best value reasonably available to the SHs in the circs.

Maple Leaf v. Schneider (1998 ONCA) p. 1046: Control Block of SH Can Shape Duty
       - Control block of shares (75%) owned by S family; they had criteria for a sale (included customer interests,
           continuity of corporation)
       - Family criteria for sale included interests of customers & continuity of their name
       - ML offer did not meet their concerns; a special committee was formed to evaluate the potential offer
       - Canvassed the market for an offer that would be acceptable based on the controlling SH’s criteria
       - ML offer was by far the highest (kept raising it); directors ended up entering into a lock-up with a lower bid
           with Smithfield Group
       - Did the directors breach their duty (FD / DOC / OR) by failing to take the highest bid?
       - Does the BJR apply to the committee’s decision?
Corporations I: Davis (2011)                                                                                               85

        -   Does the Revlon duty apply?
            -   BJR applies to committee’s decision IF:
                  o (1) Acted independently & in good faith
                  o (2) Can only agree to transaction that is fair in the sense of being the best value available in the
                      circumstances (there would be no sale if no compliance with family’s criteria)

        -   Courts look for something like the BJR: evidence of independent thinking, did they meet the DoC, and as
            long as there are no serious conflicts, the courts are not going to interfere in business decisions
        -   Revlon duty not law in Ontario
        -   When a company is for sale and there is a control block of shares; their conds will govern whether or not
            there will be a sale  their conditions shape the content of the duty
                o Directors’ decision can contravene the wishes of a majority of SH  if company acts honestly &
                     reasonably = BJR
                o Interests are defined by REs, and REs are defined by wishes of family (control block of shares), so
                     minority shareholders did not have a reasonable expectation of getting highest possible price.
        -   Best if independent committee is set up to avoid conflicts of interest
        -   An auction is not the only way to discover value for the SHs – can also go out and canvass the market (which
            they did)

Paramount v. Time (1989 Del) p. 1064: Corp LT Plans Valid – Defense: Switched Merger so other co’s SHs voted
        - Litigation surrounds injunction trying to restrain Time from acquiring Warner
        - Takeover bid by Paramount trying to buy Time’s shares while Time already in merger agmt w Warner. So
          Time switched and acquired Warner instead of reverse, so that Warner SHs would vote instead of Time SHs
        - Basically, P tries to stop T’s merger, and main claim is that if T-W deal went through, very unlikely T shares
          would trade anywhere close to the price pre-merger
        - Can the Board complete the merger without allowing a SH vote on the P offer, while being consistent with
          their FD?
        - Merger agreement okay.
               o Did not contemplate a control change of T  no Revlon state  no duty to maximize SH value 
                   BUT Board decision was subject to the enhanced Unocal scrutiny of the court
               o Merger was in the LT plan of the corporation, and was consistent with FD
               o Merger begins and ends with directors’ resolution  nothing prevents them from reconsidering the
                   merger except their duty to act in the best interests of the corporation
                         It was within their powers and duties to change the structure of the transaction so that it
                            doesn’t require a SH vote
               o Met Unocal test: (1) Prior policy was imp corp goal; (2) Proportional to threat
        - Directors can use their corp law powers to make a change of a merger so the SHs cannot interfere with
          the merger
        - Merger not seen as change of control (triggering Revlon duty) in this case
        - Because reactive, must pass the Unocal test. Decision to change the merger transaction so that it didn’t
          require SH approval without allowing the SH vote met the Unocal test:
               o (1) Decision that the merger was in the best interests of the corporation was reasonable
               o (2) Changing the nature of the transaction was a proportionate response to the threat posed by P
86                                                                                              Corporations I: Davis (2011)

QVC v Paramount (Del SC) p. 1085: Paramount-Viacom Merger: Change of Control Merger = Revlon Duty
        - Paramount merger agreement with Viacom; P was allowing V to acquire control of its shares
        - QVC decided to try to bid too. P went ahead with letting Viacom acquire control of shares through tender
          offer and second-step merger.
        - P breached FD when rejected offer from QVC
        - Because it was a change of control situation, Revlon duty is applicable to obtain the best value reasonably
          available for SH
          a. Was a change of control situation: Distinguished from Paramount v Time because Viacom was going to
              get a controlling share, and would basically be able to do everything in the corp. Control premium
              should be set by market, not by deal of directors.

           CHANGE OF CONTROL SITUATION  Revlon duty
           REACTION TO A TAKE-OVER BID  Subject to Unocal (Teck + proportionality)
           (not law in Canada but persuasive)

347883 Alberta v. Producers Pipelines (1991 SKCA) p. 1087: Emphasis on Sec Law / SH Rights – cts willing to look to Sec
Law to provided content to FD – Depriving SHs of choice by not putting the poison pill to a vote was coercive, not ok
        - PP wanted to defend against takeover bid by AB
        - AB argued that defensive action (poison pill: could get 10 shares for half price, offer not open to AB) was
           oppressive to the interests of AB who was not only a bidder but also a minority SH of PP
        - Also claimed that directors acted unlawfully:
               o (1) Not getting SH approval for the poison pill (didn’t put to vote in SH mtgs)
               o (2) Amendments that provided directors to approve any bid put to the SH
               o (3) Discriminating against particular SH
               o (4) Not in best interests of the company, as they were just trying to save their position as directors
        - PP argued that AB is purely using the OR as a tactic to takeover PP
        - Was the poison pill oppressive to AB? (OPPRESSION REMEDY case)
        - No, takeover bid by AB ok
        - Unocal test of proportionality is relevant:
               o Principal role of directors is to advise SH, not direct them
               o Defensive tactics should not deny SH ability to make a decision
               o Any defensive tactics should be pre-approved by the SH
        - Conduct by directors points to using the poison pill as a stall tactic to allow directors’ to retain control of the
               o RD: If SH had ratified poison pill – no issue
        - Only acceptable response unless there is some proper purpose is passivity (don’t interfere) & an auction.
        - TEST for interference in a share sale:
               o (1) Solely on interests of corp and no other interest
               o (2) Depriving SHs of choice by extending SRA was coercive
        -   Poison pills are limited by securities law in Canada (National Policy (?) 61-101) that is designed to protect
           SH choice in cases of takeovers
               o Unrestricted auctions produce the most desirable results  max SH value
               o Securities law must have a substantial impact on any review of defensive tactics taken by directors
Corporations I: Davis (2011)                                                                                          87

                            Onus is on directors to prove actions were reasonable and in the best interests  nothing
                             given in this case
                          Any defensive action should be put to SH for prior approval where possible, or otherwise
                             subsequent ratification.
                          Defensive tactics that result in SH being deprived of the ability to respond to a take-over
                             bid or to a competing bid are unacceptable
Note: Securities law policy tended to influence courts decision on whether there was unfair prejudice or unfair

Icahn v. Lions Gate Entertainment (2011 BCCA), Vista: If in Corp’s Best Interests to Defend, Do It. Only RE was FD
        - LG had too much debt, and Icahn was a SH with 20% of voting shares and no background in LG business but
            was initiating a takeover
        - LG carried a number of bonds with conversion options to voting shares but had conditions on them
        - LG changed the conditions to allow immediate conversion
        - Thus, company get rid of debt and increased outstanding shares, thus diluting I’s holding
        - Did the debt to equity conversion that diluted Icahn’s shares before proxy battled = Oppression Remedy?
        - Icahn had no remedy under OR because he was not arguing as an unfairly prejudiced SH, but rather as a
            “bitter bidder” in a takeover attempt
        - He had no reasonable expectation that they would not dilute his shares, because diluting his shares was
            part of getting rid of debt and that was in the BIOC. His only RE was that they act in BIOC.
        - Yes, the directors are required to treat the SHs and Icahn fairly (BCE), but that did not require the board to
            forego the opportunity to reduce the debt for his benefit.
        - It is okay that the directors had as a secondary objective to dilute Icahn’s shares because their primary
            objective was to deleverage Lions Gate (eliminate some of the debt)
                o Thus as per Teck, their defensive tactics were defensible because they had reasonable grounds that
                     it was in the corp’s best interests to do so.
        - Teck: If reasonable grounds to believe in corporation’s best interests to fend off a takeover bid, then
            defensive tactics are ok.
        - BCE: 2 steps for OppRem: (1) Identify reasonable expectations; (2) Establish the manner in which those
            reasonable expectations not fulfilled was oppressive / unfairly prejudicial or unfair disregard… did not
            consider their interests

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