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A. WHAT CORPORATIONS ARE AND WHY THEY CAME INTO EXISTENCE 1. Overview of the Nature of a Corporation (i)The corporate balance sheet
Cash Accounts Receivable Inventory Equipment Land

Liabilities & Equity
Accounts Payable Bank Loan Debentures/Bonds

Shareholders‟ Equity
Class A Class B Class C

(ii)Management Directors (elected by sh‟s)

Officers (appointed by directors) -eg Prez, Secretary  Other Management (including technical/support staff)  Other Employees/Agents

Shareholders (sh) -approval required for major fundamental decisions

(iii)General Characteristics a) Limited liability b) Separate legal personality c) Perpetual existence -many jurisdictions have separate stat for smaller corps but Can only has one for all size of corps (mom & pop to GM) 2. Corporate Personality and Limited Liability (i)Legal nature of the corporation a) Salomon v. Salomon & Co, 1897, HL FACTS: S had business run as sole proprietorship but then incorporated it. According to stat, to be a corp you needed 7 shs so S, his wife, daughter, and 4 sons were shs but others besides him only had one share. When S sold business to corp, he added value of goodwill. 40000 authorized shares (director can authorize up to 40000) but only 20 007 issued at L1 par value (how much share‟s worth on face of it, not it‟s actual value - minimum sh had to contribute). S issued L10 000 in debentures and used them to get security for loan from B. Debentures were secured by a floating charge on assets of business (floating charge fixes at point

of default and holder gets interest on assets at that time). B puts in receiver and business liquidated and B claims on debentures. S claims as person having equitable interest in debentures (debs) so could only have to pay B L5000 on loan. Liquidator said debs fraudulently issued and business fraudulent re goodwill nothing paid for shares so S owes L20 001. At trial and CA, S held personally liable - the corp is no more than S‟s agent. Appealed. ISSUE: Is S personally liable? DECISION: S not liable. REASONS: HL said debs not fraudulently issued and business not a fraud. S had loaned business money and if it was a fraud, why would he have done this? KEY- corp was validly constituted under the stat - only had to have 7 members - it doesn‟t matter if independent or if only had one share - not required in stat. The corp in law was a different person than members - not an agent or trustee therefore shs could contract with the corp and could advance funds. COMMENTS: Criticized as unjust result for creditors but they could have checked register and seen what was actually going on. (ii)Implications of case and separate legal nature a) Salomon - sh can contract with corp; sh can be cred of corp and rank equally with other creds - can rank ahead if securities taken b) Lee v. Lee’s Air Farming Ltd., 1961, PC FACTS: L‟s Ltd. had 1 sh, director, prez who was L. Main asset was airplane. L was pilot, crashed plane and died. Wife sought workers‟ comp but Board said no b/c L couldn‟t be employee b/c he‟d be employing himself. ISSUE: Could L be employee? DECISION: L was employee; L‟s Ltd was separate legal personality. REASONS: L wasn‟t contracting with himself b/c corp was separate legal person (unlike situation in Re Thorne under prtsps). Sh can be employee even if he‟s sole sh. c) Macaura v. Northern Assurance Co. Ltd, 1925, PC FACTS: M transferred timber interest to Irish Sawmills and took 40 000 shares in return. All timber taken off and ready to go. M executes last of 5 insurance policies on timber and 16 days later all timber lost in fire. Insurance corp claimed fraud. Arbitrator said no fraud but found for insurance corp b/c policy said money to go to M but timber interest changed to corp - can‟t take insur on land you don‟t own. ISSUE: Should M get money? DECISION: Arbitrator‟s decision upheld, no money for M. REASONS: Can‟t take insurance on land you don‟t own. M‟s claim that he owned the assets as the only sh was rejected - corp owned assets and M had no right to them - won‟t allow this kind of gambling. d) Summary - corp can contract with shs; corp has separate legal existence; directors are agents of corp as are shs. (iii)Problems with separate legal personality a) since shs can become creditors, they may do so at time corp is insolvent to disadvantage of other creditors

b) may set up corp with few assets - thin capitalization/shell corp to detriment of creditors and other non-consensual creditors (tort victims who don‟t plan to deal with corp or have opportunity to check it out) c) may deceive people that they‟re dealing with the indiv, not corp d) might incorp to avoid personal obligations (iv)Shareholder liability -under CBCA s.45(1), shs aren‟t liable for corp debts - b/c of this, a corp lacks the power to impose an annual assessment on shs for purpose of providing operating revenue, even if firm‟s non-profit. -parties may bargain around this -CBCA imposes liability on shs in some cases where shs participated in mgmt wrongdoing - CBCA s.45(1) holds shs liable in 3 cases: 1)a reduction of stated capital under s.38 when the corp is thereby rendered insolvent; 2)a breach of duties imposed on shs under s.146(5) when they assume mgmt powers under a unanimous shs‟ agreement; and 3)a claim by judgment creditors under s.226(5) with respect to actions continued against a corp after dissolution -CBCA s.118(5) permits court, if satisfied that it‟s equitable to do so, to order shs to repay money or property improperly distributed to them to the corp. These orders may be made when payments are made when the corp is insolvent or would be insolvent after a payment is made upon a share repurchase (s.34), a redemption of preferred shares (s.36), a dividend payment (s.42), a loan (s.44), and a repurchase under the appraisal remedy (s.190) or the oppression remedy (s.241); or an excessive commission is paid on an issue or sale of shares (s.41). (v)Minimum stated capital -academics criticized Salomon and recommended a minimum stated capital requirement - on incorp, the corp would be required to receive at least a stipulated amount as consid for issue of shares -however benefits of unlimited liability may be overstated and dangers of limited liability can be exaggerated - fact that unlimited liability provides access to personal assets of partners won‟t be equivalent to full payment when those partners don‟t have money to cover shortfall and businessmen have developed techniques to avoid debilitating losses from insolvency of debtors with limited liability. 3. Share Ownership, Limited Liability and the Transferability of Shares (i)Theories of limited liability -see chart (next page)

-1-5 are all things that serve to benefit shs and society at large -allow investors to reduce return on investment required so that lowers amount of financing required, lowering price to consumers -consequences: 1)potential deception of 3rd party consensual creditors; 2)inadequate comp for tort victims; 3)inadequate deterrent for tortious acts -all of above depend on how efficient the market is -benefits of limited liability (ll) - permits risk averse to shift burden of default to shoulders of creditors but large businesses (which is what most creditors are) are frequently presumed to be risk neutral, since risk of default on single account may be dissipated when cred holds accounts with many debtors B. DISREGARDING THE CORPORATE ENTITY -BCCA s.14 - co shan‟t carry on business without a member but if it does for 6 months plus every director and officer during that time is jointly and severally liable -BCCA s.21 - (1) subject to (2), a co has power and capacity of a natural person of full capacity; (2) no co has capacity to operate a railway except without authorization by LG in C or operate a club without written authorization by Min -BCCA s.130(3) - where officer/director of co or extraprov co, or person on its behalf permits it not to display or use its name as required in (1) or (2), he‟ll be liable to any purchaser, supplier or security holder who suffers loss as result of being misled thereby -BCCA s.153 - every insider of a corp who makes use of any specific confidential info for benefit of self or associate of self is (a) liable to compensate any person for any direct loss suffered as a result; and (b) accountable to the corp for any direct benefit or advantage received or receivable as a result -CBCA s.45 - (1)shs of corp aren‟t liable for any liability, act or default of corp except under ss.38(4), 146(5), or 226(5) -CBCA s.131(4) - same as BCCA s.153 1. Disregarding the Corporate Entity - Introduction -there are circumstances where court will “pierce the corporate veil” as ll or separate corp status may be inefficient -arg for piercing veil made when: 1)the assertion of separate corp status amounts to breach of an implicit contractual provision or stat policy; 2)the firm has in effect represented that liability is unlimited; and 3)unlimited liability can be justified as a response to incentive costs which may arise when some claimants are non-consensual -Kosmopoulos - exceptions to principles of Salomon arise when it would be too flagrantly opposed to justice to apply principles - no clear guidelines -language used typically is “co is simply agent of sh” or “co is alterego or instrumentality of sh”

2. Gap-filling -if parties had thought about it, this is what they would‟ve done -if courts don‟t do it, they let loss lie where it falls - makes people more careful when drafting contracts but may have high costs to the parties so when court does it, it‟s saving these costs a) SEDCO v. Patterson-Boyd Mfg Corp, 1981, SKCA FACTS: P,B,H formed PB Mfg Corp and got loan from Sedco with covenants re payment of interest on principal to associated companies (ie that Sedco would be repaid before associated cos). P,B,H promised Sedco that they‟d postpone their claims on PB Mfg. P,B,H formed PB Fab Corp which loaned money to PB Mfg and had a priority claim on PB Mfg. P,B,H were shs of PB Fab and gave it funds. PB Mfg went bankrupt. ISSUE: Which debentures come first? DECISION: Sedco‟s claim came first. REASONS: PB Fab an associated co so falls in covenant provision therefore can‟t pay interest/principal to assoc co. Even if PB Fab not an assoc co, court should lift corp veil and say that P,B,H are the same as PB Fab - using PB Fab to do exactly what they promised not to do in original loan. This finding stronger as gives Sedco better chance to recover. 3. Implied Contractual Terms -when separate corp status asserted, gap-filling policies may suggest a need for “recognizing” an implied term that prohibits end runs around express contractual requirements. Firm promoters might then be prevented from incorping to avoid express personal obligations. a) Gilford Motor Company Ltd. v. Horne, 1933, Eng CA FACTS: H had been managing director of G. His employment k prohibited from competing directly or indirectly with G within 3 miles of G for 5 years. H resigned and started competing business within 3 miles. Incorped business b/c of concerns about employment k. ISSUE: Did H‟s actions violate the employment k? DECISION: H breached k, injunction against him and co granted. REASONS: H‟s co was a sham designed to avoid H‟s duties under the k. 4. Affiliated Corporations -courts willing to pierce veil, even to benefit of affiliated co - done to benefit group - desirable on gap-filling theories, since group managers can be presumed to have wished to have maximized total value of the group a)DHN Food Distributors Ltd. v. London Borough of Tower Hamlets 1976 FACTS: Group of corps involved in grocery business. Land was owned by Bronze Investments Ltd and trucks owned by DHN Food Transport Ltd. DHN Distributors carried on business and held all shares of other 2 corps. Land expropriated and comp for its value offered to Bronze but no offer of comp for loss of business suffered since it was carried on by DHN, not Bronze. ISSUE: Should the corp entity be disregarded to benefit of DHN?

DECISION: Corp entity disregarded. REASONS: There‟s tendency to ignore separate legal entities in a group like this and this especially so where parent co owns all shares in subsidiaries. Subsids bound hand and foot to parent co and must do what it says. b)Manley Inc. v. Fallis COMMENTS: Like Gilford, F had employment k with subsid of M. M sought to sue on k of subsid. Court pierced veil to enforce non-competition clause. c)Compare Walkovsky v. Carlton and Mangen v. Terminal Cabs FACTS - WALKOVSKY: C had formed many subsid cos, each of which was thinly capitalized. One of these was Seon Cab Corp which hit W. Court didn‟t pierce veil - held that each was a legitimate business. FACTS - MANGEN: Shs owned shares in Terminal Cabs Ltd which had many subsid corps and cab in one of these hit M. Court did pierce veil. COMMENTS: Court less willing to pierce to get at indiv sh - why? If more than one, not losing all benefits of limited liability when they pierce veil to get at parent co. 5. Corps Formed to Avoid Statutory Requirements -like gap-filling but stat is involved - if legislature had thought of it, they‟d have put this in -whether veil pierced depends on legis purpose b/c need to ensure compliance stronger in some situations than in others -particularly willing to disregard separate corp entities in tax cases a)British Merchandise Ltd. v. Br Transport Commission, 1961 FACTS: Stat allowed 1 trucking licence per customer and if hold “C” licence, can‟t hold “A” licence. Co that had C licence incorped new corp to get A licence but refused. ISSUE: Should other corp be able to get licence? DECISION: Licence legitimately refused. REASONS: Subsid co truly a device to do what the legis said it couldn‟t do. b)Nedco Ltd. v. Clark, 1973, SKCA FACTS: Nedco a wholly-owned subsid of Northern Electric Co who‟s workers were striking. Started picketing Nedco who sought injunction which was granted at trial. ISSUE: Is Nedco a separate entity? DECISION: Quashed injunction, pierced veil. REASONS: Nedco a wholly-owned subsid controlled by N. Viewed from realistic standpoint rather than legal one, held that Nedco an integral component of N and no reason why picketing should be restrained. Can‟t form subsid to avoid stat on picketing. c)In the matter of A.E. Aimes & Co., 1972, OSCB FACTS: Kaiser Ltd issued prospectus in ON, filed with ON Securities Commission (OSC). B/c prospectus not filed with American Securities and Exchange Comm‟n, stated that no shares would be sold to US residents. However KRL Investments Ltd formed to permit US executives of Kaiser to subscribe for its shares. Kaiser‟s shares allotted to KRL, whose shares were beneficially held by

US executives. No prejudice to ON residents. If US investor wanted to sell then KRL sold Kaiser shares and used proceeds to repurchase KRL shares from US investor. ISSUE: Should KRL‟s separate identity be disregarded? DECISION: Separate existence disregarded. REASONS: OSCB not impressed - you created separate entity to do exactly what you said you wouldn‟t so pierced corp veil. If purpose of legis is furtherance of objective of investor protection and the prevention of misleading or inaccurate disclosure through a prospectus, then there‟s good case for piercing veil (but here no prejudice?). 6. Representations of Unlimited Liability -concern is deception of 3rd parties as to who they‟re actually dealing with -reliance - charged less for credit on basis of unlimited liability -efficiency - potential loss created which could be avoided - party has misguided 3rd party - could best avoid loss -commonly happens where people deal with business for awhile and then it incorps without telling others or without them knowing - puts obligation on corp to give notice of incorping or will pierce corp veil -firm‟s failure to observe corp formalities in preparation of documents said to justify piercing a)Chaing v. Heppner, 1978, BCSC COMMENTS: C took watch in to get fixed and it was destroyed by fire in shop. Sued H personally and court rejected H‟s arg that k was with corp. H personally liable nothing on claim ticket to show them as corp or not. [BCCA s.130(3);CBCA s.10 - must put co name in full on everything; if fail to do so, directors and officers can be personally liable if fail to put in “ltd”, “inc”, etc (at least to 3rd party creditors).] b)Seizing on failure to comply with corp formalities: Wolfe v. Moir, 1969 COMMENTS: W hurt rollerskating at M‟s rink. Rink run by Chinook Ltd. but nothing on ads or tickets which said this name. M failed to give notice that are dealing with ltd co therefore took risk of being personally liable. Sounds like M wouldn‟t have been liable if had put Chinook Ltd. on ad or ticket. Seems odd that comp depends on following or not following requirements - penalty for failure to comply - creates business for lawyers. c)Other misreps or frauds: Big Bend Motel Ltd. v. Security Mutual Co. COMMENTS: Motel applied for fire insurance and said on application that it had never suffered fire loss before. But single sh owner had suffered such loss before and had had troubles getting insurance (fire bug!!). Insurance co says answer false, that it made misrep and court agrees. Disregarded corp entity - answering question was a false rep and co was being used to perpetrate fraud. d)Corporate formalities -when firm managers themselves ignore formalities of separate corp existence, why should they be permitted to insist upon it in dealings with 3rd parties? -does slopppiness merit sanction of losing limited liability?

-some courts have focussed more attention on relationship b/w def sh and the corp than on the rep to pff creditor - Frankel Structural Steel Ltd. v. Goden Holdings Ltd., 1971, SCC - F asked to supply steel by H but F wouldn‟t without direction from H to G that G would advance money directly to F. F phoned B who was solicitor in G and he told F that G would pay him directly but subsequently, G paid money directly to H. H went bankrupt and F sought to hold G and members of firm personally liable. ONCA held that partners in G weren‟t personally liable but SCC reversed. 3 partners were G to extent that they were the only shs and officers and managed - G had no independent volition. B committed the firm when he spoke directly to F that firm would pay. -separate corp existence has even been disregarded when creditor has clearly not relied on a sh‟s personal liability - Tato Enterprises Ltd. v. Rode, 1979, Eng - creditor entered into k with “Scott Bradley Ltd.” when no such co existed. Creditor must have assumed that he was dealing with corp with limited liability but court imposed personal liability on sh. Failure of R to take time to determine correct name of the corp and to conduct business in that name is simply further evidence of his failure to comply with requirements of CA which are necessary if a person purporting to be an agent of a corp is to avoid personal liability. - also in Roydent Products Inc. v. Inter-dent Int’l Dental Supply Co., 1993, ONSC the court imposed personal liability. All of R‟s dealings were with H and it didn‟t investigate I at all. I was unincorp division of Steven Holland and Sales Ltd. H held personally liable - he failed to register to shield himself from personal liability and is caught by principle that „one seeking the law‟s ordinary protection from personal liability must comply with the formalities prescribed by the legis‟ [Salomon]. -in US, court may absolve promoters from liability where there was an honest but ineffective attempt to incorp when 3rd parties didn‟t rely on promoter‟s personal liability. -where corp formalities have been observed, Cdn courts won‟t permit a 3rd party that has contracted with one member of group of affiliated corps to pick and choose which member of group it will sue - Scotsburn Co-operative Services Ltd. v. W.T. Goodwin Ltd, 1985, SCC e)Customers and employees -customers and employees can be seen as firm claimholders -while customers may not have present claim against firm, they‟re potential future creditors to extent that there‟s positive probability that they‟ll be able to assert future warranty claims -employees might have present claims with respect to back pay and accumulated holiday time as well as unfunded pension liabilities -employees suffer human capital losses on firm‟s default of 2 kinds - 1)employee‟s expected future earnings often be reduced unless can quickly find better job thereafter; 2)job loss will mean destruction of firm-specific human capital - skills may not transfer -bankruptcy effects net wealth transfer from customers and employees when they‟ve overpaid for their claims or overinvested firm-specific human capital thinking

that they‟ll participate in bankruptcy distribution when in fact their claim is valueless -limited liability doesn‟t effect a wealth transfer from customers or creditors when they bargain on basis that their only recourse is against the firm - thus Wolfe and Tato might be explained on basis that 1)customers believed that unlimited liability regimes were in place; and 2)the firm was the party that could have cured this misapprehension at least cost -veil-piercing justified on gap-filling theories - in k of sale and employment, customers and employees assumed that they‟d be able to sue promoters or shs on firm‟s default. A court that permits them to do so would then supply an implied term for which they‟d have bargained had they thought of it - but would firm have agreed to the term? -may justify piercing in distributional theories - on these theories, mandatory unlimited liability policies amount to business tax for benefit of protected classes - if it‟s right to do so is question of politics not law -either way, employers unlikely to skip payday - CBCA s.119(1) - unpaid employees can recover up to 6 months‟ back wages form employer‟s directors 7. Non-Consensual Claimants and Incentive Costs -most commonly tort victims a)Walkovsky v. Carlton COMMENTS: Cab co‟s formed with minimal assets and each cab with minimal insurance. May pierce to protect and compensate W and to provide incentive to corp to take greater care - deterrence gap - limited liability may not be sufficient to compensate claimant - greater deterrent if sh found liable 8. Other Ways of Disregarding the Corporate Entity (i)Suing Directors or Officers in Tort -Berger v. Willowdale AMC, 1983, ONCA FACTS: B worked for Falken Automobiles Inc. which was wholly-owned by F. One winter day she fell outside work getting into her car. It had been snowing and melting for several days. F had standing orders that service dept to clear walkway but they hadn‟t done so. On that day, F was present and knew sidewalk not clear but did nothing. B got compensation from Workers‟ Comp but needed more so sued F personally. According to WCB legis, can‟t sue fellow employees. ISSUE: Was F personally liable? DECISION: F liable. REASONS: Court first looked at WC Act which specifically excluded an executive officer of a corp from def‟n of employee so B could sue F as he not employee. Court then looked at common law and B had to establish that F negligent and did so. Looked at US authorities which supported principle that employee may, in appropriate circumstances, bring action against exec officer of the co employer if can show duty owed and that duty breached by exec officer through personal fault. Exec officer may delegate duty and escape liability only if he personally didn‟t create danger or can show that he didn‟t personally know or constructively

should‟ve known that duty not carried out. B established these points. Court then looked at policy that would deny B‟s claim - would it be unjust to hold F personally liable? Duty can exist both in employer co and F personally. F had personal knowledge of danger and control over means to eliminate it. F claimed that through employer co he contributes to WCB fund to comp workers and to make him personally liable would place him in double jeopardy and contravene Act intent but court rejected this. This defeated by provision of Act which excluded exec officer from def‟n and so maintained right of employee to bring action against officer. Liability will depend on many factors including size of co, # of employees and nature of business, whether or not danger was or should‟ve been readily apparent to exec officer, length of time dangerous situation was or should‟ve been apparent to exec officer, whether officer had authority and ability to control situation, and whether had ready access to means to rectify danger. DISSENT: Legislature has said neither co employer nor neglectful employees are guilty of a tort, if they‟re not liable to B why should F be? Act has substituted rights at common law. COMMENTS: Effect is that it makes officers/directors very risk averse. This good for deterrence but seems excessive. Can get around this - have co indemnify you; buy insurance - protects director/officer so due care model may be good deterrent. (ii)The Oppression Remedy -PCM Construction Control Consultation v. Heegar COMMENTS: H fired and sued for wrongful dismissal. Co had no assets so suit of no use. Lawyer argues that acts of officers in getting rid of H were oppressive. S.241(3) CBCA gives power of court to make order it thinks fit and s.241(3)(j) provides that court can make order compensating an aggrieved person. So court goes after directors/officers to compensate H using s.241(3)(j). 9. General Theory for Disregarding Corporate Entity (i)Voluntary Relationships (consensual claimants) -disregard to avoid transacting around limited liability - fill in gaps, avoid transaction costs of creating stat provisions for corp -to avoid information-gathering costs - misreps, deceiving re liability- pierce to reduce screening costs so don‟t have to examine each co (ii)Involuntary Relationships (non-consensual claimants) -more likely to pierce where there‟s 1 or fewer shs involved -more likely to pierce when it leads to claim against another limited liability entity - like Mangen - don‟t cause investors to check into other investors b/c not personally liable -employees - s.119 CBCA - liable to pay employees for unpaid wages (s.96 Employment Standards Act) - but is CBCA provision constitutionally valid in that it deals with property and civil rights? Another concern is human capital specific to this business - no

comp available for this loss where value of skills is highest for this business -customers - have warranty, ongoing service - should these be compensated if co goes bankrupt? C. PRE-INCORPORATION CONTRACTS -3 forms of pre-incorp contracts: 1)ks entered into on behalf of proposed corp by proposed managers/shs; 2)pre-incorp subscriptions made by proposed shs for issue of shares by corp; 3)shareholder agreements made to deal with rights and responsibilities for operation of new corp -corp only comes into existence once certain stat formalities observed 1. Review of Ratification -agent must purport to act on behalf of prin who exists and can be ascertained -prin must have capacity to do act at time agent acts and at time of ratif 2. The Common Law (i) Kelner v. Baxter, 1866, Court of Common Pleas FACTS: K owned hotel and agreed in Aug with others to form co of which K would be director and president. Jan. 9, 1866 the promoters executed memo of association for proposed co. K agreed to sell additional wine to co and agreement signed by directors on behalf of co on Jan.27/66. On Feb.1, directors purported to ratify k; Feb.20 the co incorped; Apr.11 the directors ratified again. K not paid and sues. ISSUE: Are directors personally liable for k? DECISION: Personal liability. REASONS: Corp didn‟t ratify on Feb.1 b/c entity didn‟t exist and it couldn‟t ratify on Apr.11 b/c co didn‟t have capacity to act in Jan when agreement made therefore co couldn‟t become party to the k. Co couldn‟t ratify, only promoters could be liable. Agreement would be wholly inoperative unless it were held binding on defs personally. Where a k is signed by one who professes to be signing as agent but who has no principal existing at the time, and the k would be inoperative unless binding upon person who signed it, he‟s bound and a stranger can‟t by subsequent ratif relieve him of responsibility. (ii)Dairy Supplies Ltd. v. Fuchs, 1959, SKCA COMMENTS: F signed k for Snowland Dairy which wasn‟t yet incorped. Parties agreed that if co co organized forthwith, pff would only look to it for payment. Court held that this agreement rebutted presump that promoter‟s liable on pre-incorp k. D made Kelner argument that b/c co couldn‟t be responsible, F should be but rejected. (iii)Black v. Smallwood, 1966, Aust HC FACTS: B purported to enter into k for sale of land and S and C signed as directors of co. Co not incorped but S and C thought it was. B wanted to hold S,C as liable.

ISSUE: Are S and C personally liable? DECISION: Not liable. REASONS: B tried Kelner argument but it was rejected. Kelner different on facts in that K looking to indivs for payment but here the circumstances were different. Kelner stands for principle that if you‟re looking to indivs for payment, they‟ll be liable but if you‟re looking to co only, the promoters aren‟t liable. Fundamental question in every case is what the parties intended or must be understood to have intended. (iv)Newborne v. Sensolid Ltd., 1953, Eng CA COMMENTS: N entered into k before co incorped and signed his name below that of the proposed co. S wanted out of k and N sues using Kelner argument. Held that the only k that had been made was with N‟s co, not N himself and since co wasn‟t in existence when k signed, there never was a k. (v)Wickberg v. Shatsky, BC COMMENTS: S‟ wanted to take over co so formed new co to do so but this co never incorped. On May 11, they incorped co of different name but May 9 hired W for co with original name and he was to manage co. Business dropped and S‟ tried to work W on straight commission but employment k said he was to get salary and he refused commission and was fired. W sues for wrongful dismissal - sues S‟ that k was with them personally - Kelner. Court rejected and said that promoters were only personally liable if it was intended that they would be personally liable. W tries to argue breach of warranty of authority but problem in that if rep had been true, what would‟ve been remedy? Nominal b/c would only have claim against insolvent co. (vi)Summary of common law: -if persons signing for co were intended to be personally liable they will be but if that wasn‟t the intention, they won‟t be personally liable -Kelner - co‟s not in existence can‟t ratify - need new k -hard to explain imposition of promoter liability where both parties honestly believe that firm is incorped since everyone will then expect that the only k is with the firm. For this reason, promoters weren‟t personally liable in Black and Newborne. 3. CBCA s.14 (i)The modifications - s.14(1) - person who enters into written k in name of or on behalf of a corp before it comes into existence is personally bound by k and entitled to benefits effectively overrules common law but exceptions in 14(4) -s.14(2) - corp may, within reasonable time after coming into existence, by any action or conduct showing intent to be bound, adopt a written k made before it came into existence and on adoption: (a) corp is bound by the k and entitled to benefits thereof as if it had been in existence at time of k; (b) person who purported to act in name of or on behalf of the corp ceases to be bound

-s.14(3) - court may apportion liability b/w promoters and corp - as applies to Landmark Inns: court managed not to use s.14(3) but it seems to be situation where it would apply - k didn‟t exist as H repudiated it so corp couldn‟t adopt it doesn‟t square very well with rule that ratif relates back to time of offer and acceptance -s.14(4) - if expressly provided in written k, person who purported to act in name of or on behalf of corp pre-incorp isn‟t bound or entitled to benefits (ii)Effect of repudiation -Landmark Inns v. Horeak: H and partners wanted to set up optical co and leased space from L in Oct. Co incorped in Feb. H and p‟s decide they don‟t want space anymore and start looking elsewhere. In March, co adopted k. SK stat identical to CBCA. L sues H personally, saying breach of k and wants comp for lost rent and expenses for setting up space. H says L must go after co under s.14(2) but not him personally. Co bankrupt at this time. Court held that co couldn‟t adopt k b/c prior to March, H had repudiated lease by looking elsewhere. If k repudiated before adoption of the k, the co can’t adopt it. H also argued not liable under s.14(1) even if co didn‟t adopt using s.14(4) but court held that signature on behalf not enough to amount to express provision of non-liability (iii)Problems with the CBCA provision -constitutional problem - s.14(2) deals with property and civil rights which is prov area of responsibility - for it to apply, feds would have to argue power ancillary to fed power to regulate corps -”contract” - who is the k with? common law would say it‟s void - no k b/c can‟t k with non-existent co. Westcom Radio v. MacIsaac: M thought she was prez of incorped co but it didn‟t exist; W sued for payment on bills on OBCA (virtually identical to CBCA); CA - stat no solution - purported k a nullity so not caught by s.14. Gillen - this a stupid reading of stat - Legis would then have wasted time -written contract only in stat - what if oral k? Revert to common law (iv)Miscellaneous -may want to use shelf co in situations where client wants a corp right away to protect them re personal liability - incorp #ed co and client can use it under # name or make application for new one and then change directors from people in firm to the new people -policy behind ratif - concern about being able to speculate against 3rd party

A. A BRIEF HISTORY OF CORPORATIONS -earliest antecedents were trading companies in 16 and 17th centuries - typically created through Crown charter and weren‟t organized in corp form early on -if no charter, re-created through prtsp form (joint stock co) with many partners would waive restriction on admitting new partners - trust deed - elect trustees who would appoint managers (effectively created a corp form)

-by late 17th century had charters and large prtsps -1844 - Joint Stock Companies Act - under this promoters could file with the Registrar a “deed of settlement” containing the corp‟s charter and get certificate -1855 - Limited Liability Act - first intro of ll - if corp‟s assets insufficient to pay debt, could sue shs but only to extent of amount unpaid on their shares -1862 - Companies Act - consolidated previous stats - if organizers wanted doctrine of limited liability to apply, they‟d file “memorandum of association” which recited amount of the corp‟s capital and manner in which shares to be divided and memo to be accompanied by the “articles of association” which contained internal regulations of corp - both were public documents -pressure in 19th century to have corp form of organization b/c of improvements in transportation, needed much capital to get economies of scale -1850 - Parl of Prov of Can passed general incorp Act for joint stock companies with mfg, mining, mechanical or chemical purposes - under act, 5+ persons could apply to incorp with disclosure of objects, capital structure and shs in application - incorp followed immediately but 50-year time limit - generally afforded limited liability -1864 - new stat in Can for corps engaged in mfg or mining - incorpors applied for letters patent under seal of Gov in Council - issuance was discretionary and no requirement that by-laws be filed, unlike memo jurisdictions where articles of assoc were public documents -after Confed, letters patent method part of new Dominion and ON Acts -MB, ON, PQ, NB, PEI, and Can became letters patent jurisdictions while BC, AB, SK, NS, and NFLD became memo of assoc or registration jurisdictions -in memo juris, memo and articles are deemed to be a k among incorpors inter se and also b/w them and the corp, to which others become parties when become shs -memo juris - 2 characteristics: 1)allocation of power b/w directors and shs determined in accordance with incorp documents, and there‟s complete freedom to include any terms not in conflict with the stat but in practice many adopt model n Table A of stat (result is that average memo corp documents look like those of average letters patent corp); and 2)on application for incorp registrar has little discretion to reject incorp documents - if stat criteria met, particularly if objects aren‟t illegal and if proposed name not already spoken for, registrar must accept -in theory letters patent (lp) juris differ in both respects - corp in lp juris derives existence from sovereign executive act of issuance of lp; allocation of power b/w directors and co in general flows from stat and there‟s less freedom of k in esigning corp structure than in memo juris; Min in lp juris has absolute discretion n granting lp or not (conceptual difference) and he may impose conditions -only PEI remains lp jurisdiction -most provs have adopted US approach of articles of incorp - to incorp, comply ith provisions of stat - ON 1970; Can 1975 B. THE CONSTITUTIONAL POSITION -can have valid fed and valid prov corp -Con Act, 1867 s.92(11) - provs can incorp co with prov object - residual to feds

-what are prov objects? appears to impose territorial rather than functional limitation - it doesn‟t restrict the activities of prov corps to substantive areas reserved to prov legis competence (i)Bonanza Creek Gold Mining Co v. The King, 1916, PC FACTS: Co incorped in ON but operating mine in Yukon and had options to get leases from feds for adjoining lands. When they sought to exercise these options, feds said co couldn‟t operate outside of ON. DECISION: Could operate outside ON REASONS: Prov object not a territorial constraint or link to prov powers under s.92. What it meant was that ON could incorp co with power to operate anywhere in ON but couldn‟t give right to operate in Yukon. That right was left to the other juris. Then what‟s fed incorp power? Can incorp co with right to operate anywhere in Canada. (ii)John Deere Plow v. Wharton and Duck, 1915, PC FACTS: JD tried to incorp to operate in BC but there was already a co with that name in which W was sh so Registrar said JD couldn‟t operate there. As to D, he had bought stuff from co but didn‟t pay. Claimed that JD couldn‟t sue him b/c it couldn‟t operate in BC therefore he didn‟t have to pay. DECISION: JD could operate in BC; JD could maintain action in BC REASONS: Prov can‟t refuse a fed co a licence to operate in that prov. Further prov can‟t refuse co the right to maintain an action in BC. (iii)AG MB v. AG Can, 1929, PC COMMENTS: This case high water mark of how far provs can go to block power of fed corps. MB passed legis that had to get licence to sell shares in MB and if Registrar didn‟t like your financing structure you couldn‟t sell shares. Court said MB couldn‟t do that b/c had effect of sterilizing the co. (iv)Lymburn v. Mayland, 1932, PC COMMENTS: AB said that co had to sell shares through licensed broker. Court said that was okay b/c weren‟t sterilizing corp. (v)Multiple Access v. McCutcheon, 1982, SCC COMMENTS: ON and Can had virtually identical legis and M challenged that prov law of no effect b/c fed stat occupied the field. Court held that ON legis still valid as long as there‟s no conflict with fed stat. (vi)Canadian Indemnity Co. v. AG BC, 1977, SCC COMMENTS: Arose when BC introduced public auto insurance plan which forbade private insurance. C said legis had effect of sterilization but court upheld BC stat. Stat okay b/c it applied to all co equally and didn‟t discriminate.

(vii)The Charter -when determining if corp entitled to Charter right, courts focus on whether corp can exercise a right given nature of corp entity - settled that corp not entitled to ss.7, 11(c) protections - but corp may envoke Charter right if it can show that it has an interest that falls within scope or purpose of right - eg right to trial in reasonable time -even where corp can‟t invoke Charter right, it can challenge the validity of the law if it‟s a def in criminal proceedings - Big M Drug Mart; Wholesale Travel C. THE INCORPORATION PROCESS 1. Incorporation (i)BCCA: ss.5-18, 34, 36-38, 130, 321, 328, 337 -s.5: form co by subscribing to memorandum - memo info requirements to incorp, must file and subscribe to a memorandum - can put whatever you want in it but should only put in minimum specified b/c can only amend as per the Act so may end up with it there forever - should put rest of info in the articles or sh agreement -s.6: co shall have articles - may adopt Table A -s.7: memo and articles must be signed by every subscriber -s.8: registrar shall register co if satisfied after receiving all documents, fees -s.9: once registered, r will issue certif and publish notice in Gazette -s.10: process for corrections of inadvertent error by registrar -s.11: certif of incorp conclusive evid of incorp -s.12: from date of incorp, subscribers capable of exercising corp powers -s.13: co and members bound when memo and articles registered -s.14: co not carry on bus. without member but if does for 6 months plus, directors and officers jointly and severally liable for debts -s.15: registrar may reserve name for certain period before incorp -s.16: co must include Ltd, etc in name -s.17: co won‟t be incorped if registrar disapproves for valid reason -s.18: procedure re similar or confusing name -s.34: every co has extraterritorial capacity but must follow it‟s legis -s.36: corp incorped under other juris can deliver instrument of continuation to registrar - requirements of what instrument must contain -s.37: co from BC may apply for continuation in another juris -s.38: creditors‟ rights, liens, debts, etc attach to continued corp -s.130: co must display its name - requirements -s.321: extraprov co registered under Act after 30 days of operating here -s.328: extraprov co shall have resident attorney in prov -s.337: extraprov co that‟s unregistered incapable of doing certain things, commits an offence with fine

(ii)CBCA: ss.5-13, 104, 187, 188 -s.5: one+ people or corps may incorp by signing articles of incorp -s.6: articles of incorp - what they must contain - can be amended by 2/3 majority of shs - only put in what‟s required b/c of difficulty and cost of amending - better to put info in by-laws -s.7: incorporator shall send articles and documents to Director -s.8: Director shall issue certif upon receiving articles -s.9: corp exists on date shown in certif -s.10: name must use Ltd, etc and appear on all corp documents -s.11: can reserve name or can receive number as name -s.12: name requirements and prohibitions, effects of change to name -s.13: if name revoked, receive certif of amendment -s.19: file notice of registered office -must file prescribed fee -s.104: after certif issued must hold meeting and do certain things -s.187: corps from other juris‟ can apply for continuance -s.188: CBCA corp can file for continuance in other juris if do certain things -must provide NUANS name search report (iii)General comments and differences -BC memo = fed articles; BC articles = fed by-laws -in BC, you can see memo and articles but can‟t federally 2. Post-Incorporation Procedures -in BC, you might issue shares to subscribers; approve share certifs; allot any additional shares; approve corp seal; bank resolution and procedures; appoint auditors (can be waived by shs); appoint new directors (especially if have shelf co); determine year-end -under CBCA, issue shares; approve share certif; appoint officers; determine year-end; bank resolution; etc. 3. Corp Name and Benefits of Acts -must have corp name - both BC and Can want to be sure there‟s no confusion so Reg or Dir will refuse incorp where name deceptively similar or likely to be confusing or is inappropriate - can reserve name ahead of time (56 days prov; 90 fed) and cna change name after incorp - eg if incorp under # name to deal with problem later -which Act should you incorp under? CBCA: provides name protection can operate under that name in every prov but can still be sued for passing off; can‟t be restricted from maintaining an action in that prov - John Deere Plow v. Duck; greater prestige of being fed co; lawyers across Can more familiar with CBCA. BCCA: BC lawyers prefer it, more familiar with it; easier to deal in Victoria than Ottawa (time zones); people nicer in Victoria; it‟s cheaper

4. Continuance -have co that‟s already incorped and it changes its juris -BC ss.36-38; CBCA ss.187-88 (see above) -if want to move - require permission from shs; need approval of Reg or Dir; go and file appropriate documents - BC file articles of continuance; would have to amend corp constit to comply with stats of other juris; have to satisfy name requirement D. EXTRA-PROVINCIAL LICENSING -can operate in other juris if it allows you to and most do -BC - requirements for extraprov licence to carry on business - what‟s “carrying on business”? - have some presence in prov - agent, office, warehouse indicate presence - s.1(8) of BCCA - need to provide someone in prov who will provide service -requirements generally entail paying fee, filing forms, appointing local agent -if fail to register, fines under s.337 BCCA; typically can‟t maintain legal action in that prov; may be incapable of owning land; BCCA s.338 - person who acts as agent or rep for unregistered extraprov co is personally liable for debts and obligations incurred by him as agent -fed cos - prov stats usually specify that there‟s no discretion to deny regis to applic that‟s fed incorped [BCCA s.18(5)] - to do so would presumably be unconstit since unregis extraprov co is typically disabled from doing business E. RESTRICTIONS ON MANAGEMENT AUTHORITY 1. Agency and Corporations -actual authority of co‟s officers can be specifically outlined - contract, resolutions of Board - but otherwise it comes from customary authority of person in that position or usual authority. To constrain, you subject it to various restrictions -officers‟ may have ostensible authority 2. Ultra Vires (i)What is it? have objects of co, ie it‟s incorped to do certain things - when manager acts in disregard of restriction in the co‟s objects, his action is ultra vires (uv) the corp, signifying that he went beyond scope of his authority and that of the corp uv doctrine developed by courts under which corp held not to be bound by acts of it‟s agents that were beyond powers of the corp - served to protect shs from changes in risk however declaring k void on basis that the k beyond powers of the co can impose risk of corp‟s agents acting beyond powers on outsiders who have k‟ed with the corp but b/w shs and outsiders, shs are better able to control for this risk - shs are least cost risk avoiders Ashbury Ry. Carriage & Iron Co. v. Riche, 1875, HL: -co contracted with R to construct railway in Belgium but objects of corp stated it was “to make and sell, or lend on hire, railway-carriages...; to carry on business of

mechanical engineers...; to purchase and sell...; and to buy and sell any such materials...” -did objects give co power to enter into construction? -court held that co didn‟t have that power, the objects didn‟t allow it and co can‟t deviate from objects -k basically uv the co so co didn‟t have capacity to do that so k void b/c it goes beyond objects which Act says you can‟t change (ii)Reasons/Justifications for uv doctrine particularly public co‟s, wanted to keep them in scope of stat - particularly with railways need to control risk of significant institutions, ie ensure that bank didn‟t engage in non-banking to keep them from insolvency protected shs from change in risk entailed by change in business (iii)Problems with doctrine every time enter into k, have to check from both sides that it fits within objects of corp b/c if it‟s void, neither side can enforce - expensive - alternate ways to control for risk: -sell out if don‟t like risk; -sue directors as having no authority -creditors could k for own protection through default arrangement where a significant change in business would be an event of default (iv)Response to uv doctrine have huge list of objects and provision to read all independently and co has power to do things ancillary to objects courts responded and tried to avoid applying uv doctrine but every so often it would do so -eg Bonanza Creek Gold Mining Co decision which was interped as holding that uv doctrine didn‟t apply to letters patent corps so they could avoid their contracts - corp incorped in letters patent juris has all the powers of a natural person unless such powers are excluded in the letters patent or by incorp stat -eg Re Introductions Ltd., 1970, Eng CA - corp formed with objects for all aspects of tourist trade in GB; after inactivity, it re-emerged as breeder of pigs and got bank loan on debentures; business failed and corp‟s liquidator disputed validity of debenture on uv grounds; bank looked to objects one clause of which said could borrow money by issue of debenture and memo said each object to be read independently; court held that debenture unenforceable - no matter what objects clause said, power couldn‟t be elevated to an object simply by calling it such power to borrow money had to be exercised in furtherance of some corp object; if bank hadn‟t known money for pig business then had no duty to inquire but bank had actual knowledge that purpose of loan to finance pig business possibility that courts wouldn‟t enforce placed burden on creditors for screening so demanded info from corp including articles, by-laws, board

resolutions authorizing k, opinion letter from corp‟s counsel - reduced risk but increased costs (v)Legislative response to uv doctrine s.15 CBCA/21 BCCA: corp has powers to natural person - so instead of list of objects you have powers of any indiv s.16(2) CBCA/22(1),(2) BCCA: can put restrictions on businesses corp can carry on - start with anything under 15/21 then narrow down s.16(3) CBCA/22(3) BCCA: no act of corp is invalid by reason only that it‟s contrary to articles/memo - need other reason s.17 CBCA/26 BCCA: no one deemed to have notice of co doucments only by reason that they‟re filed with Reg or Dir or available for inspection - no constructive notice s.18 CBCA: authority of dirs, officers, and agents - co can‟t assert rights against person who has acquired rights from the corp through several ways except where the person has or ought to have, by reason of their position, knowledge to the contrary s.23 BCCA: if co incorped before Oct 1/73 and has words setting out its objects in memo, those words deemed struck out and replaced with “the businesses that the Co is permitted to carry on are restricted to the following” s.24 BCCA: where memo of co excluded, immediately before Oct.1/73, powers authorized by a former Companies Act, the memo shall be deemed to restrict co from exercising that excluded power s.33 BCCA: co may empower person to act as its rep or attorney in its dealings s.116 CBCA/148 BCCA: act of dir or officer is valid notwithstanding an irregularity in his election or appointment or defect in qualification what do you do if co violates? It‟s now up to shs to take action - principal can take action restraining dirs/officers from engaging in that type of activity: -s.25 BCCA: court may restrain co from doing act; make order requiring comp be paid to co or any other party; and where it appears that a k hasn‟t been substantially performed by a party, make order it considers necessary -derivative action - shs bring action on co‟s behalf against dirs, officers -CBCA: can get damages against directors and officers we‟ve gotten rid of uv but it‟s not completely gone - if incorp in BC or CBCA or similar, you‟re ok but if not, you‟ll have to deal with uv - eg what if corp formed by legis/stat? then must be sure to be in those objects, eg Vancouver Stock Exchange -if from other juris, be careful to check 3. Constructive Notice and the Indoor Management Rule -if directors acted beyond powers that‟s okay if you can show they acted within ostensible authority -constructive notice: are deemed to know content and any restricitons in memo and articles (BC) or articles (CBCA) - if you failed to check, it‟s your problem - can‟t hold directors liable for ostensible authority

-problem is that you had to check so retrenched cn rule with indoor management rule (imr) -imr - need resolution of dirs or shs before dirs or officers can do particular transaction and others can‟t figure out from publicly filed documents whether they had this resolution so 3rd party isn‟t deemed to have knowledge of whether things to be done were done - s.17 CBCA/26 BCCA gets rid of cn rule; s.18 CBCA stat imr (see above)

A. EQUITY SECURITIES 1. The Nature of a Share -in NA, a sh is frequently said to be an owner of the corp -some claim that as corps grew, shares became more widely dispersed among shs and result is that shs were surrending control to professional managers -Sparling v. Caisse de depot et placement, SCC, 1988: C didn‟t file insider trading documents required under CBCA re its shares in Domtar. C tried to say it wasn‟t subject to burden of stat b/c it hadn‟t taken benefits but court said they had taken benefit by buying shares - stuck with burden if take benefit. “A share isn’t an isolated piece of property. It is...a ‘bundle’ of interrelated rights and liabilities. A share isn‟t an entity independent of the stat provisions that govern its possession and exchange. Those provisions make up its constituent elements. They define the very rights and liabilities that constitute the share‟s existence...A „share‟ and „sh‟ are concepts inseparable from the comprehensive bundle of rights and liabilities created by the Act. Nothing in the stat, common sense or the common law indicates that this bundle can be parcelled out piecemeal at whim of Crown.” This “bundle of rights” defined partly by the stat and partly by memo/articles of the co. 2. Types of Shares (i)Classes of shares: stats very flexible on allowing different classes of shares with different rights and restrictions - s.20 BCCA/24 CBCA (ii)Frequently used types of shares: common shares: 3 rights - voting rights, dividend rights (who‟s entitled to share of profits), and rights on liquidation - these rights have to be set out somewhere or else they are presumed to be part of only 1 class of shares - s.24(3) CBCA preferred shares: usually non-voting; usually called this b/c of some preference: a)dividends and liquidation: divds - certain amount must be paid on this share before paying any others; liquidation - so much of proceeds must be given to preferred firs before anything given to common shares; International Power Co v. McMaster University, SCC, 1946 - business liquidated and issue was who gets share of proceeds. McM had preferred shares and IPC had common shares. McM

said it got value of preferred shares and then ranked equally with other shares for share IPC said once preferred shares got their percentage, they were done and got nothing more. Court held that for divd portion, if nothing said otherwise, you pay off divd and no right to share with common shares. If want preferred to share with common, you must put it in. For liquidated portion, preferred can share in liquidation over and above divd. So if provision silent re liquidation, preferred get to share in any additional so must say if don‟t want this to happen. b)cumulative vs. non-cumulative: cumul right - if in first year co doesn‟t pay divd of eg $5 then in next year it must pay $10, etc. non-cumul - if don‟t pay, divd is gone. If don‟t say otherwise, presumed to be cumul - non-cumul is rare. c)participating vs. non-partic: partic - once paid divd, you have right to share of divd over and above that - share with common shares d)convertible vs. non-convertible: conv - ability to change pref share into some other share, eg common share - may be useful if co successful b/c if you have non-partic share, you don‟t get extra but can get that if convert your share to common e)retractable vs. non-retractable: ret - allows sh to surrender share to co for predetermined amount of money f)redeemable vs. non-redeemable: red - power of co to call share in and co will pay you certain lesser amount - allows co to refinance (iii)Power to issue: power of directors - dirs have power to issue shares under both CBCA/BCCA authorized limit - give dirs power to authorize up to certain limit of shares and once they reach limit, they would go back to shs (would have to change memo) BCCA s.19(2) - have to have authorized limit no authorized limit - CBCA s.6(1)(c) - gives option to have limit or not shares in series within a class - shs create classes of shares and decide bundle of rights but bundle set out may not be best now - shs give dirs power to issue shares with certain features, ie series of shares - BCCA s.253/27 CBCA - allow dir to issue shares in series - are constraints within stat: can‟t give any series any greater preference rights than another (eg each must have 1 feature but it needn‟t be the same feature) - can‟t give pay preferences to different series - would share rateably (one doesn‟t get paid in full and other get nothing - each gets proportion) subscriptions and allotments - purchase of shares is contractual and offer for shares is a subscription - fill out subscrip offering to buy shares. Dirs decide on allotment of shares from subscrips - get 2/3 of what subscribe to if there aren‟t enough shares (iv)Consideration for shares: CBCA s.25(1) states that shares may be issued for such consid as dirs determine bonus stock or shares issued for no consid aren‟t expressly prohibited but provision has been interped to require consid

a)par value vs. non-par value and discount stock: -if paid less than par value (pv) of share, liability to co would be limited to the pv (even though it‟s more than what you paid) - provided source of additional funding, allowed creds to know how much money available when giving credit -pv wasn‟t source of funding b/c couldn‟t sell at discount price - Ooregum Gold Mining Co. v. Roper, HL, 1892: FACTS: Issued pref shares with L1 pv but sold for 1 shilling - called for additional 4 shillings so only had to pay 5 shillings total. One sh said this was ultra vires and violated stat to sell shares at less than pv. REASONS: Can‟t sell shares for less than pv - shs had to pay extra 15 shillings to total L1. Agreement to take share is agreement to become liable to pay the co he amount for which the share has been created and agreement is one the co itself as no authority to alter or qualify. Prohibited discount stock to protect creditors. -BCCA s.19 don‟t have to have pv and under CBCA s.24 can‟t have pv -problems with pv: way of accounting would have amount paid in and contributing surplus which would deceive creditors - couldn‟t determine what credit to give b/c didn‟t know real capital - figures on balance sheet didn‟t show true current value; left impression that if have $1 pv share then that‟s the worth of the share but not so - Dickerson Committee said Can should get rid of pv and CBCA did -some tax advantages with pv shares -Can - Northwest Electric Co. v. Walsh, 1898, SCC - co issued 160 $100 par shares for $20 to wife of a promoter but co near insolvency and shares worthless. MB court disting‟ed Ooregum that MB stat was letters patent one and it wasn‟t clear that uv rule applied in same way. Further MB Joint Stock Companies Act appeared expressly to permit discount stock in s.30(b). SCC held the issue of shares to be uv and illegal - shows the judicial hostility toward discount stock -US - corp permitted to issue discount stock if shares traded at less than par helped co to increase its capital -policy re discount stock prohibition is to protect creditors but how are they prejudiced by it? Creditor‟s claim made more valuable by anything that increases firm‟s solvency, its value on default or cred‟s share of firm value on default existing creds are made better off by issuance of discount stock but future creds are not b)assessable vs. non-assessable: assessable - sold share for $10 but only took $5 account as subscriptions receivable - both stats say shares must be fully paid s.25(3) CBCA (s.25(2) CBCA - shares issued by corp are non-assessable) c)watered stock: pump up assets with things not real - issue shares for non-monetary consid as stat permits but without obvious money measure, it was more difficult to impeach value sell shares - record on equity side and record on assets value of something it doesn‟t have or reduce liability - potential misrepresentation watered stock will arise whenever no pv shares are issued for inadequate consid, whether in monetary or non-monetary form

past decisions show great reluctance on part of courts to impeach dirs‟ valuation of property or services received on an issue of shares - Ooregum: “so long as co honestly regards the consid given as fairly representing the nominal value of the shares in cash, its estimate ought not to be critically examined.” - Re Hess Mfg, 1894, SCC: if any consid given, it‟s beyond master‟s competence to enquire into the adequacy of it. CBCA s.118(1) creates express remedy against dirs in cases such as those above and reps a fundamental shift in treatment of watered stock issue of shares for inadequate consid dilutes interest of existing shs therefore prohibitions against it show a me-first rule that parties would have expressly adopted in claimholders‟ bargain; further consid is that there‟s potential for misrep by dirs as to actual value of corp and shares Re Dorenwends Ltd, ONSC, 1924: FACTS: H given shares for past services. Co recorded that paid $8 000 in past services but co had had profits in excess of $8 000. Effect on balance sheet was to shift equity as stated capital increased by $8000 but undistributed profits decreased by $8000. REASONS: Court said no deception or watered stock. Effective result was to make creditors better off b/c $8000 in stated capital couldn‟t be given to shs in dividends as can only take divds out of undistributed profits. Stated that policy against watered stock was to prevent co‟s from creating capital that didn‟t exist but that wasn‟t what happened in this case as assets immediately available to creds weren‟t disturbed in any way. s.43 BCCA/25(3) CBCA - deal with watered stock problem - must pay in full consid and past services, property must be equal to monetary value of the share problem is determining this value Israels, “Problems of Par and No-Par Shares: A Reappraisal”: analysis of material refutes conception that use of no-par shares in and of itself affords protection against liability for watered stock. In his view, clear that use of no-par rather than par value shares will not protect dir or officer against liability to creds under stat or at common law for overvaluation of property or services received as consid for shares, and that the likelihood of liability being imposed increases as lawyers and courts become increasingly aware of financial realities. d)unacceptable consid: some kinds of consid flatly prohibited by stat, eg CBCA s.25(3) requires consid of money, property or past services and other forms aren‟t permitted even if they‟re adequate and bargain is otherwise fair - such consid is unacceptable whatever it‟s real worth - under CBCA, promissory notes or promises to pay, nonproperty assets, and future services are unacceptable consid (BCCA s.43) barriers to partly paid shares are to protect creditors as well as share purchasers themselves on theory that they might otherwise subscribe for too many securities from a credit-granting issuer prohibition on non-property assets: See v. Heppenheimer, 1905, NJCC FACTS: Co paid $1.5 million for mills and consolidated them into one block. Listed goodwill from purchase as $3.5 million for total of $5 million in assets. Claimed that goodwill was result of having monopoly. Shs bought bonds for $1 million; and stated capital listed as 3 million for common shares, and 1 million

for preferred shares. But co only paid $1.5 million total - said goodwill was consid for shares. DECISION and REASONS: What co did was unacceptable as goodwill not an asset brought into the co therefore not consid for shares. Only used goodwill to increase capital total thereby increasing amount of capital it could attain. Didn‟t matter that co had good intentions and good faith in future operations. Under our stats, this type of consid would be unacceptable. e)remedies: dirs can be personally liable for failure to make sure share fully paid under s.118(1) CBCA/45 BCCA breach of stat provision to issue shares where not fully paid - so would be potential penal sanction - s.251 CBCA/358 BCCA - to protect against this, would want to keep evidence which shows full payment (eg cheque) or have appraiser‟s report to ensure value of past services or property various persons may be affected - creds, shs - so may be ways for them to bring action. Shs may be able to bring personal action that their funds/rights diluted which resulted in them suffering a loss  stat tort or misrep derivative claim - co has suffered loss by issuance of shares so shs can bring action on behalf of co - damages paid to co so would only get share as regularly entitled oppression action - show that your rights were prejudicially affected, unfairly disregarded, were oppressive - shs or creds can bring action creditors - tort claim on basis of misrep or can claim under derivative or oppressive claims - oppression remedy good for creds b/c can get order against particular sh to pay any amount not paid difficulty with misrep theory is that any prejudice under it presumes reliance and creds may not examine balance sheet before issuing credit Bing Crosby Minute Maid v. Eaton, 1956, SC of Calif: FACTS: Issued shares at discount effectively. Co went bankrupt and creditor sued sh Eaton. REASONS: E sued on misrep theory and court notes misrep theory and stat breach theory. Stat did seem to indicate that could sell on discount (note our stat may be more strongly against discount) so main basis was on misrep. Held that it wasn‟t necessary for pff to show reliance. Put reverse onus on def who had to rebut reliance of 3rd party but 3rd party doesn‟t have to prove reliance. To defend, def had to show pff knew of watering of the stock and not established here. (v)Pre-emptive Rights: if you had 4 shs each with 25% of shares, they have 1/4 of vote so wouldn‟t want co to issue new shares or their interest would drop - to protect against this, give pre-emptive right p.e. right - have to offer shares first to existing shs and each has right to take up pro rata amount (eg 25% of new shares to maintain their interest) p.e. rights common in small corps with fewer shs CBCA s.28: p.e. rights are optional feature to put in articles - there are exceptions to where they‟ll be allowed

BCCA s.41: p.e. rights are mandatory for non-reporting co - more protective reporting co is one with its stock listed on any stock exchange or it has issued shares pursuant to a prospectus - reporting co has option of p.e. rights (vi)Dividends: can be in cash or in specie (something other than cash) - eg stock dividend where shares in same co issued to shs - tends to lower price of shares so not so great at power of dirs to decide if divds will be given UNLESS otherwise provided in articles (BC) or bylaws (fed) - can contract around this power generally no oblig for dirs to give divds - is rare to make them declare a divd when dirs do declare divd, it becomes debt of co divds can only be paid out of retained earnings/profits of co if pay divd when co insolvent, dirs can be held personally liable - insolvent when liabilities greater than assets or can‟t pay debts as they come due - personal liability to discourage abandoning ship - CBCA s.42; BCCA s.151(1)(c) - dirs can also be personally liable if paying the divd would make co insolvent when declare divd, set record date and at that date, those people are the shs who are entitled to the divd - there‟s usually some date set before record date called the “x record date” where if you buy before this date you get divd but if buy after you don‟t - this allows time for person to be recorded in co‟s books - x record date normally set 4 days before record date (vii)Regulation of Title and Transfer: try to keep track of who shs are and to know who is entitled to rights a)share certificates: certif gives evidence that you have bundle of rights - usually gives name of co, name of owner of shares, class of shares, may list share rights (or statement that copy of sh rights available) - a person showing self to be owner of share is entitled to get certif b)bearer form and registered form: bearer form is when owner of share is person bearing the share - creates problem if lost or stolen or for co to identify who shs are; registered form is only form allowed by BCCA and CBCA and owner of share is person whose name appears on certif - mechanism for keeping track of who shs are c)problems with transfers: BCCA - transfer share by assignment - problem with this is that assignee takes it subject to equity claims on it and so doesn‟t know if has good title or not or exactly what assignee‟s rights are; CBCA - makes share certif a negotiable instrument so aren‟t subject to equities d)“street form”/nominees and depository institutions: corps deal with paperwork by having nominee shs who would hold shares as nominal owners and who have legal title so could enforce rights - if they transfer the share, change bookkeeping so just have to switch names without having to issue new share certif - shs are beneficial owners and so when transferred my name switched to yours so nominal owner now holding on behalf of you, not me - now use depository institutions which are optional in Can but 95% of new issues use these now (eg Cdn

Depository of Securities) - institution holds as nominee for beneficial owner but only institution listed on books - often brokerage firms are listed as beneficial owners holding on your behalf as your broker - broker then nominee holder and you beneficial owner - can have several levels of this and creates problem for giving notice of meetings - securities administrators set out in National Policy 41 how to give notice to shs of meetings which is required 120 days before meeting this not legis, only regulation - status dubious after Ainsley (admin case - eek!) B. DEBT SECURITIES 1. Types - Notes, Bonds Debentures (i)notes, commercial paper: promissory notes are negotiable - usually very short time to maturity, eg within 30 days can sell within market but are usually sold for less than value (ii)bonds and debentures: evidences of indebtedness provide on face for payment at particular time in future and in interim will pay interest at regular intervals as far as law concerned, no distinction b/w bonds and debentures (debs) but some refer to bond as “secured debt” and deb as “unsecured” 2. Wide Variety of Terms (i)Sweeteners: a)conversion rights of bond to shares in co - advantages: shares have no fixed return so get more money if co does well, downside risk less as get divd on shares b)participation rights/income bonds - some right to share in profits of co c)warrants - gives you right to buy some other security in co, eg shares - must exercise warrant by particular date - has price on it: striking price which shows price you can buy at - quite often above market price but you have potential that market price may go up and you could make a return - warrants sometimes detachable so if you hold bond can sell off warrant but keep bond, ie can sell them separately (ii)Protection terms: -corp stats provide shs with thick set of rights and remedies but rights of bondholders and debholders depend more upon their contract or trust deed - CBCA ss.82-93 give more limited protection to debtholders than rights given to shs under stat, with any further rights to be provided in trust deed -CBCA s.238 - on literal reading of complainant, bondholders have same status as shs to bring derivative and oppression actions under ss.239 and 241 however this doesn‟t mean that bondholders‟ enforcement rights will be same as those of shs - at common law, bondholders had severely restricted rights to litigate on behalf of their corp

-b/c of this, debholders rely for protection primarily on contractual provisions of the trust deed - most important terms in k state amount of money borrowed, interest rate, and times for repayment and also whether a security interest given in issuer‟s collateral and what the interest is a)take security interest in particular asset or general assets of co so you have priority in insolvency over other creditors b)negative pledge - co won‟t give any debt securities with rights having prior interest or rights to ours c)ratio tests - co has to maintain certain ratio of liabilities to assets or can have working capital ratio - minimum times interest earned - ratio of profits to interest - profits normally have to be 3 times interest to be paid d)sinking fund - requirement that co pay certain amount in trust to trustee every year (calculated to grow into certain amount) or put serial number on bonds and every year co must retire certain bonds by paying off debt (drawn by lottery) e)default rights - acceleration clause: if you default, you must pay total plus interest now, not years from now - can apply if violate negative pledge or ratio test; if violation, bondholders get voting rights, right to put in certain number of directors, seize securities they may have, appoint a receiver, put in receiver manager who operates co and collects revenue to pay down debts (iii)Enforcement: what if you have lots of bonds out there? costs of monitoring co to see if it‟s following terms may outweigh value of bond - could sit back and see if someone else monitoring then you get full value free rider problem doesn‟t make sense for any bondholders to enforce but they have problem if selling bond b/c if there‟s no enforcement, who‟d buy bond? co can signal to people that it will pay bonds by setting up trustee at trust co to increase value it can sell bonds for - trust indentures - trustee obligated to make sure co complying with bond covenants - enables co to get more money for bond statutes: tried to address concern that co may put in trustee who‟s their friend or an idiot that wouldn‟t enforce: -s.83 CBCA/98 BCCA: conflicts of interest re trustee - can be replaced -s.84 CBCA/98 BCCA: trustee must be qualified - licenced under fed or prov legis -s.89 CBCA/101 BCCA: trustee can get access on demand to list of deb holders - may be necessary if bondholders have voting rights or on default -s.89 CBCA/101 BCCA: trustee has power to demand evidence of compliance of co -s.91 CBCA/105 BCCA: trustee charged with duty to act in good faith and in best interest of bondholders - must act with skill and due diligence of a reasonably prudent trustee s.96 BCCA/82(1) CBCA: def‟ns of event of default; trustee; trust indenture s.97 BCCA: ss.96-107 apply to a trust indenture

s.99 BCCA/85 CBCA:debholder can demand list of other debholders from trustee s.100 BCCA: debholders must give names and addresses to trustee on demand s.102 BCCA/86, 87, 88 CBCA: what evid of compliance with s.101 must be s.103 BCCA/89 CBCA: debholder will give trustee evid of any action required or permitted to be taken by debholder s.104 BCCA/90 CBCA: trustee must give notice of default within 30 days s.106 BCCA/92 CBCA: trustee not liable if relies and acts in good faith on statements s.107 BCCA/93 CBCA: trustee and debholder can‟t k out of s.105/91 duties s.82(2) and (3) CBCA: (2)part applies to trust indenture if debt obligations issued under it are part of distrib to public; (3)Dir may exempt if indenture subject to laws of other juris that‟s substantially equivalent to this one (iv)Corporate reorganizations: mgmt interests conflict with those of debtholders on insolvency - may resist bankruptcy proceedings where face losing job permanently debt firms can reduce cost of credit by conceding termination rights to monitoring creditors, under which managers can be quickly replaced on default this has reduced agency costs - Can private receivership served to police misbehaviour by managers by bargaining for right to appoint receiver to seize control of assets and manage them on behalf of debholders Cdn Bankruptcy and Insolvency Act may stay this right and it could be regretted on agency cost analysis - entrenched managers will resist valueincreasing control challenges by shs or creditors which will lessen their chance to get return (v)Scaling back senior rights: rights of senior lenders might be scaled back through private agreement among all lenders (called a “work-out”) or through a majority clause in a trust indenture maj clauses in indenture are provisions in the k b/w trustee and issuer that permit the alteration of bondholder rights - maj cluases typically permit change in debt holders‟ rights on 2/3 approval of those voting on matter - scheme need not be submitted to court though dissenting debtholder may apply for s.241 CBCA oppression action don‟t require unanimity for changes b/c that may lead to free rider problems one may hold out on reorganization and if claims of others are cancelled, the value of the hold-out‟s interest will increase and this makes the reorganization unstable with possibility that none would consent as long as there‟s possibility of increase by holding out may want judicial review of fairness of scheme like have for BIA or CCAA reorganization but this not likely under maj clause and is entirely unavailable in a work-out - US enacted Trust Indenture Act to restrict scope of reorgs through a maj clause but this not done in Can - some portions of US Act incorped in CBCA

ss.82-93 but the restrictions on maj clauses weren‟t - justification for continued existence is probably the reduced costs of less formal and quicker reorg technique standard of fairness when jud approval of reorg scheme is sought will depend on nature of proceedings - in liquidation, senior debtholders‟ absolute priority will be enforced so juniors get nothing until seniors fully paid - in Eng and likely Can have relative priority doctrine where juniors permitted to participate even though seniors not made whole relative priority doctrine creates skepticism about protective value of trust indentures on default - don‟t get full value and your rights may be scaled back chief criticism of relative priority is that it effects wealth transfer from seniors to juniors b/c it fails to respect seniors‟ priority rights - from ex ante perspective wouldn‟t expect this transfer effect to persist, instead senior claims will be discounted on issuance to reflect possibility of subsequent distributional effects not yet determined whether absolute or relative priority more efficient absolute requires greater investment by courts in production of info since it‟s based on an evaluation of the firm as a going concern however absent this, it‟s difficult to make estimate on fairness of payout - more serious criticism of absolute priority test is that it prolongs length of time corp spends in reorg as juniors have incentive to delay implementation of scheme - relative priority doctrine might reduce adverse incentive costs of equity misbehaviour, since it gives shs a greater participation in downside returns (vi)Varieties of debt securities: debt securities classified according to nature of security interest mortgage bond: secured by mortgage over issuer‟s fixed assets, particularly real estate, and is frequently the corp‟s most senior security - default value of prop usually less than its going concern value, and bondholders‟ rights in collateral will merely establish priority in reorg when issuer in financial difficulties requires more money, bondholders may expressly agree to subordinate their claims to new lenders, who are issued prior lien bonds - corp‟s assets may also be mortgaged more than once and then speak of “First Mortgage Bonds” and “Second Mortgage Bonds” and latter is deferred to former collateral trust bonds - secured by an interest in issuer‟s securities or accounts receivable subordinated indentures aren‟t merely unsecured but also provide that other outstanding indebtedness has priority to repayment - these may be issued when corp has excessive amount of debt and is unable to attract equity investors subordinated obligations are unconditional promises to pay interest and principal but are deferred until seniors are paid bond provisions achieved much complexity as reaction to enormous shifts in interest rates - purchase of bond at fixed rate is a gamble on interest rates generally as well as on the solvency of the firm rate of return on outstanding securities, based on current market values and expressed in percentage figure, is the securities‟ yield

increase in interest rates in 1960s-70s resulted in massive transfer of wealth from debt to equity holders and this led to exotic debt provisions in 1980s as moved to shorter maturity periods, extendible debt which gives option to convert to long term debt if interest rates fall, retractable debt where had long maturity but holder could force earlier redemption as hedge against increased rates low-grade bonds more popular now - they lack investment-grade rating and have high chance of default - referred to as junk bonds - aren‟t entirely objectionable b/c do have promise of higher income 3. Trustees Under Trust Indentures (i)Lawrence Report: trustees under indentures almost invariably one of fed or prov incorped trust companies in Can Committee wants to ensure that security holders will enjoy services of a disinterested indenture trustee and that trustee will conform to high standards of conduct recommended ss.82-93 be enacted and they were - these sections impose upon trustees duties and responsibilities equal to their proper role as fiduciary for security holders and trustee must be independent and conform to high standard of conduct when performing these duties (ii)Role of the trustee: extent of responsibilities under ss.82-93 remains unclear - hasn‟t yet been established in what circumstances, if at all, the trustee owes affirmative duty prior to default prior to stat codification of duties, trustees under trust indenture said to owe same duties of loyalty and care as ordinary trustees - but duties now codified and under s.93 you can‟t exempt these duties, s.91 standard based on trustee for debentureholders not ordinary trustee trust indentures normally state in detail how rights may be enforced on default “event of default” typically defined to include any default in payment of principal or interest as well as breach of any other covenant - on this event, trustee may, in his discretion, accelerate all payments of principal and interest and this usually leads to bankruptcy for issuer and this often more harmful to security holders than permitting issuer to continue in default - nothing in CBCA requires trustee to enforce covenants apart from general s.91 duties (iii)No action clauses: most trust deeds place large obstacles in path of indiv security holder who seeks to enforce his claim - typical “no action clause” prevents debholder from exercising any remedy unless trustee fails to act on receipt of “debholders‟ request”, signed by holders of at least 25% of principal amount of outstanding debs - if trustee fails to commence proceedings any debholder may bring indiv action at own expense but they‟re seldom able to afford to do so

practical effect of no action clause is therefore to leave question of when to enforce the indenture to sole discretion of trustee 4. Convertible Securities, Rights and Warrants (i)Conversion: conversion broadly defined as act of exchanging securities of one class for those of another, the exchange being effected by surrender of original security and issuance to holder of new security in its place privilege of conversion is optional and is created by a certif of incorp, trust indenture, deed of trust or other document setting out full terms and conditions under which privilege may be used fundamentally conversion privelege is independent optional right but is inseparably connected with security which evidences it and is available only to the holder and may not be exercised by or transferred to one who isn‟t holder of the security itself holder of convertible obligation isn‟t stockholder in equity or at law nor is he a subscriber to shares - has option of becoming stockholder but has none of those rights until he complies wiht requirements of contract warrants and convertible securities closely related in that both are contractual options for purchase of shares - only essential difference is in consid payable warrant is exercised by payment of cash while privilege of conversion is exercised by surrender of a corp obligation or share of stock (ii)Rights and warrants: warrants are options to acquire shares for cash consid and often are issued with debt securities - when securities are issued with a warrant, warrant permits its holder to subscribe for different class of securities for cash - if warrants attached to bonds, they can‟t be sold separately but they‟re generally detachable and can be transferred even if the bonds are retained rights are options to purchase shares which are usually offered to existing shs at current market value on pro rata basis - while warrants generally give holders the right to purchase shares over period of several years, rights are seldom exercisable more than a few months after issue

A. METHODS OF DISTRIBUTING 1. Direct Issue -private corps normally - corp gives shares directly to various people -rights issue: use existing shs as your market for new shares - give them rights (like warrant except buy it for less than market value) as incentive to buy shares 2. Bought Deal/Firm Offer -have securities firm (underwriter) buy entire issue and then they go out and try to sell them on market - firm underwriting (they will buy total)

-normally they want discount price so they can make profit selling in the market - fee for taking risk of selling -underwriters often form syndicate to take part in selling to distribute risk 3. Best Efforts -not underwriting at all -engage firm to do best efforts in selling securities and they do so for a commission - no guarantees that you‟ll get what you need and no protection for business if shares turn out to be unmarketable 4. Stand-by Underwriting -securities firm may stand-by to take up the unsold portion of the issue to some maximum amount or proportion 5. Role of the Underwriter -in best efforts, function is to provide services in marketing securities -in bought deal, underwriter provides form of insurance against fluctuation in market price -underwriter also provides some assurance to market that info with respect to issuer is credible - uw has greater incentive to protect reputation as it‟ll be involved in selling many issues of securities and markets will thus have more experience with their credibility B. PRIMARY AND SECONDARY MARKETS -primary: corp gets the shares out to the firms, shs and bondholders -secondary: don‟t buy shares from the corp but done throught trades b/w people who have bought various securities - issuer not involved -commonly done through stock exchanges -retail investors: individual - less common -institutions: banks, trust co, mutual funds, pension funds, investment co -can have public co without having shares listed on the Exchange - “over-thecounter” trades - difference b/w on- and off-Exchange blurred b/c now can trade by computer C. SECURITIES LEGISLATION, POLICY STATEMENTS, AND ORDERS -12 juris‟ns of sec legis in Can (no fed - started to but provs objected) -fair degree of similarity across provs, eg registering, take-overs, etc. -attempt to create uniform policy across Can in 1960s but gradually broke down now try for compatibility - recently started considering national securities commission to replace prov ones -have closed system stats - NF, NS, ON, SK, AB, BC, PQ - MB has old uniform act stat -create policy statements on basis of grants of discretion to securities administrators if it‟s within public interest - effectively they‟re legislating as set out what you can/can‟t do and creates sanctions - recent cases says this something

you can‟t do in policy statements so provs give regulatory powers to security administrators - contain broad policy directions as well as detailed requirements -orders - exercise discretion in particular areas - can grant exemptions and can pass blanket orders for fact situations that occur frequently and it applies to all such situations - indicate how securities administrators will exercise their discretion D. PROSPECTUS DISCLOSURE -prospectus provides info about the security being sold and about the issuer -regulations tend to set out forms for prospectuses for different types of issuers and forms contain lists of items that must be disclosed -prospectus typically sets out attributes of security, estimated proceeds of issue, info on issuer, loan and share capital of business, backgrounds of dirs, etc. -in addition to these, issuer must provide full disclosure of all “material facts” which is a fact that significantly affects, or would reasonably be expected to affect, the market value or price of the security -estimates of future earnings were formerly prohibited but are now allowed subject to constraints intended to protect investor against being misled - if include future forecasts, must also have accountant‟s written comments based on review of this info 1. The Prospectus Requirement -require prospectus disclosure when securities are distributed -concern that people won‟t tell all the risks so require prospectus to be sure all the info gets out, eg rights attached, business info, people involved -anything that‟s material and may effect price must be included -have to get receipt for prospectus before you can distribute a security -CBCA s.193: corp that files or distributes a prospectus, statement of material facts, regis statement, securities exchange take-over bid circular or similar document relating to distrib to public of the securities of the corp must send copy to Dir 2. Definition of Security -not just shares, bonds, debentures or other evidence of indebtedness but also oil royalty, collateral trust certif, etc. - specific terms that they knew about when drafted stat and also general terms eg profit-sharing agreement, anything known as security, includes investment contract definition of security under most Cdn securities legis uses word “includes” thus def‟n could be extended to cover items not set out in def‟n itself -S.E.C. v. W.J. Howey Co., 1946, USSC - FACTS: H would take people on tours through orange groves and encourage people to invest in them. Divided up grove into strips which you could buy. H would manage whole grove and would figure out profit of whole grove and you‟d get share proportionate to how many strips you owned. ISSUE: Was that a security? DECISION: Was a security. REASONS: created 3 part test

(how original): 1)transaction whereby person invests; 2)in a common enterprise; 3)and led to expect profits solely from efforts of promoter or 3rd party. COMMENTS: Test known as “common enterprise test”. -modified slightly in Pacific Coast v. O.S.C., 1978, SCC: COMMENTS: Held that there wasn‟t need for enterprise to be common to investors b/w themselves. Common enterprise exists where key to venture was efforts of the promoter alone for a benefit to both promoter and investor. Not necessary for profits to accrue solely from efforts of 3rd party as long as efforts of the 3rd party are “undeniably significant” for enterprise‟s success. -State of Hawaii v. Hawaii Market Center Inc., 1971: COMMENTS: HMC raised capital for store by selling memberships in the store which could be acquired by buying merchandise worth low amount for much higher amount. Members could earn returns by selling other memberships and when they did, initial member would earn commission. Thus members returns didn‟t come “solely” from efforts of 3rd parties. Found to be a security. Used “risk capital test” which said that an investment k is created whenever: 1)an offeree furnishes initial value to an offeror; and 2)a portion of this initial value is subjected to risks of the enterprise; and 3)furnishing of initial value is induced by offeror‟s promises or reps, which give rise to reasonable understanding that a valuable benefit of some kind, over and above initial value, will accrue to offeree as result of the operation of the enterprise; and 4)offeree doesn‟t receive right to exercise practical and actual control over managerial decisions of the enterprise. Like Pacific Coast, it moves away from “solely”. 3. Definition of “Trade” -any sale or disposition of a security for valuable consid or anything in furtherance of sale/disposition of security for valuable consid - very broad - distribution of pamphlet to peak interest would be trade -must have a prospectus to do these things 4. Definition of “Distribution” -trade in a security that hasn‟t been previously issued OR buy back of share of own shares (treasury stock - in Can can‟t hold them but must cancel them) and if you resell them, it‟s a distribution OR if control person (ability to elect majority of dirs - anyone who owns 20% or more of shares is deemed to be a control person) sells shares, it‟s a distribution -if sell shares, must get prospectus -prior legis used to include “distrib to the public” but “the public” created uncertainty so most Can juris adopted closed system under which expression “to the public” has been dropped -inclusion of sales of shares by control person has potential important ratifications, eg fact that control person may be departing may be material to corp affairs; if large block of shares is to be disposed of, that fact is

material to market; control person may be choosing to trade when he‟s in possession of undisclosed material info concerning the issuer; and control person may be conduit for distrib of securities to members of public who wouldn‟t qualify for an exemption from prospectus requirement - last reason likely strongest however sales by control person are a distrib even where there‟s no possibility that he‟s acting as an underwriter on a primary distrib -20% requirement not absolute - In the Matter of Deer Horn Mines Ltd., 1968, ON Sec Comm: Held that 14.5% interest sufficient. Question of whether or not block of shares materially affects control isn‟t one capable of arithmetic measure alone. 5. The Prospectus Distribution Process -primary market disclosure -first make arrangement with underwriters -second step is to start preparing preliminary prospectus - due diligence examination - try to ensure everything in prospectus is reasonably accurate -third you get receipt for preliminary prospectus from sec administrators -sec administrators (SA) will vet prospectus - usually takes 5-8 weeks they look at the prospectus and ask questions about potential problems -SAs send comment/deficiency letter to issuer -issuer tries to correct deficiencies -issuer provides SA with final material and they check it usually within days and if it‟s okay, they‟ll issue receipt -in interim waiting period before you get final receipt you can solicit expressions of interest and provide copies of prelim prospectus but can‟t sell until you get the final - very limited in what things you can tell potential investors, eg price, where to buy -must give final prospectus to buyer and they have 2 day cooling-off period to decide whether to buy or withdraw -have multiple juris in Can so they‟ve developed scheme to deal with this designate principal juris but issuer files prelim prospectus and supporting materials in each juris where securities are to be distributed - principal juris issues deficiency letter to all juris and if they have problems, they respond to principal juris who must deal with these - 1 letter sent to corp -agreements b/w Can and US - in Can National Policy 45 permits offering of securities in Can based on compliance with US securities laws - issuer must prepare prelim prospectus for Cdn offerings which complies with US SEC requirements supplemented with additional info required by NP 45 not all eligible for this as have different criteria for different securities criteria focus on issuer having provided base of disclosure through continuous disclosure requirements and evid of market following based on such things as having listing on Stock Exchange -most Cdn securities acts provided some room for merit review where SA can refuse to issue receipt, eg where unconscionable consid has been or

will be paid; proceeds of issue insufficient to accomplish purpose of issue; issuer can‟t reasonably be expected to be financially responsible b/c of finan conditions of issuer or its officers, dirs, promoters or control persons; issuer‟s past conduct leads to conclusion that it can‟t conduct interests with integrity; or person who‟s prepared or certified the prospectus is unacceptable 6. Sanctions for Non-Compliance -failure to deliver prospectus: don‟t provide prospectus - stat civil sanction for rescission or damages - in most juris, right of rescission must be exercised within 180 days; also penal sanction of fine/imprisonment; can have admin orders, eg order directing compliance, order directing person to cease trading, if registered dealer can get reprimand, suspension or restriction of regis -failure to file prospectus: penal sanctions but no stat civil action; can get admin orders 7. Statutory Civil Liability for Misrepresentations or Omissions -stat civil remedy for misreps - remedy of rescission or damages available against certain people including dirs, issuer, underwriter, certain officers eg prez, CEO, treasurer, and anyone who provided expert opinion in prospectus can be liable - can include lawyers -stat civil action goes beyond common law action for negligent misrep under Hedley Byrne v. Heller, 1964, HL - don‟t have to prove reliance; defendant can get off if can prove pff knew of misrep; don‟t have to prove negligence; don‟t have to prove causation - def must prove he wasn‟t neglig or didn‟t cause damage - show due diligence (that‟s why due diligence efforts done at beginning stage of distrib) -def‟n of misrep is broad - an untrue statement of a material fact or an omission to state a material fact that‟s either required to be stated or is necessary to prevent a statement that‟s made from being false or misleading in circumstances in which it‟s made - material fact typically defined as fact that significantly affects or could reasonably be expected to signif affect the market price or value of the securities -potential defences - show that pff had knowledge of misrep; show that misrep didn‟t cause the loss; misrep wasn‟t made by particular def and def had no reason to believe and didn‟t believe that statement was false; def didn‟t consent to filing of the prospectus or withdrew consent prior to purchase by purchaser - most important defence is due diligence where def must show that they conducted reasonable investigation to provide reas grounds for belief that there wasn‟t a misrep - standard of reas is that required of a prudent person in the circumstances of the particular case

E. CONTINUOUS DISCLOSURE -secondary market disclosure -must keep investors subsequently informed -applies to recording issuers only - recording issuers are those with securities issued on a stock exchange or who have issued a prospectus or other disclosure document -kinds of disclosure: regular financial statements - annual audit of finan statements; proxy circulars - info relating to meetings and persons having ownership of more than 10% of voting rights or indebtedness of dirs; insider trading reports - insiders (dirs, officers) must report all their trades; timely disclosure - any material info or big changes must be disclosed immediately; annual information form (AIF) - gives update of what‟s happening, includes mgmt discussion and analysis which gives results of last couple of years and what they think about it -if fail to file these, there are penal and admin sanctions but no stat liability for misrep - to get liability would have to make Hedley Byrne argument and then would have to prove reliance which is hard for average investor to do F. POP SYSTEM, SHELF OFFERINGS, PREP PROCEDURES 1. The POP System -POP - prompt offering prospectus -came as competitive response to US and Europe legis to make it easier to raise money overseas -file AIF which gives most info that was in prospectus and then prospectus would only have to contain info on particular security therefore vetting process is quicker -prospectus under this system referred to as short form prospectus -not everyone can use POP - there must be sufficient build-up of info by way of continuous disclosure to allow market to assess value of securities offered by issuer so under NP 47 one test of eligibility to qualify for POP is that issuer must have been a reporting issuer in juris in Can for at least 12 months and must not be in default of any of its continuous disclosure documents - another concept behind POP is that there must be sufficient market following of issuer so that info in documents will reflect market price so another test is test of market following - includes public float of equity securities of at least $75 000 000 and another test is volume of securities available for trading and another test is that issuer have an approved rating for offerings of non-convertible debt or preferred shares 2. Shelf Offerings -prepare prospectus for particular security omitting info on price but don‟t issue security now --file prospectus and get it vetted then put it on shelf until you want to issue it and you don‟t price it until day you issue - distribute prospectus supplement when issue which gives price but it doesn‟t need to be vetted

-could decide to issue almost overnight -also not available to everyone - to use shelf, must be eligible to use POP system - criteria intended to assure that market has base of info and that there‟s sufficient market following to assimilate info in both shelf prospectus and prospectus supplement quickly -under this system, issuer can also issue variable term debt where terms such as interest rates, price, denominations, and currency will be determined at time of sale -as with POP, continuous disclosure, AIF, and prospectus supplement incorped by reference are deemed to be part to the prospectus for purpose of stat civil action for misrep in prospectus 3. PREP Procedures -PREP - post receipt pricing -directed at waiting period after filing prospectus -file final prospectus without price, get receipt without this info and within next 5 business days you can file price -same eligibility concerns as POP and shelf so eligible to use PREP if eligible to use POP - however there‟s more lenient allowance for PREP as amount of info that market must assimilate is less so can be eligible for PREP if issuer has equity securities outstanding that are listed and posted for trading on recognized stock exchange - includes TSE, Montreal Exchange, VSE, NYSE, and American SE

A. AGENCY COSTS 1. The Nature of Agency Costs -agency costs arise when one person relies on another to do something on their behalf, eg J runs business as sp where if she shirks she bears the full costs therefore no agency costs. She could introduce other investors but J would still be the primary person. She has greater incentive to loot or shirk b/c she‟s not bearing whole loss - agency cost. Could also have agency cost if hire employee paid on straight wage - they have no incentive to work so will shirk. J could overcome this by monitoring them but this also brings costs. Employee could signal to J that won‟t shirk but this creates bonding costs. -agency costs are sum of monitoring costs, bonding costs and the residual costs - residual costs exist where marginal costs of monitoring or bonding outweigh the marginal gains from these activities 2. Agents and Principals in a Corporation -mgmt are considered agents and principals are the stakeholders including shs, creditors, employees, customers, community at large - interests of principals may differ

-mgmt can be principal, eg where receiver brought in or when firm policies assigned to secured lenders 3. A Hypothetical Claimholder‟s Bargain in Corporation Context - managers would agree to be bound by policies which maximize wealth of corp and all participants - agreement is what claimholders would‟ve come to if they had thought about it before it occurred 4. Enforcement Problems -hypothetical bargain may be difficult to maintain - it may make sense to agree now but in future may lose incentive - agency costs will arise b/c of difficulty in enforcing over time 5. Strategies to Reduce Agency Costs -get rid of agency relationship altogether - not realistic as it was entered into b/c it was beneficial - benefits may outweigh costs -governance strategies which are harm prevention devices that reduce agency costs by attributing monitoring duties to claimholders - puts claimholders in better position to monitor activities - eg may grant voting rights to one set of claimholders or impose gatekeeping responsibilities on dirs and auditors -liability strategies - bonding tactics in which managers promise efficient performance, with performance made more creditable through imposition of liability on breach of promise - manager‟s assets serve as bond of fidelity of his promise - personal liability if doesn‟t perform 6. Agency Costs and Efficient Markets -if market price reacts to these strategies (  ), there‟ll be incentive for mgmt to use them - benefit to corp if price goes up while costs go down -enabling corp law - exists where govt sets up default stat - sees market as efficient -mandatory corp law - should say what corp law is - markets aren‟t efficient so should impose agency strategies B. DIRECTORS AND OFFICERS 1. Role of Directors and Significance of Election of Directors -under CBCA s.102, dirs manage the corp and that can‟t be changed without a unanimous sh agreement - this virtually impossible for large, publicly-held corps -under BCCA s.141, dirs shall manage or supervise mgmt of business of co; (2) no limit or restriction on dirs powers shall be effective against person who doesn‟t have knowledge of this limit - manage or supervise power more open than CBCA -dirs can appoint officers and delegate duties to them - CBCA s.121

-election of dirs by shs is way shs can have some control over mgmt of the corp - significant even if group of shs can‟t get together to kick out dirs, they can buy more shares so have voting power to get rid of them takeover - articles/bylaws provide for election of dirs 2. Residency and Qualification Requirements -both acts require at least 50% of dirs to be residents of Can - CBCA s.105(3)/BCCA s.133(1) -BCCA s.133(2) - further requirement that at least 1 must reside in prov -residency requirement creates tax problems if foreign corp creates Cdn subsidiary so developed ways to overcome this - contract with nominee dir that they will act at bidding of foreign corp (validity questionable b/c it‟s against public policy) or could have unanimous sh agreement that allows them to control and takes this power from dirs (but aren‟t they effectively taking on role of dirs - CBCA s.146 you‟re dir if you take on dir‟s duties) -BCCA s.132: every co shall have at least 1 dir, reporting co must have at least 3 dirs; Table A Art.10.2 - number of dirs is 3 -CBCA s.102(2): corp shall have 1+ dirs but corp who has or will issue securities to the public shall have no fewer than 3 at least 2 of whom aren‟t officers or employees of corp -BCCA s.138/CBCA s.105(1): not qualified to be dir if under 18, insane, not an individual, or have bankrupt status (CBCA) - BCCA adds that you‟re unqualified if convicted of certain offences or if corp is reporting corp, if your registration has been cancelled under certain Acts -BCCA s.139: every dir who‟s required by articles to hold specified share qualification shall obtain this within 2 months after election or by time fixed in articles, whichever is first; (2) office of dir vacated if dir doesn‟t get share qualification or ceases to hold this qualification; Table A Art.10.3 dir not required to have share qualification -have residency requirement b/c felt that would ensure dirs would promote Cdn national interests but this not a stat duty of dirs so foreign corps could simply appoint Cdns who don‟t have this nationalism -in reality, proportion of resident Cdns on boards considerably higher than requirement in stats -BCCA s.140: co must keep register of dirs containing certain info 3. Removal of Directors -shs may want to remove dirs at some point midway through their term so want to avoid having dirs locked in -CBCA s.109 - dir can be removed by ordinary resolution (more than 50% of votes cast) -BCCA s.154(1): sets out when dir ceases to hold office; (2) says when resignation is effective; (3) says when co may remove dir by special resolution (75% of votes cast)

-BCCA s.155: unless articles say otherwise, remaining dirs may fill casual vacancy; (2) where number of dirs below quorum requirement, continuing dirs may act for purpose of filling vacancies up to that number or of summoning general meeting but for no other purpose; (3) where there are no dirs, members holding maj of shares entitled to elect dirs may, in writing, designate 1 dir to exercise (2) rights -BCCA s.163: co must hold annual general meeting within 15 months after date of incorp, amalgamation, or effective date of certif of continuation, and after initial meeting, must have one within every calendar year; (2) Reg may extend this period for no longer than 6 months -CBCA s.106: notice of dirs shall be sent to Director; (2)each dir in this notice will be dir until first meeting of shs; (3)shs will elect dirs by ordinary resolution at first meeting and at following annual meetings where election required; (4)can have staggered terms for dirs; (5)dir not elected for specified term ceases to be dir at close of first annual meeting of shs after his election; (6)dirs continue in office if new dirs aren‟t elected; (7)if shs fail to elect minimum number of dirs required by articles b/c of disqualification, incapacity or death of candidates, dirs elected at that meeting can exercise all powers of dirs if they constitute quorum; (8)dirs may appoint dirs, if articles allow it, for term expiring no later than close of next annual meeting but number of appointees can‟t exceed 1/3 of number of dirs elected at previous meeting -BCCA s.134: subscribers to memo are 1st dirs and successors are elected or appointed according to articles -BCCA s.136: no election of dir valid unless he consented to act as dir in writing before election or if elected at meeting and was present and didn‟t refuse to act as dir; (2) consent only effective until next election or appointment of dirs unless consent specifies some other time -BCCA s.135: sets out notice requirements for electing dirs at general meeting -BCCA s.137: co must file Form 10 within 14 days after election of dirs; (2) offence to violate (1) -BCCA s.156: co shall file Form 11 within 14 days giving notice of someone ceasing to be a dir - if don‟t it‟s an offence under (2) -CBCA s.108: dir ceases to be dir when he dies or resigns, is removed under s.109, or is disqualified under s.105(1); (2) resignation becomes effective at time written resig is sent to corp or at time specified in resig, whichever is later -CBCA s.111(1) quorum of dirs may fill vacancy except if vacancy results from increase in number or minimum number of dirs or from failure to elect number required by articles; (2) if dirs don‟t have quorum, they‟ll call special meeting of shs to fill vacancy but if don‟t, any sh can do so; (3) if class or series has right to elect one or more dirs and that position vacant, remaining dirs elected by that class can fill vacancy or sh of that class/series can call special meeting; (4) articles may provide that only shs

can fill vacancy by vote; (5) dir appointed/elected to fill vacancy holds office for unexpired term of predecessor -CBCA s.133: dirs shall call annual meeting within 18 months after incorp and every 15 months after, and may call special meeting any time -CBCA s.112(1): shs may amend articles to increase or decrease number or minimum and maximum number of dirs; (2) where shs do this at meeting, they may elect requisite number of dirs to meet this number at the same meeting -CBCA s.113: corp must send notice of change in dirs to Director within 15 days -Bushell v. Faith, 1970, HL: FACTS: Co had 3 dirs, B, B, and F, who were siblings. Each held 100 shares. Articles said that if vote to remove dir, that dir will have 3 votes per share. B and B wanted F out so requisitioned meeting and held vote. B and B said they won 200-100 but F said he won 300-200. ISSUE: Was F removed? DECISION: F stayed on, resolution defeated. REASONS: Court denied B and B‟s request for injunction to remove F. The Act didn‟t include that couldn‟t attach special weight to shares so therefore you could. B and B simply weren‟t able to make ordinary resolution so F stays on. DISSENT: This is exactly what stat was intended to cover - it was designed to prevent dir from being unremoveable. To allow F would remain would go against stat intent. COMMENTS: Result may make sense in a closely held corp where don‟t want situation where investment locked in but have no say in management. What will this do in publicly held corp? Do we want to retain special voting rights in certain circumstances? 4. Authority and Powers of Directors and Officers (i)adopt, amend or repeal bylaws (articles): CBCA s.103 - dirs can make, amend or repeal any by-law; (2) shs have to ratify by-law change; (3) but up until sh meeting, the change is valid - this power can be removed if articles, by-laws or a unanimous sh agreement provide otherwise BCCA - articles are amended by shs but is a de facto power of dirs as they typically propose amendments (ii)powers to borrow: CBCA s.189(1): power of dirs to borrow is default power - it can be taken away through articles, by-laws, unanimous sh agreement; (2) dirs may deleg power to borrow to a dir, committee of dirs or an officer subject to any restriction in articles, by-laws or unanimous sh agreement BCCA Table A Art.6, 10.1: dirs don‟t have power to borrow unless articles provide otherwise (iii)power to declare dividends: CBCA s.115(3): divd power is power of dirs that they can‟t delegate BCCA Table A Art.15.1: gives dirs divd power

(iv)appointment of officers, remuneration and delegation: CBCA s.121: dirs have power to appoint officers subject to articles, by-laws, unanimous sh agreement BCCA s.157: every co will have prez, secretary and any other officers as provided for in memo, articles or by resolution of dirs; (2) if not qualified to be dir, can‟t be officer; (3) offence to violate (2); (4) where articles don‟t provide for election, removal or appointment of officers, dirs shall elect prez, appoint/elect secretary and any other officers BCCA Table A Art. 13.1: appointment of officers shall be remunerated as dirs think fit CBCA s.115: dirs may appoint managing dir who‟s resident Cdn or a committee of dirs and delegate to them any of the powers of the dirs; (3) sets out limits on what you can‟t delegate BCCA Table A Art.12.3: dirs may delegate any but not all of their powers to committees consisting of such dirs a)Internal Delegation: Hayes v. Canada-Atlantic, 1910: H, G, and P were shs and dirs of corp and G and P were on committee of dirs. Dirs said they delegated all powers to this committee of G, P and committee proceeded to pass resolution to remove H, give themselves big raise, to say that only prez (G) could call special sh meetings and only prez could call meeting of dirs - effectively tried to get rid of H. Applicable stat was Dominion Company Act although this occurred in NY. Court held that they simply couldn‟t delegate all of the powers of dirs to committee b/c doing so would effectively close out the shs. Limited powers of delegation to ordinary management of the corp. b)External Delegation: delegate to people outside the corp. Sherman & Ellis v. Indiana Mutual Casualty, 1930: S and E given all powers for 20 years by I by contract. Court held that can‟t delegate all the powers. 20 year time too long. 2 factors were how many powers they‟d given away and how long they‟d been given for. Kennerson v. Burbank Amusement Co., 1953: B made contract with K delegating many powers to K for long time. Court held that this was excessive delegation - too many key powers were delegated for too long a time. (v)removal of officers: Re Paramount Publix Corp., 1937, USCA: FACTS: K hired for 3 years at $2500/week. 6-8 months in, he‟s removed. Stat provision says dirs can remove officers at will. ISSUE: Can dirs do this? DECISION: Yes but court qualifies. REASONS: Corp can remove them as officers at will but not as employees without consequence of damages. If corp were allowed to remove them as employees without damages, there‟d be no binding effect in employment k. Shindler v. Northern Raincoat Co. Ltd., 1960: FACTS: Pff was managing of N. He sold out to L and there was provision that he be kept on as managing dir for 10 years. In N‟s articles, there was a provision that you can‟t be managing dir if not a dir. L sells out to N who don‟t want to keep S on so they dismiss him. ISSUE: Is k to keep S on for 10 years ultra vires the co b/c of the articles? DECISION: No. REASONS: Contract okay - can have provision in articles


contrary to employment contract. Corp can exercise its rights under the articles but are open to potential damages for wrongful dismissal. Implied term of contract was that def should do nothing to bring an end to the manner in which S was employed. Co could change articles so can remove dir before end of term. COMMENTS: Trade-off b/w giving shs some control and providing security to officers. 5. Directors‟ Meetings -determined by by-laws or articles -quorum requirement usually a majority - see CBCA s.114(2); BCCA Art.12 -BCCA s.149: resolution of dirs may not be passed without a meeting; (2)where articles provide, dirs can meet by phone or other communication facilities that permit all to hear each other; (3) unless articles say otherwise, resolution of dirs may be passed without a meeting if all dirs consent to it in writing and consent is filed with minutes of proceedings -BCCA Table A Art. 12.1: dirs may meet where they think fit and can set quorum necessary for transaction of business and unless set quorum, it will be majority of dirs then in office -BCCA Art.12.2: dirs or committee of them may take any action permitted or required to be taken of them and may exercise all or any of powers vested in them by resolution either passed at a meeting in which quorum present or consented to in writing under s.149. -CBCA s.114: unless otherwise provided, dirs may meet any place, and on any notice as by-laws require; (2) subject to articles or by-laws, majority of number of dirs or minimum number required by articles is a quorum; (3) dirs can‟t transact business at meeting unless majority present are resident Cdns; (4) exception to (3); (5) notice of meeting shall specify any matter to be dealt with as set out in s.115(3) but need not set out purpose of meeting; (6) dir may waive notice of meeting; and attendance of dir at meeting is waiver of notice of meeting except where dir attends to protest that meeting not lawfully called; (7) notice of adjourned meeting not required if time and place of such meeting is announced at original meeting; (8) if corp only has one dir, he may constitute a meeting; (9) subject to by-laws, dir may meet by telephone or other communications facilities - conference call -CBCA s.117: resolution in writing signed by all dirs entitled to vote on it is as valid as a meeting and copy of this resolution shall be kept with minutes of proceedings of dirs 6. How Boards of Public Corporations Operate the myth: that boards actually establish corp objectives, strategies, policies, how board will be run, ask discerning questions of mgmt, etc. the reality: don‟t establish these things or ask important questions or select officers - this would require alot of time and support staff that

boards don‟t have - if have outside dirs, they often have other full-time job and may be on other boards -reports in Canada indicate that it‟s not the board that controls mgmt but vice versa - dirs appoint officers at request of mgmt, are reluctant to fire top mgmt, and have littale time to offer to board suggested responses: -have full-time dirs with full-time staff - problems with this: either re-allocate existing mgmt staff to dirs or duplicate these services -dirs should engage in monitoring function - appoint and monitor mgmt‟s activities and review activities of CEO and Prez 7. Outside Directors (i)in limited way, stats call for this: CBCA s.102(2) - with 3 dirs, minimum of 2 must be non-mgmt dirs BCCA ss.132 - must have at least 3 dirs; s.211 - have to have audit committee, if have at least 3 dirs, majority must be non-mgmt (ii)TSE Report: recommended a majority of unrelated dirs - unrelated are those who have no business or other kind of relationship that may raise potential conflict at end of year, in annual report or proxy circular, must set out what corp governance is and who the unrelated dirs are - in May, 1995, TSE adopted by-law requiring disclosure of corp governance practices for TSE listed corps (iii)problems with unrelated dirs: don‟t perform useful monitoring function b/c they‟re usually appointed by mgmt mgmt appointees are often people of the same background who think same way as mgmt lack time, info, staff to act effectively often hold several of these directorships who monitors the outside dirs? tend to just rubber stamp whatever mgmt says (iv)professional directors: full-time dirs who do nothing else - wouldn‟t let them hold too many of these positions - eg max of 6 would be chosen by instit investors criticisms: instit investors often have conflict of interests - manage funds invested in co, do underwriting - if go against mgmt, they lose these things; who monitors professional dirs?

C. SHAREHOLDERS‟ VOTING RIGHTS -BCCA s.1 ordinary resolution: a resolution passed in general meeting by simple majority of votes cast in person or by proxy; or resolution that‟s been submitted to members who would‟ve been entitled to vote at a general meeting and that‟s been consented to in writing by members holding not less than 3/4 of votes entitled to vote on resolution -CBCA s.2(1) ordinary resolution: resolution passed by a majority of votes cast by the shs who voted in respect of that resolution 1. Shareholder Control Over Directors: Shareholder Residual Powers (i)The power to manage: CBCA s.102 - dirs manage corp subject to unanimous sh agreement BCCA s.141 - dirs manage or supervise subject to articles - if choose Table A articles, Art. 10.1, dirs have powers corp has Automatic Self-Cleansing v. Cunninghame, 1906, Eng CA: FACTS: Had article similar to 10.1 BCCA. M brought resolution to sell off assets and liquidate. Resolution passed 1500 to 1200. Dirs refused to follow through saying that it wasn‟t a good thing for corp. M seeks derivative action against dirs (court order to force dirs to sell). ISSUE: Can court force dirs to sell? DECISION: No. REASONS: Dirs not required to follow through - dirs had powers of corp so it was up to them to decide, not shs. Shs could force this by amending articles to take power from dirs but would need special resolution to do so and they didn‟t have enough votes for that - needed 3/4 but only had 5/9. within realm of its authority, as set out in incorp stat or unanimous sh agreement, board may act independently of and contrary to views of sh majority - CBCA s.102(1) codifies Cunninghame CBCA, BCCA says dirs shall manage but usually corp‟s senior officers do this and dirs, at most, supervise for public corps, s.102 CBCA is rule of economic efficiency - by giving managerial authority to separate class of managers, CBCA facilitates specialization economies in firm‟s business decisions if shs voted on all day-to-day matters, this may lead to costs resulting from shs acting in their, not the corp‟s, best interest or seeking side payments from mgmt to discourage them from pursuing certain objective may also facilitate takeovers that operate to control mgmt behaviour specialization economies less likely in closely held firms so that‟s why s.102 is subject to unanimous sh agreement - can strip board of all authority and give primary managerial responsibility to shs under s.146(2) (ii)The contract between the shareholders: in memo juris, and maybe lp juris, incorp documents are k b/w members of co to find that it‟s a k recognizes possibility that shs will be permitted to enjoin the corp from breaching its charter - eg Salmon v. Quin & Axtens Ltd. where articles said that dirs could only take certain actions if A and S (dirs) had notice and

hadn‟t dissented to proposal. S dissented in writing to a proposal that passed by simple majority so insufficient to amend articles. S succeeded in action to enjoin the action. Shs could‟ve passed proposal by special resolution. - however k analysis may restrict shs rights as was done in Cunninghame (iii)Shareholder powers in cases of deadlock: Barron v. Potter, 1914: 2 dirs required for quorum, C had 2nd vote in case of tie. B and P not speaking so no business conducted. B issued notice to convene extraordinary general meeting of shs where purpose was to appoint other dirs and to remove P. P sent B notice of sh meeting to happen same day but 20 minutes earlier but B didn‟t get this notice. P met B on train platform and P convened meeting but B walked away. B held own meeting in corp offices where P was removed as managing dir. B filed writ that P‟s board meetings invalidly convened as B had no notice. P claimed that B‟s meeting invalid as contravening corp‟s articles. B prevailed - dirs meetings invalidly held since B said he wouldn‟t attend all along. As for election of new dirs at B‟s meeting, the court held that for practical purposes there wasn‟t a board and that, to avoid deadlock in conduct of affairs, shs had the power to do what dirs were unable to do. 2. Election of Directors -perhaps most important right of shs is right to elect directors 3. Adoption, Amendment, Repeal of By-Laws -default rule under CBCA is that dirs have power to initiate changes in bylaws - s.103(1) - however that‟s subject to the articles, by-laws, or unanimous sh agreement - so can put this power in hands of shs -even if power to make changes to by-laws left to dirs, shs can make proposals for changes in by-laws - CBCA s.103(5) - and changes initiated by dirs must be approved by shs - CBCA s.103(2) -in memo juris like BC, articles correspond to by-laws and under the BCCA, the articles can only be amended by a special resolution of shs normally it‟s dirs who would put amendments to articles before shs 4. Fundamental Changes and Class Voting Rights (i)Fundamental changes: attempt to control tyranny of majority to make significant changes and take advantage of minority, eg amalgamation where force minority out for low price by creating new class of shares for majority and sell other classes for low price tyranny of minority - what if need unanimous agreement and one holds out stats require special majority for certain kinds of changes BCCA s.1 extraordinary/special resolution: resolution passed by not less than 3/4 of votes cast at general meeting of which notice has been given 21 days or more in advance or resolution passed in writing by requisite number of those entitled to vote

CBCA s.2(1) special resolution: resolution passed by majority of not less than 2/3 of votes cast by shs who voted in favour to that resolution or signed by all shs entitled to vote on resolution a)CBCA s.173: lists fundamental changes, eg changing name, creating new class of shares, increase/decrease in # of dirs so need special resolution - special maj can still tyrannize so min have appraisal right to have shares bought at fair price CBCA s.183(1) - dirs of amalgamating corps shall submit agreement for approval to meeting of shs of their co and to holders of each class or series of such shares; (4) shs of class or series of amalging corp are entitled to vote separately on agreement if the amalg agreement contains provision that would entitle them to vote as class or series under s.176; (5) amalg agreement adopted when shs of each corp approve it by special resolution (appraisal remedy) CBCA s.188(1) - corp may apply for continuation in another juris subject to approval by that juris and the Director; (4) each share of corp carries right to vote on a continuance whether normally can vote or not; (5) continuance application authorized when approved by shs on special resolution CBCA s.189(3) - see BCCA s.150; (6) each share can vote on (3) matter whether normally can or not; (8) action in (3) adopted by special resolution CBCA s.211(3) - corp may liquidate and dissolve by special resolution or if have more than one class, by separate special resolution of each class whether otherwise entitled to vote or not b)BCCA: 1)in memorandum - s.241 says you can only amend as Act provides and Act says you can only change what it requires in memo at registration - s.247 can change name - s.254 and 256 increase or decrease authorized capital - s.245 restriction on business - s.255 subdivide/consolidate shares - these are all ways you can change memo by special resolution and this is all the Act allows you to change therefore don‟t put alot in the memo [s.242 if change memo, copies must include changes; 244 if change articles, must include change in copies; 246 any member may within 7 days after special resolution give notice of dissent to corp and then s.231 applies; 248 corp may by special resolution alter its memo or articles by creating, defining and attaching special rights to any shares; 249 co may by special resolution alter memo or articles by varying or abrogating any special rights attached to any shares]; 2)in articles - s.243 can amend anything in articles by special resolution BCCA s.37(1) - co may, if authorized by special resolution, the registrar, and the laws of another juris, apply to officer of that juris for instrument of continuation BCCA s.150 - dirs shall not sell, lease or otherwise dispose of whole or substantial whole of undertaking of corp unless have approval by members by special resolution (appraisal remedy) BCCA s.253 - special rights/restrictions attached to class of shares may authorize issue of shares in that class by series and may authorize dirs by resolution to alter memo to fix number of shares in each series; and to alter memo or articles to create, define and attach special rights/restrictions to shares of each series BUT such resolutions may only be passed prior to issue of such shares; and

after issue of shares of that series, the special rights/restrictions may only be altered pursuant to ss.248, 249, 254, or 255 as case may be BCCA s.257(1) - co may reduce capital in any way by special resolution confirmed by the court BCCA s.264 - where co proposes changes to its capital or shares, the alterations may be made by one special resolution; and the consents of a class may be made by one separate resolution of the class BCCA s.272(4) - amalgamation agreement adopted by each co where it‟s approved by special resolution if only one class of shares; or where there‟s more than one class, when it‟s approved by special separate resolution of each class BCCA s.291 - co may wind up voluntarily by special resolution (ii)Class Voting Rights: CBCA s.176/BCCA s.250 - give voting rights to classes that don‟t normally have voting rights; could be series voting right if series affected differently from others [CBCA s.176(4)/BCCA s.250]; vote whether otherwise carry vote or not [CBCA s.176(5)/BCCA s.250 (implicit)]; separate resolutions of classes entitled to vote - all classes vote on it separately and each must approve by special resolution [CBCA s.176(6)/BCCA s.250(1)]; class voting and fundamental changes - BCCA generally requires special resolution by class (s.250 gives right to vote if specially affected) - CBCA quite specific re situations when get vote and resolution has to affect class in some way that would give them right under s.176 (s.183(4) amalg, 189(7) sale or lease, 211(3) liquidation/dissolution) 5. The Distribution of Voting Rights (i)The presumption of one vote, one share: CBCA s.140/BCCA s.185(c) - unless articles provide otherwise, each share entitles sh to one vote stat provision has been modified -if have preferred shares, have no voting rights; can have restricted (uncommon common) share which is common share minus voting rights concern arose re uncommon common shares - NYSE had restriction that if corp had these kinds of shares, it couldn‟t be listed on the exchange but other exchanges allowed them and it got to point where corps weren‟t listing on NYSE b/c of this so NYSE brought pressure on SEC to forbid any exchange from listing such corps - SEC brought in provision which prevented dual capital recapitalization (no exhcange could list equity securities of any issuer that issued any class of security, or took other measures that nullified or restricted the per share voting rights of the holders of an outstanding class of common shares but it didn‟t apply to new issues) - however this rule held to be invalid as it dealt with state law so are now working on new one Canada - uncommon common shares proliferated so OSC had hearings on them in early 1980s - passed policy that corps could use them but required alot of disclosure and they had to be approved by majority of minority (majority of minority arose in family corps where if family wanted to create this new class

they needed more than just majority vote of family but also needed majority of minority shs) TSE coattail provisions - can have restricted shares but when there‟s bid for voting shares in a takeover, restricted shares ride on coattails of non-restricted ie must make same offer to non-voting shares as make to voting ones Easterbrook and Fischel - one vote, one share made sense from agency cost perspective - if have small voting shares, when they make a decision it has large effect on all others so may not have others‟ best interest at heart - but there are benefits to allowing non-voting shares as it may encourage investment in firmspecific human capital - b/c managers‟ control can‟t be challenged, they‟ll want to signal to potential investors that they‟ll be good, efficient managers so investors will want to buy issue of shares to capitalize business empirical evidence - market seems to react negatively to dual capital recapitalization but have favourable view to new issue of non-voting common shares as these led to overall increase in price of voting common shares - suggests that should prohibit recapitalization in this way and just have new issue of nonvoting shares otherwise there isn‟t Kaldor-Hicks efficient gain all around (ii)Voting restrictions: voting restrictions on shares often more directed at preventing successful takeovers than are non-voting shares - called “shark repellants” - when these provisions adopted at incorp (Bushell) they‟re unlikely to have distributional effects but when they‟re adopted after issuance of shares pursuant to amendment to articles, they‟re more troubling b/c not only do you lose take-over bid premiums but also can serve to insulate inefficient mgmt special voting rights can either limit the voting rights of large shs (capped voting rights) or endow class of shares held by insiders with more than one vote per share (supervoting rights) a)single class of shares: Jacobsen v. United Canso Oil & Gas, ABQB, 1980: FACTS: B family controlled mgmt and kept themselves in mgmt though only held 0.33% of shares. Other shs wanted to get rid of them. Provision in by-laws held that there was one vote per share but only up to 1000 shares (“shark repellant” provision). ISSUE: Was this provision valid under the CBCA as made it impossible to take over co? DECISION: Provision invalid. REASONS: Rights b/w shares are equal and if there‟s to be a variance, you can only do it through having separate class. Pointed CBCA s.140 that have one vote per share and CBCA s.24(3) that when only have one class of shares, all shares have right to vote, etc and held that by-law violated these provisions. Court didn‟t accept argument that shares were equal in all respects except in how many votes - corp can‟t disting rights on basis of who shs are. is Bushell v. Faith consistent with Jacobsen? Is there reason why shs shouldn‟t be permitted to arrange internal govt as they want? b)multiple classes of shares: Bowater Cdn Ltd. v. R.L. Crain and Craisec, 1987, ONCA: FACTS: Articles gave 10 votes per share to special common shares as long as they were held by original issuee but if held by another person there was

only 1 vote per share. B trying to takeover C and could have if each share had 1 vote but was prevented by special common shares. ISSUE: Were special common shares valid? DECISION: Upheld 10 votes but step-down provisions invalid. REASONS: At trial, court held that 10 vote shares were okay b/c they were set out in a special class but transfer provisions (step-down) weren‟t valid. CA upheld trial judgment as consequence otherwise would be potential for fraud as buyer might nto appreciate difference. Can‟t make distinctions b/w shares on basis of identity of shs so special shares had 10 votes no matter who held them. Rights of given class of shares must be equal in all respects. (iii)Equal treatment: R. v. McClurg, 1990, SCC: FACTS: M and E dirs of corp incorped under SBCA which was modelled on the CBCA. M and E had Class A shares in corp and their wives had Class B non-voting shares. Both shares description included that they were “carrying the distinction and right to receive dividends exclusive of the other classes of shares in the said corp.” (sprinkle divd) This was done to minimize overall level of taxes. M and E gave divd to Class B shares and Min of Revenue reassessed their tax claims that these divds were really given to M and E and were part of their income. The divds should‟ve been given to both Class A and B shares. Min claimed this b/c of the presumption of equality b/w shares and sprinkling divd didn‟t make adequate distinction b/w the classes. ISSUE: Did sprinkle divd provision violate presump of equality b/w shares? DECISION: No. REASONS: Although shares presumed to be equal, the clause was sufficient to differentiate - gave right to potential divd. Shs knew what their rights were and that divds were discretionary. In SBCA there was no specific provision against sprinkling divd therefore court will presume validity. Corp law is to be facilitative and stat must minimize transaction costs by providing default contract. It would be paternalistic in the extreme to invalidate when don‟t have any shs complaining about allocation of rights. DISSENT: Provision not sufficient to displace presump of equality as sprinkling divd applied to all classes of shares so didn‟t make adequate distinction b/w classes. Dirs can‟t make distinctions on divds on basis of sh‟s identity. Invalid b/c it does exactly what Jacobsen and Bowater said you couldn‟t, ie make distinction based on sh‟s identity. Also invalid b/c it encourages dirs to breach fiduciary duty - they look at identity of shs to decide on divds so aren‟t acting in corp‟s best interest. (Majority said shs could then sue dirs for breach but dissent said that too expensive.) SBCA doesn‟t give right to use sprinkling divds so they aren‟t allowed. If you can have sprinkling divd why not sprinkling voting rights as well? This isn‟t allowed so neither should other. (iv)Cumulative voting: purpose of cumulative voting is to allow minority group to have some representation on board of dirs study showed that of 553 cos, only 3 used cumulative voting

how it works - usually - instead of one vote/share you will get more votes depending on number of dirs to be elected - formula is number of shares x number of votes per share x number of dirs to be elected you can allocate votes as you wish among nominees - eg instead of voting for 9, you could throw all your votes behind just 1 nominee likelihood of minority electing dirs is proportional to number of dirs to be elected - if more dirs to be elected, more likely that minority will get dir on board BCCA s.185(c) - one vote per share unless articles say otherwise - leaves open option to set up cumulative voting CBCA s.107 - if you want to have cumulative voting, you can but if you give this right with one hand, you can‟t take it away with the other - this could be done in several ways - studies show that share values increase when corp adopts cumulative voting but decreases when corp interferes with it - one way to defeat cumul voting is by reducing number of dirs to minimum in by-laws so minority can‟t elect a dir but s.107 does away with this b/c it holds that you must have fixed number of dirs if have cumul voting - another way to do it is to have 3 year term for dirs and then stagger these terms so only electing small number of dirs per year but s.107 says with cumul voting, dirs can only be elected for 1 year terms - third way to avoid is through s.109 where you can remove dir by ordinary resolution but s.107 says that at a meeting called for removal of a dir, if number of votes against his removal would be enough to elect him on election using cumulative voting, then the removal is defeated 6. The Significance of Voting Rights - “rational apathy” - what is point of voting rights in widely held public corp - shs don‟t want to invest alot on control if they only have small investment in corp - creates free rider problem as well as they‟ll wait for someone else to do these things and then take benefit at no cost - shs won‟t bother to monitor as it isn‟t worth it -rational apathy led to calls for sh democracy - allowing people to vote by proxy and ensuring that they‟re given adequate info to facilitate shs in exercising their voting rights by making it cheaper and easier -control blocks - significant for voting rights - shs who have large enough number of shares that they‟re no longer rationally apathetic - have enough shares to effect control and also have incentive to monitor very common in Can, more so than US - many institutional investors hold control blocks -takeover - use voting rights to take over - purchase large block of shares Manne: potential for takeover is what makes voting rights significant corp could finance by selling non-voting shares therefore no potential for takeover but corp could sell for voting shares to signal to investors that they have strong incentive to act in shs best interests as their careers are being put on the line - reduces agency costs -transaction costs may explain why corps give voting rights -opportunism is one such transaction cost and one risk of such opportunism is where one

party invests assets in the bargain itself but then faces risk of shakedown by other parties if terminated relationship is less costly to them participation in voting may also reduce opportunism that would reduce incentive to invest in transaction specific assets (those assets which can‟t be transferred to another transaction and will be lost if one of the parties abandons the bargain) - participation in voting can provide a source of info which can allow one to anticipate future developments and plan investments in transaction-specific assets accordingly (I don‟t get this) -b/c shs are last in line for claims if corp becomes insolvent or liquidates, participation in decision-making through voting rights may be important device for shs to control against managerial opportunism D. SHAREHOLDERS‟ MEETINGS 1. Shareholder Meetings and Shareholder Democracy -shs have to have opportunity to exercise voting rights and this done through meetings - either in person or through reps -some stat provisions in regard to meetings are mandatory, eg annual meeting 2. Basics of Shareholder Meetings -CBCA s.133 must have annual meeting within 18 months after incorp and thereafter, every 15 months - BCCA s.163 must have meeting within 15 months and every 13 months thereafter (s.164 exception - don‟t have to have meeting if all shs entitled to attend or vote at meeting of nonreporting corp consent in writing to all business to be done at meeting) -BCCA s.165 - one member of corp may constitute a meeting if corp has quorum of one -BCCA s.166 - if corp fails to call general meeting, court may call one upon application by member of corp -BCCA s.169/CBCA s.155(1) -sets out what dirs must place before annual meeting -BCCA s.172 -if articles don‟t make provisions for class meetings, provisions relating to call/conduct of general meetings apply -CBCA s.138 - corp must make list of shs entitled to receive notice no later than 10 days after record date or if no record date, at close of business of day preceding day when notice given - shs on list then entitled to vote at meeting and also to inspect list -CBCA s.140 - unless articles say otherwise, entitled to 1 vote per share - BCCA s.185(c) -CBCA s.162(1) - shs by ordinary resolution appoint auditor at first general meeting and he stays auditor until next meeting when shs appoint again -special meetings - don‟t happen very often and are called at times other than annual - BCCA calls them extraordinary meetings

-conduct special business which is business other than ordinary business (electing dirs, approving financial statements, appointing auditors, determining remuneration for auditors) -ordinary business - requires 50% to pass by ordinary resolution -special business - special resolution - 2/3 (CBCA) or 3/4 (BCCA) -place of meeting - normally determined by dirs but can specify in by-laws or articles to have meetings in specific location (BCCA Table A, Art. 7.1/CBCA s.132) -under CBCA, have to have meeting in Can but if all shs entitled to vote agree, can have meeting outside Can- s.132(1), (2) -under BCCA, have to have meeting in BC but can move it to elsewhere with Registrar‟s permission - s.170 -quorum - majority of shs entitled to vote equals a quorum but by-laws can provide otherwise - CBCA s.139 -BCCA s.168 - quorum is 2 shs unless articles provide otherwise or unless corp only has 1 sh -notice of meetings - CBCA s.135 - notice must be give 21-50 days before meeting - also have to set record date (CBCA s.134) so know who‟s entitled to receive notice - when give notice of special business, must give sufficient info so shs know what it‟s about and can form reasoned judgment [s.135(5), (6)] - s.136 sh can waive notice -BCCA s.167 - at least 21 days notice - 56 days if electing dirs so have time for sh nominations (s.135) - Form 24: when there‟s special business, must give sufficient info for reasoned judgment must set record date to determine who‟s entitled to receive notice of a general meeting and record date must be not more than 49 days before meeting - s.73 - s.185(a) notice of general meeting served to every member as set out in Table A if articles don‟t otherwise provide -problem with notice requirements arises b/c of depository institutions and brokerage firms registered as nominee owners who will receive notice - 21 days not enough time to get info out to beneficial owner and for benef owner to give nominee info on voting -National Policy 41 - set record date 35-60 days ahead of time, 25 days before record date corp has to request names of benef owners, 33 days before meeting corp must send out info to benef owners -problem with NP 41 - Ainsley - these weren‟t guidelines but basically legislation which securities administrators don‟t have the power to do - many juris have now given admin‟ors the power to make regulations 3. Conduct of Meetings (i)Normal meeting process: BCCA s.185(b) - any member elected by members can be chair

the designated person takes the chair - receives report of scrutineers that adequate notice given and that there are enough shares present to = quorum chair asks for first motion which is usually to dispense with reading of minutes of last meeting then usually have resolution to approve minutes then have annnual report presented by prez who reads out the report of auditors motion for approval of financial statements election of dirs - usually only have same number of nominees as there are for positions -if there are more nominees than positions, go to a poll where you circulate ballots and shs write down who they‟re voting for and the number of votes they‟re executing -BCCA s.182/CBCA s.141 - unless articles/by-laws provide otherwise, voting at general meeting done by show of hands except if poll demanded - any member or proxyholder entitled to vote at meeting can demand poll if aware that 5% or more of shares would be voted against a resolution, must have poll - poll can be demanded before or after show of hands next motion is for appointment of auditors and may also have motion for approval of remuneration of auditors minutes of meeting must be kept chair can be elected at meeting by members present but normally articles/bylaws designate a chair - usually prez or chair of board of dirs BCCA s.183 - where subsid member of holding company that‟s incorped in BC, subsid not part of quorum of general meeting nor is it entitled to vote (ii)Duties of chair: have duty to act in fair and impartial manner without bias - but chair usually has bias anyways chair only has to allow arguments to go for reasonable period of time but after that he can make minority sit down Re Marshall: FACTS: WM was beneficial owner and he gave instructions that shares to be voted particular way - supposed to vote for their nominees. One registered owner ignored this and voted for management slate of dirs. WM seeks order directing chair to tabulate votes according to will of benef owners. ISSUE: Is it duty of chair to go behind regis owner to assess dispute b/w regis and benef owner? DECISION: No. REASONS: Chair didn‟t have to go behind regis owner - could take votes as given by regis owner and entitled to treat regis owner as the person entitled to vote the shares. Otherwise chair would have to resolve a dispute for which he/she doesn‟t have training and this would delay the meeting and create chaos as no one would know who was entitled to vote shares. COMMENTS: What could WM do now? Could bring action against regis owner that he violated contractual or trust relationship. Could bring oppression action to recall meeting. Could get himself registered as owner, requisition a meeting, and under CBCA s.109 remove dirs - this harder under BCCA b/c under s.159 need special resolution to do this so may have to wait until next meeting.

Re United Canso Oil and Gas: FACTS: Corp reincorped in NS and action brought in NS. Earlier, court had refused application that 1000 share maximum vote restricion valid (Jacobsen). In this case, corp had meeting and shs got enough votes together to oust Buckleys from control. Buckley served as chair and he refused proxies, refused proxy forms and proxies received by fax, questioned vote counting by scrutineers, ruled there wasn‟t a quorum present and adjourned the meeting. ISSUE: Did chair act in bad faith? DECISION: Yes. REASONS: Court held that fax signatures okay and articles didn‟t provide that board authorization need be present to count proxies. B acted in unfair and partial manner. Blair v. Consolidated Enfield Co.: FACTS: B prez of CE. Had proxies before the meeting and questioned how they should be voted. B also chair and he felt he should exclude himself b/c of bias but solicitors said that not necessary and that shares should be voted in favour of management. Decision was that shares should have been voted other way so costs awarded against B and CE. New dirs of CE sought payment from B alone. B asked for compensation from CE. ISSUE: Is B entitled to comp or did he act in bad faith? DECISION: B entitled to comp, he acted in good faith. REASONS: Court held that legal advice doesn‟t automatically sanctify actions but it must be taken into account. Said that chair usually has bias so decisions shouldn‟t automatically be questioned for that reason. Real question is whether they acted bona fide despite that bias. Held that some decision re the proxies had to be made and there was no suggestion of error. B reliance on solicitors‟ advice reasonable, he acted bona fide. should corp meetings have independent chairs? Solicitors not exactly nonbiased b/c they have interest in keeping mgmt in power b/c mgmt hired them. What would happen if their advice other than strictly professional? Would CE have action against them? 4. Shareholder Requisitioned Meetings -CBCA s.143/BCCA s.171 - similar but not identical -CBCA - holders of 5% plus of shares entitled to vote at meeting sought to be held can requisition dirs to call meeting -BCCA - holders of 5% plus of shares entitled to vote at general meeting can requisition meeting -dirs supposed to call meeting, if they fail shs can requisition it themselves and corp must reimburse them for reasonable expenses - if they don‟t, dirs can be personally liable (BC) -CBCA s.143(2) - shs requisitioning meeting must supply form stating the business to be transacted at the meeting 5. Court-Ordered Meeting -CBCA s.144/BCCA s.173 - if it‟s impracticable for meeting to be called in manner prescribed by by-laws/articles, the court will order one on application by dir, sh or the Dir/Registrar

(i)Deadlock: Re El Sombrero, 1958, Eng: FACTS: closely-held corp where quorum was 2 shs - only 3 shs total - 2 of whom were dirs. One sh held 900 of the 1000 shares. Dirs didn‟t call annual meeting and other 2 wouldn‟t show if 3rd requisitioned a meeting. 3rd applies to court for meeting. ISSUE: Should court order a meeting - was it impracticable that meeting would be held? DECISION: Yes, ordered meeting. REASONS: The 2 shs were preventing 3rd from exercising stat right to remove dir (different from Bushell as there there was a provision in the articles). Look at all the circumstances of the particular case and answer the question whether, as a practical matter, the desired meeting of the co can be conducted to determine if it is impractical - doesn‟t have to be impossible. Dirs breached stat duty to call meeting. COMMENTS: Curious result - 2 shs with 50 shares each will be locked into investment with no say in management, 900 sh could suck off profits, decide divds, mgmt salary, etc. Quorum requirement may have been set at 2 so 2 shs could have some say in management - like partnership that can‟t remove us without our consent. Effect of decision was to nullify contractual provision meant to protect the parties. However, dirs could have called meeting then not shown up as is their power as shs - therefore no quorum. Re Opera Photographic Ltd, 1989, Eng: FACTS: 2 shs holding 51 and 49% division. Have falling out. 51% requisitions meeting but quorum is 2 so there‟s no meeting when 2nd doesn‟t show. Asks court to order meeting and to vary the quorum requirement. ISSUE: Should court order a meeting? DECISION: Meeting ordered. REASONS: Court cites Westbourne Galleries case where says these kinds of corps really a quasi-partnership so can‟t remove someone without their consent. But court breaks deadlock anyway. Can‟t prevent 51% from exercising right under stat to remove 49%. Possible remedies for 49% include buyout remedy, oppression remedy, winding up. (ii)Intervening in battles for control: courts generally reluctant to intervene Re Morris Funeral Service Ltd., 1957, ONCA: FACTS: Corp had 278 shares - 147 to estate, 98 to widow, 30 to son D, 1 to son A, 1 to K, 1 to M. All indiv shs were dirs. Estate shares could only be voted if executors agreed unanimously. D and widow wanted to remove K and put D in his place as prez. A,K,M opposed. Couldn‟t get meeting quorum without estate shares. D and widow ask court to modify quorum. ISSUE: Should court intervene and modify quorum requirement? DECISION: Won‟t intervene. REASONS: Court would only be subbing one faction‟s board for that of another if intervened. Shs will have to get agreement and if they don‟t, then they should wind up corp. Re Barsh, 1986, ON: FACTS: B, F, and B‟s son had corp and each had 1 share. Last sh meeting was April, 1966 and it now 1986. Quorum was 3 - all had to be present. B dies and in will he transfers share to his son in trust. F initially refuses to attend meeting so son applies to court for ordered meeting (not really necessary now as F will consent to certain resolutions. ISSUE: Should court order meeting or reduce quorum to 2 shs holding 51% of shares? DECISION:

court won‟t intervene. REASONS: Won‟t intervene b/c would only be favouring son in battle for control. Effect would be to lock F in with little or no chance of return and that would violate purpose of setting quorum at 3. cases may ignore possibility of strategic behaviour by parties relying on veto rights - veto rights offer protection but can be used for sh opportunism - if insistence on veto rights would lower firm value, one with less to lose may hold out til gets his way - in small firm may get greater opportunism without veto rights as minority held at mercy of majority - refusing to enforce all veto rights in order to minimize strategic behaviour then seems like a “Nirvana” fallacy, where 2nd best strategies are criticized for lingering inefficiencies but are still allocatively superior to alternative strategies under real world conditions. (iii)Intervention on basis of fault: Re Routley’s Holding Ltd, 1960: FACTS and REASONS: 1 of shs was making it difficult to hold meeting and when he did call one, he held it in his office, refused valid proxies of objecting shs and then continued meeting without quorum. Court focussed on sh‟s action when deciding to order meeting. Said it had to be held at neutral locale, lowered quorum to 2 shs with 50% of shares. Emphasized dir‟s breaches of law in his conduct at the previous meeting. as practical point, should get sh agreement beforehand to settle how will elect dirs - certain matters require unan agreement (iv)Publicly held corporations: Re Canadian Javelin Ltd, 1976, PQ: FACTS: D owns 18% of shares and for most part can control corp. D indicted in US but is on the run. Some shs purport to remove D‟s nominees on the board and accept resignation of D. D gets together with others and they rescind what others did. Have 2 competing boards and insurgent board doesn‟t want to call annual meeting. It‟s difficult to get financing in US without having meeting. D seeks court ordered meeting. ISSUE: Should court order meeting? DECISION: Meeting order granted. REASONS: Reiterate what they said in Re El Sombrero that impracticable doesn‟t mean impossible but here it‟s impracticable b/c don‟t have finan statements ready and need to have them so meeting can approve them. Important to have meeting b/c of the detriment to the corp in not having one. COMMENTS: Effectively intervened in battle for control - trading off b/w this and detriment to public shs. Court did order that there be a neutral chair and included order that no person or group could solicit proxies under name of “management”. (v)Powers of shareholders at court ordered meeting: Charlebois v. Bienvenu, 1968, ONCA: FACTS: Had 2 competing boards and 1st board challenged validity of meeting. Interim injunction ordered. ISSUE: Could court order a meeting? DECISION: No meeting ordered. REASONS: Interped stat as saying that shs could only elect dirs at annual meeting so it, the court, couldn‟t give shs the power to elect dirs. Court can’t give shs powers that they don’t normally have.

6. Access to the List of Shareholders (i)Purpose: want list for proxy solicitation; for takeover - make bid to existing shs; to requisition a meeting; to exercise right to nominate dirs(BCCA s.135/137 CBCA) (ii)Ways of obtaining access: a)request corp to provide list: CBCA s.21(3) - any person can get list in context of distributing corp; if not distributing corp, then only shs and creditors can get list (s.2 def‟n of distrib corp) -BCCA s.191 any person can get access -how do you request? send in application with affidavit of name and address under BCCA, assert that list for corp purpose; CBCA s.21(9) assert that won‟t be using list for any reason other than in an effort to influence voting, an offer to acquire shares of corp, or any other matter relating to affairs of corp -CBCA s.21(3) - corp must provide list within 10 days of request -BCCA s.191 - corp will promptly furnish list within 14 days problem is that corp has time to respond and to know that something‟s up b)access to sh register: BCCA s.187/20 CBCA - corp required to keep list -BCCA s.188/21(1) CBCA - corp has duty to give access and people have right to see the list during business hours -BCCA s.188(3), (4) - if non-reporting corp, any sh or debentureholder can get list; if reporting co then anyone can get it -CBCA s.21(1) - in non-distrib corp have limits on who can get list but if it‟s a distrib corp, no limits (iii) “Corporate purposes”: State ex rel. Pillsbury v. Honeywell Inc., 1971, Minn SC: FACTS: . P upset that H making personnel fragmentation bombs. P acquired 100 shares in H but they weren‟t registered in his name so he gets self registered and wants access to list of shs to sway their views on manufacture of these bombs. ISSUE: What is a corp purpose? Is this corp purpose? DECISION: Not corp purpose, no access. REASONS: Mere statement of proper purpose isn‟t sufficient and refused to follow older line of cases that said that desire to communicate with other shs was proper purpose. Couldn‟t use list to impose your political views on others but only for corp purposes. Corp purpose must be tied to economic side of business. in Canada, if allege in affidavit that list is for corp purpose, that‟s enough unless corp can show otherwise (iv)Constraints on inspection: Cooper v. Premier Trust Co, 1945, ONCA: FACTS: Corp tried to stop sh C from seeing list when she came in during business hours. Further, she spoke with secretary to set up time to see list but corp refused. Corp said that there was contract with C that she‟d come back on Monday to see list. When she did see list, only allowed to have it for 10 minutes. ISSUE: Did corp provide reasonable access? DECISION: Corp unreasonable. REASONS: Courts will put

constraints on corps trying to prevent access. In this case, corp‟s access not good enough - have to allow access during reasonable business hours. There was no contract b/c C gave no consid and she had stat right to check the list. E. PROXY SOLICITATION IN THE PUBLIC CORPORATION 1. Shareholder Democracy and Proxy Solicitation -have problem with rational sh apathy so use proxy solicitation provisions to make it easier for shs to vote and be informed -at common law, shs had no right to be represented by proxies but standard provision in articles of corp allowed/required it - corp generally made sure it was there and most dirs generally solicited proxies (usually to meet quorum requirements) -at common law, had right to notice of meeting and right to information sufficient to make reasoned judgment - problem arose as often dirs would fill in who nominees were or how sh wanted to vote and sh would just sign without reading - sometimes proxies didn‟t include anywhere to vote no to mgmt - to do so, sh would have to write up own proxy and this often not worthwhile if you‟re a small sh and shs didn‟t get enough info about dissident groups -US response - 1930s - mandatory mgmt proxy solicitation and also provided - no more one-way voting; no more designated nominee; and both mgmt and dissident groups must provide info in proxy solicitations 2. Proxies and Who Must Solicit (i)Proxy basics: BCCA s.1(1)/CBCA s.147 - proxy: a completed and executed form of proxy by which a member/sh has appointed a person as his nominee to attend and act for him and on his behalf - proxy is the form that a person uses to appoint someone as his proxyholder -form of proxy: written or printed form that, on completion and execution by or on behalf of a member/sh, becomes a proxy -proxyholder is person appointed by sh or member BCCA s.174 - ss.175-181 only apply to general meetings and class meetings of reporting corps any sh entitled to vote can appoint a proxyholder - CBCA s.148/175 BCCA registered owner is the one who appoints but instructions come from beneficial owner - BCCA s.176(2)/CBCA 153(2) regis owner shall not appoint proxyholder to vote shares if he doesn‟t know name of benef owner rights of proxyholder same as those of sh - CBCA s.148/BCCA s.175 - same authority as principal subject to constraints (basically constraints of agency law) -proxyholder can be constrained by vote by show of hands - CBCA s.152/ Table A BCCA - proxyholder may hold proxies for more than one sh and may have conflicting instructions on how to vote - in this case, proxyholder can demand poll

(ii)Who must solicit: short answer is mgmt - must solicit from each sh entitled to vote at meeting CBCA s.149/177 BCCA -exceptions to mgmt solicitation - CBCA s.149(2) - don‟t have to solicit if less than 15 shs; CBCA s.151 - can get exemption from Dir to exempt you from mandatory solicitation under s.149 -BCCA s.177 - reporting corp required to solicit proxies but non-reporting corp isn‟t; BCCA s.179 - can get exemption order from solicitation from Securities Commission if it‟s in public interest failure to solicit proxies is an offence - BCCA s.177(2), 368/149(3), (4) CBCA may be able to get compliance order - CBCA s.247 - this not provided for in BCCA but you could use s.13 re contract(?I don‟t know, we both missed this) BCCA s.178/150 CBCA - can‟t solicit proxies unless send info circular as well CBCA s.154 - interested person can apply to court for any order it thinks fit if form of proxy or circular contains untrue statement or omits a material fact (iii)Form of proxy: proxy requires clear indication that someone other than designated person can be nominated - CBCA Reg s.32(3)/BCCA s.175(5), 181(g) have to allow for voting for or against resolution - CBCA Reg 32(5),(6)/BCCA s.181(b) requires that person soliciting proxy say who it is that‟s soliciting - CBCA Reg 32(1)/BCCA s.181(a) - eg mgmt or dissident other regs in CBCA: 33: form of proxy may confer discretionary authority re amendments to matters identified in the notice if person on whose behalf the solicitation is made is not aware within a reasonable time before meeting that there‟ll be amendments presented and that the form of proxy specifically states that it confers such discretionary authority 34: form of proxy shall not confer authority to vote on appointment of an auditor or election of a dir unless a bona fide proposed nominee for the position is named in the form of proxy 35: sets out what must be in management proxy circular eg in boldface that it is a mgmt solicitation, name of any dir who plans to oppose what‟s in mgmt circular, who‟ll bear cost of the solicitation, number of shares of each class that can be voted, the nature of any constraints on share voting done under s.174, any actions brought under s.239 or 241 against corp, etc 36: mgmt proxy circular that‟s sent to Dir shall be accompanied by statement signed by corp dir/officer that a copy‟s been sent to each dir, each sh entitled to notice, and the auditor 37: def‟n of “dissident” - any person other than mgmt or its affiliates on whose behalf a solicitation is made and includes committee or group that solicits proxies, any member fo the group

38: sets out what dissident circular must contain eg name of corp to which it relates, details of the identity and background of each dissident, what‟s required in paragraphs 35(a),(d),(e),(m),(n),(o) re mgmt circular, details of dissident‟s interest in securities of corp 39: if dissident is prtsp, corp, association or other organization, info in 38(c),(d),(f),(h),(i) must be given on each partner, dir, officer 40: info unknown to dissident and info that he can‟t reasonably attain can be omitted from circular but circumstances of why that‟s unknown must be given 41: dissident‟s circular must be signed by dissident with statement that he approved of the contents 42: proxy shall be dated as of a date not more than 30 days before day on which it‟s first sent to sh 43: if financial statements included in mgmt circular, they must comply with provisions in Part V of regs and if they aren‟t reported on by the auditor, they must be accompanied by report of corp‟s chief financial officer that they aren‟t audited 3. Who Must Send Proxy Circular? -BCCA s.1(1)/147CBCA - anyone who engages in solicitation must send circular - quite broad def‟n of solicitation -solicitation/solicit - includes every request for proxy whether or not accompanied by form of proxy; every request to or not to execute form of proxy; sending or delivery of form of proxy or other communication to member; sending of proxy under s.177(1)(BCCA) -Brown v. Duby, 1980, ONHC: FACTS: Dissidents send letter/communication to US shs asking them not to grant proxy to mgmt until they had chance to talk to them. ISSUE: Was the letter solicitation? DECISION: Yes, under s.147(c) or (b). REASONS: Problem with letter was that they only sent letter and this not proper form of proxy or proxy circular as required when soliciting proxies so violated the stat. One defence was that b/c letter only went to US, US law applied and then action valid under S.E. Act. Court said that CBCA applied everywhere to all shs b/c it‟s the incorping stat and also have to comply with securities legis in juris where your shs are located. This was an action for an injunction to stop dissidents from sending anything as they committed stat tort of noncompliance so was offense under s.154 CBCA. B/c stat provided for stat civil action under s.154, dissidents claimed there was no room for common law and their actions didn‟t violate s.154 b/c there was no misrep. Court said there was still room for common law as stat only works where there‟s a misrep so common law applies to other situations. However, court still refused injunction b/c of consequences - balance of inconvenience test - it would be too inconvenient to grant injunction. Court likely concerned about reputational effect on the dissidents. COMMENTS: the stat provides for a civil action for misreps under s.154

but if there‟s no misrep but still have violation of stat, have stat tort action at common law -revisions in US on solicitation - institutional investors have substantial blocks of shares in corp and these difficult to sell if don‟t like mgmt so stuck with large block and with mgmt - brought political pressure for new def‟n of solicitation - allows sh to be able to publicly announce how they‟re going to vote and why without having to send proxy or proxy circular - should this be done in Canada? 4. Shareholder Proposals (i)Shareholder proposals and shareholder democracy: allow shs to vote on mgmt and fundamental changes but mgmt still controls meeting process as they control the agenda sh proposals are mechanisms that allow shs to put a proposal before a shs‟ meeting and which can be put on mgmt proxy circular with info on the proposal which saves costs for the sh concerns about sh proposals: to what extent should you allow it to be used to re-allocate the day-to-day business? what if proposal doesn‟t relate to the corp‟s business or is something the meeting can‟t deal with? (ii)Statutory provisions: CBCA s.137: (1)sh entitled to vote at annual meeting entitled to submit a proposal; (2) proposal is to be set out in the proxy/info circular; (3) sh can include statement supporting proposal; (4) proposal may include nomination of someone for election as dir if supported by at least 5% of shares; (5) corp not required to comply with (2),(3) if proposal not submitted within 90 days, or it appears that proposal done solely to enforce personal claim or to redress a personal grievance against corp or dirs, officers, security holders, or primarily for purpose oof promoting general econ, political, racial, religious, social or other similar causes, or substantially same proposal was submitted within last 2 years and defeated, or proposal being used to secure publicity; (6)no corp incurs liability only by reason of complying with this section; (7) if corp refuses circular, must tell sh why within 10 days after receiving proposal; (8) sh can apply to court about refusal under (7); (9) corp may apply to court to justify refusal; (10) if applic made under (8),(9) Dir must be informed BCCA s.171: sh who holds 5% or more of shares can requisition meeting BCCA s.180: where members requisition meeting under s.171, they can give 1000 word statement explaining their position to corp and corp shall include it as part of its info circular under s.178 - more difficult to do than under CBCA BCCA s.135: if hold 10% or more of shares having right to vote, then can nominate dirs at annual meeting CBCA concern - it provides that can make proposal “at an annual meeting” does this mean can‟t do so at special meeting?

(iii)Cases: Medical Committee for Human Rights v. S.E.C., 1972, USCA: FACTS: Dow Chemical producing napalm and MC wants to put proposal before sh meeting to suggest Dow stop producing it. Dow refuses, saying it‟s a political issue and that it relates to mgmt so not something shs can vote on. MC went to SEC who upheld Dow‟s decision. MC applies for judicial review. ISSUE: Should Dow include the proposal? DECISION: Sent back to SEC. REASONS: States that Dow‟s two concerns are opposites - one that proposal too specific as relates to mgmt decision but also too general as relates to politics. Dow can‟t have it both ways - it either relates to corp business or not. As to proposal being too specific - shs can put restrictions on what business and mgmt allowed to do, this a specific sh power under the legis. As to proposal being too general - no reason advanced why shs couldn‟t put this question forward, no reason why shs couldn‟t ask that assets be used in a more socially responsible manner. Overriding purpose of legis was to assure corp shs had right to control important decisions. COMMENTS: Dow put proposal on rather than send it back to SEC proposal defeated. This case is relatively permissive view as to what you allow in proposals. Different than here b/c our stat lays out everything on proposals whereas here the constraints were in SEC regs. SEC regs required dirs to put forward any sh proposal “relating to the conduct of the ordinary business operations of the issuer”. SEC revised legis in 1983 to phrase similar to that in CBCA s.137(5) re general political causes, etc. Following this case, mgmt in many firms included proposals together with a strong statement against them in circular and most proposals were defeated. Political protesters started using other tactics. Varity Corp. v. Jesuit Fathers of Upper Canada, 1987, ONCA: FACTS: J got shares in V and wanted to put forward a resolution to get V to divest in South Africa - said there was risk in staying there and that many corps had already divested. Wanted V to take immediate steps to divest, terminate licence agreements, and announce plans publicly. V applied to court so they didn‟t have to put proposal on. ISSUE: Should V put proposal forward at meeting? DECISION: Didn‟t have to put forward the proposal. REASONS: Took restrictive view even though first two proposals seemed like something corp could do. Court held that even though resolution related to specific things, it was done primarily for political purpose so V can exclude it. Stated that these specific proposals were secondary to political cause under s.137(5) CBCA. Greenpeace Foundation of Canada v. Inco Ltd., 1984, ONHC: FACTS: G wanted resolution that company reduce sulphur dioxide emissions by 274 tonnes per day and corp refused. ISSUE: Should corp have included proposal?

DECISION: Court refused to grant order to G. REASONS: G not registered sh of record for 90 days as required by s.137. Second, substantially the same proposal was included in last 2 years and it was defeated. Third, resolution primarily for an “environmental” cause so not proper to include. COMMENTS: Said “environmental” cause but likely meant social to fit under s.137 CBCA. CA upheld on appeal on basis of not being registered for 90 days. (iv)Strategy for shareholder proposals: make sure person is registered sh make sure person who‟s registered isn‟t a recognized public interest group or social advocate like Greenpeace don‟t have long-winded preamble - limit to “this not a good business decision” make sure resolution is something shs can do at meeting, eg restraint on business 5. Proxy Solicitation Expenses -in normal case, seems that corp should pay reas expenses but difficult question when have fight for control -Peel v. London and North Western Ry. Co., 1907, Eng CA: Mgmt claimed expenses. Court held that mgmt was entitled to have expenses compensated. Can‟t incur expenses to keep selves in control but only for best interest of corp. Buckley - Expenses have to be reasonable, done in good faith, and incurred in interest of corp. -Rosenfeld v. Fairchild Engine and Airplane Corp, 1955, NYCA: FACTS: Insurgent group won battle for control and paid mgmt for its expenses but mgmt had already compensated itself. Insurgents also paid their own expenses from corp. Sh wants corp to be reimbursed for entire amount. ISSUE: Should corp pay expenses of both groups? DECISION: Court allowed both to be claimed. REASONS: As to mgmt getting compensation, court looked to Peel. Mgmt can be reimbursed for reasonable expenses in bona fide policy battle done in best interest of corp. Mgmt entitled to some protection they need to solicit proxies b/c of sh apathy as otherwise they‟d be at mercy of others. As to insurgent group, they could be reimbursed by vote from shs and they had this. These expenses have to be reasonable and fair and ratified by shs. DISSENT: There was no resolution by shs allowing insurgents to pay former mgmt therefore invalid for them to pay. (But they don‟t need this would have contractual right to reimburse? I don‟t know) Many expenses may not be reasonable and these shouldn‟t be compensated. If not entitled to comp, you need shs to approve it or have to show that expenses reasonable - puts onus on mgmt. Questions distinc made b/w pure attempt to keep control and bona fide policy battle - mgmt will always be able to

show policy reason so test inadequate. Wasn‟t going to allow insurgents to get compensation - payment was ultra vires act to pay them and could only do so if had unanimous sh vote which they didn‟t have. Felt that you shouldn‟t give insurgents comp b/c then have situation of “to the victor go the spoils” which would encourage frivolous expenses and looting. COMMENTS: Majority decision would likely be the result in Can. Does it make sense to put onus on mgmt to prove reasonableness - harder for dissidents to show and concern over frivolous expenses in disputes. There‟s also risk of having frivolous claims brought against mgmt as here the challenging sh held 25 shares out of 2+ million. F. ACCESS TO RECORDS AND FINANCIAL DISCLOSURE 1. Access to Records -BCCA s.39/CBCA s.19(1): corp must keep registered office and for purposes of s.187, a records office both in BC/Can and elsewhere if want but regis and record office can be in same place; s.40: dirs can change location of those offices in BC by passing resolution and filing Form 4 with Registrar [CBCA s.19(3),(4) dirs can change address and shall send notice to Dir] -BCCA s.187/20 CBCA - corp required to keep list of enumerated things -BCCA s.188/21(1) CBCA - corp has duty to give access and people have right to see the list during business hours -BCCA s.188(3), (4) - if non-reporting corp, any sh or debentureholder can get list; if reporting co then anyone can get it -CBCA s.21(1) - in non-distrib corp have limits on who can get list but if it‟s a distrib corp, no limits -BCCA s.189 - every one entitled to examine list under s.188 is entitled to require corp to give copy on payment of reas charge not exceeding $.50/page; s.190: every member entitled on request to copy of memo and articles at no charge [CBCA s.21(2)] -BCCA s.192 - offence to use list of members or debholders for other than corp purposes; s.193 - every corp that refuses to permit person to examine documents or to provide copies against ss.188-191 commits an offence and court may order corp to provide documents -BCCA s.194(1) records or registers can be kept in bound form or electronic processing form; (2) minutes to be kept in bound/looseleaf book -BCCA s.195 - every corp must keep records of financial and other transactions of sales, purchases, assets, liabilities, etc. and subject to articles or ordinary resolution, dirs may determine to what extent and at what times, places, and conditions these can be looked at -CBCA s.21(3) - any person can get list in context of distributing corp; if not distributing corp, then only shs and creditors can get list (s.2 def‟n of distrib corp); (9) assert that won‟t be using list for any reason other than in an effort to influence voting, an offer to acquire shares of corp, or any

other matter relating to affairs of corp, (3) - corp must provide list within 10 days of request -CBCA s.263/356 BCCA - every corp must send an annual return to Dir/ Reg to file and Dir may furnish any person with a certificate that a corp has sent Dir any document required to be sent under the Act; BCCA s.357: annual report must be in form of, and contain info required by, Form 18 (p.137) -CBCA s.266/359 BCCA - person who‟s paid prescribed fee entitled during regular business hours to examine a document required by this Act and to make copies 2. Financial Reports -BCCA s.169/155 CBCA: sets out what financial reports dirs must place before shs at each annual general meeting -BCCA s.196/159 CBCA: at least 10/21 days before annual general meeting, each reporting corp must send to auditor and shs a copy of finan statements set out in s.169/155; (2) also will provide to debholder at demand of debholder; (3) for non-reporting corp, must provide finan info on demand to a sh or debentureholder; (4)/(2) offence to contravene -BCCA s.197: every corp after 6 months of incorp must send interim financial statements to shs for that time period; offence to contravene -CBCA s.160(1): corp who‟s securities were or are distributed to public must send s.155 documents to Dir not less than 21 days before annual general meeting or no later than 15 months after last general meeting; (4) if corp sends or is required to send interim finan statements to shs or stock exchange, it will also send them to Dir; (5) subsid corp doesn‟t have to comply if finan statements of its holding corp include its accounts, and holding corp sends these documents to Dir as required; (6) offence to not comply - documents must be available for public scrutiny -CBCA Reg. 44: finan statements of s.155 must be prepared according to standards of Cdn Institute of Chartered Accountants; 45: auditor‟s report in s.169 must also be prepared by these standards; 46: finan statements in s.155 will at least include a balance sheet, statement of retained earnings, income statement, and statement of changes in finan position 3. Auditing of Financial Statements -auditors used even before stat requirements - done for bonding reasons as signalled to accuracy of finan statements -BCCA s.202(1): every corp shall have auditor; (2) dirs may appoint first one and then can elect at next general meeting; (3) auditor shall continue if no one new elected; (4) dirs may fill any casual vacancy in auditor‟s office; (5) court may appoint auditor on application by a sh, debholder or creditor; (6) corp must give auditor written notice of his appointment -BCCA s.203(1): if shs in non-reporting corp consent in writing to resolution waiving appointment of auditor, corp not required to appoint

one; (2) waiver only effective for one financial year; (3) sub (1) doesn‟t apply to subsid unless holding corp shs have waived auditor for holding corp, or waiver of appointment is approved by superintendent -BCCA s.204: auditor must be a member or in prstp with members in good standing of CICA or CGA Assoc of BC -BCCA s.207(1)/161 CBCA: auditor must be independent of corp and dirs and officers; (2) independence question of fact but sets out 3 types of people who aren‟t independent; (3) defines immediate family and prstp as used in (2); (4) if auditor disqualified under (1), he can continue until next general meeting; (5) within 90 days of knowing you contravene these conditions, must eliminate circumstances of contravention or resign; (6) where auditor contravenes, any interested party may apply to court to have him removed -BCCA s.209(1): corp can remove auditor by ordinary resolution; (2) must give auditor written notice of intention before calling general meeting; (3) auditor has right to make representations in writing to corp not less than 3 days before mailing of notice of meeting and corp will forward copies to shs -BCCA s.210: mgmt of reporting corp shall not propose at any annual general meeting the appointment of an auditor other than incumbent -BCCA s.211/171 CBCA: dirs of reporting corp shall elect audit committee at their first meeting composed of not fewer than 3 dirs(BCCA only) of whom majority aren‟t officers or employees -BCCA s.212: auditor shall make report to shs on the financial statement that‟s to be presented at annual general meeting and will give opinion on whether he thinks finan statements accurate and that they‟re in accordance with generally accepted accounting principles -CBCA s.163(1): shs of corp not required to comply with s.160 may resolve not to appoint auditor; (2) this resolution only valid until next annual meeting; (3) resolution under (1) not valid unless is unanimous including shs not normally entitled to vote G. SOME REFLECTIONS ON CORPORATE GOVERNANCE 1. Mandatory vs. Enabling Corporate Law (i)Enabling argument/position: don‟t need mandatory provisions, they‟re ineffective agency costs: want to minimize these through monitoring, bonding where mgmt has incentive to signal to shs that will act in their interest b/c if they put in negative corp charter provisions no one will invest and they‟ll lose job - but will only signal until marginal cost of signalling is equal to marginal gain context of corp structure will vary and optimal corp charter will vary from corp to corp - mandatory may constrain mgmt from getting charter that best suits corp incentive for mgmt to signal to shs will be brought to bear by the market product market - costs of financing higher so cost of products higher; depends on capital market efficiency - that shs are able to price these corp charter provisions;

takeover market - gives insurgents the incentive to takeover - signal shs then receive gains; labour market - corp mgmt market - mgmt have incentive to look at person next to them and say if you did this, we can do better - incentive on mgmt to replace inefficient mgmt (ii)Mandatory argument: a)market constraints are ineffective: product markets aren‟t perfectly competitive, aren‟t efficient so there is some slack for mgmt to act opportunistically capital markets - no proof that market prices things accurately - it may act quickly but incorrectly - may overreact takeover market - have to pay high premiums to takeover corp so something must be dramatically wrong with corp to give incentive to takeover - estimation of transaction costs are quite high labour market - turnover rate in this markey is fairly low RESPONSE: enabling argument shows that market not perfect b/c there are agency costs Nirvana fallacy - legis isn‟t Nirvana - have to ask what costs of legis are as it may prevent some corps from getting optimal arrangement of corp structure - end up averaging what is best for most corps - in addition, legis isn‟t perfect - isn‟t it controlled by mgmt as well? b)adverse selection: buyer of product can‟t disting good from bad to some extent so what happens is that if there were genuine high quality products you wouldn‟t be willing to pay price for it b/c you can‟t tell difference - so bad quality drives down good capital market can‟t disting good corp charter provisions from bad so no incentive for mgmt to use good therefore legis should set out good quality provisions to ensure that all follow it - everyone better off if all are at high quality RESPONSE: doesn‟t have to be legis that does this - could have other groups signal quality eg thru stock exchanges requiring listing corps to have good quality c)uncertainty and public goods hypothesis: having standard form has benefits there‟s collective benefit to all as courts interp that form and it‟s easier for market to interp terms if they‟re standard - but is there incentive to adopt standard? yes as long as gains are higher than gains of customized terms - need mandatory terms to ensure that standard adopted by all so benefit goes to all RESPONSE: why does it have to be legis? can‟t you do this without legis? mandatory provisions may work in opposite direction of public good - there may be benefits to innovation of adopting customized terms - let others try it then adopt if it‟s good - but if you have standard, no one will try to innovate to improve, will just free ride on others d)innovation hypothesis: mgmt can‟t effectively signal the value of their provisions but legis can - people trust legislators and know they‟ll act in public good but are distrustful of mgmt

RESPONSE: do legislators really act for public good? innovations may only benefit investors and not mgmt so could be good e)opportunistic amendment: even if investors can price provisions when they‟re adopted, they can‟t protect selves from downstream changes - mgmt may take advantage down the road - need mandatory terms to protect shs from these changes eg. mandatory voting on fundamental changes, appraisal remedy (iii)To what extent can laws be mandatory?(Black argument) mandatory rules are simply mimicking market rules anyway - if left alone, the market would do it anyway eg proxy solicitation and appointing of auditors done before they were mandatory avoidable rules - although rules are mandatory, a lawyer could get around them -eg amalgamation provisions requiring sh vote: A and B combine to form C but need votes of A by 2/3 majority and what if you as mgmt don‟t want vote? (1)A could takeover B as this a mgmt decision with no need for sh approval and once A gets control it winds up B and A gets the assets; (2) A incorps a subsid that‟s 100% A-owned then amalgamate Asub with B then merge Asub with A and wind up B; (3) sale of B corp‟s assets to A as this only requires vote of B shs as is mgmt decision of A to buy B‟s assets -so really, how mandatory is this rule on amalgamation? rules are changeable - changed over time thru political pressure so may not always be mandatory unimportant rules - have appearance of being mandatory but are really unimportant eg BCCA s.168 on quorums - have to have 2 minimum to have quorum but how many widely held corps are going to have quorum of 2? carry corp charter with you wherever you do business to can select law from any juris - shop around to find one you like corp seat rule - corp law that governs is one that operates where corp‟s head office is - civil law rule - could try to make arg that this makes corp law more binding but this would have effects - could still shop around and operate elsewhere and what are the competitive and economic effects of this 2. The Corporate Charter Competition Debate -should there be harmonization of stats? This would avoid “race to bottom” where mgmt trying to take advantage of shs so goes to juris where it can best do so -counter arg is that there may be some advantages to competition - “race to top” as encourages innovation and gives mgmt an incentive to act in shs‟ interest - empirical evidence - movements to Delaware - evidence from reincorps in Del is that stock prices increased - criticisms of this evid: when people reincorp they‟re going public or planning takeover so these are positive things to market and are what increased prices, not the move to Del

-CANADA: why don‟t we have same situation as US? - advantages that Del has that no province does: provs aren‟t strongly dependent on incorp fees like Del and that‟s why Del has to be best - don‟t have same pressure in provs; provs don‟t have same control over laws as states do - different court set-up, less control over judges, securities regulators have greater scope of power in Can than US as they make important decisions, different capital market structure in Can where firms have larger control blocks, fewer are widely held and there‟s higher degree of institutional shs so charter competition not as valuable or important b/c have these large control blocks who can make changes quite easily if don‟t like charter terms - so to what extent in Can can you promote charter competition given all these limits? 3. Shareholder Passivity and Growth of Institutional Investors -at what point does size of interest overcome apathy, when does it become rational to get involved? -institutional investors more likely to get involved so they could do monitoring -Japan, Germany have different corp structure - instit investors very large and have strong control and there are numerous links b/w them - they monitor through President‟s council meetings -but instit investors constrained from doing this in North America - have investment restrictions on instit investors which limit what they can put in their portfolios and have to invest certain % in Canada so these things create difficulties - have trouble selling shares but also have trouble controlling mgmt -most provisions are securities law provisions: have to report investments; at 10% interest you become an insider and have trade restrictions, must notify other shs on any trades and each additional 2% must be reported; at 20% interest have obligation that have to offer price you paid for last share to every other sh, takeover requirements - deemed a control person at 20% and if you sell any shares, you have to do so with a prospectus (exception if held shares for 12 months and gave 7 days notice); can be control person with less than 20% if you can effect a material change -other constraints in NA on influencing mgmt - broad def‟n of solicitation means you must use proxies and circulars and these have high costs so difficult to communicate with other shs and generally as dissidents you aren‟t entitled to compensation for expenses; another constraint is the 20% control person limit - if have 2 shs acting in same way and if they can materially affect corp, then they‟re control people; if want to put dir on board you have risk of being deemed a control person and also 10% problem of being an insider so have difficulty selling as you have access to info others don‟t - could use Chinese wall to protect against this -maybe we should get rid of constraints so instit investors can affect control

-but must think about why these provisions were put in to begin with and it may not make sense to get rid of them -breakdowns b/w instit ivestors not so clear - used to be 4 different kinds of instit investors doing 4 separate things but they‟re now starting to link together - banks now have more control than others 4. Interest Group Theories Roe - US corp situation unique re widely-held corps - why did that happen? 1)populist ideology in late 19th century - distrust of concentration of power 2)smaller banks and other institutions wanted to limit power and influence of Wall St. 3)local business elites in every state were reluctant to be dominated by larger institutions 4)managers of corps wanted to be free of concentrated ownership of banks and other instit investors or shs more generally -all these things coalesced to lead to limit of banks‟ power in Canada, had similar structure re banks but had different political story so that‟s why banks still significant, concentrated and why we have higher degree of financial institution investment in Canada interest group theories more generally look at who‟s exerting influence: 1)mgmt - more significant influence b/c more closely related than widely dispersed shs 2)employees - more inclined to delay or stay bankruptcy to preserve existing jobs then take promise of new jobs 3)lawyers - for solicitors, they want complexity and barristers want uncertainty so can litigate 4)regulators in general - securities regulators - serving public good but also have interest in expanding scope of what they influence 5)courts, judges - judges tend to come from particular group - litigators so they prefer uncertainty; also want prestige 5. Corporate Social Responsibility -Dodge v. Ford Motor Co., 1919, Michigan SC: FACTS: Ds were shs in F of 10%. Corp very successful but only gave small divd and Ds wanted more. HF said he wanted to expand the business to benefit all of society rather than just shs. ISSUE: Could corp give small divd so could expand to benefit all above shs? DECISION: No, duty to shs. REASONS: Said it was nice that HF wanted to help all these people but a corp is not a charity. Corp only has one purpose and that is to make profit. Ordered F to pay divd. COMMENTS: Court likely wouldn‟t have ordered divd if HF hadn‟t said that he wanted to extend benefit to all. Presumption is that corp is to be run for profit unless specify otherwise. -Parke v. Daily News, 1962, Eng: FACTS: Corp selling off newspapers for L2 million. Had to use .5 million for entitlements to employees being

fired and gave rest of money voluntarily to employees in various ways as severance compensation. Sh challenged. ISSUE: Were payments to employees beyond the corp‟s powers? DECISION: Yes. REASONS: Corp couldn‟t give this money as charity as it is set up to make profits. -CBCA s.122(1)(a) - have duty to act honestly and in good faith with view to the best interest of the corp - Dodge and Parke view appears to be that best interest of corp is to make profit - but then have Hutton v. West Cork. Ry. Co., 1883, Eng CA where court said corp has power to make contributions on basis of “enlightened self-interest” - can make charitable contribution as long as it‟s with view to profit of corp - A.P. Mfg. Co v. Barlow, 1953, NJ - modern conditions require that corps acknowledge and discharge social as well as private responsibilities as members of the community -consequences of profit motive show why should make profits a dirty word Glasby article - anti-competitive pricing, plant relocation without considering local community, pollution activities, advertising to create demand, clearcutting, bribery of politicians, producing dangerous products, moving to foreign country to avoid legis counter - how do you give people incentive not to do these things? how do you explain problems in planned economies where incentive not to make profits but to keep costs down? have range of possibilities: 1)dualist approach - may make profits subject to constraints - have 2 separate systems of public and private - dirs and officers should maximize profits while interests of others are protected through legal controls such as labour laws 2)monist approach - be socially responsible as long as it‟s conducive to long-term profit 3)modest idealist - usually compare cost of control of actions to cost of fine and do what‟s cheaper - even if it‟s cheaper to pay fine, don‟t do it as should try to control instead despite profitability shouldn‟t produce - make decisions based on spirit of the law rather than strict profit maximization 4)high idealist - try to get broader representation in mgmt so have wider scope of decision-making powers in mgmt - expand purpose of corp to include interests of other groups 6. The Stakeholder Debate -try to find ways to give stakeholders a greater say in business -2 approaches - let dirs take wider range of things into account or give more representation on board of dirs -in US - allow dirs to take wider range of things into account -corp constituency statutes - Illinois - while dirs/officers considering best interests of corp, can also consider effects on employees, customers, suppliers, and the community

-however none of the US stats include any right for any of these interest groups to start an action against dirs for failing to take their interest into account - NY specifically precludes this - raises question of who really brought provisions about and why - was it the stakeholders or mgmt-motivated? -allocation of fiduciary duties - corp constituency stats allow mgmt to make excuse not to take any particular interest group into account - if fiduc duties spread around, they‟re not valuable - fiduc duty only valuable if given to one person/group -who gets most benefit from fiduc duty? rational claimholder‟s bargain would say that should give fiduc duty to whoever is affected most and arg is is that that‟s the shareholder - so give fiduc duty to shs and if others have given it up, then should give them compensation in some form eg extra wage for employees this is basically what law does now - status quo type argument Macy and Miller -Williams article - contractual bargain may be better way to do it representation on board may not be most effective technique -broader question - is it the corp that causes the problem and if so should there be some other form of organization that‟s better to represent all stakeholders? H. CLOSELY-HELD CORPORATIONS 1. The Nature of the Closely-held Corp and Why It‟s Treated Differently (i)Nature of: relatively few shareholders shs generally are active in the business no active or established market for shares restriction on transfer of shares most closely held corps have lower value than widely held ones (ii)Reasons for treating differently: shs tend to have more at stake so are more inclined to take part in mgmt so may want to facilitate this in some manner - aren‟t as inefficient as widely held corp where may have sh apathy don‟t have same problem with separation of ownership and control so may not need things like mandatory proxy solicitation, auditor, proxy circular, etc benefits to shs if had these things would not be as great as in widely held corp and costs of them would be quite high often want to control who they are in business with so often have share transfer restrictions would it make sense for Can to have separate stat to deal with closely-held corp as most other jurisdictions do? 2. Statutory Definitions of “Closely-held Corps” and Modifications for them

(i)Statutory definition: there isn‟t one currently but older stats tried to disting them BCCA s.1 - def‟n of reporting company (widely-held) and non-reporting company (closely-held) - reporting co is one that has any of its securities listed on stock exchange while non-reporting doesn‟t - no specification on number of shs CBCA - took functional approach to make distinctions when came to each area of stat, eg financial disclosure - most of this has changed except for proxy solicitation - now have followed BCCA approach with def‟ns of distributing and non-distributing corp where distrib corp (s.126) is corp, any of whose securities are or were part of distrib to public and remain outstanding and are held by more than one person (listed on a stock exchange or distributed securities pursuant to a prospectus) - distrib corp required to disclose finances, have auditor and audit committee, and have to have proxy solicitation if have more than 15 shs (ii)Statutory modifications: waiver of notice of sh meeting requirement - has to be unanimous waiver so likely only used by closely-held corp(ch corp) - CBCA s.136/167 BCCA one shareholder meetings recognized - CBCA s.139(4)/165 BCCA can have resolutions in lieu of sh meeting but these must be in writing and unanimous so likely only ch corp would use - CBCA s.142/164 BCCA can dispense with requirement of auditor by special resolution if corp hasn‟t made distrib to public - CBCA s.163/203 BCCA reduced financial dosclosure or reduced filing - BCCA s.169: non-reporting corp doesn‟t have to provide comparative finan statement; BCCA s.197: nonreporting corp doesn‟t have to produce interim finan report; CBCA s.160: nondistrib corp not required to send finan statements to Dir can avoid proxy solicitation and proxy circular - CBCA s.149(2): if have fewer than 15 shs; s.177 BCCA: non-reporting corp doesn‟t have to send proxies quorum can be one if only have one sh - BCCA s.168(b) 3. Shareholder Agreements (i)Generally: can use sh agreement to agree on how shares will be voted - can be contractual arrangement or a trust where trustee votes shares according to how it‟s specified in trust indenture (trust not common in Can) (ii)Constraining director’s powers: Ringuet v. Bergeron, 1960, SCC: FACTS: Corp had 4 shs with sh agreement to make themselves dirs - all 4 were supposed to vote at meetings to do this and if you don‟t you have to transfer shares to other parties. B voted out by others. ISSUE: Was a sh agreement valid? DECISION: Yes. REASONS: Court held that these kinds of sh agreements were valid BUT you can‟t constrain the powers of the dirs or fetter their discretion - can‟t have agreement to constrain dirs to vote as dirs at meeting. COMMENTS: Odd result that interped meetings to just

meant sh meetings and not dir meetings. Case cited for proposition that you can’t have agreement that binds dirs’ discretion on how to vote. (iii)Unanimous shareholder agreement: a)CBCA s.102: dirs have power to manage subject to unanimous sh agreement (usa); s.146(2): if have usa, you can constrain powers of dirs - allows you to take powers away from dirs and give them to shs and then can constrain powers of shs b)BCCA has no equivalent of CBCA s.146 but s.141 gives dirs the power to manage subject to the articles of corp - Table A articles give this power so if you want to limit dirs‟ powers, must draft different articles that don‟t give all these powers commonly use usa and make it part of articles - why? it‟s not publicly filed it‟s easier to amend - saves money b/c don‟t have to pay fee to amend articles can use it to control voting of shares can‟t provide in articles for means of dispute resolution but you can put these things in usa how to solve problem on usa: -BC - (i)what if you want to have ch corp where all shs to be dirs but one sh, who owns 50% plus of shares, wants controls over certain things? How can you assure that all become dirs? -use unan sh agreement to set out how will vote shares -Is this valid? Yes - Ringuet - can constrain voting rights of shs (ii)how can you assure that minority shs will be appointed officers? -BCCA s.141 sets out dirs‟ powers but can include provision in articles that this is subject to unan sh agreement. Then get usa saying that shs will appoint officers and that they‟ll vote shares in particular way (iii)how can you provide for maj sh to have control over borrowing, sales, and declaration of divds when they are main financier? -write these powers into usa to constrain voting -put into articles that these powers subject to usa -put into articles directly that X will have these powers (iv)what stat authority allows you to do (ii) and (iii)? -BCCA s.141 that dirs‟ powers are subject to the articles (v)re (iii), which method is preferred for BCCA corp? Why? -preferred method is usa for 4 reasons set out by  above -Can - (i)same fact pattern but for CBCA corp. How do you assure that all become dirs and is it valid? -use usa to constrain how will vote in election of dirs -s.146(1) codifies Ringuet that such voting arrangements valid (ii)how can assure that min shs appointed as officers? -CBCA s.102 states that dirs‟ have power to manage subject to usa so create usa that gives power to appoint officers to shs from dirs (iii)how can give maj control over things as in BC (iii)?


-CBCA s.102 power of dirs to manage subject to usa; s.146(2) usa gives power to shs from dirs (iv)Share transfer restrictions: CBCA s.6(1)(d)/51(1)(e) BCCA - articles/share certif must state if there‟s restriction on issue, transfer or ownership of shares CBCA s.49(8) - if there‟s restriction on a security, the restriction isn‟t effective against transferee who has no knowledge of it unless share certif conspicuously notes it - BCCA s.58: share is transferable as provided in articles a)reasons for: -to control transfer of shares to avoid undesirable business associates and to preserve relative interest -want to allow share transfers so have way to get out of business -to provide mechanism for getting fair price for shares and to avoid being squeezed out -to allow forced buyouts which will resolve deadlocks b)validity of: Canada National Fire Ins. Co. v. Hutchings, 1918, PC: share transfer restrictions need to be sanctioned by stat and absolute restriction to refuse transfers by discretion of dirs is not valid. COMMENT: this only for letters patent juris so maybe only applies in PEI Edmonton Country Club v. Case, 1975, SCC: Corp incorped under like BCCA. Requirement that shs pay annual fee and if they didn‟t, corp had lien on their shares. Second, needed dirs consent for share transfer at their unfettered discretion. HELD: This was valid kind of transfer restriction. Canada National only dealt with lp juris not memo juris like here. In other than lp juris, unfettered discretion to restrict transfer was okay. Laskin DISSENT - like LaForest in McClurg - even in memo stats, unless stat permitted the restriction on shares, they are transferable b/c they‟re property. Must be subject to test of reasonableness. c)types: absolute restriction: validity of these is questionable but it does achieve 1 and 3 of reasons for restrictions as set out above - but can‟t get your money out consent restriction: need consent of board to transfer - avoids undesirable business associates, preserves relative interests, and creates potential market for shares but you run risk of squeeze out and it‟s not effective for resolving deadlock first option provision: sh goes to 3rd party and gets offer but then have to bring offer to existing shs to take up offer and if they don‟t, you can sell to 3rd party - can be used to avoid undesirables, preserve interests, provide market for shares, and avoids squeeze out as 3rd party sets price for shares but doesn‟t do anything to resolve deadlocks and also have problem if existing shs don‟t have money to buy shares - most common shotgun clause: if A wants to buy out B, A can make offer to B then B can accept offer from A or can buy A‟s shares for price A offered to buy

B‟s - good to avoid deadlock and to avoid squeeze out but have concern that price may not be fair for person in weaker financial position series of events options: if someone dies, goes bankrupt, gets divorced, then corp has right to buy their shares buy-out clause: allows shs to buy someone out and attached to it is mechanism for establishing a fair price for shares, eg independent valuer -can have combination of these (v)Choice b/w closely-held corp and a widely-held corp: decision on this will depend on variety of econ circumstances - firm will only go public when doing so increases the value of the shares which were issued prior to the public distrib but if firm worth more closely-held, then won‟t make public distrib advantages of public market: efficiencies in info production - allows free riding by laypeople as market will determine and account in price all the necessary info; efficient market also provides monitoring service as anticipated mgmt misbehaviour will be reflected in the price; availability of resale of securities is advantage to investors; easier access to capital markets for corp to finance advantages of closely-held corp - potential tax advantages; economize on agency costs as don‟t often have separation of ownership and control which creates agency costs; lower costs of disclosure disadvantages of closely-held corp - inability to sell shares heightens risk of opportunistic behaviour; less protection for minority shs; valuation uncertainties re share price closely-held corps may wish to adopt different liability rules than widely-held corps b/c certain transactions that might pass scrutiny in widely-held might be stopped if attempted by closely-held, eg mgmt‟s business judgment in public corp might be subjected to stricter rules so shs in closely-held corp may want to protect selves in same way

A. INTRODUCTION 1. Analogy to Agency -dirs and officers really acting as agents -both have duty of care -both have duty to avoid conflicts of interests -have obligation not to make secret profits or not to take corp opportunity for selves -have duty to act according to interest of corp - have duty to act for proper purpose 2. Statutory Codification -CBCA s.122(1)/142(1), 159 BCCA - dirs/officers have duty of care and duty to act in good faith/ loyalty to corp and act in its best interest

3. Forms of Management Misbehaviour (i)Duty of care: a)shirking - don‟t make diligent effort - liability strategy for this not very stringent and it may make sense for it to not be strong - more expensive for mgmt to be extremely diligent and decisions may be slower b)excessive risk aversion - only invest where can avoid risk - firm-specific investments to lower risks whereas shs may want diversified risk b/c they face lower risks than mgmt - mgmt reluctant to take risks b/c they can lose job if wrong - as liability strategy, have problem of hindsight where can see right decision - may be better to offer compensation package to mgmt to encourage risk-taking (ii)Conflicts of interest and corporate opportunities: looting - mgmt takes all the benefits conflicts of interest where have transaction b/w dir and corp can include taking advantage of corp opportunities where mgmt takes business for self to keep all the profits even though opportunity came to them in context of mgmt of corp (iii)Proper purpose and best interests of the corp: control transactions - interests of shs and mgmt diverge most at point where takeover happening - shs get benefit of high share prices but mgmt loses its jobs and firm-specific human investments that may not be able to be transferred elsewhere proper purpose comes up when mgmt developing techniques to defend against takeover - use proper purpose test, best interest test to determine if mgmt was adopting the strategies for best interest of corp - tests are mechanisms for dealing with divergence in takeover situations - proper purpose doctrine limits what defensive techniques mgmt can use B. SHIRKING/DUTY OF CARE 1. The Pre-Statutory Duty of Care -Re Cardiff Savings Bank, 1892: M became dir of bank at 6 and attended first meeting at 27. Liquidator seeking compensation so went after M as dir. HELD: M only had to exercise reasonable care at the meetings he attended and he had no responsibility for meetings he didn‟t attend. This changed with stat. -Re Brazilian Rubber Plantations and Estates Ltd., 1911: Syndicate formed to buy rubber plantations and one promoter of syndicate got various persons to be dirs - one was ignorant of business, 2nd was old, 3rd only given minimal duties, and 4th only got in b/c others were there. Syndicate had bought plant for L15 000 and was going to sell to the newly formed corp for L150 000. Had public offering of shares to raise money and in prospectus they lied about the size and number of trees. Promoters got money and walked away. Action brought against 4 dirs for misrep in

prospectus. HELD: Standard of care is that which is expected to be taken by person acting on own behalf in the circumstances - had to take into account that one dir ignorant, 1 old, etc. - therefore they weren‟t responsible for the loss. COMMENTS: Standard of care pretty low. -Re City Equitable Fire Insurance Co.: Profitable insurance co suddenly went bankrupt b/c of looting by manager. Liquidator sues dirs and auditors. HELD: Dirs and auditors not liable for not catching manager. 4 principles: 1)reasonable care: degree of care is to be measured by care that ordinary person might be expected to take in the circumstances on their own behalf 2)degree of skill required is that which can be expected of this particular person with their particular knowledge and skills 3)amount of attention - dir not required to give continuous attention to affairs of corp 4)dirs can trust and rely on officers to act in good faith as long as they don‟t have grounds for suspicions 2. Statutory Modifications -reasonable care: CBCA s.122(1)(b)/142(1)(b) - similar test in both have to exercise care, diligence, and skill of a reasonably prudent person -degree of skill: CBCA s.122(1)(b) - may retain degree of skill as it uses words “in comparable circumstances”; BCCA has no reference to the circumstances in s.142(1)(b) -degree of attention: both CBCA and BCCA refer to the “diligence” of a reasonably prudent person; for absent dir to dissent, must notify within 7 days of meeting - CBCA s.123(3)/151(6),(7) BCCA -trust of officials - nothing in CBCA or BCCA to override common law on this; CBCA s.123(4) provides that dir not liable for good faith reliance on financial statements, or report of lawyer, accountant, engineer or other professional person -BCCA s.151(1) - dirs who vote for or consent to resolution authorizing the purchase of shares contrary to s.260, commission or discount contrary t s.47, payment of divd when corp insolvent, loan or guarantee contravening s.126 or 127, payment of indemnity to dir under s.152 without court approval, or an act contravening s.22 are jointly and severally liable to corp to make good any loss suffered; (9) dir not liable under (1) if he proves he didn‟t know and couldn‟t reasonably know that resolution contravened the Act or if he relied in good faith on statements presented by officers to be correct -BCCA s.159 - ss.142 and 148, specifying duty of dirs to act in good faith, apply to officers as well as dirs

3. Application of the Statutory Duty (i)The business judgment rule: US expression but we have same concept - courts mean that they will not second guess mgmt decisions and will assume they acted in good faith and in best interests of corp reasons for this rule - judges not experts in business; would involve gathering a large amount of info - expensive; concern that with benefit of hindsight and more time to decide, court may make decision that doesn‟t reflect the circumstances that the dir was in the more scope you give to this, the less you give to duty of care Anglo-Cdn position - basically the same approach - courts reluctant to interfere and don‟t want to second-guess varying view on to what extent the rule extends - do you have to show fraud or just negligence? Shlensky v. Wrigley, 1968, Illinois CA: FACTS: W owned Chicago Cubs and wouldn‟t put up lights in Wrigley Field to allow night games. W almost made Ford-type statement that baseball a daytime game but stopped self by saying that it was business decision b/c lights would have bad effect on the neighbourhood. S was sh and brought action that W breaching duty of care. ISSUE: Did W breach duty of care? DECISION: No breach. REASONS: Held that to override business judgment rule presump, you have to show fraud, bad faith or conflict of interest and none of these shown here. Concern for neighbourhood legit as deterioration in neighbourhood might have had negative effect on value of business. Smith v. Van Gorkom, 1985, Del SC: FACTS: T corp had substantial income tax credits that they could apply against other income. Considered merger with other corp with stream of income that could take advantage of credits. Manager thought price of shares to be in $50-60 range. V chair of board of dirs of T and he arranged a meeting with T‟s mgmt on Sept.20 for higher selling deal but mgmt refused. On same day, V goes to board to approve deal on basis of 20 min presentation from prez. Attorney also told them that if they don‟t approve, there could be litigation and that there was no requirement for outside valuation of shares. Board considered proposal, reconsidered it in Oct, and approved in Jan. Board consisted of 10 dirs, 5 of whom were non-mgmt. Of these 5, 4 were CEOs of other corps with 35 years of experience and 5th was the former dean of U of Chicago Business School - so not slouches on business. Just before transaction went ahead, they had consulting group report on corp that went all through every aspect of the corp. Shs sought rescission of board‟s decision. ISSUE: Did dirs breach duty of care? DECISION: Did breach. REASONS: Court - 1)noted that there was protection of dirs and officers by business judgment rule; 2)rule is presump in favour of dirs that they acted in good faith and in honest belief that it was in corp‟s best interest and added third that they were acting so on an informed basis; 3)party attacking dirs must show sufficient evidence to rebut these 3

presumps; 4)adopts gross neglig standard of duty of care. Held that dirs were grossly neglig on 3rd element of business judgment rule presump that must act on informed basis. Here, found that dirs didn‟t adequately inform themselves about corp and they should‟ve gotten another valuation. Had only spent about 2 hours total considering the merger and this wasn‟t enough time. DISSENT: Where do majority and shs get off challenging and second-guessing these people who have more business experience than them. Dirs were well-informed and 2 hours was adequate time b/c they had consulting report. COMMENTS: Damages against dirs were $23 million. Response to decision was dramatic rise in insurance rates for dirs and officers even in Can. Del amended corp stat so corp could limit liability of dirs and officers for breaches of duty of care. Stock prices increased. (ii)Causation: Barnes v. Andrews, 1924, NYDC: FACTS: A became dir of corp b/c of friendship with prez but A only dir for a year. A missed one meeting for valid reason but attended the only other one there was during time he was dir. Corp sold about 500 000 shares but it wasn‟t enough for corp to get going. Receiver made claim against A for neglig. ISSUE: Was A neglig? DECISION: No neglig. REASONS: Did find that A failed to keep himself sufficiently informed about corp business but pff had to go further. Even if receiver established breach of duty by A, he would also have to show that proper performance by A would have prevented the loss and he must also show amount of loss that would’ve been avoided. Difficult to establish causation here b/c there were many other things going wrong with corp. COMMENT: On this standard, it would be difficult to establish causation. (iii)The Canadian position: Fraser v. MNR, TCC: FACTS: F one of 3 dirs in closely-held corp and was promoted to vice-prez. His job was to secure raw materials and the others took care of the finances. Major client of corp was Canada Post and it was delinquent on its payments. This put corp in cash flow problem so it didn‟t give in remissions that were to be submitted to govt for fed income tax. When F found out about this, he went to the other dirs to find out more but they told him everything was okay. Govt didn‟t get paid so came after F. ISSUE: Did F breach duties? DECISION: F breached duty. REASONS: Provisions in income tax act same as CBCA for duty of care. Court held that F didn‟t do anything to prevent the failure to pay taxes. Also looked at relative skills of F and found that he was intelligent person who should‟ve known to do something and that he had duty to be vigilant. Said that other dirs didn‟t have exclusive responsibility for finances - F had equal responsibility as co-dir. COMMENTS: Suggests fairly high standard of care but context of it being a tax case may account for this

higher standard. As to failure to remit taxes, others have internal mechanisms to ensure they take care - market incentives. But here, all were probably in agreement that if we can get away with it, let‟s go for it so court concerned that it was only control left. Dixon v. Dixon Morgan McEwen, 1989: FACTS: Pff lost much money shortly after buying shares in corp. Brought action against dirs, officers, auditors and one def sought to have case decided on summary judgment. ISSUE: Should case be dismissed on summary judgment? DECISION: No. REASONS: Def who brought action that it be decided on summary judgment had several things working against him. First he was from Switzerland and so never attended a meeting and he was also on audit committee but didn‟t go to those either. Second, he didn‟t even know who the chief financial officer was and thirdly, he had put his signature on 3040 blank pieces of paper for corp to fill out as it liked. Court found that the matter was complex and needed more attention so wouldn‟t decide on summary judgment. Summary: have we shifted from pre-stat duty of care to more stringent standard? Fraser suggests so but it‟s a tax case so may have particular concerns. Van Gorkom likely shows shift has gone too far. To answer question: set out pre-stat duty, note the shift in Fraser, Van Gorkom but be careful doing them. Discuss whether has been shift or not. He says there probably has been slight shift. BCCA s.152/CBCA s.124 - dirs can get indemnification if they haven‟t acted in bad faith or didn‟t have reasonable grounds to believe conduct was illegal - allows for indem insurance -puts duty of care back into market as corp is paying indemnity - market will be concerned about these payments to bad dirs so will lower value of the corp -insurance still expensive and contains numerous exemption clauses these tend to be related to environmental liability issues C. LOOTING: INTERESTED DIRS‟ CONTRACTS/CONFLICTS OF INTEREST 1. Pervasiveness of Conflicts of Interest (i)Common conflict of interest situations: corp has k with dir or officer - dir wants highest price for self but best interest of corp is the lowest price transaction b/w corp A and corp B where dir in A also has significant share interest in B transaction b/w parent and less than 100% owned subsid - subsid wants highest price but best interest as member of parent is to get lowest - conflict of increasing value of parent while losing on subsid contract b/w A and B corps where one sh of A has 51% interest in A and wholly owns B corp - eg selling land from B to A so sh wants highest for B and lowest for A b/c owns 100% of B - shs are said not to owe a duty to one another - such a situation likely covered by stat

(ii)Pervasiveness of conflicts: conflicts higher in small corps - don‟t have as much ready access to finance and frequently get loan from shs so have conflict b/c sh invariably also dir or officer - can also arise over sale of goods or services to corp even in widely-held corp have problems - often hire people for their expertise and this often comes b/c they have experience in the area or know people in it can have parent-subsid conflicts (iii)Possible responses: have no rules or restrictions - leave it to corp for internal control or to market controls to constrain have strict rule that if there‟s conflict, the transaction is invalid - don‟t bother to sort out good from bad - however this limits who could be on boards, eg employees couldn‟t be procedural rule - as long as procedures complied with, transaction is fair number of ways to determine it‟s fair - interested dirs can‟t vote but others can after being fully informed of conflict; take to shs to vote on after giving them complete disclosure on it; let the court assess fairness of the contract if sh complains (iv)Remedies: common law response is that the transaction itself is voidable at behest of the corp and the interested dir has to account for profits - however have problem if likelihood of getting caught isn‟t very high then accounting almost like a licence fee 2. The Common Law Rule and Responses to It (i)The common law rule: Aberdeen Ry Co. v. Blaikie Brothers, 1854, HL: FACTS: B was dir of A and also partner in BB. Numerous dirs voted in favour of k to sell chairs to A. After only half delivered, prices dropped and A didn‟t want any more. BB sued for specific performance. A claimed that k voidable for conflict of interest. ISSUE: Was there conflict of interest? DECISION: Yes, k voidable. REASONS: Court held that A could avoid the contract as B was in conflict b/c of being dir and partner therefore contract voidable. Strict rule that court won’t look at fairness of the contract or that other dirs voted in favour of it. If there’s conflict of interest, then the transaction is voidable and dir/officer is responsible to account. COMMENT: Rule of inalienability like this imposes costs on the corp b/c it may lose valuable business opportunities but avoids court the cost of having to look at and judge fairness. If there are alot of such transactions that are unfair and it‟s too costly for court to judge the fair from the unfair, then such a strict rule may be justified.

(ii)Ratification: Northwest Transportation v. Beatty, 1887, PC: FACTS: B owned/acquired 291 of 600 shares of NW. 2 of his buddies given 5 shares each so B had control over 301 votes. Feb.7 corp had meeting of shs where B and his buddies were elected dirs. Also discussed purchase of ship owned by B. Feb.10 dirs pass resolution to buy B‟s ship. Feb. 16 ratify purchase at shs meeting 306-289 - only passed by reason of B‟s votes. ISSUE: Can interested sh vote on the transaction? DECISION: Yes. REASONS: Interested dirs perfectly entitled to vote as long as they didn‟t bring about the ratification by some unfair means or fraud or transaction wasn‟t illegal to get result. (iii)Responses to the common law rule: implied terms so that parties can contract around fiduc duties after Aberdeen, articles had provision that said dirs may be involved - if they disclose interest and no-interested shs vote for it, then it can go ahead disclosure must be adequate - to be determined by the court 3. The Statutory Provisions for Disclosure -CBCA s.120 - applies to dirs and officers - only applies to material transactions so if it‟s not, go back to common law IF (i)there‟s disclosure of conflict; (ii)approval of conflict by dirs or shs (with interested dir not voting); and (iii)the contract‟s reasonable and fair then contract not void or voidable. -application to court to set aside contract on terms court thinks fit can be made - s.120(8) -BCCA ss.144-147 - don‟t apply to officers so go back to common law Dirs must account for profit unless: A)-disclosure; -approval by dirs; and -dirs abstain from voting OR B)-contract reasonable and fair; and -approved by special resolution of shs after full disclosure -if not complied with, then an interested person or the corp may apply to the court to enjoin the contract and set it aside or make such other order it thinks appropriate -CBCA - has general form of disclosure -BCCA s.147 - does it work same and will it count as disclosure for future circumstances? -disclosure and voting exceptions for some transactions - BCCA s.144(4)/120(5) CBCA - decisions re remuneration for dir, officer; for indemnification or insurance; contract with affiliated corp - in BCCA,

deemed not to be interested dir, under CBCA interested dir can vote on these transactions and could challenge on reasonable and fair standard 4. Application of the Fairness Standard -in BC, can go under A or B above but what if you go under A, which has no fairness requirements, and transaction grossly unfair? -in BCCA no fairness test set out but California case (Maynard, I think) said that following procedures doesn‟t preclude the overriding duty to act in good faith and best interests of the corp - so fairness is implicit under procedural provision - this could apply here so may include fairness rule under s.142 under A -OSC Policy 9.1 - related party transactions - have committee of dirs review transaction for fairness and need approval of shs for transactions involving 25% or more of corp‟s assets - sh approval of majority of minority - also requires extensive public disclosure and definition of related parties broader than dirs and officers 5. How “Interested” Does Director Have to Be? -interest doesn‟t have to be pecuniary - if hold shares in other corp as trustee rather than as benef owner, that interest sufficient to attract conflict of interest prohibition - Transvaal Lands Co. v. New Belgium (Transvaal) Land and Development Co, 1914, CA -CBCA s.120(1)(b) - dirship in other corp is an interest -CBCA s.120(1)(a) - are interested if dirs or officers have material interests in material contracts with other corp - material not defined -material interests must be disclosed in proxy circular - CBCA Reg s.35(bb) - even if action not being taken at meeting, Reg s.35(w) requires disclosure of material interests of officers/dirs in material contracts but also has omissions eg. if interest solely arises from being dir in other corp D. LOOTING: CORPORATE OPPORTUNITIES 1. The Problem -dir/officer gets business opportunity and instead of letting corp take it, he takes it himself - gets full return even though may be better to let corp take it -simple rule - you can‟t do this - but it‟s not easy to determine when opportunity belongs to corp: -dirs hired for expertise that often came from being involved in other corps - what corp do they take opportunity to? what about opportunities that come to them independently from their role as dirs? -what if corp can‟t take the opportunity itself? -what if corp chooses not to take it? Opportunity may be worth more to manager than corp so why not let manager take it and then give him less compensation? This allows court to separate who

the opportunity is better for but this is difficult so make strict rule that can‟t do this at all 2. The Cases - The Approach of the Courts (i)The strict rule: Regal (Hastings) Ltd. v. Gulliver, 1942, HL: FACTS: R owned cinemas and got offer to lease 2 others but lessor said he wouldn‟t lease to A (subsid of R) unless A had L5000 in stated capital or personal guarantees from dirs. R could only put up L2000 so other dirs and the lawyer put up L500 personally and took shares in A. Sold leases and shares of R for L15 000 so had 3 time increase in value. New owners of R said leases a corp opportunity for R for whole opportunity and dirs didn‟t do this, they took opportunity. Claim that dirs obligated to account for increased value. ISSUE: Was this a corp opportunity? DECISION: Yes. REASONS: Russell - this is a corp opp b/c shares acquired by reason of and only by reason that they were dirs of R and in course of their execution of their office. Once this found, don‟t need to inquire into fairness or good faith of dirs - Keech. Breach only arises when managers make a profit “by reason and in the course of” their managerial duties. COMMENT: Concern that new owners have gotten windfall. (ii)Relaxation of the strict rule: a)the Canadian approach: Peso Silver Mines Ltd. v. Cropper, 1966, SCC: FACTS: C and 2 others were 3 of 6 dirs of P, a public corp. P offered claims by Dick - offer made to C and V and they brought it to P. P‟s board said it couldn‟t purchase claims. 6 weeks later C,W,V are approached by Dr about claims. C,W,V form private corp to take claims and form public corp to develop the properties. P taken over and new dirs say they should be given shares in these new corps b/c the claims should‟ve been theirs. W and V give shares but C says no. Said he forgot that these claims initially offered to P b/c they get so many claims and said that these ones came to him solely in his personal capacity. New dirs sue. ISSUE: Was this corp opportunity? DECISION: No. REASONS: BCCA said that P made bona fide decision not to take the claims so not like Regal - came to C after rejection by P. SCC didn‟t overrule this but gave narrow reading to Regal. C and others didn‟t get claims by reason and only by reason that they were dirs of P - got them in their personal capacity. Canadian Aero Services Ltd. v. O’Malley, 1974, SCC: FACTS: C preparing bid for aerial mapping and O and Z were working on bid for C. They were concerned about the constraints imposed by C -

felt they couldn‟t win bid and if they lost the bid, they‟d lose their jobs. So O and Z resigned, formed own corp T that put in bid and wins. C sues. ISSUE: Was this a corp opportunity? DECISION: Yes. REASONS: ONCA - O and Z got bids by reason and only by reason that they were dirs - but O and Z weren‟t dirs - just employees. SCC - Firstly, officers are agents of corp and they owe fiduc duties. Second question was did the offer come when they were executing duties of their office as they resigned before T made bid. Court held that duties can extend beyond time when you leave office and law not constrained by narrow reading of Regal - can expand them to fit modern corp. Neither the conflict test nor the test of accountability for profits acquired by reason and only by reason of being dirs and in the course of the execution of the office should be considered as the exclusive touchstones of liability. Fiduc duty of dir/officer doesn‟t terminate upon their resignation and it can‟t be renounced at will by the termination of employment. Gillen court either provided modified Regal test which recognizes some instances where dirs can take corp opportunities if they‟re rejected by the corp (Peso, Burg) OR laid out broad fairness principle that dirs/officers duties arise from general standards of loyalty, good faith, avoidance of conflicts of interest and factors to take into account are what office they held, their knowledge about opportunity, and time opportunity offered. W.J. Christie & Co. v. Greer, 1981, MBCA: G an employee of W for 20 years and was also a dir and senior officer - key employee. G, with 2 other employees, resigned from W and then solicited W‟s clients and managed to get several major ones away from W. Issue was whether G owed fiduc duty to W and court applied Canaero in finding that G owed duty. G owed fiduc duty even after he resigned as dir, officer, senior employee. COMMENTS: Other cases have reached duty to lower level employees who were key in their particular sphere. b)the US approach: “interest” or “expectancy” test - opportunity was corp opportunity if corp had a present interest, expectation in it - corp actively seeking the opportunity narrow test “line of business” test - Guth v. Loft, 1939, Del SC - L corp manufactured and distributed candies, syrups, etc and G was prez. G involved with M who owned National Pepsi Cola which went bankrupt. M and G set up corp and bought trademark and secret formula. Pepsi distributed through G‟s corp but L had to produce the syrup and send it to G‟s corp to distrib it - L paid cost plus 10%. Opportunity arguably was not one that L was actively seeking or had present interest in so court developed broader test. Held that opportunity was in L’s line of business so was opportunity L could have taken. Therefore G had obligation to take it to L. G had to account for profits.


broad fairness test - Burg v. Horn, 1967 - H engaged in real estate and got B to make investment in D corp which H owned. H also owned other related businesses but at time B invested, there was no discussion of what H would do about these related businesses. H and B had falling out and B sued H saying it should have brought particular opportunity to D. Court found that Guth was too broad so adopted fact-sensitive fairness test “but the duty not to compete, like the duty to offer opportunities to corp, is measured by the circumstances of each case”. On these facts, found H not liable - B knew of other corps when invested and so knew these other corps would take advantage of opportunities - gap-filling by court as decided in way it felt was consistent with what parties would have decided beforehand. (iii)Directors of many corporations: Johnston v. Greene, 1956, Del SC: FACTS: O a dir of A which financed aircraft sales and A cash-rich and looking for investments. O also dir of other corps including Atlas Airlines - corps involved in related businesses. O got opportunity to get patent for self-locking nuts and he brought this to A but A‟s lawyers advised against it. A bought shares in patentee corp but didn‟t buy patent. So O took opp to syndicate, which included himself, who purchased the patents. ISSUE: To which corp did O owe fiduc duty? DECISION: No one. REASONS: Court found that opp came to O independent of role at A and that opp was not something A was actively seeking nor was it in A‟s line of business. Court concluded that if O not said to be under obligation to any one corp, why couldn‟t he take opp for himself? This not a related business so O‟s actions okay - would only have been wrong if opp fit within line of business of one of the corp‟s O involved with. COMMENTS: What would result have been if he was only a dir at A? Then he would owe fiduc duty to A. But if he‟s dir to many corps then he doesn‟t owe duty to any? Seems like strange result. (iv)Parent and subsidiary corporations: when parent owns less than 100% of subsid Sinclair Oil v. Levien, 1971, Del SC: FACTS: S owned subsid Sinven in Venezuela - 97% of shares. S set up subsids in any country where it had operations. L owned 2.5% of shares in Sinven and he complained about divds - said corp shouldn‟t be paying large divds as these were taking away investment opportunities and also claimed that S offering opportunities to other subsids but not to Sinven. ISSUE: Did S owe duty to Sinven re opportunities? DECISION: No. REASONS: Held that S had established pattern of allocating opportunities to its subsids when those opportunities arose in the subsid‟s

jurisdiction. No opportunities had arisen in Sinven‟s juris so that‟s why it had no opportunities. S had no duty to allocate opportunities to Sinven if they didn‟t happen in Sinven‟s juris. COMMENTS: Seems like easy way out for parent corp to award allocation of opportunities to subsids but how should corp decide which opportunities to give to which subsids? Brudney and Clark say opportunity should be given to whichever corp, parent or subsid, can best exploit it but if opp‟s value doesn‟t depend on whether parent or subsid owns it, then parent‟s taking of opp shouldn‟t be seen as injury to subsid. When opp of equal value to both and available at bargain price, then opp should be given to subsid unless parent shows by clear and convincing evidence that it‟s parent-specific - reject sharing rule that both share opp pro rata. This sharing inappropriate for corp opp b/c of greater valuation uncertainties. E. PROPER PURPOSE AND BEST INTERESTS OF THE CORPORATION 1. Introduction -ways to challenge validity of acts of dirs and maybe officers -usually comes up in context of a takeover where dirs use defensive techniques to fight it 2. Proper Purpose/Primary Purpose Test -ask series of questions: 1. identify the power exercised (eg power to manage, issue shares) 2. what was the purpose for which the power was intended? 3. what was the primary purpose for which the power was used? 4. was the primary purpose for which the power was used consistent with the purpose for which it was intended? -YES: then ask “was the exercise of the power in the best interests of the corp?” If yes, then power valid but if no, then the exercise of the power was invalid and challenger can get injunc, possibly damages -NO: then exercise of power invalid and challenger can get injunc and possibly damages -Howard Smith Ltd. v. Ampol Petroleum, 1974, HL: Previous to this case, courts had tendency to infer purpose but here used new approach. FACTS: A made bid for M at L2.27 per share and later H made bid at L2.5. A contacts B corp and they decide that b/w them they own 55% of shares so got sh agreement and voted for A‟s bid. M angry so issues new shares, mostly to H, which lowers A and B‟s share to less than 50%. A challenged this issuance. At trial, court held that dirs acted in good faith and not out of self-interest but this irrelevant b/c action inconsistent hadn‟t exercised power for any of the actions possible. Trial struck down share issuance and M appealed. HL brought new test: 1.identify power

2.what was the substantial purpose for which the power was exercised? substantial purpose with the purpose or purposes for which the power may have been given - not limited to one specific purpose so somewhat more open-ended. 3. Best Interest Test -Teck Corp. v. Millar, 1972, BCSC: FACTS: M dir of A which is junior mining corp. A investigates claims but when it goes to get ore, it looks for major to finance. T and P were possible majors - T was new on scene whereas P established and had good reputation so was preferred by A‟s dirs. T buying shares of A with insider info and eventually got majority. Before T could replace dirs, M and other dirs made deal with C (P‟s subsid) to defeat T‟s control of A through large share issue. T said this not proper purpose. ISSUE: Was this proper purpose? DECISION: Doesn‟t use proper purpose test but use new “best interest” test. REASONS: Court looked at proper purpose line of cases and also best interest line and says that in most cases we end up using best interest test. Apply the test in this way: the dirs must act in good faith. Then there must be reasonable grounds for their belief. If they say that they believe there will be substantial damage to the corp’s interests, then there must be reasonable grounds for that belief. If there are not, that will justify a finding that the dirs were actuated by an improper purpose. Onus on complainant to show prima facie evidence that there were no reasonable grounds and that dirs didn’t act in good faith. proper purpose test and best interest test are open to challenge for any exercise of power but next 2 (#4 and 5) are more directly focussed on takeover situation 4. Inconsistent with Any Other Purpose -Exco Corp v. NS Savings and Loans Company, 1987, NSSC: Corp used many defensive techniques including issuance of shares. Challenged. Court held: when exercising their power to issue shares from treasury the dirs must be able to show that the considerations upon which the decision to issue was based are consistent only with the best interests of the company and inconsistent with any other interests. This burden ought to be on the dirs once a treasury share issue has been challenged. This test consistent with dirs’ fiduc duty. COMMENTS: This a very strict, tough test and arguably is confined to takeover context.

5. Reasonable in Relation to the Threat Posed -347883 Alberta Ltd. v. Producers Pipelines Inc., 1991, SKCA: FACTS: P adopted poison pill plan when S tried to takeover. Poison pill plan makes takeover difficult to swallow. Created rights plan which gives shs the right to buy additional shares at low price when a certain event happens. In this case, event is anyone who owned 5-10% of shares and makes bid to takeover - when this happens, rights plan operates. Plan was to last from Aug to Dec. Had sh meeting but rights plan not put before shs. In response to S‟ actions, dirs got together with major shs and entered into agreement on how to vote shares and on extension of rights plan to Feb but this not brought before shs. Modified rights plan with board out clause that if had unanimous dir approval for takeover, then rights plan wouldn‟t operate. Had shs meeting in Feb where they approved issuer bid (allows corp to buy its own shares) but rights plan not discussed. S sought to strike down the issuer bid and rights plan. ISSUE: Were the dirs‟ actions reasonable in relation to threat? DECISION: REASONS: Court heavily influenced by securities administrators‟ National Policy 38 where administrative powers come into effect when they see takeover defense they don‟t like. Sec admin‟ors like defensive techniques such as unrestricted auction but don‟t like those that block takeovers or deny shs the right to sell their shares. Set out different approach following US jurisprudence: when corp faced with takeover situation, the dirs must exercise their powers in accordance with their overriding duty to act bona fide and in the best interests of the corp even though they may find themselves, through no fault of their own, in conflict of interest. If, after investigation, they determine that the action is necessary to advance the best interests of the corp, they may act, but 1)the onus will be on them to show that 2)their acts were reasonable in relation to threat posed and 3)were directed to the benefit of the corp and its shs as a whole, and 4)not for an improper purpose such as entrenchment of dirs. Since shs have right to decide to whom and at what price they‟ll sell, defensive action must interfere with that as little as possible. Any defensive action should have sh approval. Defensive tactics that result in shs being deprived of the ability to respond to a takeover bid or to a competing bid are unacceptable. for any exercise of power - primary purpose test - Smith; Teck - for Teck, must remember that only BCSC case so BCCA could re-open primary purpose takeover situation - any of these positions open: primary purpose, Teck, Exco (any other purpose), PPI (reasonable in relation to threat posed) F. SH AND CORP REMEDIES - PERSONAL AND DERIVATIVE ACTIONS 1. Introduction -personal action: various rights unique to the sh, eg notice, right to appoint a proxy, vote, adequate info, inspect books, allow them to bring action - normally sh can sue in own name if rights breached

-derivative action: wrong done to the corp which has caused loss to the corp and this results in loss to the sh - sh‟s right to sue derives from corp‟s right to sue to rectify the loss 2. The Derivative Action at Common Law -Foss v. Harbottle, 1843, Eng: 2 shs of corp complained that sale to corp done at inflated prices and dirs of corp owned corp that sold it. Court said that shs could not bring action, only the corp could. Dirs would decide whether or not to bring action and if they decide not to, shs can but only if have majority so if you‟re minority sh in this situation, you‟re stuck. -Northwest Transportation v. Beatty: interested dirs/shs could vote on transaction to bring action therefore difficult for minority sh to bring action -exceptions to Foss: - all read narrowly 1)if was personal wrong, could bring action (not really an exception) - but how widely do you interp personal wrong? Courts had cut this down and down - Percival v. Wright: dirs owe duty to corp only and not shs so if there was a breach of duty, it wasn‟t a wrong to the shs but to corp only so shs couldn‟t sue. 3. Statutory Modifications (i)Introduction: done to overcome Foss limitation that even if tried to bring action, need sh majority done to overcome free rider problem - why incur costs monitoring cost problem - shs have little incentive to monitor concern about frivolous and vexatious claims (ii)Who can get leave: BCCA s.225; CBCA ss.238, 239, 240, 242 CBCA s.238 - “complainant” - registered or benef security holder (wider than just sh); present or former security holder; dir or officer or former dir/officer; Dir under CBCA; any other person who, in discretion of court, is a proper person to make an application BCCA s.225(1) dir or member may bring deriv action; 225(3)(d) if member or dir at time of act causing action; 225(8) member includes benef sh and any other person who, in court‟s discretion, is proper to make an applic potentially quite broad under both stats (iii)Basis on which leave will be granted: CBCA s.239 - apply to court for leave to bring action but to get leave, court must be satisfied that you gave reasonable notice of your intent to bring action to dirs and they fail to bring action; has to be done in good faith; has to appear to be in interest of corp that action be brought

BCCA s.225(3) - may apply for leave if have made reasonable efforts to get dirs to bring the action; are acting in good faith; it‟s prima facie in the corp‟s interest that the action be brought; and must have been member at time of act complained of overcomes Foss rule where had to get dirs to bring action or majority of shs stats allow for minority sh to bring action try to avoid vexatious claims by requiring good faith and best interests of corp (iv)Who pays the costs?: under both stats, courts can order corp to pay complainant‟s reasonable legal fees - BCCA s.225(5); CBCA s.240 - attempt to ease cost burden CBCA s.240(c) - permits possibility of personal recovery in deriv action imposes costs over all the shs but there‟s no guarantee court will do so court can make order for interim costs - CBCA s.242(4); BCCA s.225(4)(b) has been done where it looks like complainant won‟t be able to continue or where it looks like action is in corp‟s best interest CBCA s.242(3) - no order for security of costs - done b/c didn‟t want dirs requesting security from applicant as this would discourage actions BCCA s.229 - can give order for security of costs but it‟s to be provided by corp not the particular complainant (v)Settlements: sh may make deal with corp to not bring action in return for small payment so both stats state that can‟t have settlement without the approval of the court once you‟ve started the action - BCCA s.225(6); CBCA s.242(2) (vi)Ratification: shs - majority can ratify any breaches of fiduc duties - Northwest Transportation; Banford - can even ratify bad faith transaction stats - fact that there‟s been ratification is not determinative - action won‟t be dismissed solely b/c there‟s been ratification - CBCA s.242; BCCA s.225(7) 4. Judicial Application of the Derivative Action Provisions -Re Northwest Forest Products Ltd., 1975, BCSC: FACTS: Applic for leave to bring deriv action. Claim - N had subsid F and decided to sell F assets for $200000 in return for assumption of liabilities of F plus 2 debentures with face value of $35000. Purchaser took $120000 in liabilities. Assets sold to G and on same day, G mortgaged assets for $290000 at Royal Bank. Looks like assets sold for only 50% of value. One of F‟s dirs also a dir for G and N - conflict of interest. Complainants sent letter to corp about nature of complaint. ISSUE: Was leave granted? DECISION: Yes. REASONS: 4 points: (1)Dirs said that rule still same as Foss but court said no, stat was designed to improve/overcome this

rule. (2)what effort do you have to give to get corp to bring action - don‟t need to set out every last detail - sufficient to just give nature of cause of action and circumstances to which it relates. (3)in terms of showing action is in interest of corp, it must appear on face but you don‟t have to show that it will succeed - has to be reasonable evidence on face that there‟s breach of duty. (4)ratification by shs of transaction - court didn‟t accept this - ratification doesn‟t preclude action b/c it‟s not clear who voted - seems to override Northwest Transportation where it didn‟t matter who voted - this case suggests that if interested party did vote, it wouldn‟t be okay. COMMENTS: Courts have been pretty lenient in granting leave. This was double deriv action and is expressly permitted by CBCA s.231(1) cause of action may be brought on behalf of firm or any of its subsids. BCCA doesn‟t include any provision for this but court likely would as they did here. 5. Personal Actions -pre-CBCA: 1)principle distinc b/w personal and deriv was that money went directly to pff in personal action and to corp in deriv; 2)unnecessary to join corp in personal action but in deriv, corp is usually sued as a party -CBCA - under deriv have to get leave but don‟t for personal -Jones v. H.F. Ahmanson & Co., 1969, Cal SC: FACTS: USLA where min held 15% and maj held 85%. General increase in s & l share values and maj wanted to take advantage by selling shares. Set up UF and for every share of USLA put in, got 250 shares of UF out - just for maj. Made public offering of UF shares and included their own - made $15 million plus. Sold debentures in UF but revenues weren‟t sufficient so pledged USLA and used that money to pay off debentures in UF. UF made offer to buy out USLA min for 51 shares of UF for 1 of USLA - wasn‟t reasonable value. Min complained. ISSUE: Did min have personal right to bring personal action against maj? DECISION: Yes. REASONS: Court described deriv and personal actions - deriv seeks to recover benefit for corp and all shs for injury that wouldn‟t otherwise be remedied b/c of corp‟s failure to act. Action is deriv, ie in the corp right, if the essence of complaint is injury to the corp or the whole body of its stock or property without any severance or distrib among shs or if it seeks to recover assets for corp or to prevent dissipation of its assets. The indiv wrong necessary to support personal action suit by sh need not be unique to that pff. The same injury may effect a substantial number of shs. If the injury isn‟t incidental to an injury to the corp an indiv cause of action exists. COMMENTS: See again re oppression which developed in Can b/c in Can there‟s no duty of maj shs to min shs - US has this duty but no oppression remedy. -Goldex Mines Ltd. v. Revill, 1974, ONCA: FACTS: Allegations of failure to provide adequate disclosure in proxies, failure to solicit proxies, failure to accept proxies. ISSUE: Were these actions personal in nature?

DECISION: Yes. REASONS: Adopted Jones statement re personal actions. What this statement means is that the action isn‟t simply arising b/c corp itself has been damaged and as consequence to corp damage, shs injured. -in BC when you bring a personal action, you can bring it by way of class action -personal actions greatly expanded under CBCA with personal remedies created for certain offences, eg. s.120(8) interested dirs‟ contracts; 205 takeover bids; 241 oppression remedy; etc. 6. Corporate Actions and Windfall Gains -corp can bring action by itself through dirs -concern is that there are situations where action should be defeated b/c it would be windfall - b/c there‟s no contemporaneous ownership requirement in the CBCA - s.240(c) complainant includes present or former - says nothing about being there at time of action -BCCA s.225(3)(d) - for deriv claim, min sh can only get leave if they were a member at time of transaction or other event giving rise to the cause of action -if dirs bring action for corp, there‟s no defence of windfall gain -Abbey Glen Property Corp. v. Stumborg, 1978, ABCA: FACTS: T a land developer corp and S were dirs. Part of syndicate who owned much land. As officers of T, S sought financing to develop property but were refused so S incorped public corp to develop. 4 years later T taken over and becomes A - now have all new shs. (General pattern - taking of corp opportunity but b/w that and bringing of action, new shs who bought without knowledge of corp opp.) ISSUE: Were S liable for accounting? DECISION: Yes. REASONS: S accountable for profits from G. S raised additional defence of windfall but majority said that wasn‟t a defence. Dir had duty to account and it didn‟t matter that someone got unjustly enriched. Who knows what effect knowledge of corp opp would‟ve had on purchase price. Also problem of trying to figure out who were shs at time. Quotes Regal - This, it seems, may be an unexpected windfall, but whether it be so or not, the principle that a person occupying fiduc relationship shall not make a profit thereof is of such vital importance that the possible consequence in the present case is in fact as it is in law an immaterial consideration. Sense that it‟s difficult enough to catch people in corp opp and that deterrent effect not that strong anyway and if this defence were allowed, it would reduce deterrent effect even more. G. THE OPPRESSION REMEDY 1. Introduction -Diligenti v. RWMD Operations: D 25% owner in restaurant business with R,W,M. D did most of setup and other work and wanted to be paid.

Dispute with other 3 who, at next election, removed D as dir and used their power to remove him as manager, voted for substantial increase in dirs‟ fees and mgmt salaries and increase in payment for guarantees, and held sh meetings in places where D couldn‟t get to them. Comment basically, D wouldn‟t have had remedy without oppression remedy. 2. The Statutory Oppression Remedy (i)Who can apply: CBCA s.238 - “complainant” - registered or benef security holder (wider than just sh); present or former security holder; dir or officer or former dir/officer; Dir under CBCA; any other person who, in discretion of court, is a proper person to make an application BCCA s.224(6)(a),(b) - member or anyone court considers proper can seek oppression remedy (ii)Grounds for relief: CBCA s.241 - if court satisfied that act or omission of corp, or exercise of business or affairs of corp or affiliates, or powers of dirs have been exercised in way that‟s oppressive or unfairly prejudicial to or that unfairly disregard the interest of nay security holder, creditor, dir, or officer the court may make order to rectify BCCA s.224 - affairs of corp or powers of dirs being exercised in oppressive way or act of corp or members done in unfairly prejudicial way, then member can seek remedy (iii)Remedies: broad array of possible remedies BCCA s.224(2)/241(3) CBCA - any order court considers appropriate, including... 3. Shareholders as Complainants (i)Expectation principle: Ebrahimi v. Westbourne Galleries Ltd., 1973, HL: FACTS: E and N were partners and later incorped. Each took 500 shares but when N‟s son joined, each gave him 100 shares. Falling out b/w E and N and Ns move to remove E as dir and manager. Corp had not paid out profits as divds but as manager‟s salary. E made applic for just and equitable winding-up b/c oppression had been so narrowly interped in Eng. REASONS: Held that it was just and equitable to give winding-up - closely-held corp where had understanding that would participate in business and restriction on trading - so now E had no way out. Parties entered into corp on expectation that E would be involved and that was basis for them coming together. This obligation so basic to agreement of incorp that if breached, court should give winding-up order - fundamental oblig to grant remedy. COMMENTS: This expectation cited in our oppression remedy cases.

Oppression on this basis is filling in terms of contract thereby reducing transaction costs. Basic question is what were expectations of the parties. BCCA s.295(1) corp can be wound up on applic by court order; (2) before hearing applic by creditor to wind up, court may require cred to give security; (3) court may order corp be wound up if it‟s just and equitable to do so; or when memo/articles provide that when certain event occurs, corp dissolves; (4) member same as above. BCCA s.296 - court can grant remedy of winding up when it‟s just and equitable to do so as remedy under s.224 on oppression. CBCA s.214 - shs may seek to dissolve corp where event has occurred that entitles complaining sh to demand dissolution under a unan sh agreement; it‟s just and equitable to do so; or conditions for granting s.241 oppression remedy have been met. (ii)Affiliated corporations: BCCA s.224 - does not mention affiliated corps at all CBCA s.241 - mentions affiliates Scottish Co-op Wholesale Ltd. v. Meyer, 1959, HL: FACTS: M knew how to make rayon. Co-op created subco and had 4000 shares in it. M and L had 3900 shares. Once co-op knew rayon secret, M and L were expendable. ISSUE: Could M and L make oppression complaint as they held shares in subsid not parent? DECISION: Yes. REASONS: Dirs exercised powers in oppressive manner. 3 dirs of subco were also dirs of co-op. Duty as dirs of sub was to complain at co-op meetings about what they were doing to sub. So was oppressive by not using co-op position to complain. Ordered that shares of M and L be bought out at fair price. COMMENTS: In BC, as there‟s no mention of affil corps, have to try to make this linkage type argument. (iii)Duty of majority to minority and bad faith: Brant v. KeepRite Inc., 1991, ONCA: FACTS: K in cooling business and having finan difficulties. Maj shs buy assets of ICG which was subsid of maj sh and they were in the heating business - this remedied seasonal cash flow problems. K gets money to buy by doing rights offering. Lawyers warn them to be careful b/c it‟s related corp that‟s subsid of maj shs - but generally in Can no duty of maj to min so only duty would be that of dir. Dir could vote even if affil corp (CBCA s.120) so just have overriding fairness concern re oppression. Tried to form independent committee to determine if was a fair transaction and committee said yes. Went to shs and some in min questioned the whole transaction and many voted against. Sought to exercise appraisal remedy but there was question as to fair value. Also brought oppression action. ISSUE: Does maj have duty to min? DECISION: No. REASONS: Even if have appraisal right, that doesn‟t preclude you from bringing oppression action. Duty of maj to min - none. None of other cases very clear (BC case Newton said there was duty of maj to min over and above oppression). Reasons of judge for not

allowing maj to min duty - importing a fiduc duty could put dir/officer in irreconciliable conflict of interest b/w self as maj and other as min. Also, cases that could be dealt with under this situation could be dealt with under oppression (just characterize it as conduct of corp even though really was conduct of maj shs). Do you have to show bad faith or lack of probity? CBCA stat different from other juris b/c don‟t just have “oppression” but also “unfairly prejudicial” or “unfairly disregarding interests”. We don‟t have to show bad faith or lack of probity, it just has to be unfair. Long discussion on indep committee. ON Policy 9.1 likely covers this situation, but even if you follow this policy, there‟s still some residual risk of unfairness. Court satisfied that committee okay and that whole thing fair. Business judgment rule - oppression doesn‟t override bjr where dirs will be found neglig but oppression will look at overall fairness. (iv)The oppression remedy and deriv and personal actions: overlap b/w oppression provisions and fiduc duties and things people can complain about in personal action - action could fit under all of these quite easily - Tara Gurr deriv in court - 2 different kinds of cases - sometimes things complained about under oppression were deriv and courts said they needed to apply for leave (BC trial court level) or others said there was no problem in making claim that was deriv in nature under oppression if you look at the cases, there‟s many oppression cases you‟ll find all kinds that are purely deriv and never is there any discussion of having to apply for leave arguments for proceeding under oppression: 1)done by applic, there‟s no pleadings, discovery, trial, and proceeds by affidavit evid - cheaper; 2)broader substantive grounds for relief - wide open fairness test; 3)much broader range of remedies - not stuck with the usual; 4)vis a vis the deriv, under oppression you don‟t have to apply for leave 4. Creditors and Others as Complainants -CBCA s.238 - any other person in discretion of court - applies to deriv and oppression -BCCA s.224(6) - member can include any person court thinks fit -CBCA s.241(2) - any security holder, dir or officer, creditor - this narrows proper person under s.238 for oppression - BCCA no constraints First Edmonton Place Ltd. v. 315888 Alberta Ltd, 1980, ABQB: FACTS: Inducements given to lawyers to lease - money, free rent. Lawyers occupy for 21 months then left without signing 10-year lease. Lawyers dealt with First Edmonton through a numbered company, took money from company and distribed it to themselves. F wants leave to bring deriv action on behalf of # corp against lawyers or oppression

remedy for himself as cred. ISSUE: Can F get leave for deriv or get applic for oppression? DECISION: Yes for deriv, no for oppression b/c not creditor at time. REASONS: General principle - need to strike balance b/w preserving cred interest and ability to manage corp even in a way prejudicial to creditor, you just can‟t be unfair. Who is proper person? Must show that justice and equity dictate that person should be proper person eg., if corp perpetrated fraud on the person, otherwise it‟s question of unfairness. Re unfairness, look at: underlying expectation of creditor; extent to which the acts were foreseeable; and extent to which cred could have protected himself; and detriment to interest of cred. Cred must be cred at time of acts complained of. Applying this, for deriv, said F was a proper person (brought deriv so money would be in corp and he could then sue corp). No oppression claim - there was no fraud; no expectation of 10 year lease; and not cred at time complained of. It’s possible for cred to be complainant. West v. Edson Packaging Machinery Ltd., 1993, ONGD: FACTS: E employees induced to buy shares in EH, a privately held corp. Led to believe they‟d be able to sell shares if ever left EP. Complaining about refusal to buy back shares. ISSUE: Could employees bring oppression claim? DECISION: Yes. REASONS: They were proper persons - it‟s not limited to creditors. COMMENTS: Why did this case deal with First Edmonton? Why didn‟t they just go with them as security holders? Why go through effort of making employee proper person? Looks like, if you‟re lucky enough to be an employee of corp, you can ignore other areas of law and use oppression and broad question of fairness.

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