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BUSINESS ASSOCIATIONS PROFESSOR MURRAY FALL

VIEWS: 2 PAGES: 82

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                             BUSINESS ASSOCIATIONS: FALL 2005
FORMS OF BUSINESS ORGANIZATION.................................................................................. 4
FINANCIAL STATEMENTS ........................................................................................................ 4
QUESTIONS TO ASK FOR PARTNERSHIPS ............................................................................ 6
EXISTENCE OF PARTNERSHIPS............................................................................................... 7
SUBORDINATION ...................................................................................................................... 10
JOINT VENTURES...................................................................................................................... 11
RELATION OF PARTNERS TO ONE ANOTHER ................................................................... 12
RELATION OF PARTNERS TO THIRD PARTIES .................................................................. 14
AGENCY ...................................................................................................................................... 16
DISSOLUTION OF THE PARTNERSHIP ................................................................................. 17
LIMITED LIABILITY PARTNERSHIPS ................................................................................... 18
LIMITED PARTNERSHIPS ........................................................................................................ 19
QUESTIONS TO ASK FOR CORPORATIONS ........................................................................ 21
CONSTITUTIONAL JURISDICTION FOR CORPORATIONS ............................................... 22
NATURE OF THE CORPORATION: LEGAL ENTITY, CAPACITY, LIMITED LIABILITY
....................................................................................................................................................... 23
THE INCORPORATION PROCESS ........................................................................................... 24
    Jurisdiction of Incorporation ..................................................................................................... 24
    Continuance .............................................................................................................................. 24
    Name ......................................................................................................................................... 25
    The Incorporation Process ........................................................................................................ 26
AMENDMENTS TO THE ARTICLES OF INCORPORATION (s. 173) .................................. 29
UNANIMOUS SHAREHOLDER AGREEMENTS (s. 146) ....................................................... 30
    Exclusive Rights to Elect Directors (s. 109) ............................................................................. 30
OWNERSHIP OF THE CORPORATION ................................................................................... 31
    Issuance of Shares ..................................................................................................................... 31
    3 Basic Share Rights (s. 24(3)): Voting, Dividends, Remaining Assets Upon Dissolution:
    Restrictions on Step-Down Provisions ..................................................................................... 32
    Classes of Shares (s. 27), Series of Shares, Redemption, Retractable, Convertible ................. 33
    Pre-Emptive Rights (s. 28) and Cumulative Voting (s. 107) .................................................... 33
    The Rule in Trevor v. Whitworth: Re. Issuer Holding Own Shares ......................................... 34
PRE-INCORPORATION CONTRACTS (s. 14) ......................................................................... 36
DISREGARDING THE CORPORATE ENTITY: PIERCING THE VEIL (s. 45(1)) ................ 38
    Corporate Groups ...................................................................................................................... 39
    Other Examples of Piercing the Veil ........................................................................................ 40
    US Approach to Piercing the Corporate Veil ........................................................................... 41
CRIMINAL LIABILITY OF CORPORATIONS ........................................................................ 42
TORTIOUS LIABILITY OF CORPORATIONS ........................................................................ 44
    When is a directing mind personally liable for what the corporation does? – personal
    involvement............................................................................................................................... 44
    When employees do something tortious but are acting within the terms of their employment or
    acting for the benefit of the corporation, are they personally responsible? – compulsion of duty
    defence ...................................................................................................................................... 44
    When will the corporation be vicariously liable for torts committed by employees or
    independent contractors? .......................................................................................................... 45
                                                                                                                                                    2


LIMITATIONS ON BUSINESS CARRIED ON BY THE CORPORATION: PROTECTION OF
THIRD PARTIES ......................................................................................................................... 47
   Ultra Vires Rule ........................................................................................................................ 48
   The Indoor Management Rule (ss. 16(3), 18, and 116) ............................................................ 48
CORPORATE GOVERNANCE: GENERAL THEMES ............................................................ 50
   The Agency Theory of Corporate Governance ......................................................................... 50
   Legal Mechanisms to Control Corporate Opportunism: Election and Removal of Directors,
   Fundamental Corporate Actions and Shareholder Approval .................................................... 50
   Information Provided to Shareholders ...................................................................................... 51
   Capital Markets and Market Control of Corporate Governance ............................................... 51
   Regulatory Responses to Concerns Over Corporate Opportunism........................................... 51
   Sarbanes-Oxley Act of 2002 ..................................................................................................... 52
   Canadian Regulatory Response to SOX ................................................................................... 52
   Civil Liability for Continuous Disclosure................................................................................. 52
   Investor Confidence Rules ........................................................................................................ 53
THE DUTY OF CARE (s. 122(1)(b)) .......................................................................................... 54
FIDUCIARY DUTIES OF DIRECTORS: s. 122(1)(a) ............................................................... 55
   Self-Dealing Contracts: Disclosure and Ratification (s. 120) ................................................... 55
   Take-Over Bids: Proper Procedure, Duty Shifts to Maximizing Shareholder Value ............... 58
   Rule in Foss v. Harbottle .......................................................................................................... 58
DEFENCES TO ALLEGED BREACH OF DIRECTORS' AND OFFICERS' DUTIES UNDER
S. 122 ............................................................................................................................................ 59
   The Proper Purpose Test: Legitimate Business Purpose .......................................................... 59
   Due Diligence ........................................................................................................................... 60
   Business Judgement Rule: Takeover Bids, Asset Purchases, and Severance ........................... 60
DUTIES OF DIRECTORS TO OTHER STAKEHOLDERS ...................................................... 63
   Duty to Shareholders During Takeover Bid ............................................................................. 63
CORPORATE OPPORTUNITIES ............................................................................................... 65
DIRECTORS' PERSONAL LIABILITY TO THIRD PARTIES FOR NEGLIGENCE ............. 68
SHAREHOLDERS' RIGHTS: SHAREHOLDERS' MEETINGS ............................................... 70
   Limitations of the Shareholders' Right to Vote in Bylaws (s. 103) .......................................... 70
   Shareholder Meetings: Annual (s. 133(1)) and Special Meetings (s. 133(2)) .......................... 70
   Information for Shareholders (ss. 135(6) and 149(1)) .............................................................. 71
   Requisitioned Meetings (s. 143) ............................................................................................... 71
   Shareholder Requisitioned Meetings and Proposals (s. 137).................................................... 72
SHAREHOLDERS' RIGHTS: SHAREHOLDER ACTIVISM ................................................... 74
   Shareholder Proposals (s. 137) ................................................................................................. 74
   For the Election of Directors..................................................................................................... 74
   Calling Meetings to Raise Issues of Corporate Governance (s. 137(5))................................... 75
   Court's Power to Review Election and Determine Outcome (s. 145(1)) .................................. 75
   Access to Shareholders' Lists (s. 21(3)) .................................................................................... 76
CORPORATE SOCIAL RESPONSIBILITY .............................................................................. 77
SHAREHOLDER REMEDIES .................................................................................................... 79
   Derivative Actions (s. 239) ....................................................................................................... 79
   Corporate Actions ..................................................................................................................... 81
   Liquidation and Dissolution (ss. 211, 212, 214, and BIA/CCAA) ........................................... 81
                                                                                                                                 3


Oppression Remedy (s. 241) ..................................................................................................... 82
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              FORMS OF BUSINESS ORGANIZATION
   There are 4 principal types of business structures:
       o Sole proprietorships – includes anyone working for herself; can have employees
           but only one owner; no separate legal regime; if business carried on under a name
           other than that of the owner, then must be registered under Business Names Act
       o Partnerships – where two or more persons carry on business with a view to profit;
           not necessary to register although registration may be required under the Business
           Names Registration Act before the partnership can sue in court; in the absence of
           a partnership agreement, governed by the Partnerships Act
       o Trusts – often used as financial investment vehicles; minimizes entry-level
           taxation within the structure because only revenues that do not flow through to
           unitholders are taxed
       o Corporations – creatures of statute; only exist if created pursuant to a statute;
           separation of ownership and management
   The choice between the different types of business structure typically turns on statutory
    requirements (i.e. doctors cannot incorporate), taxation, liability, and expense (initial and
    ongoing)

                         FINANCIAL STATEMENTS
   Financial statements and account must be prepared in accordance with GAAP ("bench
    marking")
   Balance sheet – shows assets and liabilities at a point in time
   Income statement – shows operations over a period
   Cash flow statement – shows changes in non-cash items of working capital
   Canadian companies must have their financial statements audited by a qualified
    independent auditor
   Hercules, Management Ltd. v. Ernst & Young (SCC, 1997) – shareholders alleged that
    D's audits were negligently prepared
        o Ratio: Audits occur within an acceptable range of representations and thus it is
            necessary to establish what constitutes an intolerable error before pursuing a case
            for negligence against an auditor
   Dentech Products v. Demed Manufacturing Ltd. (BC SC, 2001) – action for alleged
    misrepresentations contained in Demed's financial statements
        o Ratio: GAAP permits a margin of error in financial statements which may result
            in material financial consequences to those who rely on the statements; a plaintiff
            will have to prove that the error fell outside the range acceptable under GAAP,
            that it was reasonable to rely on the financial statement, that there was actual
            reliance, and that the reliance led to damages
   Pocklington Foods Inc. v. Alberta (Provincial Treasurer) (1998) – case involved
    valuation of shares of the company
        o Ratio: There are different methods for valuing a business: market price (what
            does the market think the company is worth?), asset base (what amount would be
            required to replace the future service capability of the subject property?), income
            approach (estimate the cash flow of the business and calculate present value)
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        o Ratio: Valuation of a company involves subjective judgements about which
            method to employ
   Brant Investments Ltd. et al. v. KeepRite Inc. (Ont. CA, 1987) – Ontario court held that
    there are four acceptable methods of valuation
        o Ratio: The four methods of valuation acceptable by the judiciary are:
                 Market value approach – quoted value on stock exchanges
                 Assets approach – valuation of the company's net assets at fair market
                    value
                 Earnings or investment value approach – capitalization of maintainable
                    earnings
                 Some combination of the above
   Note that the courts tend to favour the market value or fair market value approach where
    the value is approached from the perspective of the party losing the assets
                                                                                                 6



            QUESTIONS TO ASK FOR PARTNERSHIPS
   Does a partnership exist?
         o Is it really only a joint venture?
         o Is it a regular partnership?
         o Is it a limited partnership?
                 Was a declaration filed to create the limited partnership?
                 Did a limited partner take part in the control of the business?
         o Is it an LLP?
                 Are LLPs allowed for this type of partnership?
                 Was the name registered?
   Who are the partners of the firm?
         o Was the partnership dissolved at some point in time?
         o Was a partner improperly expelled?
   Is there a partnership agreement or does the statute govern the partners' relations to one
    another and to third parties?
   Do the partners owe something to one another?
         o Should one of the partners have accounted to the others in relation to income
            derived from being a partner?
         o Has a partner competed with the firm?
         o Has a partnership interest been assigned to a third party?
         o Has the partners' statutory right to share equally in the profits of the firm been
            varied by agreement?
   Do the partners owe something to a third party?
         o Has a partner bound the firm to a third party?
         o Is the sealed contracts rule relevant?
         o Did the partner have actual or apparent authority to bind the firm?
   Are there any subordination issues?
                                                                                                                        7



                             EXISTENCE OF PARTNERSHIPS
1. (1) “business” includes every trade, occupation and profession; (“entreprise”)
Partnership
2. Partnership is the relation that subsists between persons carrying on a business in common with a view to profit,
but the relation between the members of a company or association that is incorporated by or under the authority of
any special or general Act in force in Ontario or elsewhere, or registered as a corporation under any such Act, is not
a partnership within the meaning of this Act.

Rules for determining existence of partnership
3. In determining whether a partnership does or does not exist, regard shall be had to the following rules:
1.       Joint tenancy, tenancy in common, joint property, common property, or part ownership does not of
         itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share
         any profits made by the use thereof.
2.       The sharing of gross returns does not of itself create a partnership, whether the persons sharing such
         returns have or have not a joint or common right or interest in any property from which or from the use of
         which the returns are derived.
3.       The receipt by a person of a share of the profits of a business is proof, in the absence of evidence to the
         contrary, that the person is a partner in the business, but the receipt of such a share or payment,
         contingent on or varying with the profits of a business, does not of itself make him or her a partner in the
         business, and in particular,
         (a)        the receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the
                    accruing profits of a business does not of itself make him or her a partner in the business or liable
                    as such;
         (b)        a contract for the remuneration of a servant or agent or a person engaged in a business by a share
                    of the profits of the business does not of itself make the servant or agent a partner in the business
                    or liable as such;
         (c)        a person who,
                    (i)       was married to a deceased partner immediately before the deceased partner died,
                    (ii)      was living with a deceased partner in a conjugal relationship outside marriage
                              immediately before the deceased partner died, or
                    (iii)     is a child of a deceased partner, and who receives by way of annuity a portion of the
                    profits made in the business in which the deceased partner was a partner is not by reason only of
                    such receipt a partner in the business or liable as such;
         (d)        the advance of money by way of loan to a person engaged or about to engage in a business on a
                    contract with that person that the lender is to receive a rate of interest varying with the profits,
                    or is to receive a share of the profits arising from carrying on the business, does not of itself
                    make the lender a partner with the person or persons carrying on the business or liable as such,
                    provided that the contract is in writing and signed by or on behalf of all parties thereto;
         (e)        a person receiving by way of annuity or otherwise a portion of the profits of a business in
                    consideration of the sale by him or her of the goodwill of the business, is not by reason only of
                    such receipt a partner in the business or liable as such.
Insolvency
4. In the event of a person to whom money has been advanced by way of loan upon such a contract as is mentioned
in section 3, or of a buyer of the goodwill in consideration of a share of the profits of the business, becoming
insolvent or entering into an arrangement to pay his or her creditors less than 100 cents on the dollar or dying in
insolvent circumstances, the lender of the loan is not entitled to recover anything in respect of the loan, and the seller
of the goodwill is not entitled to recover anything in respect of the share of profits contracted for, until the claims of
the other creditors of the borrower or buyer, for valuable consideration in money or money’s worth, are satisfied.

Meaning of “firm”
5. Persons who have entered into partnership with one another are, for the purposes of this Act, called collectively a
firm, and the name under which their business is carried on is called the firm name.
                                                                                                               8

Variation by consent of terms of partnership
20. The mutual rights and duties of partners, whether ascertained by agreement or defined by this Act, may be
varied by the consent of all the partners, and such consent may be either expressed or inferred from a course of
dealing.
       In the absence of a partnership agreement to the contrary, partnerships are governed by
        the Partnerships Act (s. 20)
       It is not possible to escape the consequences of being a partnership simply by maintaining
        that the enterprise is not a partnership; courts look at substance of the enterprise
       The central elements involved in determining whether a partnership exists include
        whether the alleged partnership interest is freely alienable (free alienation suggests no
        partnership) and the degree of control or management that the alleged partner has
       Thrush v. Read (Ont. CA, 1950) – individuals held mining claims as syndicate and
        delegated management to two of the individuals; holding of common property is not
        sufficient to create a partnership; issue is whether there was intention to carry on business
        in common with a view to profit
             o Ratio: In determining whether a partnership exists, the courts will look to
                 substance over form
             o Ratio: Restrictions on the alienation of an interest in the enterprise will be
                 indicative of the existence of a partnership; in contrast, mere co-ownership
                 involves free alienation of one's share (s. 3(1))
             o Ratio: A partnership may exist to carry on an ongoing activity or even a single
                 transaction
             o Ratio: The assignment of an interest in a partnership does not make the assignee a
                 partner
       Cox and Wheatcroft v. Hickman (HL, 1860) – ironworks business encountered financial
        difficulties, was assigned to trustees authorized to carry on business and use profits to pay
        off creditors; Hickman claimed trustees were partners with ironworks; the court held that
        a finding of partnership would require that the business be carried on for trustees as
        principals but they were carrying on business on behalf of the creditors
             o Ratio: The fundamental characteristic of a partnership is mutual agency and thus
                 a partnership only exists where each person alleged to be in the partnership carries
                 on business on behalf of the other alleged partners; hence, the mere sharing of
                 profits is not independently sufficient to warrant a finding that a partnership exists
             o Ratio: The test for whether an enterprise is a partnership is to determine whether
                 there exists a relationship of mutual agency between the persons involved such
                 that any one of them can bind the enterprise, they have a fiduciary duty to one
                 another, and they are jointly and severally liable for the obligations of the
                 enterprise
             o Ratio: Creditors are not partners merely because they are being repaid out of the
                 profits of the firm (s. 3(3)(d))
       Pooley v. Driver (UK, 1876) – the capital investment was split between the partners and
        some lenders; lenders were entitled to share in the profits but there were conditions on
        that participation; lenders were to be protected by s. 3(3)(d); court held that lenders were
        partners because they had an interest in the capital just like the partners and because the
        lenders could enforce the terms of the partnership agreement
                                                                                                9


        o Ratio: If creditors are involved in the actual operation of the business, then they
            can be found liable as partners because third parties may have reasonable
            expectations concerning whether the creditors are partners
   Backman v. Canada (SCC, 2001) – Canadians collectively acquired assignment of
    interest in US partnership and then sold the interest back to the US partners; there was no
    intention to have any ongoing business and instead it was formed for a single transaction
        o Ratio: Investors must have a view to a profit for a partnership to come into
            existence; thus, it is only intention to make a profit that matters; actually making a
            profit is not necessary nor is the size of the profit important; hence, co-ownership
            of assets is not independently sufficient to constitute a partnership (s. 3(1))
        o Ratio: A partnership may be formed for a single transaction
        o Ratio: For a new partner to be admitted to a partnership, the criteria for a valid
            partnership must be reaffirmed
   1266261 Ontario Inc. v. Florencki (Ont. SC, 2003) – plaintiff corporation with one
    shareholder recruited three others to help with business; business deteriorated and three
    claimed a partnership and ownership interest in the partnership property
        o Ratio: The lack of a partnership agreement, or a partnership agreement that lacks
            sufficient detail to make the rights and obligations of the parties clear, may be
            considered determinate evidence that a partnership does not exist
        o Note: This case can be contrasted with Backman and used to argue that form has
            priority over substance in the context of determining whether a partnership exists
                                                                                                                       10



                                           SUBORDINATION
3. (3) (a) the receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the accruing
           profits of a business does not of itself make him or her a partner in the business or liable as such;
(d)        the advance of money by way of loan to a person engaged or about to engage in a business on a contract
with that person that the lender is to receive a rate of interest varying with the profits, or is to receive a share of
the profits arising from carrying on the business, does not of itself make the lender a partner with the person or
persons carrying on the business or liable as such, provided that the contract is in writing and signed by or on behalf
of all parties thereto

Insolvency
4. In the event of a person to whom money has been advanced by way of loan upon such a contract as is mentioned
in section 3, or of a buyer of the goodwill in consideration of a share of the profits of the business, becoming
insolvent or entering into an arrangement to pay his or her creditors less than 100 cents on the dollar or dying in
insolvent circumstances, the lender of the loan is not entitled to recover anything in respect of the loan, and the seller
of the goodwill is not entitled to recover anything in respect of the share of profits contracted for, until the claims of
the other creditors of the borrower or buyer, for valuable consideration in money or money’s worth, are satisfied.
        A partner's right to the firm's profits is subordinated to the rights of other creditors
        Sections 3(3)(d) and 4 imply that if a person lends money to a partnership and the loan is
         to be repaid out of a share of the profits then the lender ranks subordinate to other
         creditors in the event the partnership becomes insolvent
             o Thus, it is possible to share in the profits of a firm and not be a partner but the
                 person that enjoys this position is subordinate to other creditors
        Cox and Wheatcroft v. Hickman (HL, 1860) – ironworks business encountered financial
         difficulties, was assigned to trustees authorized to carry on business and use the profits to
         pay off creditors; Hickman claimed the trustees were partners with the ironworks; the
         court held that a finding of partnership would require that the business be carried on for
         trustees as principals but they were carrying on business on behalf of the creditors
             o Ratio: Creditors are not partners merely because they are being paid out of the
                 profits of the firm; hence, the mere sharing of profits is not independently
                 sufficient to warrant a finding that a partnership exists
        Canadian Deposit Insurance Corporation v. Canadian Commercial Bank (SCC, 1992)
         – lenders to CCB had a claim on 50% of CCB's pre-tax income to be credited against
         repayment of the loans; loans went sour and plaintiff argued that the lenders should be
         subordinated; court held that receipt of a share of the profits is not conclusive of
         partnership; once the loan was repaid, payments from CCB's pre-tax income were to stop
         and hence the lenders were not "receiving a share of the profits"
             o Ratio: Repayment of a loan out of a share of the profits is not equivalent to
                 sharing in the profits and hence does not conclusively determine that the recipient
                 is a partner
        Pooley v. Driver (UK, 1876) – court held that lenders were partners because they could
         enforce the terms of the partnership agreement
             o Ratio: If creditors are involved in the actual operation of the partnership, then
                 they may be deemed to be partners
                                                                                                11



                                JOINT VENTURES
   Courts have to determine whether a particular arrangement is a joint venture or a
    partnership
   Some have claimed that a joint venture differs from a partnership in that the relationship
    of co-owners or joint-venturers has limited scope
   The existence of a contract may be significant for determining whether an enterprise is a
    joint venture or a partnership because generally the parties in a joint venture will enter a
    contractual arrangement setting out the rights and responsibilities of the parties and will
    also include a statement that the parties are not partners
        o However, such a clause will not necessarily be determinative
        o Significant features to look for in any contract that may create a joint venture
            rather than a partnership are (1) whether the contract limits the parties' agency
            with respect to the enterprise, (2) whether the contract limits the parties' liability
            for the acts of the other parties, and (3) whether the contract precludes joint and
            several liability for the obligations of the enterprise
   Canadian Deposit Insurance Corporation v. Canadian Commercial Bank (Alta., 1986)
    – lender had a claim of 50% of CCB's pre-tax income to be credited against loans, thus,
    the lender was sharing in the profits in satisfaction of the loans; court distinguished
    between partnerships and joint ventures, held that no partnership existed as repayment
    out of profits is not equivalent to sharing in the profits
        o Ratio: Repayment out of profits is not equivalent to sharing in the profits
        o Ratio: A partnership is concerned with carrying on a business whereas a joint
            venture is usually restricted to a specific project or undertaking
                                                                                                                       12



               RELATION OF PARTNERS TO ONE ANOTHER
Variation by consent of terms of partnership
20. The mutual rights and duties of partners, whether ascertained by agreement or defined by this Act, may be
varied by the consent of all the partners, and such consent may be either expressed or inferred from a course of
dealing.

Rules as to interests and duties of partners
24. The interests of partners in the partnership property and their rights and duties in relation to the partnership shall
be determined, subject to any agreement express or implied between the partners, by the following rules:
         1.       All the partners are entitled to share equally in the capital and profits of the business, and
                  must contribute equally towards the losses, whether of capital or otherwise, sustained by the firm,
                  but a partner shall not be liable to contribute toward losses arising from a liability for which the
                  partner is not liable under subsection 10 (2).
         2.       The firm must indemnify every partner in respect of payments made and personal liabilities
                  incurred by him or her,
                  (a)       in the ordinary and proper conduct of the business of the firm; or
                  (b)       in or about anything necessarily done for the preservation of the business or property of
                            the firm.
         2.1      A partner is not required to indemnify the firm or other partners in respect of debts or obligations
                  of the partnership for which a partner is not liable under subsection 10 (2).
         3.       A partner making, for the purpose of the partnership, any actual payment or advance beyond the
                  amount of capital that he or she has agreed to subscribe is entitled to interest at the rate of 5 per
                  cent per annum from the date of the payment or advance.
         4.       A partner is not entitled, before the ascertainment of profits, to interest on the capital subscribed
                  by the partner.
         5.       Every partner may take part in the management of the partnership business.
         6.       No partner is entitled to remuneration for acting in the partnership business.
         7.       No person may be introduced as a partner without the consent of all existing partners.
         8.       Any difference arising as to ordinary matters connected with the partnership business may be
                  decided by a majority of the partners, but no change may be made in the nature of the
                  partnership business without the consent of all existing partners.
         9.       The partnership books are to be kept at the place of business of the partnership, or the principal
                  place, if there is more than one, and every partner may, when he or she thinks fit, have access to
                  and inspect and copy any of them.

Expulsion of partner
25. No majority of the partners can expel any partner unless a power to do so has been conferred by express
agreement between the partners.

Retirement from partnership at will
26. (1) Where no fixed term is agreed upon for the duration of the partnership, any partner may determine the
partnership at any time on giving notice of his or her intention to do so to all the other partners.

Duty as to rendering accounts
28. Partners are bound to render true accounts and full information of all things affecting the partnership to any
partner or the partner’s legal representatives.

Accountability for private profits
29. (1) Every partner must account to the firm for any benefit derived by the partner without the consent of the
other partners from any transaction concerning the partnership or from any use by the partner of the partnership
property, name or business connection.

Duty of partner not to compete with firm
                                                                                                                   13

30. If a partner, without the consent of the other partners, carries on a business of the same nature as and competing
with that of the firm, the partner must account for and pay over to the firm all profits made by the partner in that
business.
        Note that ss. 29-30 imply that partners have fiduciary duties to one another
        Unless contracted out of pursuant to s. 20, the provisions in the Act determine the relation
         of partners to one another
        Partners share equally in the profits of the firm (s. 24(1))
        Every partner has the right to management of the partnership (s. 24(5))
        Consensus of all partners is required before the firm can take action that will affect the
         nature of the partnership (s. 24(8))
             o For all other matters, majority approval is sufficient (s. 24(8))
        For a new partner to be admitted to the firm, all partners must approve (s. 24(7))
        A partner cannot be expelled from the firm by a majority vote unless pursuant to express
         agreement (s. 25)
        Rochwerg v. Truster (Ont. CA, 2002) – individuals were CAs practising as a partnership;
         one partner became a director of 2 firm clients; he disclosed his directorships and
         remitted his director's fees to the firm (ss. 28 and 29); he left the firm and the partnership
         dissolved; his directorships entitled him to stock options; the issue was whether he was
         obliged to disclose his interest in the options; court held he should have disclosed options
             o Ratio: Pursuant to ss. 28 and 29, a partner must disclose and account or all profits
                 derived from involvement with the firm
                                                                                                                       14



               RELATION OF PARTNERS TO THIRD PARTIES
Power of partner to bind firm
6. Every partner is an agent of the firm and of the other partners for the purpose of the business of the partnership,
and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the
firm of which he or she is a member, bind the firm and the other partners unless the partner so acting has in fact
no authority to act for the firm in the particular matter and the person with whom the partner is dealing either knows
that the partner has no authority, or does not know or believe him or her to be a partner.

Effect of notice that firm not bound by act of partner
9. If it is agreed between the partners to restrict the power of any one or more of them to bind the firm, no act
done in contravention of the agreement is binding on the firm with respect to persons having notice of the
agreement.

Liability of partners
10. (1) Except as provided in subsection (2), every partner in a firm is liable jointly with the other partners for
all debts and obligations of the firm incurred while the person is a partner, and after the partner’s death the partner’s
estate is also severally liable in a due course of administration for such debts and obligations so far as they remain
unsatisfied, but subject to the prior payment of his or her separate debts.

Liability of firm for wrongs
11. Where by any wrongful act or omission of a partner acting in the ordinary course of the business of the firm, or
with the authority of the co-partners, loss or injury is caused to a person not being a partner of the firm, or any
penalty is incurred, the firm is liable therefor to the same extent as the partner so acting or omitting to act.

Persons liable by “holding out”
15. (1) Every person, who by words spoken or written or by conduct represents himself or herself or who
knowingly suffers himself or herself to be represented as a partner in a particular firm, is liable as a partner to
any person who has on the faith of any such representation given credit to the firm, whether the representation
has or has not been made or communicated to the persons so giving credit by or with the knowledge of the apparent
partner making the representation or suffering it to be made.

Liability commences with admission to firm
18. (1) A person who is admitted as a partner into an existing firm does not thereby become liable to the creditors
of the firm for anything done before the person became a partner.
Liability for debts, etc., incurred before retirement
(2) A partner who retires from a firm does not thereby cease to be liable for partnership debts or obligations
incurred before the partner’s retirement.
Agreement discharging retiring partner
(3) A retiring partner may be discharged from any existing liabilities by an agreement to that effect between the
partner and the members of the firm as newly constituted and the creditors, and this agreement may be either express
or inferred as a fact from the course of dealing between the creditors and the firm as newly constituted.

Rights of persons dealing with firm against apparent members
36. (1) Where a person deals with a firm after a change in its constitution, the person is entitled to treat all apparent
members of the old firm as still being members of the firm until the person has notice of the change.
Estate of dead or insolvent partner, how far liable
(3) The estate of a partner who dies, or who becomes insolvent, or of a partner who, not having been known to the
person dealing with the firm to be a partner, retires from the firm, is not liable for partnership debts contracted after
the date of the death, insolvency, or retirement.
        Every partner is an agent of the firm and his or her acts will bind the firm (s. 6)
            o However, if there is an agreement to the contrary, then the acts of the excluded
                party will not bind the firm in relation to any third party that has notice of the
                exclusion (s. 9)
                                                                                                 15


   Partners and the firm are subject to joint and several liability but not for liabilities that
    arise before becoming a partner (ss. 10(1) and 11)
   If a partner retires, he is responsible for liabilities that arose during his tenure (s. 18(2))
    and also possibly for liabilities that arise after leaving the partnership in cases he is still
    held out as being a partner (s. 36(1)); thus, general notice should be given indicating that
    a former partner is no longer a partner of the firm (s. 36(3))
                                                                                                                 16



                                                 AGENCY
Power of partner to bind firm
6. Every partner is an agent of the firm and of the other partners for the purpose of the business of the
partnership, and the acts of every partner who does any act for carrying on in the usual way business of the kind
carried on by the firm of which he or she is a member, bind the firm and the other partners unless the partner so
acting has in fact no authority to act for the firm in the particular matter and the person with whom the partner is
dealing either knows that the partner has no authority, or does not know or believe him or her to be a partner.
       Every partner is an agent of the partnership and may bind the partnership in respect of
        any action taking in the conduct of the partnership's enterprise (s. 6)
       There are two variations of the general agency concept:
             o (i) if the agent is directly authorized by the principal to act on its behalf then the
                 agent has actual authority; this creates direct liability between the principal and
                 the third party with whom the agent contracts, even if the principal is undisclosed
             o (ii) the sealed contracts rule states that an undisclosed principal cannot be sued on
                 a contract executed by his or her agent when that contract is executed under seal;
                 hence, only the party to the contract and not the firm will be liable under a sealed
                 contract
       Friedmann Equity v. Final Note Ltd. (SCC, 2000) – appellant argued that the sealed
        contract rule should be abolished
             o Ratio: Although undisclosed principals may sue and be sued on the basis of
                 simple contracts, the sealed contract rule applies in the context of partnerships and
                 thus only the parties to a sealed instrument may have rights and obligations under
                 it; thus, a sealed contract severs the relationship of mutual agency
       An agent may have apparent or ostensible authority because the principal has indicated
        directly or indirectly to third parties that the agent has such authority; this creates direct
        liability between the third party and the principal
             o However, if the agent has neither apparent nor ostensible nor actual authority but
                 still enters the contract, then the agent is solely liable for the contract because the
                 agent has warranted his authority even though he has none
       Freeman & Lockyer v. Buckhurst Park Properties (UK CA, 1964) – a person instructed
        a firm of architects to act for the enterprise but the architects were not paid and sued
             o Ratio: For a third party to rely on the representation of a principal in respect of a
                 representation leading to the belief that an agent has authority to enter contracts
                 on the firm's behalf, so that the principal is bound, the representation must have
                 been made by a party with the actual authority to make such representations and
                 the representation must induce the third party to enter the contract
                                                                                                                     17



                      DISSOLUTION OF THE PARTNERSHIP
Expulsion of partner
25. No majority of the partners can expel any partner unless a power to do so has been conferred by express
agreement between the partners.

Retirement from partnership at will
26. (1) Where no fixed term is agreed upon for the duration of the partnership, any partner may determine the
partnership at any time on giving notice of his or her intention to do so to all the other partners.

Dissolution by expiry of term or notice
32. Subject to any agreement between the partners, a partnership is dissolved,
         (a)     if entered into for a fixed term, by the expiration of that term;
         (b)     if entered into for a single adventure or undertaking, by the termination of that adventure or
                 undertaking; or
         (c)     if entered into for an undefined time, by a partner giving notice to the other or others of his or her
                 intention to dissolve the partnership, in which case the partnership is dissolved as from the date
                 mentioned in the notice as the date of dissolution, or, if no date is so mentioned, as from the date
                 of the communication of the notice.

Dissolution by death or insolvency of partner
33. (1) Subject to any agreement between the partners, every partnership is dissolved as regards all the partners
by the death or insolvency of a partner.

By illegality of business
 34. A partnership is in every case dissolved by the happening of any event that makes it unlawful for the business
of the firm to be carried on or for the members of the firm to carry it on in partnership.
        Sections 32-44 establish a protocol for dissolving or terminating a partnership in the
         absence of any stipulation to this effect in the partnership agreement
        A majority of partners cannot unilaterally expel another partner from the firm unless
         there is an express agreement to the contrary (s. 25)
             o Thus, partners have dissolution rights only
             o Any partner can dissolve the partnership by giving notice of his intention (s. 26(1)
                 and s. 32(c))
        In the absence of agreement to the contrary, a partnership automatically dissolves upon
         the occurrence of one of three circumstances:
             o (1) End of fixed term (s. 32(a))
             o (2) End of undertaking or venture (s. 32(b))
             o (3) When a partner leaves, gives notice (s. 32(c)), dies (s. 33(1)), or becomes
                 insolvent (s 33(1))
        Diefenbacher v. Young (Ont. Ct. Just., 1991) – plaintiff was former partner in accounting
         firm; plaintiff claimed wrongful expulsion from partnership; no partnership agreement
         provision relating to expulsion hence s. 25 active; issue was critical because date of
         dissolution would determine quantum of partnership property to be divided
             o Ratio: In the absence of any agreement to the contrary, a majority of partners
                 cannot expel any other partner from the partnership; instead, the partnership must
                 be dissolved (s. 25)
                                                                                                                        18



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

Formation
44.1 (1) A limited liability partnership that is not an extra-provincial limited liability partnership is formed when
two or more persons enter into a written agreement that,
        (a)      designates the partnership as a limited liability partnership; and
        (b)      states that this Act governs the agreement.

Limitation on business activity
44.2 A limited liability partnership may carry on business in Ontario only for the purpose of practising a profession
governed by an Act and only if,
        (a)       that Act expressly permits a limited liability partnership to practise the profession;
        (b)       the governing body of the profession requires the partnership to maintain a minimum amount of
                  liability insurance; and
        (c)       the partnership complies with section 44.3 if it is not an extra-provincial limited liability
                  partnership or section 44.4 if it is an extra-provincial limited liability partnership.

Business name
44.3 (1) No limited liability partnership formed or continued by an agreement governed by this Act shall carry on
business unless it has registered its firm name under the Business Names Act.
Name
(3) The name of a limited liability partnership mentioned in subsection (1) shall contain the words “limited liability
partnership” or “société à responsabilité limitée” or the abbreviations “LLP”, “L.L.P.” or “s.r.l.” as the last words or
letters of its name.
Use of registered name only
(4) No limited liability partnership mentioned in subsection (1) shall carry on business under a name other than its
registered firm name.
        Limited liability partnerships are partnerships among professionals with the essential
         feature that individual partners are not liable for the negligent acts of other members of
         the partnership (s. 10(2))
             o However, partners in an LLP remain liable for their own negligence or the
                 negligence of those under their control (s. 10(3))
        There must be a written agreement (s. 44.1) and the partners must carry on a profession
         governed by an Act that permits members to operate through an LLP and which requires
         the members to maintain insurance (s. 44.2)
                                                                                                                      19



                                   LIMITED PARTNERSHIPS
Limited partnership
2. (1) A limited partnership may, subject to this Act, be formed to carry on any business that a partnership without
limited partners may carry on.
Whom to consist
(2) A limited partnership shall consist of one or more persons who are general partners and one or more persons
who are limited partners.

Formation
3. (1) A limited partnership is formed when a declaration is filed with the Registrar in accordance with this Act.

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

Rights of limited partner
10. A limited partner has the same right as a general partner,
        (a)      to inspect and make copies of or take extracts from the limited partnership books at all times;
        (b)      to be given, on demand, true and full information concerning all matters affecting the limited
                 partnership, and to be given a complete and formal account of the partnership affairs; and
        (c)      to obtain dissolution of the limited partnership by court order.

Share of profits
11. (1) A limited partner has, subject to this Act, the right,
         (a)       to a share of the profits or other compensation by way of income; and
         (b)       to have the limited partner’s contribution to the limited partnership returned.
When profit may not be paid
(2) No payment of a share of the profits or other compensation by way of income shall be made to a limited partner
from the assets of the limited partnership or of a general partner if the payment would reduce the assets of the
limited partnership to an amount insufficient to discharge the liabilities of the limited partnership to persons who are
not general or limited partners.

Business dealings by limited partner with partnership
12. (1) A limited partner may loan money to and transact other business with the limited partnership and, unless the
limited partner is also a general partner, may receive on account of resulting claims against the limited partnership
with general creditors a prorated share of the assets, but no limited partner shall, in respect of any such claim,
         (a)       receive or hold as collateral security any of the limited partnership property; or
         (b)       receive from a general partner or the limited partnership any payment, conveyance or release from
                   liability if at the time the assets of the partnership are not sufficient to discharge partnership
                   liabilities to persons who are not general or limited partners.
Rights of limited partner
(2) A limited partner may from time to time,
         (a)       examine into the state and progress of the limited partnership business and may advise as to its
                   management;
         (b)       act as a contractor for or an agent or employee of the limited partnership or of a general partner; or
         (c)       act as a surety for the limited partnership.

Limited partner in control of business
13. (1) A limited partner is not liable as a general partner unless, in addition to exercising rights and powers as a
limited partner, the limited partner takes part in the control of the business.
        A limited partnership must have at least one general partner with unlimited liability and
         at least one limited partner with limited liability (s. 2(2))
                                                                                                  20


   A limited partnership can only be formed by filing a declaration under s. 3 of the Limited
    Partnership Act
   A limited partner is liable only to the extent of his contribution to the firm (s. 9);
    however, this limitation of liability is lost if the limited partner takes part in the control of
    the business (s. 13(1))
   Control is not a defined term in the Act but a limited partner may advise the partnership
    as to the firm's management (s. 12(2)(a)); thus, the issue is to demarcate between
    exercising control and advising as to management
   Haughton Graphic Ltd. v. Zivot (Ont. HC, 1986) – Zivot was limited partner in a limited
    partnership as well as the controlling shareholder and president of the corporate general
    partner; in his capacity as president of the corporate general partner, he acted as manager
    of the limited partnership; court held that he was personally liable as a general partner on
    the basis that he took part in the control of the limited partnership business
         o Ratio: If a limited partner is an employee, officer, or director of a corporate
             general partner and, in that capacity, takes part in the control of the limited
             partnership, he may be subject to unlimited liability as a general partner
         o Modified Ratio: If a limited partner controls the corporate general partner and, in
             his capacity as director or officer of that corporate general partner, acts as
             manager of the limited partnership, then the limited partner may be deemed to be
             a general partner and hence to have unlimited liability
   If a limited partner takes control, a third party's perception of the limited partner may be a
    factor in determining whether the limited partner will be found to have been a general
    partner
                                                                                              21



           QUESTIONS TO ASK FOR CORPORATIONS
   Has the corporation been incorporated properly?
         o Are there any jurisdiction issues surrounding the corporation's actions?
         o Were there any pre-incorporation contracts?
                  Were such contracts adopted by the corporation?
   What is the ownership structure of the corporation?
         o Is there a class of shares that has the statutorily-required 3 rights?
   Are there any grounds for piercing the corporate veil?
         o Fraud, improper purpose
   Is the corporation criminally liable?
   Is the corporation liable in tort?
         o Is the corporation vicariously liable in tort?
   Has the corporation exceeded any limitations on the business that the corporation is
    entitled to engage in? – articles, ultra vires, indoor management rule
   Are there any circumstances which give rise to a conflict of interest?
         o Corporate opportunism – note legal/market controls
         o Agency theory
   Have the directors or officers breached the statutory duties in s. 122? Note that this could
    be the fiduciary duty or the duty of care
         o Is there a unanimous shareholders' agreement that would absolve the directors of
            liability?
         o Defences to breach of s. 122 duties:
                  Proper purpose test defence
                  Business judgement rule defence
                         Reasonable decision based on reasonable information
                  Due diligence defence
         o Takeover bid scenarios
                  Independent committee, independent legal and financial advice, auction
         o Self-dealing contract scenarios
                  Disclosure obligations and ratification by shareholders or directors
   Do the directors or officers owe a duty to any other stakeholders?
         o Creditors, employees, shareholders
         o Closely-held corporations – shareholders
   Are the directors personally liable to third parties for negligence?
   Did the director or officer take a corporate opportunity that properly belonged to the
    corporation?
   Do the shareholders have any rights that are relevant?
         o Have the shareholders' rights to votes been compromised?
         o Have shareholders been provided with the required information for shareholders'
            meetings?
         o Should the shareholders requisition a meeting?
         o Should the court intervene in the appointment of an auditor or director?
         o Should the shareholders submit a proposal?
         o Is anyone entitled to access to the list of shareholders?
                                                                                                  22



   CONSTITUTIONAL JURISDICTION FOR CORPORATIONS
15. (2) A corporation may carry on business throughout Canada.
       The federal and provincial governments have concurrent jurisdiction to incorporate
        companies and thus parties can elect to incorporate either federally or provincially
            o Section 92(11) of the Constitution Act, 1867 provides that the provinces can
                legislate in respect of "the incorporation of companies with provincial objects"
            o The federal government has no express general power of incorporation but in
                Citizens Insurance Co. of Canada v. Parsons (PC, 1881) the court held that such
                a power was implicit in the federal government's residual jurisdiction to legislate
                with respect to the POGG of Canada
       Reference in the Matter of the Incorporation of Companies in Canada (SCC, 1913) –
        the reference question posed was to determine the geographical reach of provincially
        incorporated companies under s. 92 of the Constitution
            o Ratio: A province can create corporations with powers exercisable within the
                province; but, a province is not capable of endowing a corporation with the right
                to carry on business in any other jurisdiction; thus, a province can grant a
                corporation the capacity to carry on business in other jurisdictions but it will
                become able to do so only if it obtains the permission of the other jurisdiction (s.
                15(2))
                                                                                                                      23



          NATURE OF THE CORPORATION: LEGAL ENTITY,
                 CAPACITY, LIMITED LIABILITY
15. (1) A corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person.

45. (1) The shareholders of a corporation are not, as shareholders, liable for any liability, act or default of the
corporation except under subsection 38(4), 118(4) or (5), 146(5) or 226(4) or (5).
        Corporations are created by statute and thus one must look to the statute for basic
         guidance
        Salomon v. Salomon & Co (HL, 1897) – Aron Salomon carried on business as sole
         proprietor, incorporated and sold his business assets to the corporation in exchange for
         debentures secured against the assets now owned by the corporation; when the business
         ran into difficulty, the liquidator alleged that the corporation was really just Aron
         Salomon carrying on business
             o Ratio: The corporation is an artificial creation of the law and a separate legal
                 entity and thus a shareholder may be a creditor, and even a secured creditor, of the
                 corporation. (s. 15(1))
             o Ratio: A corporation may have a single shareholder
             o Ratio: Shareholders are shielded from personal liability and their liability extends
                 only to the amount of their investment in the corporation (s. 45(1))
             o Ratio: A corporation owns its own assets; hence, creditors face the risk that a
                 corporation is undercapitalized
             o Ratio: The amount of investment in a corporation and the motives for
                 incorporating are irrelevant to whether the corporation is a separate legal entity;
                 thus, a corporation is not an agent of the shareholders
        Lee v. Lee's Air Farming (UK PC, 1960) – man created corporation to operate aerial top-
         dressing business; he was the sole shareholder and the sole director; he was killed during
         work; the issue was whether the employment agreement he had created between the
         corporation and himself as employee was valid so that his wife could claim compensation
         resulting from death of an employee on the job; court held there was a valid contract
         between the company and the man as employee
             o Ratio: A person is capable of entering a contract of employment with a
                 corporation of which he holds all the shares; thus, it is possible for a person to
                 negotiate a contract with himself as representative of the corporation and also as
                 employee
             o Ratio: It is possible for a person to be both sole director and sole shareholder and
                 also to be an independent contractor hired by the corporation
                                                                                                                      24



                           THE INCORPORATION PROCESS
                                      Jurisdiction of Incorporation
Ontario Extra-Provincial Corporations Act
Carrying on business in Ontario
1. (2) For the purposes of this Act, an extra-provincial corporation carries on its business in Ontario if,
         (a)      it has a resident agent, representative, warehouse, office or place where it carries on its business in
                  Ontario;
         (b)      it holds an interest, otherwise than by way of security, in real property situate in Ontario; or
         (c)      it otherwise carries on its business in Ontario.
Idem
(3) An extra-provincial corporation does not carry on its business in Ontario by reason only that,
         (a)      it takes orders for or buys or sells goods, wares and merchandise; or
         (b)      offers or sells services of any type, by use of travellers or through advertising or correspondence.

CBCA
105. (3) Subject to subsection (3.1), at least twenty-five per cent of the directors of a corporation must be resident
Canadians. However, if a corporation has less than four directors, at least one director must be a resident Canadian.
        The incorporators need to decide whether to incorporate federally or provincially and, if
         provincially, in which province
            o Historically, people have avoided Quebec and BC because BC required 75%
                shareholders approval to take certain actions and Quebec did not permit
                continuance of a Quebec corporation in another jurisdiction
            o However, these differences have largely been eliminated
            o NWT allows non-Canadians to control the board of directors
            o Nova Scotia allows unlimited liability corporations in which shareholders are
                exposed to unlimited liability in the event of a winding up; this has certain tax
                advantages in the US
            o Incorporators generally choose the jurisdiction with the most flexibility in terms
                of choosing directors and effecting corporate changes
                     The CBCA only requires that 25% of directors be Canadian (s. 105(3))
            o Each province has extra-provincial registration and licensing requirements
                (although Ontario does not require registration of Canadian provincial
                corporations or CBCA corporations)

                                                  Continuance
187. (1) A body corporate incorporated otherwise than by or under an Act of Parliament may, if so authorized by the
laws of the jurisdiction where it is incorporated, apply to the Director for a certificate of continuance.
(3) Articles of continuance in the form that the Director fixes shall be sent to the Director together with the
documents required by sections 19 and 106.
(4) On receipt of articles of continuance, the Director shall issue a certificate of continuance in accordance with
section 262.
(5) On the date shown in the certificate of continuance
         (a) the body corporate becomes a corporation to which this Act applies as if it had been incorporated under
         this Act;
         (b) the articles of continuance are deemed to be the articles of incorporation of the continued corporation;
         and
         (c) the certificate of continuance is deemed to be the certificate of incorporation of the continued
         corporation.
                                                                                                                       25


188. (1) Subject to subsection (10), a corporation may apply to the appropriate official or public body of another
jurisdiction requesting that the corporation be continued as if it had been incorporated under the laws of that other
jurisdiction if the corporation
          (a) is authorized by the shareholders in accordance with this section to make the application; and
          (b) establishes to the satisfaction of the Director that its proposed continuance in the other jurisdiction will
          not adversely affect creditors or shareholders of the corporation.
(3) A notice of a meeting of shareholders complying with section 135 shall be sent in accordance with that section to
each shareholder and shall state that a dissenting shareholder is entitled to be paid the fair value of their shares in
accordance with section 190, but failure to make that statement does not invalidate a discontinuance under this Act.
(4) Each share of the corporation carries the right to vote in respect of a continuance whether or not it otherwise
carries the right to vote.
(5) An application for continuance becomes authorized when the shareholders voting thereon have approved of the
continuance by a special resolution.
        Continuance is the ability of a corporation to change its governing statute and continue
         under the corporate laws of another jurisdiction
        A corporation from another jurisdiction can seek continuance as a CBCA corporation (s.
         187)
        A CBCA corporation can seek continuance under the corporate laws of another
         jurisdiction (s. 188)

                                                        Name
        The name of a corporation should not be of a sort that could be confused with an existing
         corporation (s. 12), nor can it be obscene or suggest a connection to the Royal family or
         the government (CBCA Regs. s. 22)
        Incorporators are required to use NUANS (Newly Updated Automated Name Search) to
         check any proposed name
        The availability of a domain name is now a primary consideration when selecting a name
         for a corporation
        The courts have adopted a stance that allows for injunctions to prevent "cyber-squatting"
        British Telecom v. One in a Million (UK, Ch. App., 1999) – One in a Million bought
         domain names and then resold them
             o Ratio: A court can intervene by way of injunction in passing-off cases if one of
                 the following sets of circumstances is present: (1) there is passing off established
                 or threatened; (2) the defendant is a joint tortfeasor with another in passing off
                 either actual or threatened; or (3) the defendant has equipped himself with or
                 intends to equip another with an instrument of fraud
                                                                                                                         26



                                        The Incorporation Process
5. (1) One or more individuals not one of whom
         (a) is less than eighteen years of age,
         (b) is of unsound mind and has been so found by a court in Canada or elsewhere, or
         (c) has the status of bankrupt,
may incorporate a corporation by signing articles of incorporation and complying with section 7.
(2) One or more bodies corporate may incorporate a corporation by signing articles of incorporation and complying
with section 7.

6. (1) Articles of incorporation shall follow the form that the Director fixes and shall set out, in respect of the
proposed corporation,
         (a) the name of the corporation;
         (b) the province in Canada where the registered office is to be situated;
         (c) the classes and any maximum number of shares that the corporation is authorized to issue, and
                    (i) if there will be two or more classes of shares, the rights, privileges, restrictions and conditions
                    attaching to each class of shares, and
                    (ii) if a class of shares may be issued in series, the authority given to the directors to fix the
                    number of shares in, and to determine the designation of, and the rights, privileges, restrictions and
                    conditions attaching to, the shares of each series;
         (d) if the issue, transfer or ownership of shares of the corporation is to be restricted, a statement to that
         effect and a statement as to the nature of such restrictions;
         (e) the number of directors or, subject to paragraph 107(a), the minimum and maximum number of
         directors of the corporation; and
         (f) any restrictions on the businesses that the corporation may carry on.
(2) The articles may set out any provisions permitted by this Act or by law to be set out in the by-laws of the
corporation.
(3) Subject to subsection (4), if the articles or a unanimous shareholder agreement require a greater number of
votes of directors or shareholders than that required by this Act to effect any action, the provisions of the articles or
of the unanimous shareholder agreement prevail.
(4) The articles may not require a greater number of votes of shareholders to remove a director than the number
required by section 109.

8. (1) Subject to subsection (2), on receipt of articles of incorporation, the Director shall issue a certificate of
incorporation in accordance with section 262.
(2) The Director may refuse to issue the certificate if a notice that is required to be sent under subsection 19(2) or
106(1) indicates that the corporation, if it came into existence, would not be in compliance with this Act.

9. A corporation comes into existence on the date shown in the certificate of incorporation.

16. (3) No act of a corporation, including any transfer of property to or by a corporation, is invalid by reason only
that the act or transfer is contrary to its articles or this Act.

17. No person is affected by or is deemed to have notice or knowledge of the contents of a document concerning a
corporation by reason only that the document has been filed by the Director or is available for inspection at an office
of the corporation.

105. (1) The following persons are disqualified from being a director of a corporation:
         (a) anyone who is less than eighteen years of age;
         (b) anyone who is of unsound mind and has been so found by a court in Canada or elsewhere;
         (c) a person who is not an individual; or
         (d) a person who has the status of bankrupt.

247. If a corporation or any director, officer, employee, agent, auditor, trustee, receiver, receiver-manager or
liquidator of a corporation does not comply with this Act, the regulations, articles, by-laws, or a unanimous
                                                                                                                  27

shareholder agreement, a complainant or a creditor of the corporation may, in addition to any other right they have,
apply to a court for an order directing any such person to comply with, or restraining any such person from acting in
breach of, any provisions thereof, and on such application the court may so order and make any further order it
thinks fit.
        A corporation can be incorporated by one or more corporations (s. 5(2)) or individuals (s.
         5(1)) or some combination thereof (s. 5(1))
             o The individuals cannot be less than 18, of unsound mind, or have the status of a
                 bankrupt (s. 5(1))
        Under the CBCA, incorporation requires that the following documents be filed:
             o Articles of incorporation (s. 6, Form 1)
             o Notice of registered office (s. 19(2), Form 3), which must be in Canada
             o Notice of directors (s. 106, Form 6)
             o A name-search report on the proposed name
             o The required fee
              (1) articles of incorporation (s. 6)
                              Name
                              Province of registered office
                              Number of directors, or minimum and maximum
                              Classes and maximum number of shares that the corporation is
                                authorized to issue
                                      If there are two or more such classes, the rights, privileges,
                                        restrictions and conditions attaching to each class
                                      If a class may be issued in series, the authority given to
                                        directors to fix the number of shares in, and the rights,
                                        privileges, restrictions and conditions attaching to each
                                        series
                              Restrictions, if any, on issue, transfer, or ownership of shares
                              Restrictions, if any, on the business the corporation may carry on
                    o Any provisions to be set out in the bylaws (s. 6(2))
                    o If the articles or any USA require more than the statutorily-required
                         number of votes (s. 6(3))
              (2) Any USA (s. 146)
              (3) Any bylaws
              (4) Notice of registered office (s. 19)
              (5) Notice of directors (s. 106)
                    o Directors must be at least 18, not of unsound mind, individuals, and not
                         have the status of a bankrupt (s. 105)
        The Director can only refuse to issue a certificate if there is technical non-compliance
         with the act (s. 8(2))
        A corporation comes into existence when the certificate of incorporation is issued (s. 9)
        Section 16(3) protects third parties from corporate acts contrary to the articles
        Section 17 provides that third parties are not deemed to have constructive notice of the
         contents of documents filed in connection with an incorporation
        Notwithstanding s. 16(3), sections 247 and 248 provide that a complainant or creditor can
         get a compliance order or a restraining order either forcing the corporation to comply
                                                                                      28


with the articles, bylaws, and any USA or prohibiting the corporation from continuing to
act in violation thereof
                                                                                                                       29



 AMENDMENTS TO THE ARTICLES OF INCORPORATION (s.
                     173)
1. (1) "special resolution" means a resolution passed by a majority of not less than two-thirds of the votes cast by
the shareholders who voted in respect of that resolution or signed by all the shareholders entitled to vote on that
resolution

173. (1) Subject to sections 176 and 177, the articles of a corporation may by special resolution be amended to
(a) change its name;
(b) change the province in which its registered office is situated;
(c) add, change or remove any restriction on the business or businesses that the corporation may carry on;
(d) change any maximum number of shares that the corporation is authorized to issue;
(e) create new classes of shares;
(f) reduce or increase its stated capital, if its stated capital is set out in the articles;
(g) change the designation of all or any of its shares, and add, change or remove any rights, privileges, restrictions
and conditions, including rights to accrued dividends, in respect of all or any of its shares, whether issued or
unissued;
(h) change the shares of any class or series, whether issued or unissued, into a different number of shares of the same
class or series or into the same or a different number of shares of other classes or series;
(i) divide a class of shares, whether issued or unissued, into series and fix the number of shares in each series and the
rights, privileges, restrictions and conditions thereof;
(j) authorize the directors to divide any class of unissued shares into series and fix the number of shares in each
series and the rights, privileges, restrictions and conditions thereof;
(k) authorize the directors to change the rights, privileges, restrictions and conditions attached to unissued shares of
any series;
(l) revoke, diminish or enlarge any authority conferred under paragraphs (j) and (k);
(m) increase or decrease the number of directors or the minimum or maximum number of directors, subject to
sections 107 and 112;
(n) add, change or remove restrictions on the issue, transfer or ownership of shares; or
(o) add, change or remove any other provision that is permitted by this Act to be set out in the articles.
        Articles of incorporation can only be changed by a special resolution of the shareholders
         (2/3 of those shareholders in attendance at the meeting) (s. 173)
                                                                                                                     30



        UNANIMOUS SHAREHOLDER AGREEMENTS (s. 146)
146. (1) An otherwise lawful written agreement among all the shareholders of a corporation, or among all the
shareholders and one or more persons who are not shareholders, that restricts, in whole or in part, the powers of the
directors to manage, or supervise the management of, the business and affairs of the corporation is valid.
(5) To the extent that a unanimous shareholder agreement restricts the powers of the directors to manage, or
supervise the management of, the business and affairs of the corporation, parties to the unanimous shareholder
agreement who are given that power to manage or supervise the management of the business and affairs of the
corporation have all the rights, powers, duties and liabilities of a director of the corporation, whether they arise
under this Act or otherwise, including any defences available to the directors, and the directors are relieved of their
rights, powers, duties and liabilities, including their liabilities under section 119, to the same extent.
        Shareholders can execute a USA pursuant to s. 146 and thus take control of those matters
         that would otherwise be managed by the directors (s. 146(1)); however, to the extent that
         they do so, shareholders are liable as if they were directors (s. 146(5))

                           Exclusive Rights to Elect Directors (s. 109)
109. (2) Where the holders of any class or series of shares of a corporation have an exclusive right to elect one or
more directors, a director so elected may only be removed by an ordinary resolution at a meeting of the shareholders
of that class or series.
        Section 109(2) allows a single class of shares to hold the power to elect directors
            o Thus, it is possible for a single shareholder or group of shareholders to exercise
                exclusive control over the election of directors
                                                                                                                       31



                       OWNERSHIP OF THE CORPORATION
                                              Issuance of Shares
24. (1) Shares of a corporation shall be in registered form and shall be without nominal or par value.

25. (1) Subject to the articles, the by-laws and any unanimous shareholder agreement and to section 28, shares may
be issued at such times and to such persons and for such consideration as the directors may determine.
(2) Shares issued by a corporation are non-assessable and the holders are not liable to the corporation or to its
creditors in respect thereof.
(3) A share shall not be issued until the consideration for the share is fully paid in money or in property or past
services that are not less in value than the fair equivalent of the money that the corporation would have received if
the share had been issued for money.
(4) In determining whether property or past services are the fair equivalent of a money consideration, the directors
may take into account reasonable charges and expenses of organization and reorganization and payments for
property and past services reasonably expected to benefit the corporation.

48. (2)"security" or "security certificate" means an instrument issued by a corporation that is
         (a) in bearer, order or registered form,
         (b) of a type commonly dealt in on securities exchanges or markets or commonly recognized in any area in
         which it is issued or dealt in as a medium for investment,
         (c) one of a class or series or by its terms divisible into a class or series of instruments, and
         (d) evidence of a share, participation or other interest in or obligation of a corporation

49. (1) Every security holder is entitled at their option to a security certificate that complies with this Act or a non-
transferable written acknowledgment of their right to obtain such a security certificate from a corporation in respect
of the securities of that corporation held by them.
(7) There shall be stated on the face of each share certificate issued by a corporation
          (a) the name of the corporation;
          (b) the words "Incorporated under the Canada Business Corporations Act" or "subject to the Canada
          Business Corporations Act";
          (c) the name of the person to whom it was issued; and
          (d) the number and class of shares and the designation of any series that the certificate represents.
        A share is a proportionate interest in the net worth of a business
        The original founders of the company put money or property into the corporation in
         exchange for a percentage interest in the enterprise
        Shares must be in registered form and hence it must always be possible to determine the
         name of who holds a share from the corporation's share register (s. 24(1))
        Section 25 sets out the conditions for the issuance of shares including that they must be
         issued for money, property or past services and that any property or past services
         provided as consideration for shares must be of fair equivalent to the money value that
         would have been obtained had the shares been issued for money (s. 25(3))
        Shares are issued when the directors pass a resolution issuing the shares and stating what
         consideration has been received for the shares (s. 25(1))
        Pursuant to s. 49, each security holder is entitled to a certificate and that certificate must
         state the name of the person to whom it was issued
             o This satisfies the requirement of s. 24(1)
        Under s. 48(2) the definition of "security" is synonymous with "security certificate" and
         includes evidence of a share so a share certificate is evidence of the share registered in
         the name of the person shown on it
                                                                                                                         32


        Shares used to be issued at par value but s. 24(1) provides that all shares are now issued
         without par value
        No par shares give greater flexibility in arranging a corporation's capital structure because
         no par shares can be split when the price rises too high and if the market price falls below
         the original issue price, the company can issue additional shares at the current market
         price without being considered to have issued the shares at a discount

   3 Basic Share Rights (s. 24(3)): Voting, Dividends, Remaining Assets Upon
               Dissolution: Restrictions on Step-Down Provisions
24. (3) Where a corporation has only one class of shares, the rights of the holders thereof are equal in all respects
and include the rights
         (a) to vote at any meeting of shareholders of the corporation;
         (b) to receive any dividend declared by the corporation; and
         (c) to receive the remaining property of the corporation on dissolution.
(4) The articles may provide for more than one class of shares and, if they so provide,
         (a) the rights, privileges, restrictions and conditions attaching to the shares of each class shall be set out
         therein; and
         (b) the rights set out in subsection (3) shall be attached to at least one class of shares but all such rights are
         not required to be attached to one class.

42. A corporation shall not declare or pay a dividend if there are reasonable grounds for believing that
(a) the corporation is, or would after the payment be, unable to pay its liabilities as they become due; or
(b) the realizable value of the corporation's assets would thereby be less than the aggregate of its liabilities and
stated capital of all classes.

140. (1) Unless the articles otherwise provide, each share of a corporation entitles the holder thereof to one vote at a
meeting of shareholders.
        There are three basic rights which must each attach to at least one class of shares issued
         by the corporation (typically all to the class of "common shares") (s. 24):
             o Right to vote at shareholders' meetings (s. 24(3)(a))
             o Rights to receive dividends (s. 24(3)(b))
             o Right to receive the remaining property of the corporation upon dissolution (s.
                 24(3)(c))
        Dividends are declared at the discretion of directors and cannot be declared if the
         corporation is insolvent (s. 42)
        Shares may also be issued in series within a class (s. 27)
        Bowater Canadian Ltd. v. R.L. Crain Ltd. (Ont. CA, 1987) – Crain set up a class of
         special common shares to be held by Craisec which had all the rights of the common
         shares but carried ten votes per share; in the event that such shares were transferred to
         anyone else, they reverted to having only one vote per share; court held that this was
         invalid because the "step-down" provision was illegal as s. 24(3) requires that the holders
         of a class of shares are equal in all respects
             o Ratio: The rights which attach to a class of shares must be provided equally to all
                 shares of that class because such rights attach to the shares themselves and not the
                 shareholder; thus, a step-down provision that ascribes different rights to a share
                 depending on who holds the share is invalid
             o Note: It is possible to create what is effectively a step-down provision by
                 providing in the articles that upon transfer the special voting shares are converted
                                                                                                                        33


                  into some other class of shares; otherwise, s. 140(1) operates so that each shares
                  carries one vote

        Classes of Shares (s. 27), Series of Shares, Redemption, Retractable,
                                      Convertible
27. (1) The articles may authorize, subject to any limitations set out in them, the issue of any class of shares in one
or more series and may do either or both of the following:
           (a) fix the number of shares in, and determine the designation, rights, privileges, restrictions and conditions
           attaching to the shares of, each series; or
           (b) authorize the directors to fix the number of shares in, and determine the designation, rights, privileges,
           restrictions and conditions attaching to the shares of, each series.
(2) If any cumulative dividends or amounts payable on return of capital in respect of a series of shares are not paid
in full, the shares of all series of the same class participate rateably in respect of accumulated dividends and return of
capital.
(3) No rights, privileges, restrictions or conditions attached to a series of shares authorized under this section shall
confer on a series a priority in respect of dividends or return of capital over any other series of shares of the same
class that are then outstanding.
(4) If the directors exercise their authority under paragraph (1)(b), they shall, before the issue of shares of the series,
send, in the form that the Director fixes, articles of amendment to the Director to designate a series of shares.
(5) On receipt of articles of amendment designating a series of shares, the Director shall issue a certificate of
amendment in accordance with section 262.
(6) The articles of the corporation are amended accordingly on the date shown in the certificate of amendment.
        Dividend rights can be cumulative or non-cumulative
              o The articles may include a provision that if cumulative dividends have not been
                  paid for a period of time (i.e. 2 years) then the preferred shares acquire voting
                  status
        There may also be provisions that preferred shares are entitled to a fixed value upon
         dissolution of the corporation; preferred shares typically have a fixed dividend and no
         voting rights
        It is not unusual to create a class of "blank cheque" preferred shares in the articles so that
         the board can create new series of preferred shares without having to amend the articles;
         the board is given authority in the articles to fix the specific terms and conditions
         attaching to the shares
        Shares can be redeemable – corporation buy the shares from the shareholders at a specific
         time (s. 36(1))
        Shares can be retractable – the shareholder can force the corporation to buy back the
         shares (i.e. to require repurchase)
        The terms and conditions of the different classes of shares are set out in the articles and
         can only be modified or amended by special resolution (s. 173)

               Pre-Emptive Rights (s. 28) and Cumulative Voting (s. 107)
28. (1) If the articles so provide, no shares of a class shall be issued unless the shares have first been offered to the
shareholders holding shares of that class, and those shareholders have a pre-emptive right to acquire the offered
shares in proportion to their holdings of the shares of that class, at such price and on such terms as those shares are
to be offered to others.
(2) Notwithstanding that the articles provide the pre-emptive right referred to in subsection (1), shareholders have no
pre-emptive right in respect of shares to be issued
          (a) for a consideration other than money;
          (b) as a share dividend; or
                                                                                                                      34

         (c) pursuant to the exercise of conversion privileges, options or rights previously granted by the
         corporation.

107. Where the articles provide for cumulative voting,
(a) the articles shall require a fixed number and not a minimum and maximum number of directors;
(b) each shareholder entitled to vote at an election of directors has the right to cast a number of votes equal to the
number of votes attached to the shares held by the shareholder multiplied by the number of directors to be elected,
and may cast all of those votes in favour of one candidate or distribute them among the candidates in any manner;
(c) a separate vote of shareholders shall be taken with respect to each candidate nominated for director unless a
resolution is passed unanimously permitting two or more persons to be elected by a single resolution;
(d) if a shareholder has voted for more than one candidate without specifying the distribution of votes, the
shareholder is deemed to have distributed the votes equally among those candidates;
(e) if the number of candidates nominated for director exceeds the number of positions to be filled, the candidates
who receive the least number of votes shall be eliminated until the number of candidates remaining equals the
number of positions to be filled;
(f) each director ceases to hold office at the close of the first annual meeting of shareholders following the director's
election;
(g) a director may be removed from office only if the number of votes cast in favour of the director's removal is
greater than the product of the number of directors required by the articles and the number of votes cast against the
motion; and
(h) the number of directors required by the articles may be decreased only if the votes cast in favour of the motion to
decrease the number of directors is greater than the product of the number of directors required by the articles and
the number of votes cast against the motion.
        The idea behind the pre-emptive right is that an existing shareholder should have a right
         to maintain his existing percentage share in the corporation before new shares are sold to
         outsiders
             o Section 28(1) permits pre-emptive rights to be included in the articles but s. 28(2)
                 provides that pre-emptive rights are not triggered in the situations set out in s.
                 28(2)(a)-(c)
        Some companies grant pre-emptive rights to significant shareholders; however, this is
         often done not in the articles but by means of a contract because the right is not conferred
         on all shareholders
        Section 107 provides for the possibility of cumulative voting which is intended to
         empower significant minorities so that they can elect directors
             o Cumulative voting permits minority interests to obtain representation on the board
                 of directors by permitting them to multiply the number of shares they control by
                 the number of directors to be elected, and then to concentrate the total number of
                 votes upon a single candidate or group of candidates, thereby securing the
                 election of their nominees
             o Example: Holder of 10 shares entitled to one vote per share. 10 director positions
                 to be filled. Thus, the shareholder will be entitled to cast 100 votes in total.
                 Under cumulative voting, the shareholder could cast the 100 votes for a single
                 candidate.
             o The smaller the number of directors in a corporation, the greater the proportional
                 shareholding required to elect one director by cumulative voting

          The Rule in Trevor v. Whitworth: Re. Issuer Holding Own Shares
30. (1) Subject to subsection (2) and sections 31 to 36, a corporation
         (a) shall not hold shares in itself or in its holding body corporate; and
         (b) shall not permit any of its subsidiary bodies corporate to acquire shares of the corporation.
                                                                                                                    35

(2) Subject to section 31, a corporation shall cause a subsidiary body corporate of the corporation that holds shares
of the corporation to sell or otherwise dispose of those shares within five years from the date
         (a) the body corporate became a subsidiary of the corporation; or
         (b) the corporation was continued under this Act.

33. (1) A corporation holding shares in itself or in its holding body corporate shall not vote or permit those
shares to be voted unless the corporation
         (a) holds the shares in the capacity of a legal representative; and
         (b) has complied with section 153.
(2) A corporation shall not permit any of its subsidiary bodies corporate holding shares in the corporation to vote, or
permit those shares to be voted, unless the subsidiary body corporate satisfies the requirements of subsection (1).

34. (1) Subject to subsection (2) and to its articles, a corporation may purchase or otherwise acquire shares issued by
it.
(2) A corporation shall not make any payment to purchase or otherwise acquire shares issued by it if there are
reasonable grounds for believing that
         (a) the corporation is, or would after the payment be, unable to pay its liabilities as they become due; or
         (b) the realizable value of the corporation's assets would after the payment be less than the aggregate of its
         liabilities and stated capital of all classes.
        Trevor v. Whitworth (HL, 1887) – court held that it was illegal for a corporation to
         purchase or redeem its own shares
        However, this had been replaced by s. 34(1) which specifically permits a corporation to
         purchase or otherwise acquire its own shares, subject to a solvency test (s. 34(2))
        Nevertheless, s. 30 provides that a corporation cannot hold shares in itself or in its
         holding body corporate and s. 33 provides that such shares cannot be voted if in fact so
         held because otherwise the corporation could elect its own directors
        It is possible to avoid this restriction by implementing a three-cornered control in which
         A and B control C, B and C control A, and A and C control B
                                                                                                                       36



                  PRE-INCORPORATION CONTRACTS (s. 14)
14. (1) Subject to this section, a person who enters into, or purports to enter into, a written contract in the name of or
on behalf of a corporation before it comes into existence is personally bound by the contract and is entitled to its
benefits.
(2) A corporation may, within a reasonable time after it comes into existence, by any action or conduct
signifying its intention to be bound thereby, adopt a written contract made before it came into existence in its
name or on its behalf, and on such adoption
          (a) the corporation is bound by the contract and is entitled to the benefits thereof as if the corporation
          had been in existence at the date of the contract and had been a party thereto; and
          (b) a person who purported to act in the name of or on behalf of the corporation ceases, except as provided
          in subsection (3), to be bound by or entitled to the benefits of the contract.
(3) Subject to subsection (4), whether or not a written contract made before the coming into existence of a
corporation is adopted by the corporation, a party to the contract may apply to a court for an order respecting the
nature and extent of the obligations and liability under the contract of the corporation and the person who entered
into, or purported to enter into, the contract in the name of or on behalf of the corporation. On the application, the
court may make any order it thinks fit.
(4) If expressly so provided in the written contract, a person who purported to act in the name of or on behalf of the
corporation before it came into existence is not in any event bound by the contract or entitled to the benefits thereof.
        The promoter is personally liable on the pre-incorporation contract (s. 14(1))
        But, the corporation can adopt the contract by an act evidencing the intention to be so
         bound and become a party to it (s. 14(2)) at which time the promoter ceases to be liable
         (s. 14(2)(b))
        However, a party to the contract can apply to the court for an order respecting liabilities
         under the contract and the promoter may find himself still liable (s. 14(3))
        To protect himself, a promoter can insist on an express provision in the contract that he is
         not to be personally liable and this provision is enforceable (s. 14(4))
        Note that the CBCA provision relates only to written contracts (s.14(1)) whereas the
         comparable OBCA provision does not include this restriction
        Kelner v. Baxter (UK Common Pleas, 1866) – pre-incorporation agreement was executed
         and signed "on behalf of the proposed Gravesend Royal Alexandra Hotel, Limited"; the
         company was incorporated shortly thereafter; Baxter was not intended to have personal
         liability
              o Ratio: At common law, for a corporation to be liable for a pre-incorporation
                  contract, a new contract must be executed between the corporation and the third
                  party affirming the corporation's rights and obligations
        Dairy Supplies v. Fuchs (1959) – founders of the company had expressly told the
         plaintiff that he could only look to the company for satisfaction of the contract
              o Ratio: If a third party enters a pre-incorporation contract with a promoter and the
                  promoter expressly informs the third party that the promoter will not be
                  personally liable under the contract, then the promoter escapes liability (s. 14(4))
        Westcom Radio Group v. MacIsaac (Ont. Div. Ct., 1989) – both the plaintiff and the
         defendant thought the corporation had been incorporated; court held that adoption of a
         pre-incorporation contract is only possible if the corporation comes into existence
              o Ratio: At common law, if the corporation never comes into existence, the agent is
                  personally bound by a pre-incorporation contract in the absence of an express
                  provision otherwise
                                                                                            37


   Szecket v. Huang (Ont. CA, 1998) – parties entered a contract with one of the parties
    "acting on behalf of a company to be formed"; corporation was never formed; promoter
    was held liable for the contract; a corollary issue in this case asks why corporate law was
    relied upon if there was no corporation in existence
        o Ratio: A corporation must take positive steps to adopt a pre-incorporation
            contracts (s. 14(2))
   Sherwood Design Services Inc. v. 872935 Ontario Ltd. (Ont. CA, 1998) – asset purchase
    agreement signed by individuals "in trust for a corporation to be incorporated"; lawyer
    used a shelf company and sent a letter to plaintiff's lawyer indicating that the closing
    would proceed; deal did not close; shelf corporation used by another client; original
    plaintiff sued to recover assets of corporation now capitalized by new client
        o Ratio: The positive step required to adopt a pre-incorporation contract need not
            be a formal document or ratification but there must be some step taken to execute
            adoption; there must be "clear and convincing" evidence of the intention to adopt
            but only a relatively minor act is necessary (s. 14(2))
        o Dissent: The corporation could not have adopted the contract because the control
            of the corporation had not been transferred to the purchaser
   1394918 Ontario ("P") v. 1310210 Ontario ("V") (Ont. CA, 2002) – V signed an
    agreement to sell land to "Raymond Stern in trust for a company to be incorporated and
    not in his personal capacity"; deal fell through because of V; solicitor for Stern accepted
    the repudiation of the contract but reserved the right to sue for damages; P was
    incorporated; Stern assigned the contract to P and P sued
        o Ratio: Obligations that have accrued under a pre-incorporation contract are not
            extinguished by failure of the corporation to adopt the contract; such rights and
            obligations as have accrued may be assigned to another corporation which may
            then enjoy the right to sue in respect of the original contract
        o Ratio: A corporation formed subsequent to the repudiation of a pre-incorporation
            contract may nevertheless adopt and enforce the contract (by suing for damages)
        o Ratio: Pursuing a legal action to which a corporation would be entitled if a pre-
            incorporation contract were adopted is deemed to be sufficient evidence that the
            corporation pursuing the action has adopted the pre-incorporation contract
                                                                                                                        38



 DISREGARDING THE CORPORATE ENTITY: PIERCING THE
                   VEIL (s. 45(1))
45. (1) The shareholders of a corporation are not, as shareholders, liable for any liability, act or default of the
corporation except under subsection 38(4), 118(4) or (5), 146(5) or 226(4) or (5).

38. (4) A creditor of a corporation is entitled to apply to a court for an order compelling a shareholder or other
recipient - in the event of a reduction in stated capital where the corporation has not met a solvency test
         (a) to pay to the corporation an amount equal to any liability of the shareholder that was extinguished or
         reduced contrary to this section; or
         (b) to pay or deliver to the corporation any money or property that was paid or distributed to the
         shareholder or other recipient as a consequence of a reduction of capital made contrary to this section.

118. (2) Directors of a corporation who vote for or consent to a resolution authorizing any of the following are
jointly and severally, or solidarily, liable to restore to the corporation any amounts so distributed or paid and not
otherwise recovered by the corporation:
          (a) a purchase, redemption or other acquisition of shares contrary to section 34, 35 or 36;
          (b) a commission contrary to section 41;
          (c) a payment of a dividend contrary to section 42;
          (d) a payment of an indemnity contrary to section 124; or
          (e) a payment to a shareholder contrary to section 190 or 241.
(4) A director liable under subsection (2) is entitled to apply to a court for an order compelling a shareholder or other
recipient to pay or deliver to the director any money or property that was paid or distributed to the shareholder or
other recipient contrary to section 34, 35, 36, 41, 42, 124, 190 or 241.

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

226. (4) Notwithstanding the dissolution of a body corporate under this Act, a shareholder to whom any of its
property has been distributed is liable to any person claiming under subsection (2) to the extent of the amount
received by that shareholder on such distribution, and an action to enforce such liability may be brought within two
years after the date of the dissolution of the body corporate.
(5) A court may order an action referred to in subsection (4) to be brought against the persons who were
shareholders as a class, subject to such conditions as the court thinks fit and, if the plaintiff establishes a claim, the
court may refer the proceedings to a referee or other officer of the court who may
         (a) add as a party to the proceedings each person who was a shareholder found by the plaintiff;
         (b) determine, subject to subsection (4), the amount that each person who was a shareholder shall
         contribute towards satisfaction of the plaintiff's claim; and
         (c) direct payment of the amounts so determined.

10. (5) A corporation shall set out its name in legible characters in all contracts, invoices, negotiable instruments and
orders for goods or services issued or made by or on behalf of the corporation.
        In general, the courts have been faithful to the doctrine that the corporation is a separate
         legal entity and that shareholders are entitled to limited liability (s. 45(1))
             o The CBCA contains several statutory exceptions to this general rule:
                      Improper reduction of stated capital (s. 38(4))
                      Improper distribution (i.e. dividends) (s. 118)
                      Under a USA (s. 146)
                      Dissolution (s. 226)
                                                                                              39


   However, in certain circumstances, the courts are willing to "pierce the corporate veil" in
    order to impose liability on promoters or shareholders notwithstanding the lack of
    statutory authority to do so
        o Piercing the veil is thus based on equitable principles and is intended to protect a
            third party who interacts with the corporation
   The general rule seems to be that courts will pierce the veil (1) where the corporation was
    incorporated for illegal, fraudulent, or improper purposes, (2) where the company was
    undercapitalized, possibly intentionally, (3) where there is a tort claim against the
    company (involuntary creditor), and (4) where the company was not incorporated for
    bona fide reasons or where a controlling shareholder directs a wrongful act

                                  Corporate Groups
   Smith, Stone & Knight v. Birmingham Corp. (UK, 1939) – corporation was found to be
    merely the agent of another entity (the parent company)
        o Ratio: The factors that are relevant to a finding that a corporation is merely the
            agent for another entity include (1) were the profits treated as profits of the
            shareholder? (2) was the person conducting the business appointed by the
            shareholder? (3) was the shareholder the head and brain of the trading venture?
            (4) did the shareholder govern the adventure and decide what should be done and
            what capital should be committed to the venture? (5) did the shareholder make the
            profits by its skill and direction? (6) was the shareholder in effectual and constant
            control?
   City of Toronto v. Famous Players (1935) –court held that the subsidiary was the
    "puppet" of the parent and that therefore the business of the subsidiary was the business
    of the parent
   Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (Ont. Trial
    Div., 1996 aff'd Ont. CA, 1997) – CLMS was the wholly-owned sub of Canada Life
    Assurance Co.; Transamerica argued that CLMS had been negligent in underwriting
    certain mortgages and claimed that Canada Life was liable for the wrongs of CLMS
        o Ratio: The lack of a precise test for piercing the corporate veil does not mean that
            a court is free to act as it pleases on some loosely defined "just and equitable"
            standard
        o Ratio: There are three circumstances in which the courts will pierce the corporate
            veil: (1) when the court is construing a statute, contract, or other document; (2)
            when the court is satisfied that a company is a "mere façade" concealing the true
            facts; (3) when it can be established that the company is an authorized agent of its
            controllers or its members, corporate or human (corporate group situation)
        o Ratio: The courts will disregard the separate legal existence of a corporation in
            the context of a corporate group where (1) it is completely dominated (no
            independent management and no conducting business separate from parent) and
            controlled by another and (2) there has been conduct akin to fraud that would
            unjustly deprive claimants of their rights
   Note: The enterprise entity theory (that claimants can recover from other entities within
    the corporate group) is NOT received law in Canada
                                                                                                40


                       Other Examples of Piercing the Veil
   In general, the corporate veil will only be pierced in the interests of a third party
   Tunstall v. Steigman (UK, 1962) – landlord incorporates and then tries to evict tenant to
    go into business for herself in the location; usually, a landlord can evict a tenant if the
    landlord personally needs the space; the court allowed the tenant's application to prevent
    the eviction on the grounds that the landlord was not identical to the corporation and
    hence it was not the landlord who personally needed the space
         o Ratio: A corporation is not identical with its shareholders, even if there is only a
            single shareholder
   Rockwell Developments Ltd. v. Newtonbrook Plaza Ltd. (Ont. CA, 1972) – Kelner
    would incorporate a separate company for each real estate transaction
         o Ratio: That a corporation has only a single shareholder is not sufficient to warrant
            disregarding the corporate entity and holding shareholders liable (s. 18)
   Saskatchewan Economic Development Corporation v. Patterson-Boyd Manufacturing
    Corp. (Sask. CA, 1981) – SEDCO loaned money to PBMC but wanted personal
    guarantees; directors set up a company to lend money to PBMC secured by a first charge
    on inventory and thus SEDCO was subordinated to the dummy corporation; the directors
    would not have been able to subordinate SEDCO's claim on their own
         o Ratio: The corporate veil will be pierced when individuals create a corporation to
            accomplish something they could not have done in their individual capacity
   Constitution Insurance Co. v. Kosmopoulos (SCC, 1987) – Kosmopoulos was sole
    shareholder in corporation; insurance on corporation's assets was in his name personally;
    a fire damaged the assets of the business; the insurer refused to pay claiming that
    Kosmopoulos did not have an insurable interest in the assets
         o The court held that even though Kosmopoulos had no ownership interest in the
            assets, his interest as the sole shareholder in the residual value of the corporation's
            assets gave him such a stake that it amounted to an insurable interest
         o Ratio: The court may pierce the corporate veil where it is "just and equitable" to
            do so for the benefit of the shareholders (but see Transamerica above)
         o Ratio: A shareholder may have an insurable interest in the residual value of the
            corporation's assets; thus, the courts may disregard the separate corporate entity
            for the benefit of shareholders
         o Note: The usual direction for disregarding the corporate entity is a third party
            trying to get through the corporate veil to shareholders; this case is an instance
            where the shareholder was trying to get back through the corporate veil to the
            corporate assets
   Wolfe v. Moir (Alta. SC, 1969) – officer of a corporation that operated a roller skating
    rink was held personally liable in connection with an injury to a skater because the
    business was advertised using the officer's name and not the corporation's name in
    contravention of the ABCA
         o Ratio: For a person to rely on the protection from personal liability granted by
            corporate statutes, it is incumbent on him to ensure compliance with all of the
            formalities of the statute (s. 10(5))
         o Ratio: If a person advertises to the public using his own name rather than that of
            the corporation of which he is a shareholder, director, or officer, and without
                                                                                            41


          identifying the name of the company with which he is associated, then he may be
          held personally liable (s. 10(5))
   The Canadian test thus seems to be:
       o Small, private corporations – fraud or an improper purpose
       o Corporate groups – complete domination and fraud

                 US Approach to Piercing the Corporate Veil
   The US approach is looser than the Canadian standard and approaches the doctrine in
    Kosmopolous where piercing the veil was allowed when it would be "just and equitable"
    to do so
   Pepper v. Litton (US SC, 1939) – the essence of the test is whether or not under all the
    circumstances the transaction carries the earmark of an arm's length bargain; if it does
    not, then equity will set it aside
        o For example, a transaction between a controlling shareholder and his company is
            presumed to not be arm's length
   Taylor v. Standard Gas & Electric Co. (US SC, 1939) – the doctrine of corporate entity
    will not be followed when to do so would result in fraud or injustice
        o Ratio: No plan of arrangement ought to be approved which does not accord
            preferred shareholders a right of participation in the equity of the company's
            assets prior to that of the majority holder of common shares
        o Ratio: Common shareholders cannot abuse their voting power to the disadvantage
            of preferred shareholders
   Walkovszky v. Carlton (NY CA, 1966) – claim by tort plaintiff against sole shareholder
    of cab corporation; shareholder-defendant owned ten corporations each of which had
    only 2 cabs and carried only minimum insurance
        o Ratio: If there is no evidence of fraud, and there has been full compliance with
            the statute, then the courts will not pierce the veil simply to give a tort victim
            access to deeper pockets
        o Ratio: Courts are less likely to pierce the veil where liability would attach to an
            individual rather than a corporation
        o Dissent: The corporation was intentionally undercapitalized in order to avoid
            responsibility for acts which were bound to arise as a result of the enterprise and
            hence corporate group liability should have been imposed
                                                                                                42



           CRIMINAL LIABILITY OF CORPORATIONS
   Can a corporation be held liable for a true criminal offence requiring mens rea and, if so,
    under what circumstances will the corporation be found to have the requisite intent?
   R. v. Sault Ste. Marie (SCC, 1978) – court distinguished between three types of offences;
    absolute liability offences do not require mens rea and afford the defendant no defence;
    strict liability offences carrying a presumption of guilt and only affording the defendant a
    due diligence defence; true criminal offences requiring that the Crown must prove both
    the actus reus and the mens rea of the offence
         o Ratio: For a corporation to successfully argue a due diligence defence to a strict
             liability offence, it must be the corporation itself that exercised due diligence and
             hence it must be the directing mind that exercised the due diligence (a corporate
             motto to that effect is not enough); the directing mind will typically be the person
             or persons who have responsibility to manage the business in the area in which
             the offence occurred
         o Ratio: A corporation can be found guilty of a true criminal offence where the
             criminal act was authorized by the "directing mind" of the corporation; any person
             who has governing executive control over an area of the corporation's business or
             affairs is considered to be the corporation in relation to that area; thus, there may
             be many directing minds
   R. v. Canadian Dredge & Dock (SCC, 1985) – conspiracy to rig bids for dredging
    contracts in Hamilton harbour
         o Ratio: The test for whether a person is the directing mind is whether an employee
             has been delegated, expressly or by implication, the authority to design and
             supervise the implementation of corporate policy, as opposed to only the authority
             to carry out such policy (The "Rhone SCC, 1993)
         o Ratio: A person may be a directing mind of a corporation if (1) the action taken
             was within the field of the person's responsibilities; (2) the action was not totally
             in fraud of the corporation; and (3) the action was partly to the benefit of the
             company
         o Ratio: Managers will not generally be considered to be the directing mind and
             will of a corporation; typically, only directors and senior officers are the directing
             mind of a corporation
         o Ratio: If a person ceases completely to act in the interests of the corporation and
             acts totally in fraud of the corporate employer, and takes for herself all the
             benefits that should have gone to the corporation, the person cannot be identified
             as being the directing mind of the corporation
   Gauthier v. Ville de Lac Brome (SCC, 1998) – Gauthier tortured by the police including
    the police chief; Gauthier sued the town for exemplary damages (requiring proof of
    tortious intent) alleging that the municipality's officials knew or ought to have known
    about the conduct of the police
         o Ratio: A corporation can be held liable for exemplary damages (that depend on
             intentional conduct) where it can be shown that the corporation had the requisite
             intent to commit the act and this can be established where it can be shown that the
             directing mind of the corporation had the requisite intent
                                                                                            43


        o Ratio: The directing mind for policing acts is the chief of police rather than the
           mayor
   R. v. Bata Industries (Ont. CA, 1995) – Bata's factory yard contained drums with
    carcinogens; company waited 3 years before removing drums; directors were charged;
    issue was which directors were responsible
        o Ratio: When determining whether to hold a director liable for an offence
           committed by the corporation, the test has two parts:
                Did the board of directors establish a system to prevent the commission of
                   this type of offence?
                Did each director ensure that the corporate officers were instructed to
                   establish a system sufficient to ensure compliance with the relevant laws
                   and was there reasonable monitoring of implementation?
        o Ratio: Directors and senior officers are entitled to rely on the belief that company
           policy is being complied with, in the absence of evidence to the contrary
   Note that Bill C-45 removes any perceived impediments to corporate criminal liability
        o Companies are responsible to take reasonable steps to prevent harm
        o Criminal culpability can result from the actions of the representatives of a
           company and hence companies can be held liable for failure to stop corporate
           representatives from committing criminal offences
                                                                                              44



           TORTIOUS LIABILITY OF CORPORATIONS
When is a directing mind personally liable for what the corporation does? –
                          personal involvement
    Generally, the answer is only if the directing mind was personally involved in the tort
    Montreal Trust v. Scotia McLeod (Ont. CA, 1996) – suit against directors of People's
     Jewellers relating to alleged misrepresentations to lenders at the time of a bond financing;
     all the directors were relieved of liability with the exception of the two who actually
     made the misrepresentations
          o Ratio: A directing mind will only be personally liable for a tort committed by the
              corporation when the directing mind was personally involved in committing the
              tort
    Auger v. Berkshire Investment Group (Ont. CA, 2000) – directors, officers, and
     employees can be liable for torts they commit personally even if they are acting in the
     course of their duties or in accordance with "the best interests of the corporation"
          o Ratio: It is no defence to personal liability for a tort for a director, officer, or
              employee to argue that they were acting in the course of their employment duties
              or in accordance with the "best interests of the corporation"; however, this is
              likely to be more the case for directing minds as opposed to employees
          o Note: This can be contrasted with Ontario v. Magda below

 When employees do something tortious but are acting within the terms of
  their employment or acting for the benefit of the corporation, are they
          personally responsible? – compulsion of duty defence
    ADGA Systems v. Valcom (Ont. CA, 1999) – ADGA sued Valcom and their senior
     officers for wrongfully attempting to get certain of ADGA's staff to put their names on a
     bid
         o Ratio: Employees, officers, and directors can be held personally liable for tortious
             conduct causing physical injury, property damage or a nuisance event even when
             their actions were performed pursuant to their corporate duties
    1175777 Ontario Ltd. v. Magda International Inc. (Ont., 2001) – court allowed officers,
     directors, and employees to rely on the compulsion of duty defence in connection with
     their participation in a breach of contract by the parent's subsidiary so long as they were
     acting bona fide in the best interests of the subsidiary
         o Ratio: It is possible for officers, directors, and employees to rely on a compulsion
             of duty defence in connection with their wrongful conduct so long as they were
             acting in the best interests of the corporation
         o Note: This can be contrasted with Auger v. Berkshire above
                                                                                                45


    When will the corporation be vicariously liable for torts committed by
                   employees or independent contractors?
    Generally, the answer is only if the employee was acting within the scope of his/her
     employment at the time the tort was committed and not if the person was an independent
     contractor
    John v. Flynn (Ont. CA, 2001) – Flynn got drunk at work and drove home; drank some
     more; drove later and hit John; John sued Flynn and Flynn's employer
         o Ratio: A corporation may be vicariously liable for acts committed within the
             scope of an employee's duties but only if committed within the scope of the
             employee's employment; hence, the test involves asking whether the offensive
             action constituted part of the employee's job and then whether the corporation
             owed any duty to the aggrieved party
    Bazley v. Curry (SCC, 1999) – children's foundation unknowingly hired pedophile who
     took advantage of his position to sexually abuse children
         o Ratio: The test for vicarious liability for a tort committed by an employee is
             whether the employer's enterprise and empowerment of the employee materially
             increased the risk of the injury
                  Factors which are relevant to determining whether the enterprise and
                     empowerment of the employee materially increased the risk of the injury
                     include the nature of the opportunity provided, the extent to which the act
                     furthered the corporation's interests, the vulnerability of potential victims,
                     and the power conferred on the employee in relation to the victim
                  But, the test must be sensitive to three factors: fair compensation for
                     victims, deterrence of enterprises hiring such individuals, ability to spread
                     risk (insurance)
         o Ratio: The Salmond test for whether a tort was committed within the scope of
             employment asks whether:
                  (i) the acts were authorized by the employer
                  (ii) the acts were not authorized by the employer but are so connected with
                     acts authorized by the employer that they may be regarded as modes of the
                     authorized acts
         o Ratio: First, look to precedent for guidance; then, look to the connection between
             creation of the risk and the impugned act
    Jacobi v. Griffiths (SCC, 1999) – club operated a recreational facility; children sexually
     abused by program director but not onsite
         o Ratio: The enterprise and empowerment will not be deemed to have materially
             increased the risk of harm where the employee had to go beyond the scope of
             his/her duties in order to commit the tort
    671122 Ontario Ltd. v. Sagaz Industries Canada Inc. (SCC, 2001) – Design supplied
     seat covers; Canadian Tire switched to Sagaz because independent marketing rep of
     Sagaz bribed Canadian Tire's senior officer; Design sued Sagaz
         o Ratio: A corporation will not be vicariously liable for the acts of a tortfeasor who
             is not an employee but is instead an independent contractor because the
             corporation lacks the requisite control over such persons
                  Factors to consider when determining whether someone is an employee or
                     an independent contractor include the level of control the employer has
                                                                             46


over the worker's activities, whether the worker provides his own
equipment, whether the worker hires his own helpers, the degree of
financial risk taken by the worker, the worker's opportunity for profit in
the performance of his tasks
                                                                                                                      47



         LIMITATIONS ON BUSINESS CARRIED ON BY THE
         CORPORATION: PROTECTION OF THIRD PARTIES
15. (1) A corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person.
(2) A corporation may carry on business throughout Canada.
(3) A corporation has the capacity to carry on its business, conduct its affairs and exercise its powers in any
jurisdiction outside Canada to the extent that the laws of such jurisdiction permit.

6. (1) Articles of incorporation shall follow the form that the Director fixes and shall set out, in respect of the
proposed corporation,
          (f) any restrictions on the businesses that the corporation may carry on.

3. (4) No corporation shall carry on the business of
         (a) a bank;
         (b) a company to which the Insurance Companies Act applies; or
         (c) a company to which the Trust and Loan Companies Act applies.

16. (1) It is not necessary for a by-law to be passed in order to confer any particular power on the corporation or its
directors.
(2) A corporation shall not carry on any business or exercise any power that it is restricted by its articles from
carrying on or exercising, nor shall the corporation exercise any of its powers in a manner contrary to its articles.
(3) No act of a corporation, including any transfer of property to or by a corporation, is invalid by reason only that
the act or transfer is contrary to its articles or this Act.

17. No person is affected by or is deemed to have notice or knowledge of the contents of a document concerning a
corporation by reason only that the document has been filed by the Director or is available for inspection at an office
of the corporation.

116. An act of a director or officer is valid notwithstanding an irregularity in their election or appointment or a
defect in their qualification.

247. If a corporation or any director, officer, employee, agent, auditor, trustee, receiver, receiver-manager or
liquidator of a corporation does not comply with this Act, the regulations, articles, by-laws, or a unanimous
shareholder agreement, a complainant or a creditor of the corporation may, in addition to any other right they
have, apply to a court for an order directing any such person to comply with, or restraining any such person from
acting in breach of, any provisions thereof, and on such application the court may so order and make any further
order it thinks fit.
        The Basic Rule: The combined effect of ss. 15, 16(3), 17, 18, and 116 is that any
         restriction in the articles has no effect on third party's rights against the corporation
        A corporation has the capacity and privileges of a natural person (s. 15(1)) and may carry
         on business throughout Canada (s. 15(2))
             o A corporation also has the capacity to carry on business in any other jurisdiction
                  subject to the extent that the laws of that other jurisdiction permit (s. 15(3))
        The articles of incorporation may restrict the type of business that a corporation can carry
         on (s. 6(1)(f)) and under ss. 247 and 248 (proceed in a summary manner with respect to s.
         247) these restrictions can be enforced by shareholders and creditors
             o S. 16(2) prevents a corporation from carrying on business contrary to its articles
                  but s. 16(3) protects third parties by providing that failure to do so does not
                  prejudice third parties by invalidating such acts
             o Although a corporation can effectively enter any contract, its articles may prevent
                  it from actually performing its obligations thereunder; however, restrictions on
                                                                                                                   48


                  business set out in the articles have little effect on shareholders because of s.
                  16(3) and hence the third party can sue for damages

                                              Ultra Vires Rule
        Historically, the ultra vires doctrine functioned to restrict the type of business that a
         corporation could carry on with the result that if a corporation engaged in business
         beyond the scope of its "objects", the business would be invalidated
        Ashbury Railway Carriage v. Riche (HL, 1875) – ARC incorporated with a charter that
         limited the type of business that could be carried on; ARC repudiated the contract as not
         binding on the grounds that the contract was outside the scope of the limited objects set
         out in ARC's charter
             o Ratio: A corporation is only entitled to do that which is expressly set out in its
                 corporate charter and hence if a corporation acts outside the scope of its charter
                 the contract is rendered void as if the contract never existed (ultra vires)
        Bonanza Creek Gold Mining v. Rex. (PC, 1916) – BCGM incorporated to carry on the
         business of mining but with no geographic limitation; Crown denied that BCGM had any
         capacity to carry on business in the Yukon as it was provincially incorporated in Ontario
             o Ratio: A province can grant a corporation the capacity to carry on business in
                 other jurisdictions, but it will only have the power to do so if it obtains the
                 permission of the other jurisdiction
             o Ratio: The doctrine of ultra vires does not apply to corporations incorporated
                 under the general corporate statute but may apply to corporations incorporated by
                 special act
        Continental Bank Leasing v. Canada (1998) – Bank Act provides that no bank shall
         have an interest in a partnership; Bank's sub held interest in partnership; court found that
         the curative provisions prevented the application of the ultra vires doctrine
             o Ratio: The ultra vires doctrine does not apply to any type of corporation
             o Ratio: Because of s. 15(1), a corporation has the capacity to enter any type of
                 contract and any such contract is valid and binding; however, the articles may
                 prohibit the corporation from fulfilling its obligations under the contract;
                 nevertheless, in such situations, a third party is always protected because it can
                 sue for damages having relied on s. 16(3)
        Air Canada v. Airco (Quebec SC, 1999) – statutory restriction on foreign ownership
         made bid for Air Canada problematic so Airco devised a scheme pursuant to which it
         would not violate the restriction but could effectively acquire control of Air Canada;
         court found that the plan of arrangement would contravene the intent of the Act
             o Ratio: Even if a company can find a technical means of doing what would
                 otherwise be prohibited by statute, the courts may exercise their jurisdiction to
                 prevent the company from taking that action
             o Thus, there are common law restrictions on the type of business that a corporation
                 can carry on

                   The Indoor Management Rule (ss. 16(3), 18, and 116)
16. (3) No act of a corporation, including any transfer of property to or by a corporation, is invalid by reason only
that the act or transfer is contrary to its articles or this Act.
                                                                                                                      49

18. (1) No corporation and no guarantor of an obligation of a corporation may assert against a person dealing with
the corporation or against a person who acquired rights from the corporation that
(a) the articles, by-laws and any unanimous shareholder agreement have not been complied with;
(b) the persons named in the most recent notice sent to the Director under section 106 or 113 are not the directors of
the corporation;
(c) the place named in the most recent notice sent to the Director under section 19 is not the registered office of the
corporation;
(d) a person held out by a corporation as a director, an officer or an agent of the corporation has not been duly
appointed or has no authority to exercise the powers and perform the duties that are customary in the business of the
corporation or usual for a director, officer or agent;
(e) a document issued by any director, officer or agent of a corporation with actual or usual authority to issue the
document is not valid or not genuine; or
(f) a sale, lease or exchange of property referred to in subsection 189(3) was not authorized.
(2) Subsection (1) does not apply in respect of a person who has, or ought to have, knowledge of a situation
described in that subsection by virtue of their relationship to the corporation.

116. An act of a director or officer is valid notwithstanding an irregularity in their election or appointment or a
defect in their qualification.
        Mere technical errors or defects in corporate action do not render that action invalid (s.
         18(1)), except against those who knew or ought to have known of the defect (s. 18(2));
         hence, the corporation cannot repudiate a contract on the basis that the corporation lacked
         proper authority (i.e. the proper resolutions were not in place or the registered office had
         changed and notice had not been re-filed)
        Third parties can assume that internal procedures have been executed properly and the
         corporation cannot rely on a deficiency in those internal procedures to avoid obligations
        Rockwell Developments Ltd. v. Newtonbrook Plaza Ltd. (Ont. CA, 1972) – Kelner
         would incorporate a separate company for each real estate transaction; Kelner was
         interested in purchasing land held by Newtonbrook and Kelner signed agreements as
         secretary; however, there were no resolutions giving Kelner authority to enter into the
         offer to purchase, funds were advanced by Kelner directly rather than through the
         corporation's account
             o Ratio: Lack of proper corporate authorization to enter a contract does not mean
                 that a company is absolved of liabilities under a contract (s. 18)
        Royal British Bank v. Turquand (Exch. Ct., 1856) – bank wanted to claim the loan but
         the corporation argued that there had been no resolution of directors authorizing the
         borrowing and hence that the corporation was not obliged to pay; court held that the bank
         had a right to infer the fact of the necessary resolutions
             o Ratio: A corporation cannot, after having entered a contract, later deny that the
                 technical requirements were in place giving the company authority to enter the
                 contract, and thereby try to repudiate the contract; thus, third parties have the right
                 to assume that a corporation has the requisite authority to engage in the conduct
                 that it is performing (s. 18)
        In order to protect clients, lawyers insist on conducting due diligence investigations to
         correct technical and procedural errors before proceeding with a transaction because s.
         18(2) provides that those with knowledge of a defect may not be able to claim the
         protection under s. 18
                                                                                                                    50



           CORPORATE GOVERNANCE: GENERAL THEMES
        Corporate governance refers to the manner in which a corporation is managed and
         controlled
        A fundamental tension is created when management is separated from ownership because
         the interests of these two groups of stakeholders do not necessarily coincide leading to
         corporate opportunism
        The basic corporate governance structure is that:
             o Shareholders elect directors (although management tends to pick the nominees)
             o Directors appoint the officers or management
             o Management hires the employees
             o Employees operate the assets, product the product or service, etc.
        Management can fire the employees, the directors can fire management, and the
         shareholders can remove the directors (although shareholders usually just sell their shares
         – shareholder apathy)
        Berle and Means – argue that management enjoy unfettered discretion because of the
         separation of ownership and control; there is little incentive for an individual shareholder
         to attempt to control the corporation

                        The Agency Theory of Corporate Governance
        A corporation can only act through delegation of authority to agents of the corporation
             o But this creates the possibility that the agent will use the delegated authority in a
                 manner inconsistent with the goals of the corporation
        In a closely-held corporation, there is very little risk of an agency conflict, but as more
         tasks must be delegated, the risk increases
        Some argue that shareholders can manage this risk through the use of legal mechanisms
         such as statutory duties of care, and through market forces such as institutional investors
         and shareholder activists

Legal Mechanisms to Control Corporate Opportunism: Election and Removal
  of Directors, Fundamental Corporate Actions and Shareholder Approval
102. (1) Subject to any unanimous shareholder agreement, the directors shall manage, or supervise the management
of, the business and affairs of a corporation.

106. (3) Subject to paragraph 107(b), shareholders of a corporation shall, by ordinary resolution at the first meeting
of shareholders and at each succeeding annual meeting at which an election of directors is required, elect directors to
hold office for a term expiring not later than the close of the third annual meeting of shareholders following the
election.
        Shareholders have the power to elect directors (s. 106(3)) at annual meetings for a term
         not exceeding 3 years
             o At annual general meetings, there are three things that must be accomplished:
                 approving the annual financial statements, appointing an auditor, and electing
                 directors
             o Shareholders can also remove directors from office (s. 109)
        Directors have the duty to manage or supervise the management of the business and
         affairs of the corporation (s. 102)
                                                                                             51


   Many fundamental corporate actions can only be executed with the prior approval of
    shareholders by way of special resolution (2/3 vote):
        o Amendments to the articles (s. 173)
        o Imposing constraints on the issue or transfer of shares (s. 174)
        o Amalgamations (ss. 181-185)
        o Continuance (ss. 187-188)
        o Sale, lease or exchange of all or substantially all of the property of the corporation
           other than in the ordinary course of business (s. 189)
        o Arrangement pursuant to s. 192

                     Information Provided to Shareholders
   Corporate and securities legislation requires that shareholders are provided with certain
    information so that they can make informed decisions:
        o Annual audited financial statements (s. 155(1)) not less than 21 days prior to each
           shareholders' meeting (s. 159)
        o Interim financial statements, if the corporation is public (s. 77 of OSA)
        o Narrative discussion of the results of operations (MD&A) (OSC Rule 51-501)
        o Information concerning the persons proposed to be elected as directors (s. 57(n)
           of CBCA Regs.)
        o Executive compensation paid to each of CEO and five highest paid executives
           (Form 40 OSA)
        o Details of any transaction requiring shareholder approval
   However, shareholders depend on management for the accuracy and completeness of the
    information and still must take collective action in order to accomplish anything
        o Note that Bill 198 will create civil liability for misrepresentations in continuous
           disclosure documents and this may create additional incentives encouraging
           disclosure

     Capital Markets and Market Control of Corporate Governance
   If the capital markets are efficient (so that the market price of shares reflects fully all
    publicly available information), then the consequences of management misconduct
    should be reflected in share price
         o But, this only works with respect to publicly-available information which is not
             the case when dealing with insider trading or selective disclosure
   The job market imposes some controls on management as does the fear of a take-over bid
   Institutional investors take large stakes in corporations and thus play an active role in
    monitoring management

    Regulatory Responses to Concerns Over Corporate Opportunism
   Allen Report – effective corporate governance reduces the risk of loss and the magnitude
    of loss
        o Principal recommendation was that each listed company should be required to
            describe in its annual report or information circular its system of corporate
            governance with reference to certain particular items including the principal
            responsibilities of the board of directors, guidelines for the composition of the
                                                                                             52


         board, the governance-related functions to be carried out by the board, and
         information regarding the quality and timeliness of public information
       o Recommended civil liability for non-disclosure

                            Sarbanes-Oxley Act of 2002
   SOX is intended to enhance the accuracy, reliability and transparency of corporate
    disclosure by significantly increasing management's responsibility and liability for the
    contents of disclosure documents
   The major requirements are:
        o Implement and maintain disclosure controls and procedures
        o Maintain a system of internal controls
        o Annual report disclosure extended to include conclusions about effectiveness of
           disclosure controls and procedures
        o CEO and CFO certification requirements for annual reports and financial
           statements
        o Audit committees must be composed entirely of independent directors; disclosure
           as to "financial experts" and reasons why, if none are on the committee
        o Whistle-blowing rules – lawyers required to report evidence of material violations
           of securities laws
        o Insider trading reports within 2 days of transaction
        o Prohibitions on loans to executives and directors and bonus reimbursement if
           financial report is later restated due to material non-compliance as a result of
           misconduct

                    Canadian Regulatory Response to SOX
   Ontario has introduced 2 bills (Keeping the Promise for a Strong Economy, and Investor
    Protection Act) which make the OSA the most stringent legislation in Canada
   The amendments do the following:
       o Create statutory civil liability for continuous disclosure
       o Permit the OSC to require delivery of information and documents relevant to their
           review of disclosure documents
       o Offences of fraud and market manipulation
       o OSC has increased rule-making authority in respect of composition of audit
           committees, issuer's internal controls and disclosure procedures, and CEO and
           CFO certification of disclosure documents
                Audit committees of public companies are to be composed of
                   independents except in limited circumstances
                Audit committees should identify financial experts but such persons are
                   not subject to additional liability

                    Civil Liability for Continuous Disclosure
   The amendments, coming into force in December of 2005, will create a right of action
    against the issuer or any responsible person in favour of any person who buys or sells
    securities during a period of time in which there is an uncorrected misrepresentation in a
    disclosure document or a public oral statement
                                                                                              53


   Another amendment will confer a right of action to persons who acquire or dispose of
    securities during a period of time in which the issuer fails to make a timely disclosure of
    a material change
   Potentially liable parties include: the issuer, each officer who authorizes or acquiesces in
    the information, each influential person and each director and officer of the influential
    person
   There will be a due diligence defence to the causes of action
   The fraud and market manipulation provisions are intended to create new offences
    prohibiting any course of conduct that results in an artificial price for a security or the
    misleading appearance of trading activity in a security

                             Investor Confidence Rules
   In 2003, the CSA introduced three rules to restore investor confidence in capital markets:
        o CEO and CFO certification of annual and interim filings (MI 52-109)
        o Role and composition of audit committees (MI 52-110)
        o Auditor oversight (MI 52-108)
                                                                                                                       54



                            THE DUTY OF CARE (s. 122(1)(b))
Duty of care
122. (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall
         (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable
         circumstances.

Defence
123. (5) A director has complied with his or her duties under subsection 122(1) if the director relied in good faith on
         (a) financial statements of the corporation represented to the director by an officer of the corporation or in a
         written report of the auditor of the corporation fairly to reflect the financial condition of the corporation; or
         (b) a report of a person whose profession lends credibility to a statement made by the professional person.
        City Equitable Fire Insurance Ltd. (UK, 1925) – order made for winding up of
         company; deficit of 1.2 million due to imprudent investments in securities and diversion
         of funds by managing director into another company in which he was interested;
         liquidator brought an action
             o Ratio: Determining whether the standard of care to which directors will be held in
                 discharging their duties has been met involves consideration of the following:
                 directors are not liable for mere errors of judgement; directors are not bound to
                 give continuous attention to the affairs of the company; directors may delegate
                 duties to others and assume that the duties will be performed properly, in the
                 absence of grounds to believe otherwise; however, a director still has a duty to
                 monitor the performance of the delegated tasks on a periodic basis
             o Ratio: At common law, a director is only required to exercise the care that would
                 be reasonably expected of a person of their knowledge and experience
        The legislature has chosen to adopt a "prudent person" test which is an objective standard
         modified by attention to the "comparable circumstances" although directors will be held
         to a standard commensurate with their particular experience and qualifications
        Determinations concerning breach of the duty of care are made on a director-by-director
         basis in order to account for each director's skill, qualifications, and experience, and to
         recognize the "comparable circumstances" that apply in the case of each director
             o Thus, a lawyer or accountant will be expected to have conducted different
                 investigations than a non-professional; hence, the test is a modified objective
                 standard
        The duty of care simply establishes that a director owes a particular duty in discharging
         his duties without specifying to whom that duty is owed
             o In normal circumstances, the duty is owed to the corporation but also requires that
                 attention be paid to the interests of other stakeholders such as employees,
                 shareholders, and creditors
                                                                                                                       55



             FIDUCIARY DUTIES OF DIRECTORS: s. 122(1)(a)
122. (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall
         (a) act honestly and in good faith with a view to the best interests of the corporation; and

123. (5) A director has complied with his or her duties under subsection 122(1) if the director relied in good faith on
(a) financial statements of the corporation represented to the director by an officer of the corporation or in a written
report of the auditor of the corporation fairly to reflect the financial condition of the corporation; or
(b) a report of a person whose profession lends credibility to a statement made by the professional person.

146. (5) To the extent that a unanimous shareholder agreement restricts the powers of the directors to manage, or
supervise the management of, the business and affairs of the corporation, parties to the unanimous shareholder
agreement who are given that power to manage or supervise the management of the business and affairs of the
corporation have all the rights, powers, duties and liabilities of a director of the corporation, whether they arise
under this Act or otherwise, including any defences available to the directors, and the directors are relieved of their
rights, powers, duties and liabilities, including their liabilities under section 119, to the same extent.
        Under s. 122(1)(a), directors have a fiduciary duty to the corporation
            o However, directors can rely on financial statements given to the director by an
                officer or auditor who represents to the director that the financial statements
                accurately represent the financial condition of the corporation (s. 123(5)(a)) and
                also reports of persons whose profession lends credibility to their statements such
                as lawyers, accountants, and engineers (s. 123(5)(b))

               Self-Dealing Contracts: Disclosure and Ratification (s. 120)
120. (1) A director or an officer of a corporation shall disclose to the corporation, in writing or by requesting to have
it entered in the minutes of meetings of directors or of meetings of committees of directors, the nature and extent of
any interest that he or she has in a material contract or material transaction, whether made or proposed, with the
corporation, if the director or officer
          (a) is a party to the contract or transaction;
          (b) is a director or an officer, or an individual acting in a similar capacity, of a party to the contract or
          transaction; or
          (c) has a material interest in a party to the contract or transaction.
(2) The disclosure required by subsection (1) shall be made, in the case of a director,
          (a) at the meeting at which a proposed contract or transaction is first considered;
          (b) if the director was not, at the time of the meeting referred to in paragraph (a), interested in a proposed
          contract or transaction, at the first meeting after he or she becomes so interested;
          (c) if the director becomes interested after a contract or transaction is made, at the first meeting after he or
          she becomes so interested; or
          (d) if an individual who is interested in a contract or transaction later becomes a director, at the first
          meeting after he or she becomes a director.
(3) The disclosure required by subsection (1) shall be made, in the case of an officer who is not a director,
          (a) immediately after he or she becomes aware that the contract, transaction, proposed contract or proposed
          transaction is to be considered or has been considered at a meeting;
          (b) if the officer becomes interested after a contract or transaction is made, immediately after he or she
          becomes so interested; or
          (c) if an individual who is interested in a contract later becomes an officer, immediately after he or she
          becomes an officer.
(4) If a material contract or material transaction, whether entered into or proposed, is one that, in the ordinary course
of the corporation's business, would not require approval by the directors or shareholders, a director or officer shall
disclose, in writing to the corporation or request to have it entered in the minutes of meetings of directors or of
meetings of committees of directors, the nature and extent of his or her interest immediately after he or she becomes
aware of the contract or transaction.
                                                                                                                       56

(5) A director required to make a disclosure under subsection (1) shall not vote on any resolution to approve the
contract or transaction unless the contract or transaction unless the contract or transaction
          (a) relates primarily to his or her remuneration as a director, officer, employee or agent of the corporation
          or an affiliate;
          (b) is for indemnity or insurance under section 124; or
          (c) is with an affiliate.
(6) For the purposes of this section, a general notice to the directors declaring that a director or an officer is to be
regarded as interested, for any of the following reasons, in a contract or transaction made with a party, is a sufficient
declaration of interest in relation to the contract or transaction:
          (a) the director or officer is a director or officer, or acting in a similar capacity, of a party referred to in
          paragraph (1)(b) or (c);
          (b) the director or officer has a material interest in the party; or
          (c) there has been a material change in the nature of the director's or the officer's interest in the party.
(6.1) The shareholders of the corporation may examine the portions of any minutes of meetings of directors or of
committees of directors that contain disclosures under this section, and any other documents that contain those
disclosures, during the usual business hours of the corporation.
(7) A contract or transaction for which disclosure is required under subsection (1) is not invalid, and the director or
officer is not accountable to the corporation or its shareholders for any profit realized from the contract or
transaction, because of the director's or officer's interest in the contract or transaction or because the director was
present or was counted to determine whether a quorum existed at the meeting of directors or committee of directors
that considered the contract or transaction, if
          (a) disclosure of the interest was made in accordance with subsections (1) to (6);
          (b) the directors approved the contract or transaction; and
          (c) the contract or transaction was reasonable and fair to the corporation when it was approved.
(7.1) Even if the conditions of subsection (7) are not met, a director or officer, acting honestly and in good faith, is
not accountable to the corporation or to its shareholders for any profit realized from a contract or transaction for
which disclosure is required under subsection (1), and the contract or transaction is not invalid by reason only of the
interest of the director or officer in the contract or transaction, if
          (a) the contract or transaction is approved or confirmed by special resolution at a meeting of the
          shareholders;
          (b) disclosure of the interest was made to the shareholders in a manner sufficient to indicate its nature
          before the contract or transaction was approved or confirmed; and
          (c) the contract or transaction was reasonable and fair to the corporation when it was approved or
          confirmed.
(8) If a director or an officer of a corporation fails to comply with this section, a court may, on application of the
corporation or any of its shareholders, set aside the contract or transaction on any terms that it thinks fit, or require
the director or officer to account to the corporation for any profit or gain realized on it, or do both those things.
        A typical situation in which it is alleged that directors have breached their fiduciary
         duties arises in the context of self-dealing contracts in which the corporation contracts
         with a director or officer either directly or indirectly through the director's or officer's
         interest in another enterprise
             o This will generally happen when the director is involved in the approval of a
                 contract that will either bring business to another corporation in which the director
                 has an interest or where the board approves the sale of an asset to an enterprise in
                 which the director has an interest at a discount (or purchase of an asset from such
                 an enterprise at a premium)
        NOTE: The appropriate remedy for a self-dealing contract is a derivative action
        Section 120 sets out a four part test for situations where directors and officers have a
         material interest in company business:
             o (1) Disclosure obligations for interested director – positive duty to disclose
                 material interest (s. 120(1))
                                                                                               57


        o (2) Abstaining from voting on such matters except for matters concerning
            remuneration and indemnification (s. 120(5))
        o (3) Disinterested director ratification (s. 120(7)) or shareholder ratification by
            special resolution (s. 120(7.1))
        o (4) But, in any case, the contract must have been fair and reasonable to the
            corporation at the time it was ratified (ss. 120(7) and (7.1))
   Aberdeen Ry. Co. v. Blaikie Bros. (UK HL, 1854) – corporation purchased chairs from a
    partnership in which one of the corporation's directors was a partner
        o Ratio: At common law, self-dealing contracts are prohibited and thus directors
            are forbidden from entering or approving self-dealing contacts, regardless of the
            merits of the contract
   Northwest Transportation Co. (NWTC) v. Beatty (UK PC, 1887) – Beatty was the
    controlling shareholder of NWTC; NWTC required a new steamer and Beatty had one to
    sell; Beatty agreed to sell it to NWTC at what was considered to be a fair price; the
    contract was put to the shareholders for approval and passed because of Beatty's
    controlling position; minority shareholders sued because Beatty was the vendor
        o Ratio: Shareholders can ratify a self-dealing contract in which the corporation
            contracts directly or indirectly with a director, even in cases where the director in
            question is also the majority shareholder
   R. v. Harris (Ont., 1989) – Harris was a director of Superior Propane for 20 years; the
    company had a policy against self-dealing contracts; over the years, Harris set up several
    corporations though which he sold or leased land and supplies to Superior Propane at a
    grossly inflated cost
        o Ratio: If a person, owing a fiduciary duty to a corporation, places himself in a
            conflict of interest knowingly and for a dishonest purpose, then a fraud has been
            committed and the person has breached the duty; this type of conduct cannot be
            saved by director or shareholder ratification
                 Factors to be considered include: position or office held, nature and
                    ripeness of the corporate opportunity, amount of knowledge possessed,
                    circumstances in which the knowledge was obtained, whether the
                    information was public or private, timing in cases where the alleged
                    breach occurred after termination of the relationship with the company,
                    and the circumstances under which the employment relationship was
                    terminated
   UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc. (Ont. SCJ, 2002) – Berg was
    appointed director and chairman of Repap; Berg's hiring by Repap brought no material
    benefits to Repap that would justify hiring an executive with a lucrative employment
    contract; Berg presented an employment agreement to the board which contained
    extremely lucrative change of control provisions; the board did not conduct a thorough
    review of the employment agreement; the court held that Berg had breached his fiduciary
    duty (s. 122(1)(a)) because the contract was substantially unfair to Repap as it created an
    enormous liability with no corresponding benefit; the directors were found to have
    breached their duty of care (s. 122(1)(b)) because they did not review the employment
    agreement diligently
                                                                                            58


        o Ratio: A self-dealing contract can be invalidated even if adequate disclosure is
          made and directors' approval is obtained if the contract was not fair and
          reasonable to the corporation at the time it was approved (s. 120(7)(c))
        o Ratio: The business judgement rule can only protect a director when the director
          has exercised a reasonable amount of due diligence in relation to the decision in
          question

Take-Over Bids: Proper Procedure, Duty Shifts to Maximizing Shareholder
                                Value
    Unocal Corp. v. Mesa Petroleum (Del., 1985) – Unocal partially owned by Mesa;
     subject to takeover by Chinese company; competing offer came in at lower price; board
     recommended accepting the lower price because of obstacles that would possibly have
     impeded the success of the Chinese bid
         o Ratio: In the context of a takeover bid, the board of the target company should
             form an independent committee, which committee should consult independent
             legal and financial advisors and obtain a valuation and fairness opinion, and then
             make a recommendation to the board
         o Ratio: Once a company is "in play", the directors' fiduciary duty shifts so that it
             will be satisfied if the board acts in the best interests of the shareholders by
             seeking to maximize shareholder value
         o Ratio: In the context of a takeover bid, defensive measures should be proportional
             to the problems with the bid (white knight, poison pill, crown jewel sale)
    Revlon v. MacAndrews & Forbes Holdings (Del. SC, 1985) – informal negotiations for
     company; board planned defensive tactics; initial bid made at higher price than negotiated
     price; board implements defensive tactics; every time the board took action, the bidder
     upped the bid price; the court held that the board had not acted in the interest of
     maximizing shareholder value
         o Ratio: Once a company's sale becomes inevitable, the directors must seek the
             highest price for the shareholders and cannot undertake defensive measures that
             will prevent any bid from succeeding because this is unreasonable

                               Rule in Foss v. Harbottle
    Foss v. Harbottle (UK, 1843) – claim was that defendant directors had caused the
     company to borrow money in a manner contrary to the company's charter in order to pay
     for lands purchased from directors; the court dismissed the action
         o Ratio: Where the corporation has been injured, only the corporation has a right of
             action to sue
                  But: Note that this has been superseded by the derivative action
         o Ratio: Shareholders can absolve fiduciaries of the consequences of a breach by
             voting to ratify it (s. 120(7.1))
                  But: Note that this allows the majority shareholders to oppress the
                     minority shareholders and has been superseded by the oppression remedy
                                                                                                                      59



    DEFENCES TO ALLEGED BREACH OF DIRECTORS' AND
             OFFICERS' DUTIES UNDER S. 122
123. (5) A director has complied with his or her duties under subsection 122(1) if the director relied in good faith on
(a) financial statements of the corporation represented to the director by an officer of the corporation or in a written
report of the auditor of the corporation fairly to reflect the financial condition of the corporation; or
(b) a report of a person whose profession lends credibility to a statement made by the professional person.

206. (2) If within one hundred and twenty days after the date of a take-over bid the bid is accepted by the holders of
not less than ninety per cent of the shares of any class of shares to which the take-over bid relates, other than shares
held at the date of the take-over bid by or on behalf of the offeror or an affiliate or associate of the offeror, the
offeror is entitled, on complying with this section, to acquire the shares held by the dissenting offerees.

                 The Proper Purpose Test: Legitimate Business Purpose
        Test: Was the action authorized by the directors done for a proper corporate purpose?
        Teck v. Millar (BC SC, 1972) – Teck bought 51% of the shares of Afton Mines on the
         open market; the directors of Afton Mines entered a transaction with Canex in exchange
         for shares which granted Canex an interest equal to that of Teck; Teck sued arguing that
         the Canex contract was not entered into bona fide for the interests of shareholders but
         instead to defeat the majority share position held by Teck; court held that the board had
         upheld their duty
             o Ratio: For directors to issue shares in a manner intended to retain control for
                 themselves is to engage in an improper purpose; an improper purpose will
                 generally be a purpose that is not in the best interests of the corporation or that is
                 self-serving
             o Ratio: Directors are not bound to act in a manner which pleases the majority
                 shareholder(s) because the fiduciary duty is owed to the corporation
        Howard Smith v. Ampol Petroleum (PC, 1974) – Ampol bid for all the shares of Millers
         at 2.27; Smith bid for all the shares at 2.50; Ampol and Bulkships agreed to reject Smith's
         bid; the directors determined that they did not require the full premium offered by Smith;
         an issue of shares purely for the purpose of creating voting power is improper; this
         conduct is particularly inappropriate when it is intended to enable a transaction to
         proceed that the existing majority would have been in a position to block
             o Ratio: Action of a director or officer that restricts shareholders' right to determine
                 to whom and on what terms they will sell their shares is an action for an improper
                 purpose; to entrench supporting shareholders in order to preserve one's position as
                 director or officer is an improper purpose
             o Ratio: Once a company is "in play" the directors duty shifts so that their duty is to
                 obtain the best value possible for shareholders
        347883 Alberta Ltd. v. Producers Pipeline (1991) – a "poison pill" was struck down as
         being for the improper purpose of entrenching the directors
             o Ratio: Defensive tactics intended solely to entrench the existing director or
                 officer are performed for an improper purpose
                                                                                                60


                                      Due Diligence
   Test: Did the directors or officers conduct reasonable due diligence and employ
    reasonable decision-making methods before arriving at a decision? In general, the test
    will be whether the directors or officers engaged in adequate information collection,
    review, and analysis
   YBM Magnex International Inc. (OSC, 2003) – directors of YBM were advised that the
    company was being investigated by the US; company filed a prospectus but omitted
    information concerning the investigation or the allegations
        o Ratio: The standard of care to which a director will be held may be higher in the
            case of directors with professional qualifications (i.e. lawyers, accountants)
        o Ratio: The standard of care to which directors and senior officers will be held
            may be higher in the case of directors who sit on special committees (i.e. audit
            committee) because of improved access to information and their in-depth
            knowledge of the company's operations
        o Ratio: Directors have a positive duty to obtain information relevant to the
            execution of their duties as directors and when they obtain information, or
            become aware of facts, which might lead one to conclude that there may be an
            issue that may adversely affect the company, then they have a duty to act on that
            information
        o Ratio: A director will be expected to conduct such reasonable investigations as
            would be expected of a reasonable person in comparable circumstances

Business Judgement Rule: Takeover Bids, Asset Purchases, and Severance
   The "business judgement rule" refers to the fact that the courts will show deference to the
    judgement exercised by a board of directors when the directors employed a reasonable
    decision-making method and reached a reasonable decision in the circumstances
        o The courts will not interfere in the management of the corporation in the absence
            of an allegation that the director's action has been tainted with fraud, illegality, or
            a conflict of interest
   Test: So long as the directors (1) employed a reasonable decision-making process
    involving reasonable due diligence and (2) there is no indication of fraud, illegality, or a
    conflict of interest, the courts will defer to the judgement of the board in relation to the
    appropriateness of a business decision
   A typical situation in which to exercise the business judgement rule is in the context of a
    takeover bid
        o The appropriate course of action in the context of a hostile takeover bid is for the
            directors to form a special committee of directors who have no conflict of interest,
            who then obtain independent legal and financial advice, and they try to generate
            an auction by attracting other bidders with intention of maximizing shareholder
            value (CW v. WIC below)
        o Holding an auction may be the only way to determine whether the price bid is
            reasonable and in the best interests of the corporation
        o Note the "squeeze out" provisions in s. 206(2)
   Casey v. Woodruff (NY) – the courts will generally only rely on the business judgement
    rule when reasonable diligence has in fact been exercised
                                                                                              61


   CW Shareholding v. WIC Western International (Ont. Ct J, 1998) – CanWest made a
    bid for WIC; WIC appointed a special committee and the committee retained independent
    financial and legal advice; the directors approved a poison pill but the OSC cease traded
    the order; the directors recommended rejection of the bid and took steps to generate other
    bids including setting up a data room with access subject to standstill provisions; Shaw
    was offered a break fee to make a bid; Shaw made a bid that was accepted by the board
        o Ratio: In the context of a takeover bid, standard procedure is for the board of the
            target company to set up a special committee composed of those directors who do
            not have a conflict of interest, the committee hires independent legal and financial
            advice to provide valuations and fairness opinions, the committee may attempt to
            generate alternative bids or an auction process; permissible courses of action may
            include using break fees to generate competitive bids and offering asset purchase
            options
        o Ratio: Defensive measures employed in the context of a takeover bid should be
            approved by shareholders
        o Ratio: In the context of a takeover bid, the directors' duty of care shifts so that the
            duty owed is to attempt to maximize value for shareholders
        o Ratio: Courts will not substitute their own judgement for that of the directors so
            long as the directors (1) employed a decision-making method that was free of
            conflict and involved reasonable due diligence; (2) made the decision in good
            faith and on reasonable grounds; (3) made the decision honestly, prudently, and in
            good faith
   Pente Investment Management v. Schneider Corp. (Ont. CA, 1998) – controlling block
    of shares held by family; Maple Leaf bid for Schneider; directors appointed special
    committee of independents which retained its own legal and financial advisors;
    committee rejected the Maple Leaf bid as inadequate and canvassed for white knights;
    committee elicited another bid from Smithfield; court held that directors acted
    appropriately and not bound to go back to Maple Leaf to see if they would up their bid
        o Ratio: In Ontario, it is not necessary to hold an auction every time there is a
            takeover bid
        o Ratio: If a board of directors has acted on the advice of a committee composed of
            persons having no conflict of interest, and that committee acted independently, in
            good faith, and has made an informed recommendation as to the best available
            transaction for the shareholders in the circumstances, then the business judgement
            rule will apply and the directors will be held to have satisfied their duties
        o Ratio: The business judgement rule focuses on the quality of the decision-making
            process rather than the result reached
        o Ratio: If the board acts on the recommendations of an independent committee
            properly formed then the board will be found to have exercised reasonable
            business judgement in the circumstances and the directors will be absolved of
            liability for breach of their statutory duties
   Brant Investments v. KeepRite Inc. (Ont. CA, 1991) – K was indirectly owned by ICI
    (65% ownership); ICI decided to merge K with 2 other wholly-owned subs of ICI and
    could do this because ICI had enough votes to pass a special resolution; board appointed
    an independent special committee; minority shareholders alleged the special committee
                                                                                               62


    did not consider alternative transactions; court held that the board acted appropriately
    given that shareholder approval was obtained by way of special resolution
        o Ratio: Shareholder approval of a board decision by way of special resolution can
            absolve the directors of any liability attaching to the decision because if the
            owners of the company approve of the action taken, then that provides substantive
            grounds on which to base deference to the board's decision
   Securities legislation imposes a stricter requirement than a mere special resolution;
    instead, securities legislation requires that a majority of the disinterested shareholders
    approve the transaction
   Gazit (1997) Inc. v. Centrefund Realty Corp. (Ont. SCJ, 2000) – Gazit made a bid for
    Centrefund; board entered post-bid arrangements to alter change of control provisions on
    advice of independent financial consultant; the arrangements indirectly benefited senior
    management; Gazit alleged a breach of the directors' duty; court found that the
    arrangements were made on the advice of independent advisors, to accommodate the
    requests of an alternative bidder and in order to make the company more attractive to
    other bidders
        o Ratio: In the context of a takeover bid, if the special committee or independent
            advisors recommend a course of action intended in good faith to enhance the
            auction process, then the fact that the chosen course of action indirectly benefits
            the target company's management is not sufficient reason to disregard the
            recommendation; thus, if the board adopts the recommendation in good faith, the
            business judgement rule will apply to absolve the directors of all liability
   Smith v. Van Gorkom (Del. SC, 1985) – VD was chairman of Transunion, a business in
    trouble because of tax rulings; consultants recommended a sale of the business; CFO said
    $50-60 per share, trading in the $30s; Fitster offered $55; board deliberated for a short
    period of time and accepted the offer; the minority shareholders sued; court held that the
    board had not done anything to properly value the corporation
        o Ratio: The decision-makers must make reasonable efforts to ensure that they have
            the information and advice necessary to make a fully-informed decision
        o Ratio: In the context of a takeover bid, the board must undertake reasonable
            investigations to determine the value of the company and cannot rely on market
            price; this may necessitate conducting an auction or a professional valuation
        o Ratio: Prudent boards will obtain a "fairness opinion" to determine whether a bid
            for the company falls within the range of reasonable valuations for the company
   In re The Walt Disney Company Derivative Litigation (Delaware Ct. Chancery, 2005) –
    Ovitz was brought to Disney out of concern that he would go to a competitor; worked at
    Disney less than 15 months, was awarded a $140 million severance package;
    shareholders alleged the directors breached their duties; court held the board had acted
    reasonably
        o Ratio: A director's fiduciary duties are merely boundaries and thus within those
            boundaries, a director is free to act as his or her judgement and abilities dictate
        o Ratio: Determining whether a director has breached his or her statutory duties
            proceeds on a director-by-director basis and thus findings of liability can differ for
            each director on a board depending on the decision-making process employed, the
            director's knowledge and experience, and the reasonableness of the decision in the
            circumstances
                                                                                                                       63



        DUTIES OF DIRECTORS TO OTHER STAKEHOLDERS
122. (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall
         (a) act honestly and in good faith with a view to the best interests of the corporation; and
         (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable
         circumstances.

123. (5) A director has complied with his or her duties under subsection 122(1) if the director relied in good faith on
         (a) financial statements of the corporation represented to the director by an officer of the corporation or in a
         written report of the auditor of the corporation fairly to reflect the financial condition of the corporation; or
         (b) a report of a person whose profession lends credibility to a statement made by the professional person.
        Peoples v. Wise (SCC, 2004) – Wise purchased Peoples from M&S and went into debt to
         M&S; Wise integrated operations and implemented joint inventory procurement scheme;
         both companies went into receivership and then declared bankruptcy; trustee of Peoples
         launched a suit against the directors of Wise claiming that they had favoured Wise to the
         detriment of Peoples as a result of their joint purchasing scheme; the issue was whether
         the fiduciary duty extended to creditors; court held that the adoption of the joint inventory
         procurement scheme was intended to enhance the company and was at worst an honest
         error of business judgement
             o Ratio: The fiduciary duty in s. 122(1)(a) is owed to the corporation and not to
                 other stakeholders; however, as a corporation borders on insolvency, it becomes
                 increasingly legitimate to consider the interests of other stakeholders such as
                 shareholders, employees, creditors, consumers, governments, and the environment
             o Ratio: For the purposes of determining whether directors have breached their
                 duties under s. 122, a consideration of "comparable circumstances" should include
                 external socio-economic factors such as presence of competitors
             o Ratio: It is reasonable for directors to rely in good faith on the representations of
                 a person whose profession lends credibility to their statements (s. 123(5)(b))
             o Ratio: Directors who sit on the board of a parent and a sub must balance the best
                 interests of the two corporations
             o Ratio: Directors will be held to have fulfilled their statutory duties if their actions
                 were genuinely intended to make the corporation a "better" corporation
             o Ratio: The duty of care in s. 122(1)(b) may be owed to stakeholders other than
                 the corporation depending on the context but directors will not be held to have
                 breached that duty if they acted prudently and on a reasonably informed basis and
                 if they made reasonable business decisions in light of all the circumstances about
                 which the directors or officers ought to have known (business judgement rule)
        Directors may find it difficult to satisfy their obligation to act in the best interests of the
         corporation in situations where the controlling shareholder has a different agenda

                           Duty to Shareholders During Takeover Bid
        Maple Leaf Foods Inc. v. Schneider Corp. (Ont. CA, 1998) – ML made unsolicited
         takeover bid; majority shareholder family did not want to sell to ML; Schneider found
         white knight in Smithfield and accepted the Smithfield bid; ML launched a suit alleging
         that the duty of the directors was to get the best value for shareholders; thus, ML was
         alleging that the directors' duty was owed to shareholders
                                                                                  64


o Ratio: Directors are not the agents of the shareholders and directors have the
  absolute power to manage the affairs of the corporation even if their decisions
  contravene the express wishes of the majority shareholder(s)
o Ratio: A company is not "in play" if there is an obstacle that would effectively
  prevent a bid from succeeding and in this context the duty does not shift to
  maximizing shareholder value until the controlling shareholder(s) looks
  favourably upon the bid
o Ratio: If directors unfairly disregard the rights or interests of a group of
  shareholders, the directors may be found to have not acted in the best interests of
  the corporation (oppression remedy)
o Ratio: In the context of a takeover bid, the duty owed by directors to the
  corporation may shift so that the duty becomes a duty to maximize value for
  shareholders
o Ratio: In order to determine whether directors have breached their statutory
  duties under s. 122, the courts may consider whether the directors had a personal
  interest in the decision made or whether they acted for an improper purpose; if the
  motivation behind the decision made was to make the corporation(s) "better" the
  courts will generally defer to the judgement of the board (business judgement
  rule)
o Ratio: The duty of care includes the phrase "in comparable circumstances" so that
  it is necessary to consider prevailing socio-economic conditions when
  determining whether there has been a breach of the directors' statutory duties
                                                                                                                     65



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

Partnerships Act
Duty as to rendering accounts
28. Partners are bound to render true accounts and full information of all things affecting the partnership to any
partner or the partner’s legal representatives.
Accountability for private profits
29. (1) Every partner must account to the firm for any benefit derived by the partner without the consent of the
other partners from any transaction concerning the partnership or from any use by the partner of the partnership
property, name or business connection.
Duty of partner not to compete with firm
30. If a partner, without the consent of the other partners, carries on a business of the same nature as and competing
with that of the firm, the partner must account for and pay over to the firm all profits made by the partner in that
business.
        Corporate opportunism deals with situations where an opportunity arises that is
         potentially for the benefit of the corporation but which the directors or officers deflect in
         whole or in part so that they personally benefit
        The central issue is determining when the opportunity "belongs" to the corporation
        NOTE: The appropriate remedy for taking a corporate opportunity is a derivative action
        Cook v. Deeks (UK PC, 1916) – 3 of 4 directors incorporate new corporation and
         negotiate for construction contract on behalf of new corporation despite history of
         awarding contracts to old corporation, to the detriment of other director; 3 directors used
         their controlling votes to ratify a resolution declaring that the old corporation had no
         interest; court holds directors liable for profits made
             o Ratio: An opportunity belongs to the corporation if the fiduciary knows about the
                 opportunity only by virtue of his relationship to the corporation; he cannot exploit
                 such an opportunity, nor can he use his majority shareholdings to ratify such an
                 action
             o Ratio: The interested parties cannot ratify the taking of a corporate opportunity
                 because such ratification is tainted by conflict of interest (oppression remedy)
        Atkins & Durbow Ltd. v. Bell (BC CA, 1957) – A&D hired Bell as director knowing he
         has 2 other similar businesses; Bell improves A&D profitability by shifting quotas
         amongst all 3 companies; A&D sued alleging Bell breached his fiduciary duties; court
         holds that A&D hired Bell knowing he had the same duty of loyalty to the other 2
         companies
             o Ratio: If a director/officer was appointed while the corporation was aware of
                 his/her position as director/officer with another corporation, the corporation has
                 no right to demand that its interests be favoured over those of the other
                 corporation to which the director/officer owes a duty
        Regal (Hastings) Ltd. v. Gulliver (UK HL, 1942) – corporation owned one cinema and
         wanted to lease another but could not afford to guarantee the loan; directors set up
         corporation by funding a subsidiary, knowing that the subsidiary was about to be sold;
         directors made large profit on sale of shares in the subsidiary; the new shareholders
                                                                                              66


    elected a different board that sued the old directors; court held that the directors had
    breached their duty, regardless of whether the corporation could have afforded the leases
        o Ratio: If a corporation would have taken an opportunity if able, even if unable to
            do so for financial reasons, it is his fiduciary duty for a director to take the
            opportunity and profit from it
   Zwicker v. Stanbury (SCC, 1953) – hotel owned by CPR as creditor and major
    shareholder; company could not afford to refinance; directors agreed to personally
    refinance the bonds and paid out CPR in exchange for shares held by CPR; hotel
    prospered and the directors profited in the context of a takeover bid; minority
    shareholders alleged that the directors breached their duty in acquiring the shares
        o Ratio: A director cannot use information obtained as a result of being a director to
            his own benefit when it would have been possible to use the information to the
            benefit of the corporation in the same manner
   Peso Silver Mines v. Cropper (SCC, 1966) – board of directors considered, and after
    receiving independent professional advice, rejected an opportunity to acquire certain
    mining claims because of limited finances and other legitimate business reasons; Cropper
    was member of the board; later, Cropper formed another corporation to buy the mining
    claims; Peso sued Cropper; court held for Cropper
        o Ratio: If the board of directors rejects an opportunity for bona fide business
            reasons, then directors are not thereafter prohibited from pursuing the opportunity
            personally; thus, if the corporation no longer has the intention to take the
            opportunity, on bona fide grounds, then directors are relieved of their duty of
            loyalty in relation to that particular opportunity
        o Ratio: The mere fact that a director knows of an opportunity by virtue of his
            position as a director is not independently sufficient to hold him liable should he
            later take the opportunity for his own benefit
   Note that Peso v. Cropper raises the possibility that the director will influence the board's
    rejection of the opportunity in order to take advantage of it personally later
   Peso is distinguished from Regal because in Peso the opportunity was rejected whereas
    in Regal the rejection was really just part of the directors' decision to implement an
    alternative strategy
   Test: The test is therefore: was the rejection of the opportunity by the board a bona fide
    legitimate business decision or was the rejection tainted by self-interest so that the
    director could pursue the opportunity personally?
   Canadian Aero Service Ltd. v. O'Malley (SCC, 1974) – defendants were former senior
    officers of plaintiff; plaintiff was engaged in mapping project; after working on the
    project, the defendants resigned and later formed a new corporation which successfully
    won in a tender call for further mapping work; court held that defendants did breach their
    duty, despite not being in fiduciary relationship any more and despite the fact that the
    opportunity taken was different from that available to the corporation
        o Ratio: When determining whether a person took a corporate opportunity:
                 (1) Does the opportunity belong to the corporation?
                          Maturity, specificity, significance, public or private, rejection
                 (2) What is the relationship of the fiduciaries to the opportunity?
                                                                                              67


                           Position, relationship between fiduciary and opportunity,
                            knowledge as fiduciary, involvement in competing business, use of
                            position, time after termination
        o Ratio: If the corporation still has the intention to seek the opportunity for its own
            use, even if unable to do so for financial reasons or otherwise, then not even
            termination of the employment relationship will absolve former directors and
            officers of liability for taking the opportunity for their own benefit
        o Ratio: The fiduciary relationship of directors can survive termination of the
            relationship with the corporation
   Note that the remedy for taking a corporate opportunity it not damages; instead, it is
    profits made, or losses avoided
   Rochwerg v. Truster (Ont. CA, 2002) – partner in accounting firm accepts directorship
    with client; remits director's fees to partnership but does not disclose stock options; court
    holds that partner liable to account to partnership for benefits obtained by virtue of being
    partner, pursuant to s. 28 and s. 29(1) of the Partnerships Act
                                                                                                                     68



    DIRECTORS' PERSONAL LIABILITY TO THIRD PARTIES
                   FOR NEGLIGENCE
122. (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall
(a) act honestly and in good faith with a view to the best interests of the corporation; and
(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable
circumstances.

123. (5) A director has complied with his or her duties under subsection 122(1) if the director relied in good faith on
(a) financial statements of the corporation represented to the director by an officer of the corporation or in a written
report of the auditor of the corporation fairly to reflect the financial condition of the corporation; or
(b) a report of a person whose profession lends credibility to a statement made by the professional person.
        Directors will generally be held personally liable to third parties for negligence in
         discharging their corporate duties where they have been personally involved in
         committing the tort; individual directors will enjoy a due diligence defence, but the
         standard will be higher when shareholders' interests may be significantly affected
        Most of these cases arise in situations where there has been a misrepresentation in a
         prospectus
        Scotia McLeod Inc. v. Peoples Jewellers Ltd. (Ont. CA, 1995) – Peoples issued
         debentures pursuant to a prospectus that omitted material fact; CEO and CFO had
         represented that certain liabilities were remote and not material; directors brought a
         motion to have the case dismissed against the individual directors
             o Ratio: For directors and officers to be personally liable for negligent acts of the
                 corporation, they must have committed tortious behaviour outside of their formal
                 decision-making role in the corporation; thus it must be shown that their personal
                 actions were themselves tortious or that their acts exhibited a separate identity
                 from that of the company so as to make the act or conduct complained of their
                 own
             o Ratio: For directors and officers to be personally liable for the negligence of the
                 corporation, there must have been active participation in the conduct that led to
                 the negligence
        Escott v. BarChris Construction (US Dist. Ct. NY, 1968) – action by purchasers of
         debentures who alleged a misrepresentation in the prospectus; claimed against everyone
         who signed the certificate pages in the prospectus; court held that each director was liable
         unless he could establish a due diligence defence
             o Ratio: If an action for negligence is brought personally against a director under s.
                 122(1)(b), the director will be absolved of liability if he can establish a due
                 diligence defence according to which he had reasonable grounds for his action
                 and had undertaken such reasonable investigations as were necessary to support
                 his action (OSA s. 130(1)(c)); thus, directors have a positive duty to seek out the
                 required information required to make informed decisions
        Smith v. Van Gorkom (Delaware SC, 1985) – board of directors was asked to approve
         sale of corporation to unrelated company, at a substantial premium; proposal was
         recommended by CEO of corporation; board took only 2 hours to approve
             o Ratio: For a director to be absolved of liability for the negligent act of a
                 corporation, the director must establish that he made reasonable efforts to ensure
                 that he had the information and advice necessary to make the decision; in the
                                                                                              69


            context of a transaction that may dramatically affect shareholders' investment (i.e.
            a takeover bid), the courts may hold directors to a higher standard with respect to
            the information-gathering process; however, where the impugned conduct was in
            relation to operational or strategic matters, there will likely be more deference to
            the board's interpretation of adequate due diligence
   YBM Magnex International Inc. at al (OSC, 2002) – directors were advised that
    company subject to US investigation; company filed prospectus that omitted any
    reference to investigation; class action suits launched by investors who purchased
    securities pursuant to prospectus
        o Ratio: In terms of the information gathering expected of a director to establish a
            due diligence defence, more is expected of directors with special qualifications;
            more is expected of inside directors (officers/employees); more is expected of
            directors who sit on special committees
        o Ratio: Directors have a positive duty to act if they uncover information that may
            lead to a conflict of interest or that may adversely affect the company
        o Ratio: Directors may rely on information provided by members of committees or
            professionals pursuant to s. 123(5) but only to the extent that such reliance is
            reasonable in the circumstances
        o Ratio: In determining whether directors are entitled to a due diligence defence,
            the test is whether the decision-making process was reasonably diligent; this will
            vary with the individual's skill, access to information, and degree of participation
            in the process
   R. v. Bata Industries (Ont. CA, 1995) – Bata's factory yard contained drums with
    carcinogens; company waited 3 years before removing drums; directors were charged;
    issue was which directors were responsible
        o Ratio: When determining whether to hold a director liable for an offence
            committed by the corporation, the test has two parts:
                 Did the board of directors establish a system to prevent the commission of
                     this type of offence?
                 Did each director ensure that the corporate officers were instructed to
                     establish a system sufficient to ensure compliance with the relevant laws
                     and was there reasonable monitoring of implementation?
        o Ratio: Directors and senior officers are entitled to rely on the belief that company
            policy is being complied with, in the absence of evidence to the contrary
                                                                                               70



SHAREHOLDERS' RIGHTS: SHAREHOLDERS' MEETINGS
   Shareholder approval must be sought for any matter that has the potential to
    fundamentally affect the nature of or value of the shareholders' investment or interest
   This includes shareholder approval by special resolution in respect of the following:
       o Amendment to the articles of incorporation (s. 173)
       o Sale, lease or exchange of all or substantially all of the assets of the corporation
           (s. 189)
       o Election of directors – ordinary resolution (s. 106)
       o Removal of directors – ordinary resolution (s. 109)
       o Appointment of auditors (s. 162)
   However, shareholder voting is not a particularly powerful tool for several reasons:
       o Shareholder apathy resulting in few completed proxies
       o Few shareholders attend meetings
       o Prohibitively cumbersome procedure for shareholders to appoint an alternate slate
           of directors

     Limitations of the Shareholders' Right to Vote in Bylaws (s. 103)
   Bylaws are created, approved by the board of directors (s. 103(1)), and then must be
    approved by the shareholders (s. 103(2))
   Can a corporation limit a shareholder's right to vote by including such a limitation in the
    corporate bylaws?
   Jacobson v. United Canso Oil & Gas Ltd. (Alta. QB, 1980) – corporation had a bylaw
    providing that no person was entitled to vote more than 1000 shares regardless of how
    many shares the person held; court held the bylaw was invalid
       o Ratio: All shares within a class have the same voting rights and they can only be
           amended by amending the articles of incorporation; hence, a bylaw purporting to
           confer different rights on shares within a class is invalid; in order to have shares
           that are entitled to different voting rights, the shares must be of different classes

Shareholder Meetings: Annual (s. 133(1)) and Special Meetings (s. 133(2))
   At the first shareholders' meeting, and at every subsequent annual shareholders' meeting,
    the shareholders must elect the directors for a term of not more than 3 years (s. 106(3))
   Meetings are to take place within Canada at a place provided for in the bylaws (s. 132(1))
   Only directors can call annual meetings (s. 133(1))
   The first annual meeting must be held within 18 months of the corporation's
    incorporation (s. 133(1)(a)) and the shareholders must elect directors (s. 106(3)) and
    appoint an auditor (s. 162(1))
   Each subsequent annual meeting must be held within 15 months of the last annual
    meeting (s. 133(1)(b))
   Every annual meeting must involve the review of the comparative financial statements (s.
    155(1)(a)), the appointment of the auditor (s. 155(1)(b)) and election of directors whose
    terms have expired (s. 106(3))
   However, the directors can at any time call a special meeting of the shareholders (s.
    133(2))
                                                                                              71


       o Any business other than the business that must be conducted at the annual
         meetings is considered to be special business (s. 135(5))

             Information for Shareholders (ss. 135(6) and 149(1))
   Prior to any shareholders' meeting, the directors are required to provide shareholders with
    a proxy form including information necessary to permit shareholders to make informed
    decisions about the matters to be considered at the meeting (s. 149(1))
   Garvie v. Axmith (Ont. HC, 1962) – directors gave notice of special meeting to purchase
    assets; shareholder applied for declaration that resolutions passed were invalid as proxy
    did not provide adequate information; court agreed that proxy was inadequate
        o Ratio: All information presented by the directors to shareholders must be
            presented fairly, be reasonably accurate, and not be misleading in any material
            respect; information provided to shareholders in respect of business to be
            conducted at an annual or special meeting must put shareholders in a position in
            which each of them can make an informed decision as to how to vote on the
            matters to be considered at the meeting (s. 135(6))

                          Requisitioned Meetings (s. 143)
   The directors can at any time call a special meeting of shareholders (s. 133(2))
   In addition, the holders of not less than 5% of the issued voting shares of a corporation
    can requisition the directors to call a meeting of shareholders for the purpose stated in the
    requisition (s. 143(1))
         o Management must send a proxy circular to shareholders (s. 149)
         o On receiving the requisition, the directors shall call the meeting unless the
            directors have already called a shareholders' meeting (s. 143(3))
         o Note that one of the purposes for which a shareholder can requisition a meeting is
            to remove a director pursuant to s. 109(1)
         o If the proposal is for a legitimate business purpose, then the corporation must set
            out the proposal in the management proxy circular required by s. 149 (s. 137(2))
         o However, the corporation is not obliged to do this if it appears that the purpose of
            the proposal is to redress a personal grievance, or the proposal does not relate in a
            significant way to the business of the corporation, or substantially the same
            proposal was submitted at a previous meeting and did not receive the prescribed
            minimum support at the meeting, or the proposal is being used to secure publicity
            (s. 137(5))
   If the directors do not call a meeting within 21 days of receiving the requisition, any
    shareholder who signed the requisition can call the meeting (s. 143(4))
   The court can also call a meeting of shareholders where it appears necessary to the court
    to do so (s. 144(1))
   Charlebois v. Bienvenu (Ont. CA, 1968) – question was whether court could sanction an
    order for the calling of a meeting to achieve a purpose beyond the scope of what
    shareholders could normally convene such a meeting for; court concluded that a court-
    ordered shareholders' meeting could only consider business that could have been
    conducted at the meeting if called in any other manner
         o Note: This case has since been superseded by s. 145 of the CBCA
                                                                                             72


   Section 145 of the CBCA allows a corporation, shareholder, or director to apply to a
    court to determine any controversy with respect to an election or appointment of an
    auditor or director of the corporation (s. 145(1))
       o The court can declare the result of a disputed election or appointment (s.
            145(2)(b))

    Shareholder Requisitioned Meetings (s. 143) and Proposals (s. 137)
   The holders of not less than 5% of the issued shares of a corporation can requisition the
    directors to call a meeting for the purpose stated in the requisition (s. 143(1))
        o The directors, upon receiving the requisition, shall call a meeting to transact the
             business (s. 143(3))
        o If the directors do not call the meeting within 21 days after receiving the
             requisition, any shareholder who signed the requisition can call the meeting (s.
             143(4))
   A shareholder can also apply to the court to order that a meeting be called if it is
    impractical to follow the normal mechanism for requisitioning a meeting (s. 144(1))
   Although only registered shareholders can vote their shares, either a registered
    shareholder or a beneficial shareholder may submit a proposal to be considered at a
    shareholders' meeting (s. 137(1))
        o The corporation must include the proposal in the management proxy circular (s.
             137(2))
        o However, the corporation need not include the proposal in the management proxy
             circular if it appears that the purpose of the proposal is to redress a personal
             grievance, or the proposal does not relate in a significant way to the business of
             the corporation, or substantially the same proposal was submitted at a previous
             meeting and did not receive the prescribed minimum support at the meeting, or
             the proposal is being used to secure publicity (s. 137(5))
        o A proposal made under s. 137 may include a proposal to amend the article of
             incorporation (s. 175(1))
   Airco v. Air Canada (Ont., 1999) – Airco bid for Air Canada; Airco acquired shares in
    Air Canada and requisitioned a meeting under s. 143 at which the intention was to oust
    the existing board; Airco wanted the deal to happen in November; Air Canada, in
    response, set a meeting for January; Airco applied to the court to have the meeting called
    earlier; court held that Airco's requisition was valid under s. 143
        o Ratio: Under s. 143(3) the directors are obligated to call a meeting pursuant to a
             shareholder requisition, unless the directors have already called a meeting and
             have given notice to shareholders of the meeting and the shareholders' business
             has a reasonable expectation of being heard at the meeting called by directors(s.
             143(3)(b)); however, even if one of the exceptions in s. 143(3) applies, the
             requisitioning shareholder still has the right under s. 143(4) to call a meeting if
             there is no reasonable expectation that the proposed business will be considered at
             the directors' meeting but the onus is on the shareholder and not management to
             call the meeting "as nearly as possible in the manner in which meetings are to be
             called pursuant to the bylaws"
                                                                                    73


o Ratio: The court's power to order that a shareholder meeting be held pursuant to
  s. 144 should be exercised cautiously and should only be exercised when the
  shareholders' right to call a meeting under s. 143(4) is ineffective or impractical
                                                                                            74



SHAREHOLDERS' RIGHTS: SHAREHOLDER ACTIVISM
                          Shareholder Proposals (s. 137)
   Corporate statutes provide a mechanism whereby shareholders may nominate directors
    and propose matters for consideration by all shareholders
   There are 4 broad categories of proposals that shareholders may make:
       o Proposals to amend the articles of incorporation (s. 175)
       o Proposals to make or amend a bylaw of the corporation (s. 103(5))
       o Proposal to nominate a director provided that the proposal is signed by one or
           more shareholders representing not less than 5% of the voting shares of the
           corporation (s. 137(4))
                Note that failure to meet the 5% requirement does not preclude a
                   shareholder attending a shareholders' meeting and nominating a candidate
                   for a directorship at the meeting itself
       o Proposal to bring a matter before the shareholders for discussion or resolution,
           provided that the matter relates to the business and affairs of the corporation (s.
           137(1), subject to exceptions in s. 137(5))
       o Requisition of a meeting to discuss matters relating to the business and affairs of
           the corporation (s. 143)
   A shareholder can solicit proxies from no more than 15 other shareholders before falling
    under the requirement that he prepare a dissident's proxy circular (s. 150(1.1))
       o However, most shareholders prefer to submit a proposal to management for
           discussion at the shareholders' meeting because management is obliged to include
           the proposal in management's proxy provided that the proposal is not excluded by
           s. 137(5) (s. 137(2))

                           For the Election of Directors
   Note that a majority of the directors on the board of a public company must be
    independent and there must be at least 3 directors on such a board
   A director may be removed by ordinary resolution at a special meeting (s. 109(1))
   D'Addario v. EMS Inc. (Ont. SCJ, 2005) – D'Addario was president and significant
    shareholder; D'Addario was removed by the board for entering several related-party
    transactions that were not in the best interests of the corporation (i.e. lucrative
    compensation and severance); as shareholder, D'Addario requisitioned a meeting to elect
    new directors; the board scheduled a meeting in response; D'Addario then announced that
    notwithstanding the board's scheduled meeting, he was holding a meeting in another city;
    EMS sought an injunction to prevent D'Addario's meeting; court granted injunction
        o Ratio: If a shareholder submits a proposal for consideration at a shareholder
            meeting pursuant to s. 137 and the board schedules a meeting to consider the
            matter, the shareholder cannot subsequently schedule another meeting to discuss
            the same matter
        o Ratio: Pursuant to s. 143(4), if the directors do not call a meeting within 21 days
            after receiving a valid requisition from shareholders representing 5% or more of
            the voting shares under s. 143(1), the shareholders may call a meeting themselves;
                                                                                              75


            however, if the directors call such a meeting, the shareholders cannot
            subsequently call a meeting to discuss the same matters (s. 143(3)(b))


    Calling Meetings to Raise Issues of Corporate Governance (s. 137(5))
    Verdun v. TD Bank (SCC, 1996) – beneficial shareholder submitted proposal for
     inclusion in management's proxy circular under s. 137(2); proposals related to corporate
     governance issues like board composition and executive compensation; bank objected
     under s. 137(5)(b) and (e) (personal grievance and publicity); court held that proposals
     were valid
         o Ratio: Beneficial shareholders can submit proposals (s. 137(1))
         o Ratio: A proposal submitted by a shareholder in accordance with s. 137 and
             addressing legitimate issues of corporate governance including board composition
             and executive compensation is not precluded by any of the factors in s. 137(5)
    Michaud v. Banque Nationale (Quebec SC, 1997) – Michaud was registered owner of 1
     share; he submitted resolutions to be included as proposals in management's proxy
     circular under s. 137(2); bank argued that the proposals were to redress personal
     grievance c/s. 137(5)(b); court disagreed and held proposals were valid
         o Ratio: Shareholders have a right to make proposals raising a range of corporate
             governance issues under s. 137(1) and they do not fall within the exclusions in s.
             137(5)
    Note that s. 137(5)(d) prevents shareholders from repeatedly submitting the same
     proposal for consideration

    Court's Power to Review Election and Determine Outcome (s. 145(1))
    A corporation may indemnify a director or officer in respect of civil or criminal
     proceedings (s. 124(1))
         o But, the corporation can only indemnify the director or officer if the individual
              acted honestly and in good faith with a view to the best interests of the
              corporation (s. 124(3))
    Blair v. Consolidated Enfield Corp. (SCC, 1995) – Blair was director and president; at
     meeting, of which Blair was chairman, management slate, including Blair, stood for re-
     election; however, at the meeting, Canadian Express nominated a candidate to replace
     Blair; Canadian Express wanted to use its proxies to support the vote; normally proxies
     can only be voted in respect of information contained in the proxy circular, which in this
     case did not include the new nominees because they were nominated at the meeting; Blair
     had to decide whether to allow Canadian Express to vote its proxies, and thus Blair was
     in a conflict of interest; Blair consulted independent legal counsel who recommended
     disallowing Canadian Express' proxies; Blair followed recommendation; Canadian
     Express sued; court had to determine issue under s. 145(1) and held that Blair had
     fulfilled his duty
         o Ratio: Pursuant to s. 145(1), a court can determine the outcome of any
              controversy with respect to election or appointment of a director or auditor of the
              corporation
         o Ratio: Where reliance on independent legal advice is reasonable and sought in
              good faith, the court will conclude that the director who acted in a manner
                                                                                             76


           consistent with the advice fulfilled his fiduciary duty and is entitled to be
           indemnified for any claims resulting therefrom


                     Access to Shareholders' Lists (s. 21(3))
   Shareholders, creditors and, if the company is public, any other person, can apply to
    acquire a list of shareholders which the corporation must provide within 10 days (s.
    21(3))
        o However, the person making the application must submit an affidavit stating that
           the list will not be used except for limited purposes set out in s. 21(9) (s. 21(7))
        o The corporation is required to maintain a list of shareholders (s. 138) and the list
           governs who can vote at the shareholders' meetings (s. 138(3.1))
        o Note that the list only discloses registered and not beneficial shareholders
        o This occurs in the context of takeover bids where the bidder is required to
           distribute a takeover bid circular to all shareholders
   Maxx Petroleum Ltd. v. American Eagle Petroleum (Alta. CA, 1993) – shareholder
    wanted to buy a controlling interest; asked for shareholders' list pursuant to s. 21(3) but
    applied to court for an order directing compliance by immediate production to expedite
    the process; court denied the request
        o Ratio: If a party requests a list of shareholders pursuant to s. 21(3), the
           corporation has 10 days to produce the list; the only circumstance where the court
           may order delayed or expedited production of the list is in the event of oppression
           under s. 241(2)
                                                                                               77



             CORPORATE SOCIAL RESPONSIBILITY
   The tension is between profit maximization and social responsibility
   Dodge v. Ford Motor Company (Mich. SC, 1919) – all profits had historically been paid
    out as dividends; Ford, as majority shareholder, announced that company would use all
    retained earnings to finance expansion with the goal of bringing down costs to
    consumers; the immediate effect would be to diminish value of the shares; court ruled
    that special dividend had to be paid but allowed some retention of earnings for expansion
    plans
        o Ratio: Directors cannot conduct the affairs of the corporation in a manner where
            the primary purpose is to benefit persons other than shareholders
        o Ratio: The primary purpose of a corporation is creating profits for shareholders;
            thus, the primary beneficiary of any profitability should be shareholders
   Note that the court in Dodge may have overlooked the long-term view of profitability in
    favour of immediate returns for shareholders
   Parke v. Daily News Ltd. (UK Ch.D., 1962) – Daily News owned two unprofitable
    newspapers that were being sold; the employees would not retain their jobs through the
    sale; board decided to use all extra funds to give employees compensation based on
    length of service; court held that the payments were invalid
        o Ratio: Conducting business on behalf of the company means for the benefit of
            shareholders; a company's money can only be spent for purposes reasonably
            incidental to the carrying on of the corporation's business
        o Ratio: An expenditure is only valid provided that it is reasonably incidental to the
            carrying on of business; the test is (1) is the transaction reasonably incidental to
            the carrying on of the company's business? (2) is it a bona fide transaction? (3) is
            it done for the benefit of and to promote the prosperity of the company?
                 Gratuitous payments are only acceptable if they meet this test
   Note that it is possible for a company to have a recognized mandate to engage in
    philanthropy and this may affect the suitability of a distribution; provided that the articles
    do not prohibit philanthropy, the issue is whether any such distribution is in the best
    interests of the corporation
   R. v. Bata Industries (Ont. CA, 1995) – Bata's factory yard contained drums with
    carcinogens; company waited 3 years before removing drums; directors were charged;
    issue was which directors were responsible
        o Ratio: When determining whether to hold a director liable for an offence
            committed by the corporation, the test has two parts:
                 Did the board of directors establish a system to prevent the commission of
                     this type of offence?
                 Did each director ensure that the corporate officers were instructed to
                     establish a system sufficient to ensure compliance with the relevant laws
                     and was there reasonable monitoring of implementation?
        o Ratio: Directors and senior officers are entitled to rely on the belief that company
            policy is being complied with, in the absence of evidence to the contrary
        o Ratio: In the context of environmental offences, directors and senior officers are
            entitled to a due diligence defence which is met if they have put an environmental
                                                                                           78


            code in place; they are entitled to assume that the code has been implemented as
            directed
   65302 British Columbia v. Canada (SCC, 1999) – a corporation is entitled to deduct
    fines in computing its taxable income; hence, the government effectively pays part of the
    fine
   Under s. 137, shareholders may submit any matter for consideration at a shareholders'
    meeting provided that the shareholder has held or has the support of shareholders who
    hold and have for 6 months held shares representing at least 1% of the outstanding shares
    with a value in excess of $2,000 (CBCA Regs. s. 46)
        o However, the corporation can refuse to permit the proposal if it does not relate to
            the business or affairs of the corporation (s. 137(5)(b.1))
                                                                                                                         79



                                 SHAREHOLDER REMEDIES
        The basic exam strategy will be to plead all three: oppression (s. 241), derivative action
         (s. 239), and liquidation (s. 214)
        The remedies available to a shareholder are:
              o Dissent and appraisal (s. 190)
              o Oppression remedy (s. 241)
              o Compliance order (s. 247)
              o Derivative action (s. 239)
              o Winding-up (s. 214)
        Section 242 sets out rules that apply to both derivative actions and oppression actions
              o Shareholder ratification of the impugned act is not sufficient to stay or dismiss a
                 derivative action or claim under oppression (s. 242(1))
              o The court must approve any settlement or pre-trial disposition of a derivative
                 action or oppression claim (s. 242(2))
              o Complainants are not required to put up security for costs in respect of derivative
                 actions or oppression claims (s. 242(3))
              o The court can order the corporation to pay interim legal costs of a complainant
                 under a derivative action or oppression action (s. 242(4))

                                         Derivative Actions (s. 239)
238. "complainant" means
(a) a registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security of a
corporation or any of its affiliates,
(b) a director or an officer or a former director or officer of a corporation or any of its affiliates,
(c) the Director, or
(d) any other person who, in the discretion of a court, is a proper person to make an application under this Part.

239. (1) Subject to subsection (2), a complainant may apply to a court for leave to bring an action in the name and
on behalf of a corporation or any of its subsidiaries, or intervene in an action to which any such body corporate is a
party, for the purpose of prosecuting, defending or discontinuing the action on behalf of the body corporate.
(2) No action may be brought and no intervention in an action may be made under subsection (1) unless the court is
satisfied that
          (a) the complainant has given notice to the directors of the corporation or its subsidiary of the complainant's
          intention to apply to the court under subsection (1) not less than fourteen days before bringing the
          application, or as otherwise ordered by the court, if the directors of the corporation or its subsidiary do not
          bring, diligently prosecute or defend or discontinue the action;
          (b) the complainant is acting in good faith; and
          (c) it appears to be in the interests of the corporation or its subsidiary that the action be brought, prosecuted,
          defended or discontinued.
        A derivative action may be commenced where all shareholders are affected equally by
         the impugned conduct or act
        Typical situations involve directors involved in self-dealing contracts, or actions to
         restrain directors from acting outside the scope of their authority
        Note that damages awarded under a derivative action are usually paid to the corporation
             o However, the court has discretion to make any order it considers appropriate
                 including making payment directly to shareholders (s. 240)
        A complainant (s. 238) may apply for leave to bring a derivative action provided that:
                                                                                              80


         o (1) notice was given to the directors at least 14 days before making the application
             and the directors have not done anything about it
         o (2) the complainant is acting in good faith
         o (3) it appears to be in the interests of the corporation that the action be brought
   Discovery Enterprises v. Ebco Industries Ltd. (BC CA, 1998) – because complainant
    brought both derivative action and oppression action, issue was whether bringing the
    derivative action creates a fiduciary obligation between the complainant and the
    corporation that might preclude the bringing of the oppression action
         o Ratio: The fact that a complainant is granted leave to bring a derivative action
             does not imply that the complainant has a fiduciary obligation to the corporation
         o Ratio: If a complainant brings a derivative action on behalf of a corporation and
             also an oppression action against the same corporation, the complainant may use
             the same counsel for both actions
   Schadegg v. Alaska Apollo Resources (BC, 1994) – minority shareholder sought to bring
    derivative action in respect of issuance of shares at deep discount; financing was required
    to keep company operational
         o Ratio: When determining whether leave should be granted in respect of a
             derivative action, the court may consider whether the act was approved by a
             majority of shareholders (s. 242(1)) and, although such approval is not decisive, it
             may be considered substantive evidence that the application for leave should be
             dismissed
         o Ratio: When determining whether to grant leave to bring a derivative action, the
             court does not need to determine whether the action will succeed
         o Ratio: Application for leave to bring a derivative action will be dismissed where
             the application is frivolous or vexatious, and shareholder and directors' approval
             of the impugned conduct may be considered evidence that the application should
             be dismissed
   Primex Investments v. Northwest Sports Limited (BC SC, 1995) – court considered the
    standard for determining when a petitioner is acting in good faith and whether the action
    is in the interests of the corporation; court held that because shareholder's interest was
    enhancement of share value, that interest was co-extensive with that of the corporation
         o Ratio: Enhancing share value is considered to be in the interests of the
             corporation and thus if a complainant applies for leave to bring a derivative action
             on the grounds that the impugned conduct diminished share value, then the court
             will likely grant leave to bring the action
         o Ratio: Where there is an arguable case to be heard by the court, leave to hear the
             derivative action will generally be granted
   Jones v. Ahmanson (Cal. SC, 1969) – minority shareholders not given opportunity to
    participate in IPO of holding company that held majority of shares; minority shareholder
    sued on behalf of herself, the corporation, and the other minority shareholders; court had
    to consider whether to allow the bringing of the derivative action
         o Ratio: Where the injury for which compensation is sought is personal and not an
             injury to the corporation, then a derivative action cannot be brought
                                                                                               81


                                  Corporate Actions
   Abbey Glen Property v. Stumborg (Alta. CA, 1978) – issue was self-dealing contract and
    the taking of a corporate opportunity; corporation sought to bring action against former
    directors
        o Ratio: A director is liable to account to the corporation when he, having failed to
            secure the contract for the corporation's benefit, subsequently concludes a
            separate agreement to his own benefit
        o Ratio: When a fiduciary relationship is established between a director and a
            corporation, the relationship subsists until such time as the relationship is
            conclusively terminated

      Liquidation and Dissolution (ss. 211, 212, 214, and BIA/CCAA)
   There are 4 ways that a corporation may end its existence:
   (1) Voluntary dissolution by the board of directors with the approval of the shareholders
    (s. 211)
         o This can be proposed by the directors or by a shareholder and requires
            shareholder approval by way of special resolution (s. 211(3))
   (2) Administrative dissolution by the Director for failure to file required documents (s.
    212)
   (3) Dissolution by court order (s. 214)
         o The court may order such dissolution if the court is satisfied that there has been
            conduct that is oppressive or unfairly prejudicial to the interests of any
            securityholder, creditor, director or officer (s. 214(1)(a)) or
         o If a USA entitles a complaining shareholder to demand dissolution upon the
            occurrence of a specific event and that event has occurred (s. 214(1)(b)(i)) or
         o If it is just and equitable that the corporation be liquidated and dissolved (s.
            214(1)(b)(ii))
   (4) Insolvency under the BIA or CCAA
   Liquidation is typically only practical in closely-held corporations
   Ebrahimi v. Westbourne Galleries (UK HL, 1972) – business carried on as partners;
    profits distributed as directors' compensation; son admitted to board and as shareholder;
    father and son vote other director off board, thus he has no access to profits
         o Ratio: Shareholder expectations, if reasonable, may be a source of rights when
            considering what is just and equitable pursuant to s. 214(1)(b)(ii)
         o Ratio: For equitable considerations to be relevant when considering the court-
            ordered dissolution of a company, the following factors are relevant:
                  Personal relationship of mutual confidence
                  Agreement as to shareholders participating in the business
                  Restrictions on the transfer of shares
         o Ratio: It may be improper to remove a director from the board where he can
            establish that there was a special underlying obligation of his fellow directors, in
            good faith or confidence, that so long as the business continued he would be
            entitled to management participation; the remedy may be dissolution (s.
            214(1)(a))
                                                                              82


o Ratio: A court may order dissolution where the corporation is effectively a
  partnership and where the partners have come to disagree fundamentally on how
  the business should be operated (s. 214(1)(b)(ii))

                  Oppression Remedy (s. 241)

								
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