Business_Associations_Dhir_F08

					Business Associations
   Prof. Aaron Dhir, Fall 2008




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TABLE OF CONTENTS
                                                                                                                                    Bridgewater Hardware Ltd. v. Scottish Union and
PARTNERSHIP MODELS ...........................................................4                                                     National Insurance Co. (1953) ................................ 24
      SOLE-PROPRIETORSHIPS ..................................................... 4                                                  Kosmopoulos v. Constitution Insurance Co. of
      PARTNERSHIPS ................................................................... 5                                            Canada (1983) -- O.C.A. .......................................... 24
                                                                                                                                    Kosmopoulos v. Constitution Insurance Co. of
             Formation & registration: is there partnership? ................. 6
                                                                                                                                    Canada (1983) – S.C.C. ............................................ 24
             The Relationship of Partners to Each Other ....................... 6
                                                                                                                                    Lee v. Lee's Air Farming Ltd. (1961) [NZ] ................ 24
             The relationship of partners to third parties ...................... 7
                    A.E. LePage v. Kamex Developments ........................ 8                                   PIERCING THE CORPORATE VEIL ...................................... 25
                    Volzke Construction v. Westlock Foods Ltd ............ 10                                                       Clarkson Co. Ltd. v. Zhelka (1967) .......................... 25
                    Pooley v. Driver ....................................................... 10                                     Air Canada v. M&L Travel Ltd. (1993) ..................... 25
             Allen, “Our Schizophrenic Conception of the Business                                                                   Transamerica Life Insurance Co. of Canada v. Canada
             Corporation” ..................................................................... 10                                  Life Assurance Co. (1996) ....................................... 26
             Dissolution of partnerships ............................................... 11                                         Big Bend Hotel Ltd. v. Security Mutual Casualty Co.
      LIMITED PARTNERSHIPS ................................................... 12                                                   (1980) ..................................................................... 26
                                                                                                                                    Wildman v. Wildman (2006) ................................... 26
             Legal nature of a limited partnership ............................... 12
                                                                                                                                    Walkovszky v. Carlton............................................. 27
                   Kucor Construction & Developments & Associates v.
                   Canada Life Assurance Co. (1998) ........................... 12                                 CORPORATION IMPLIEDLY ACTING AS ‘AGENT’ ............... 27
             Advantages/disadvantages ............................................... 12                                            Smith, Stone and Knight Ltd. v. Birmingham Corp.
                   Haughton Graphic Ltd. v. Zivot (1986) .................... 12                                                    (1939) ..................................................................... 28
                   Nordile Holdings Ltd. v. Breckenridge (1992).......... 13                                                        Sun Sudan Oil Co. v. Methanex Corp. (1992) .......... 28
      LIMITED LIABILITY PARTNERSHIPS (LLP) ........................... 13                                   LIABILITY ...............................................................................29
THE CORPORATE CONSTITUTION........................................... 14                                           CORPORATE CRIMINAL LIABILITY ..................................... 29
      FUNCTION OF THE CORPORATE CONSTITUTION .............. 14                                                            The identification theory.................................................. 29
                                                                                                                                The "Rhone" v. The "Peter A.B. Widener" (1993) ... 29
      CORPORATE CONSTITUENCIES ......................................... 14
                                                                                                                          Corporate defence ........................................................... 29
             External Constituencies: public, government, employees,
                                                                                                                                Canadian Dredge & Dock Co. v. The Queen (1985) 29
             creditors ........................................................................... 14
                                                                                                                       STATUTORY REFORM: BILL C-64 ........................................... 30
             Internal Groups: shareholders, directors, officers ............ 15
                                                                                                                       INSIDER TRADING ................................................................. 30
      TYPES OF CORPORATE CONSTITUTION ............................ 16
                                                                                                                   ULTRA VIRES ..................................................................... 31
      INCORPORATION .............................................................. 17
                                                                                                                   CORPORATE TORTIOUS LIABILITY..................................... 31
             Registration ...................................................................... 17
                                                                                                                           Tort of ‘inducing breach of contract’ ............................... 32
             Mechanics of Incorporation.............................................. 17
                                                                                                                                 Pocklington ............................................................. 32
             Federal vs. provincial incorporation ................................. 18
                                                                                                                                 Garbutt Business College Ltd. v. Henderson
             Public vs. private companies ............................................ 18
                                                                                                                                 Secretarial School Ltd. (1939) ................................. 32
      THE CANADIAN CONSTITUTION ....................................... 19                                                       Einhorn v. Westmount Investments Ltd. (1969)..... 32
             Federal Power................................................................... 19                                 McFadden v. 481782 Ontario Ltd. (1984) ............... 32
                  Citizens Insurance Co. of Canada v. Parsons (1881) 19
                                                                                                                   CORPORATE CONTRACTUAL LIABILITY ............................. 33
             Regulating Corporate Activity ........................................... 19
                                                                                                                                    Panorama Developments v. Fidelis Furnishings ..... 33
                  John Deere Plow Co. v. Wharton (1914) ................. 20
                                                                                                                                    Freeman & Lockyer v. Buckhurst Park Properties .. 35
                  Bonanza Creek Gold Mining Co. v. The King (1916) 20
                                                                                                                                    Canadian Laboratory Supplies Ltd. v. Engelhard
                  Canadian Indemnity Co. v. British Columbia (Att.
                                                                                                                                    Industries ................................................................ 35
                  Gen.) (1976) ............................................................ 20
                  Multiple Access Ltd. v. McCutcheon (1982) ............ 20
                                                                                                                   STATUTORY REFORM ....................................................... 35
                                                                                                                           Constructive notice & the indoor management rule ....... 35
                  Reference re ss. 91 and 92 of the Constitution Act,
                                                                                                                           Pre-incorporation transactions ........................................ 36
                  1867 (1991) ............................................................. 21
                                                                                                                                 Kelner v. Baxter (1866) ........................................... 37
             Federal Power (ctd) .......................................................... 21
                                                                                                                                 Black v. Smallwood (1966)...................................... 37
                  Multiple Access Ltd. v. McCutcheon (1982) (ctd).... 21
                                                                                                                                 Westcom Radio Group v. MacIsaac ........................ 38
             The Canadian Charter of Rights and Freedoms ................ 22
                                                                                                                                 Szecket v. Huang (1998) ......................................... 38
                  R. v. Agat Laboratories Ltd. (1998) .......................... 22
                                                                                                                                 1394918 Ontario Ltd. v. 1310210 Ontario Inc. (2002)
CORPORATE PERSONALITY .................................................... 23                                                    ................................................................................ 38

      THE CORPORATION AS LEGAL PERSON ............................ 23                                       DIRECTORS & OFFICERS .........................................................39
                   Salomon v. Salomon (1897) .................................... 23
                                                                                                                   CORPORATE CAPITAL STRUCTURE ................................... 39
             Practical Consequences .................................................... 23
                                                                                                                           Debt and shares ............................................................... 39
                   Macaura v. Northern Assurance Co. (1925) ............ 23
                                                                                                                           Share capital..................................................................... 39
                   General Accident Fire Life Assurance Corp. v.
                                                                                                                           Classes of shares .............................................................. 40
                   Midland Bank Ltd. (1940) ........................................ 24
                                                                                                                                 R. v. McClurg (1990) ............................................... 40
                                                                                                        2
             Voting rights ..................................................................... 40                                     Dodge v. Ford (1919) - Michigan Supreme Ct......... 55
             Series within a class .......................................................... 40                                        State Tax Commission v. Aldrich............................. 55
      MANAGEMENT: DIRECTORS & OFFICERS ......................... 41                                                                     Peoples Department Stores Inc. (Trustee of) v. Wise
             Directors: myth and reality ............................................... 41                                             (2004)—again ......................................................... 55
             Meetings ........................................................................... 41
                                                                                                                  SHAREHOLDERS .....................................................................57
             Public corporations: elections & appointments ............... 42
                                                                                                                         SHAREHOLDER POWER (MAJORITY RULE) ....................... 57
DUTIES OF MANAGEMENT .................................................... 43
                                                                                                                            SHAREHOLDER POWER: ANNUAL & SPECIAL MEETINGS ...... 58
      DUTIES OF CARE, DILIGENCE & SKILL................................ 43                                                    Ordinary business: annual meetings ................................ 58
                  Re City Equitable Fire Insurance Co. ....................... 43                                             Extraordinary business: special meetings ........................ 59
                  Soper ....................................................................... 43                       WAYS TO EXERCISE SHAREHOLDER POWER ..................... 60
             The business judgment rule .............................................. 44                                   SHAREHOLDERS’ REMEDIES (I): PERSONAL ACTIONS............ 64
                  Peoples Dept. Stores v. Wise .................................. 44                                        SHAREHOLDERS’ REMEDIES (II): DERIVATIVE ACTIONS ........ 64
                  Hercules Managements Ltd. v. Ernst & Young (1997)                                                                  Farnham v. Fingold (1973) ...................................... 64
                   ................................................................................ 44                               Goldex Mines Ltd. v. Revill (1974) .......................... 65
      FIDUCIARY DUTY............................................................... 45                                               Bellman v. Western Approaches Ltd. (1981) .......... 66
                       Peoples Dept. Stores Inc. v. Wise (2004) [revisited]47                                               SHAREHOLDERS’ REMEDIES (III): OPPRESSION REMEDY ....... 66
         FIDUCIARY DUTY: CREDITORS’ “OPPRESSION REMEDY” ....... 47                                                                   Brant Investments Ltd. v. KeepRite Inc. (1991) ...... 66
         FIDUCIARY DUTY: TAKEOVER BIDS ........................................ 48                                                   Arthur v. Signum Communications Ltd. (1991) ...... 67
              Judicial review of exercise of managerial powers............. 48                                                       Krynen v. Bugg (2003) ............................................ 67
                       Hogg v. Cramphorn (1967) ...................................... 48                                            Westfair Foods Ltd. v. Watt (1991)......................... 67
                       Teck Corp. v. Millar (1972) ...................................... 48                                         Deluce Holdings Inc. v. Air Canada (1992) .............. 67
              Self-dealing transactions/conflict of interest.................... 49                                                  Miller v. McNally (1991) ......................................... 68
         FIDUCIARY DUTY: “SEIZING THE CORPORATE OPPORTUNITY”                                                                         Joncas v. Spruce Falls Power & Paper Co. (2000) ... 69
         ............................................................................................... 51                          First Edmonton Place Ltd. v. 315888 Alberta Ltd.
                       Bray v. Ford (1896) .................................................. 51                                     (1988) ..................................................................... 69
                       Cook v. Deeks (1916)............................................... 52                               SHAREHOLDERS’ REMEDIES (IV): OTHER REMEDIES ............. 70
                       Regal (Hastings) Ltd. v. Gulliver (1942) ................... 52                                        (1) Compliance and restraining orders ............................. 70
                       Boardman v. Phipps (1967) ..................................... 52                                     (2) Appraisal remedy ........................................................ 70
                       Peso Silver Mines Ltd. v. Cropper (1966) ................ 53                                           (3) Investigations, audits and the "Big D" Director .......... 70
                       Canadian Aero Services Ltd. v. O'Malley (1974) ...... 53                                               (4) Capital punishment ..................................................... 70
      FIDUCIARY DUTY: CORPORATE PURPOSE/NON-
      SHAREHOLDER STAKEHOLDERS ........................................ 54




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PARTNERSHIP MODELS
SOLE-PROPRIETORSHIPS
        the so-called “least evolved” of all business associations
        oldest and simplest business vehicle; tend to be small operations where an individual sets up a commercial enterprise

Structure
 straightforward; the sole proprietor owns the assets of the business and is the ultimate decision maker

Formation and registration requirements
 Comes into existence whenever an individual starts doing business (e.g. the local babysitter)
 There may be industry specific licenses (driver’s licence, etc.)
 No specific registration requirement; HVR, there may be a requirement to register under the Business Names Act:
        o s. 2(2): if business is not carried on in one’s own name, the business name must be formally registered (useful to determine the
             individual behind the business – for courts, taxes, creditors, etc.)
        o BNA provides a definition of business under s. 1 which provides the scope of the Act
        o s. 7(1): one is not capable of maintaining a proceeding in Ontario in court unless one obtains leave of the court

Not a separate legal entity
 Assets are owned directly by sole proprietor
 Taxes payable from the business are owned by the sole proprietor personally (i.e. taxed as income)
 When contracts are entered into, the sole proprietor is the contracting party
 Sole proprietorship not vicariously liable for torts committed in carrying on business; proprietor is liable
 Anyone obtaining a judgment against the SP is able to satisfy the judgment not just from the assets of the business, but from the personal assets
    of the sole proprietor
 Sole proprietor cannot employ himself as an employee (but can hire employees)
 Re: BNA, if the business name is not the proprietor’s name, one can sue or be sued using the name of the SP

Dissolution
 Straightforward: proprietor merely stops doing business
 While responsible for the business’ debts, afterwards the proprietor keeps whatever residual amount is left (if any)

Advantages
 Ease of creation and dissolution
 No registration or disclosure requirements beyond taxation
 Proprietor retains all revenues
 Tax advantages – since taxes are computed in the personal income of the sole proprietor, business losses can be deducted against income of other
    businesses

Disadvantages
 Full unlimited liability; all of one’s personal assets can be taken in order to satisfy liabilities arising from the SP
 Difficulties getting credit from banks, etc.
 No perpetual existence accompanying this form of business organization (i.e. the business dies with the proprietor)




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PARTNERSHIPS
    Legal institution in which
       (a) two or more persons
       (b) carry on business in common
                    [“in common” difficult to define; contemplates whether parties are acting in concert based on some agreement, whether express,
                        implied or presumed via conduct]
       (c) with a view to profit
                    [“with a view to a profit” does not mean that a profit must be made, but that reasonable attempts are made to have the
                        partnership business be profitable]


    Business      Re: Ontario Partnerships Act (PA), includes “every trade, occupation and profession”


                                                                           th
       Partnership principle codified common commercial practice in 19 -century England. All provinces have such legislation.
      Key principle governing a partnership relationship: agency

Agency
 partnership law is closely related to agency law in many respects; partners are treated as agents of one and other – the acts of a partner can bind
    all of the other partners
                             s. 6 of the PA: the Acts of one partner can bind the others (e.g. contracts with third parties)
                   As agents of each other, partners owe each other a fiduciary duty
                             As a result, a key element of partnerships is trust

Organization of PA
 ss. 2-5: nature of partnership
 ss. 6-19: relationships with external third parties
 ss. 20-31: relationship of partners to each other
 ss. 32-44: dissolution
 ss. 45-46: miscellaneous

      note that the legislation is not the codification of all things partnership; rather, the PA is a starting point by providing a default set of rules (many
       of which can be deviated from by partnership agreements )

Partnership agreements
 Can take virtually any form as long as partners are in agreement (can be written, oral, inferred by conduct, etc).
 Five broad issues dealt with in partnership agreements:
         (1) How partners will go about managing a business
         (2) How partners will go about resolving disputes
         (3) The process and procedure for allowing new partners to join
         (4) How the income will be divided
         (5) How a share of the partnership property is calculated if a partner decides to leave
 Other specific particulars commonly included in partnership agreements are:
         o Business’ name
         o Nature of the business (to address provisions in the Act requiring the determination of “usual way of business” as in s. 6 or “ordinary
              course of business”, per s. 11)
         o Partners’ names and addresses
         o Business’ location
         o Duration of partnership (fixed term, dissolution at will, procedures for termination, etc.)
         o Financial structure of the partnership (e.g. partner’s investments and capital contributions; asset ownership)
         o Salaries must be specified in the partnership agreement; otherwise the default in s.24(6) is no remuneration
         o Share of profits; all partners share profits equally if not addressed
         o Share of losses; re: s. 24(1), if not separated addressed, all partners share in losses equally
         o Managerial and voting powers; re: s. 24(5), if not defined, each partner may take part in management but need not do so
         o Provisions for retirement from the partnership
         o Provisions for settling disputes (mediation, arbitration, etc.)
         o Procedures for admitting new partners; re: s.24(7), unless otherwise defined, all partners must consent to bring in new partners
         o Procedures for purchasing the interest of retired or deceased partners (including the valuation of those interests)
         o The partners duties (i.e. who is the managing partner, who participates in the day-to-day of the business)

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          o    Fiscal periods for accounting and tax purposes


Formation & registration: is there partnership?
Formation
 Requires review of def’n of partnership, re: PA s. 2
         o A partnership exists where two or more persons carrying on business, in common, with a view to a profit
   Def’n of business re: s. 1(1)
         o Includes all trades, occupations and professions
   in common
         o Partners need to be carrying on business together in some manner (HVR, all partners need not be actively engaged)
         o Implication: some agreement required (whether oral, written or implied)
 with a view to a profit
         o i.e. not for charitable purposes or a not-for-profit organization
         o Doesn’t mean that one necessarily makes a profit, only that one is attempting to do so

Registration
BNA s. 2(3): one must register the partnerships’ business name [statute uses ‘firm’, ‘firm name’ – simply means ‘partnership’, ‘business name’+
 S. 2(4): requirement in s. 2(3) does not exist if firm name includes the individual partners’ names
 Legal Status and Liability:
                  a partnership is not recognized in law as a separate entity; it is not an entity distinct from its partners
                  each partner is therefore personally liable for any debts and any other liabilities of the partnerships to the full extent of one’s
         personal assets
                  a partner cannot be an employee of the business, and except for particular circumstances, cannot be a creditor

 Legal Actions
                   with respect to legal actions, under Rule 8.01(1), a partnership can sue and be sued in the partnership name

 Advantages and disadvantages
 More capital than a sole proprietorship (from other partners), and the possibility of perpetual business (through the addition of new partners)
 Disadvantages: administration problems (relationships btw partners, potential disputes)
Formation (ctd): when does a partnership exist?
 agreement of a partner to enter into, operate a partnership can be imputed (i.e. objectively determined by court from evidence of relationship)
 partnership may be found though the ‘partners’ never considered or referred to themselves that way, and in fact deny existence of a partnership
 PA s. 3: three [convoluted] rules to determine whether or not there is partnership
        1. Joint-tenancy or common ownership of property does not in of itself create a partnership
        2. The sharing of gross returns (business revenues w/out expenses deducted) does not in or itself create a partnership
        3. The receipt by a person of a share of profits of a business is prima facie proof of partnership, HVR, this in of itself does not necessarily
              make the person receiving those profits a partner;
                    in particular, the receipt of debts does not in of itself make the person receiving those debts a partner
                    a contract of employment or agency that calls for payment of profits does not make the employee/agent a partner
                    receipt of deceased partner’s profits by surviving spouse/child does not in of itself make recipient a partner
                    loan arrangement (where a lender receives a variable interest rate depending on profits, or the lender receives a share of
                       business profits) does not necessarily make the lender a partner if the contract is in writing and signed by or on behalf of the
                       parties to it. HVR,
                             if there is no written executed agreement, the lender is prima facie a partner


The Relationship of Partners to Each Other
Partners’ relationships characterized by
 its personal nature,
          o Legislation doesn't allow third parties to gain full rights of partners on assignment of one partner's rights to a third party
          o PA s. 31: assignment of a partner's share doesn't entitle the assignee to take over mgmt/admin; merely entitles assignee to the assigning
                partner's profits
          o PA s. 33: partnership ends if a partner dies/becomes insolvent
 its fiduciary character,
          o Nature of partnership requires implicit trust, since absent agreement to contrary, any partner may bind the partnership w/out consent
                of the other(s)
          o W.A. Gregory, The Law of Agency and Partnership, p. 298: fiduciary character of partnerships is "[one] of the most significant aspects of
                the partnership relation"
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              o   Fiduciary principles imposed on all partners re: their conduct w/in partnership
                        Subordinate personal interests to those of the partners
                        Subordinate interests of third parties to those of the parties
                                   not all aspects of relationship characterized as fiduciary are themselves fiduciary; a partner is under fiduciary obligation
  Fiduciary "particularity"
                                   re: a defined area of conduct, and exempt from fiduciary obligation outside that area

        Reciprocal agency,
              o Each partner is agent of all the others (i.e. he agrees to engage in activities on their behalf, and vice-versa)
              o Principal limits agent's authority; may be limited or unlimited
              o Agent liable to discharge his authority in good faith, according to established terms
              o Principal liable to be bound to a contract by the agent; liable for torts of agent committed w/in scope of the agency
              o Partnership is a form of reciprocal agency: each partner binds and is bound by actions of other partners
              o Getting out of a partnership while extracting the value of one's interest may be a complicated proposition
        The principle of presumptive equality
              o Each partner is entitled (but not required) to participate in the mgmt of the firm; PA s. 24, #5
              o All partners entitled to have access to partnership books
        The ability of partners to consensually alter certain elements of partnership affairs.
              o Partners can contract out of default legislative rules: PA s. 20
              o Major changes to partnership agreement require unanimity of partners; 'ordinary matters' connected w/ partnership may be done by
                    majority: PA s. 24, #8


Lecture: Relationship of partners to one another

Principles:
   1.                  Equality
                                 s. 24(1)
                                 s. 24(5)
                                 s. 24(9)

    2.                 Consensualism (PA s. 20)
                                s. 24(8): Subject to partnership agreement, you can't introduce a new partner or introduce a fundamental change to the
                  functioning of the business w/out consent of all partners
                                s. 25: majority of partners doesn't have the ability to expel a partner, unless this ability is expressly provided for in
                  agreement
    3.                 Fiduciary Duty
                                During the partnership's existence, all partners owe to one another
                                           Duty of loyalty
                                           Honesty
                                           Good faith
                                s. 28: partners obligated to render true accounts


The relationship of partners to third parties
        Each partner liable for all partnership contracts, debts and torts during ordinary course of partnership business.
        Non-partners may also bind the partnership: PA s. 7

1.       No pre-partnership liability
              o PA s. 18(1): Liability begins w/ admission to the partnership. One isn’t liable for partnership debts before one becomes partner oneself.
              o Exception: following a person's admission to partnership, assets are seized to satisfy debts incurred by the partnership before that
                     person became a partner (b/c partnership assets belong to the firm rather than to the individual partners).
2.       Liability incurred by a partnership while one is a partner
              o PA s. 6: actions of one partner can bind the others [recall principle of 'agency'].
              o PA ss. 10(1), 18(2): partners who retire, leave are still liable for debts, obligations incurred while they were in the partnership.
              o To bind the other partners, a partner's agreement must be "[carried] on in the usual way of business of the kind carried on by the firm"
              o A third party might rely on the apparent authority of Virginia to bind her fellow partners b/c she was carrying on in the firm's "usual way"
              o PA s. 13: partners will be jointly and severally liable for
                          Losses or injuries caused to third parties by wrongful acts or omissions of a partner acting in the ordinary course of business of
                              the firm or with the authority of the co-partners (PA s. 11), and
                          The misapplication of money or property of a third party received for or in custody of the firm (PA s. 12)



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                          Wrongdoing partners jointly and severally liable: plaintiff can recover the entirety of its damages from any one of the
                           "wrongdoing partners"---and then this wrongdoing partner can sue the other wrongdoing partners for a contribution to their
                           share of the liability
          o PA s. 6: defences to partnership liability:
                      (i) A partner acting on behalf of the firm had no authority to engage in the impugned actions and the third party dealing w/ that
                           partner either knew the partner in question had no such authority or the third party did not know the partner in question was
                           a partner, or
                      (ii) The third party did not believe the partner was a partner
          o PA s. 9: Partners can limit a partner's ability to bind them, but third parties have to know about the limits in order for the partners to
                 avoid liability.
3.   Liability incurred by a partnership while one holds oneself out as a partner or allows oneself to be held out as a partner ("holding out" liability)
          o PA s. 15(1): “Holding out” liability akin to estoppel—where a person represents or knowingly allows the representation that he/she is a
                 partner in a firm, that person can’t later deny being partner of that firm, in the face of potential liability.
          o Knowledge of "general" representation sufficient to establish liability:
                       either an individual represented himself/herself as partner, or
                       allowed such a representation to be made.
                       To establish "holding out" liability, third party who has incurred loss must also have relied on that false representation and
                           advanced credit to the firm.
4.   Liability incurred by a partnership after a partner withdraws from partnership
          o PA s. 36: absent adequate notice to third parties, a partner who leaves a partnership retains liability.
          o Clarke v. Burton (1958):
                      o Charles Burton worked for his father William Burton's insulation business, Burton's Insulation & Roofing.
                      o The two had a falling out and Charles left to work on his own, but continued working under the firm name Burton's Insulation.
                      o Burton informed the plaintiff he was no longer w/ his father.
                      o Plaintiff had sufficient notice: never considered the defendant a partner; had full knowledge that the defendant had severed
                           connection w/ his father and was in business for himself. Couldn't recover against defendant.
                      o A creditor who continues to deal w/ the partnership w/ full notice of the dissolution cannot claim against a retired partner
                           merely b/c a certificate of dissolution has not been registered.
5.   Posthumous liability
          o PA s. 15(2): Partners' estates are not liable for partnership liabilities incurred after death, whether or not the firm name, as it existed
                 prior to partner's death, remains in use afterward, or whether the deceased partner's name remains part of the partnership name.
          o A deceased partner’s estate is not liable for any debts incurred by the partnership after the partner’s death/retirement/insolvency.

Example:
o Stanford finishes articling at a partnership firm, returns as an associate.
o The firm does not have a partnership agreement
o As incentive, employment contract stipulates a year-end bonus set at a certain percentage of the firm’s yearly profits.
o Stanford is significantly involved in the management decisions of the firm.
o During the year, Stanford works on a major transaction where the firm is negligent in its representation of the client, who suffers a $100M loss.
    The client claims that Stanford is liable for the loss as a co-partner. Issue goes to litigation.
o Is it possible that the court will construe Stanford as a partner and thus that he may attract liability?

                                                      Written agreement, intention to hold property in common insufficient for court to find
A.E. LePage v. Kamex Developments                      partnership. Requires intention to become partners in a joint venture.

    1970, appellants formed a syndicate, incorporated Kamex Developments Ltd. to hold a property in trust for them, pursuant to written agreement
    4 provisions of Agreement:
          (1) Profits from the property were to be paid to the parties in proportion to their interests in the company
          (2) If there were deficiencies, the parties would share them proportionally
          (3) There was a right of first refusal for all of the parties
          (4) Any decision on the sale of the building was to be made via majority vote
    Eventually, the property was listed for sale under an open listing (simultaneously marketed by several real estate agents)
    LePage Realty approached one of the co-owners, March. In violation of the Agreement, he entered an exclusive listing agreement with them.
    Sale went through another agent; LePage commenced a suit against the appellants for the lost commission.
    LePage: March was a representative of a partnership (and thus had the authority to bind the other partners)
    Court:
          o Test re: Thrush v. Read (1950)—whether
                     ... on a true construction of the agreement, and having regard to all the circumstances, it should be held that the parties to
                         that agreement intended to become, and thereby became, partners in a joint venture and that therefore they were not
                         merely co-owners of the common property.
          o Kamex Group was not a partnership; the only intention that could be established was to hold property in common
          o The parties intended to keep their respective interests in the property separate from each other for tax purposes, which would have
               been thwarted by partnership

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o   The right of first refusal is not inconsistent with the right to deal with one’s respective interest in property
o   No partnership; THF March couldn’t bind the other partners; THF no contract with LePage




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    Volzke Construction v. Westlock Foods Ltd             Intention not conclusive in assessing partnership; examine surrounding circumstances.

     Bonel Properties planned to build expansion on mall. Approached Westlock Foods (owners of local IGA), offered space in the yet-to-be-built mall.
     Principal shareholder of Westlock didn’t just want to be a tenant, wanted to be an owner. Made an offer to Bonel for a 25% interest in the mall.
     Bonel accepted and was paid $32,000 for the ownership interest.
     Volzke: general contractor who went to shareholder; said it would have to go out to tender, but he would introduce them to Bonel
     Volzke sued Westlock, claiming that it was in partnership with Bonel (and THF Bonel’s actions were binding on Westlock):
            o Bonel and Westlock had opened a joint bank account—HVR, only officers of Bonel had signing authority;
            o All accounts were submitted to Bonel and all of the appellant’s accounts were paid until the shareholder died;
            o After the shareholder died, his wife carried on the business activities—HVR, she had no signing authority on the bank account;
            o Bonel paid for and undertook all repairs on property;
            o Bonel was responsible for 80% of a mortgage jointly taken out.
     Westlock sued Bonel in a different action; court found there was either a partnership or a joint-venture between the parties
     In this case, trial judge found that Bonel and Westlock were co-owners, not partners, and therefore Westlock could not be liable
            o No intention to enter into a partnership; Westlock could not be a partner because it had no control over the business
     CA: nothing in the definition of partnership that requires each partner to have control over the business
            o Evidence of the parties’ actions showed that Westlock and Bonel had agreed to share costs and profits on an 80/20 basis
            o Receiving a share of the profits is prima facie proof of partnership
            o In addition, the two parties referred to each other as partners, had joint financial accounts, etc.
            o Intentions of the parties are an important but non-conclusive indication of whether or not a partnership exists; therefore one must also
                 examine the circumstances surrounding the operation of the business, though note that control is not determinative
            o [Ultimately the courts seem to make a determination of partnership on the basis of what approach is fair to the parties]

     PA s. 3, #2: sharing of gross returns does not create in of itself a partnership at law
            o The section leaves open the possibility of a partnership if something more can be shown that points towards a finding of partnership
     S. 3, #3: receipt of a share of profits is prima facie proof of partnership, but that of itself does not make one a partner in the business
            o If your share in the business depends on how much money the business makes, that is not enough to make one a partner

Pooley v. Driver         Partnership? Or debtor-creditor relationship? Benefits of partnership should attract its responsibilities

     Loan agreement describers the lenders (Drivers) as partners; had the same term as the loan and were to share in the profits
     Business was liquidated; Pooley, whom the business-owners had owned money, sought to recover his debt from the Drivers, claiming that the
      Drivers were partners in the enterprise
     Was this just a money-lending situation, or was this a partnership?
     Driver: they were lenders based on a contract in writing; THF not partners
     Problem: loan agreement was not executed
     Court:
           o The legislation did not apply; the case was open to the contextual factors; the Drivers were in fact partners and therefore liable
           o The Drivers participated in management of the business, had an interest in the capital; other factors consistent w/ partnership present
           o Underlying theme: if you are getting the benefits of partnership, you should correspondingly attract its inherent responsibilities

PA s. 4: insolvency
 Bankruptcy is a process whereby assets are divided between creditors; insolvency is merely where one cannot meet one’s outstanding liabilities
 If you have loan and that individual becomes insolvent or makes an arrangement to pay their creditor less than the value (or dies insolvent), in
     these situations the lender cannot recover their share of the loan until the claims of the other creditors are satisfied
                             Lenders to partnerships for a share of the profits essentially rank behind other partnership creditors, subject to PPSA
                 legislation


Allen, “Our Schizophrenic Conception of the Business Corporation”
     pp. 264: two seemingly inconsistent models that have dominated corporate legal thinking, which attempt to address a set of related foundational
      questions (namely, what is a corporation, what purpose does it serve, and for whose benefit should those in control of a corporation act?)
           o Contract or Property Model (Shareholder Primacy Model)
                      The corporation is the private property of its shareholders;
                      Its purpose, and that of the directors (as agents of the owners), is to maximize their wealth.
           o Social Entity Model (Communitarian/Pluralist/Concession Model)
                      Corporation is a social institution which comes into being and operates as a legal entity only with governmental approval
                      The juridical personality is justified by the state’s interest in promoting the general welfare of a society
                      Corporate purpose should include a consideration of the interests of ‘stakeholders’ beyond shareholders
                                                                            10
                                i.e. employees, surrounding community, etc.
      Pg. 265: “…to law and economics scholars,” the latter model is “barely coherent and dangerously wrong.”
      “The Dark Side of Chocolate”: article on world’s chocolate producers; accuses them of child labour practices, etc.

      Our definition of business: the provision of goods and/or services
      Vehicles of business enterprise in our focus: sole proprietorships, partnerships, limited partnerships, limited liability partnerships and corporations
      Other types of business enterprise: joint ventures, income/business trusts, cooperatives and not-for-profits, franchises, etc.
      Two basic purposes to business organizations law:
           (1) To govern the relationships that exist between the owners and the managers
           (2) To establish the responsibilities of the owners and the managers to other stakeholder groups

Welling: How Partners Conduct Business

Mainly (1) partnership agreements. But where a partnership agreement is absent or is silent on a matter, (2) provincial partnerships legislation.


Dissolution of partnerships
    Dissolution (PA s. 32 (a) - (c))
    o A fixed-term partnership automatically dissolves upon expiry of the term.
    o A partnership of an undefined term dissolves upon notice by one of the partners of intention to dissolve the firm.
    o A partnership formed for a single adventure or undertaking terminates upon conclusion of that adventure/undertaking.
    o Death or insolvency of a partner will conclude the partnership absent agreement to contrary.
    o Partnership will be dissolved where it becomes illegal for the partnership to continue at all or to be continued by its existing members.
    o PA s. 35: Partnership may be dissolved by the court upon application by a partner in a variety of circumstances, e.g.
              o partner found mentally incompetent/of permanently unsound mind,
              o partner becomes permanently incapable of performing his/her part of the contract,
              o partner guilty of conduct calculated to prejudicially affect the carrying on of the partnership,
              o Partner wilfully or persistently commits a breach of the partnership agreement or otherwise engages in conduct in matters relating to
                  the business such that it is not reasonably practicable for the other partner(s) to carry on the partnership,
              o Partnership can only be carried on at a loss,
              o Circumstances have arisen that, in the opinion of the court, render it just and equitable to dissolve the partnership

    Distribution of Partnership Assets
    PA s. 44: In settling accounts btw the partners after dissolution of partnership, the following rules shall, subject to any agreement, be observed:
              o Losses, including losses and deficiencies of capital, are to be paid first out of profits, next out of capital, and lastly, if necessary, by the
                   partners individually in the proportion in which they were entitled to share profits, but a partner is not required to pay any loss arising
                   from a liability for which the partner is not liable under subsection 10 (2).
              o The assets of the firm, including the sums, if any, contributed by the partners to make up losses or deficiencies of capital, are to be
                   applied in the following manner and order,
                             in paying the debts and liabilities of the firm to persons who are not partners therein;
                             In paying to each partner rateably what is due from the firm to him or her for advances as distinguished from capital;
                             in paying to each partner rateably what is due from the firm to him or her in respect of capital.
              o After making the payments required by paragraph 2, the ultimate residue, if any, is to be divided among the partners in the proportion
                   in which profits are divisible.

    Partnership liability
        Phil and Dhir run a law firm as a partnership.
        Leanne has her own law practice as a sole practitioner.
        Leanne shares office space w/ the other two. She sometimes works w/ them on a consultancy basis but she is not a partner.
        Kevin retains Phil and Dhir on a significant corporate transaction and pays lots of money. They're happy and want to bring in similar deals. To
         make it appear the partnership has more depth, they put Leanne's name on letterhead.
        Leanne figures, hey, can't hurt me none. Phil and Dhir know that Leanne has a good reputation.
        Kevin receives correspondence from Phil and Dhir, on their new letterhead, featuring Leanne's name.
        Kevin thinks, Gee, Leanne's now a partner in this firm, these two lunk-heads must be smarter than they seem! He hires them again.
        This time, Phil and Dhir fuck it up.
        Kevin sues Phil, Dhir and Leanne for negligence.
               o PA s. 15(1): a "fake" partner is liable as a "real" partner to any person who has, on the faith of such representation, given credit to the
                   firm. Kevin has relied on such a representation and has advanced credit to the firm as a result.
               o HVR, Leanne is not actually a partner. The section is meant to discourage bad faith ‘holding out’ as a partner, and she didn't do that
                   (the other two did, and she omitted to rectify it). The section isn't meant to apply to such as her.




                                                                                11
LIMITED PARTNERSHIPS
Distinct from ordinary partnership:
    LPA s. 3(1): Must be created by express action, namely the filing of a declaration of limited partnership.
    LPA s. (3(3): Declaration renewed every 5 yrs. Content of declaration:
           o LPA Regulation 713 s. 1(a) (see statutory consolidation book)
    Not all partners of a limited partnership have unlimited personal liability. LP requires one (or more) partner(s) to have unlimited personal liability
     (the "general partner(s)"). The general partner manages and controls the business of the partnership.
    Other partners' liability is limited to the amount of their investment in the partnership ("limited partners").
           o Limited partners are passive; they are not entitled to actively take part in control/management of the limited partnership: LPA s. 13(1).
               Should a limited partner engage in the active control/mgmt of the LP, that limited partner will be held liable as a general partner.
    LPA s. 5(2): One can be both general and limited partner. Liability is that of a general partner but w/ same rights against other partners as a limited
     partner.


Legal nature of a limited partnership
Kucor Construction & Developments & Associates v.                    o    LP is not a legal entity like a corporation: can’t own property.
Canada Life Assurance Co. (1998)                                     o    General partner has undivided interest, title in the LP’s property.

    [Kucor Construction attempted to convey property to a limited partnership to which it was a party.]
    Issue 1: is a limited partnership a discrete legal entity capable of holding, conveying real property title?
          o Lindley & Banks on Partnership: "A limited partnership is not a legal entity like a limited company but a form of partnership with a
                number of special characteristics introduced by the Limited Partnerships Act".
          o If Parliament had meant a limited partnership to be a legal entity, they would have made it so, as they did for corporations in the
                Business Corporations Act, s. 15: a "corporation has the capacity and the rights, powers and privileges of a natural person".

    Issue 2: if it's not a legal entity, how can a limited partnership acquire/hold property?
          o Ground J., Lehndorff at pp. 38-40:
                            Limited partners must “take a completely passive role … or they will otherwise lose their limited liability protection which
                             would have been their sole reason for choosing a limited partnership vehicle as opposed to an 'ordinary' partnership vehicle."
                            Limited partners leave the running of the business to the general partner. The ownership of the limited partnership property,
                             assets and undertaking “is an undivided interest which cannot be segregated for the purposes of legal process”.
                            If dissatisfied w/ the gen’l partner or the operation of the LP, limited partners have two courses of action: they may vote to
                                   (a) remove the general partner and replace it with another or
                                   (b) dissolve the limited partnership.
          o Re: Elevated Construction Ltd. v. Nixon (1969) and The Madison County Bank v. Gould (1843), a limited partnership takes title in the
                 name of the general partner.

    Kukor should have conveyed the property to itself as general partner to the LP, or to every party to the LP.]
    A limited partnership cannot acquire title to property. Title can only be held by the general partner.


Advantages/disadvantages
LPA s. 12(2)(a): a limited partner may [inquire] into the state and progress of the limited partnership business and may advise as to its management.
13(1): if a limited partner goes so far as to take control of the business, he/she is treated as gen'l partner and loses limited liability.

Haughton Graphic Ltd. v. Zivot (1986)              Court satisfied that limited partner was directing mind of company; held liable as general partner.

    Plaintiff Nash sues 2 limited partners of Printcast Publishing, Zivot and Marshall.
    Defendant Zivot incorporates Lifestyle Magazine as sole gen'l partner of Printcast.
    HVR, Zivot introduces himself as Printcast’s 'president' (in print, magazine masthead, etc.) and Marshall as VP.
    Nash's company printed the first 5 issues of Lifestyle Magazine. Then Printcast went into bankruptcy, leaving Nash unpaid for 3 issues.
    Nash knew Printcast was a limited partnership but was not familiar w/ LP structure.
    Defence: there was no specific reliance---Haughton never specifically relied on the two limited partners as gen'l partners.
    Court:
     o Nothing in statute refers to a specific reliance defence; court won’t read such a defence into the provision.

                                                                             12
     o Nash didn't have to believe—or rely on the belief—that Zivot and Marshall were gen'l partners.
    Alternate Defence: Zivot and Marshall were limited partners, didn't control the LP Printcast.
    Court:
     o Zivot & Marshall were directing minds of Printcast, in complete control
     o Zivot was effectively liable as gen'l partner, re: Alberta Partnership Act s. 63 (akin to Ontario LPA s. 13(1))
                  63: A limited partner is not liable as a general partner unless he takes part in the management of the business.

Nordile Holdings Ltd. v. Breckenridge (1992)                  Minority shareholder of gen’l partner co. is not ‘directing mind’, THF not liable.

    Similar to above: limited partners (Breckenridge and Rebiffe) were minority shareholders and directing officers of the general partner ("Arbutus")
     of the LP ("Arman Rental Properties").
    Nordile doesn't get paid, seeks to hold Breckenridge and Rebiffe personally liable. Claims:
          o Breckenridge and Rebiffe were in control of Arman's business, should be liable as gen'l partners.
          o Breckenridge and Rebiffe acted "solely in their capacities as directors and officers of the general partner, Arbutus."
    Court:
          o "Acting solely in one capacity necessarily negates acting in any other capacity." They were merely minority shareholders of the general
                partner. To find OTW would ignore the principle that a corporation is a separate legal entity.
          o Breckenridge and Rebiffe were not the directing minds behind Arbutus, THF they can’t be held liable as gen'l partners in Arman.
    How does one distinguish Haughton and Nordile?
          o Haughton: Zivot was controlling shareholder of the gen’l partner co. Marshall was not a controlling shareholder, but was also liable.
          o Distinction btw acting solely in one's capacity as corporate gen'l partner vs. acting in capacity as legal partner
          o How can one tell which 'hat' the individual is wearing?

Another way of losing limited liability in an LP is if the limited partner's name appears in the name of the LP; unless the person seeking to rely upon it
knows the person who is only a limited partner.



LIMITED LIABILITY PARTNERSHIPS (LLP)
    New incarnation of partnership: like ordinary partnership, not a separate legal entity (i.e. no legal status separate from those of its partners).
    Significant in jurisdictions where incorporation is not permitted for most professionals (e.g. lawyers, accountants).
           o Individuals are not liable for the negligent actions or omissions of persons not directly under their supervision and control. Instead,
                 firm as a whole is liable. Partners remain liable for their own negligent actions or omissions.
    In US, Increasing scope of professional liability > increasingly large damage awards > increasingly costly to insure firms > increasing push for limited
     liability protection.

PA s. 10(2): Limited liability partnerships
    Subject to subsections (3) and (3.1), a partner in a limited liability partnership is not liable, by means of indemnification, contribution or otherwise,
     for,
          (a) the debts, liabilities or obligations of the partnership or any partner arising from the negligent or wrongful 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; or
          (b) any other debts or obligations of the partnership that are incurred while the partnership is a limited liability partnership.

PA s. 10(3): Limitations
    Subsection (2) does not relieve a partner in a limited liability partnership from liability for,
               the partner’s own negligent or wrongful act or omission;
               the negligent or wrongful act or omission of a person under the partner’s direct supervision; or
               the negligent or wrongful act or omission of another partner or an employee of the partnership not under the partner’s direct
                supervision, if,
                     (i) the act or omission was criminal or constituted fraud, even if there was no criminal act or omission, or
                     (ii) the partner knew or ought to have known of the act or omission and did not take the actions that a reasonable person would
                          have taken to prevent it.

See also PA s. 44.1 - 44.4




                                                                             13
THE CORPORATE CONSTITUTION
FUNCTION OF THE CORPORATE CONSTITUTION
Function of a Constitution

Three questions fundamental to study of business organizations:
  1.     Who is in control?
  2.     Who gets the profits?
  3.     Who is liable?

Corporate constitution answers the first two questions and gives part of the answer to the third. [The third is answered in part by "the principle of
corporate personality, and general laws governing personal and vicarious liability." Welling p. 91]

Welling, Corporate Law in Canada: The Governing Principles

Canadian corporate law built on 4 major principles:
    (1) Corporate personality
            Principle that a corporation's behaviour is to be legally analyzed by analogy to the behaviour of human beings
            Incorporating brings a new legal person into existence, who can own property, engage in contracts, commit torts and crimes
            HVR, when directors of a corporation are acting as such, their acts are corporate acts and not individual acts; they are not liable as
             individuals for what they do
    (2) Managerial power
            Daily operation of corporate business is to be done by a relatively independent managerial group
    (3) Majority rule
            Internal corporate decisions are to be made by a democratic process among those constitutionally enfranchised on any particular issue
    (4) Minority protection
            Protection of minority shareholders from majority shareholders
            Certain corporate, managerial or majority shareholder inclinations ought to be restrained from injuring the minority members of any
             group created by the corporate constitution



CORPORATE CONSTITUENCIES
Corporate                How the internal corporate government operates
constitution             Balances competing interests of internal groups (each of which has an explicit role delineated in the corporate constitution)


External Constituencies: public, government, employees, creditors
  a.      The general public
                   Affected by inflation, unemployment, foreign/domestic trade; intimately connected w/ corporate success or failure
                   "nexus of contracts" btw shareholders, directors, managers, other employees, public
                   "corporate social responsibility" -- idea that corporate mgmt needs to be conducted w/ a view to the broader interests of society,
               not just shareholders' financial interests
                   Public may become involved w/ corporations through purchase or sale of 'securities' -- corporate shares/debt obligations that trade
               on stock exchanges or elsewhere; creditors/shareholders of corporation cease to be members of the public in relation to that
               corporation

  b.      The government
                   Govt relates to corporations in 3 ways:
                 1.           Provision of a legislative regime which allows for creation of corporations, regulates general business activity
                 2.           Creation and administration of forms of statutory controls that regulate corporate activity: anti-monopoly, tax incentive,
                      foreign investment review, other political-economic controls (outside corporate law)
                 3.           Shareholder of a particular corporation (either as minority shareholder or 100% of a Crown corporation)


                                                                            14
 c.     Employees
               Usually dealt with in labour law, employment law
               Protected from employer's bankruptcy: their claims against the corporations are given preferential treatment by the fed
            Bankruptcy and Insolvency Act ss. 136(1)
               Notable exception: OBCA s. 131(1) payment of employees' wages

 d.     Creditors
                Someone to whom the corporation owes money
                           Purchaser of a corporate bond
                           Bank/lending institution
                           Suppliers of inventory
                           Sometimes employees (unless paid in advance)
                Traditionally outsiders to the corporate constitution---not generally explicitly recognized in corporate constitutions
                HVR, modern Cdn statutes provide grievance procedures for 'complainants'
                           Holder of a security, including debt securities
                Doesn't have the rights of a shareholder
                Ct or a secure creditor may appoint a 'receiver' or 'receiver-manager' to take ctrl of property for the benefit of a creditor (CBCA,
             Bankruptcy and Insolvency Act); transfers the bankrupt's assets to a 'trustee in bankruptcy' who holds them, turns them into cash to pay
             unsecured creditors in proportion to the debts they are owed


Internal Groups: shareholders, directors, officers
 a.     Shareholders
                Holders of equitable interest in the company
                Elect the board of directors
                In control: they have provided the funds the corporation uses to carry on business; they make business decisions that control
            corporate destiny; they appoint/elect those who make day-to-day business decisions
                Directors and officers may be the same people

                    Welling, Corporate Law in Canada: The Governing Principles

                    Corporations are "democratic institutions [which] encourage the buying and selling of votes." Number of votes a shareholder has
                    is determined by number/type of shares held.

                    More like an "absentee proprietor" than beneficiary under a trust.

            Shareholders are entitled to information: lists of shareholders (CBCA s. 21), disclosure of management conflicts of interests (CBCA s.
             120(6.1)), periodic financial reporting
            Generally insulated from liability

 b.     Directors and Officers

      Welling, Corporate Law in Canada: The Governing Principles

        Directors
            Cdn corporate statutes typically create a board of directors to supervise mgmt of the corporation. Elected by shareholders.
            Directors determine direction of business and "have imposed upon them a correlative statutory obligation to exercise their powers 'with
             a view to the best interests of the corporation.'"
            Most operate as review bodies, sounding boards for ideas, performance of the corporation's professional managers. "Traditional
             corporate law dwelt on the legal responsibilities of directors and largely ignored corporate officers. The officers of a typical corporation
             are far more important in the business world."

        Officers
            Legal position: Employees who run day-to-day operations of corporation w/in long-range policies set by board of directors.
            Reality: determine the corporate destiny; appoint board of directors, select their own successors, regard shareholders as a "necessary
             rubber stamp" in accomplishing their long-term managerial goals.




                                                                          15
TYPES OF CORPORATE CONSTITUTION
Theoretical Differences

  o         "Constitutions are of different types or models. They do not all have the same elements; and even where two constitutions have elements
       with the same name, there is no guarantee that they are parallel in any other way" (e.g. role of the President in US, Ireland).
  o         In practice there are not that many different basic models—people copy those that have worked, amending to take account of local
       conditions and correcting perceived shortcomings.
         i.           What are the constitutional documents of a corporation?
        ii.           What is the basis of powers held by different internal groups?
       iii.           What is the grievance mechanism for ensuring compliance w/ the corporate constitution?

      Type                     Details                  Constitutional documents                  Source of powers              Grievance procedures
                                                    Charter/letters patent
                                                    Begins, "To all to whom these                                              Common law of
                                                    presents shall come, greeting."                                            standing (no grievance
                                                                                                                               procedure in letter
                                                    Sets out name, capital structure,     Charter itself                       patent)
                  Created by Crown prerogative
Charter                                             other basic features.
                  (e.g. HBC, some universities);
corporations                                                                              Distribution of powers btw           In common law scire
                  no longer happens.
                                                    Defines nature of corporate           directors, shareholders              facias proceeding,
                                                    constitution, but might provide                                            charter could be
                                                    only a skeleton, requiring further                                         forfeited for non-
                                                    corporate by-laws (easier to                                               compliance
                                                    amend than the charter itself).
                                                    Relevant legislative Act
                                                    Likely provides more details of
                  Created by act of legislature;
                                                    corporate constitution than would     The Act itself                       Provided explicitly in
Special Act       rare now (e.g. Red Cross,
                                                    a charter                                                                  Act, or else common
corporations      Communities Economic
                                                                                          Dictates distribution of powers      law of standing
                  Development Fund Act)
                                                    Likely to provide explicitly for
                                                    enactment of by-laws
                                                                                          Division of powers set out in
                                                                                          statute

                                                                                          Board of directors usually have
                  Co. incorporated under a                                                managerial power                     Different from charter
                                                    Letters patent, statute under
                  registration statute, adopting                                                                               corporation model;
                                                    which they were granted
Letters Patent    the charter corporation as its                                          Shareholders given power to          follows English
corporations      model.                                                                  elect directors, powers in special   jurisprudence, adopting
                                                    Issued under Act; subordinate to
                                                                                          situations (e.g. approval of         contractarian model
                                                    it, must comply w/ it
                  Still in force in PEI, Quebec.                                          changes to letters patent)           (below)

                                                                                          Directors may create, amend,
                                                                                          repeal by-laws (approved by
                                                                                          shareholders)
                                                    "memorandum of association" –
                                                    short; contains name of company,
                                                    objects, share capital, some other
                                                    details
                                                                                          Shareholders                         Discretionary
Contractarian                                       "articles of association" – set out                                        'oppression' remedy
                  Very different from charter
corporations /                                      details of constitution, "anything    Directors not usually given any      adopted from UK in BC,
                  corporations, letters patent
“English model                                      that would be a by-law in another     managerial powers by statute;        NS
                  corporations
companies”                                          type of corporation"                  delegated powers by
                                                                                          shareholders
                                                    Most important characteristics of
                                                    contractarian corporation derive
                                                    from its origin as a 'deed of
                                                    settlement' company, e.g. “The
                                                                           16
                                                            memorandum and articles shall,
                                                            when registered, bind the
                                                            company and its members as if
                                                            signed and sealed by each
                                                            member and containing
                                                            covenants on the part of each
                                                            member, his heirs, executors and
                                                            administrators, to observe all the
                                                            provisions of the memorandum
                                                            and of the articles”. (Nova Scotia
                                                            Companies Act, s. 24(1))
                                                            (1) Articles of Incorporation
                                                            correspond to Memorandum of
                                                                                                                                        (1) discretionary
                         Dominant business model in         Association or letters patent:
                                                                                                                                        oppression remedy; (2)
                         Canada                             must set out name, capital
                                                                                                                                        mechanism by which a
                                                            structure, some other basic
                                                                                                                                        shareholder can ask the
                         Derived from US model, to          features
                                                                                                                                        court to allow the
                         rationalize corporate law,
                                                                                                                                        shareholder to enforce
                         remove difficulties of             Difficult to change: requires ⅔
                                                                                                  USA transfers some powers,            a right belonging to the
                         contractarian co.                  majority shareholder vote
                                                                                                  obligations to shareholders from      corporation; (3) statute
Division of
                                                                                                  directors                             which dictates that,
Powers                   Statute expressly divides          (2) Unanimous Shareholder
                                                                                                                                        when a shareholder is
corporations             powers w/in the corporate          Agreement – contracts, possibly
                                                                                                  Few procedures for amendment,         outvoted, the
                         constitution btw shareholders,     combined w/ trusts; some
                                                                                                  termination                           corporation is forced to
                         mgmt                               agreements among shareholders
                                                                                                                                        buy his/her shares at
                                                            can become constitutional
                                                                                                                                        fair value, so a
                         Different from letters patent      documents of the corporation,
                                                                                                                                        shareholder has a way
                         corporation: no discretion to      though most Cdn statutes require
                                                                                                                                        out if he/she disagrees
                         refuse to register a division of   the agreement to divest some
                                                                                                                                        w/ the corporation's
                         powers corporation                 managerial power from the
                                                                                                                                        direction
                                                            directors to qualify as a USA; must
                                                            be unanimous (obv.)



INCORPORATION
Registration

     1.                  Incorporators submit an application to a CBCA official (the "director"/"registrar"—CBCA ss. 8 and 262).
     2.                  The official reviews the application and ensures it is in order.
     3.                  The official issues a certificate of incorporation. The corporation is born.
     4.                  CBCA sets the corporate birth date
                                   s. 9: "A corporation comes into existence on the date shown in the certificate of incorporation."

Mechanics of Incorporation


                    Articles of incorporation                                                                         One or more individuals or bodies
          (1)       One or more individuals or bodies corporate or any combination thereof may incorporate a          corporate or any combination thereof can
                    corporation by signing articles of incorporation and complying with section 6.                    incorporate a company

                    Idem
 4
                    Subsection (1) does not apply to an individual who,                                               4 (1) doesn’t apply to someone
                             a.        Is less than eighteen years of age;                                               a.                Under 18
          (2)                b.        Has been found under the Substitute Decisions Act, 1992 or under the              b.                Found mentally
                                   Mental Health Act to be incapable of managing property or who has been                     incapable
                                   found to be incapable by a court in Canada or elsewhere; or                           c.                bankrupt
                             c.        Has the status of bankrupt.

                    Contents of articles
 5        (1)
                    Articles of incorporation shall follow the prescribed form and shall set out the prescribed information.

 The articles are the primary constitutional document of the corporation.


                                                                                  17
    119 (1)              Each director named in the articles will hold office until the first shareholders' meeting.

    94 (1) (a)           First shareholders' meeting must take place w/in 18 months of incorporation
      After all steps are completed, a certificate of incorporation is issued. Re: OBCA s. 7, the certificate is "conclusive proof" that the corporation has
       been incorporated under the Act on the date set out on the certificate.


    10 (1)           Name of every corporation must contain word "limited", "incorporated" or "incorporation", or an abbreviation thereof


    Record keeping               OBCA s. 140 (1) and (2)



    By-laws
                          Procedures for appointment of officers; abilities of officers                        Grievance procedures
                          Year-end dates, quarterly reports                                                    Payment of dividends, share appreciation


    By-laws may be made, amended, appealed, by the directors, via a directors' resolution

    Shareholder confirmation


    116 (1)                 Directors may make/amend/repeal a bylaw.

                            If our directors make/amend/repeal a bylaw, they have to submit it to the shareholders at the next shareholders' meeting.
    116 (2)
                            The shareholders can then confirm/reject/amend the bylaw/amendment/repeal.

                            Where a bylaw is made/amended repealed under (1), it's effective from the date of the directors' resolution until it is subsequently
    116 (3)
                            confirmed/rejected/amended by shareholders under (2), or …

                            … it ceases to be effective.
    116 (4)
                            In addition, no subsequent resolution of the directors that would have substantially the same purpose or effect will be effective until
                            confirmed by the shareholders. [i.e. Directors can't just go and produce the same bylaw again]


Federal vs. provincial incorporation
      o                  One has the choice for incorporation amongst the various jurisdictions in Canada
      o                  Whether one incorporates provincially or federally depends on the type of transaction and nature of the business to be conducted
      o                  As a starting point, a local business is more likely to be provincially incorporated; HVR, if the focus is national or large-scale, could
              be federal; no hard/fast rule
      o                  Differences btw OBCA and CBCA are minimal, give no great advantage either way
                                   CBCA doesn't contain an equivalent restriction to OBCA s. 126 (2), but OBCA companies can get around this.
                                   w/ CBCA, limited immunity from extra-provincial licences; HVR, cost of getting those licences is increased
      o                  Advantages of fed incorporation
                                   Security for investors
                                   Wider pool from which to raise money/draw investors
                                   Easy to transfer "ownership" through sale of shares, as opposed to more intentionally cumbersome process of changing
                     partnership personnel
                                   Individual partners can bind a partnership, but an individual can't bind a corporation
                                   Perpetual corporate existence
      o                  Disadvantages of fed incorporation
                                   Expensive start-up costs
                                   Increased administration -- extensive filing requirements, more govt supervision


Public vs. private companies
      o                     Public: shares issued to the public (IPO -- Initial Public Offering)
                                     Can be traded, purchased by anyone
                                     Companies that distribute/offer their shares to the public, are subject to (provincial or federal) securities regulation
                                     CBCA: 'distributing' corporation
                                     OBCA: 'offering' corporation;


                                                                                     18
                                 Can be closely held—there may be a dominant person/group holding the vast majority of shares, while the shares
                    available to the public are few
      o                Private: ownership of company privately owned
                                 Shares (can be owned but) are not traded on public exchanges (referred to as Non-Offering Corporations, Close
                    Corporations, Closely Held Corporations)
                                 Not subject to securities regulation



THE CANADIAN CONSTITUTION
    Several different jurisdictions have legislative power to create corporations whose business activities are not restricted to the incorporating
    jurisdiction.

    Federal, provincial division of powers in ss. 91, 92 of Constitution Act, 1867

    Welling, Corporate Law In Canada: The Governing Principles pp. 3-4

           When provinces attempt to legislate "in relation to" a matter over which Federal parliament has exclusive jurisdiction, the legislation is ultra
           vires and is void.

           "Fortunately, it is usually clear if a statute is directed primarily at the creation of corporations. The primary 'aspect' of legislation is usually
           sufficient to establish legislative competence, even if the statute incidentally affects matters outside that legislature's competence."


Federal Power
    Constitution Act, 1867 s. 91 art. 15: Banking, incorporation of banks, and the issuance of paper money
      o                Deals specifically w/ creating corporations.

    Power to incorporate is included in the general residual clause in the preamble to s. 91:

           It shall be lawful for the Queen, by and with the Advice and Consent of the Senate and House of Commons, to make Laws for the Peace, Order
           and good Government of Canada, in relation to all Matters not coming within the Classes of Subjects by this Act assigned exclusively to the
           Legislatures of the Provinces. …

Citizens Insurance Co. of Canada v. Parsons (1881)

      s. 91: Fed Parl. Has authority to make laws for the peace, order and good government of Canada in all matters not assigned to the provinces.
      Where the jurisdictions overlap, the court must determine whose powers are supreme and define the limits of their respective powers.
      2 sections must be read together, language of one interpreted, modified by the other, to reconcile the respective powers they contain and give
       effect to all of them.


Regulating Corporate Activity
      Both federal and provincial legislatures have authority to restrict or control corporations' behaviour.
      Province's power derives from Constitution Act s. 92 (11).
      Federal power derives from residual power, Constitution Act s. 91
      o               Empowered to make laws for POGG of Canada
      o               Not in 91 (2): the regulation of trade and commerce
                                Since provinces have been given jurisdiction to incorporate companies w/ provincial objects, fed govt must have
                  jurisdiction to legislate incorporation of companies w/ objects beyond provincial boundaries
                                In practice, validity of fed incorporation not dependent on company carrying on business in more than one province.
                                The company's objects need not be entirely intra-provincial nor entirely inter-provincial.


    Pith & substance      Most disputes re: division of powers come down to characterization of the legislative attempt (its dominant matter or feature)

    Double aspect         Same wording can be viewed as having more than one "pith and substance", one federal, the other provincial

    Paramountcy           Where legislation conflicts, the Feds prevail
      Some forms of regulation affect corporations so seriously that they constitute rules of corporate law, and therefore belong to whichever
       legislature created the corporation in question.
                                                                                 19
John Deere Plow Co. v. Wharton (1914)

     BC statute made it an offence for non-BC corporations to do business w/out a licence; said any contracts made by non-licenced, extra-provincial
      corporations were unenforceable in BC.
     Appellant was refused a licence: already a company registered in the province under the same name.
     "The expression 'civil rights in the province' … must be regarded as excluding cases expressly dealt with elsewhere in the two sections,
      notwithstanding the generality of the words."
     Power of legislating re: incorporation of companies w/ other than provincial objects "must belong exclusively to the Dominion Parliament, for
      the matter is one 'not coming within the classes of subjects assigned exclusively to the legislature of the provinces.'"
     If fed. Parliament can create such companies, "then it becomes a question of general interest throughout the Dominion in what fashion they
      should be permitted to trade."
     Federally incorporated companies may carry on business anywhere in Canada. "[T]he province cannot legislate so as to deprive a Dominion
      company of its status and powers. … *T+he status and powers of a Dominion company … cannot be destroyed by provincial legislation."
     Not w/in power of BC legislature to enact the licensing legislation; inoperative.
            o Provisions directed to interfering w/ status of Dominion companies, preventing them from exercising powers conferred on them by fed
                 Parliament, dealing w/ a matter beyond s. 92.
            o BC legislature may pass laws re: companies w/out distinction, requiring those that were not incorporated w/in the province to register
                 "for certain limited purposes, such as the furnishing of information"

                                                                         Provincially-incorporated companies don’t automatically have rights outside the
    Bonanza Creek Gold Mining Co. v. The King (1916)                     province. HVR, they may contract for these rights.

     Can an Ontario corporation contract to mine gold out-of-province [in Yukon]?
     Conflict btw legislative power of one province to create a corporation and that of a second province to determine what the corporation would be
      permitted to do w/in the second province's borders.
     Ontario creation of the corporation and the Yukon prohibition of its activities w/in the territory are provincial acts that can stand together. [HVR, a
      federal corporation is entitled to some extent greater than an Ontario corporation to exercise powers in other provinces.]
     "*I+f the company had no legal existence or capacity … outside the boundaries of the province *of+ Ontario, by whose grant exclusively it came into
      being, it is not apparent how any other Government could bestow on its rights and powers which enlarged that existence and capacity."
     Words in s. 92, "legislation in relation to the incorporation of companies with provincial objects" preclude the grant to a corporation of power and
      rights re: objects outside the province. The words leave untouched the ability of the corporation to accept such powers and rights if granted ab
      extra.
             o An Ontario corporation can contract out-of-province, but the province cannot confer on the company the right to do so. That's up to
                  the other jurisdiction.


                        A corporation has the capacity to carry on its business, conduct its affairs and exercise its powers in any jurisdiction outside
OBCA s. 16
                        Ontario to the extent that the laws of such jurisdiction permit.
     One gets this permission through extra-provincial licensing schemes, whereby companies incorporated in another jurisdiction can get a licence to
      do business elsewhere. (They have to file certain information, pay the required fees.)

Canadian Indemnity Co. v. British Columbia (Att. Gen.) (1976)

     Plaintiff federal co. sought declaration that BC statutes nationalizing the BC auto insurance industry (requiring all motor vehicle owners to have
      insurance) were ultra vires the BC legislature. Martland J.:
           o Parliament can create and maintain the legal existence of a corporate entity, with which a Province cannot interfere. But a provincial
                  Legislature within its own field of legislative power can regulate, in the Province, a particular business or activity. The fact that a
                  federally-incorporated company has, by federal legislation, derived existence as a legal person, with designated powers, does not mean
                  that it is thereby exempted from the operation of such provincial regulation. It is subject to such regulation in the same way as a
                  natural person or a provincially-incorporated company.

                                                                   Prov. legislation may duplicate fed. legislation without triggering paramountcy doctrine
    Multiple Access Ltd. v. McCutcheon (1982)                      Does compliance w/ one involve breach of the other? Can they operate concurrently?


                                            Buying/selling of corporate securities by 'insiders' who have information that has not yet been released to the
                           general public.
 Insider trading
                                            Governed by fed Canada Corporations Act and prov. Ontario Securities Act (fundamentally identical). Both intra
                           vires.
     Are both the Canada Corporations Act, Ontario Securities Act applicable to a federal corporation?
     Certain provisions of the Ontario legislation found to have an "identity of purpose, conduct and remedy" w/ the fed legislation. "Does the mere
      duplication constitute 'the conflict' required by the paramountcy doctrine in order to render a provincial statutory provision inoperative?

                                                                                20
      Trial judge, 'more modern test of conflict':
             o "[While both provisions punish the same acts], there is no conflict in the sense that compliance with one law involves breach of the
                  other. It would appear, therefore, that they can operate concurrently."
             o 'double liability' would be avoided by "cooperation between administrators and the ordinary supervision of the courts over duplication
                  of proceedings before them."
             o "The provincial legislation merely duplicates the federal; it does not contradict it. The fact that a plaintiff may have a choice of remedies
                  does not mean that the provisions of both levels of government cannot 'live together' and operate concurrently."
             o "Mere duplication without actual conflict or contradiction is not sufficient to invoke the doctrine of paramountcy and render otherwise
                  valid provincial legislation inoperative. … The Courts are well able to prevent double recovery in the theoretical and unlikely event of
                  plaintiffs trying to obtain relief under both sets of provisions."
      Increasing prov. regulation of foreign corporations; judicial reluctance to find fed/provincial legislation in conflict.

    Tide turned with...

Reference re ss. 91 and 92 of the Constitution Act, 1867 (1991)

      Applicability to federal corporations of provincial legislation which
                Required registration if a corporation used a 'business name' different from its corporate name;
                Allowed a provincial official to order a co. not to use a particular business name if the official thought confusion would result; and
                Allowed a provincial official to order a co. to change its corporate name, or at least not use it (and to use a business name instead), if the
                 official thought confusion would result from use of the corporate name.
      Held:
            (a) A federal corporation could be required to register if it used a business name in the province;
            (b) A fed co. could be ordered to use a different business name if it used its business name only in intra-provincial business;
                           If, however, the corporation used the name to carry on business inter-provincially, this engaged the federal "trade and
                            commerce power" and ousted the provincial jurisdiction over the name; and
            (c) A federal corporation could not be ordered to change its corporate name, or even to use a business name instead of its corporate name.
                           "Even if the legislature only intended to restrict a federally incorporated company in the use of its corporate name, as distinct
                            from requiring a change of name, the legislation is of doubtful validity. The name of a corporation is more than a label by
                            which it is known: it is also, to use the language of Blackstone, "the knot of the combination". The corporate name is thus
                            entwined with the status of the corporation and must be used as required by corporate law. With respect to a federally
                            incorporated company, the relevant corporate law is that by Parliament".
                           “*Federally] incorporated companies are regulated in the use of their corporate names by federal corporate law, just as
                            provincially incorporated companies are similarly regulated by provincial corporate law. the use of the corporate name is thus
                            within the field of corporate law and, in the case of federally incorporated companies, within the exclusive jurisdiction of
                            Parliament. The province has no jurisdiction to regulate the use of the corporate name of a federally incorporated company."
      Conclusion: provinces can regulate the corporations of other provinces to an unlimited degree, but can regulate federal corporations to a
       limited and difficult-to-define degree. Practical outcome: little difference btw federal & provincial corporations.


Federal Power (ctd)
      Fed Parliament given no specific power to regulate business corporations' activities. Fed powers described in Constitution as being "in relation to
       [specified] matters"
      Corporate activity more often affected by provincial laws, for 2 reasons:
      1.              Broad range of provincial control over local matters, including 'property and civil rights in the province'
      2.              "Judicial emasculation" of what might otherwise have been a broad federal 'regulation of trade and commerce' power under s. 91
           art. 2.

Judicial Committee, Canada (Att Gen) v. Alberta (Att Gen) (The Insurance Reference) (1916):
    "[The] authority to legislate for the regulation of trade and commerce does not extend to the regulation by a licensing system of a particular trade
     in which Canadians would otherwise be free to engage in the provinces."

                                                       Some aspects of corporate activity regulated by the incorporating legislature; most, HVR, regulation
Multiple Access Ltd. v. McCutcheon (1982) (ctd)
                                                       of business activity

      Issue: Whether insider trading rules (governed by prov. legislation) could be included in a federal incorporating statute and applied to federal
       corporations.
      Does the pith and substance of the insider trading provisions of the federal Act fall within a "class of subject" allocated to Parliament?
            o Ziegel, Studies in Canadian Company Law (1967), vol. 1, at p. 170:
                         "[Regulation] of proxies and insider trading … affect the relationship between the directors and its shareholders and the
                          solicitation of voting powers at meetings of the company."
                         "The validity of the federal legislation must be determined without heed to the Ontario legislation."


                                                                               21
                        "Insider malfeasance affects … corporate powers, organization, internal management [and] financing because shareholders
                         and potential shareholders must be assured the company's affairs will be scrupulously and fairly conducted; otherwise the
                         raising of capital, clearly an element of company law, will be inhibited. … *The impugned sections+ have a general purpose and
                         a 'rational, functional connection' with company law. The sections in my view are intra vires the Parliament of Canada."
         o    Some aspects of corporate activity (e.g. extent of a corporation's legal powers, intra-corporate power structure created by its corporate
              constitution) are treated as extensions of the legislative jurisdiction to incorporate: in those matters, regulation is by the incorporating
              legislature.
         o    In most areas of endeavour, HVR, regulation is of business activity, whether pursued by corporations or individuals. Here, legislative
              power to regulate evolves from assignment of 'matters' in ss. 91 and 92.


The Canadian Charter of Rights and Freedoms
   Restricts established 'supremacy of Parliament' principle (any law could be passed by either fed Parliament or one of the provinces).
   OBCA s. 15: a corporation has the rights, powers and privileges of a natural person. So the idea of incorporation (bringing into existence a new
    legal person) raises the issue of whether or not corporations should be afforded rights under the Charter.
   Corporations generally accorded status of 'persons' for purposes of legal analysis, re: Interpretation Act, 1985: "In every enactment, … 'person', or
    any word or expression descriptive of a person, includes a corporation."
   HVR, provincial & federal Interpretation Acts don't apply to the Charter, since it's a constitutional document. It uses the words "individual" and
    "citizen" as opposed to person. Courts reluctant to give Charter ss. 15, 11(b), etc. protections to corporations.

R. v. Agat Laboratories Ltd. (1998)           Corporations, , don’t have all Charter rights; language varies for each. (e.g. ss. 11(b), 7; not s. 9)

   Co. charged w/ several environmental offences. Crown failed to make timely disclosure.
   Can the corporation rely on a Charter s. 7 defence? Does it apply to a corporation?
   A corporation cannot urge that its own "life, liberty or security of the person [is] being deprived in a manner not in accordance with the principles
    of fundamental justice." (Irwin Toy)
   Exception 1: attacks on constitutionality of a statute (Big M. Drug Mart, R. v. Wholesale Travel Group)—“Any accused, whether corporate or
    individual, may defend a criminal charge by arguing that the law under which the charge is brought is constitutionally invalid."
   Exception 2: s. 11(b), right to trial w/in a reasonable time: R. v. C.I.P.
         o Language of some provisions precludes protection of corporations; language of s. 11(b) does not. "I do not read [Irwin Toy] as ruling
              out the possibility of corporations asserting other Charter guarantees."
         o "Irwin Toy Ltd. went only so far as to establish an appropriate analytical framework: whether or not a corporate entity can invoke a
              Charter right will depend upon whether it can establish that it has an interest falling within the scope of the guarantee, and one
              which accords with the purpose of the provision." (R. v. C.I.P.)
         o Charter s. 11(b) applies to corporations: “To hold otherwise would be to suggest that the community is somehow less interested in
              seeing [corporations] brought to trial. It would also suggest that the status of an accused can determine whether that accused is to be
              accorded 'fair' and 'just' treatment. … *Therefore+ the phrase 'Any person charged with an offence' in the context of s. 11(b) of the
              Charter includes corporations."
   Exception 3: s. 2, protection of freedom of expression: Slaight Communications Inc. v. Davidson
   Conclusion:
         o Section 7 protects the right to make full answer and defence, being one of the principles of fundamental justice;
         o All accused (individuals or corporations) have an identical interest in being able to make full answer and defence when charged with
              an offence; and
         o A corporate accused may therefore invoke s. 7 to protect that interest.
   "Our expanding the Big M Drug Mart exception to civil proceedings in these limited circumstances is not intended to provide corporations with a
    new weapon for litigation." Corporation not permitted to raise the Charter as of right in any proceeding.




                                                                            22
CORPORATE PERSONALITY
THE CORPORATION AS LEGAL PERSON
A corporation is an artificial person:
    Creature of law
    Doesn't exist in natural world
    Doesn't need to exist in a legal system, but all developed legal systems provide for them.
    Can do many things human beings can do:
         o Hold property
         o Contract w/ others
         o Commit torts
         o Sue and be sued, etc.

    "The King is dead, long live the King" -- the office holder is separate from the office


                                          Collective name by which legal analysis could be focused on an aggregate of individuals
    Partnership                           Partnership name can be used to launch legal proceedings, but little else. Merely identifies sum of
                           individual partners acting collectively.

    Corporation        So much more!


    Salomon v. Salomon (1897)               The corporation is a legal person, a separate entity from its principals


      An incorporated company “must be treated like any other independent person with its rights and liabilities appropriate to itself".
      "Either the limited company was a legal entity or it was not. If it was, the business belonged to it and not to Mr. Salomon. If it was not, there was
       no person and no thing to be an agent at all; and it is impossible to say at the same time that there is a company and there is not."
      "If [the company] was a real thing, if it had a legal existence, and if consequently the law attributed to it certain rights and liabilities in its
       constitution as a company, … it is impossible to deny the validity of the transactions into which it has entered."


Practical Consequences
Lord Denning, Bolton (Engineering) Co. v. Graham and Sons (1965):
        “Directors and managers … represent the directing mind and will of the company and control what it does. [Their state of mind] is the state of
        mind of the company and is treated by the law as such. .. Whether their intention is the company's intention depends on the nature of the
        matter under consideration, the relative position of the officer or agent and the other relevant facts and circumstances of the case.”

Macaura v. Northern Assurance Co. (1925)                       Separate legal entity—RULE LATER REJECTED

      Macaura was shareholder in a company.
      Action re: insurance claim for timber burned in a fire. Arbitrator held that appellant had no insurable interest in the timber. To have an insurable
       interest, he'd have to be the owner of the company.
      "[It appears] that there really was no person other than the plaintiff who was interested in the preservation of the timber. It is true that the timber
       was owned by the company, but practically the whole interest in the company was owned by the appellant. He would receive the benefit of any
       profit and on him would fall the burden of any loss. But the principles on which the decision of this case rests must be independent of the extent
       of the interest held."
      "The appellant could only insure either as a creditor or as a shareholder in the company. And if he was not entitled in virtue of either of these
       rights he can acquire no better position by reason of the fact that he held both characters."
      "[T]he corporator even if he holds all the shares is not the corporation, and … neither he nor any creditor of the company has any property legal or
       equitable in the assets of the corporation."
                      i.e. the sole owner of a single-shareholder, single-director company has no insurable interest in the assets of that company; only
                   the company itself has an insurable interest in the timber
                      The company has a separate legal existence


                                                                                 23
General Accident Fire Life Assurance Corp. v. Midland Bank Ltd. (1940)

   A parent corporation holding a controlling interest in the shares of a subsidiary corporation had a "business interest" in the subsidiary's assets, but
    held no insurable interest therein.

Bridgewater Hardware Ltd. v. Scottish Union and National Insurance Co. (1953)

   Plaintiff hardware co., principal shareholder E.R. Goudey, sought to recover on fire policy in which the insured was described as "E.R. Goudey,
    operating as Bridgewater Hardware" and the property insured as "stock consisting of hardware … the property of the insured".
   Btw date of policy and fire, the business had been sold to the corporation as a going concern.
   Held: Corporation could not sue. Goudey had no insurable interest.

                                                                                              Rejects Macaura—sole owner of single-shareholder, single-
Kosmopoulos v. Constitution Insurance Co. of Canada (1983) -- O.C.A.                          owner company has insurable interest in company’s assets

   Plaintiff incorporated his leather goods store. Believed he still owned the business thereafter. Lease of the premises continued in his name, never
    assigned to the corporation. The insurance policy read 'Andreas Kosmopoulos O/A Spring Leather Goods'.
   The store was damaged in a fire. Insurance co. holding the policies sought to deny K's claim.
   Appellant insurance companies: K, as shareholder of the corporation, has no insurable interest in the assets of that corporation.
   HELD: "the plaintiff … had 'benefit from [the corporation’s assets’+ existence, prejudice from [their] destruction'."

                                                                                               OCA ruling upheld; “piercing the corporate veil” (below)
Kosmopoulos v. Constitution Insurance Co. of Canada (1983) – S.C.C.                            Shareholders have insurable interest in corporation

   "The law on when a court may disregard [the principle that a corporation is a separate legal entity] by 'lifting the corporate veil' and regarding the
    company as a mere 'agent' or 'puppet' of its controlling shareholder or parent corporation follows no consistent principle."
   "Mr. Kosmopoulos was advised by a competent solicitor to incorporate his business in order to protect his personal assets. … Having chosen to
    receive the benefits of incorporation, he should not be allowed to escape its burdens. … The company was a legal entity distinct from Mr.
    Kosmopoulos. It, and not Mr. Kosmopoulos, legally owned the assets of the business."
   "Mr. Kosmopoulos, as sole shareholder of the company, was so placed with respect to the assets of the business as to have benefit from their
    existence and prejudice from their destruction. He had a moral certainty of advantage or benefit from those assets but for the fire. He had,
    therefore, an insurable interest in them capable of supporting the insurance policy and is entitled to recover under it."
   "The identity … between the Company and *a+ sole shareholder and director is such that an insurable interest in the Company's assets may be
    found in the sole shareholder."


Insurable interest    A sole shareholder, though lacking any proprietary interest in the corporation's assets, has an 'insurable interest' in them.


   Simplistic to say Kosmopoulos overrules Macaura. What changes is the definition of 'insurable interest'.
        o Kosmopoulos doesn't claim that shareholders own assets of the corporation. HVR, they can have an insurable interest in the corporation
               though they don't have a proprietary interest.
        o Macaura wasn't sole shareholder. Kosmopoulos was.

Lee v. Lee's Air Farming Ltd. (1961) [NZ]             Majority shareholder/director/employee can wear many hats w/out conflict.

   Appellant's deceased husband Lee was controlling shareholder and governing director of his corporation. Employed on salary as chief pilot.
   Corporation insured itself against liability to pay compensation in case of an accident to him. He crashed and died.
   NZ Court of Appeal: appellant's deceased husband couldn't hold office of governing director at the corporation and also be its servant.
   Was the deceased a 'worker' w/in the meaning of the Worker's Comp Act? Was he a person under a contract of service with an employer?
        o “[The deceased was paid wages to fly] at the request of farmers whose contractual rights and obligations were with the company
             alone. … *When engaged in this activity+ the deceased was [obviously not] discharging his duties as governing director.”
        o The fact that he was director “is no impediment to his entering into a contract to serve the company. [The court sees] no reason to
             challenge the validity of any contractual obligations which were created between the company and the deceased.
        o "Nor in their Lordships' view were any contractual obligations invalidated by the circumstance that the deceased was sole governing
             director in whom was vested the full government and control of the company." Re: Salomon, one person may function in dual capacities.
        o [I]t is said that the deceased could not both be under the duty of giving orders and also be under the duty of obeying them. But this
             approach does not give effect to the circumstance that it would be the company and not the deceased that would be giving the orders.
             Control would remain with the company whoever might be the agent of the company to exercise it. The fact that so long as the
             deceased continued to be governing director, with amplitude of powers, it would be for him to act as the agent of the company to
             give the orders does not alter the fact that the company and the deceased were two separate and distinct legal persons.
        o Possible for deceased to be both servant of the company (as chief pilot) and governing director.

                                                                            24
                          Mr. Lee wasn't employing himself—the company was employing him. The co. is a separate entity. It doesn't matter that Mr.
                           Lee was giving out orders to himself, because Mr. Lee and the company aren't the same person.

    Corporate personality cuts two ways: certain acts are acts of the corporate person; such acts are not acts of any individual(s) who might have been
    involved in some way.



PIERCING THE CORPORATE VEIL
Piercing/lifting
                                  Where judges ignore the existence of the corporate person and fix liability on the managers or the shareholders.
the corporate veil 
                                   "You look behind the curtain to see who actually controls the corporation, and then you assign liability to that person."
                          (Dhir)


Courts rarely pierce the veil -- instead hold up the principles of Salomon -- piercing the veil is an example of 'the messiness of corporate law' (re: Dhir)

Welling, Corporate Law in Canada: The Governing Principles

3 rationales for "piercing the corporate veil": [see Dhir's outline p.15]
   1. "It's just not fair"
                 US doctrine: Douglas J. explains why the claim of a controlling shareholder was subordinate to claims of corporate creditors:
                        "At times equity has ordered disallowance or subordination by disregarding the corporate entity. That is to say, it has treated the
                        debtor corporation simply as a part of the stockholder's own enterprise. … *A+ sufficient consideration may be simply the
                        violation of rules of fair play and good conscience by [the majority shareholder], a breach of the fiduciary standards of conduct
                        which he owes the corporation, its stockholders and creditors.
           Welling: this rationale "simply won't do"; no enforceable standards of "fair play and good conscience" in Cdn corporate law
   2.     Corporation was created/managed "for nefarious purposes"
                    Contradictory
   3.     Agent of someone else -- "puppet"/"sham"/"cloak" -- No consistent principle -- "Unprincipled invective" in obiter
                    e.g. Clarkson Co. Ltd. v. Zhelka:
                Where co. formed for wrongful act, individuals and co. "are responsible to those to whom liability is legally owed" – but how? why?
                    Criticism: "If it were possible to ignore the principles of corporate entity when a judge thought it unfair not to do so, Salomon's Case
                would have afforded a good example for the application of that approach".
                    Justice Sharpe, Transamerica (below): courts will disregard the separate legal personality of a corporate entity where it is
                completely dominated and controlled and being used as a shield for fraudulent or improper conduct.
                           1. The first element, "complete control", requires more than ownership. It must be shown that there is complete
                                domination and that the subsidiary company does not, in fact, function independently. …
                           2. The second element refers to the nature of the conduct: is there "conduct akin to fraud that would otherwise unjustly
                                deprive claimants of their rights"?

Clarkson Co. Ltd. v. Zhelka (1967)                 No consistent principle; VEIL = MESSY

      Lifting the veil represents "refusals to apply the logic of the Salomon case where it would be flagrantly opposed to justice."
      "If a company is formed for the express purpose of doing a wrongful or unlawful act, or, if when formed, those in control expressly direct a
       wrongful thing to be done, the individuals as well as the company are responsible to those to whom liability is legally owed.”
             o “In such cases, or where the company is the mere agent of a controlling corporator, it may be said that the company is a sham, cloak or
                  alter ego, but otherwise it should not be so termed."

Air Canada v. M&L Travel Ltd. (1993)                   Director directly caused breach of trust, had knowledge of it; constructive trustee of the corporation.

      It is clear that the appellant participated or assisted in the breach of trust. [He] dealt with the funds in question: in particular, he stopped payment
       on all cheques, and then opened a trust account and attempted to withdraw the stop payment orders and to transfer the funds into the new trust
       account in order to pay the respondent. The breach of trust was directly caused by the conduct of the defendant directors. [Their actions]
       prevented payment on cheques issued to Air Canada [and] precipitated the seizure by the bank of the only funds available in the unprotected
       general account. In such circumstances, the directors are personally liable for the breach of trust as constructive trustees provided that the
       requisite knowledge on the part of the directors is proved.
      With respect to the knowledge requirement, this will not generally be a difficult hurdle to overcome in cases involving directors of closely held
       corporations. Such directors, if active, usually have knowledge of all of the actions of the corporate trustee. [Though the appellant was not as
       closely involved with the day-to-day operations as was the other director, Martin, he] knew of the terms of the agreement between M&L and the
       respondent airline, as he signed that agreement. The appellant also knew that the trust funds were being deposited in the general bank
       account, which was subject to the demand loan from the Bank. This constitutes actual knowledge of the breach of trust. That is, even if the
       appellant could argue that he had no subjective knowledge of the breach of trust, given the facts of which he did have subjective knowledge, he
       was wilfully blind to the breach, or reckless in his failure to realize that there was a breach. Furthermore, the appellant received a benefit from
                                                                                  25
    the breach of trust, in that his personal liability to the Bank on the operating line of credit was extinguished. Therefore, he knowingly and directly
    participated in the breach of trust, and is personally liable to the respondent airline for that breach.


Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996)                            RULE FOR LIFTING THE CORPORATE VEIL


   There are undoubtedly situations where justice requires that the corporate veil be lifted. [Cases above] indicated that it will be difficult to define
    precisely when the corporate veil is to be lifted, but that lack of a precise test does not mean that a court is free to act as it pleases on some
    loosely defined "just and equitable" standard. There may be a principal-agent relationship between the two related corporations which leads to
    liability despite separate legal personalities [e.g. Clarkson Co v. Zhelka]. [Doesn't apply here.]
   "[Courts will pierce the corporate veil] where it is completely dominated and controlled and being used as a shield for fraudulent or improper
    conduct.

        i.The first element of 'complete control', requires more than ownership. It must be shown
                a. that there is complete domination and
                b. that the subsidiary company does not, in fact, function independently …

              [The] relationship between Canada Life and C.L.M.S. was that of a typical parent and subsidiary. While C.L.M.S. is wholly owned by
              Canada Life and its board of directors is comprised of Canada Life executives, I have found that it
                 does have an independent management and
                 conducts a business separate and distinct from that of its parent.
              There is, in my opinion, no evidence sufficient to give rise to a triable issue that C.L.M.S. is the mere puppet of Canada Life.

       ii.The second element refers to the nature of the conduct: is there "conduct akin to fraud that would otherwise unjustly deprive claimants of
               their rights"?

              While Transamerica has alleged Fraud against C.L.M.S., there is no evidence to suggest that Canada Life has any involvement in that
              alleged fraud, apart from the fact that C.L.M.S. is its wholly owned subsidiary.

              Further, no basis for holding Canada Life liable as an accessory to breach of fiduciary duty by C.L.M.S.

Welling, Corporate Law in Canada: The Governing Principles (ctd)

   The principle that a corporation is a separate legal entity does not mean that one is expected to ignore the identity of the individual shareholders
    and managers. In fact, their character and behaviour patterns are key factors in constructing a unique personality for the corporation. One way of
    looking at the corporation is to consider it as a relatively unimaginative person whose behaviour can usually be predicted because it tends to
    mimic the character traits of certain people influential in its organization.
   … Does the law permit us to look inside the corporation's equivalent of a family to establish a pattern of behaviour? A cautious "yes" can be
    advanced, provided the principle of corporate personality is not sacrificed.


Big Bend Hotel Ltd. v. Security Mutual Casualty Co. (1980)                    Appropriate to lift veil re: fraud


   Kumar was president and sole shareholder of corporation. Corporation burned down.
   Kumar had been president and principal shareholder of another corporation, whose hotel had burned less than three years prior.
   Insurers: plaintiff or its agent fraudulently omitted to communicate material circumstances on his insurance application. Denied benefits.
   Action to recover benefits.
   Kumar: improper to list loss suffered by previous corporation on new co.'s application.
   Held:
         o Exception to the notion of separate legal personality: where improper conduct or fraud.
         o Kumar personally controlled both companies. Previous fire was material and "failure to complete the form in that regard led the insurers
              to believe that Kumar had sustained no prior loss."
         o Kumar knew the info had to be disclosed, purposely omitted to disclose it "to mislead or deceive the insurers".
         o Test: how a reasonable insurer would react to the true facts. Obv, any reasonable insurer would have declined to accept the risk.
         o Courts may lift veil where company is a "mere cloak or sham" (Gilford Motor Co. v. Horne)
         o "[E]quity will not allow an individual to use a company as a shield for improper conduct or fraud."


Wildman v. Wildman (2006)                  Inverted veil piercing, looking past individual to hold co. liable (violates the Salomon principle?)


   Deadbeat sunk his finances into the corporation, didn’t pay his child support.
   "inverted veil piercing" whereby the court looked through/behind/past the individual shareholder in order to hold the corporation liable.
          Principle of separate legal personality is not an absolute principle

                                                                            26
                  Federal, provincial child-support guidelines contemplate veil-piercing in appropriate cases.
                  Re: Arsenault, appropriate to look behind the corporate veil where
           1. The individual exercises complete control of finances, policy, and business practices of the company.
           2. That control must have been used by the individual to commit a fraud or wrong that would unjustly deprive a claimant of his or her rights.
           3. The misconduct must be the reason for the third party's injury or loss.
                  Court finds it "flagrantly opposed to justice" to allow the appellant to hide behind the corporate veil. Though businesspersons may
                   incorporate "for valid business, tax and other reasons, the law must be vigilant to ensure that permissible corporate arrangements do
                   not work an injustice in the realm of family law. In appropriate cases, piercing the corporate veil of one spouse's business enterprises
                   may be an essential mechanism for ensuring that the other spouse and children of the marriage receive the financial support to which,
                   by law, they are entitled. The trial judge was correct to recognize that this was such a case."

2 ways to finance a business
  1.     Equity
  2.     Borrowing


 Minimum capitalization               A company can't be incorporated unless it receives a minimum amount from its shareholders.


          If a company is established mainly by borrowing and has no equity capital, it may have great difficulty getting a return. A 'minimum
           capitalization requirement' is a precautionary measure: the initial incorporators should be prepared to invest a significant, meaningful portion of
           the start-up capital.
          Where debt-to-equity ratio is too high, creditors will have difficulty getting paid.
          What's an acceptable debt-to-equity ratio? Varies according to type of corporation. HVR, in deciding whether to extend loan, most lenders will
           have credit guidelines, limits for debt-to-equity ratio (e.g. 2-to-1 is commonly used upper limit for small business loans)

Should thin capitalization be a legitimate reason to disregard a corporation's separate legal existence?

Walkovszky v. Carlton                 Thin capitalization insufficient basis to pierce corporate veil | Failed to prove fraudulent corporate structure

        Plaintiff Walkovsky severely injured by NYC cab, owned by Seon Cab Co., of which defendant Carlton was shareholder, and nine other cab
         corporations.
        Each corporation had 2 cabs. Each cab had minimum mandatory amount of auto insurance ($10,000); Seon had little capital, insufficient to
         compensate Walkovsky.
        Plaintiff:
              o Although the companies were ostensibly independent, they operated as a single large, under-capitalized corporate entity (re:
                    employees, garage, financing, repairs, etc.); corporate structure "designed to defraud the general public" who might be injured by the
                    corporations' cars.
              o Seeks to have court disregard corporate entity, assign personal liability to Carlton. Also seeks to assign personal liability to other
                    shareholders of cab companies.
        Carlton: claim should be dimissed; no legitimate cause of action.
        Issue: shareholders of multiple corporations individually liable due to fraudulent corporate structure?
              o "The corporate form may not be disregarded merely because the assets are insufficient to assure [the plaintiff] of the recovery sought."
              o Cab owners/operators are entitled to form such corporations. If the insurance coverage required by statute is inadequate for protection
                    of the public, remedy lies not w/ the court but w/ the legislature.
              o Maybe sound policy to require some corporations to take out adequate insurance, but
                             i.e. thin capitalization is insufficient basis to pierce the corporate veil
        Dissent, Keating J.:
              o Shareholders should be held individually liable. "A participating shareholder of a corporation, vested with a public interest, organized
                    with capital insufficient to meet liabilities certain to arise *in the course of+ business … The only types of corporate enterprises
                    [discouraged will be those] designed solely to abuse corporate privilege at the expense of the public interest." [social entity model]



CORPORATION IMPLIEDLY ACTING AS ‘AGENT’
    Agent can bind            Principal liable for torts committed by agent w/in scope of his agency [therefore if you can prove agency, you can hold the
    principal to contract     principal "liable for what the corporation has done"]

    Salomon's case: relationship of controlling shareholder and corporation does not in general constitute principal-agent relationship.
      o               To distinguish Salomon, ct must distinguish btw
             1.                 Situation where controlling interest is merely exercising the prerogative of control, and
             2.                 Situation where corporation is acting as agent of its controlling interest
                                         Controlling interest must have been acting in a personal capacity

                                                                               27
                                                                                       Criteria for agency of subsidiary to controlling corporation
    Smith, Stone and Knight Ltd. v. Birmingham Corp. (1939)                            OBCA s. 1(2), (5)

     Co. rented property to its subsidiary. City expropriated the land. Required to pay compensation to commercial estate holders, but not to tenants.
     Plaintiff: subsidiary was carrying on the business as agent of the estate holder.
           o "There was no agreement of any kind made between the two companies, and the business was never assigned to the [subsidiary]. There
                  was no suggestion that anything was done to transfer the beneficial ownership of [the land] to the [subsidiary].
                           If, either physically or technically, the [subsidiary] was in occupation, it was for the purpose of the service it was rendering to
                            the claimants, such occupation was necessary for that service, and I think that these facts would make that occupation in law
                            the occupation of the claimants.
                           An analogous position would be where servants occupy cottages or rooms for the purposes of their business, and … if they
                            have to occupy those premises for the purposes of their business, their occupation is the occupation of their principal …
           o Criteria which would indicate agency of subsidiary co. to its controlling shareholder:
                           Were the profits treated as profits of the [principal/parent] company?
                           Were the persons conducting the [subsidiary/agent] appointed by the parent company?
                           Was the company the head and brain of the [subsidiary] venture?
                           Did the company govern the venture, decide what should be done and what capital should be embarked on the venture?
                           Did the company make the profits by its skill and direction?
                           Was the company in effectual and constant control?

                                             Agreement between corporate subsidiaries is legitimate business practice; no agency.
    Sun Sudan Oil Co. v.
                                             Insufficient justification for piercing the corporate veil.
    Methanex Corp. (1992)                    Agreement doesn’t bind parent companies.

Two companies embarked on a joint venture exploring for petroleum in Sudan. The signatories to the joint venture were subsidiaries of the contracting
parties. Exploration results were disappointing and eventually the project was abandoned. Defendant subsidiary failed to pay amounts owing under the
operating agreement.

Plaintiff (operator of the joint venture):
            o Seeks reimbursement for subsidiary’s default from the parent company (party to the letter agreement).
            o Claims the facts justify a "piercing of the corporate veil".
Defendant:
            o In utilizing subsidiary companies, both parties were well aware of the notion of limited liability; no basis for now attaching liability to the
                parent for the unmet contractual obligations of its subsidiary.
HELD:
            o Claim dismissed.
            o Had they wished the parties could have used commercial strategies well known to them to incur the liability of the parent company or
                companies. There was no liability otherwise by the parent company for the obligations of its subsidiary.
            o “*The+ parties to this agreement used subsidiary companies for legitimate business reasons, which could include shielding of the
                parent from liability for the debts of the subsidiary. It is *the subsidiary’s+ name on the contract, not that of [the parent company].
                The parties were sophisticated companies well versed in the international oil business, with access to legal and other advice. They
                could have taken other steps to protect themselves, such as using parental guarantees. Although [the parent company] was the driving
                force behind [the subsidiary], I am not satisfied, on a balance of probabilities, that the commitment made in September 1985 in relation
                to the third commitment period was made by Industries on its own behalf, or was ever treated by Sun as a commitment by Industries
                rather than by Ocelot Sudan. Industries made genuine efforts to find funding elsewhere for the project. It may have been guilty of poor
                planning and poor business decisions. But that is not the stuff of legal liability, nor should it be. For these reasons I am not convinced
                that this is an appropriate case for lifting the corporate veil and deviating from the Salomon principle.”
            o Plaintiff fails to establish parent companies’ intent to be bound by agreements between subsidiaries is “industry practice”—practice is
                not “so well known in the industry that all parties know of it” and intend to be bound by it.




                                                                               28
LIABILITY
CORPORATE CRIMINAL LIABILITY
    Balancing act: waive formalities required by the corporate constitution, or, thwart some outsiders' civil liberties and transactional expectations?

    A person can incur obligations in 3 ways:
      1.              Personally -- duties to other people recognized in tort or contracts
      2.              Consensual liability through agency (agent contracts according to your instructions; you're liable for obligations incurred by your
           agent)
      3.              Non-consensual liability (your agent commits a tort within the scope of the agency that you didn’t want or intend—agent liable in
           tort as well)


The identification theory
                                                                     Test for corporate criminal liability – identification theory, i.e. 'directing mind' –
    The "Rhone" v. The "Peter A.B. Widener" (1993)                   responsibility for decisions re: corporate policy

      Is the master of the appellant's tug a Directing Mind of the corporation?
      Identification of particular individuals w/in a corporate structure as directing minds of that company is "a question of mixed fact and law … a
       question of law … once the facts have been ascertained".
             o Lennard's Carrying Co. v. Asiatic Petroleum Co. (1915): "It is not enough that the fault should be the fault of a servant in order to
                  exonerate the owner, the fault must also be one which is not the fault of the owner, or a fault to which the owner is privy; … when
                  anybody sets up that section to excuse himself from the normal consequences of the maxim respondeat superior the burden lies upon
                  him to do so."
                           The fault or privity of a ship-owner must be fault or privity in respect of that which causes the loss or damage in question.
                           Intention of a company can be derived from its officers and agents in some instances depending on the nature of the matter in
                            consideration and their relative position within the company.
                           "*T+here may be more than one directing mind and … there may exist 'delegation and sub-delegation of authority from the
                            corporate centre' and the 'division and subdivision of the corporate brain.'"
             o Focus of inquiry:
                           Whether the impugned individual has been delegated the 'governing executive authority' of the co. w/in scope of his/her
                            authority, i.e. whether the discretion conferred on an employee amounts to an express or implied delegation of executive
                            authority to design and supervise the implementation of corporate policy rather than simply to carry out such policy.
             o "Courts have moved away from allowing [corporate ship-owners] to wash their hands completely of all responsibility for matters of
                  navigation by … showing that *they+ appointed a competent master"; "there exists an overall duty on a ship-owner to supervise properly
                  the navigation of its vessels".
             o "reasonable likelihood" test whether the exercise of particular duty by a ship-owner would have prevented the impugned damage.
      Application to case:
             o Ship captain had additional responsibilities re: breaking in new tug captains, assisting w/ occasional problems, taking care of documents
             o HVR, these additional tasks "do not denote delegation to [the captain] of the governing executive authority over the management and
                  supervision of Great Lakes' fleet."
      Key factor distinguishing directing minds from normal employees: capacity to exercise decision-making authority on matters of corporate policy,
       rather than merely to give effect to such policy on an operational basis


Corporate defence
Canadian Dredge & Dock Co. v. The Queen (1985)                       Where employee directing mind was on ‘a frolic of his own’, no vicarious liability

      The principle of attribution of criminal actions of agents to the employing corporate principle in order to find criminal liability in the corporation
       only operates where the directing mind is acting within the scope of his authority, in the course of the corporation's business.


                                                                              29
    "[Vicarious] liability in the law of torts has been traditionally fenced in by the concept of the employee acting within 'the scope of his employment'
     and not … 'on a frolic of his own'. The identification theory *of criminal liability], however, is not concerned with the scope of employment in the
     tortious sense. 'Scope of employment' … *has+ reference to the field of operations delegated to the directing mind."
    "[The] act in question must be done by the directing force of the company when carrying out his assigned function in the corporation. It is no
     defence to the application of this doctrine that a criminal act by a corporate employee cannot be within the scope of his authority unless expressly
     ordered to do the act in question. Such a condition would reduce the rule to virtually nothing."
    "Acts of the ego of a corporation taken within the assigned managerial area may give rise to corporate criminal responsibility,
            o whether or not there be formal delegation;
            o whether or not there be awareness of the activity in the board of directors or the officers of the company; and …
            o whether or not there be express prohibition."
    Question: whether there is, in fact and in law, any controlling difference between a directing mind acting in fraud of the corporation and a
     directing mind acting on behalf of the corporation as its managerial arm but doing so for his own benefit.
    Were the charge in question a charge of fraud, there would clearly be no benefit to the corporation, and indeed the design of the dishonest
     employee was aimed squarely at reducing the financial stature of the employer.
    The employee would be guilty of fraud and the victim of that fraud would be the company.
    It is otherwise, however, where there is benefit to the corporation, in whole or in part, from the unlawful acts of its directing mind.
    "Where the directing mind conceives and designs a plan and then executes it whereby the corporation is intentionally defrauded, and when this
     is the substantial part of the regular activities of the directing mind in his office, then *the manager's+ energies are … directed to the destruction of
     the undertaking of the corporation. [He] ceases to be the directing mind and the doctrine of identification ceases to operate."
    "Where the criminal act is totally in fraud of the corporate employer and where the act is intended to and does result in benefit exclusively to the
     employee-manager, the employee-directing mind, from the outset of the design and execution of the criminal plan, ceases to be a directing mind
     of the corporation and consequently his acts could not be attributed to the corporation under the identification doctrine."
    ID doctrine only operates where the action taken by the directing mind
            o was within the field of operation assigned to him;
            o was not totally in fraud of the corporation; and
            o was by design or result partly for the benefit of the company.
    Directing minds of corporations (managers) were acting partly for the benefit of the corporations and partly for their own benefit; not wholly in
     fraud of their employees. Therefore corporations liable.



STATUTORY REFORM: BILL C-64
Purpose: to make it easier to prosecute large corporations. Defines which individuals in the co. will provide the mens rea element.

A "senior officer" must be found:
         "a representative who plays an important role in the establishment of an organization's policies or is responsible for managing an important
       aspect of the organization's activities"
                   Incl. directors, chief executive officer, chief financial officer

CC s. 22.2: corporation is a party to the offence if any senior officer has the intention to benefit the corporation in part and
  a.      Acting within the scope of their authority, is a party to the offence;
  b.      Having the mental state required for the offence, directs representatives to commit the prohibited act or make the omission; or
  c.      Knowing that a representative of the organization is or is about to be a party to the offence, does not take all reasonable measures to stop
        them from being a party to the offence.

For an offence requiring only criminal negligence instead of intention, CC s. 22.1: corporation is a party to the offence if
  a.      A representative of the corporation is acting within the scope of his authority; and
  b.      "the senior officer who is responsible for the aspect of the organization's activities that is relevant to the offence departs … markedly from
       the standard of care that, in the circumstances, could reasonably be expected to prevent a representative of the organization from being a party
       to the offence."

(actus reus satisfied by any individual involved in the corporation committing the act)

Statute still requires that the senior officers have the intention of at least partially benefiting the corporation.

Specific treatment of corporations for sentencing and probation: CC s. 718.21 - 732.1(3.2)



INSIDER TRADING
    Trading in the securities of a corporation while one knows information that is not generally available in the marketplace.
    Governed by provincial Securities Acts.

                                                                               30
   Sometimes a director who votes for/consents to a resolution contrary to certain sections in the statute will be personally liable to the corporation.
    (Prevents a corporation from purchasing or redeeming its own securities, paying out dividends or making certain kinds of loans or guarantees if
    there are reasonable grounds for believing that the requirements of various financial tests will not be satisfied)
   Directors may also be liable where insufficient property is given as consideration for shares, excessive commissions are paid for the sale of shares
    or other corporate managers are improperly indemnified for legal costs, charges or expenses. May be liable for wages of employees.
   Duty to furnish information to corporation's auditor, to notify auditor of errors in financial statement.
   Duties imposed collectively (rather than individually):
         o To call a special meeting of shareholders if there is no quorum of directors, and
         o To correct errors in financial statements.



ULTRA VIRES
[Abolished in Ontario and federally by OBCA and CBCA s. 15(1)]


 Communities Economic Development Fund
                                                 Ultra vires is abolished, but still applies to Act corporations (created by official act for specific purposes)
 v. Canadian Pickles Corp. (1991)


   Co. set up by The Communities Economic Development Fund Act, "to encourage the optimum economic development of remote and isolated
    communities within the province" (re: s. 3). Loaned defendant co. $150,000. Defendant was not in an isolated community. Defendant defaulted.
   Can a corporation set up by special legislation conduct business outside its stated objects? What are the consequences of violation of the Act?
          o Bonanza Creek Gold Mining Co. v. The King (1916):
                       "'ultra vires' has no real application in the absence of statutory restriction added to what is written in the charter. … If by the
                          terms of the charter it is prohibited [from taking some action], a violation of this prohibition is an act not beyond its capacity,
                          and is therefore not ultra vires, although such a violation may well give ground for proceedings by way of scire facias for the
                          forfeiture of the charter."
                       An action can still be ultra vires the company if prohibited by statute.
   "Corporations created by or under a statute have only those powers which are expressly or impliedly granted to them. To the extent that a
    corporation acts beyond its powers, its actions are ultra vires and invalid.”
   HVR (re: Bonanza Creek), if the appropriate language is used, the powers of a corporation created by or under a statute may be as wide as those
    of a common law corporation:
          o "[A company incorporated under statute] will have the incidents which the common law would attach [only if] the statute has by its
               language gone on to attach them. In the absence of such language they are excluded, and if the corporation attempts to act as though
               they were not, it is doing what is ultra vires".
          o "The language may be such as to show an intention to confer on the corporation the general capacity which the common law ordinarily
               attaches to corporations created by charter."
   Principle: a statutory corporation can only do what it is expressly or impliedly authorized to do by statute
   Court:
          o "general abolition of the doctrine of ultra vires is … common sense".
          o "[Statute and common law] developments have made the doctrine a protection to no one and a trap for the unwary."
          o HVR, "limited aspects of the doctrine … may be present with respect to corporations created by special act for public purposes."
          o Where corporation is formed pursuant to a special legislative act ("special Act corporation”), if such a statute doesn't contain provisions
               that alter the ultra vires doctrine, then the doctrine may still apply.
          o Reasoning:
                       Statutory corporations were established for specific purposes, pursuant to specific legislation. They shouldn't be able to do
                          anything outside those legislative purposes.
   Under statute, it is no longer necessary for corporations to establish a particular object.
   OBCA s. 15: corporation has rights, powers, privileges of a natural person. Doesn't preclude object/restriction, but doesn't require it.
   OBCA s. 17(2): If it does restrict itself, it's forbidden from acting in a manner contrary to that restriction.
   HVR, re s. 17(3): if the corporation violates its restriction anyway, that act is not invalid.
          o Third party's contract will not be prejudiced by virtue of the fact that the corporation violated its own restriction. i.e. the third party can
               still enforce obligations. (This doesn't mean the restriction is useless: shareholders might argue that acting in contravention of the
               restriction amounts to oppressive conduct upon them.)



CORPORATE TORTIOUS LIABILITY
   Co. is vicariously liable for the torts of its agents. In some situations, HVR, vicarious liability does not apply; personal liability must be shown.
   Test: If a corporation is the named defendant and the mental culpability of the defendant must be proved, then somewhere in the corporate
    organization must be found a guilty mind which can be identified with the mental element of corporate activity.

                                                                              31
Tort of ‘inducing breach of contract’
Lumley v. Gye: each of the parties to a contract has a "right to the performance" of it; and it is wrong for another to procure one of the parties to break
it or not to perform it.

Quinn v. Leathem (1901) [source of tort]: "A violation of legal right committed knowingly is a cause of action and it is a violation of legal right to
interfere with contractual relations recognized by law if there be no sufficient justification for the interference." [this tort requires 3 parties: contracting
plaintiff, breaching defendant and inducer-to-breach]

Pocklington             Traits of inducing breach

    (a)    Existence of contract
    (b)    Knowledge of contract
    (c)    Breach of contract by contracting party
    (d)    Defendant acted to induce breach
    (e)    Defendant by his conduct intended to cause that breach
    (f)    Defendant acted without justification
    (g)    Plaintiff suffers damages

Garbutt Business College Ltd. v. Henderson Secretarial School Ltd. (1939)                          School co. induced breach of contract

     Famous teacher Henderson worked for the plaintiff Garbutt College. Restrictive covenant in his contract said he couldn't open a rival school.
     New school lured Henderson away. Enrolment at the first place declined "as students flocked to the Henderson name".
     Henderson held all shares of the new company except 3 held by his wife and daughter.
          o Court upheld restrictive covenant. Henderson liable for damages from breach of contract.
          o The school had no contract w/ Garbutt and thus is not liable for breach of contract. If the Henderson school is liable, it is in tort.
                        "[T]he company and all its officers well knew that what it was doing in employing Henderson was in breach of his agreement
                         with the plaintiff."
                        [The corporation] "aided and encouraged and paid" Henderson to break his contract (re: Quinn v. Leathem).
                        "[W]hile it cannot be said that the corporation was a mere cloak or sham to enable Henderson to break his contract it was to
                         the knowledge of the company the channel by which, after its incorporation, he continued his breach of contract".

                                                                Defendants transferred money from A company to B company so that A couldn’t repay its
Einhorn v. Westmount Investments Ltd. (1969)                    obligations; induced breach “for their own mercenary benefit and gain”.

     Plaintiff real estate agent contracted to procure a property for the defendant Belzbergs.
     The Belzbergs controlled Westmount Investments and another company, Midtown Centre Ltd.
     Defendant Belzbergs moved to strike out statement of claim on the ground that it disclosed no cause of action against them personally.
           o The [individual] defendants "knowingly and mala fides caused the corporate defendant [Westmount] to transfer the said property to
                  Midtown with the intent and purpose of denuding the corporate defendant of its contract to pay Einhorn … . *T+hey siphoned off the
                  assets of the corporate defendant into Midtown which they controlled to place them beyond the reach of Einhorn; and as they
                  controlled both companies it was done for their own mercenary benefit and gain."
           o "It is also alleged that the Belzbergs conspired to bring this about and that they induced the corporate defendant to break its contract
                  with Einhorn. The torts of conspiracy, of wrongful procurement of a breach of contract and of actionable interference with Einhorn's
                  contractual relations with the corporate defendant are raised in the statement of claim".
           o Court lifts the corporate veil. The Belzbergs' conduct unjustly deprived the plaintiff of his rights: "[w]here [performance] consists of
                  making a money payment, I am unable to think of a more effective method of rendering performance impossible than that of
                  emptying the till by transferring the contracting party's assets to other persons."
           o Statement of claim "discloses reasonable causes of action against the Belzbergs personally for actionable interference with Einhorn's
                  contractual relations with the corporate defendant and for wrongful procurement [inducement] of a breach of his contract”.

                                                            Principals induced breach by fraudulent conveyance. Liable as agents of corporation.
McFadden v. 481782 Ontario Ltd. (1984)                      Acting in their own self-interest, “on a frolic of their own”; corporation not liable.

     Plaintiff worked for PMAC. PMAC sold to PMAI, let go of plaintiff.
     Principal shareholders of PMAC "caused PMAC to pay them $32,500, which left PMAC with no money."
                "[A]ll of these payments were unauthorized by either corporate by-law or by statute, and were made in breach of [the principals']
                 statutory obligations as directors and officers of the company … with the intention of defeating any claim the plaintiff might have against
                 the corporation."
     Issue: whether the individual defendants are personally liable to plaintiff for amount awarded against defendant company
     Plaintiff:

                                                                              32
         (1) Payments made by PMAC to the defendants were fraudulent preferences under the Fraudulent Conveyances Act and should be set aside
              in favour of the plaintiff pursuant to s. 2 of that Act
         (2) The individual defendants were personally liable under the tort of inducing breach of contract.
   McCardie J., Said v. Butt (1920):
             "[I]f a servant acting bona fide within the scope of his authority procures or causes the breach of a contract between his employer
              and a third person, he does not thereby become liable to an action of tort at the suit of the person whose contract has been broken."
              WTF?
                        If an officer/shareholder, acting w/in her authority, induces a breach of contract btw corporation and third party, the
                         officer/shareholder isn't liable to the third party.
   Winfield's Law of Torts:
             Said exception—The plaintiff cannot sue the servant for interference, b/c "[the servant] is my alter ego, and I cannot be sued for
              inducing myself to break a contract."
   Held: exception in Said v. Butt doesn't apply.
             "The fact that the agent is an alter ego of the corporation may afford a defence to the corporation (since it makes no sense to sue it for
              both breaching and inducing itself to breach a contract), but it is not clear why that would relieve the agent. For as a general rule, an
              agent is always liable personally for his tortious acts, notwithstanding that his acts (and hence his liability) may in law also be those of
              the corporation" (The "Koursk" (1924)).
             … "And it is also accepted that a principal may be relieved of liability for the tortious act of his agent, where the act is outside the agent's
              scope of authority, real or implied—though the agent himself remains liable" (Richards v. West Middlesex Waterworks Co (1885)).
             Director of officer is under a duty to act w/ a view to the best interest of the company. Inducement justified where taken as such a
              duty. HVR, must be acting bona fide w/in the scope of his authority.
             Plaintiffs here were not acting bona fide. The payments were made specifically in order to defeat the plaintiff's claim against PMAC. The
              plaintiffs were acting strictly in their own self interest.



CORPORATE CONTRACTUAL LIABILITY
3 'key players in corporate agency analysis'
        1.           the corporation
        2.           agent which potentially acted on corporation's behalf
        3.           outsider/third party who negotiated w/ the agent

When is the corporation liable for contracts made as a result of commitments given by persons purporting to act on the corporation's behalf?

        Eisner contracts w/ furniture co. for desks, signs on behalf of Disney as its CEO
        Reasonable to expect that Disney Co. ought to be bound by CEO's contract
        HVR, just before, Disney passed resolution forbidding executives from making contracts re: furniture purchases.
        What if the Simba mascot made the contract?
       o           Reasonable to assume low-level employee had authority to contract on behalf of employer?
       o           The corporation will only be bound by the actions of an agent if it can be demonstrated that the agent had authority to enter the
            type of contract in question. i.e.
            (1) Actual authority, or
            (2) Ostensible/apparent authority

Actual authority
   Agent authorized by corporation to enter into particular transaction(s)
   Relationship btw corporation and agent created by express or implied delegation from corporate principal to agent
         o might occur through by-laws, articles of incorporation, employment contract, etc.; any could delegate authority to engage in conduct

Ostensible/apparent authority
   Corporation represents to third party that the agent (w/ whom the third party dealt) had the authority to bind the corporation.
         o Authority of the agent as it reasonably appeared to the third party
         o Representation can be express or implied from a corporation's conduct
         o Ostensible authority often arises where a particular person holds a particular office in the corporation.

Panorama Developments v. Fidelis Furnishings                   Corporate secretary contracts on a frolic of his own. HVR, he has ostensible authority.

   Defendant's corporate secretary Baine, by written correspondence, contracted w/ plaintiff rental agency to use cars for corporate business.
    Agreement states bills will be sent directly to defendant, Fidelis.
   Baine rents cars for personal use. He goes to jail. Fidelis denies contractual liability.
   Is Fidelis bound to pay even though the cars were not used for corporate business?
   Fidelis: contracts made for Mr. Baine personally, not on behalf of the corporation.
   Denning: Correspondence was on company letterhead. He signed as corporate secretary. Document describes Fidelis as contracting party.
                                                                             33
   Fidelis: Baine was just a corporate secretary—doesn't have the authority to contract on behalf of Fidelis.
   Denning:
         o Corporate secretaries’ responsibilities have evolved: they make representations on behalf of companies, contract on companies' behalf.
         o Company elevated secretary's authority, put him in position to commit such fraud. Corporate secretary has ostensible authority.




                                                                       34
Freeman & Lockyer v. Buckhurst Park Properties                  Co. had provision for managing director; individual ostensibly occupied it.

   Defendant land purchasers hire plaintiff architects & surveyors to work on property. Plaintiff does so, doesn't get paid, sues.
   P received instructions from Kapoor, one of four directors of the D corporation.
   Articles of Buckhurst contain provision for appointment of managing director—never done.
   Trial judge:
          o Although there was no formal appointment, Kapoor acted as managing director, w/ the knowledge of the other 3 directors.
          o Ps intended to contract w/ Kapoor as agent of Buckhurst, not on his own account.
          o Buckhurst board intended Kapoor should negotiate best possible price for the property.
          o HVR, Kapoor had no actual authority to contract. Court proceeds on ostensible authority.
   Test for ostensible authority:
          (a) Representation to the third party that the agent had authority to bind the corporation
                       By committing Kapoor to perform managing director's duties, board essentially represented that Kapoor had that authority.
          (b) Representation comes from someone w/in corporate structure w/ authority to make such a representation.
          (c) Representation must have induced the third party to enter into a contract w/ the corporation; i.e. third party actually relies on
               representation
                       Ps relied on K as being authorized to contract on behalf of corporation
   Who actually made the representation here?

                                                                               Ostensible authority requires representation from another party.
Canadian Laboratory Supplies Ltd. v. Engelhard Industries                      See OBCA s. 19(d).

    P regularly buys platinum from Engelhard for its lab operations, resells scrap metal to Engelhard.
    Mr. Cook is a rogue employee of CanLab. He has authority to sell the scrap metal but not to buy the platinum.
    Cook contacts Engelhard, says
           o Platinum is gonna be used for experiments to be conducted by scientist "Giles";
           o Due to the secret nature of the experiments, nobody else at CanLabs is to know about these platinum sales;
    On this basis, Engelhard sells platinum to Cook on regular CanLabs purchase order and agrees to purchase scrap metal from "Giles".
    Payment for scrap returns is made directly to "Giles" rather than to CanLabs.
    There's no Giles. Cook gets the money. This scheme goes on for 7 yrs. Cook pockets $800,000.
    When the scam is found out, CanLabs brings action for conversion [tort of unauthorized deprivation of an owner's property] against Engelhard.
    CanLabs: claims legal title to the platinum ordered by Cook for "Giles". Engelhard had no lawful claim to it.
    Engelhard: Cook had ostensible authority to enter deal on CanLabs' behalf.
    Did Mr. Cook have ostensible authority?
           o To establish ostensible authority,
                          Representation to third party that agent had the authority to bind the corporation, from someone other than the alleged
                           agent in the transaction [despite obiter: agent's own representations might be sufficient].
                          Did CanLabs represent to Engelhard that Cook had this authority? If so, when/by whom did representation occur?
                                    Engelhard made inquiries re: Cook's authority to the VP operations, Fabian; and to the purchasing agent, Snook.
[Held, re: Estey J.: Purchasing agent Snook was proper person for Engelhard to contact re: CanLab purchases]
                                    Engelhard’s complaint re: late payment was corrected after conversation w/ Snook.
                                    Engelhard entitled to assume that Snook had ostensible authority to deal w/ matter on behalf of CanLab.
                                    Acceptance of request for revision should be construed as CanLabs holding up Snook as authority for such dealings.
Laskin J., dissenting in part:
    Snook was merely a purchasing agent w/ no real authority to bind CanLab; he couldn't hold out Cook as having authority.
    Re: contacting VP Ops Fabian, CanLab was put on inquiry b/c of call from CanLab; any subsequent losses ought to be covered by CanLab.



STATUTORY REFORM
Constructive notice & the indoor management rule
   What if a corporation's constituting documents (Articles of Incorporation, etc.) set out constraints on exercise of corporate power?
   Authority/ability of directors, officers to carry out acts w/in their own capacity
   Historically: b/c the Articles were publicly filed documents,
         o THF available to third parties,
                        Third parties THF deemed to have knowledge/'constructive notice' of contents of Articles. If Articles included constraints on
                         corporate power, third parties deemed to have knowledge of that constraint. e.g.:
                                   Articles allow corporation to exercise power only if certain steps are followed (e.g. contingent upon certain
                                    percentage of shareholder approval). Third party enters contract w/ corporation, doesn't get paid.

                                                                           35
                                  Third party: officer who entered contract on behalf of co. had ostensible authority to do so, b/c directors
                                   represented such. Third party relied on that representation.
                                  Re: Doctrine of constructive notice, the third party could not have reasonably relied upon that representation, b/c
                                   they were deemed to know about the restriction in the Articles.
                       Creates another risk for the third party: you better check contracting co.s' articles!
   HVR, re: new Indoor management rule (OBCA s. 18 & 19, CBCA ss. 17 & 18):
         o The third party is not deemed to know of any in-house restrictions on officers'/directors' authority.
         o Third party is entitled to assume that all necessary internal corporate steps referred to in the constituting documents have been
              properly complied with.
         o Corporations will not be permitted to 'assert' certain facts against the third party
                       If the third party alleges actual authority and the corporation presents no admissible evidence (re: OBCA s. 19) to disprove it
                        and makes no statements in denial of it, the case can only proceed on the basis that the allegations were admitted to be true.
    Whether a corporate agent had actual authority will depend on the facts.
    Whether the third party can establish the prerequisites to ostensible authority, and thereby preclude the corporate principal from denying the
     truth of some representation, will also depend on the facts.


    OBCA s. 17(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.
    CBCA s. 16(1)

                     No person is affected by or is deemed to have notice to have notice or knowledge of the contents of a document concerning a
    OBCA s. 18
                     corporation by reason only that the document has been filed by the Director or is available for inspection at an office of the
    CBCA s. 17
                     corporation.

                     No corporation … may assert … 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
    OBCA s. 19               corporation;
    CBCA s. 18         (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 does not have authority to exercise the powers and perform the duties that are customary in the business of the
                             corporation or usual for such director, officer or agent;
                             ...
                        (f) a sale, lease or exchange of property referred to in subsection 189(3) was not authorized.

                     [Who benefits: "a person dealing with the corporation or … a person who acquired rights from the corporation" (e.g. Engelhard)]

    --               Exception: Subsection (1) does not apply in respect of a person who has, or ought to have, knowledge of a situation described in that
    CBCA s. 18(2)    subsection by virtue of their relationship to the corporation.


Pre-incorporation transactions
Pre-incorporation Transaction for goods/services arranged after the corporation is conceived but before the certificate for incorporation is actually
transaction       issued (the co.'s official birth).

Pre-incorporation contracting party might signal intention to act to bind the corporation to be incorporated.
    HVR, how can an artificial entity, which doesn't exist when the contract is signed, be legally bound by the contract?
          o If there's no problem w/ the contract, this never comes up.
          o But what if incorporation never occurs? What if there is a business failure? What if the directors reject the contract upon incorporation?
          o Is the (pre-incorporation) contracting party liable? Is the corporation liable?

When two parties agree what will happen following incorporation, were those parties or the corporation intended to incur legal obligations? [i.e. was
there a contract?]


'A'      Individual involved in incorporation process. Purports to act on behalf of future corporation

'O'      Outsider; not involved in incorporation process. Intends to buy from or sell to the future corporation


      Corporation can't be a party to a contract before it is a legal entity. Obv. A and O cannot agree that O will contract w/ the corporation before it is
       formed.
      Contract requires agreement to fundamental terms:

                                                                               36
           o    Who are parties to contract: A and O? O and corporation? Contract fails absent such details.
           o    There must be a common intention that A is to be personally liable on the contract.

Kelner v. Baxter (1866)          Pre-reform. Individual liable for pre-incorporation transaction. Facts show intention to be bound personally.

       Plaintiff contracted to sell wine to defendant's corporation [hotel co.], before it was incorporated.
       Contract: defendant is signing on behalf of the hotel co. The wine is consumed.
       Corporation is formed, immediately becomes insolvent. Plaintiff not paid.
       Who's liable to the supplier of wine? [Baxter himself, or the insolvent corporation?]
    Court:
       Defendants liable until corporation formed, new contract devised. Baxter himself is liable, not the corporation.
       Not only that, but the corporation couldn't even ratify the contract after its incorporation, since it wasn't a party to it to begin with.
       "There must be two parties to a contract; and the rights and obligations which it creates cannot be transferred by one of them to a third person
        who was not in a condition to be bound by it at the time it was made."
       "[The plaintiff did not contemplate] that the payment was to be contingent on the formation of the company by the 28th of February. The paper
        expresses in terms a contract to buy."
       "The defendants, having no principal who was bound originally, or who could become so by a subsequent ratification, were themselves bound".
       Agreement disclosed defendants' intention to be bound personally until corporation formed.
             o "Putting in the words 'on behalf of [the hotel co.]' would operate no more than if a person should contract for a quantity of corn 'on
                   behalf of my horses'."

Black v. Smallwood (1966)            Kelner v. Baxter (above) concerned intent; here, parties didn’t intend to be bound.

     Action for specific performance of land purchase contract. Defendants described themselves as directors of Western Suburbs Holding Pty. Ltd.,
      before that corporation was formed.
     Plaintiff claims Smallwood et al liable for contract as promoters of Western Suburbs:
           o Kelner v. Baxter established that any time a person contracts on behalf of a non-existent co., that person will be liable.
     Court distinguishes Kelner v. Baxter:
           o Distinction btw act of a man himself and acts done by another on his behalf.
           o In Kelner, the court focused on whether or not the parties intended for the promoter to be personally liable.
           o In this case, Smallwood et al did not intend to be bound personally under the contract.
           o "The defendants in Kelner v. Baxter [were not agents for the principal but] were the principals. The contrast with this case is obvious.
                  Here, instead of both parties knowing that the company was not in existence, they both … thought that it was."

     A corporation is not capable under common law of contracting prior to incorporation; THF not liable on pre-incorporation contract.
     Corporation still not liable if, after incorporation, it ratifies or adopts a pre-incorporation contract.
     There must be a new, post-incorporation contract.
     In order to assign contractual liability to the promoter (re: Black v. Smallwood), must establish intention of parties to contract.
     Re: intentions of parties,
           o If both promoter and third party knew the corporation was not yet in existence, presumption that the parties intended the promoter to
                be personally liable.
           o HVR, if both parties thought the co. was in existence, presumption that the parties did not intend the promoter to be liable.


                   Contract prior to corporate existence
                   Except as provided in this section, a person who enters into an oral or written contract in the name of or on behalf of a corporation
OBCA s. 21(1)      before it comes into existence is personally bound by the contract and is entitled to the benefits thereof.
CBCA s. 14(1)
                   Problem with provision: before incorporation, contract can only be between the pre-incorporation parties. Courts have held that s.
                   21(1) creates a contract between them. Solution: contract out of liability re: s. 21(4).

                   Exception to 21(1)
OBCA s. 21(4)      If expressly so provided in the oral or written contract referred to in subsection (1), a person who purported to act in the name of or
CBCA s. 14(4)      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.

                   Adoption of contract by incorporation
                   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 an oral or written contract made before it came into existence in its name or on its behalf, and upon such
OBCA s. 21(2)      adoption,
CBCA s. 14(2)             (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.

                                                                            37
                  Note: CBCA provision excludes oral contracts.


Westcom Radio Group v. MacIsaac                   Despite explicit wording of s. 21(1), no corporation = no contract. Bullshit ruling, undermines s. 21(1).

   OBCA s. 21(1) applies to an oral or written contract. Court focuses on term 'contract', adopts literal approach:
       o S. 21(1) only applies if there is a contract. If no corporation, no contract. [Case criticized as contrary to the spirit of s. 21(1).]

Szecket v. Huang (1998)            Defendant failed to contract out of pre-incorporation liability re: OBCA s. 21(4) despite clear intention to do so.

   Huang wanted to develop Szecket's patented metal-bonding technology for use in Taiwan. Had funding to do so.
   Agreements signed to define mutual understanding of proposed venture, and to provide funding.
   Szecket wanted Huang to "personally, and on behalf of a company to be incorporated, guarantee" the benefits of the contract; included provision
    in proposed contract, saying Huang personally guaranteed the benefits.
   Huang removed "personally, and"; agreement became "on behalf of a company to be incorporated".
   Provision "as contemplated by s. 21(4)" not included.
         o Trial court found deleting “personally, and” insufficient to contract out re: s. 21(4).
         o Court of Appeal: by deleting the "personally and" thing, Huang explicitly repudiated intention to be held liable; satisfies s. 21(4), relieves
              him of personal liability.
         o SCC:
                      Just deleting the clause is insufficient; the contract needs an express provision waiving liability re: OBCA s. 21(4).
                      Defendant "knew, and, indeed, intended" to contract on behalf of company to be incorporated.
                      "[W]here the company is not incorporated and the contract is not performed, liability for breach of the pre-incorporation
                       contract depends on the application of s. 21, which was enacted to replace the common law."

                                                                         Repudiates Westcom. Rights of pre-incorporation contractor transferred to
1394918 Ontario Ltd. v. 1310210 Ontario Inc. (2002)                      corporation, as per OBCA s. 21.

   Agreement re: purchase/sale of land. Stipulated purchaser entering contract in trust for co. to be incorporated; not in his personal capacity.
   Agreement was to become null and void if purchaser didn't complete the deal w/in 120 days.
   119 days after agreement signed, vendor asserted agreement was null and void.
   2 weeks later, purchaser’s counsel sent letter claiming damages for unlawful repudiation.
   2 more weeks pass. Company is incorporated. Purchaser assigns his rights (held in trust) under the (repudiated) contract to the new co.
   New corporation sues the repudiating vendor.
   Vendor: corporation has no capacity to commence an action for damages under the contract.
   Court of Appeal: Yes it does.
        o Rejects rigid, literal Westcom approach: “[OBCA s.] 21 was intended to replace the common law. [It should be read in the] context of
              the purpose it was intended to fulfil. The statutory scheme for pre-incorporation contracts throws off the confusion of the common law
              and shouldn't be thwarted to that end by concern, for instance, that a common law contract requires two parties with co-existent
              liabilities. If s. 21 calls for liability absent those features, then those liabilities must flow and the ‘contract’ referred to must be treated as
              a statutory creation.”

Don't conflate the theories of pre-incorporation transaction and agency.




                                                                              38
DIRECTORS & OFFICERS
CORPORATE CAPITAL STRUCTURE
Debt and shares
        2 ways for corporations to raise capital: they can convince people to give them money in exchange for
    1.        "Equity securities" (corporate shares), or
    2.        "Debt securities" (creditors' loans)
        Either way, the new holder of the security (the shares or the debt interest) acquires rights re: corporation (varying depending on the security).

Debt capital—corporate power to borrow

        Old English model registration required authorization to borrow in corporation’s memorandum of association. (Usually implied where it appeared
         upon a reasonable construction that it was "intended to be conferred"—Kerr v. University Press Ltd., 1923.)
        Now, no restriction on an individual's borrowing capacity; THF no restriction on corporations (OBCA/CBCA s. 15(1)—co. has privileges of a person).

Share capital

        A share is an item of personal property w/ a bundle of rights attached to it, exercisable to the exclusion of other people:
              o Personal property w/ rights attached to it
              o Right to receive distribution of assets upon liquidation/winding up
              o Right to proportionate distribution of value of assets, after the corporation's debts have been satisfied
        Corporate share provides divided interest in corporation; investment of money into the corporation in exchange for the bundle of rights
        A share is not a property right in the corporation; shareholders don't have title to corporate assets
        Shareholder may purchase share from the corporation or from a prior shareholder.
              o When share was issued to original holder, holder paid share price to the corporation.
              o Shareholder may be an institution itself.
        Creation of shares: OBCA s. 5, CBCA s. 6(1)
              o Not compulsory to specify in the articles a maximum number of shares: CBCA s. 6(1)(c)
        Issue of shares restricted in at least 3 ways
              (1) Shares are to be issued for consideration: OBCA s. 23(3), CBCA s. 25(3)
              (2) Directors are required to act "with a view to the best interests of the corporation": OBCA s. 134(1), CBCA s. 122(1)
              (3) Rules re: how corporations must account for share capital: OBCA s. 24(1), CBCA s. 26(1)
                            Separate stated capital account for each class and series of shares issued
                            Co. shall add to the appropriate stated capital account the full amount of any consideration for any shares it issues.
                            On issue, co. shall not add to a stated capital account re: the share it issues an amount greater than the amount of the
                             consideration' it received for the share
                            A corporation shall not reduce its stated capital or any stated capital account except in the manner provided in this Act.

Minimum requirements

 OBCA s. 22(1)        CBCA s. 24(1)    Shares of a corporation shall be in registered form and shall be without nominal or par value.


        Co.’s used to have to keep a listing of what shares were held by whom. Anyone could look at the register, determine who was a shareholder.
        Still true; HVR, greatly simplified under reformed Canadian statutes: OBCA s. 141, CBCA s. 50.




                                                                                39
Classes of shares
   Welling: "[A] class is simply a sub-group of shares with rights and conditions in common which distinguish them from other shares.”
   Corporations discriminate among shareholders by dividing them into classes. Where more than one class of share, rights/conditions set out in
    corporate Articles, re: OBCA s. 22(4)(a), CBCA s. 24(4)(a).

Share class         Common characteristics
                        Given preference re: distribution of dividends, distribution of proceeds on liquidation
                        Usually non-voting
                        Common features:
                         (a) Cumulative dividend rights
Preferred shares         (b) Participating—participate in dividends beyond specified preferred amount they are to receive in any given year
                         (c) Redemption/call provision—redeemable by the company; to facilitate refinancing of the company, shares bought back
                              from shareholder
                         (d) Retraction rights—permits shareholder to tender the share to the company and the company has to buy it back at some
                              price specified in advance
                        Right to share in dividends and on a distribution of proceeds of liquidation
Restricted shares
                        Allows control group to raise capital w/out losing control of company.
Rights              Shareholders have right to buy a share in the company for a predetermined price
                    Holder of option has right to buy/sell item specified in contract (e.g. particular securities such as shares, debentures); gives holder
Options
                    right to buy/sell specified quantity of a specified security w/in a specified period at a stated price.

R. v. McClurg (1990)          A discretionary dividend clause is a valid means of allocating/changing dividend rights for specific classes of shares.

   All shares have the right to receive an equal dividend unless OTW provided in the Articles.
   Palmer's Company Law: “It is only when a company divides its share capital into different classes with different rights attached to them that the
    prima facie presumption of equality of shares may be displaced.”
   Welling: "[A] class is simply a sub-group of shares with rights and conditions in common which distinguish them from other shares"
   OBCA s. 22(4)(a), CBCA s. 24(4)(a): "the rights, privileges, restrictions and conditions attaching to the shares of each class" must be expressly
    stated in the Articles of Incorporation.
   Crown: 'discretionary dividend clause' must be disregarded b/c it failed to comply w/ CBCA. Presumption of equality not rebutted.
   Court:
           Wrong! A discretionary dividend clause is a valid means of allocating declared dividends, sufficient to rebut presumption of equality.
           Can only be interpreted as creating difference btw share classes, since that is the rationale for the clause.
           Shareholders are fully aware of their entitlements and privileges to the extent that the presumption of equality is rendered inapplicable.

Voting rights
   Traditional to entitle some/all shareholders to vote and to set out matters on which their votes will be determinative.
   Corporate designers who want to create a class of non-voting shares must make this explicit in the Articles—likely unenforceable unless explicit.
   Argument: non-voting shares are a device to entrench management in corporations.
   2 other issues
         o "ratification", and
         o Notion that a shareholder's vote must sometimes be cast "in the best interests of the corporation"


Series within a class
   Division w/in a class of shares, established by OBCA s. 25(1)(a), CBCA s. 27(1)(a).
         o Permits shareholders w/in a class to be differentiated from one another on another basis.
         o Lets directors quickly, proactively deal w/ fluctuating market conditions. If the corporation needs funding quickly and some different
              share rights should be offered to provide financing for a particular venture, they'll have to go to the shareholders to approve creation of
              a whole new class—which would require an amendment to the Articles—too slow.
         o The articles may determine the designation, rights, privileges, restrictions and conditions attaching to the shares of each series.
         o No rights, conditions attached to a series shall confer upon a series priority over any other series of the same class that are then
              outstanding.
         o Ability to establish classes must be set out in the Articles.



                                                                           40
MANAGEMENT: DIRECTORS & OFFICERS
    3 functions in any economic pursuit:
        (a) Holding proprietary interests
        (b) Exercising power
        (c) Acting

    The latter is carried out by a hired manager. During the 20th century, those who managed the enterprise (a and b) increasingly wielded real power.
    New class of professional managers, w/out capital investment.


Directors: myth and reality
      Boards of directors don't establish objectives, strategies, policies; this is done by company mgmt
      Rise of "mergers and acquisitions": If a corporation is poorly managed, its share value may fall. "Corporate raiders" take them over, resell either
       the shares, or the assets of the co., at a profit. Now a full-time activity for many business people, lawyers.
      Rise of "institutional shareholders": enormous, wealthy entity (e.g. a pension fund or a mutual fund, managed for benefit of employees or other
       investors—Elementary Teachers’ Pension Fund) holds enough shares in a large co. that its voting power cannot be ignored by mgmt.


    Management
                                            Officers (as opposed to directors)
                                            For our purposes, describes both directors and officers

    Board of directors
                                            Establish long-term directives, policies, corporate strategies
                                            Provide for/monitor managerial personnel to bring the above to fruition


Most Canadian corporate statutes enact minimal standards for directors. e.g. OBCA s. 115(1), CBCA s. 102(1): Directors
       Subject to USA, the directors shall manage or supervise the management of the business and affairs of a corporation.

                                      A corporation shall have a board of directors which shall consist of,
OBCA s. 115(2), CBCA s. 102(2):
                                      (a) in the case of a corporation that is not an offering corporation, at least one individual; and
Board of directors
                                      (b) in the case of a corporation that is an offering corporation, not fewer than three individuals.
                                      The following persons are disqualified from being a director of a corporation:
                                      1.                     A person who is less than eighteen years of age.
                                      2.                     A person who has been found under the Substitute Decisions Act, 1992 or under the Mental
OBCA s. 118(1), CBCA s. 105:
                                            Health Act to be incapable of managing property or who has been found to be incapable by a court in Canada
Qualifications of directors
                                            or elsewhere.
                                      3.                     A person who is not an individual [i.e. a corporation].
                                      4.                     A person who has the status of bankrupt.
                                      At least 25 per cent of the directors of a corporation other than a non-resident corporation shall be resident
OBCA s. 118(3): Residency
                                      Canadians, but where a corporation has less than four directors, at least one director shall be a resident Canadian.
                                           You have to name your first directors. The first directors will hold office until the first shareholders' meeting,
                                            whereupon new directors will be elected or the first director(s) ratified for a 3 yr max term (no later than the
OBCA s. 119(6)
                                            third annual shareholders' meeting.
                                           If director is not elected for expressly stated term, he/she ceases to hold office after the first annual meeting.
OBCA s. 121(1): When director
                                      A director will cease to hold office when he/she dies, resigns, becomes disqualified or is removed from office.
ceases to hold office
                                      Shareholders are empowered by statute to remove directors. Such a removal is accomplished by ordinary
OBCA s. 122(1)
                                      resolution of shareholders.
                                      Re: actual number of directors (Welling, 306): Cdn statutes normally require only one, unless we're dealing w/ an
OBCA s. 115(2)
                                      offering corporation, in which case there must be at least three.


Meetings
      Directors meet to perform a supervisory role, serve as members of committees (corporate governance committee, audit committee,
       compensation committee, etc.)

    OBCA s. 126(1): Place of
                                      Held at place where the registered office of the corporation is located, subject to …
    meetings and quorum

                                                                              41
                                        If the by-laws so stipulate, meetings can be held at any place within or outside Ontario, but must be held at a
    OBCA s. 126(2): Exceptions
                                        location inside Canada.
                                        In addition to any other provision in the by-laws, Articles re: calling meetings, a quorum of directors can at any time
    OBCA s. 126(8) Calling meeting
                                        call a meeting for the transaction of any business.
    of directors
                                        The general nature of that business to be conducted is to be specified in the Notice which calls the meeting.
    OBCA s. 126(9) Notice of            Unless the by-laws stipulate otherwise, notice of the time/place of the meeting must be given to every director, 10
    meetings                            days or more before the meeting date (to the director's latest address as per the corporate records).
                                             A director can waive notice at any time and in any manner. [The ability to do so will be useful, e.g. if urgent
    OBCA s. 126(10): Waiver of                matters arise and it's impossible to give the required amount of time.]
    notice                                   Attendance at the meeting constitutes waiver of notice, unless a director attends with the express purpose of
                                              objecting to the transaction proposed at the meeting, on the grounds that the meeting was not lawfully called.
    OBCA s. 126(13): Meeting by
                                        It's possible to attend via conference call, teleconference, etc., if all participating directors give consent.
    phone
                                            Sometimes it's more effective to dispense w/ meeting altogether by merely consenting in writing; requires no
    OBCA s. 129(1): Resolution in            discussion.
    lieu of meeting                         A written resolution signed by all directors entitled to vote at the meeting will be valid as if it had actually
                                             been passed at an actual meeting.


                                        Number of people who must be present for the corporation to be considered legally competent to transact
                         business.
Quorum                                   A corporation in its articles or by-laws, may specify whatever quorum it likes. But if it doesn't, a quorum is
                         constituted by a majority of the directors on the board, or, a majority of the minimum number required by the articles. [subject
                         to s. 126(4), which says, if you have fewer than 3 directors, all directors must be present to constitute a quorum.]


Public corporations: elections & appointments
        Most senior officer is known as the Chief Executive Officer (CEO)
        Others: Chief Financial Officer, treasurer, secretary, etc.
        No requirement that different people occupy the role of shareholder, officer, director. In larger companies, however, there's simply not enough
         time to do it all. But senior officers are often members of the board of directors as well.

    1.       Number of positions
                Cdn statutes normally require only one director; corporate constitution may set maximum/minimum numbers. At least 3 usually
                required for corporations "offering securities to the public." OBCA s. 115(2), CBCA s. 102(2).

    2.       Procedure
             o        "first directors" named in application for incorporation, hold office until first shareholders' meeting
             o        Election to staggered terms of office is the norm; statute may limit the term
                                OBCA s. 119(3), CBCA s. 106(3): max 3 yrs.
                                OBCA s. 119(5), CBCA s. 106(5): The length of directors’ terms may vary.
                                OBCA s. 119(6), CBCA s. 106(6): Where length of term not explicit, ends after first annual meeting.
             o        Corporate constitution may permit class directors
                                Reserves one or more positions on the board for directors elected solely by a particular class of shareholders
             o        Corporate constitution may permit cumulative voting
                                Substituting proportional representation for strict majority rule
                                OBCA s. 120, CBCA s. 107: Each shareholder may cumulate all the votes attached to her shares in a multi-director
                         election, and divide them as she sees fit among the candidates;
                                          gives minority shareholders opportunity to concentrate their votes and elect some candidates (rather than
                                           casting futile votes for a losing candidate each time).
             o        OBCA s. 133, CBCA s. 121: Appointment of officers less regulated; board of directors may designate corporate "offices" and then fill
                 them.

    3.       Casual vacancies
             o        OBCA s. 124(5), CBCA s. 111(4): Quorum of board of directors is statutorily empowered to fill vacancies.
             o        Statute may contemplate, HVR, that the articles will give this power to the shareholders; statute may give it to the shareholders
                 where there is not a quorum of directors

    4.       Removal
             o         OBCA ss. 6(5), 122(1); CBCA ss. 6(4), 109: Power for shareholders to remove directors
             o         Bushell v. Faith (1970): permissible for a contractarian company to have a provision in its articles of association that on a resolution
                  to remove a director from office, any shares held by that director carried three votes per share; this even in the face statute that said

                                                                                 42
                 notwithstanding anything in the articles, a director could be removed by ordinary resolution; 3-votes-per-share rule not compatible w/
                 statute



DUTIES OF MANAGEMENT
DUTIES OF CARE, DILIGENCE & SKILL
Directors and officers (management) individually constrained by statutory standards of behaviour:
    1.              "legal" (common law) duties,
    2.              "equitable" duties,
    3.              statutory duties

Duty of care, skill and diligence generally involves issues of competence.

OBCA s. 134(1)(b), CBCA s. 122(1)(b): Every director and officer of a corporation, in exercising his/her power and discharging his/her duties, must
exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

    (Low threshold to satisfy mgmt's duty of care)

    Re City Equitable Fire Insurance Co.             Old common-law (subjective) standard

      At c.l., director wasn't bound to show up to all directors' meetings, but ought to when able.
      Ct: in order to determine whether or not a director is acting w/in the required standard of care, one must look at the nature of the co.'s business,
       the co.'s organization, and the way the works id distributed btw directors and officers.
      Three key propositions on DOC
               1.       In performing their duties, directors need not exhibit a greater degree of care and skill than may be reasonably expected of a
                     person of his/her knowledge and experience.
               2.       Directors are not bound to give their "continuous attention" to the corporation's affairs; he doesn't have to attend all (or hardly
                     any) board meetings, though he/she ought to do so if reasonably able.
               3.       When a director has properly delegated duties to another corporate official, he/she is entitled to rely on those officials to actually
                     perform the duties.

    Soper        Developing characterization of the duty of care                  ‘objective subjective’ hybrid (rejected by Wise)

      October 87: Soper, an experience business person, becomes director of RBI. Operates a modeling school and talent agency. Soper is aware the
       company is experiencing financial difficulties.
      November 87: RBI's balance sheet demonstrates a net loss of over $130,000.
      Re: Income Tax Act, taxes have to be deducted, held for Fed govt. however: directors are not liable for unremitted amounts if it can be established
       that they met a due diligence standard; specifically, that they exercised a degree of care, diligence and skill.
      RBI doesn't fulfil its obligations to make the tax remittances. Soper is never informed of this. HVR, he didn't ask whether RBI was compliant w/ its
       remittance obligations.
      Ct rules Soper did not meet the due diligence test:
            o Instead of doing nothing, as director he had a positive duty to act.
            o Positive duty arose when facts arose which might have led him to conclude there was a problem. At the latest, he should have acted in
                 November 87, when he was shown the catastrophic net loss.
      In making its ruling, the court provides more guidance on the content of the duty of care:
            o Re: whether there is a difference btw the City Equitable standard (at common law) and the statutory standard
            o Common law should be viewed as a subjective and objective hybrid test
            o The DOC standard will depend on personal knowledge, experience and position of the particular director on a given set of facts. (Also
                 significant: corporate culture, resources, organization.)




                                                                               43
The business judgment rule
Peoples Dept. Stores v. Wise             'important, impactful decision' despite ambiguity. Directors’ fiduciary duty to creditors?     Objective standard

      1992: Wise buys shares of Peoples from Marks & Spencer.
            o $5 million to be paid on closing w/ $17 million more to be paid over 8 yrs
            o Peoples is to be fully amalgamated w/ Wise after the full amount is fully paid.
      Three Wise brothers are main shareholders, officers and directors. They become sole directors of Peoples.
            o [2 ways to initiate bankruptcy proceedings:
                           Debtor can initiate bankruptcy proceedings voluntarily, voluntarily assign property to creditors.
                           Under certain circumstances (in legislation), debtor can be forced into bankruptcy via the petition of a creditor.]
      Marks & Spencer initiate bankruptcy proceedings against Peoples. Peoples later consents to the petition. Both Peoples and Wise are declared
       bankrupt, January 2005.
      Peoples' trustee files a petition against the Wise brothers. Claim:
            o The Wise brothers favoured the interests of Wise over Peoples to the detriment of Peoples' creditors, in breach of their duties as
                 directors under CBCA s. 122(1).
      Wise claim they reasonably relied on the expertise of their vice president of finance.
      Issue: whether directors of a co. owe a fiduciary duty to the corporation's creditors, in addition to the corporation.
      Held: directors owe a duty of care to creditors, but that duty does not rise to a fiduciary duty.
            o Absent a USA to the contrary, CBCA s. 102 (OBCA s. 115) holds directors responsible for managing the corporation.
            o Fiduciary duty: "act honestly and in good faith with a view to the best interests of the corporation" [subjective]; and
            o Duty of care: "exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances"
                 [objective]
            o CBCA s. 122(1) re: directors' duties requires more of directors and officers than the traditional common law duty of care
                           Officer/director must exercise care, diligence and skill that a reasonably prudent person would exercise in comparable
                            circumstances
                                      “comparable circumstances” requires context in which the manager's decision was made to be taken into account.
                                      HVR, this is not the introduction of a subjective element relating to the competence of the director, but rather the
                                       introduction of a contextual element into the statutory standard of care.*
            o Beneficiary is open-ended, must include creditors
            o Primary facts, also prevailing socio-economic conditions considered. "Directors and officers often have business expertise that courts do
                 not. Many decisions made in the course of business, although ultimately unsuccessful, are reasonable and defensible at the time".
            o [Welling, 319:] 3 important points re: the duty of care
                           The directors and officers are not going to breach the duty of care if they act prudently and on a reasonably informed basis.
                           The decisions the directors and officers make have to be reasonable business decisions, in light of all of the circumstances of
                            which the directors and officers actually knew or ought to have known.
                           "business judgment rule" -- court should defer to a manager's business decisions. HVR, courts are capable of determining
                            whether an appropriate degree of diligence was used in reaching what is claimed to be a reasonable business decision.
      Held: Implementing the policy was reasonable business decision made w/ a view towards rectifying an urgent and serious business problem.
       There were many factors that contributed more directly to the financial downfall of Peoples (e.g. the entrance of Wal-mart into the market).
      Re: the VP finance's expertise, CBCA s. 123(4):
            o A director is not liable … if he relies in good faith on
                           Financial statements of the corporation represented to him 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
                           A report of a lawyer, accountant, engineer, appraiser or other person whose profession** lends [his claims] credibility.
            o The VP finance had a bachelor's degree in commerce and 15 yrs of experience in administration and finance w/ Wise. Not an
                 accountant. Not sufficient level of professionalism required to allow the directors to rely on his advice as a bar to a suit under the DoC.

    * Under this fluid-yet-objective standard, director doesn't have to attend all meetings but ought to do so when reasonably able.
    ** "profession" should be interpreted quite literally.

    Hercules Managements Ltd. v. Ernst & Young (1997)                              Welling, notes p. 322

           At c.l., auditor of a corporation generally does not owe a duty of care to the shareholders of the corporation, in respect of financial loss
            caused by a careless audit.
           Admitting you have no knowledge in a certain area and consulting someone who does is a diligent exercise of power. A director is entitled
            to rely on advice received from professionals, provided there was no blatant evidence the information was inaccurate or misleading.




                                                                              44
 OBCA now has specific incentive for directors to attend meetings. They can't escape responsibility by blowing off meetings.

 Section            Subject
                    Consent of director at meeting
                    A director who is present at a meeting of directors or committee of directors is deemed to have consented to
                    any resolution passed or action taken thereat unless the director,                                                   Directors who don’t dissent on record
           (1)                 (a) requests that his or her dissent be or his or her dissent is entered in the minutes of the meeting;   are deemed to consent.
                               (b) sends a written dissent to the secretary of the meeting before the meeting is terminated; or
                               (c) sends a dissent by registered mail or delivers it to the registered office of the corporation
                                      immediately after the meeting is terminated.
                    Idem                                                                                                                 Likewise, directors who vote to consent
           (2)
                    A director who votes for or consents to a resolution is not entitled to dissent under subsection (1).                on record can’t later dissent on record.
                    Idem
                    A director who was not present at a meeting at which a resolution was passed or action taken is deemed to            A director who was absent from the
           (3)      have consented thereto unless within seven days after becoming aware of the resolution the director,                 resolution has seven days to place
                               (a) causes his or her dissent to be placed with the minutes of the meeting; or                            his/her dissent on the record.
 135                (b) sends his or her dissent by registered mail or delivers it to the registered office of the corporation.
                    Reasonable diligence defence
 123
                    A director is not liable under section 130 and has complied with his or her duties under subsection 134 (2) if
                    the director exercised the care, diligence and skill that a reasonably prudent person would have exercised in        Good-faith reliance on the co.’s
                    comparable circumstances, including reliance in good faith on,                                                       financial statements/reports
                                (a) financial statements of the corporation represented to him or her by an officer of the               constitutes “exercise of the care,
                                       corporation or in a written report of the auditor of the corporation to present fairly the        diligence and skill that a reasonably
                                       financial position of the corporation in accordance with generally accepted accounting            prudent person would have exercised
           (4)                         principles;                                                                                       in comparable circumstances”
                                (b) an interim or other financial report of the corporation represented to him or her by an officer of
                                       the corporation to present fairly the financial position of the corporation in accordance with    OBCA: satisfies only fiduciary duty.
                                       generally accepted accounting principles;
                                (c) a report or advice of an officer or employee of the corporation, where it is reasonable in the       CBCA: satisfies directors’ fiduciary
                                       circumstances to rely on the report or advice; or                                                 duty and duty of care.
                                (d) a report of a lawyer, accountant, engineer, appraiser or other person whose profession lends
                                       credibility to a statement made by any such person. [business judgment rule]

Court addressed CBCA s. 123(5) (the business judgment rule) in Peoples. Although they weren't found in violation of their duty, in mounting their
defence, the Wise bros argued they were entitled to rely in good faith on the judgment of their VP finance, Mr. Clement. They argued that his
profession lent credibility to his statement.


 PRO                                           CON

                                                                     Courts do this every day
                          Institutional
       competition
                                                                     Potentially mgmt could go too far
                                                                     "tyranny of the majority" (though legislation prevents this by providing rights for minority
                          Fosters
                                                    shareholders)
       creativity
                                                                     Doesn't encourage due diligence in business decisions; fosters carelessness



FIDUCIARY DUTY
 Directors, officers owe a fiduciary obligation, re: OBCA 134(1)(a), Canadian Aero Services Ltd. v. O'Malley (1974)


                                                    If a wrong arises, the same remedy exists against the wrongdoer on behalf of the principal as would against a
                                   trustee.
 Fiduciary                                          Word "fiduciary" not definitive of a single class of relationships to which a fixed set of rules, principles
                                   applies. Each equitable remedy available only in a limited number of fiduciary situations; and the mere statement that John
 relationship
                                   is in a fiduciary relationship towards me means no more than that in some respects his position is trustee-like; it does not
                                   warrant the inference that any particular fiduciary principle or remedy can be applied. (L. Sealy, "Fiduciary Relationships")
                                                    Relationships defined "class by class"

    o                Involves issues of honesty and good faith.
    o                Most actions for wrongdoing involve this second duty.
    o                Directors owe fiduciary obligations to their corporations. Corporate officers owe the same fiduciary duties: Canadian Aero Services
          Ltd. v. O'Malley (1974)
    o                Now we have a statutory regime to curb mgmt's temptations.
                                                                                         45
46
    Judicial review of the exercise of managerial powers

    Exercise of power reviewable based on purpose for which it was exercised.

      1.             Limitation within the power, as a matter of construction
           Legal powers implicitly limited as to the purposes for which they may be used.

      2.               Whether or not the power has been effectively exercised requires an examination of the motives for which it was used
           If used in what the fiduciary thought was the best interest of the corporation, it is effective; otherwise, not.


    Peoples Dept. Stores Inc. v. Wise (2004) [revisited]                 No fiduciary duty owed to creditors


      Issue: does the CBCA s. 122(1)(a) (OBCA s. 134(1)(a)) fiduciary duty protect creditors?
      CBCA s. 102, (OBCA s. 115): Directors, officers control deployment and management of financial, human and material resources.
      Statutory fiduciary duty requires directors, officers to
             o act honestly and in good faith vis-a-vis the corporation
             o Respect the trust and confidence reposed in them to manage the assets of the corporation in pursuit of the realization of the objects of
                  the corporation
             o Avoid conflicts of interest
             o Avoid abusing their position to gain personal benefit
             o Maintain confidentiality of information
             o Serve the corporation selflessly, honestly and loyally
      "Specific substance" of the fiduciary duty, re: CBCA
             o Canadian Aero Services Ltd. v. O'Malley (1974): Directors, officers may have to account to the co. for profits they make that do not
                  come at the corporation's expense; a director “must not be allowed to use his position … to make a profit even if it was not open to the
                  company, as for example, by reason of legal disability, to participate in the transaction."
                             HVR, not required that directors, officers in all cases avoid personal gain as a direct or indirect result of their honest an good
                              faith supervision or management of the corporation.
                             If directors, officers are also shareholders, as is often the case, their lot will automatically improve as the corporation's
                              financial condition improves
      Trial judge determined the Wise brothers "derived no direct personal benefit from the new domestic inventory procurement policy", though there
       was an indirect benefit. No dishonesty or fraud on the part of the Wise brothers. Re: the Court of Appeal, "the brothers were driven solely by the
       wish to resolve the problem of inventory procurement … in line with the pursuit of the interests of the corporation within … s. 122(1)(a).
      "[In] determining whether they are acting with a view to the best interests of the corporation it may be legitimate, given all the circumstances of a
       given case, for the board of directors to consider, inter alia, the interests of shareholders, employees, suppliers, creditors, consumers,
       governments and the environment." …
      "The various shifts in interests … do not, however, affect the content of the fiduciary duty under s. 122(1)(a) of the CBCA. At all times, directors
       and officers owe their fiduciary obligation to the corporation."
      "Short of bankruptcy, as the corporation approaches what has been described as the "vicinity of insolvency" [deterioration in the corporation's
       financial stability], the residual claims of shareholders will be nearly exhausted."
      "Any honest and good faith attempt to redress the corporation's financial problems will, if successful, both retain value for shareholders and
       improve the position of creditors."
      Creditors' interests are protected, e.g. by amalgamation (CBCA s. 185), the oppression remedy—OBCA s. 248(2)(c), CBCA s. 241(2)(c)
      Stakeholders have viable remedies at their disposal. No need to read the interests of creditors into the duty set out in s. 122(1)(a)



FIDUCIARY DUTY: CREDITORS’ “OPPRESSION REMEDY”
      OBCA s. 248(2)(c), CBCA s. 241(2)(c): If the court is satisfied that the powers of the directors … have been exercised in a manner … oppressive or
       unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer … the court may make an order to
       rectify the matters complained of.
      A person applying for the oppression remedy must fall w/in the definition of 'complainant', re: OBCA s. 245, CBCA s. 238:
             (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.
      Creditors may apply for the oppression remedy under para. (d) by asking a court to exercise its discretion and grant them status as a complainant.




                                                                               47
FIDUCIARY DUTY: TAKEOVER BIDS
Judicial review of exercise of managerial powers
     Exercise of power is reviewable based on the purpose for which it was exercised
           o Legal powers implicitly limited as to the purposes for which they may be used (if you give someone power to deposit to your bank
                 account, clearly he/she can't withdraw money)
           o Fiduciary obligation owed by corporate managers is limited: whether or not managerial power has been effectively exercised requires an
                 examination of the motives for which it was used
                           i.e. if it was used in what the fiduciary thought was the best interest of the corporation, it is effective
     Myriad motivations inform a hostile takeover bid.
     Often, bidder believes changes to mgmt structure (replacing directors) will enhance the co's value.
     In such a situation, self-interest of the directors (under threat) might lead them to attempt to block the takeover bid. They could make the
      takeover difficult to achieve (e.g. by making the bid as expensive as possible -- the poison pill; issuing new shares to equity holders at a discounted
      price, to dilute the bidder's shares)


    Hogg v. Cramphorn (1967)             Improper purpose doctrine (rejected in Teck)


     Directors issued shares to new "employees' trust" to dilute, defeat takeover bid by minority shareholder.
     Articles of incorporation: directors may allot shares "to such persons and on such terms and conditions and at such times as the directors think
      fit."
     Was the share-issuance scheme an improper use of managerial authority? Can directors legitimately manipulate voting position?
     Re: Punt v. Symons & Co. Ltd.
            o A power *to issue shares+ of the kind exercised by the directors in this case … is given them for the purposes of enabling them to raise
                 capital when required for the purposes of the company. … *W+hen I find a limited issue of shares to persons who are obviously meant
                 and intended to secure the necessary statutory majority in a particular interest, I do not think that is a fair and bona fide exercise of the
                 power.
     Re: Piercy v. S. Mills & Co. Ltd.
            o [Directors] are not entitled to use their powers of issuing shares merely for the purpose of maintaining their control or the control of
                 themselves and their friends over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority
                 of shareholders.
     Held:
            o Directors had a good-faith belief that the takeover would be detrimental to the company and were not acting in their own self
                 interest.
            o NTL, share scheme still invalid. Not justified just b/c the directors genuinely believed it would benefit the company.
            o Unless a majority in a company is acting oppressively towards the minority, this court should not and will not itself interfere with the
                 exercise by the majority of its constitutional rights or embark upon an inquiry into the respective merits of the views held or policies
                 favoured by the majority and the minority.
            o The power to issue shares was a fiduciary power and if, as I think, it was exercised for an improper motive, the issue of these shares is
                 liable to be set aside.


                                         Where directors are given a particular power, they can't go and use that power for a purpose that was not
                         originally intended.
Improper
purpose doctrine 
                                          e.g. Issuing shares just to thwart a takeover is not a proper use of the power to issue shares.
                                         Because directors are using their power for an improper purpose, they are breaching their fiduciary obligation
                         to the corporation.


    Teck Corp. v. Millar (1972)                Same deal; directors diluting shares                     Rejects improper purpose doctrine


     "Directors had the power to enter into the contract here, and … the power to allot shares pursuant to such a contract. *However,+ they were
      actuated by an improper purpose in the exercise of their powers."
     Not an allegation that the directors acted ultra vires; allegation of abuse of power.
     Directors, in the exercise of their powers, must act in what they bona fide consider to be the best interest of the company. If they issue shares to
      retain control for themselves, that is an improper purpose: Fraser v. Whalley (1864).
     [Directors] must exercise their discretion bona fide in what they consider -- not what a court may consider -- is in the interest of the company, and
      not for any collateral purpose: Re Smith & Fawcett, Ltd. (1942).
                                                                               48
              o        Hogg ruling that directors may not allot shares to frustrate a takeover attempt, even if they believe that it is in the best interests of
                       the company is inconsistent with the law as laid down in Re Smith & Fawcett.
                                 Court's jurisdiction to intervene founded on theory that:
                                           If the directors' purpose is not to serve the interest of the company, but to serve their own interest or that of their
                                            friends or of a particular group of shareholders, their purpose is improper and they have abused their power.
              o        If today the directors of a company were to consider the interests of its employees no one would argue that in doing so they were not
                       acting bona fide in the interests of the company itself.
              o        [Directors] ought to be allowed to consider who is seeking control and why. If they believe that there will be substantial damage to
                       the company's interests if the company is taken over, then the exercise of their powers to defeat those seeking a majority will not
                       necessarily be categorized as improper.
              o        HVR, "the limits of their authority must be clearly defined." Test:
                                 "The directors must act in good faith. Then,
                                 There must be reasonable grounds for their belief *that+ there will be substantial damage to the company's interests … . If
                                  there are not, that will justify a finding that the directors were actuated by an improper purpose. …
     Here:
          o    No improper purpose. In seeking to prevent Teck obtaining the contract, the defendant directors were honestly pursuing what they
               thought was the best policy for the company. …
         o Plaintiff failed to show directors had no reasonable grounds for believing that a takeover by Teck would cause substantial damage to the
               interests of Afton and its shareholders. Reasonable grounds for belief that substantial damage would occur were demonstrated.
     What will constitute reasonable grounds?
         o Reports, analysis, affidavits, etc.


Self-dealing transactions/conflict of interest
     Historically, managers simply forbidden from engaging in self-dealing; any contract made in violation of this prohibition is void or voidable.
     [Fiduciary duty] of agents of a corporation (i.e. officers) to act as best to promote the interest of the corporation whose affairs they are
      conducting. No one w/ such duties shall be allowed to enter into engagements in which he has or can have a personal interest conflicting or
      which possibly may conflict with the interests of those whom he is bound to protect. No question is allowed to be raised as to the fairness or
      unfairness of a contract so entered.
     [The fiduciary relationship exists where one party (the "beneficiary") relies upon the actions of another (the "fiduciary")]
     Re: Frame v. Smith, Relationships where the law imposes a fiduciary obligation tend to have 3 characteristics
           o Some scope for exercising power or discretion,
           o Fiduciary is able to unilaterally exercise that power/discretion in a manner that can affect the interests of the beneficiary, and
           o The beneficiary is particularly vulnerable to ("at the mercy" of) the fiduciary, who holds the power/discretion.
     Law-and-economics argument for fiduciary duty:
           o Duty counteracts the incentive for mgmt to act for their own benefit at the corporation's expense. (And there are many ways they can
                 act in their own interests; it's impossible for equity holders, when they undertake equity investment, to negotiate protection against the
                 myriad forms of malfeasance; too costly.) Imposing a proactive duty on mgmt is the most financially-sound, efficient approach.
           o You have to put company interests ahead of your own. If you don't, principal remedy is an accounting of profits. If we don't allow you to
                 profit from breach of fiduciary duty, you have no incentive to breach.

     In order to protect the duty to act in the beneficiary's best interests, we forbid conflicts; and if there is a conflict, the fiduciary is not even allowed
      to try to prove that he was, in fact, acting in the best interests of the beneficiary.
     "[If] the appearance or the possibility of a conflict between self-interest and duty to the corporation", voidable by corporation, absent corporate
      authorization to deal notwithstanding the conflict, given with full and frank disclosure by the fiduciary.
     Conflict of interest situations are inevitable; real problem is what to do about the voidable contracts that result:

                  1.        Where the director/officer stands to benefit personally by thwarting a takeover bid that would be positive for the corporation.
                  2.        Where the director/officer has a personal interest in a particular corporate contract (a self-dealing transaction).
                  3.        Where the director/officer takes personal advantage of an opportunity he/she was supposed to get not for his/her own benefit but
                        for the benefit of the corporation. ("Seizing the corporate opportunity.")

     Solution: legislate a routine procedure by which corporate organization can dispose of problem.
     OBCA and other statutes have now modified c.l. test to allow transactions btw managers and their corporations, so long as certain procedural
      safeguards are observed; based on recognition that in some cases, the best price or the source of supply for the corporation could be some way
      related to a director or officer.

                         Disclosure: conflict of interest
                         A director or officer of a corporation who,                                                                                          Director’s conflict of
132                                  (a) is a party to a material contract or transaction or proposed material contract or transaction with the               interest must be
        (1)                                  corporation; or                                                                                                  disclosed in writing or at
120                                  (b) is a director or an officer of, or has a material interest in, any person who is a party to a material contract or   a directors’ meeting.
                                             transaction or proposed material contract or transaction with the corporation,
                         shall disclose in writing to the corporation or request to have entered in the minutes of meetings of directors the nature
                                                                                             49
        and extent of his or her interest.
        Disclosure by director
        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 then interested in a proposed contract or transaction, at the first meeting after he or
(2)                        she becomes so interested;
                   (c) if the director becomes interested after a contract is made or a transaction is entered into, at the first
                           meeting after he or she becomes so interested; or
                   (d) if a person who is interested in a contract or transaction later becomes a director, at the first meeting after
                           he or she becomes a director.
        Disclosure by officer
        The disclosure required by subsection (1) shall be made, in the case of an officer who is not a director,
                     (a) forthwith after the officer becomes aware that the contract or transaction or proposed contract or                 Non-director officer’s
                             transaction is to be considered or has been considered at a meeting of directors;                              conflict of interest must
(3)
                     (b) if the officer becomes interested after a contract is made or a transaction is entered into, forthwith after he    be disclosed “forthwith”
                             or she becomes so interested; or                                                                               (CBCA: “immediately”).
        (c) if a person who is interested in a contract or transaction later becomes an officer, forthwith after he or she becomes an
        officer.
        Where contract or transaction does not require approval
         Despite subsections (2) and (3), where subsection (1) applies to a director or officer in respect of a material contract or        Even where the contract
        transaction or proposed material contract or transaction that, in the ordinary course of the corporation’s business, would          wouldn’t require
(4)
        not require approval by the directors or shareholders, the director or officer shall disclose in writing to the corporation or      approval, a director or
        request to have entered in the minutes of meetings of directors the nature and extent of his or her interest forthwith after        officer must disclose it.
        the director or officer becomes aware of the contract or transaction or proposed contract or transaction.
        Director not to vote
        A director referred to in subsection (1) shall not attend any part of a meeting of directors during which the contract or
        transaction is discussed and shall not vote on any resolution to approve the contract or transaction unless the contract or         The director can’t vote
(5)     transaction is,                                                                                                                     on a resolution regarding
                    (a) one relating primarily to his or her remuneration as a director of the corporation or an affiliate;                 his own conflict.
                    (b) one for indemnity or insurance under section 136; or
                    (c) one with an affiliate.
(5.1)   Remaining directors deemed quorum
        If no quorum exists for the purpose of voting on a resolution to approve a contract or transaction only because a director is not permitted to be present
        at the meeting by reason of subsection (5), the remaining directors shall be deemed to constitute a quorum for the purposes of voting on the
--
        resolution.
(5.2)
        Shareholder approval
--      Where all of the directors are required to make disclosure under subsection (1), the contract or transaction may be approved only by the shareholders.

        Continuing disclosure
        For the purposes of this section, a general notice to the directors by a director or officer disclosing that he or she is a
(6)     director or officer of or has a material interest in a person, or that there has been a material change in the director’s or        Sufficient disclosure
        officer’s interest in the person, and is to be regarded as interested in any contract made or any transaction entered into
        with that person, is sufficient disclosure of interest in relation to any such contract or transaction.
                                                                                                                                            Such a conflict doesn’t
        Effect of disclosure                                                                                                                render void/voidable any
        Where a material contract is made or a material transaction is entered into between a corporation and a director or officer         transaction entered into
        of the corporation, or between a corporation and another person of which a director or officer of the corporation is a              by the corporation, if the
        director or officer or in which he or she has a material interest,                                                                  director or officer
                    (a) the director or officer is not accountable to the corporation or its shareholders for any profit or gain realized   disclosed his/her
(7)                        from the contract or transaction; and                                                                            conflict, the transaction
                    (b) the contract or transaction is neither void nor voidable,                                                           was approved by the
        by reason only of that relationship or by reason only that the director is present at or is counted to determine the presence       directors, and the
        of a quorum at the meeting of directors that authorized the contract or transaction, if the director or officer disclosed his       transaction was
        or her interest in accordance with subsection (2), (3), (4) or (6), as the case may be, and the contract or transaction was         reasonable and fair at
        reasonable and fair to the corporation at the time it was so approved.                                                              the time.
        Confirmation by shareholders
        Despite anything in this section, a director or officer, acting honestly and in good faith, is not accountable to the corporation or to its shareholders for
        any profit or gain realized from any such contract or transaction by reason only of his or her holding the office of director or officer, and the contract or
(8)     transaction, if it was reasonable and fair to the corporation at the time it was approved, is not by reason only of the director’s or officer’s interest
        therein void or voidable, where,
(7.1)               (a) the contract or transaction is confirmed or approved by special resolution at a meeting of the shareholders duly called for that purpose;
                           and
                    (b) the nature and extent of the director’s or officer’s interest in the contract or transaction are disclosed in reasonable detail in the notice
                           calling the meeting or in the information circular required by section 112.
        Court setting aside contract                                                                                                        If director/officer fails
(9)     Subject to subsections (7) and (8), where a director or officer of a corporation fails to disclose his or her interest in a         to disclose conflict, the
        material contract or transaction in accordance with this section or otherwise fails to comply with this section, the                co. or a shareholder can
(8)     corporation or a shareholder of the corporation, or, in the case of an offering corporation, the Commission may apply to            apply to the court to
        the court for an order setting aside the contract or transaction and directing that the director or officer account to the          have the contract

                                                                            50
                    corporation for any profit or gain realized and upon such application the court may so order or make such other order as it   annulled and hold the
                    thinks fit.                                                                                                                   director/officer liable
                                                                                                                                                  for the profit.

      OBCA s. 132, CBCA s. 120: Requires director or officer who is a party to a [material or proposed] contract or transaction to disclose the nature
       and extent of his interest as soon as possible and to refrain from voting on any resolution to approve the contract.
      Framework to be followed for self-dealing transactions: OBCA s. 132(1)
            o (Who?) Pertains to both officers and directors.
            o (What?) A director or an officer has to give written disclosure to the corporation of the nature and extent of his interest. Or he must
                   request that the nature and extent of his interest be entered into the minutes of a directors' meeting.
            o (In what situations?) Three situations in which this disclosure must occur:
                         (a) If the director/officer is himself a party to a material contract or transaction (or proposed material contract or transaction) w/
                              the corporation.
                         (b) If the director/officer is a director or officer of any person (i.e. corporation) who is a party to any material contract or
                              transaction (or proposed material contract or transaction) w/ the corporation.
                         (c) If the director/officer has a material interest in any person who is a party to a material contract or transaction (or proposed
                              material contract or transaction) w/ the corporation.
      Court determines "material interest" on a case-by-case basis. Little guidance re: meaning.
      Generally: a material contract is likely one w/ an impact on the value or market price of a corporation.
      Also: if a director/officer is a significant shareholder, he's likely to be considered to have a material interest therein.
      In some situations, disclosure would have to be made repeatedly (e.g. if the director of a first corporation is also director of a second corporation
       which is regularly a customer of the first).
            o Re: s. 132(6), director is permitted to give "general notice" that he has an interest in all contracts and transactions btw the two
                   corporations.
      When must disclosure occur?
            o If an officer who is not a director: s. 132(3).
            o If a director, re: s. 132(2) –
                         (a) When the director has an interest in the contract, at the meeting when the contract/transaction is first considered.
                         (b) When the director does not have an interest in the contract, at the first meeting after the director became interested.
                         (c) If he became interested after the contract is made, he must disclose at the first meeting after the director became interested.
                         (d) if a person who is interested in a contract or transaction later becomes a director, at the first meeting after he or she becomes
                              a director.
      Re: s. 132(4): even if the proposed transaction is not one which would normally require director/shareholder approval, disclosure is still necessary.
      After disclosure, the self-interested contract is put to the directors for approval.
            o Re: s. 132(5): a self-interested director doesn't get to vote, and actually doesn't get to attend any part of the meeting where the contract
                   in question is discussed—subject to some exceptions, re: s. 132(5)(a)-(c).
            o Re: s. 132(5.1): if the exclusion of the director would result in loss of quorum at directors' meeting, the remaining directors are deemed
                   to constitute a quorum for the purposes of voting on a resolution pertaining to the contract.
            o Re: s. 132(5.2): if all the directors are conflicted, the contractor transaction can only be approved by the shareholders.
      After approval by the directors, the self-interested director is not liable for his profits, as long as
            o Re: s. 132(7): the contract was reasonable and fair to the corporation at the time it was approved.
            o Re: s. 132(8): even if all the s. 132(7) requirements are not met, the contract/transaction can still be saved (and the manager not held
                   accountable for his profits) if 2 conditions are met:
                         (a) If a contract/transaction is approved by a special resolution at a shareholders' meeting that specifically called for that purpose
                              (re: def'ns s. 1(1), 'special resolution' means an affirmative vote by at least ⅔ of the voting shareholders);
                         (b) If the nature and extent of the manager's interest in the contract/transaction is disclosed in reasonable detail to the
                              shareholders.
            o [Basically s. 132(8) lets the shareholders absolve a manager's breach of fiduciary duty by voting to ratify the self-interested transaction;
                   it's an anomalous provision -- other than under this provision, a shareholder resolution that approves a breach of fiduciary duty does not
                   cure the breach or relieve the manager of liability.]



FIDUCIARY DUTY: “SEIZING THE CORPORATE
OPPORTUNITY”
    A director or officer who profits out of a conflict btw self-interest and fiduciary duty to the corporation is liable to give up those profits.


    Bray v. Ford (1896)           Welling p. 355


      [Governor of a college also employed as its solicitor. Charged fees.]


                                                                                     51
     "*A+ person in a fiduciary position … is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a
      position where his interests and duty conflict. … *There+ is danger, in such circumstances, of the person holding a fiduciary position being swayed
      by interest rather than by duty, and thus prejudicing those whom he was bound to protect."
     … if the opportunity is enticing, the manager might be tempted to pursue it himself rather than having the corporation do it.
     Involves the director/officer appropriating business/investment opportunity that might otherwise have gone to the corporation he serves.
     ABC Inc. is a mgmt consulting firm. Anna is a director and an IT consultant.
     Anna is approached by Virginia, a potential client. Virginia is about to undertake a project requiring an IT consultant.
     The project could be taken on by ABC, but Anna is interested in taking on the work herself and knows that she could get paid very well for it.
     The law takes a pretty harsh line w/ managers who have seized the corporate opportunity.

Cook v. Deeks (1916)

     4 shareholders/directors in a rwy construction business, contracting w/ CPR.
     Nobody likes Cook (P). The other three (Ds) form a new company, excluding Cook from further profit.
     They accelerate work on a contract w/ CPR, so that CPR will give them another contract. CPR has hired them b/c of their efficiency in the past,
      even w/out the lowest tender.
     CPR gives them a new contract. They choose to carry out the contract w/ a new company, Dominion Construction. This excludes the original
      corporation from the contract (and also P, not a member of the new company).
     "[Those] who assume the complete control of a company's business … are not at liberty to sacrifice the interests which they are bound to
      protect, and, while ostensibly acting for the company, divert in their own favour business which should properly belong to the company they
      represent. … [The] law is just as stern in the case of disloyalty for the benefit of a third party as it is the case of disloyalty for one's own benefit."
     [Obvious breach: they intercepted a company contract, took it for themselves. Seizing the corporate opportunity isn’t always this clear.]

What if, in good faith, the company directors decide the company cannot take a contract? Can they take it themselves?

Regal (Hastings) Ltd. v. Gulliver (1942)                Directors personally invest, then pocket share profit to recoup.

     Officers seized opportunity co. couldn't afford; breach of fiduciary obligation?
     Movie-theatre-owning co. Regal wants to acquire more theatre leases. Forms Amalgamated to acquire the leases.
     Regal plans to be sole shareholder of Amalgamated. Invests 2000 pounds to Amalgamated but can't afford any more.
     The lessor of the two theatres is concerned about transacting w/ a company so thinly capitalized as Amalgamated. Refuses to agree to the leases
      unless Regal's directors personally guarantee the leases until Amalgamated has the 5000 pounds.
     The directors don't want to do this, but they've only got 2000 pounds. They decide:
           o 4 of the 5 directors, plus their solicitor, will invest 500 pounds each. (Brings them to 4500 pounds.)
           o The remaining director (Gulliver) didn't purchase any shares himself, but persuaded 2 corporations and another individual to pony up
                the remaining 500 pounds.
     Amalgamated gets the lease. 3000 shares of Amalgamated and Regal are sold to the same purchaser. The Amalgamated shareholders (i.e. the
      Regal directors, the solicitor and the others) get a considerable profit from the sale.
     The new Regal shareholders elect a new board. That board sues the former directors for breaching their fiduciary obligation, demanding they
      hand over the profits made from the share sale. They claim:
           o The former directors took for themselves an investment (the 3000 shares in Amalgamated) that properly belonged to Regal.
           o Regal should have owned those shares. The directors shouldn't have profited from such a seizure of the corporate opportunity.
     Issue: whether the directors breached their fiduciary obligation to Regal by seizing the corporate opportunity.
     Held:
           o Re: Keech, directors can't profit personally by virtue of their station.
           o The directors profited only b/c of their positions as Regal fiduciaries. They profited only in the course of holding that office. "There is no
                doubt it was only because they were directors … of the plaintiff company that this stroke of fortune came their way".
           o The fact that the co. wasn't able to actually get the opportunity itself (since they only had 2000 pounds and couldn't afford it) is
                irrelevant.
                          "[One] occupying a position of trust must not make a profit which he can acquire only by use of his fiduciary position, or, if he
                           does, he must account for the profit so made."
                          i.e. There doesn't have to be an actual conflict for a breach to be found.
           o Directors … are not trustees, but they occupy a fiduciary position towards the company whose board they form. Their liability in this
                respect does not depend upon breach of duty but upon the proposition that a director must not make a profit out of property acquired
                by reason of his relationship to the company … . It matters not that he could not have acquired the property of the company itself -- the
                profit which he makes is the company's, even though the property by means of which he made it was not and could not have been
                acquired on its behalf.
     When directors pursue a business opportunity that came to them in their capacity as directors, their personal interests and their directorial duties
      can conflict. They can't profit from such an opportunity.


    Boardman v. Phipps (1967)              Where seizing the opportunity benefits shareholders



                                                                                52
     Similar to Regal -- trust's solicitor bought shares, took control of company. Turned its fortunes around.
     Conflict of interest and duty; forced to give up his profit.
     Court allowed counterclaim: the effort the solicitor invested in seizing the corporate opportunity benefited the trust beneficiaries; allowing him to
      keep his profit prevents unjust enrichment.


    Peso Silver Mines Ltd. v. Cropper (1966)             Rejects Regal in part; seizing the corporate opportunity requires access to the opportunity
                                                         only by virtue of one’s position as director


     Cropper is director of Peso, a mining interest.
     Peso is offered a speculative mining property by Dixon. Peso's board considers the offer and ultimately rejects it.
     Subsequently, Cropper becomes involved in a group which purchases the same mining property that the Peso board had previously rejected. That
      property turns out to be quite lucrative.
     Control over Peso changes hands. The new owners sue Cropper, alleging breach of fiduciary duty.
     Issue: whether or not Mr. Cropper breached his fiduciary duty to Peso by seizing the corporate opportunity (such that he has to convey his
      interest to Peso), even though Peso declined the offer.
     Peso's claim: Cropper got the property b/c of information he obtained by virtue of a Peso director.
     Held [kind of rejecting Regal]:
           o Cropper didn't obtain his interest in the property b/c of his position as director of Peso. When he was director of Peso, they were getting
                 like 200+ mining properties offered in total. Sometimes 2 or 3 a week.
           o The purchase took place after the earlier rejection "passed out of Cropper's mind".
           o Rationale:
                          Peso should cease to have an interest in the property when the board decides not to require it.
                          Rejects notion that, b/c Cropper had knowledge of the opportunity through being director of Peso, he should thereafter be
                           prohibited from taking up that offer; rather, to find seizure of the corporate opportunity he must have had access to the
                           opportunity only b/c of his position.

     Shouldn't court have considered whether Cropper was instrumental in getting Peso to reject the initial offer (so he could take it for himself later)?
     What if Peso had decided that it just didn't have the capital but that it wanted to revisit the offer later, if it were still available?

                                                                      Factors in determining whether someone seized the corporate opportunity
    Canadian Aero Services Ltd. v. O'Malley (1974)                    Dhir: “Oh my God, so important”

     Can-Aero does mapping and geographical exploration. It's interested in a contract re: aerial photography, topographical mapping in Guyana.
     The promotional work for Can-Aero, w/ the Guyanese authorities, is done w/ the president of Can-Aero, O'Malley.
     Technical work is done by an executive VP, Zarzicki (the defendant).
     Both are stressed out by the responsibility put on them by their employer. Both are worried that if they don't secure the contracts they're
      pursuing, they're going to be fired.
     They incorporate Terra Services Ltd. O'Malley becomes president, Zarzicki becomes executive VP. They resign from Can-Aero.
     W/in four days of resignation and before their resignation is formally recognized by Can-Aero, five companies are invited to place bids on the
      Guyana project. 2 of the 5 are Can-Aero and Terra.
     Terra gets the contract, in part due to the extensive, detailed coverage in its proposal (thanks to O'Malley and Zarzicki, bankrolled by Can-Aero).
     Can-Aero sues for an accounting of Terra's profits. Claim:
           o Terra [i.e. the former Can-Aero employees] hijacked Can-Aero's corporate opportunity, in breach of fiduciary obligations.

Who owes the fiduciary duty?
  Top management, including senior officers, not just directors.
  At 368: doesn't matter if O'Malley and Zarzycki were officially directors of Canaero; "they were 'top management' and not mere employees"
  The c.l. duties of directors, officers can continue to exist after they leave office.
  At 369: [the officer] is "precluded from [seizing the opportunity] even after his resignation where the resignation may fairly be said to have been
   prompted or influenced by a wish to acquire for himself the opportunity sought by the company, or where it was his position with the company
   rather than a fresh initiative that led him to the opportunity which he later acquired"
  Re: rationale for applying the obligation, it's in recognition for the "degree of control" they possessed over corporate operations.
  At 370: "strict application against directors and senior management officials is simply recognition of the degree of control which their positions
   give them in corporate operations, a control which rises above day to day accountability to owning shareholders and which comes under some
   scrutiny only at annual general or at special meetings. It is a necessary supplement, in the public interest, of statutory regulation and
   accountability … an acknowledgment of the importance of the corporation in the life of the community and of the need to compel obedience by it
   and by its promoters, directors and managers to norms of exemplary behaviour."
  At 372: it would be an absurdity if Zarzycki could avoid his fiduciary obligation just b/c he had varied the project in some detail in his proposal on
   behalf of Terra
  Most importantly: the subject matter of the Terra proposal is the same as that which Zarzycki had pursued for Canaero.
  It doesn't matter whether Terra was specifically incorporated for the purpose of intercepting Canaero's corporate opportunity.
  At 373: this case is to be distinguished from Peso Silver Mines:


                                                                             53
            o     In Peso, there was a good faith rejection of the corporate opportunity by the directors. Here, there was no opportunity for the Canaero
                  board to consider the opportunity before it was usurped by Terra.
             o Unlike Peso, this is not a situation where there were a bunch of opportunities offered to Canaero and the company was open to all of
                  them. Canaero had dedicated itself to bringing a particular deal to fruition; they had focused their energy and resources on it, and then it
                  was wrongfully seized.
      As a result of the breach, Canaero is entitled to whatever the fiduciaries got as a result of their breach. Either it's an accounting of profits or it's a
       remedy for unjust enrichment -- either way, an imbalance in the Force is rectified.
      At 374: Justice Laskin, factors to be considered when assessing whether someone has seized the corporate opportunity:
      The nature or strength of the corporation's interest
             o Ripeness
                            Had the corporation done anything to develop the opportunity? How close were they to getting the opportunity?
             o Specificity
                            Was the opportunity specifically identified by the corporation? How precisely? How closely did the opportunity appropriated
                             actually resemble the opportunity the corporation was working toward?
             o Whether the opportunity was special or private
                            How significant was this opportunity? Would it have represented a major component of the company's business if it had been
                             acquired? Was it a unique opportunity? Was it one of many opportunities? Was it an opportunity that was advertised publicly
                             or widely known, or was it one the fiduciaries had access to only by virtue of their positions?
             o Rejection
                            Was the opportunity rejected in good faith before the fiduciaries acquired it?
      The relationship of the fiduciary to the opportunity
             o Relation btw fiduciary and opportunity
                            Specific relation as disclosed by the facts of the case
                            Was it an opportunity that came up in the general area that the fiduciary was responsible for?
                            Did the fiduciary negotiate for the opportunity on behalf of the company?
             o Amount of knowledge possessed
                            How much knowledge did the fiduciary acquire about the opportunity by virtue of his position?
             o Circumstances in which the opportunity was obtained
                            Did the fiduciary acquire the opportunity through an existing business, similar to (or even competing w/) the co.’s business?
             o Time in the continuation of fiduciary duty where the alleged breach occurs after termination of the relationship with the company
                            i.e. if the fiduciary took this opportunity after he terminated quit, how long after? What was the relevant point in time?
             o Circumstances under which the relationship was terminated
                            i.e. whether by retirement, resignation, firing
      The more of these factors are found, the more likely the court will find breach.
      Justice Laskin didn't overrule Peso in the Canaero decision, he merely distinguished it. This means we have to be mindful of one factor (among
       others -- see above): rejection, i.e. whether or not the corporation has rejected and lost its opportunity



FIDUCIARY DUTY: CORPORATE PURPOSE/NON-
SHAREHOLDER STAKEHOLDERS
Fiduciary duty of directors; duty of care, diligence and skill of directors
      Every director and officer of a corporation in exercising his or her powers and discharging his or her duties to the corporation shall,
            (a) act honestly and in good faith with a view to the best interests of the corporation…

      If we have a duty to act in the best interests of the corporation … what is the corporation?
      Purpose/function of corporations: to facilitate business.

The Berle/Dodd dispute
   Berle: shareholders are exclusive beneficiaries of fiduciary duties.
   Dodd: employees, consumers, society in general should be the beneficiary; corporations have a much larger constituency to whom fiduciary duties
    are owed, including, inter alia, shareholder interests, the interests of corporate employees, and broader social goals.
         o Corporate managers "guardians of all the interests which the corporation affects and not merely servants of its absentee owners"

    Corporate social responsibility: "broader constituency" to whom corporation owes duties may include any or all of
                     Shareholders                                      General creditors                                                        Social interests at large
                     Bondholders                                       Employees

     Contractarians regard corporate form as a nexus of contracts btw interested actors:                                               Anti-Contractarians reject
                                                                             Shareholders                                             characterization of shareholders as
                      Directors                                             Creditors                                                'owners' of the firm.

                                                                                        54
                     Officers                                               Employees
                     Managers
   HVR, shareholders are regarded as having primacy among the various corporate stakeholders. Sometimes
   characterized as 'principals'/'owners' of the firm.
Traditionally the former option is more popular: shareholders' interests mirror those of the corporation, have primacy over other stakeholders (at the
expense of share value maximization)


    Dodge v. Ford (1919) - Michigan Supreme Ct                       Seeming endorsement of shareholder-primacy "contractarian" principle


         Ford doing business like gangbusters, producing dividends for shareholders out the wazoo.
         1916: Mr. Ford decides the company will cease paying further large-scale dividends and instead will use its profits to expand operations,
          manufacture cars at a lower per-unit cost
         Ford: desired to provide jobs to workers, spread the industrial wealth around
         Dodge brothers: plan would diminish share value, would turn Ford into a charity.
               o P. 207: "The difference between an incidental humanitarian expenditure of corporate funds for the benefit of the employees, … and a
                    general purpose and plan to benefit mankind at the expense of others, is obvious. There should be no confusion (of which there is
                    evidence) of the duties which Mr. Ford conceives that he and the stockholders owe to the general public and the duties which in law he
                    and his co-directors owe to protesting, minority stockholders. A business corporation is organized and carried on primarily for the profit
                    of the stockholders. The powers of the directors are to be employed to that end. The discretion of directors is to be exercised in the
                    choice of means to attain that end and does not extend to a change in the end itself, to the reduction of profits or to the non-distribution
                    of profits among stockholders in order to devote them to other purposes.
               o NTL, "We are not satisfied that the alleged motives of the directors, in so far as they are reflected in the conduct of the business, menace
                    the interests of shareholders."

    vs.

State Tax Commission v. Aldrich (quoted in Teck v. Miller, revisited)

If today the directors of a company were to consider the interests of its employees no one would argue that in doing so they were not acting bona fide
in the interests of the company itself. Similarly, if the directors were to consider the consequences to the community of any policy that the company
intended to pursue, and were deflected in their commitment to that policy as a result, it could not be said that they had not considered bona fide the
interests of the shareholders. … *If+ they observe a decent respect for other interests lying beyond those of the company's shareholders in the strict
sense, that will not, in my view, leave directors open to the charge that they have failed in their fiduciary duty to the company.

And presently,

Peoples Department Stores Inc. (Trustee of) v. Wise (2004)—again

         [Re: the statutory fiduciary duty,] the phrase the "best interests of the corporation" should be read not simply as the "best interests of the
          shareholders". From an economic perspective, the "best interests of the corporation" means the maximization of the value of the corporation … .
          However, the courts have long recognized that various other factors may be relevant in determining what directors should consider in soundly
          managing with a view to the best interests of the corporation.
         Court doesn't extend scope of fiduciary duty to creditors. [The remedies of statutory oppression, breach of duty of care provide mechanisms w/
          which to protect creditors' interests from prejudicial conduct of directors.]
         This aspect of Peoples "has caused quite a stir"; its reliance upon the Teck ruling is suspect (Teck being "the lone voice out there" re: Dhir). The
          court seems to conflate the duty of competence w/ the duty of care.
         Argument against extending fiduciary duty to non-shareholders:
               o Duty to everyone ends up being a duty to no one.
               o If you're a director, and you have to consider both shareholders and non-shareholder stakeholders (the community, environment, sun
                     and moon and stars), how can you manage conflict btw the two?
               o Do directors have the tools necessary to engage in mgmt of such a dispute (especially re: community, environmental interests, etc.)
               o Peoples "leaves us in a state of confusion w/ potentially more questions than answers" (Dhir); are courts going to favour corporate
                     interests to the exclusion of others? Will lower courts fill the void by giving specific guidance?

         Rotman at p. 204: In some instances, shareholders are characterized as owners of the corporation.
         Friedman:
               o The corporate manager is the agent of the individuals who own the corporation; his primary responsibility is to those owners.
               o Corporate executives who sacrifice profits (e.g. Henry Ford) to make social improvements not demanded by law are stealing from the
                   shareholders.
               o Business persons who pursue such activity are "preaching pure and unadulterated socialism".
               o Further, at final paragraph,
                            There is one and only one social responsibility of business: to use its resources and use _____ to increase its profits, _________
                             to engage in open and free competition without deception or fraud.
                                                                                 55
   Adam Smith, The Wealth of Nations:
        o "invisible hand"
        o Self-interest guides the most efficient use of resources of the economy; public welfare is a by-product of this
        o Attempts to promote social good are ineffectual compared to unbridled market forces
   Henderson, case against corporate responsibility
        o Idea of corporate social responsibility is far too nebulous
        o Taking account of non-shareholder interests would just prove far too costly and inefficient for the corporation

   Before the 19th century, only 2 types of corporation admitted; corporation created by
          o Exercise of royal prerogative (Crown issued Letters Patent), or
          o Special act of the Legislature
   These corporations were set up specifically for societal purposes (railways, roads, etc.); their purpose certainly wasn't exclusively to raise capital
    for shareholders
   Third rationale for shareholder primacy -- Rotman, 204:
          o Corporate form best thought of as a "nexus of contracts" btw all interested actors
          o The 'nexus of contractual relations' approach is explained in Prof. Sarah's piece
                        At 462: directors should be accountable exclusively to shareholders b/c shareholders are the group that are least able to
                         bargain complete contracts to protect their interests.
                        [Dhir's favourite rationale]
                        Sarah: the nexus approach fails to account for gender implications, reinforces pre-existing ideas of ownership, perpetuates
                         imbalance in property relations btw men and women
                        Although there has been growth in activity of women as equity investors, shareholder primacy tends to recognize and afford
                         decision-making power to a particular class of shareholders, and thus has a disproportionate effect on women as small-
                         investors
                        Despite the growth in activity, at the end of the day, women earn less than similarly-situated men and therefore have less cash
                         to undertake equity investment.
                        This model doesn't adequately articulate/value the experiences and contributions of women to the life of the corporation.
                        Multiple forms of investment in the firm should be recognized. For Sarah, this will more accurately take into account
                         externalized costs (costs left to the responsibility of govt).
                        It's a representative feminist critique of the shareholder primacy model.
   Interests of employees in high interest may conflict w/ creditors' interests in getting paid. High wages = happier, more productive employees, =
    less cash for creditors. Does this "social entity" conception run the risk of spreading directors' duties too thin?
   In considering all constituencies, nobody's interests are going to be meaningfully met.




                                                                           56
SHAREHOLDERS
SHAREHOLDER POWER (MAJORITY RULE)
       Majority rule is "the usual solution in corporate law", but not the only one.
       Corporate constitution likely to include at least 2 groups required to make collective decisions.
      o           Board of directors,
      o           Shareholder collective.
       (In a meeting of the board of directors, each gets one vote; in a shareholders' meeting, each voting share gets one vote.)


    CBCA s. 146(6)    Shareholders acquiring management powers under a Unanimous Shareholder Agreement (USA) can
                      contractually bind themselves in advance to act in a way that would OTW be a breach of the fiduciary duty of
                      loyalty owed to the corporation.

    Procedural safeguards:
                  requirement that collective decision be made in a meeting
                  Right to be notified of the meeting
                  One person cannot "meet" (i.e. constitute a meeting unto himself) unless authorized in statute or corporate constitution.

    Common purpose: in a corporation where all the shareholders are directors and all attend a directors' meeting, a shareholders' meeting cannot
    be casually convened at the close of business unless all consent.

    Directors

          CBCA s. 117                         A decision may be made w/out a meeting if in writing and unanimous
                                              Where only one director, he/she can act unilaterally on the basis of unanimity

          s. 114(8)        Where only one director, he/she may act unilaterally on the basis that he/she "may constitute a meeting"

          s. 114(6)        Where only one director, he/she may waive notice requirements.


          OBCA s. 126(1)-(2)          Rules re: location of directors' meetings.

    Shareholders

           (a) Kinds of meetings

           Statutes stipulate whether powers are to be exercised at an "annual meeting" or at a "special meeting" (e.g. CBCA s. 106(3), 109(1))

           Ordinary business for the annual meeting:
             1. Election of directors,
             2. Shareholder approval of by-laws (CBCA s. 103(2)),
             3. Disclosure by directors to shareholders of the corporation's financial position (CBCA s. 155), and
             4. Appointment of the auditor (CBCA s. 162).

           (b) Notice requirements

                   Re: CBCA s. 135(1), OBCA s. 96(1), those entitled to receive notice are
                     1. shareholders who will have a vote on matters to be dealt with,
                     2. directors, and
                     3. the auditor.


                                                                           57
                         Timing of notice
                            Minimum and maximum number of days' notice for a meeting: CBCA s. 135(1)

                         Adequacy of notice
                            Difficult to legislate general rules due to variety among types of corporations.

               (c) Proxy voting

                     Allows shareholder to authorize someone else to cast his/her votes.
                     Closely regulated by CBCA Part XIII and provincial Securities Acts.
                     Rules require management to solicit proxies, provide detailed information about the matters to be voted upon.
                     Permissible to name a member of management as proxy-holder.
                               HVR, form of proxy must state that the shareholder is at liberty to name someone else.
                               (Elections of directors and appointment of auditor are routine matters; forum of proxy does not need to give the
                              shareholder the option to vote against management's proposals. Form need only give options
                                          To vote in favour, and
                                          To withhold the vote.)
                     Management typically proposes a "slate" of directors.

               (d) Shareholder initiatives

                     Once general managerial power is vested in the board of directors, the shareholder majority cannot directly dictate management
                      policy.
                     Petitions likely to be ignored.
                     See OBCA s. 99.



SHAREHOLDER POWER: ANNUAL & SPECIAL MEETINGS
Ordinary business: annual meetings
CBCA s. 133              Directors must call annual meetings.

s. 143-144               If the directors default in calling the meeting, it may be called by the shareholders or the court.

s. 142                   Meeting can be avoided in favour of a written resolution, but only if unanimous.

         (a) Election of directors

           
                  CBCA s. 106(3)             Shareholders have power to elect directors by simple majority
                     3 common modifications to strict majority rule
                            Cumulative voting
                                      Optional under most statutes (CBCA s. 107, OBCA s. 120)
                                      Rarely adopted
                                      Shareholder gets a number of votes equal to the product of
                                i.                The number of voting shares he holds, and
                               ii.                The number of vacancies on the board that must be filled.
                                      Shareholder may divide his votes or cumulate them.
                            Class directors
                                      Elected by the votes of only one class of shares: CBCA s. 111(3).
                            Voting contracts
                                      Common in small corporations.
                              
                                    CBCA s. 145.1     A written agreement between two or more shareholders may provide that in
                                                      exercising voting rights the shares held by them shall be voted as therein provided.
                                            NTL, a voting agreement among shareholders who are also directors is severable and illegal to the extent that it
                                    attempts to affect the casting of votes on the board of directors, b/c each director owes an individual fiduciary
                                    obligation to the corporation.
                                            A director is not permitted to "fetter his discretion" by an earlier contractual promise.
                                                                                  58
     (b) Approval of by-laws

             By-laws are designed to be easily modified. Directors have the power to create or amend. (Change effective until next shareholder
            meeting.)
             CBCA s. 103.
             Ss. 103(5) and 137: shareholder w/ enough shares may propose his/her own by-law.

     (c) Financial disclosure

       
            CBCA s. 155          Directors must report to shareholders on the corporation's financial position


     (d) Appointment of auditor

                Protection for shareholders. Likely a firm of accountants.
                Provides independent verification of financial information presented by the directors.
       
            CBCA s. 163(3)         Waiving the auditor requires unanimous consent of all shareholders, voting and non-voting.
             Legal power to appoint auditor lies w/ shareholders; HVR, directors propose the auditor for shareholders' approval; effectiveness
            may be impugned if auditor is not seen as independent of directors.
             Hercules Managements Ltd. v. Ernst & Young (1997):
                       Auditor does not owe a duty of care to any shareholder, but only to the corporation.
                       Fair? At least some shareholders may have bought or retained their shares in reliance on the audited accounts. NTL, only
                  the corporation can sue in negligence.
             HVR, auditors may be held liable to investors if made liable along w/ some other defendants (e.g. the management).


Extraordinary business: special meetings
     CBCA s. 133(2)    Directors can call special meetings.

     s. 143(1)         Only shareholders who meet some minimum threshold of shareholding (at least 5% of voting shares --
                       potentially a huge amount of capital) can call special meetings.
 o             Shareholder approval of a corporate contract in which a director has a material interest can be addressed under the OBCA only at a
     special meeting: s. 132(8)(a). HVR, under the CBCA, approval can be sought at any meeting: s. 120(7.1)(a).

     (a) Removal of directors

               CBCA s. 104, OBCA s. 122(1) -- "democratic recall"
               Directors elected to office by cumulative voting or class election could be immediately dismissed by the majority; statutes prevent
            this by
                          Varying the voting rules on removal in the case of cumulative voting or class directors;
                          Entrenching incumbent directors by contract; and
                          Changing the voting rules for resolutions to remove directors. (More likely to be effective in a contractarian jurisdiction
                    than a division-of-powers jurisdiction.)

     (b) Shareholder approval of conflict-of-interest contracts

              System of disclosure and recusal by the conflicted manager, to make the contract non-voidable and to allow the manager to keep
            any resultant gain.
       
            CBCA s. 120(7)(c), OBCA Substantive requirement: contract was "reasonable and fair" to the corporation when
            s. 132(8)               approved by the shareholders, even if disclosure was properly made.


     (c) Constitutional amendments

           CBCA s. 173(1)       Subject to ss. 176 [class veto] and 177 [subsequent registration with the Director], the articles of
                                a corporation may by special resolution to …
                                (o) add, change or remove any … provision that is permitted by this Act to be set out in the
                                                                          59
                                        articles.
                        Requirement of a special resolution for such amendments
                     s. 174         Re: amendment to restrict shareholding by non-residents

                     s. 175         Proposal to amend the articles may come from a shareholder using the proposal mechanism in s. 137.

                     s. 176         Where proposed amendment has some effect on a particular class of shares,
                                                      The vote must be held class-by-class, and the resolution must be passed by each
                                          affected class (s. 176(6)); and
                                                      An affected class gets a vote even if shares in that class are normally non-voting
                                          shares (s. 176(5)).
                        On the completion of any amendment to the articles, the amendment must be filed /w the Director. Made effective when the
                      Director issues either a "certificate of amendment" (s. 178) or, where cumulative amendments are collected in "restated articles" (s.
                      180), a "restated certificate of incorporation" (s. 180(3)).
                     CBCA s. 190         Dissenting shareholders may force the corporation to buy their shares and opt out.


            (d) Fundamental change w/out Constitutional amendment

                         Today, the articles rarely restrict what business the co. can conduct. Decision to move in a completely new direction belongs to the
                      directors.
                         HVR, shareholders usually buy shares based on some idea that the corporation is engaged in some particular business.
                     CBCA s. 189(3)     Compromise; sale, lease of exchange of all or substantially all of the co's property is a
                                        "fundamental change"; triggers same protections as constitutional amendment:
                                           o               Special resolutions are required,
                                           o               Non-voting shares are allowed to vote, and
                                           o               Class votes are required where there is a particular effect on a class.

                     s. 190(1)(e)       Dissenters have right to require corporation to buy their shares.


            (e) Corporate suicide

                        The ultimate power the majority may exercise: "winding up"/"dissolution"/"liquidation"
                     CBCA s. 211                            Possible for shareholders to wind up even though co. is solvent.
                                                            Requires special resolutions of each class of shares; allows non-voting shares
                                             to vote.



WAYS TO EXERCISE SHAREHOLDER POWER
        In general, the public corporation is in the control of its managers.
        HVR, certain mechanisms available to shareholders (retail shareholders, institutional investors) who want to take a more active role in the
         corporation, and to hold mgmt to account.

5 ways shareholders exercise power (syllabus 24-25)

    1.       Access to corporate records

                    Corporate law statutes allow shareholders access to some but by no means all corporate records.
                    OBCA s. 145(2): shareholders entitled w/out charge to one copy of the articles and by-laws, and to a copy of any unanimous shareholder
                     agreement.
                    s. 145(1): shareholders and creditors can examine the records referred to in 140(1) during the corporation's usual business hours, and
                     may take extracts of them free of charge.
                    If the business is an offering corporation, everyone has these rights (upon payment of a reasonable fee).
                    Records in s. 140(1) include the documents in 145(2), as well as other items:
                          Minutes of shareholder meetings
                          Shareholder resolutions
                          Register of directors
                          Etc.
                    Shareholders do not have the right to access directors' meeting minutes
                                                                                   60
               These contain sensitive information, e.g. confidential business strategies (if you worked for GM and you bought shares of Ford, you
                  shouldn't have access to their plans)

2.   Shareholders' meetings
      In practice largely symbolic, w/ little impact on running the firm. Not always the case, hvr; Disney shareholders' dissatisfaction caused
         Michael Eisner to resign.
      2 types of shareholder meetings: annual meeting and special meeting
      Annual meetings are held to conduct 3 items of business:
            1. Election of directors (s. 122(1) provides shareholders can remove any director from office by ordinary resolution at either an annual
                  or special meeting),
            2. Consideration of financial statement and the auditors' report on those statements, and
            3. Appointment of those auditors (normally the previous yr's auditors; pros hired to provide independent verification of financial
                  information that is put forth to shareholders). Auditor is compulsory for public corporations.
      s. 94(1)(i): ordinary resolution (governs ordinary business, e.g. reviewing minutes of previous meeting)
      s. 94(1) (b): special meetings can be called at other times than the annual meeting.
      s. 94(1): the directors are responsible for calling all shareholder meetings.
      BUT under s. 105(1), shareholders w/ at least 5% of the voting shares can require directors to call a meeting ("requisitioning a meeting").
      s. 105(4): if the directors fail to call a meeting w/in 21 days of any such requisition, any shareholder who signed that requisition is
         entitled to call the meeting. (see 105(3).) Important safeguard for shareholders--if you're trying to replace the directors, you don't have
         to rely on the same directors to call the meeting that spells their doom.
      s. 93(1): subject to the articles or any unanimous shareholder agreement, meeting is to be held in a place in or outside Ontario as is
         determined by the directors. IF the directors have not made any specific determination re: location, the meetings will take place at the
         registered office of the corporation.
      s. 94(2): provision for possible electronic meeting, unless prohibited by the firm's articles or by-laws
      Welling, 423: 3 issues surrounding notice

              1. Timing of notice
                      s. 96(1): minimum & maximum notice periods for shareholder meetings; for offering corporations, notice must be sent
                           out no less than 21 days before meeting date. For non-offering corporations, no less than 10 days before.
                      Notice cannot be sent out any more than 50 days before the meeting date.

              2. To whom notice must be given
                   (a): every shareholder entitled to vote at the meeting
                   (b): each director
                   (c): the corporate auditor

              3. Required content of notice
                   s. 98:, anyone entitled to attend a shareholder meeting can waive notice of the meeting in any manner and at any time. if that
                   person actually attends the meeting, attendance is deemed a waiver of the waiver notice, unless that person is attending for the
                   sole purpose of objecting to the transaction of the business on the ground that the meeting was not lawfully called to begin with.

              4. Voting by proxy
                       Welling 432: any shareholder unable to attend personally at the meeting can appoint another person to represent him/her
                        there, and to vote her shares.
                       s. 109: a proxy is a form signed by shareholder appointing someone else (the proxy-holder) to attend the meeting, act on
                        the appointer's behalf.
                       No common law right to vote by proxy. Explicitly granted by statute. OBCA s. 110(1).
                       ss. 109 - 114 deal w/ proxy.
                       s. 111: mgmt of an offering corporation has got to send a proxy form to every shareholder entitled to notice of the meeting,
                        either concurrently with or prior to the notice going out.
                       s. 110(1): proxy-holder appointed to attend the meeting need not be a shareholder.
                       s. 114(2): proxy-holder has got the same rights as the shareholder who appointed him, BUT
                       s. 110(1): shareholder can limit the scope of the authority given to the proxy-holder.
                       s. 110(2): proxy form must be signed by shareholder.
                       If the shareholder is a corporation, under ____(b) the signature must come from an officer of the corporation.
                       s. 110(2.1): proxy form expires one year from its date.
                       s. 110(4): shareholder who extended proxy may then revoke the proxy if he wants
                       Permissible forms of revocation enumerated in s. 110(4)(a)-(c), and s. 110(4.2)
                       s. 110(4.1)(a): revocation has to be received at the registered corporate office at any time up to and including the last
                        business day before the day of the meeting, OR
                       . 110(4.1)(b): revocation can also be received by the chair of the meeting on the day of the meeting.

         5.     Shareholder meetings

                                                                        61
                        Issues of quorum: number of people who must be present to lawfully conduct business.
                        s. 101(1): unless the by-laws specify otherwise, quorum exists when a majority of shareholders entitled to vote at the
                         meeting are present (either in person or via proxy).
                        s. 101(2): you don't need quorum throughout the entirety of the meeting--only at its opening.
                        s. 101(4): If the corporation has one shareholder, the presence of that single shareholder constitutes a meeting (quorum).

3.     Shareholder agreements and unanimous shareholder agreements

     Ability to make these agreements subject to restriction: can't by contract require directors to vote in a particular way e.g. at a directors meeting

     As we know directors are subject to statutory obligations, fiduciary duty, duty of care; decision-making ability can't be restricted to prevent
     them from fulfilling their obligations. But that takes us to the idea of the USA..

     Which is a particular form of shareholder agreement.

     Gives shareholder ability to restrict, in whole or in part, powers of the directors to manage/supervise mgmt of the business, affairs of the
     corporation.

     Ability can be exercised so long as they have achieved written consensus.

     USA acts as a counter-balance to OBCA s. 115(1) [says directors have the power, responsibility to manage/supervise mgmt of the corporation's
     business and affairs, subject to a USA]

     s. 108(5): effects of a USA
         A shareholder who is party to a USA has all the rights, powers, duties and liabilities of a director, to the extent that the agreement
             restricts the discretion/power of the directors.
         Under a USA, the shareholders can do anything a director is empowered to do. BUT they have all the corresponding liabilities and duties.
         Directors' failure to comply w/ the USA may provide shareholders w/ the ability to seek the dissolution of the corporation.

     s. 207(1)(b)(i): if the USA specifies that shareholders can demand to dissolve after the occurrence of a particular event, and that event
     transpires, the court has the power to order dissolution.

     Agreements in gen'l can be seen as voting contracts. BUT this isn't their only function: often a principle objective of an agreement is to impose
     restrictions or conditions on each shareholder's ability to transfer shares. (This could also form the content of a USA.) Some of the most notable
     mechanisms to control transfers are listed at the bottom of syllabus p. 24:
       i.Absolute prohibition on transfers
              States that existing shareholders can only sell their shares to other existing shareholders, not to outside parties.
      ii.Partial prohibitions on share transfers
              e.g. requiring consent of other shareholders prior to a share sale to an outside third party. Might be effected by unanimous resolution,
              majority resolution--whatever the shareholders want.
     iii.Right of first refusal
              i.e. shares must be offered to existing shareholders first, at a price to be determined by an agreed-upon method. (The other
              shareholders need not purchase the shares, but must have the option.)
     iv.Shotgun clause
              Mandatory transfer of someone's shares. Shareholder can attempt to sell his shares (or acquire another's shares); shareholder offers to
              sell their shares at a stated price (or purchase others'); the other shareholders are forced to purchase at the stated price (or sell their
              shares at the stated price).
      v.Buy-back
              Forces shareholders to sell shares to the corporation, or other shareholders, upon a pre-determined formula, on the happening of a
              certain event (e.g. the shareholder resigns/is relieved from office)

     (1) These provisions provide for greater shareholder control. (2) They also maintain relative proportions of shareholder ownership. (3) They're
     particularly useful in small corporations if the goal is to keep control of those corporations. (4) Provides a (sometimes very harsh) dispute-
     resolution function.

4.     Amendment of corporate constitution

     Welling 439.

     168(1): from time to time, the corporation may amend its articles. Might involve changing/adding/removing any number of items, including the
     items listed in ss. 168(1)(a) - (n) (look at these--creating new class of shares, changing corporation name, etc.).

     Some amendments can be made by the directors w/out shareholder approval. HVR, in general, under s. 168(5), in order to make an amendment
     under (1), i.e. the stuff listed above, the shareholders need a special resolution -- ⅔ majority of votes cast.

                                                                          62
     Correspondingly, shareholders have power to thwart proposed changes to the articles, should they disagree.

5.     Shareholder proposals

     Welling 433.

     In the context of a big publicly-trade company, the agenda for shareholder meetings is set by mgmt. The result is that mgmt retains
     considerable control over the meeting process, thereby limiting the influence of shareholders.

     BUT most corporate law statutes have provision for shareholder proposals.

     OBCA s. 99(1): shareholders entitled to vote at a meeting have the ability to submit a notice of proposal to the corporation and to discuss the
     subject matter therein at the shareholder meeting.

     s. 99(11): the term 'proposal' means a matter the shareholder proposes to raise at the shareholders' meeting.

     Under s. 99(2), when the company gets notice of such a proposal, essentially it is obligated to circulate that proposal to the shareholders in
     advance of the meeting. This is done by including it in a document called the Mgmt Information Circular (so other shareholders can consider it
     in advance, vote on it at the meeting).

     S. 99(3): shareholder has ability to compel the corporation to submit an optional statement in support of the shareholder's proposal

     s. 99(3.1): proposal and statement together cannot exceed prescribed number of words (re: OBCA regulation 62, s. 23.4)

     s. 99(5): there are certain circumstances under which mgmt does not have to comply w/ ss. 99(2) and (3).
         i.e. sometimes co. can exclude a shareholder proposal, not circulate it at all.
         s. 99(5)(b): corporation does not have to circulate a proposal if it clearly appears that the primary purpose of the proposal is to enforce a
             personal claim or redress a personal grievance against the corporation or its directors, officers or security-holders
         s. 99(5)(b.1): corporation can refuse to circulate if it clearly appears that the proposal does not relate in a significant way to the business
             or affairs of the corporation

     s. 99(7): if shareholder gives a proposal and the corporation refuses to circulate it (re: s. 99(5)), the corporation must give the shareholder notice
     of its refusal to circulate the proposal, w/ reasons for decision to omit. This must be done w/in 10 days of receipt of the proposal.

     If that happens, s. 99(8): shareholder can apply to the court for an order restraining the holding of the meeting where the shareholder wanted
     to have its proposal considered.

     The court is empowered to make any order it sees fit re: restraining the meeting or not.

     CBCA substantially amended in 2001.

            Welling, 434: the wording of the old CBCA provision allowed mgmt wider discretion to decline proposals.

            They used to be able to exclude the proposal if it was submitted by the shareholder to promote
            economic/political/racial/religious/social/etc. causes.

            Leading cases on this provision: Verity Corp. v. Jesuit Fathers of Upper Canada (1987)and Greenpeace of Canada v. Inco

            Verity Corp.: shareholders submitted proposal to Verity (automotive component manufacturer) asking them to terminate their
            investments and licensing agreements in South Africa. Verity declines, excludes the proposal. Ct allows exclusion b/c it was submitted for
            political purposes (i.e. the cessation of Apartheid).

            Greenpeace: shareholder of mining-and-metal company Inco. Sought to include a proposal asking Inco to install pollution-control
            equipment to reduce sulphur-dioxide. Ct allowed exclusion of the proposal b/c Greenpeace advanced the proposal to promote
            environmental causes.

            This part of the statute was to control proposals that were frivolous to the affairs of the corporation. e.g. Tom Cruise brings a proposal to
            Paramount about all the employees adopting Scientology.

            The amendment removes the explicit social-cause exclusion. The new CBCA provision resembles the corresponding OBCA provision,
            saying a CBCA company can exclude if a proposal does not relate in a significant way to the affairs of the corporation.

                    Whether this is better depends on our conception of the corporation and its affairs.

                    Syllabus p. 25:
                                                                          63
SHAREHOLDERS’ REMEDIES (I): PERSONAL ACTIONS
OBCA s. 245      “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 of any of its affiliates,
                   c.     any other person who, in the discretion of the court, is a proper person to make an application under
                       this Part.


Any "complainant" has standing to seek leave to commence a statutory representative action. Need not be a shareholder.



SHAREHOLDERS’ REMEDIES (II): DERIVATIVE ACTIONS
Representative action           Right to appear in court and to invoke the discretion of a judge


CBCA s. 239        "Derivative action"

Problem: ample English precedent denying minority shareholders standing where the right of action belongs to the corporate entity

Term "derivative action" now used in America and England to describe a common law right of minority shareholders.

Farnham v. Fingold (1973)

   Defendants claim no reasonable cause of action; plaintiff has no status to maintain the claims in a class action. Ask for an order dismissing the
    plaintiff's action w/out prejudice to the plaintiff's right to commence a fresh and properly constituted action
   Parts of the statement of claim concerned w/ rights, duties or obligations owed to the defendant Slater Steel Industries Ltd., or w/ damage alleged
    to be suffered by that corporation as a result of the actions of the other defendants. Derivative action rather than a class action.

      OBCA s. 99(1)     Shareholder may maintain an action in a representative capacity for himself and all other shareholders
                        suing for and on behalf of the corporation to enforce any right, duty or obligation owed to the
                        corporation that could be enforced by the corporation itself, or to obtain damages for any breach of any
                        such right, duty or obligation.

      s. 99(2)          An action under subsection 1 shall not be commenced until the shareholder has obtained an order of the
                        court permitting the shareholder to commence the action.




                                                                           64
Goldex Mines Ltd. v. Revill (1974)                Authority for joinder of representative and personal actions.


       Shareholders alleged misdeeds by directors, other class of shareholders.
       HVR, unclear whether the duties allegedly breached were owed to the shareholders or to the corporation.
       Where the acts of directors or shareholders cause damage to the company and also to other shareholders (or a class of them), is a shareholder's
        cause of action for the wrong done to him derivative?
            o Shareholders who have suffered a personal wrong may seek redress in a personal action, either by one shareholder alone, or by class
                  action. (NTL still a personal action.)
            o OTOH, a derivative action is one in which the wrong is done to the company. The stockholder is a third party in this scenario, has no
                  standing.
       Shaw v. Empire Savings & Loan Association:
            o "a stockholder of a corporation has no personal or individual right of action against third persons, including the corporation's officers and
                  directors, for a wrong or injury to the corporation which results in the destruction or depreciation of the value of his stock, since the
                  wrong thus suffered by the stockholder is merely incidental to the wrong suffered by the corporation and affects all stockholders alike."
            o HVR, the "individual wrong necessary to support a suit by a shareholder need not be unique to that plaintiff. … If the injury [to the
                  individual shareholder] is not incidental to an injury to the corporation, an individual cause of action exists."
                      Court: "not incidental to an injury to the corporation" means not arising simply b/c the corporation itself has been damaged, and as
                          a consequence of the damage to it, its shareholders have been injured. Needs something more.

OBCA ss. 106(1)(a), 115-120, 134(5)(b), 169, 184, 194(2) & (3)          Statutory directions re: sending information to shareholders

Prerequisite steps that a complainant with standing must take in order to have the complaint heard


 CBCA s. 239(2)            1.      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 ...
                           2.      The complainant is acting in good faith …
                           3.      It appears to be in the interests of the corporation … that the action be brought.

 s. 240                   In connection with an action brought … under s. 239, the court may at any time make any order it thinks fit including …
                             a.    An order authorizing the complainant or any other person to control the conduct of the action …

          Failure to give notice fatal.


Armstrong v. Gardner (1978)                 Never assigned          Re: prerequisites (1) good faith and (2) notice

    o        Elsley Co.'s sole business was renting a property to a bank. A buyer offered to buy the property, which the corporation declined. The buyer
          then acquired a majority of Elsley Co.'s shares.
    o        Majority shareholders:
                       sole asset of the company has been 'substantially encumbered' by directors of Elsley Co.;
                       proceeds placed in a company over which Elsley has no control at all;
                       No likelihood of capital appreciation.
    o        Elsley Co. directors (respondents): application is an "originating motion"; the Court "ought not to act upon the affidavit material based upon
          information and belief."


         OBCA s. 99(3)     A shareholder may, upon at least seven days notice to the corporation, apply to the court for an order
                           referred to in subsection 2, and, if the court is satisfied that,
                              a.     The shareholder was a shareholder of the corporation at the time of the transaction or other
                                  event giving rise to the cause of action;
                              b.     The shareholder has made reasonable efforts to cause the corporation to commence or
                                  prosecute diligently the action on its own behalf; and
                              c.     The shareholder is acting in good faith and it is prima facie in the interests of the corporation or
                                  its shareholders that the action be commenced;
                           the court may make an order on such terms as the court thinks fit, except that the order shall not require
                           the shareholder to give security for costs.

    o        "This is not an originating motion. It is in nature an interlocutory application brought pursuant to the provisions of the [OBCA] and ought not
          to be refused solely because the affidavit in support is based in part upon information and belief."
    o        Respondents:
                       applicant didn't comply w/ s. 99(3)(b);
                                                                                  65
                    reasonable efforts were made to cause the corporation to commence or prosecute diligently the proposed action;
                    Material indicates the solicitor for the minority shareholders wrote to Mr. Gardner suggesting that action be taken (re: the
                mortgage), to prevent investing in the buyer's co.
  o       Although the letters requesting action were not framed with great particularity as to the cause of action to be brought, they were directed to
       a solicitor.
  o       Sufficient demand made to satisfy s. 99(3)(b).
  o       Applicant is acting in good faith, has complied w/ the requirements of s. 99. the action does not appear to be frivolous or vexatious and could
       reasonably succeed and … it is in the interests of the shareholders.
  o       Application allowed.


Bellman v. Western Approaches Ltd. (1981)                   3rd prerequisite: bringing action is in the co.'s interest


  o       Minority shareholders alleged directors had breached their fiduciary duties. Asked that the corporation sue the directors.
  o       Board obtained opinion of law firm: no evidence to support allegations.
  o       Minority shareholders sought leave to bring a statutory representative action.
  o       Court considered the interests of the corporation.
  o       "How is a Court to exercise its discretion in coming to a determination that it is satisfied that "it appears in the interests of the corporation" to
       allow the derivative action to be brought?
                    Resolution not to sue was passed by four independent directors, based on the reports of their accountants and outside lawyers
                    Reasonable to conclude that the disadvantages to the company outweighed the advantages
  o       How do I conclude that these four directors were not independent?
                    Cls. 3.03 and 3.04 of the guarantor's agreement: borrowers covenanted to use their powers as directors to assert control over the
               directors nominated by the investor's group to act and vote in ways favourable to the lender.
                    Instructions of the directors to the investigators were limited to certain periods of time in respect only of legal expenses, expenses
               charged to the company and contra account settlements; "hardly … conclusive of the substantive issues raised by the complainants,
               namely, the breach of fiduciary duty"
  o       Sufficient that it appears to be in the interest of the company that the action be brought.



SHAREHOLDERS’ REMEDIES (III): OPPRESSION REMEDY
 Equitable remedy invoked in a wide variety of circumstances (judges are statutorily empowered to do whatever they want in each case).


                   [If] the court is satisfied that in respect of a corporation or any of its affiliates
                      a.                  Any act or omission … effects a result,
                      b.                  The business or affairs of the corporation [were] conducted in a manner, or
 CBCA s. 241(2)
                      c.                  The powers of the directors … have been exercised in a manner
                   that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder,
                   creditor, director or officer, the court may make an order to rectify the matters complained of.

                [If] the court is satisfied that in respect of a corporation or any of its affiliates
                   a.                  Any act or omission … effects or threatens to effect a result,
                   b.                  The business or affairs of the corporation [were] conducted in a manner, or
 OBCA s. 248(2)
                   c.                  The powers of the directors … have been exercised in a manner
                that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder,
                creditor, director or officer, the court may make an order to rectify the matters complained of.


 Remedy invoked most often when the complainant has all of the equities and few if any legalities on his side.

 14 types of relief specifically listed, w/out limiting.


 Brant Investments Ltd. v. KeepRite Inc. (1991)                   Evidence of bad faith or want of probity not essential to ground oppression.


Emphasis: protection of reasonable shareholders' expectations in the context of the shareholders' corporate relationship.

 Lord Wilberforce, Ebrahimi v. Westbourne Galleries Ltd. (1972)

         "[There] are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure." …
         The 'just and equitable' provision does not … entitle one party to disregard the obligation he assumes by entering a company, nor the court to
         dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations."

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Arthur v. Signum Communications Ltd. (1991)                    Factors that indicate oppressive conduct


 i.               Lack of a valid corporate purpose for the transaction;
ii.               Failure on the part of the corporation and its controlling shareholders to take reasonable steps to simulate an arm's length
       transaction;
iii.              Lack of good faith on the part of the directors of the corporation;
iv.               Discrimination between shareholders with the effect of benefiting the majority shareholder to the exclusion or to the detriment of
       the minority shareholder;
 v.               Lack of adequate and appropriate disclosure of material information to the minority shareholders; and
vi.               A plan or design to eliminate the minority shareholder.


Krynen v. Bugg (2003)           "Principles and guiding rules" for the oppression remedy


       Re: Welling, Corporate Law in Canada
                 Thwarted shareholder expectation is what the oppression remedy is all about.
                 The rules in a corporate constitution, like all legalistic rules, can become practical tools for dictatorship of the majority and
             oppression of the minority.
                 When this occurs, some measure of disinterested judicial activism can be useful.

       Hallmarks of oppression remedy (see textbook p. 498):
                Reasonable expectations of the oppressed shareholder according to the arrangements between the principles.
                Inequality of bargaining power ("oppression") and breach obligation to act equitably and impartially in the exercise of power and
             authority ("unfairness").
                Acts/conduct go beyond mere inconvenience and lack of information; complainant's interests unfairly disregarded; complainant
             entitled to remedy.
                No requirement of bad faith.
                Reasonableness of expectations cannot prevail over contract dealing with them.
                Reasonable expectations are not necessarily 'static' or frozen; may evolve, change as the principals adapt their arrangements.
                Business and affairs of the corporation are managed by or under the direction of the board of directors -- "business judgment rule"
             shields business decisions made honestly, prudently, in good faith and on reasonable grounds.


Westfair Foods Ltd. v. Watt (1991)              Who must be oppressed to trigger the remedy?


 o                The rights conferred by the oppression provision "turn on effect not intent."
 o                They govern "all the activities of the corporation."
 o                Shareholders "are to be insulated from anything oppressive, unfairly prejudicial or that unfairly disregards their interests."
 o                ["I will not attempt to catalogue all the rules generated by the words in the statute. For example, the courts have imposed the duty
       on directors to protect the interests of all shareholders, not just those who elect them.]
 o                "Directors must have due regard for, and deal fairly with, the "interests" of all shareholders. I have concern about the overuse of
       the word interests."
 o                Question is whether interest in financial gain is an interest that deserves protection.
 o                Historically, "a hope for profit, as opposed to a mere desire, sometimes deserves protection".
 o                "[We] regulate voluntary relationships by regard to the expectations raised in the mind of a party by the word or deed of the other
       and which the first party ordinarily would realize it was encouraging by its words and deeds." i.e. reasonable expectations


Deluce Holdings Inc. v. Air Canada (1992)                "oppression" remedy for minority shareholders + "arbitration" direction


       In what circumstances may "oppressive" conduct operate to undermine what would otherwise be a contractually arbitrable issue?

 o                 Air Canada and Deluce: 75% and 25% shareholders in Air Ontario.
 o                 Members of the Deluce family responsible for mgmt and operations of Air Ontario; Air Canada kept its distance.
 o                 Subsequently, Air Canada decided to acquire 100% ownership. Issue: whether AC acted legitimately in carrying out this legitimate
       corporate objective.
 o                 Unanimous Shareholder Agreement gives Air Canada the option to acquire Deluce interest upon the termination of employment of
       the last Stanley Deluce (the father) and William Deluce by Air Ontario.
 o                 Another agreement calls for arbitration in the event of a dispute over the value of the shares.
 o                 1989: employment contract of Stanley Deluce ended and was not renewed. 1991, employment of William Deluce was terminated.
 o                 Deluce: AC improperly exercised its majority control of the board of directors of the holding company to terminate Mr. Deluce's
       employment, for the sole purpose of enabling it to buy out the Deluces' minority interest. Conduct is "oppressive", arbitration clause is

                                                                            67
        therefore of no force and effect. Deluce calls for stay of the arbitration proceedings.

o                  Minutes of a meeting suggest Mr. Deluce wasn't fired b/c of incompetence but b/c it was expedient for AC. "It is readily apparent
        why the Air Canada representatives would not want to offend Mr. Deluce, if at all possible, in the face of pending negotiations. None the less,
        if Mr. Deluce's management performance and the financial and safety performance of Air Ontario under his stewardship were as uppermost in
        the minds of Mr. Aleong and the other Air Canada board representatives as counsel have submitted, I am sure that less categorically positive
        testimony to Mr. Deluce could have been crafted and still have met the requirements of corporate niceties."
o                  Internal documentation shows effective motivation for the termination of Mr. Deluce's employment: view at AC that 'separate
        companies' approach is financially inefficient', and the connectors weren't effectively serving AC's interests.
o                  Acquiring 100% ownership of Air Ontario was the primary motivation.
o                  2 questions arise:
          i.                 Whether AC was entitled to utilize its majority position on the Air Ontario board for the predominant purpose of carrying
                out Air Canada's objectives, or whether such conduct was 'oppressive' to the minority; and if so,
         ii.                 Whether such 'oppression' undercuts the apparent right of Air Ontario, on the face of the provisions of the unanimous
                shareholders agreement, to terminate Mr. Deluce for any reason, thus triggering Air Canada's call on the Deluce shares.

        Oppression

                  Conduct of AC and its nominee directors could be found at trial to constitute 'oppression' -- conduct which is "unfairly prejudicial"
               to or which "unfairly disregards" the interests of Deluce as a minority shareolder, contrary to CBCA s. 241.
                  AC: wording of Agreement says simply that "upon the termination of the employment" of Mr. Deluce, AC's call upon the Deluce
               shares becomes operative, w/ no cause required.
                  Deluce: more than simply a relationship of employment coupled w/ an option on the part of AC to purchase Deluce shares --
               relationship akin to a partnership, premised on mutual trust and confidence, mutual expectation that
                              Both would act in good faith w/ a view to Air Ontario's best interests, and
                              Air Ontario would be managed by members of the Deluce family.
                  Agreement s. 2.03: relationship is not that of agent or partner; HVR, parties "have bound themselves to act, and to cause their
               nominees to act, in good faith and in the best interests of Air Ontario." (Director has statutory duty, re: CBCA s. 122, to act in good faith
               and w/ a view to the best interests of the corporation.)
                  Only a termination effected for the purpose of promoting the best interests of Air Ontario can constitute "termination" within
               the meaning of the Agreement.
                  Westfair Foods Ltd. v. Watt (1990): in enacting CBCA s. 241, "Parliament obviously intended that strict attention should be paid to
               the interests of all shareholders, not just the legal rights of shareholders."
                  Ferguson v. Imax Systems Corp. (1983): "[Look to s. 241] when considering the interests of the minority shareholders and the
               section should be interpreted broadly to carry out its purpose … . *W+hen dealing with a close corporation, the court may consider the
               relationship between the shareholders and not simply legal rights … . In addition the court must consider the bona fides of the
               corporate transaction … to determine whether the act of the corporation or directors effects a result which is oppressive or unfairly
               prejudicial to the minority shareholder. … *Each+ case turns on its own facts."
                  Even if the directors may be said to have acted in good faith [re: CBCA s. 122], the result of such action may still be such that it
               'oppresses' the interests of the minority shareholder.
                  Obligations in respect of competing shareholder interests, re: 920099 Ontario Inc. v. Harold E. Ballard Ltd. (1991)
                             "It may well be that the corporate life of a nominee director who votes against the interest of his 'appointing' shareholder
                       will be neither happy nor long. However, … he must act in the best interests of the corporation. If the interests of the
                       corporation … require that the director vote in a certain way, it must be the way that he conscientiously believes after a
                       reasonable review is the best for the corporation."

        Evidence here strongly supports a conclusion that AC nominees were acting to carry out an AC agenda and made little, if any, analysis of what
        was in the best interests of Air Ontario.

        Conduct unfairly prejudicial to and unfairly disregarded the interests of the minority shareholder.

        To allow AC to dislodge Deluce may also be oppressive.

        Deluce is entitled to remain in its position as a shareholder while these matters are being resolved. Motion to stay arbitration proceeding
        allowed.


Miller v. McNally (1991)           Certain conduct may prima facie suggest oppression


    o              Lack of corporate purpose for the impugned conduct
    o              Lack of good faith by directors and discriminatory conduct between shareholders
    o              Lack of adequate disclosure
    o              Presence of non-arm's-length transactions.


                                                                            68
Joncas v. Spruce Falls Power & Paper Co. (2000)

   Employees don't fall w/in scope of s. 245(2); not security holders, creditors, directors or officers, THF not entitled to oppression remedy.
   “While bad faith may be an indicium of oppression, a finding of bad faith is not a prerequisite to the success of the application. Nor does the
    complainant have to show that the respondents did anything dishonest or illegal or that they intended to oppress.

First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988)

   New remedies not previously available in Alberta:
        o Derivative action -- action to right a wrong done to the corporation where the directors will not sue to right the wrong
        o Remedy which may be sought by minority shareholders and others where there has been oppression or unfair prejudice to or that
            unfairly disregards the interests of any security holder, creditor, director or officer of the corporation.
   Issue: whether applicant qualifies for an order granting leave to bring each action.
   Corporate respondent named as lessee in a lease entered into w/ First Edmonton Place, for 10 yrs.
   In order to obtain leave to bring an action, applicant must be found to be a "complainant" re: ABCA s. 231, to wit, "a registered holder or beneficial
    owner, or a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates". A person may be a "complainant" if
    he is a person "who, in the discretion of the court, is a proper person to make [such an application]".
   Broad power to do justice and equity in the circumstances of a particular case, where a person ought to be permitted to bring an action.
   Assuming the applicant was a creditor of the corporation at the time of the act or conduct complained of, what criterion should be applied in
    determining whether the applicant is "a proper person" to make the application?
   Applicant must show that in the circumstances of the case justice and equity require him or it to be given an opportunity to have the claim tried. 2
    such circumstances (w/out limiting):
          o Act or conduct of the directors/mgmt constituted using the corporation as a vehicle for committing a fraud upon the applicant
          o Act or conduct of directors/mgmt constituted a breach of the underlying expectation of the applicant arising from the circumstances in
               which the applicant's relationship w/ the corporation arose.
   "In the absence of evidence establishing at least a prima facie case that an injustice would be done to the lessor or that there would be inequity if
    the lessor were not allowed to bring its action and go to trial, leave to bring the action ought not to be granted."
   "There is, in the present case, no evidence showing that there was an expectation on the part of the lessor that the lessee corporation would
    retain the funds in its hands for any set period of time or any time at all.”
   "[The] lease contemplated by the possibility that the corporation would enter into a lease with the lawyers, for it specified that the lessee could do
    so. This falls far short of evidencing the existence of an expectation that there would be a lease for the entire ten-year period."
   "In deciding who is a 'proper person', and whether justice and equity require a particular applicant to be recognized as a 'proper person', … bear in
    mind the purposes of the statutory actions provided for … . *These+ were intended to protect minority shareholders."
   Welling: "A statutory representative action is the minority shareholder's sword to the majority's twin shields of corporate personality and majority
    rule."
   These actions ensure managerial accountability: protection of rights of shareholders, creditors, the public.
   Application to facts
        o Applicant a proper person to make an application to proceed w/ statutory representative action, insofar as fraud may have been
              committed on the corporation
        o HVR, improper person to seek oppression remedy, since applicant was not a creditor at the time of the act/conduct complained of.




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SHAREHOLDERS’ REMEDIES (IV): OTHER REMEDIES
(1) Compliance and restraining orders
       Basic constitutional documents:
         i.Statute
        ii.Articles and by-laws
       iii.Unanimous Shareholder Agreements


      CBCA s. 247    If 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 … apply to a court for an order
                     directing any such person to comply with … any provisions thereof.


(2) Appraisal remedy
       Shareholders who invest in corporate shares sometimes find that other shareholders have voted to change the corporate constitution.

       Dissenting minorities can sometimes force the co. to buy their shares at either a mutually satisfactory or a judicially-set "fair" price.

       Events that give rise to the appraisal remedy, re: the CBCA:
         1. Amalgamation w/ another co. (s. 190(1)(c))
         2. Major changes in the business "objects" (s. 190(1)(b) and (e))
         3. "emigration" to another jurisdiction (s. 190(1)(d))
         4. Varying share provisions [changing share issue or transfer provisions, or affecting class rights] (s. 190(1)(a))
         5. Court-supervised "arrangements" (s. 192(4)(d))

       CBCA s. 190 sets out statutory process to be followed when invoking the remedy.


(3) Investigations, audits and the "Big D" Director
       Lack of information can seriously inhibit minority shareholder protection. Statutes address this problem in 3 ways:
         1. Court-ordered investigations (CBCA s. 29)
         2. Elected [CBCA s. 104(1)(e)] or judicially appointed [s. 167] auditors, who report to shareholders re: co.'s financial state
         3. "Director" -- civil servant responsible for administration of the Act, given powers to intervene [s. 238(c)]


(4) Capital punishment
       If all else fails, a minority shareholder could have the corporation killed.


                     A court may order the liquidation and dissolution of a corporation … upon the application of a shareholder, *if oppression is
CBCA s. 214(1)
                     proved, if a provision of a USA regarding dissolution is satisfied, or if it is "just and equitable" to dissolve].




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