Canadian Corporate Law, Veil Piercing

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Canadian Corporate Law, Veil-Piercing, and the Private Law Model CorporationAuthor(s): Jason W. NeyersSource: The University of Toronto Law Journal, Vol. 50, No. 2 (Spring, 2000), pp. 173-240Published by: University of Toronto PressStable URL: http://www.jstor.org/stable/825991Accessed: 17-02-2016 09:16 UTC

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2/69

Jason

W.

Neyers*

CANADIAN CORPORATE

LAW,

VEIL-PIERCING,

AND THE

PRIVATE LAW

MODEL

CORPORATIONt

TABLE OF

CONTENTS

Introduction

174

I

CurrentDoctrine s Incoherent and

Confusing

176

A

Incoherence

Defined

176

B

The

Failings

of Present

Doctrine

179

II A PrivateLaw Model of theCorporation 189

A

Limited

Liability

191

1. The Shareholder

Contract

's'

Contract)

191

2. The Directors'

Contract

'D' Contract)

192

3.

The

Position

of

Contractual

Creditors f the

Corporate

Patrimony

194

4. The Position of Tort

Creditors f the

Corporate Patrimony

195

B

Effective

egal

Personality

200

C

Free

Transferability

f

Shares

201

D

Perpetual

Existence &

Separation

of

Ownership

and

Control

201

E

Questions

and

Objections

Relating

to

the

PrivateLaw

Model

202

1.

General

Responses

202

2.

Specific

Response

to H.L.A.Hart

208

3.

Differentiating

he

Private

Law Model

fromOther

Contractual

Models

212

III

The

Veil-piercing

ases

Re-examined

215

A

Legislative

nterventions

216

B

Statutory

nterpretation

217

C Fraud or

Mere

Facade'

219

D Agency 225

E

Tort

227

F

Veil-piercing

s not

Exceptional

237

Conclusion

238

*

D.

Phil.

andidate

Oxon.).

t

An earlier ersion

f this rticle

waswrittennder

he

upervision

fProfessor

.D.

Prentice,

hom would

ike o

thank

or

his

nvaluable

uidance

nd

critical eviews

without

hich

hisworkwould

not

have

been

possible.

also

gratefullycknowledgethedebtowed o

my

wife ebecca

Neyers

orher

helpful

diting

ndmoral

upport.

Finally,

would

ike o

thank

rofessor

avid

tevens,

omasz

ojka,

nd

the

members

of

the

Oxford

rivate aw

Reading

Group

or heir

ery

elpful

omments

n

earlier

draftsf his

roject.

ny

rrors

nd

omissionsn

the

paper,

however,

emain

he ole

responsibility

f

he

uthor.

(2000),

50

UNIVERSITY F

TORONTO

LAWJOURNAL

73

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3/69

174 UNIVERSITY

F TORONTO

LAWJOURNAL

Thinking

ike a

lawyer

nvolved

being

suspicious

and distrustful.ou

re-

evaluated

statements,

nferred rom

ilences,

ooked for

oopholes

and

ambiguities. ou did everythingut take a statementt face value. So on

one hand

you

believed

nothing.

And on

the

other,

for

he sake

of

ogical

consistency,

nd

to

preserve ong-established

ules,

you

would

accept

the

most

ridiculous

fictions

-

that a

corporation

was a

person,

that an

apartment

enantwas

renting

and and not a

dwelling....'

Introduction

The

question

of the

'true nature' of the

corporate egal person

and its

personality

as been one ofthemost troublesome nd

time-consuming

questions

ever

pondered byphilosophers,

ociologists,

conomists,

histo-

rians,

inguists,

nd

jurists.2

xaminations

of this

problem

have lead to

radically

different,

nd

seemingly

mutually

exclusive,

answers to this

question.

Once

it is

realized,

however,

hat there

are a multitude f dis-

tinctive

et

qually

valid

ways

f

ooking

at

any

phenomenon,

the

quest

to

find

nd defend the one

true'

answerbecomes

unnecessary.

nstead,

one

comes

to

realize

that here

can be

any

number

of true'

answers

o

long

as

the dictates and fundamental ssumptions f a given disciplineare ad-

hered to.

Thus,

it

s

consistent o

say

hat,

ccording

to

economics,

there

s

no

such

thing

as

corporate

personality

ince the

'true' nature of

the

corporation

s

a

nexus

of

contracts,3

hile

also

stating,

hat

ccording

to

sociology

or

social

philosophy,

orporatepersonality

s real'

and reflects

the willof the

group.4

ikewise,

ne

can make

inguistic

rguments

o

say

thatthe

use

of the

word

person'

to denote

an inanimate

patrimony5

s

a

1 S. Thurow,OneL (NewYork:

Penguin,

1977) at 93.

2

Professor

Wolff nce

argued

that ll

continental

egal

scholars could be

broken into

one

of

two

camps:

those

who had

written

bout

corporate

personality

nd those

that

had

not

yet

done

so,

M.

Wolff,

On the

Nature

of

Legal

Persons'

(1938)

54

Law

Q.

Rev. 494

at 494.

On

the

different

heories

of

legal personality,

ee

R.W.M.

Dias,

Jurisrudence,

th ed.

(London:

Butterworths,

985)

at

253,

ff.

3

While the

literature

using

this

paradigm

is too

vast

to

list,

good

summaries of this

approach

can be

found n

R.

Romano,

Foundations

f

Comporate

aw

(New

York:

Oxford

University

ress,

1997);

B.R.

Cheffins,

Company

aw:

Theory,

tructurend

Operation

(Oxford:

Clarendon

Press,

1997).

4 See,for xample, .J. hillips,ReappraisingtheReal Entity heoryoftheCorporation'

(1994)

21 Florida State

Univ.

L. Rev.

1061.

5

Patrimony

s

a civilian

xpression

for

the

totality

f

existing

nd

potential

ssets

(and

liabilities)

of a

person,

or

specific

fund,

that

are

capable

of

pecuniary

evaluation.

While a

patrimony

s

attached to

all

people,

in modern

civilian

doctrine one

may

lso

be

dedicated to

a

purpose

as a

patrimonie'affection,

ee

Arts.

1256

&

1261 Civil

Code

of

Quebec

[hereinafter

.C.Q.].



4/69

CANADIAN ORPORATE

AW

175

fiction

ccording

to common

usage"

or to

argue

that

peaking

of

groups

as

if

they

were natural

persons

is

a

very

natural

phenomenon.7

While

these argumentsare of general interest, nd the answersreached by

these various

non-legal

participants

n

the debate have

validity

in

their

own

disciplines,

heyreally

have

very

ittle o

say

to the

lawyer

bout

the

legalprinciple

of

the

corporation

s a

separate person.8

In

seeking

to

analyze

the

'separate

entity'

principle,

this

paper

will

employ

a

purely

internal

private

aw

perspective.

Thus,

it makes

no

imperialistic

laims that ts

nswers re the

one 'truth'

hat

trumps

ll an-

swers

reached

in

other

disciplines.

ts

only

claim willbe

thatthe answers

provided

form

coherent

way

o examine

this ssue from

legal perspec-tive. n order to reach thisconclusion,the

paper

is divided into three

main sections. n

Part

,

this

paper

will

ssert hat

Canadian

corporate

aw

is

incoherent s a result f ts

organization

round

a

separate

egal person

doctrine

that:

firsts

directly

ontradicted

y

the

body

of

aw

dealing

with

piercing

the

corporate

veil;

and

second

fails

to

provide

a

unifying

explanation

of

thatwhich t

claims to

be an

organizing

principle.

In

Part

II,

this

paper

will

show

that

the

traditional

ormulation f

a

corporation

as a

legal person

is also

unnecessary.

This will be

accom-

plished throughthe formulation f a 'private aw model' corporation

constructed

with

nothing

more

than the basic

legal

conceptions

of

natural

persons,

property,

ort,

ontract,

nd

unjust

enrichment.

t will

be

argued

that

this

model is

capable

both of

mimicking

he

most

basic

structural

orm

f

modern

Canadian

corporation

tatutes nd of

explain-

6

See

Trustees

f

Dartmouth

ollegev.

Woodward,

7

U.S.

518

(1819)

at

636

perMarshall

C.J.

('A

corporation

is an

artificial

being,

invisible,

ntangible,

and

existing only

in

contemplation

f

aw.').

7 See S.A. Schane, 'The Corporation s A Person: The

Language

Of A

Legal

Fiction'

(1987)

61

Tul.

L.

Rev.

563.

8 For

example,

he fiction

theory

orrectly

upposes

that rom n

everyday

inguistic oint

of

view the

short-hand

ormulation

corporate

person"

cannot

be

literally

rue.'

D.

Stevens,

The

Regulation

of

Takeovers

and the Idea of

the

Corporation'

[1994/95]

Meredithectures

72 at 419

[hereinafter

fter

Regulation'].

It is

not,

however,

legal

theory

about the

corporation,

as this

assertion tells

us

nothing

about how the

relationships

nd

legal

issues

surrounding orporate

law should

be solved.

Similarly,

the

realist ersion s

also

true

people

do

oin together

o

form

roups.

These

groups

often

ake on an

enduring

culture'

and

when mmersed

n these

groups

people

often

behave differentlys a result, ee Schane,supranote 7 at 567.Yet,therealist ersion s

'legally

rrelevant ince the

existence of

a

group identity

ays

nothing

bout the

legal

form

f

the

dentity,'

Regulation'

at 419.

Whatwe

are concerned with s

lawyers

s the

principle

of

legal

personality

and its

recognition

as

legal

doctrine,

not

'social,

psychological,

or

erotic

personality.'

See B.

Welling,

Corprrate

aw in

Canada:

The

Governing

rinciples,

d

ed.

(Toronto: Butterworths,

991)

at 80

[hereinafter

orporate

Law].



5/69

176

UNIVERSITY

F

TORONTO

AWJOURNAL

ing

all

the traditional ttributes f the

corporation,

viz,

imited

iability,

effective

egal

personality, erpetual

existence,

free

transferability

f

shares, nd separationofownership nd control. "

In Part

III,

this

paper

will

then

test

the

private

aw

model of the

corporation

to see

if it

provides

a more coherent

way

to

understand

difficult

egal

situations.

he

testing round

will

be the

quagmire

of aw

that

s

formed

by

the

veil-piercing

ases. The

argument

f

Part

V

s

that

when

the

corporation

s

properly

onceptualized,

the

riddle

of

the

veil-

piercing

cases

is

easily

solved

as

simply

he

proper application

of

com-

mon law

principles

o

the

corporation.

I Current

octrine

s incoherentnd

confusing

A. INCOHERENCE

DEFINED

In order

to

go

about

demonstrating

hat Canadian

corporate

law

is

incoherent and

confusing,

ne must

indicate

in

what

sense

the term

'incoherence' is

being

utilized. For the

purpose

of this

paper,

the

followingprivate

aw definition f

coherence will be

employed.

Under

this

view,

ncoherence

can manifest

tself n two

ways

n

any

egal system.

The first nd most common manifestation ccurswhen twodoctrines

directly

nd

logically

ontradict ne another n one

unified

area of law.

For

example,

tort

aw s

incoherent n

this

ense so

long

as the

principle

that one is

responsible

for

ll

reasonably

oreseeable

harm' is

seen to

be

contradicted

by

non-recovery

or

pure'

economic loss.

While

this

s the

primary

ormof

incoherence,

there s

also a

second

manifestation.

his

more subtle form

occurs

when a

self-appointed

oundational

principle

fails to

explain

areas

which are

central to its

experience

and

which

by

common

understanding

are to

be

included in

that

body

of

law. For

example,

a theoretical

understanding

fcontract awwould be incoher-

ent,

in

this econd

sense,

if

t

could

not

explain

and

integrate

expecta-

tion'

damages

into

its

overall

ustification

f

contract.

n

sum,

to be

coherent

a

body

of

law

must

consistof

doctrines hat

exemplify

single

theme' and

constitute

unitary

whole,

rather than

merely

being

'an

aggregate

of

conceptually disjunct

or

inconsistent

elements

that

...

9 These are an amalgam of the traditionalattributes isted in P.L. Davies (with

contribution rom

D.D.

Prentice),

Gowerv

Principles

f

Modern

Company

aw,

6th

ed.

(London:

Sweet

&

Maxwell,

1997)

at c.

5.

[hereinafter

Gower'];

R.C.

Clark,

Corporate

Law

(Boston:

Little

Brown,

1986)

at

s.1.1

2);

H.A.J.

Ford & R.P.

Austin,

Principles

f

Corporations

aw

(Sydney:

Butterworths,

995)

at 86-7

[hereinafter

rinciples];

.E.

Ribstein,

Limited

Liability

nd

Theories of the

Corporation'

50

Mar.

L. Rev.

80 at 89

[hereinafter

Limited

Liability'].



6/69

CANADIAN ORPORATE

AW

177

happen

to

be

juxtaposed.'""

The

forthcoming rgument

will be that

Canadian

corporate

aw s incoherentbecause its

organizing

principle

s

both contradicted rbitrarilynd failsto explain the totalityf the law

relating

o

corporations

n a unified

fashion.

The next

mportant

ask,

specially

o

convince the

pragmatic

awyer,

is to answerthe

question:

Our

current

nderstandingmay

be

inelegant

and

technical,

but it

gets

the

ob

done in

most

cases,

so

what

does

it

matter

f

corporate

law is

incoherent?'

n

other

words,

why

does

coher-

ence matter?While one

could write whole

manuscript ddressing

this

question,"

a

short

nswerwould take the

following

orm. f a

body

of

aw

is

coherent,

ne

can

readily

etermine nd

comprehend

ts

tructure nd

rules. One can

identify

he core formor

principle,

s well as: how this

principle

s

applied

in

secondary

doctrines;

how these

doctrines nterre-

late withone

another;

and how

they

re

further efined nto

third evel

rules

designed

for

specific

ircumstances."

hus,

the

quest

for

oherence

forces one to

formulate

econdary

doctrines nd rules so

that

they

re

ultimately

eferable

o

that

pre-eminent

rinciple.

n

doing

so,

coher-

ence renders

the

law both

intelligible

nd

accessible.13

ince a

coherent

system

s

intelligible,

people

can also be

reasonably

sure

when

their

actionswillcontravene he aw,makeplausible arguments n howthe aw

should

develop

to meet

future

demands,

and

thereby

tructure heir

relations with others in

a more

certain fashion.

Thus,

coherence also

provides predictive

alue.

Beyond

these

virtues,

oherence

also

serves to

justify

he

operation

of

law with the

public.

Since rules are

coherently

related to

'principle'

(and

courts

ustify

heir

decisions

n

written

udge-

mentsfor ll to

see),

persons

nvolved n

disputes

can see that

decision

was

rendered

for

legal

reasons

and not because of

sympathy,

olitical

expedience, subjective

moral

assumption,

r

arbitrary

mechanism

(e.g.,

flipping

coin in

despair)."

Thus, coherence has

justificatory

alue and

demonstrates hatthe

state's

mposition

f

coercion

is

ustified

on

some

10

E.J.

Weinrib,

Legal

Formalism:

On

the

mmanent

Rationality

f the

Law'

(1988)

97

Yale

L.J.

949 at

968-9.

11 See

E.J.

Weinrib,

The dea

ofPrivate

aw

(Cambridge:

Harvard

University

ress,

1995)

[hereinafter

rivate

aw].

12 This

is

largely

he

structure f the

C.C.Q.,

Book

Five,

which

startswith n

organizing

principle

of

Obligations,

hen

proceeds

to

define

ts

manifestationsn

Contract,

Civil

Responsibility, nd UnjustifiedEnrichment;how these doctrines relate to one

another;

and

then

finally

he

special

rules for

Nominate Contracts

nd Torts.

13 For

evidence,

compare

the

organization,

anguage,

and

length

of the

C.C.Q.,

which

regulates

all of

private

aw with the

Companies

Act

U.K.),

1985,

c.

6.

[hereinafter

U.K.C.A.],

which

attempts

o

regulate

only orporations.

14 D.

Stevens,

Restitution,

roperty,

nd the

Cause

of

Action in

Unjust

Enrichment:

GettingBy

with

Fewer

Things'

(1989)

39

U.T.L.J.

258,

270.



7/69

178

UNIVERSITY

F TORONTO

LAWJOURNAL

plane

higher

than brute force.

Finally,

ecause

the

quest

for

coherence

takes

principle,

ntelligibility,

nd the

process

of

ustification eriously,

t

helps to ensure that there s an internal hange mechanism within he

law itself.

Thus,

even on an

internal

understanding

f

the

law,

we

can

legitimately

rgue

that ome cases or

doctrines re

wrong

even

ancient

rules

that have

spawned

extensive nd

ramified

urisprudence'

-

because

they

do not

adequately

reflect' he

higher

principle

to

which

they

are

said

to

cohere.'"

Thus,

coherence

ensures that

working

withinthe

law

does

not

come to

equal

accepting

the

entire

orpus

of

holdings

as

if

hey

were

factsof

nature.'"'

Coherence, therefore,

lso has a

corrective

alue.

The true virtues f

coherence,

however,

re more

readily

demonstrated

when it s absent from

legal

system.

Without

oherence,

a

body

of

aw

becomes

increasingly

echnical

and

confusing

s it

retreats nto

conventionalism nd

arbitrary

istinction o

justify

he

increasingly isparate

holdings

of

the

cases. With this

disso-

nance,

the

lawyer

an

no

longer

properly

dvise his or

her

clients as to

the

probable

outcome of

litigation

r

how to

order their affairs.

hus,

'testing' itigation

ncreases,

s do

claimsof

malpractice

r

misrepresenta-

tion.Judges

xasperated

with he

increasing omplexity

nd

incoherence

of the cases either come to strangeconclusions that run counter to

intuition but

conform to

the 'law' as

conventionally

understood

it;17

reinterpret

lear

language

with

tatementsike

although

the aw

says

x,

t

really

means Y or

sometimes

Z';18

or

resort o

policy,'

Equity'

or

overtly

historicist"

rguments

ojustify

remedy iven

o

those whom

they

hink

are

deserving.2"

oon

litigants,

itigators,

nd

commentators

ose faith

n

that

body

of aw's

ability

o

properlyjustify

ts

outcomes,

often

retreating

into

other

disciplines

for

understanding.21

hen,

finally,

ecause the

law

shows no

sign

of

correcting

tself,

egislation

s

passed

to

remedy

the

worst

failings

of the

system,

ften

by

giving

the

judiciary

even wider

remedies

designed

to do

'justice'

in

the

circumstances.22

nfortunately,

15 Private

aw,

supra

note 11 at

13.

16 Ibid. at 13.

17

See the

discussion of

poison pills

surrounding

note

65,

below.

18 See

discussion

of best

interests

f the

corporation'

surrounding

note

58,

below.

19

This is

the view hat

rule can

be set

aside

without n

examinationof

ts

merits

merely

because

it

was

historically

onditioned;

for

xample,

hat

the doctrine

of

consideration

should be rejected because it is said to representa nineteenth-centuryaisser aire

mentality.

20

See

discussion

of the

corporate

approach'

tort

ases in

Part II

(E),

which

are said

to

protect

the

policy

of

imited

iability.

21

Such as the

hugely

popular

law

and

economics'

approach.

22

For

example,

he

Canadian

oppression

remedy:

the

broadest,

most

comprehensive

nd

most

open-ended

shareholder

remedy

n

the

common law

world. t is

unprecedented



8/69

CANADIAN CORPORATE

LAW

179

as the

pragmatic

awyer

will have

realized,

this

state of affairs

largely

describes

the

present

state

of

Canadian

corporate

law. What he or she

mightnot have realized is thatmuchof this discord is directly ttribut-

able to

corporate

aw's

incoherence,

rather

than

to its

increasing

com-

plexity.

Thus,

when

coherence

is

removed

fromthe

law,

one

can more

readily

ee

why

ts

bsence

should

concern the

pragmatic awyer

s much

as it does the academic.

B. THE FAILINGS

OF

PRESENT

DOCTRINE

Open

any major

corporate

aw

textbook nd one will

be

inundated

with

claims to the

effect

hat

he

principlerecognized

n

Salomon

.

A.

Salomon

& Co.

Ltd.,2

and codified in the Canadian Business

Corporations

ct,

.

15(1)24

-

that the

corporation

s a

legal

person

distinct

from

ts share-

holders, directors,

nd

any

other

legal person

-

is the

central and

foundational

principal

of

corporate

aw.25

urthermore,

hat this

princi-

ple

is

ustified,

necessary,

nd

should continue to

form such a basis

is

rarely

questioned.2"

As Lord

Templeman

claims,

it is the

'unyielding

rock'27

n which

corporate

law is

constructed.28

While this traditional

'black

letter'

pproach

has

survived

or

more than

100

years,

t is

unwise,

however, o infer uccess from urvival.What is more important s that

the

principle

can be shown .. to be

inherently

ound.'2

This is

preciously

where the

problem

with

orporate

personality

ies

foran

examination of

this

principle

revealsthat t

rendersCanadian

corporate

aw incoherent.

Clearly,

Canadian

corporate

aw

s

incoherent

n

the first

ense

due

to

the fact hat he

separate

entity

rinciple

s

directly

ontradicted

by

other

in its

scope.'

See

820099

Ontario nc. v. Harold

Ballard

Ltd.

(1991),

3 B.L.R.

(2d)

123

(Ont.

Gen.

Div.)

at

179.

23 [1897] A.C. 22 (H.L.) [hereinafter alomon .Salomon].

24

R.S.C.

1985,

c.

C-44

[hereinafter

.B.C.A.].

See also

Ontario

usiness

Corqorations

ct,

R.S.O.

1990,

c. B.16. at

s.15

[hereinafter

.B.C.A.].

25

Gower%',

upra

note

9

at

77;

Coirorate

aw,

supra

note

8 at c.

3;

H.

Sutherland,

Fraser

Stewart

ompany

aw

of

Canada,

6th

ed.

(Scarborough,

ON:

Carswell,

1993)

at

17

[hereinafter

raser].

26

As R. Grantham

& C.

Rickett,

The

Bookmaker's

Legacy

to

Company

Law Doctrine' in

Corporate

ersonality

n

the 0th

Century,

. Grantham

& C.

Rickett,

ds.,

(Oxford,

Hart

Publishing,

1998)

1

at 1

[hereinafter

Bookmaker']

claim: The

century

ld

decision

of

the

House of

Lords

in

Salomon

.

Salomon& Co.

Ltd.

is

probably

the

most cited

company awcase inthe urisdictions fthe Commonwealth.The case iscreditedwith

having

articulated the

founding propositions

of

company

law,

and

it is

accordingly

treated

by

udges

and

academics

alike

with reverence

bordering

on the

religious.'

27

L.

Templeman, Forty

ears On'

(1990)

11

Co. Law 10.

28

See also L.S.

Sealy,

Cases

nd

Materials

n

Company

aw,

6th

ed.

(London:

Butterworths,

1996)

at 54

(described

as a

cornerstone).

29

'Bookmaker,'

supra

note

26

at 7.



9/69

180 UNIVERSITY

F TORONTO

LAWJOURNAL

common law doctrine

relating

o

the

corporation.

For

evidence of

this,

one need

simply

xamine

any

udgement

where

sharp

practice

s

alleged

or any majorscholarlyworkon thesubject.No soonerhas it been stated

that

the

corporation

s a

legal person

distinct rom

ts

hareholders

than

courts and

academic writers llow that

legal personality

hould

some-

times be

disregarded.30

ow

can the

'legal

person

doctrine' that is

so

central

to

corporate

aw

n

one sentence

be

disregarded

o

casually

n

the

next?Both

propositions

annot be

true.

Something

annot both be'

and

'not be.' This

'very

ingular

contradiction' s

logically

mpossible."'

As

Lord

Halsbury

laimed

in

Salomon's

ase itself:

Either a

limited

ompany

was

a

legal entity

r it

was

not.'32

Until

this

contradiction

t

the

heart of

corporate

aw

is

explained

in some

principled

fashion,

r

reliance

upon

the

legal person

doctrine is

discontinued,

Canadian

corporate

aw will

remain

radically

ncoherent.

This

area of

conflict nd

incoherence

becomes

even

more

problem-

atic when

the

veil-piercing

octrines are

examined

more

closely.

Such

scrutiny

eveals hat he

body

of

doctrine

hat

hreatens he

coherence

of

corporate

aw

s itself

arfrom

oherent.The

first

ign

of

this

s

thatthere

is

very

ittle

agreement

as to

what,

in

fact,

constitutes

piercing

the

corporate

veil.33

s lookingat theactionsofshareholders n a corporation

veil-piercing?

ome

argue

yes,34

thers no.35 s

looking

at

the actions

of

directors

eil-piercing? gain,

imilar

yes"6

nd

no

answers.37

The

second

problematic ign

is

thatthere s

no

agreement

s to

eitherhe

number of

categories

llowing

the courts

to

pierce

the

corporate

veil;

the

doctrinal

requirements

necessary

or

each of

the

categories;

or

which cases

exem-

30 The

phenomenon

is

so

widespread

thatone

hesitates o

cite

anyone

n

particular,

ut

see Nedco

td. v. Clark

1973),

43

D.L.R.

(3d)

714

(Sask. C.A.) [hereinafterNedco] t

721

(Salomon

principle

s

fundamental

but

there are some

cases in

which the

court

can

and

should lift

he

corporate

veil')

and

R.R.

Pennington,

Company

aw,

7th

ed.

(London: Butterworths,

995)

at c.

2.

31

Corporate

aw,

supra

note

8

at

126.

32

Salomon .

Salomon,

upra

note

23

at

31.

33

R.

Flannigan,

'Corporations

Controlled

By

Shareholders:

Principals,

Agents

Or

Servants?'

1986)

51

Sask.

L. Rev.

23

at

25

[hereinafter

Agents']

and

M.A.

Pickering,

'The

Company

as

a

Separate

Legal

Entity'

1968)

31

M.L.R. 481 at

483.

34

S.

Ottolenghi,

From

Peeping

Behind

The

Corporate

Veil,

To

Ignoring

t

Completely'

(1990)

53 M.L.R.

338.

35 D. Goddard, 'Corporate

Personality

LimitedRecourse and itsLimits,' n

Corporate

Personality

n

the

20th

Century,

.

Grantham

& C.

Rickett,

eds.,

(Oxford,

Hart

Publishing,

1998)

11

at

62;

'Agents,'

upra

note 33

at

25-6;

S.W.

Mayson

t

al.,

Mayson,

French,

Ryan

on

Company

aw

(London:

Blackstone,

1997)

at

128,

138

[hereinafter

Mayson].

36

I.

Roxborough,

Directors

Liability'

1997)

141

Sol.J.

252.

37

Ottolenghi, upra

note

34

at 341.



10/69

CANADIAN CORPORATE LAW 181

plify

which

category."8

s

Mayson,

French,

nd

Ryan

correctly

tate,

given

the

present

onceptualization

f the

corporation,

t would

be

impossible

to reconcile the hundredsof cases thoughtto be relevantto the argu-

ment

or

the

dozens

of

academic

opinions.

Cases are decided

by udges

who

adopt

different ttitudes o the

question

and

rarely,

f

ever,

state

whattheir

general theory

f

corporate

personality

s.'"

Despite

this

prob-

lem,

some of

the

many

principled categories'

often

put

forward

n-

clude40

gency,

raud r mere

facade,

group enterprise,

rusts,

nterpreta-

tion of

contracts, ort,

nemy

legislation,

ax

legislation,

disrespect

of

corporate

formalities,

ther

egislation,

non-arm's-length

arent-subsid-

iary

relations,

nd

undercapitalization.

Looking

at the list,one comes to the conclusion that there is

really

nothing

coherent

about the

categories.

Rather,

they

merely

categorize

the

circumstances

surrounding

when he veil is

lifted,

s

opposed

to

exemplifying

principled

basis

from

which the courts

derive

uthority

o

pierce

the veil. f

t

s

indeed

the

former,

hese

ists re

of

ittle se

to the

judge

or

legal

scholar.

Looking

more

deeply

at

the

categories,

one wonders

why

some of

them

are even

included. For

example,

what does

agency

have

to

do

with

veil-piercing? lthough gency, s currentlypplied, has the same effect

as

veil-piercing

viz,

holding

shareholders or

directors

iable for

the

debts of the

corporation

-

it is

arguably

not a real

violation of

the

separate entity

rinciple.41

ather,

t

is

a

reaffirmationf

that

principle

because it

allows

thatone

legal

person,

a

corporation,

may

be the

agent

of

another

egal

person,

ust

as a

natural

person might.

Yet,

this

category

is to be

found

under the

veil-piercing

ategory

n

many

works

on

the

38

Pickering, upra

note 33 at

483;

A.

Beck,

'The

Two

Sides of the

Corporate

Veil'

in

Contemporaryssues n

Company

aw,

J.

Farrar,ed., (Auckland: Commerce

Clearing

House,

1987)

71

at

72.

39

Mayson, upra

note 35 at

128.

See

J.H.

Farrar,

Fraud,

Fairness and

Piercing

the

Corporate

Veil'

(1990)

16

Can.

Bus.

L.J.

474

at 478

[hereinafter

'Fraud']

(Commonwealth

uthority

s

incoherent).

40

These

categories

are

an

amalgam

of

those

posited

to

exist

n

Pennington,

upra

note

30 at

47,

ff.;

.H.

Farrar et

al.,

Farrar's

Company

aw,

4th

ed.

(London:

Butterworths,

1998)

at 70

[hereinafter

arrar's];

ealy,

supra

note

28

at

60;

J.S.

Zeigel

et

al.,

Cases

and

Materials on

Partnerships

nd

Canadian Business

Corporations,

d

ed.,

2

vols.

(Scarborough,

ON:

Carswell,

1994)

at 166

[hereinafter

Cases &

Materials];

Gower's,

supranote 9 at 173; Fraser,upranote 25 at 17,ff.; rinciples,upranote 9 at 119-25.

41

See

Corpate

Law,

supra

note

8

at c. 3.

This

disagreement

no

doubt stems from

the

case law on

the

subject,

which

confuses,

mangles,

nd

intermixes

egal gency,

actual

control,

ack of

separate

will

could

one

say

puppetness?)

and

veil-piercing

nto

one

unrecognizable

whole,

see

for

example,

oronto

City

of)

v.

Famous

Players

Canadian

Corporation

td.

(1935),

O.R.

314

(C.A.)

[hereinafter

amous

Players]

Wallersteinerv.

Moir,

1974]

3

All

E.R.

217

(C.A.).



11/69

182

UNIVERSITY

OF

TORONTO

LAWJOURNAL

subject.42

imilarly,

ome authors

also have

great

difficulty

n

including

any

of the

categories relating

to

statutory

nterventions

s 'real'

veil-

piercing.43 re these reallyexceptionsto the Salomon rinciple?Or do

these

provisions,

as

express components

of the

legislative

framework

applicable

to

corporations

ctually

define the

corporate

veil rather

han

pierce

it'?44

Beyond

the

disagreements

ver

the

statutory

nd

agency categories,

what can be said of

the others? s

there

something

more

beyond

the

datum

that the

corporate

veil should

be

pierced

when

not to do

so

'would

yield

a

result too

flagrantly

pposed

to

ustice"?'45

Most

commen-

tators hink

not.

Farrar,

or

example,

has

argued:

'there is no

common

unifying

rinciple,

whichunderliestheoccasional decisionsofthecourts

to

pierce

the

corporate

veil.'46

The

Supreme

Court

of

Canada has

stated

as much.

Justice

Wilson

argued

in

Constitution

nsurance o.

of

Canada

v.

Kosmopoulos,

or

instance,

that

the courts have

followed no

consistent

principle'

when

piercing

the

corporate

veil.47

Thus,

even

our

courts

recognize

that

these

residual

categories

re not

principled

nd

coherent

interventions ut

rather

nstances of

ad hoc

udicial

discretion."

While

manyrecognize

the

need

for

change

and

coherence

in

this

rea,49

others

are contentto leave well enough alone so as not to hinder the court's

flexibility,50

r

insist

hat

uch a

rationalization s

impossible.51

This

state of

affairs

ould be

almost

comical

if

the

proper nterpreta-

tion of

the

veil-piercing

ases

were not so

important

o

our

understand-

ing

of

corporate

law. To

reiterate,

tatute nd

precedent

posits

that

the

corporation

s

a

separate

egal

person.

Courts

nd

corporate

aw

theorists

42

Ottolenghi, upra

note

34

at

345.

See

Farrar's,

upra

note 40 at 70

or

Sealy,

upra

note

28

at

60.

43 Gower's,upra note 9 at c. 8; L. Cooke ofThorndon, 'A Real Thing - First

Hamlyn

Lecture' in

Turning

oints

f

he

ommon

aw

(London:

Sweet &

Maxwell,

1997)

1

at 13

(statutory

nterventions

re not

real

veil-piercing).

44

'Agents,'

upra

note 33 at

26.

45

Constitution

nsurance

o.

of

Canada

v.

Kosmopoulos,

1987]

1

S.C.R.

2

at

10

perWilsonJ.

[hereinafter

osmopoulos].

ee also

Re a

Company,

1985]

B.C.L.C. 333

(C.A.)

at

337-8

('the

court

will

use

its

powers

to

pierce

the

corporate

veil f

t

s

necessary

o

achieve

justice.').

46

Farrar's,

upra

note

40

at 69

takenfrom

Briggs

v..

amesHardie

& Co.

Pty.

td.,

1989]

16

N.S.W.L.R.

549

(C.A.)

at

567.

47 Kosmopoulos,upra note 45 at 10.

48

See A.-G.v.

Equiticorp

ndustries roup

td.,

1996]

1

N.Z.L.R.

528

(C.A.)

at 541

(veil-

piercing

s a

process

not a

principle).

49

Ottolenghi,

upra

note 34 at

338,

ff.

50

See

Sealy,

supra

note

28 at 56 or L.

Gallagher

& P.

Ziegler, Lifting

The

Corporate

Veil in

the

Pursuit

fJustice'

1990)

J.

Bus. L.

292.

51

See

Cheffins,

upra

note

3

at 334 and

Beck,

supra

note

38

at 91.



12/69

CANADIAN

ORPORATE AW

183

then

explain

that this

s the entral

principle

of

Canadian

corporate

aw.

This central

principle

s then

immediately

ontradictedwhen the

sepa-

ratelegal existenceofthecorporation s denied bythe courts, lbeit in

'exceptional'

circumstances.

When

the

court

is asked

to

justify

this

intervention,

ts

only

response

seems to be

because 'the

situation de-

mands'

or

'I

feel like

it.'

This state of

affairs s

unacceptable

in

such

a

developed

legal system

nd

smacksof

arbitraryustice,

rather han of

the

rational

application

of

coherent

legal

rules

to

difficult

actual circum-

stances.52

s one author

has

noted,

the

present

casuistic

approach,

even

if

permissible,

annot

satisfy

hose who believe

that

legal system

hould

be

built,

as far as

possible,

on

a

foundation of

principle.'53

Until

this

whole area of law is reformed, r

interpreted

s

complimentary

o the

separate

legal entity

principle,

Canadian

corporate

law

will

remain

radically

ncoherent.

Furthermore,

his

nteractionwith he

veil-piercing

cases shows

the

legal person

doctrine s a

weak

cornerstone n

which to

build

our

corporate

aw

edifice.

Upon

closer

examination,

Canadian

corporate

aw is

also

incoherent

in the second

sense as its

foundational

principle

fails to

explain

the

totality

f

company

aw.

Clearly,

he

legal person'

doctrinehas

done,

and

continues to do some explanatorywork. It goes a long way toward

superficially

llustrating

many

f

the

traditional

ttributes

f

the

corpora-

tion,

such as

legal personality,

imited

iability,

nd

perpetual

succession.

Furthermore,

he

egal person

doctrine an also

be

marshalled o

explain

to whom the

directors we

their

duties and in

tandem

with

Equity,

the

scope

of that

duty.

Thus,

at

first

lance,

a

pragmatist

an

argue

that

many

of

corporate

aw's

basic

principles

re

seemingly

xplained

with

the

idea

thata

corporation

s a

distinct

egal

person.

Yet,

if

the

logic

of

these

assertions s

probed

a

little

deeper

it can

be

seen thatthe

legal

person

doctrinedoes less

explaining

thanwas

origi-

nallythought.

Take,

for

xample,

the imited

iability

f

shareholders.As

Professor arrar

xplains,

the

mere

fact hat he

aw

recognizes

separate

legal

person

does

not

necessarily

mean that

imited

iability

s

created as

a

matter

f

logic.54

Under

English

aw,

a

company

with

separate

legal

52

This

is

a

paraphrase

of

L.C.B.

Gower,

Gower'

Principles

f

Modern

Company

aw,

4th ed.

(London:

Stevens

and

Sons,

1979)

at 138. See

also,

R.B.

Thompson,

'Unpacking

LimitedLiability: irect andVicariousLiability fCorporateParticipants orTorts of

the

Enterprise'

(1994)

47

Vand. L.

Rev.

1

at

23

('The

legal

doctrine of

piercing

the

veil

s

so

amorphous

that t

eaves a

large

area in which

courtscan

impose

a

smell

test

of

fairness.').

53 A.

Domanski,

Piercing

the

Corporate

Veil

-

A

New

Direction?'

(1986)

103

S.A.L.J.

224.

54

Farrar's,

upra

note

40 at

79.



13/69

184 UNIVERSITY OF TORONTO

LAWJOURNAL

identity

an still

be formed

withunlimited

iability

or ts

hareholders."

While

one can

argue

that such a state of affairs s a 'leftover'

from

a

systemwhich has a statutoryontract t itsbase, itdoes help to showthat

limited

iability

nd

separate

egal

personality

re not

conceptually

inked

as

strongly

s has been claimed. While

the link between

imited

iability

and

'legal

person'

is

perhaps

only

a minor

explanatory nconsistency

f

present

doctrine,

its

response

to directors' duties is a more

glaring

failure.

As mentioned

above,

the

legal

person metaphorposits

that

ince

the

corporation

is a

separate

legal

person,

and director's

fiduciaries,

a

director's

duty

must

be

something

imilar o the

command

of

the

C.B.C.A.

to 'act honestly nd in good faithwith viewto the bestinterests f the

corporation.'56

f

course there re

obvious

difficulties

f

nterpretation:

Are therethree

elements o

the

duty

r less?

f

there

re

three,

whatdoes

'good

faith' add to

'honestly'

nd

'best

interests'?Or

conversely,

o all

these words

characterize

the same

quality

of

motive

required

of

the

directors?57

ut

beyond

these

types

f

questions,

there s

the

underlying

problem

of

acting

n the best

interests' f

a

legal

person.

What

does

this

really

mean? As

ProfessorD.D.

Prentice

has

argued,

the term best

inter-

ests' is 'one ofthe mostproblematic n company aw,' often ndetermi-

nate' and

'arguably

ncoherent.'58

The

problem

in

this area of

the law

stems from

attempting

o

read

too much into

the

metaphor

of

'legal

person.'

As

has been

noted

byjudges

and

commentators,

ince a

corpora-

tion is

incapable

of

loyalty,

r

enmity,

r

residence,

or of

anything

ut

bare

existence in

contemplation

of

law,'"5

'requirement

to benefit

n

artificial

ntity

..

would

be

irrational nd

futile,

ince a

non-real

ntity

s

incapable

of

experiencing

well-being.'""

f the

legal

person'

metaphor

s

replaced by

the

names of the

underlying

ssets

residing

n the

corporate

patrimonythis point becomes clearer. What 'interests' does a bank

account or trade

goods

(e.g.,

tennis

rackets)

have

apart

from

he

people

who

utilize them for

the

fulfilment

f their

own

purposes

and

interests?

The

answer s

none,'

since

only

natural

persons

have

interests;

reations

55

U.K.C.A.,

s.

1(2) (c),

supra

note 13.

56 See

s.122

(1)

(a);

O.B.C.A.,

.

34(1).

57 'Regulation',supra note 8 at 457.

58

D.D.

Prentice,

Creditor's

Interests nd

Director's Duties'

(1990)

10

O.J.L.S.

265

at

273

[hereinafter

Creditor's'].

59 Daimler

Co. Ltd.v.

Continental

yre

nd

Rubber o.

(Great

ritain)

td.,

1916]

2

A.C.

307

(H.L.)

at

340

per

Waddington

L.J.

hereinafter

aimler].

60

J.E.

Parkinson,

Corporate

ower

nd

Responsibility:

ssues

n the

Theory f

Company

aw

(Oxford:

Clarendon,

1993)

at 76.



14/69

CANADIAN

ORPORATE AW

185

of the

aw

and

inanimate

objects

do

not."'

Thus,

trying

o

figure

ut

what

the

corporation

wants o

do,

or

what s in its best

interests,'

s like

trying

to deduce its sexual orientation an impossibletask."2As we have no

rational

way

of

discerning

he

answer,

sking

the

question

s not a

fruitful

exercise.'63

But

given

the clear

statutory

ronouncement

and

long

case

history,

the

law

attempts

o

discern an

impossible

answer,

usually

n one of

two

forms.The first

method is to

ignore

the

conceptual

difficulties f

best

interests' nd

push

ahead with

olving

ases

as

ifa

patrimony

was

totally

analogous

to a human

being.64

erhaps,

the

clearest

xample

of

this

type

of

misguided reasoning

occurs n the

contextof

hostile takeovers.

Here,an offer

y

one

person

for the

personal property

f

another"5

that

s,

their hares

of

a

company

turns

nto an

attackon

the

existence of the

company

and thus its

interest n its

continued

'life,'

'integrity,'

nd

'personality.'"6

n

order

to

protect

hese

ultimate

nterests,'

ommon

law

doctrine

posits

that the

board

of

directorshas the

power

to

protect

the

corporation

from

this attack.'

Thus,

in

347883 Albertanc. v.

Producers

Pipeline

nc.,67

he

court

stated

that

defensive

measures'

by

the

board

are

permissible

o

long

as the

directors

a)

in

good

faith

erceived

threat o

thecorporation, b) actedafter proper nvestigation,nd (c) employed

means

that were

reasonable

in

relation to the

threat

posed

by

the

takeover.68

ut

once the

possibility

f

corporations

having

moral

person-

ality

nd

ultimate nterests

s

denied,

as it

should

be,

the

argument

hat

takeover hould

be

defended on these

grounds

becomes

unsustainable.

f

corporations

do not

have

nterests,

hey

annot

have

a

continued

nterest

61

'Regulation,'

supra

note

8

at 457.

Support

for this

proposition

also comes

from

both

traditional nd reform

minded

commentators,

ompare

H.G.

Manne,

The Limits

nd

Rationale of

Corporate

Altruism: n IndividualisticModel'

(1973)

59 Va. L. Rev. 708

at

710

('only

individuals,

not

corporations,

have

interests')

with C.

Axworthy,

'Corporation

Law as if

Some

People

Mattered'

(1986)

36

U.T.L.J.

392

at

398

('in

contrast o

real

people,

legal personalities

have no

interests

er

se').

62

Corporate

aw,

supra

note 8

at 436

(in

the context of

ratifying

breach of

fiduciary

duty).

63 Ibid. at

436.

64

Thus,

ust

like

any

other

person'

the

corporation

must have

'interests'

nd

mustbe

subject

to

moral

duties,

ee

D.J.

Morrissey,

Toward a

New/Old

Theory

of

Corporate

Social

Responsibility'

1991)

40

Syracuse

L. Rev.

1005 at

1035.

65 See Howard mith td.v.Ampol etroleumtd., 1974] 1AllE.R. 1126 (P.C.) at 1135-6

perWilberforce

.J.

hereinafter

oward]

'right

o

dispose

of

shares at a

given

price

is

essentially

n

individual

right

o be

exercised on

individual

decision....').

66

'Regulation,'

supra

note

8

at

418.

67

(1991),

80 D.L.R.

(4th)

359

(Sask.

C.A.)

[hereinafter

roducers].

68 Ibid.

at

402.

This is

essentially

he

position

of

the

Delaware

courts,

ee

Unocal

Corp.

.

Mesa

Petroleum

o.,

493

A.2d

946

(Del.

S.C.,

1985).



15/69

186

UNIVERSITY

OF TORONTO

LAWJOURNAL

in 'life' and

do not need

protecting.

he ultimate

rony,

hen,

s that n

its

haste to

safeguard

the non-existent

nterests

f the

legal

person

from

attack, he awarguably ncouragesa board of directors o violate thereal

rights

hat hareholders

of the same class

have to

equal

treatment."'

While the

analogy

to

the human

personality

s

ultimately

lawed,

he

next solution often

employed

is to

try

o discern

who

the

corporation

'really'

is

and, therefore,

o whom

he

directors'

fiduciary

duties

are

'really'

owed.7" As Parkinson

has

argued,

since the

corporation

is a

vehicle

for natural

persons

to

realize

their

nterests,

ne

only

has

to

locate

the

proper

groups

meant

to be

benefited

n

order to

answer the

duty

uestion.71

The troublewiththis

process

is that because

corporatelaw is

inadequately conceptualized,

the term

'corporation'

can be

interpreted

o mean

virtually

nything.

herefore,

one

can

reasonably

argue

that the directors'

fiduciary

uties are owed

to the

majority,72

he

totality

f the

shareholders,73reditors,74

mployees,75

or the

community

at

large.7"

hus,

corporate

aw

s

engulfed

n a stakeholder's

debate,77

nd

corporate

aw

doctrine,

both in

and out of the

courtroom,

s thrown nto

a

'crisis'78

with

no solution.

Without

proper

egal theory

f the

corpora-

tion one will never

know

who

or what the

corporation

really

s,

nor the

content and scope of thedirectors'duties.Therefore, hesedebates and

69

See

F.H.

Buckley,

et

al.,

Corporations: rinciples

nd Policies

(Toronto:

Emond

Montgomery

ublications,

1995)

at

1094;

L.E.

Ribstein,

Takeover Defenses and the

Corporate

Contract'

78

Geo.

L.J.

71

[hereinafterTakeover'].

70

Axworthy,upra

note 61

at

399

('To

assess what

corporation's

nterests

re,

one

has

to ascertain

the nterests

f

some

group

of

people

connected with he

corporation').

71

Parkinson,

upra

note

60 at 77.

72

This

flows rom he

English.case

aw

whichholds

that

majority

f the shareholders n

a

general meeting

re the

company,

ee

Isle

of

Wight y.

. Tahourdin

1883),

25

Ch. D.

320

(C.A.);

Baronv.

Potter,1914]

1 Ch. 895.

73

See

Producers,

upra

note 67 at 590

per

Sherstobitoff

. ('corporation

cannot be

considered as

an

entity eparate

from

ts

hareholders');

Greenhalgh

. Ardene

inemas,

[1951]

Ch.

286

(C.A.).

74

See

Kinsela

v. Russell

Kinsela

Pty.

Ltd.

(1986),

4 N.S.W.L.R.

722

(C.A.)

[hereinafter

Kinsela],

quoted

in

text

surrounding

note

162,

below.

75 See Teck

Corp.

td.v. Millar

1973),

33

D.L.R

(3d)

288

(B.C.S.C)

at 313-4

perBergerJ.

(directors

ook

to interests f the

employees

consistent

with

acting

bona

fide n

the

interests f the

company').

76

See,

.for

example,

the

communitarian

scholarship

in

American

corporate

law,

representingthe 'High idealist' position,Clark, supra note 9 at s.16.2.4 (688), a

bibliography

f

which

s

in

D.

Millon,

Communitarians,

ontractarians,

nd

the Crisis

In

Corporate

Law'

(1993)

50 Wash.

& Lee L. Rev. 1373

at

1391 ff.

77 See

Symposium, Special

Issue On The

Corporate

Stakeholder

Debate: The Classical

Theory

And

Its Critics'

1993)

43

U.T.L.J.

297-796.

78 See

Symposium,

New

Directions n

Corporate

Law'

(1993)

50 Wash. & Lee L. Rev.

1373-723.



16/69

CANADIAN ORPORATE

AW 187

arguments

show the limited usefulness of the

present 'legal person'

doctrine

to

adequately

explain

the nature and

scope

of

directors'

fidu-

ciaryduties.Thus, in regardto directors'duties and limited iability,he

contribution

of the

'separate legal

existence' doctrine

s more

meagre

than otherwise

elieved.

Beyond

these

problems,

the

'legal person' metaphor

also

fails to

explain

or

justify

orporate

law's most

important

modern innovations

and

perennial problems.

Examples

of

these

deficiencies bound.

Thus,

while the

separate

existence of the

corporation

explains why

he share-

holders

are

not

said to own the

corporate

patrimony,

t

does little to

explain

the nature

of a shareholder's interest

and

the nature of the

share. Since the

rights

nd dutiesthat attachto a share' are in doubt,so

is

theirfree

transferability,

s well as

the

nature of

the duties that

share-

holders

might

owe to one another.

In other

words,

the

legal

person

doctrine cannot

answer the

question

of whether there are

fiduciary

duties between hareholders.7" nother

deficiency

f

this

doctrine

has

to

do with ts

nability

o

explain

the

circumstances

n which

shareholders

willbe allowed to

bring

derivative ctions.

f

directors'duties are owed to

the

corporation,

then

why

are

minority

hareholders ever allowed to

bringan action under the rule in Fossv. Harbottle?8of the legal person

doctrine s so

central,

why

was this

imiting

ule amended under the new

statutoryystem

o that

there

are wide remedies

for

minority

harehold-

ers such as subsidized derivative

ctions or

compliance

orders?8' urther-

more,

what does the

legal

person

doctrine tell us about the use of the

oppression

remedy

r about

the

separation

of

ownership

nd

control?82

The answer

s that t tells us little r

nothing.

n

order

forour

corporate

law to be

coherent,

its

central

principle

must be able to

explain

and

interrelate

both

he internal nd external rules of

corporate personalityand

corporate

governance.

nstead,Canadian

corporate

aw,as

presently

formulated,

provides

us

with

a

'basic'

principle

that

incompletely

ex-

plains

some

aspects

of the

law,

with its worst

failings

amended

and

ameliorated

by

a

large statutory

ontribution.

This

statutory

improve-

ment'

most

often

takes the formof

an

extraordinary

mount

of

discre-

tion that

permits djudicators

to

deal

with

omplicated

ssues on

an

im-

pressionistic

nd ad hoc

basis.'8"

Clearly,

hisstate of affairs s

unaccept-

79 Compare Brantnvestmentstd.v. Keel'rite1991), 3 O.R. (3d) 289 (C.A.) [hereinafter

Brant]

rejecting

hareholder

fiduciary

uties)

with

Allen .

Goldreefsf

West

frica

td.,

[1900]

Ch.

656

(C.A.) (must

vote

shares

n the best nterest f the

company).

80

(1843),

2

Hare 461

Ch.

D.)

[hereinafter

ossv.

Harbottle].

81

See

C.B.C.A.,

upra

note

24

at

ss.239,

247

O.B.C.A.,

upra

note

24

at

ss.246,

253.

82

See

C.B.C.A.,

upra

note

24

at

s.241; O.B.C.A.,

upra

note

24

at

s.

248.

83

'Regulation,' supra

note 8 at

376.



17/69

188

UNIVERSITY

OF TORONTO

LAWJOURNAL

able and once

again

smacks of

'whimsical'84

ustice

rather

than

the

principled application

of

egal

rules.

The truth s that although the law aspires to coherence, the best

conceptualization

of Canadian

corporate

aw

presents

tself s little

more

than an

amalgam

of

warring rinciples

nd

themes,

ncluding majority

rule,

minority

rotection,

hareholders'

rights,

orporatepersonality,

nd

managerial

power.85

While this

realization

s

important

n

demonstrating

that the

legal

person

doctrine s not as central s is

currently

hought,

t

does

little

o

show that

the

aw

s

coherent.To do thatwould

require

one

to demonstrate

how each

principle

nterrelates nd

amplifies

he

otheras

part

of an

interrelated

whole,

rather than

being

merely

isolated

-and

unrelated emanationsof state

power.'86

uch a taskwould

require

the

theorist o show

how

minority rotection

flows

naturally

rom

majority

rule,

rather than

being

an

arbitrary

imit on

either

majority

rule or

managerial power.87

ikewise,

one

would have to show how

our

under-

standing

of

corporate

personality

s

enhanced

by

the

veil-piercing

ases

rather

than

being

merely

onfused or

contradicted

by

them.

Given

the

enormity

f

the

task,

doubt whether

this

can ever be

accomplished

accepting

all

the

current

paradigms

and

principles

of

Canadian

corpo-

rate aw atface value. As Professor avies contends,

ifone

looks t the

major

evelopments

his

entury

nd the

problems

hat

hese

have

thrown

p,

it is

difficulto

avoid the

conclusion

hat here

has been

a

reluctance

o

recognise

heir

mplications

or

ompany

aw nd

that,

hen

hose

implications

ave

been

recognised,

he

reaction as been

to add to

the

existing

framework

ithout ver

re-examining

ts

foundationso

ensure hat

hey

re

sufficiently

oundto

bearthe

weight

fthe

xpanding

uperstructure.88

In

response

to this

problem,

this

paper

will

offer new

theory

of

the

corporation

- a fundamental

principle

- that unifiesthese

disparate

elements and

which

might,

onsequently,

prove sufficiently

ound' to

support

our

corporate

law

edifice and

render it

coherent.

This

model,

however,

s notmeant to

be

descriptive

f

the current

ustifications

or

corporate

law

rules

and

it

does not

replicate

the

current

thinking

of

84 B.

Welling

et

al.,

Canadian

Corporate

aw:

Cases,

Notes &

Materials

(Toronto:

Butterworths,

996)

at 358

[hereinafter

anadian].

85 Corporateaw,supranote 8 at 53.

86 Private

aw,

supra

note 11

at

12.

87

Instead,

Welling

in

Corporate

aw,

supra

note

8 at

604

argues

that

majority

ule

is no

longer

an

absolute

in

Canadian

corporate

law;

it is

conditioned

by

statute-based

minority

rotection

remedies

which,

n

a

broad

range

of

areas,

permit

discretionary

judicial

intervention.'

88

Gower's,

upra

note

9

at

62.



18/69

CANADIANORPORATEAW

189

corporate

aw

as

to

itsbasis. t

may

thus

appear

ounter-intuitiveo

many

stepped

in

the current

paradigm.

Hopefully,

f the

pragmatic

awyer

an

suspendhis orher disbelief orlong enough,he or shewill ee thepoten-

tial

for this

conceptualization

of the

corporation

to solve

many

of

com-

pany

law's intractable

roblems

and

inconsistencies.

II

A

private

aw

model

f

he

orporation

In

this section

I

will

outline

and

supplement

a

private

aw model of

the

corporation

that was first

nunciated

by

ProfessorDavid

Stevens

in

a

lectureentitled The

Regulation

of

Takeovers nd

the dea of the

Corpo-ration.'8"

According

to this

theory,

ll the traditional ttributes f the

corporation

limited

iability,

erpetual

existence,

ffective

egal person-

ality, eparation

of

ownership

and

control,

and free

transferability

f

shares-

are all seen

as the

outcome of

contracts between

natural

persons.90

hus,

following

n

the tradition

f

Hohfeld,

this

section will

posit

that ll

rights

nd

duties that

omprise

corporation

re

ultimately

reducible to

statements f

aw

concerning

natural

persons."'

Following

the

economic

literature

f

the

agency

cost

theorists,

he

private awmodel arguesthatthecoreprincipleofcompany aw sthata

corporation

is a

'nexus' of

ural

relations

between

the various

players

involved n

its

creation."'2

his

nexus forms

what n

the civilian

tradition

would

be

termed a

'special'

or

'nominate'

contract

containing

central

provisions

hat have

been

standardized

through

usage

and

over

time."

The

argument

n this

section

is that

the

central

characteristics f this

contract are

two-fold: a

relationship

of

non-agency amongst

the

shareholders nd

between

shareholders nd

directors,

nd a

promise by

89 See 'Regulation,'supra note 8.

90 Ibid.

at

420.

91

W.N.

Hohfeld,

'Nature of

Stockholders'

Individual

Liability

for

Corporate

Debts'

(1909)

9 Colum. L.

Rev.

285

at

289

('a

corporation

s

ust

an

association

of

natural

persons

conducting

businessunder

legal

forms,

methods,

nd

procedures

that re

sui

generis'

nd

when we

say

that a

so-called

legal person

has

rights

or

that it

has

contracted,

n

reality

we mean

nothing

more

than

what an

ultimately

e

explained

by

describing

he

capacities,

rights,

rivileges,

isabilities,

uties,

iabilities,

nd so

on,

of

the

natural

persons

concerned).

92

For more

on the

agency

cost

theory

ee,

Romano,

supra

note 3. For

the

differences

between thismodel and othercontractualmodels ofthecorporationsplease see Part

II

(E)

(3),

below.

93

'Regulation,'

supra

note 8

at

420.

See also

Farrar's,

upra

note

40

at

7;

F.H.

Easterbrook &

D.R.

Fischel,

The

Corporate

Contract'

1989)

Colum. L.

Rev.

1416 at

1444-5

(corporate

law is

a kind of

standardform

ontract).

Unfortunately,

hile

this

idea

is

prominent

in

economic

literature

and the

civilian

tradition,

he

idea of

nominate contracts s

not

as

far

developed

in

the

common law.



19/69

190

UNIVERSITY

F TORONTO

LAWJOURNAL

the directors o

manage

the

corporate

patrimony

ith are and

loyalty

o

as to

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