Partnerships - LSAlsa.mcgill.ca/.../563-miller_businessassociations_Winter2… · Web viewClarke...

Philippe Hébert: BusAss W2014Prof. Paul B. Miller

Table of Contents

Partnerships................................................................................................................................ 5Rules for Determining the Existence of a Partnership................................................................5Relationships between partners.....................................................................................................10

Personal nature of the partnership.............................................................................................................10Consensual nature...........................................................................................................................................10Presumptive equality......................................................................................................................................10Agency................................................................................................................................................................ 11Fiduciary character.........................................................................................................................................11

Relationships with third parties.....................................................................................................13Pre-partnership liability.................................................................................................................................13As a partner.......................................................................................................................................................14Holding out liability.......................................................................................................................................14Liability upon withdrawal............................................................................................................................15Posthumous liability.......................................................................................................................................15

Dissolution of the partnership........................................................................................................16Review of the CML partnership....................................................................................................16

Civil law partnerships............................................................................................................ 17General definition............................................................................................................................. 17Scope of enterprise............................................................................................................................17Similarities and differences with CML........................................................................................17

Authority............................................................................................................................................................ 17Responsibility...................................................................................................................................................18Entity Status......................................................................................................................................................18Liability.............................................................................................................................................................. 19

Limited Liability and Organizational Form...............................................................................19Arguments for limited liability...................................................................................................... 20

Limited partnership........................................................................................................................................ 20Emerging themes and Questions................................................................................................... 20RECAP................................................................................................................................................ 21

Business Trusts........................................................................................................................ 21Overview of corporations................................................................................................................21Business Trusts.................................................................................................................................. 23Basics................................................................................................................................................... 2310 questions........................................................................................................................................ 24

Benefit.................................................................................................................................................................24Review.................................................................................................................................................. 25

Corporations............................................................................................................................ 26Function.............................................................................................................................................. 26Constituents and outsiders..............................................................................................................26

Outsiders............................................................................................................................................................ 26Insiders................................................................................................................................................................28

Resolving conflicts............................................................................................................................. 29Types of Corporate Constitution...................................................................................................29

Charter corporations.......................................................................................................................................29Special Act Corporations..............................................................................................................................29Letters Patent Corporations.........................................................................................................................29

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Contractarian Corporation............................................................................................................................30Modern Statutory Business Corporation (division of power corp)................................................30

Legal personality............................................................................................................................... 30Statutory basis.................................................................................................................................................. 31Theoretical basis..............................................................................................................................................31

Fictionalism...................................................................................................................................................................33Realism...........................................................................................................................................................................33

Consequences of personality.......................................................................................................................33Veil Piercing....................................................................................................................................... 36

Liability for inducing breach of contract.................................................................................................36Involvement in Breach of Trust..................................................................................................................42Thin Capitalization.........................................................................................................................................46

The Great Debates............................................................................................................................ 47Scholarly Views...............................................................................................................................................47

Interests Of The Corporation...................................................................................................................................47“Shareholder primacy” view.............................................................................................................................47“Stakeholder balancing” view...........................................................................................................................48

Nature Of The Corporation......................................................................................................................................48Nexus of contracts (contractarian view)........................................................................................................48Entity of the corporation – concession theory.............................................................................................49

Judicial consideration....................................................................................................................................49Corporate Purpose.......................................................................................................................................................52

Corporate Liability................................................................................................................. 54In Tort and Criminal Law.............................................................................................................. 54

The Two Theories Of Corporate Liability..............................................................................................55Establishing intent...........................................................................................................................................55Defenses to corporate liability....................................................................................................................57Strict liability offences..................................................................................................................................59

Liability in Contract Law................................................................................................................60Historical problems........................................................................................................................................ 60

Statutory reform...........................................................................................................................................................62Actual authority of Agents...........................................................................................................................62Ostensible Authority......................................................................................................................................63

Incorporation........................................................................................................................... 65Date of incorporation....................................................................................................................... 65Constitutional minimums................................................................................................................66The Corporate Name........................................................................................................................ 66Pre-Incorporation Contracts..........................................................................................................67

Under the CVL.................................................................................................................................................69

Corporate management...................................................................................................... 69The Role of Management..............................................................................................................69

Advantages And Disadvantages Of Investor Passivity..................................................................71IN PRACTICE....................................................................................................................................................71

Assuming Management Positions..............................................................................................73Management Compensation........................................................................................................75Managerial Accountability...........................................................................................................76

The Duty of Care............................................................................................................................................76Origin..............................................................................................................................................................................76Scope...............................................................................................................................................................................76

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Beneficiary...................................................................................................................................................................77Standard of care.........................................................................................................................................................77

Common Law.........................................................................................................................................................78Business Judgment Rule (à travailler/completer)......................................................................................82

Fiduciary duty.................................................................................................................................................83Remedies.......................................................................................................................................................................86Improper purposes...................................................................................................................................................86Specific circumstances of breach of loyalty...................................................................................................89

Self-dealing cases................................................................................................................................................89Appropriation of opportunity, information, property........................................................................92Entrenchment.......................................................................................................................................................98

Majority Rule....................................................................................................................... 104Shareholder control and voting rights..................................................................................104Shareholder Meetings................................................................................................................. 106

General Principles......................................................................................................................................106Kinds of meetings...................................................................................................................................................106Notice...........................................................................................................................................................................107

Timing and direction (135(1)) and Regs s 44......................................................................................107Content (135(6))...............................................................................................................................................107

Location...................................................................................................................................................................... 107Voting...........................................................................................................................................................................108Proxy Voting............................................................................................................................................................. 109Shareholder proposals.........................................................................................................................................110

Ordinary Business......................................................................................................................................110Extraordinary Business...........................................................................................................................111

QBCA highlights............................................................................................................................. 112Shareholder accountability: an introduction.....................................................................113

Minority Protection........................................................................................................... 115Corporate law remedies – Standing.......................................................................................115Derivative action.......................................................................................................................... 118

Derivative actions v Personal actions................................................................................................119Pre-Requisites..............................................................................................................................................121

Oppression...................................................................................................................................... 121Statutory sections.......................................................................................................................................122Breadth of the remedy..............................................................................................................................122Relationship between oppression remedy and derivative action........................................129Oppression and Remedies.....................................................................................................................133

Important statutory provisions.....................................................................................137

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Principle forms of business organization1. What are the defining characteristics of the association?2. How is the organizations established (brought into existence)?

a. Formal or informal?3. How are the terms under which the organization is to be carried out defined?

a. where do we look for these terms?4. Who are the constituents of the organization? Who are the outsiders with whom the organization

principally interacts?5. Who manages the organization?

a. What powers to they have that enable them to manage?6. For whose benefit is the organization managed?7. How are the interests of the beneficiaries of the organization defined?8. How are the responsibilities of management defined?9. How are the responsibilities of non-management constituents defined (where applicable)?10. How are the responsibilities of the organization and/or its constituents vis-à-vis outsiders defined?

The Sole Proprietorship

Characteriscso Oldest and simplest way of carrying out a business. One person owns and operates an

unincorporated form of business. The business may be carried on in the sole proprietor’s name of in its own name. Not subject to formal organizational law. Not an organization.

o Examples: family operated store or restaurant owned by one member of the family, sole practice law firm

Establishmento You just do it – no formal process. You just need to set up shop and start running your

business. Depending on the kind of business, you may need a municipal, provincial or federal license, e.g. a taxi. Where a license is mandated by law, business may be regulated by licensing rules, but these are not organizational law.

o If it is operated in a name other than in the name of the sole proprietor, you may have to register that name.

Terms of organizationo No terms of association other than the ones you set up for yourself

Constituents and Outsiderso Has no constituentso Is not a legal persono Simply a name under which a person does businesso Relations governed largely by contracto Sole proprietor is not an employee of his own business

Managemento Sole proprietor is the manager

Benefitso Managed for the sole proprietor. The assets are considered personal assets set in the name

of the sole proprietor. Income of the business if personal income and is taxed at the personal income tax rate

Interests of the Beneficiarieso Personal interest of the sole proprietor

Responsibilities of managemento Not an issue, manager is accountable to himselfo If a manager is hired, responsibilities will be set up by contracto Will act under managerial constraints stipulated by lenders (often need to contract debt to

finance the business) Responsibilities of non-management constituents

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o There are no constituents Responsibilities to outsiders

o Tortious and contractual liability as they would apply to anyone. o Sole proprietor is personally responsible under any contract and for any negligence o All business and personal assets may be seized for the fulfillment of the obligation. If

there is liability, anything is up for grabso Some liability may be covered through insurance, but not allo Very risky way to practice a business due to the personal unlimited liabilityo Up side – you decide everything, down side – liability

When moving along to other organizations the answers are not as straightforward. For each organization, you should be able to answer all 10 questions.

Partnershipsp.1

Is an organization it subject to the Parternship Act. It is a relatively simple organization and has a high degree of malleability. Partnership is the default business organization. If there is more than 1 party and they haven’t declared a trust or incorporated, by default, the business will be considered a partnership.

The CML partnership

Test for existence: o In Ontario, section 2 of Partnership Act: relation that subsists between persons carrying

on a business in common with a view to profit.o Not controlled merely by a contracto you need to show that an association exists and that it falls under the statutory definition. o “relation between persons”

you need persons: 2 or more people for a partnership has more than 1 member, but these members can be artificial (e.g. a corporation)

o “carrying on a business in common with a view to profit” Business is every trade occupation and profession (PA s 1(1)) object of making profit and reasonable efforts to that end “carrying on a business in common”

might look at property of the business might look at the terms and the authority

Rules for Determining the Existence of a Partnership

o The sharing of gross returns does not in and of itself create a partnership.o The receipt by a person of a share of the profits of a business is proof, in the absence of evidence to

the contrary, that the person is a partner in the business, but the receipt of such a share or payment, contingent on or varying with the profits of a business, does not in and of itself make him or her a partner in the business

o The advance of money by way of loan to a person engaged or about to engage in a business on a contract with that person that the lender is to receive a rate of interest varying with the profits, or is to receive a share of the profits arising from carrying on the business, does not in and of itself make the lender a partner with the person carrying on the business or liable as such, provided that the contract is in writing and signed by or on behalf of all parties thereto

o A person receiving by way of annuity or otherwise a portion of the profits of a business in

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consideration of the sale by him of the goodwill of the business, is not by reason only of such receipt a partner in the business or liable as such

LePage v Kamex – p.2 co-owners of property. Bought the property with an intention to resell. Property was held in trust

for them by a company incorporated for that purpose. Each would have a right of first refusal (have to offer the interest to the other before selling interests to someone else). Need majority agreement to sell the property.

something more is needed than co-ownership for a partnership Need a specific intention to carry on a business. a mere intention to buy a property and sell it with profit is not enough. Evidence of intent March was not liable because he signed as an agent and not in his personal capacity partnership v co-ownership

o co-ownership doesn’t necessarily come from agreement between parties. Not governed by a contract in the same as a partnership

o Partnership doesn’t always arise of a formal contract but usually does.o Co-ownership doesn’t automatically involve sharing of profits and losses, partnerships

do.o Co-owners do not act as agents for one another. Partners always do. o Co-owners frequently involved in business together and partners are co-owners of a type

in their assets.

LePage v. KamexDevelopments (1977) Jurisdiction Ontario (CA)Facts The appellants purchased property and incorporated a corporation to hold the property in

trust for them in proportion to their interests. The corporation was to pay revenues and profits to them and they were liable to the corporation for any deficiencies. It was agreed that the sale or transfer of the interest of the appellants in the property to third parties could take place only after the others had been given a first opportunity of refusal. Any decision regarding the sale or other dealings with the property was to be made by majority vote. The appellants met monthly to discuss the operation of the property and the possibility of its sale. At some stage, the property was listed for sale via open listing. A decision was made by the appellants as a group that there should be no exclusive listing. Employees of the respondent then approached one of the appellants and he executed an exclusive listing agreement with them, signing on behalf of the other appellants as if they were a partnership. He had not, however, been authorized to do so.

Issues Were the appellants a partnership?Held No, they were co-owners of the property.Ratio o Whether or not co-owners become partners depends on their intention as disclosed

by all the facts of the case.o Must determine whether the intention was to carry on a business or simply to

provide by an agreement for the regulation of their rights and obligations as co-owners of a property.

o There is no intention to carry on a business in this case.o Each was at liberty to deal with his undivided interest in the land as his own.o They also kept their beneficial interests in the property separate for tax purposes.o Right of first refusal does not affect their rights to deal with their respective

interests in the property.o The mere fact that co-owners intend to acquire, hold, and sell a building for profit

does not make them partners.Comments Intent matters!

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Volzke v Westlock Foods – p. 5 significance of control – not determinant. Control ha nothing whatever to do with the existence or

not of a partnership Intent – partnership turns on the intent as revealed by either an agreement or their conduct Evidence reveals activities consistent with partnership – need express intent What did the Court emphasize in finding there was a partnership? – joint checking account, share

the costs of developing the mall proportionally, share loss and profits proportionally Distinctions with LePage?

o No intention to operate the property, here yeso In what circumstances does co-ownership of property for profit become a partnership?

Need an ongoing venture Fairness?

Volzke Construction v. Westlock Foods (1986)Jurisdiction Alberta (CA)Facts The appellant, Volzke, a general contractor, was building an extension to the Westlock

Shopping Center. The final bill was not paid. Volzke sued the respondent, Westlock Foods, claiming it was in a partnership with another firm, Bonel Properties, and therefore liable for the debt.

Bonel Properties had approached Horne&Pitfield, an IGA franchisee, for H&P take space in the expanded Shopping Center. H&P’s main shareholder, Shefsky, did not want to be a tenant but an owner. He made an offer to Bonel for a 20% interest in the shopping center and Bonel accepted. A bank account was opened in the name of Bonel Properties and Westlock Foods. Only the principals of Bonel had signing authority. All accounts were submitted to Bonel and Volzke was paid until Shefsky died. His wife carried on but was refused signing authority on the bank account. She sent tenants to Bonel, and Bonel negotiated the leases. Tenants made complaints about repairs and such to the manager of Westlock Foods. Bonel arranged to complete the repairs and paid the bills on the checks of Bonel Properties and Westlock Foods. The interim financing of the additions to the shopping center was secured through a mortgage signed by both companies.

Issues Were Bonel and Westlock partners or co-owners?Holding They were partners.Ratio o Letter indicating purchase of a 20% interest in the Westlock Shopping Centre

o Shared costs of developing business of shopping center.o Spoke of each other as partnerso Westlock and Mr. and Mrs. Shelfsy sent tenants to Bonel, received complaints, etc.o Division of profitso Bank account and printed checkso Financing for expansion

Comments Control has nothing to do with the existence or non-existence of a partnership.

Pooley v Driver – p.8 Intent/substance Significance of profit sharing

o Not enough in itself Indicia of partnership (may overlook documents if actions indicate otherwise)

o sharing of profits is a factoro sharing the capital of the partnership

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o Drivers stood to benefit by the management of the enterprise (they had control rights over how the money was managed, right to sue) – ordinarily partners’ rights, not creditors.

o Provisions for dissolution upon bankruptcy o Unusual terms of repayment for the loano Portion of capital given to the creditor = looks a lot like partnership

Pooley v. Driver (1876) Jurisdiction UKFacts Borrett and Hagen entered into a partnership agreement to carry on a business of

manufacturing grease, pitch and manure. The agreement provided for the division of capital into 60 parts. Profits were to be distributed in accordance with the number of parts attributed to each person. 17 parts were attributed to Borrett, 23 to Hagen, and the rest to persons who advanced funds by way of loan. The parts allocated to B & H were allocated to them as a means of compensating them for their work in the business. They did not provide any capital. The Drivers advanced L2500 on the terms of a separate deed that detailed the arrangements under which the loan was advanced to B&H. The loan agreement deed incorporated the terms of the partnership agreement between B&H and required B&H to observe the terms of the partnership agreement. The agreement also provided that the bankruptcy of the lender would result in the termination of the loan agreement. On liquidation of the partnership, the loan was to be repaid out of the assets of the partnership remaining after the payment of the other creditors of the partnership. The plaintiff, Pooley, was the holder of several bills of exchange drawn, indorsed, or accepted by B&H, which had been put into circulation for the purpose of raising money for the firm. When the firm went into liquidation, Pooley applied to Driver for payment of the money due on the bills on the ground that the above mentioned deeds constituted them partners in the firm. The Drivers claimed that they were mere lenders.

Issues Are the Drivers partners in the firm?Holding Yes.Ratio o Partnership is the association of two or more persons for the purpose of carrying on

a business together and dividing the profits between them. Normally, each partner contributes something, but dormant partners also exist.

o Must always look at surrounding circumstances and what sort of intentions they point to.

o It is a question of substance, not form.o The deeds gave the Drivers the same rights as would be had by dormant partners

liable to a limited extent to loss, and with a guarantee of their capital from the active partners.

o The intention was clearly to give the contributors all the benefits of partnership and to secure them from suffering the liabilities.

o They intended to take the profits and they intended that the business be carried on on their behalf. The only thing they didn’t intend was to take on the liabilities - but tough luck.

o Bovill’s Act stipulates that the advance of money by way of loan, even if the lender receives a rate of interest varying with the profits, or a share of the profits, shall not in and of itself constitute the lender a partner. But the person advancing the money must be a real lender.

o The present case is not a transaction of loan as intended by Parliament. The true relation between the parties was that of active and dormant partners, not creditors and debtors. It was an ingenious device to shield them from the consequences of being partners, but it must fail.

Comments The following factors indicate partnership and not simply a loan:- The alleged lenders were said to have an interest in the capital of the partnership.- The ability of the alleged lenders to enforce the terms of the partnership agreement- Having the return on the lender’s investment vary with the amount loaned

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- Terminating a loan agreement when a lender goes bankrupt- Having the term of the loan agreement coincide with the term of the partnership

agreement was very unusual for a loan agreement

What legal status does a partnership have?

Thorne v New Brunswick WCB – p.16o Is he a worker for the purpose of getting worker’s comp?o Contracts of self-employment: no person can enter into a contract with himself or be his

own employer Association itself does not have a status allowing to contract with one of the

partnerso Legal status of the partnership

no grounds to conclude that the partnership is a legal identity In what ways is a partnership like a legal entity? Can sue and be sued in it’s own name – this is for

the sake of convenience but they don’t suffice to establish personhood for partnerships Unlike sole proprietorship, partnerships are a legal organization. They are identical as neither have

formal legal status and ownership of the enterprise and liability lie with the individuals (proprietor or partners)

Terms of association?o Partnership agreemento Statute

Constituents?o Partners

Management?o partners have a presumptive right to manage, but the law allows for dormant partners

Benefits?o law says the partnership, understood as all partners collectively

Interest of beneficiarieso Partners are both managers and beneficiarieso They get share profits (based on how much you put up) and share capital.o will be set up in the agreement or the statute

RECAP

Determination is governed by section 2 of the Partnerships Act Important points in case law

o Question of intent: in most circumstances, look at the evidence of the actual intent of the parties

Do that looking at terms of any agreement between parties The way in which parties have conducted themselves towards each other and

third parties Courts may go further than actual intent: may focus on the objectively

manifested intent of the parties Characteristics

o Sharing of profits (section 3 sub 3) – rebuttable presumption that the relationship is a partnership in case of sharing of profits

o Under section 3.1 and 3 sub 2, co-owners and lenders are excluded from this presumptiono Sharing in the capital of the enterprise suggests a partnershipo Shared financial tools, e.g. shared bank accounts

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o Beneficial entitlements e.g. right to control management of propertyo agency for one another

Confronted with a case where the rebuttable presumption applies, how do you rebut it? Look at the same factors but prove their absence. Lack authority to deal for each other is a key element to prove

Relationships between partners

Personal nature of the partnership The rights and obligations of partnerships are personal to the partners and aren’t transferable. Powers are held against each other Partnership rights are not fully assignable rights (3.1 PA)

o When they are assigned, they are stripped of rights of management and rights of accounting and financial records

o What do you get then? Profits.o Relative to other business associations, it has limited value for the investment of capital.

The shares are not readily tradable, in contrast to other associations like incorporations. Unless contracted elsewise, insolvency or death of a partner leads to the dissolution of the

partnership. Usually, this is contracted out of.

Consensual nature Fundamentally consensual: you don’t get in absent your consent The rights, powers and obligations relative to each other are rooted in the consent to a mutual

undertaking. Always arise through the expression of the will of the partners, whether this is found in their

outward conduct or in a partnership agreement Always a product of the consent of the partners: common will that there be a partnership in

substance Usually founded on an agreement; terms of agreement will be defined by the contract itself.

o If there is no contract, the statute (PA) supplies default rules that govern the associationo Leads to a lot of malleability. o Can contract around rules of the statute if consent to termso Cannot contract out of fiduciary nature of the relationship

Section 20 – (p.36) On fundamental matters – change has to be unanimous: admitting a new partner, changing the

terms of the partnership agreement, etc. Makes the partnership unyielding. o Can’t contract around this.o Essentially gives each partner a veto

Majority rule governs ordinary business matters Parties can’t contract around the fiduciary duties.

o Why? Fundamentally consensual nature. If there is consent, why can’t they contract out of it?

Individuals come together to advance common purposes. They have to put the interests of the partnership before their own personal ones. Without fiduciary obligations, would have very little check on personal incentive. Nothing to make sure partners put the partnerships interests before their personal ones. If not, it is not a partnership

Presumptive equality Subject to agreement otherwise, statute says partners are equal

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Equal interests in liabilityo under section 24.1 – all partners share equally the profits and the losses

Equal right to participate in the management of the businesso section 24.5

Relationship based on strong mutual trust. Investors are actively engaged in the business and put their capital at risk. They show interest in the business by taking part to the management.

Partners can be passive but they have a presumptive right to take part in management Presumptive right: can contract out of this and have unequal rights May give exclusive managerial authority (only a select few have the right to manage, the others

take a passive role)

Agency

Partners stand in a reciprocal agency with one another Each partner is the agent of the others in business What is an agent?

o Person legally authorized to act on the behalf of another Might encompass many things. Most significantly, one partner can bind the

whole partnership. Each partner is considered to have the authority in law to put liability upon the

other partners if matters regarding business Principles are also liable under torts committed by agents. All are responsible

for the torts committed by one partner. Subject to certain limits

o Scope of authority of a given agent can be limited by agreemento Partners can define the extent of the authority of each partner.o Will be of no assistance in trying to avoid liability against third parties, unless the

partnership can show the third party KNEW the agent did not have authority to bind the partnership.

o What is the recourse for a partner who is victim of another partner acting in excess of authority?

Sue for breach of the partnership agreement Recourse in contract

o Agency law imposes 2 primary obligations on agents All agents in exercising their powers have an obligation to act in good faith Obligation to act in accordance with the terms of the agency agreement

Agency powers look at section 6

Fiduciary character Partners have a fiduciary relationship

o Commonly said as to be relationships of high trust and confidence.o You don’t expose yourself to the liabilities encountered in partnerships without trust

Fiduciary duties do not aid you if you’ve misplaced your trust Make it possible to rationally extend trust and confidence to a certain extent

o They provide security as to how people will act in the common interest of partnership and not their own personal interests

Certain reciprocal duties; law provides some measure of protectiono General duty of loyalty

Conflict of interest rule Fiduciary is not allowed to have personal interests conflict with the

beneficiary’s Conflict of duty rule

????

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Who is the beneficiary of the fiduciary relationship?o The partners individually are fiduciaries of the partnership collectively. The beneficiary is

therefore the partnership. Have their origin in equity but are reflected in the PA (section 21 sub 1, section 30)

Olson v Gullo – p.25 Gullo bought on his own personal account and sold it and made $2.5M Establish there is a fiduciary relationship. How do we know they have a fiduciary relationship?

o show it’s a partnership with respect to the transaction in questiono Intent to form the partnership MAY have been only for the whole 1000 acres and this was

not possible. Was there still a partnership for the transaction of the 90 acres or was it a separate transaction altogether?

There is a partnership and the transaction falls under it’s scope Duty of loyalty?

o Alleges the defendant pocketed the entire profit on the transaction. Gullo made a secret profit at the expense of his partner and broke the conflict of interest rule.

o Distinguished from Lavigne – the plaintiff alleges that according to authorities (Lavigne), the defendant should be disgorged from all of the profits.

Basis is that one cannot profit from his own wrongdoing. Usually, a fiduciary has to abandon all the profits they make by breaching their

duties: it has a deterrent effect because the fiduciary has no incentive to “push your luck”.

Has to be distinguished here because Language of section 29 PA – duty to account is framed in the partnership.

A disloyal partner remains entitled to a proportional share. No evidence of a conscious wrongdoing

Rules requiring disgorgement is also applied where the profits are obtained openly

Allegedly unique character of the partnership fiduciary relationship. The reciprocal agency makes it so that in some sense, each partner stands as both fiduciary and beneficiary. Each partner is authorized to act for the benefit of the partnership, but it is also his own benefit because he is part of the partnership. Their self-interest is always engaged.

Land is property of the partnership. To exclude the disloyal partner would be to take away his right to profits as per the partnership. This is unacceptable.

The innocent partner has to be put in the same position he would have occupied had there not been wrongdoing. This means giving him the share of the secret profit had this profit been earned by the partnership in ordinary manner. In this case, they both get half.

Problem is that there is no downside risk with taking the chance. If you get away with secret profit, you keep everything. If you get caught, you give them what you ought to have given them and you suffer no loss. No disincentive to breaching the duty of loyalty.

o Partners have a pre-existing right to proportional right to prospective

profits.

Olson v Gullo (Ont CA 1994)

Olson and Gullo were partners in property development. Oral agreement, Gullo developer, Olson marketing, contribute equal capital and share equally in profits. Gullo bought and sold some of the land in secret. Trial judge awarded whole profit to pl, Gullo’s estate appeals, says should just get half, (he’s dead now).

If one partner breaches duty, should misappropriated funds go to other, or partnership (everyone)? ‐ Partners have duty to act in partnership’s best interest, can’t act in own interest in matters

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involving the business of the partnership at partner’s expense ‐ This case explores s. 30 and s. 45 caselaw supports giving misappropriated funds to the

partnership, not to everyone but the wrongdoer, no penal aspect

Pl should only get half

Olson v Gullo 1994 ONCAThis case is about how partners should behave towards the other partners. 2 people who agreed to develop a piece of farmland on the edge of the city. They believed this piece of land could be very valuable because it could be turned into industrial land. Wanted to rezone once they bought it because it was so close to town. But they didn’t own this land yet, it was owned by various farmers. Olsen and Gullo said we will develop this business together. Olsen was responsible for contacting the potential investors to help them to buy out the land, and then they would get a profit after the land was sold. Olsen’s job was marketing/trying to get investors. Gullo said they would go to the farmers and get them to try to sell the land. They did not have a written partnership agreement, had discussed it among themselves and with some other people (who became witnesses to their oral agreement). This was in February 1988.

A couple of months later, in March, Gullo said to Olsen, the prices are too high, they are asking for too much, we might not be able to make a profit so maybe we should end this whole business. 2 months later, Gullo did buy a piece of land within this 1000 acre site – and he did not tell Olsen about it. Then he sold it straight away and made a profit of $2.4 million. Olsen found out about this and sued Gullo to try to get half of the profit from the sale of the land. He said this was part of our original business plan – we were going to carry on a business together. Gullo then went on to carry on a similar business practice (Partnership Act s. 33). Then Gullo hired somebody to kill Olsen (wtf?)– but he failed and went to prison for 3 years for conspiracy to commit murder. Olsen still sued him – judge agreed that they had a partnership which they had set up (even though it was oral) and this sale of the land was something that concerned the partnership and Gullo should not be allowed to keep the profits.

TJ: Gullows had to pay all of the profits over to Olsen because he had behaved very badly.CA: That was not correct. The law says you have to account to the firm for any benefit – means, you have to pay pro`its to partnership which gets divided up between partners – each should get half of the pro`its. Note: The CA did make Gullo pay extra costs because he behaved badly all along the trial process as well – he threatened some of the witnesses, the police had to come to the courtroom to protect the witnesses.

Relationships with third parties

Each partner has personal liability for the liability of the firms It could either be joint or joint and several??? If it is joint and several: individual has to sue any individual partner.??? If the debts cannot be satisfied with the partnership’s assets, individual assets can be seized. Great flexibility and freedom but come at the cost of great exposure to liability See section 7 PA

GO OVER THIS IN BOOK

Pre-partnership liability not liable for debts incurred by the firm before you join Caveat: capital you invest can be seized (section 18(1)) Leads to taking care to investigate solvency of the partner

No pre-partnership liabilityo PA s. 18(1): Liability begins w/ admission to the partnership. One isn’t liable for

partnership debts before one becomes partner oneself.

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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).

As a partner joint liability joint and several for losses to third parties ….

o misapplication of money provided to the firmo sections 10 &18 (2)

Defenses?o sections 6 & 9

where a copartner acted without authority and the third party had notice of this third party didn’t know he was partner or didn’t believe he was a partner If the partner incurred a debt where he was acting in breach of the agreement

and the third party knew this

Liability incurred by a partnership while one is a partnero 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)

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 partnero 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.

Holding out liability Non-partners will be treated as partners where they hold themselves out as partners or knowingly

present themselves as partners and there is reliance needs a representation you made or you allowed to be made section 15 (or 16) sub 1

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)

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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.

Liability upon withdrawal liable for debts incurred after withdrawal unless you give proper notice to third parties

Liability incurred by a partnership after a partner withdraws from partnershipo 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.

Clarke v Burton

(1958 Ont HC)

Clarke brings action against Charles as partner of Burton Insulation and Roofing. Fails cause Charles had informed Burton he had disassociated. Also, Clarke never thought he was a partner, thought he was an employee!

If disassociate without registering are you still liable if relevant person knows about it?1. 1) If one not known to be a partner retires, he is no longer liable even without notice of his

retirement2. 2) A known partner remains liable until notice is given3. 3) When P retires, those with prior dealings can assume no change in composition unless they

have notice to the contrary4. 4) If creditor does not know P was ever a partner, P ceases to be liable from date of retirement

Any notice is sufficient if it is established

Even though he had failed to register this, the notice suffices for him not to be liable

Posthumous liability Never liable

Posthumous liability

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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.

Dissolution of the partnership

Default ruleso death or insolvency (unless contracted around)o …o …

By reason of illegalityo Court order

illegal objectso on application by various parties

For mental incapacity

Apportionment of assets (p.45) Assets go to creditors

Review of the CML partnership

The 10 questions1. Characteristics?

a. Based on consentb. 2 or more people carrying on a businessc. No real entity apart from the partnersd. View to profit

2. Establishment?a. section 2 of the partnership actb. default association

3. Definition of termsa. Statute is the defaultb. Usually, in the partnership agreement, partners contract over the statute

4. Constituents? Outsiders?a. Constituents are the partnersb. Outsiders? everyone else: employees, other parties

5. 5 Who manages the association?a. Partners themselves: by default, they all have a presumptive equal right to manage the

partnership (unless shares have been received by assignmentb. This may be varied: possible to give exclusive managerial authority to either one partner

or a group of themc. This is often delegated to employees

6. Benefit for whom?a. Partners

7. How are the interests of the beneficiaries defined?a. Presumptive equal shares (profit and capital)b. This is almost always contracted overc. Shares of partners are usually determined through participation

8. How are the responsibilities of management defined?a. Fiduciary relationship: duty of loyalty

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b. Agency law: duty of good faithc. Contract law: agents not allowed to exceed the scope of their authority

i. An agent who does this is liable for breach of contract9. Responsibilities of non-management constituents

a. These are partners who aren’t managingb. Silent partners are the non-management constituents, but they are equally held to

fiduciary duties (e.g. no competition)10. Responsibilities of the association vis-à-vis outsiders

a. Partnership itself bears no responsibility to outsiders because the partnership is not a legal person

b. Partners in a personal capacity bear an unlimited liability for all business debts and obligations incurred in the regular course of business

Civil law partnerships

General definitionArt 2186 CCQA contract of partnership is a contract by which the parties, in a spirit of cooperation, agree to carry on an activity, including the operation of an enterprise, to contribute thereto by combining property, knowledge or activities and to share any resulting pecuniary profits. A contract of association is a contract by which the parties agree to pursue a common goal other than the making of pecuniary profits to be shared between the members of the association.

Can exist without a contract Joint contributions of capital, property, knowledge or neighbor

o CVL insists on contributions, whereas CML focuses on joint activities Common venture for shared profit: object of making profit (the purpose) and sharing of those

profits is essentialo This differentiates partnerships vs corporations for example which don’t have a profit

making goal Cooperation: requires the spirit of cooperation to able the differentiation of partnerships from

other associations where there is a goal of making profits Look at intent: did the parties intend on being joined in a combined enterprise for sharing profits?

o Highlight different factorso In the CVL: extent of contributions, are the interests aligned or opposing (arms length,

self interest – ordinary contract)

Scope of enterprise In the CML: partnerships are used exclusively as a vehicle for conducting a business for profit.

They are therefore operating entities like most corporations in the CVL: broader. They are commonly operating entities, but can also be a way of holding and

investing property or capitals. They can be funds or trusts. For these entities, they aren’t producing anything, it isn’t in a technical sense, operating a business.

Similarities and differences with CML

Authority Point of similarity

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Partners have presumptive authority and to enter into legally binding relationships with third parties

CCQ 2215 & 2219 Can also be modified by contract (like in the CML)

Responsibility If you give power to someone, always a risk of him abusing them CML response to this risk is fiduciary liability rules, framed by loyalty

o Managers have to show fidelity to all the partners' interests together in the associationo Not allowed to pursue your interests to the expense of the one’s of your partners. Stay in

alignment with the interests of your co-partners. o No clear rule in the PA regarding loyalty, but there are different rules

CCQ 2204o Loyalty-like duty (may not compete with the partnership or take part in activity which

deprives the partnership of anything he is bound to contribute to it) Implies a duty similar to loyalty, no clear liability rule framed in the way of loyalty General obligation of good faith in contracts – a lot more robust than in the CML

Purpose of the rules: partners act in a way respecting the common objects and common interests of the partners in the partnership

Entity Status

CML: Have no particular legal status as associations. Have no powers in their own rights. Do not have legal personality. – in the CML

Historical view in QCo Partnerships have legal personality

Entails recognition in an association the fact that the association itself has a legal identity and a set of powers and capacities and liabilities in its own right.

o Reasons in theory for this The whole is more than the sum of its parts. French and German social theorists

have a view that differs in the Anglo-American world. In general the continental perspective on associations is that they have a kind of real organic personality. These personalities can be witnessed in the way in which they deliberate, make decisions, act in the world, impact others when relating to them.

Legal personality is premised on the real personality of associations- this has been called the realist view

Anglo-American theorists Views legal personality as a pure matter of convention or custom.

Legislators simply decide when considerations of public convenience make it best to invest a group with legal personality. Mere matter of convenience.

This means for many continental theorists, recognition of legal personality seemed natural.

Anglo-American theorists find this personality a fictiono Reasons in Law

CCQ – 298, 299, 300 Have to do with legal status in CVL and principles of private ordering Partnerships in the CVL have been understood as holding property in a separate

patrimony (vs CML: holding property in a unique co-ownership). Some believe recognition of a separate patrimony of a partnership necessarily

entails recognition of the personality of the partnership because historically, a patrimony could not exist independently from the person to whom it is attached.

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o CURRENT VIEW IN QC ON LEGAL STATUS OF PARTNERSHIPS Partnerships do not have their own patrimony but individuals can compartment

their own They have certain capacities but do not have legal personality Why the change? Why reverse course?

In theoretical terms: there was precedence in the law for the fiction theory of associations whereby the decision of whether to recognize the legal personality of associations was a choice and not something compelled by attributes.

Doctrinalo Courts came to doubt whether partnerships had an

autonomous patrimony. Courts reconsidered whether partnerships had an identity.

o Rise of patrimony by appropriation, entailment that seemed to exist between patrimony and personality was revisited. Now, a patrimony can be tied to a person or a purpose.

Even if one holds partnerships have an autonomous patrimony, this no longer entails automatic personality.

Bouchard pieceo Courts have not satisfactorily explained how property can be

contributed to and held by a partnership if it doesn’t have a patrimony.

o CCQ provisions illustrate that there are a number of new capacities conferred to partnerships. Aren’t these capacities tied to something? Courts can’t explain how they have all these capacities but not personality, because possession of these capacities leads one to think there is personality.

Now CVL and CML are closer: in both, partnerships lack legal personality, which isn’t to say they lack legal capacities.

Liability Characteristics of an association have consequences on liability. Endowing an association with

legal personality should lead to liability being first and foremost based on the independent legal personality. Legal personality entails limited liability for its members.

CVL – CCQ 2221 Significant differences for apportionment of liability amongst partners, changes in membership

consequences, contributions, Basic premise in both systems: partners are personally liable for the debts and obligations of the

firm.

Dangerous like sole proprietor because personally liable. Advantage is that you are many.

Limited Liability and Organizational Form

Unlimited liability entails risks

Limited liability: a constituent will be shielded from personal liability for debts incurred by the association while carrying out business

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Arguments for limited liability

Argument for investor (not managers) limited liabilityo Should not bear responsibility for managers’ decisionso To stimulate investment, should have limited liability for suppliers of capital. The only

risk they should incur is the one of losing their capital investment, but nothing more than that.

If we don’t offer this, few people will be willing to invest because the risk is too high

Argument for managerial limited liabilityo Good management attracts investment. o Good managers will be dissuaded from taking the role if they have to risk personal

liability for the whole associationo Should only be employed to market linked risk – getting fired

Historically, argument for investor limited liability has been accepted whereas for managerial, it has been rejected.

o Mere supply of capital does not warrant full liability because it only contributes to the solvency of the firm

o On the other hand, managers decide how to run business, interactions with others, whether they breach their contracts, etc.

Corporations can have limited liability protections. Demand for this in partnership has been accommodated by new variance on the new partnership form.

Limited partnership

In both systems, it is only available to people who deliberately form a partnership. There MUST be a partnership agreement. The existence of this document and the identity of the partners must be registered so the public is aware.

A limited partnership offers limited liability but only to a particular class of partner: the limited partner. He is a passive investor in the partnership. No role in the management of the firm and is shielded from liability to third parties. Stand to lose only their capital investment. They have to have at least one partner outside the limited partner class: the managing partner. Managing partners are personally liable for the debts and obligations of the association. The limited partner forfeits limited liability if he exercises managerial control in any way over the partnership.

This protection is not costless: the gains are available through risk shifting. The risks have to be borne by someone and if the organization is insolvent, it has no assets and the risk is ultimately externalized and falls on the creditor (unpaid employee, victim of tortious activity, etc.)

Emerging themes and Questions

1. Should the legal status of an organization be considered asa. mere conventional of judicial choice b. real of organic qualities of an organization – ex.: social identityc. from the formal legal properties of an association: ex.: does legal status reflect how

property is held?2. To what extent should terms or organization be subject to private v public ordering? How much

freedom should we give to capitalists in structuring their association?

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3. The law does show interest for third parties – organization law does not only focus on securing interest of capitalists – it also considers protection of third parties that can be harmed by their interaction with the association. This concern brings us back to the concept of limited liability.

RECAP

similiraties and differenceso Authority relationships within the organizationo Definition of the responsibilities of the constituents to each othero Legal status of the organizationo Liability of the organization and members to 3rd parties

IN both systems, partners presumptively enjoy agency authority and may contribute to the management of the firm and may enter into legally binding arrangements with 3rd parties.

Partners are made responsible to each other on the exercise of the authority through fiduciary or fiduciary-like relationships.

Historically, significant doctrinal differences – under the CCLC, partnerships were persons in law but under the CML legal personality has been denied to partnerships. Difference has been breached: in the CCQ, partnerships do not have legal personality anymore. CVL and CML are on roughly same settings

Partners share unlimited personal liability for the debts and obligations, but there are important differences between CVL and CML in terms of detailed provisions

o Apportionment between partnerso Effect of changes in the composition of a partnershipo Treatment of creditors and their priorities

Limited liabilityo Managerial v investor limited liability – differences in justificationo Only available for passive investors

Business Trusts

Arguably more flexible than the partnership. Flexible in the kinds of ventures, in the way you organize it, in the way you set terms. This flexibility can entail complications.

Overview of corporations

1. What are the defining characteristics of the association?a. Legal personality – has the capacity of attracting rights powers and obligations.

Corporation can own property in its own right, can contract in its own name and be held liable for breach of contract, can sue and be sued in tort law, can be subject to criminal sanction

b. Corporation, as a legal person, incurs liability in its own right and therefore limited liability is awarded to managers and investors. Investors can lose their investment, but that is all.

c. Shareholders and directors are different. The owners of the business don’t control the business (like in partnerships). Property stake is separable from control of the enterprise. Owners “own” the corporation in the sense that shareholders put up the capital and retain a residual interest: interest in the residue after all liabilities are paid

d. Authority is invested in directors. Shareholders have no direct control over how the business is carried out. Possible for the directors to be shareholders, but the corporation allows you to have the separation.

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e. These characteristics are not exclusive to corporations though. Some also exist for limited liability partnerships (limited liability). In partnerships, you can have silent partners which are passive and therefore do not exercise control. In trusts, trustee manages but beneficiary is the passive owner. Legal personality: the CCLC.

2. How is the organizations established (brought into existence)?a. Incorporation – get a certificate of incorporation on a fully paid up application. You have

to file for incorporation under a statute, e.g. CBCA of QBCA3. How are the terms under which the organization is to be carried out defined?

a. Statute gives default terms (that can be contracted out of) and mandatory termsb. Other important terms set forth in contract: articles of incorporation (filed with

application – kind of founding contract) and shareholders agreementsc. Company by-laws. Directors may set by-laws subject to ratification by shareholders.

4. Who are the constituents of the organization? Who are the outsiders with whom the organization principally interacts?

a. Constituentsi. Shareholders – can have multiple classes of shareholders

ii. Directors – collectively form the Boardiii. Officers – CFO, CEO, CLOiv. Employees? Some debate. Should they be considered constituents (insiders) or

outsiders? This depends on how we consider them. In functional terms, they have a central role: they are critical for the corporation to produce the goods and services. In terms of role in the governance (as most lawyers do), they aren’t insiders because they have no right to participate in the governance. They deal with the corporation by contract, which makes them look like outsiders

b. Outsidersi. Maybe employees

ii. Creditorsiii. Members of the general public

5. Who manages the organization?a. Directors, by right, decide how the firm operates business. They often delegate

managerial powers to officers: CEO, etc6. For whose benefit is the organization managed?

a. Shareholdersb. But also for its own benefit because it is a legal person in and of itself

7. How are the interests of the beneficiaries of the organization defined?a. In law

i. Not defined very wellii. Directors establish the interests of the organization

b. In theoryi. Traditional view: interests of the corporation should be the same as interests of

the shareholders are a group. ii. Contemporary view: stakeholderism

8. How are the responsibilities of management defined?a. By contract in the case of officers (they are senior employees). Contract of employment

will sometimes speak to specific duties officers have. These duties are not corporate governance duties. These are prescribed by statute for both directors and officers.

b. The most significant of these duties are the duty of care and duty of loyalty9. How are the responsibilities of non-management constituents defined (where applicable)?

a. Direct accountability – controlling shareholders, because they exercise effective control because of voting rights, should be considered fiduciaries for the minority shareholders. Canadian law has REJECTED this. There is no direct accountability

b. Indirect accountabilityi. Have to bring a claim for oppression.

ii. Can bring application for appraisal10. How are the responsibilities of the organization and/or its constituents vis-à-vis outsiders defined?

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a. Corporation is a legal person; it is responsible for its own debts and obligations. They have to be satisfied through its assets and income. Because of limited liability, shareholders, directors, officers, are not personally liable to creditors of the corporation for the debts of the corporation.

Business Trusts Prefatory note

o Trusts originates from the CMLo Civilian variants of the trust

Their interest has much to do with the commercial functions, particularly the ones where it serves as a pool of investment

The rise of business trustso Recent popularity

Due to the flexibility and tax advantageso The setback

Taxation of trust distributions: other disadvantages This means any income is taxed twice: once in the hands of the corporations,

once in the hands of the individuals. This was not the case for trusts, didn’t pay the corporate tax

Trusts lost the tax advantage they had over corporations The deemed provision: every 21 years, ……………

o The uncertain future Depends on whether over time, it can be seen as a vehicle to conduct business

Basics Creation

o Created by agreement in most cases. In a commercial conext, you have trusts created by a “declaration of trest”. It set forth by the settlor (alors often the beneficiary in commercial context). On the other side of the contract, there is the trustee

o In commercial context, the trust property is capital contributed by unitholders. Parties are the trustees (who have the legal interests of the property; in law they are the owners) and have the authority to manage the property. The other parties are the beneficiaries, who have the beneficial interest in the property.

Trust relationshipo Trustees are fiduciaries of the beneficiaries. Owe a duty of loyaltyo Have a duty of evenhandedness or fair dealing: they operate for the interests of all the

beneficiaries.o Are bound by the terms in the declaration of trusts. These terms may place constraints on

the discretion of trustees. o Beneficiaries may sue trustees on their own behalf for breach of trustso Trusts are not Legal persons. The trustee is personally liable for the debts of the trusts

subject to the right to indemnification. This right is most often waived in trusts, so unitholders can have protection from liability.

Kinds of business trustso Usually, they are investment vehicles. Are not operating entities (exceptions in certain

fields: oil and gas, real estate). o Four kinds of trusts

Mutual fund (investment vehicle): pool investment funds managed under trust structure. The fund is not subject to the deemed disposition

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Securitization trust: pooled investment in asset-backed securities: interests in assets that will produce regular cash flow – e.g. entitlement to payments on mortgage, lease payments

category of mutual fund… pool of investment under which capital is invested for a specific purpose, e.g. real estate

Oil and gas funds: pooled investments for oil and gas royalties. o Can also be intermediary flow-through entities.

Existing business is motivated to adopt a business income trust because of the benefit of flow through taxation.

….

10 questions

BenefitFor the benefit of beneficiaries

Principle forms of business organization1. What are the defining characteristics of the association?

a. Investors get a beneficial interest in trust property –ownership of business assetsb. Unitholders may enjoy something like limited liability because liabilities presumptively

lie with the trustee – have the unitholders been careful to waive the right to indemnification

c. …..d.

2. How is the organizations established (brought into existence)?a. Declaration of trust in the business context.

3. How are the terms under which the organization is to be carried out defined?a. Declaration of trust, Trustees Acts, general principles of trust law, securities regulation.

b. Where trust units are publicly distributed, securities regulations apply. It is focused on protecting investors, not assuring good governance

4. Who are the constituents of the organization? Who are the outsiders with whom the organization principally interacts?

a. Trustees and beneficiaries are constituentsb. Outsiders

i. Other business entitiesii. Creditors

iii. Employees – if it is a fundiv. General public

5. Who manages the organization?a. Trustees or delegates (if expressly permitted in the declaration of trust)

6. For whose benefit is the organization managed?a. Beneficiaries

7. How are the interests of the beneficiaries of the organization defined?a. ????

8. How are the responsibilities of management defined?a. Specific duties for the trustee in the Declarationb. General principles of trust law: duty of care and loyalty

9. How are the responsibilities of non-management constituents defined (where applicable)?a. Unitholders or beneficiaries: not accountable to one another, but their shared interest in

fair dealing is protected by the trustees’ dutyb. Are protected against having their interests disregarded

10. How are the responsibilities of the organization and/or its constituents vis-à-vis outsiders defined?a. Trust not a legal person – trustees are personally liable

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i. Caveat – beneficiaries may be liable because of the trustees rights to indemnification. This right is usually waived in the Declaration

b. “limited liability” might be compromised if unitholders have some kind of control right. They might be seen to be acting as partners or agents and therefore lose this protection.

i. Statutory protection – unitholders as beneficiaries are not liable. No such statute in Quebec.

Proposed legislative reforms

Canada – Uniform Income Trusts Acto For trusts to be governed in an appropriate way

USA – Uniform Statutory Trust Entity Act

Review Problem with commercial trusts: trust rules only make sense for express trusts. The commercial

utility of business trusts could be improved with specific business trust statutes. Commercial functions are very varied

Any trust that has a primary commercial purpose is a business trust Kinds of business trusts

o Fund: vehicle for pool investment. Trust funds enable investors to invest in a common fund subject to common management. If you can pool your resources, you’ll get a better manager than if you did so individually. They are invested in different kinds of securities and assets, but some funds (usually mutual funds) are focused on a particular sector (usually real estate or oil and gas). Sub kinds – pension funds, real estate trusts, oil and gas trusts

o Trust as a flow through entity – business income trust No independent business purpose. They are (or were) merely conduit entities

designed to enable investors to enjoy tax savings. From early 90s to 2006, this was the most booming sector. Rise in this sector raised questions. They were concerned about the prospect of liability for investors and also about the quality and uniformity of terms governing these income trusts. These concerns lead to legislative intervention (Ont, Sask, Man) which supplied limited liability for investors. These statutes were drafter broadly such that they applied to beneficiaries of all trusts (not just income trusts). Other response was the Uniform Income Trust Act, modeled from the CBCA minus the legal personality. Most of the remedies ordinary available to shareholders are available to unitholders on an opt-in basis. Idea was to close the loophole giving tax advantages.

o Trust as an operating entity Before incorporation was available, most businesses were established on trusts.

Outside of certain sectors (real estate and il and gas), trusts are rarely used. Why? After all, the trust offers separation of ownership and control, it offers a kind of limited liability (liability borne by the trustee). The trust isn’t attractive because

No general body of organizational rules (nothing like the PA or CBCA). Means higher uncertainty and higher transaction costs, because what would be in the statute has to be included and lawyers have to draft this.

Inferior to the corporation because it lacks legal personality, any form of limited liability for trustee managers and lacks iron-clad limited liability for beneficiary-investors.

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Law makers in the USA are interested in the commercial potential of the trust. Uniform Statutory Trust Entity Act (only adopted in Kentucky and Washington) provides detailed organizational law, it excludes inapt trust rules (e.g. rule against perpetuities), it endows legal personality, it gives full limited liability protection to investors and managers. Gives freedom to organize.

CorporationsDominant form.

Sources: Founding documents

o Articles of Incorporationo Relevant Legislation

Other documentso By-Laws (are ratified by shareholders). Directors develop them but have to be ratifiedo Unanimous shareholders agreements (USA) entered ex-posto Internal governance records

Most important are minutes from board meetinds, auditors reports and financial statements issued by the corporation

Function Internal governance Conflict resolution

In a contest between shareholders and managers, we look to the corporate constitution documents to look at rights and powers of directors and shareholders.

Sets up the powers rights and duties.

Power and accountability Who has power in a real or legal sense? How is that power exercised? With respect to whom or

what is the power held? Who is accountable through legal market controls? To whom for what?

Generally, power justifies accountability within the corporation. Ordinary principles of legal liability govern liability of the corporation to outsiders.

Constituents and outsiders

Outsiderso They stand outside the general body and interact with the corporation as a legal person.

Their powers vis-à-vis the corporation are exerted from the outside. Terms of these interactions will be found in the individual contracts.

o General public Discrete group. The relationship between the GP and the corp is understood in

the sense of the legal impacts of the GP when it does what it does. Up-side – it engages the interest of the GP in economic growth. Fosters investment and business development. Leads to positive business impacts. Downside – members of the public suffer the decisions of the corporations (e.g. cut jobs, reduce hours,

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close plants). Individual members of the public may be drawn out of the mass and become victims of criminal acts such as fraud.

What powers do the GP have to hold the corp accountable? Generally speaking, absent government intervention, they have indirect

and weak power. Legal power of individuals is slight: they can sue if they’ve been wronged but they are often out-resourced. Otherwise, economic power, but without general boycott, almost no power

o Government Corps operate in heavily regulated industries. Otherwise, no regular interaction

with the government. Government wields his power from lawmaking, regulating and enforcing

authority. It has the capacity to make and enforce laws. Government in some cases exercises internal power through the use of

constituency: they can become shareholders in a corporation and may establish wholly owned corporations.

Where it takes a stake in private corporations, we have important questions to consider. To what extent and to what end should the government wield its voting power. Should it be considered with profitability, long-term sustainability, repayment of government loans?

o Employee Status contested because their role is key to production

Functional approach: they produce profit so should have internal status. Also, if you study the impact on their interests. They are arguably more vulnerable than most shareholders; SH are said to have the greatest firm-specific investment and most vulnerable to the risk of bad management because their investment isn’t secure. Their claim to corporate assets is residual. But in effect, most investors only have a minor investment in any given company. On the other hand, many employees have very firm-specific investments. They have specialized possibly non-transferable skills and that is why they carry greater risk. They are more vulnerable to mismanagement.

Governance perspective: employees lack any general control over the corporation through internal governance mechanisms. The dominant view in law is therefore that employees are outsiders dealing with the corporation through collective or individual employment (labour) contracts.

Corporate law itself has very little to say on employees 2 complications

Section 119 of the CBCA – directors jointly liable for unpaid wagers of more than 6 months. Directors may escape liability by resigning, however. Also, corporation must be sued first and the claim has to be brought within 6 months of the dissolution of the company.

o Parallel provision in the QBCA, section 154 If you have a jurisdiction where the employees are permitted to have

representation on the Board. In Alberta, the ABCA sets up a possibility to have an employee representative on the Board. If they have a nominee director, difficult to say they aren’t directors because they have an “in” on control

o Creditors Suppliers, banks, lending companies, holders of debt securities Dominant view: all creditors are an outside group dealing with the corp as a

legal person on the footing of contract. Creditors extend credit on fixed terms of repayment.

Rights and obligations defined exclusively by contract. Complications

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Creditors do have a measure of internal governance power even if it is not regular

o Are generally given standing under some provisions, e.g. QCBA section 247

o Not all creditors have the same standing in the corporate law. Holders of debt securities have a privileged standing. They aren’t completely outside the corporation. Especially CBCA. QCBA is different: they have far less of a leg to stand on to complain using internal devices.

Creditors can use significant extrinsic powerso Some creditors, especially banks, may bargain for a voice in

management, especially if the corporation is in default or has financial difficulties. Could ask for a veto, for example.

InsidersCorporations is an artificial legal person. Incapable of conducting itself. Needs someone to enter into the contract for it. These individuals are treated as constituents or members

Shareholderso Invest equity capital and expect return on investment because of sound management.

Expect these through dividends and increased share value.o Their interest lies in the maximization of the return on their investment, and therefore the

corporation to maximize their profits.o They are not entitled to return on their investment. They don’t have a RIGHT to it.

Corporate profits are owner by the corporation. The directors have to decide whether profits will be reinvested or whether some of them will be paid out as dividends.

o Shareholders are not creditors: they have rights in the corporation, nor rights against it. They also have voting rights. They have a unique interest in corporate assets (residual interests in assets)

o No direct power over the day-t-day business decisions made by the directors. They remain in theory significant powers through their voting powers. This is how they exercise powers.

Most important: vote for the election of directors, voting power is proportional to the size of their investment. Have a right to determine “special matters” like amendments to the corporation constitution. Have an information right: to be informed on the financial matters of the corporation. Have a standing to exercise remedies to enforce their rights and enforce compliance with the corporate constitution. Not all shareholders are necessarily equal: there can be different classes of shares with different voting rights. Can have a class with no voting rights.

Shareholders with voting rights exercise a supervision function Directors

o Bear responsibility for sound management of corporationo Stand between shareholders and officers, who receive their powers from delegation of the

Board. Board in theory supervises officers.o Must report to shareholders (who elect them) at annual meetings.o They have residual power to manage the affairs of the corporation (see 102 CBCA and

112 of the QBCA)o Exercise independent judgment: do not have to accept detailed instructions of the

shareholders: they aren’t agents, they can make their own calls.o Have significant responsibilities: have a duty of care and duty of loyaltyo Section 116 of the QBCA – officers have day-to-day management. o Officers determine the corporate destiny.o In larger corporations with disperse shareholders, officers usually are a self-successing

group. Officers choose who will replace them.

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o One can be shareholder, director and officer in a corporation. o Inside directors: director and officer. Raises an issue: the Board is supposed to supervise

the officers

Resolving conflicts Division of powers

o Answers to question of powers in the corporation constitutiono A lot of the answers in the statute.

Managerial – directors – 102 (shareholders may override through a USA, and restrict or take away all powers 146.1 CBCA 213-220 QCBA)

Borrowing power – CBCA usually directors (189 (1)) Issuing shares – directors (25(1) CBCA) Selling significant assets – shareholder approval required for sale of all or

significant assets - 189 (3) CBCA Call meetings – shareholders with a 5% interest (143(1) CBCA). 143(3) –

directors MUST if shareholders call them. Directors can call meetings to (143(2)) and have obligation to call annual meetings (143)

Residual power: when statute is silent, power lies with directors by virtue of 102 CBCA. Made clear in case

Grievance procedureso Outlets for grievanceso CBCA section 247 allows a complainant or creditor to apply for an order applying

compliance with either statute, articles, by-laws, etc.o CBCA 159(2) – makes an offence of failing to give financial statement annually to

shareholders.o The catch is that access to this is limited by the corporation constitution. They must

currently by an officer, director of shareholder. (Rowls case). o Compare 246 CBCA and 460 QCBA.

Not clear whether under 460, a retired director could have an interest.

Types of Corporate Constitution

Charter corporations Created by executive powers (royal prerogative) Issued on request but Crown have discretion to

reject the application. Sources: the Charter (or Letters Patent). By-laws are subordinate to the Charter The basis of the powers is the Charter For grievance procedures, you need to have standing

Special Act Corporations Created by legislative powers for the purpose of establishing the corporation A lot of charitable organizations. Sources: the Special Act provides details on governance (less capacity for by-laws) Sources of powers of the consituents is the Special Act Griveance procedures depends on the Special Acts. Mentions what they are and to whom they are

available

Letters Patent Corporations Incorporation statute – a corporation is registered after filing letters patent Discretion to refuse incorporation Widely in place until 1970s and the CBCA. Retained by PEI

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Sources: the letters patent that are filed and the incorporation statute. letters are subordinate to the statute. Most provisions regarding governance are in the statute and letters.

Very difficult to amend the letters: need 2/3 majority and then can be issued supplemental letters patent

Basis for powers of constituents is the statute. Clearly delineated the powers of constituents. Most management powers lie with directors, and voting rights for shareholders

Grievances procedures usually not available

Contractarian Corporation Impetus came from joint-stock companies in which private individuals invested through trust

structures when charter corporations came into disrepute. Ultimately, change in the nature of organizations, registration came to be required. Seen as a proper corporation and no longer as a partnership.

Sources: Incorporation statute, memorandum of association (provides name, object and share capital details of the corporation) and articles of association (much longer and detailed than memorandum)

Basis of powers: contractual, powers derived from contract. Shareholders are therefore the source of all powers in the corporation. They provide power to the directors through contract. They have no power other than what is in their contract. Residual powers lie with the shareholders.

Modern Statutory Business Corporation (division of power corp) They are created with a certificate of incorporation issued after application. No discretion to refuse

application if has properly been filed. Sources: Incorporation statute (CBCA or QCBA), Articles of Incorporation, by-laws (if ratified by

shareholders) and unanimous shareholders agreements (USA) Basis of powers is the statute. But shareholders can override the statute with a USA.

o Section 146 of the CBCA, 213-220 for the QBCA. o Under the QBCA, agreement must be publicly registered so the public is on notice.

Grievance procedures are set out in the statute (section 247 of the CBCA)

Legal personality

A corporation can sue and be sued in K and tort law. Can be subject to criminal sanction Can own property in its own name Said to have, in law, all the rights and privileges as natural people As artificial persons, corps can only act through natural people acting on official capacity. They

act through the Board. Legal personality enjoyed by corps is a privilege.

o State can revoke a corporation’s right to beo Not inherent to the nature, it is granted by statute. It comes from a State decision. Myself

as a natural person cannot grant legal personhood to anything. The State can renounce a privilege that was extended.

o It is a product of choice and this can be changedo Artificial because it stems from a decision by the state

Legal personality has not just been vested in business corporations, other corporations had them too: universities, religious orders etc.

Decision to afford personality is a political decision – it can be debated

Statutory basis

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CBCA s.15(1) QBCA s.10 See also CCQ ss.301-303

Legal personality has limits. Focus in CBCA and QBCA is on the private law. There is a more complicated picture: can the corporation attract public law rights and duties? They are subject to Human Rights Codes, but do they enjoy its protection? Protection from the Charter?

They do have free speech rights.

Federal Interpretation act s.29 – person includes corporation, partnership or parties

o In principle capable of enjoying charter rights, but maybe not all of them. E.g. section 7: corps are not alive, do not enjoy these rights. section 2 a) – not religious

If unclear, it will be a question of legislative intent. Whether Parliament intended to include corporations will be determined by looking at the language of the text and looking if the underlying constitutional value requires it to be extended to corporations.

Theoretical basis

Salomon v Salomon Implications of registration

o Respected the 7 shareholder requirement Implications of concentration in shareholding

o Concentration in one investor doesn’t change personality as long as requirements are met Legal personality and pre-incorporation of enterprise

o Means it is a different legal person as shareholders even if the business operates in the same way as pre-incorporation

Corporation as independent legal persono Relationship between Mr Solomon and corporation. He was the decider. Why not say the

corporation is the agent and Mr Solomon the principle? This doesn’t work. Relationship between corporation and shareholders is not one of agency. Directors don’t have to act following the shareholders, but agents have to act following directions of principle.

Implication of personalityo Once it is incorporated, must be treated as any other independent legal person.o Implications: limited liability for constituents (at CML) (at CVL, not necessarily). Its

liabilities have to be satisfied with its own income and property. Creditors of the corporation were out of luck.

NOTESo Possible to form a one person corporation today (CBCA s5; QBCA s.3)o Limited liability

Salomon establishes CML view: limited liability flows from recognition of independent legal personality. Because… it follows that… are not liable. CBCA s.45(1)

QBCA s.224 – shareholders not liable for debts of the corporation, but not same rationale

o Limited liability and costs of extending to investors: it is a way of shifting risk. Decreases shareholders risk by capping the loss to what they have invested. It does this only by shifting the risk to other parties, such as unsecured creditors. Is this justifiable?

o Unsecured creditors here were left without payment. Was Solomon acting dishonestly? – House of Lords says no: he is just taking advantage of the benefits of incorporation. It permits owners to carry on a business with limited liability. They can use debentures. Any constituent is entitled to hold debentures. Is it unfair for unsecured creditors? The unsecured creditors only have themselves to blame: they knew they weren’t dealing with

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a sole proprietorship and that there were new protections. The creditors should have investigated the solvency of the corporation.

Salomon v. Salomon & Co. Ltd (1896) Jurisdiction UK (HL)Facts Salomon was a leather merchant and boot manufacturer. Together with his wife, four sons,

and a daughter, he formed a limited company under the English Companies Act. Under the company’s articles of association, the company had capital of 40,000 shares, with each share having a value of L1. In return for selling his business to the new company at a price of L38000, Salomon was to be issued 20,000 shares and a payment of L16000 in cash or debentures. The Companies Act required that each company have seven shareholders. Salomon’s wife, sons, and daughter each held one share, and he the rest. The company eventually failed and was wound up. It turned out that if the money obtained from the sale of the company’s remaining assets was to be applied to the payment of Solomon’s debentures, nothing would be left for the other creditors. The liquidator of the company claimed that the company was merely an agent or alias of Solomon, that Salomon should be personally liable to the other creditors, and that no payment should be made on his debentures until these creditors were paid.

Issues Is the company Salomon in another form?Holding No, it is a corporation.Ratio - Salomon wanted to extend his business and make provisions for his family. Not unusual.

- Salomon had met the requirements of the Companies Act: the memorandum of association was signed by seven shareholders. The Act says nothing about them having to have no connection with one another or having to have a mind and will of their own.

- The company is a different person from the subscribers to the memorandum, even though the business and managers remain the same, and the same hands receive the profit.

- A company can raise money on debentures, which an ordinary trader cannot do. Any member of the company acting in good faith is as much entitled to take and hold the company’s debentures as any outside creditor.

- The motives of those who incorporated the company are irrelevant to the company’s rights and liabilities as a separate legal person.

- The fact that a company carries on on behalf of its shareholders does not create a principal/agent relationship

- The creditors were aware of the incorporation of the company but did not take measures to protect themselves. Too bad for them.

Comments Was it fair for Solomon to both make himself a priority creditor AND to protect his personal assets by means of incorporation? Yes. 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."

The corporation is a legal person, a separate entity from its principals

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Fictionalism Any kind of personality for an association is fiction: it is done for convenience because they don’t

make decisions in the way ordinary people do. Corporations aren’t real people They aren’t persons other than in the eyes of the law Their personhood is for the convenience of shareholders: organize capital and its deployment Whenever we try to find what corporate interests, we can equate them with the interests of the

aggregate.

Realism It is not mere fiction The corporation as an association of people, independently of the law possesses a will of its own.

In making decisions and acting on them, it contemplates a world on its own. It comes to exist independently of shareholders through processes and through corporate culture

(their own inner ethos) – it can’t be reduced to its shareholders. Therefore, their interests aren’t the same as their shareholders. This is proved by the flux in shareholders.

Consequences of personality Personality entails limited liability (Solomon) – view of the CML

Macaura No property right in the assets of the corporation because the corporation is the owner. Therefore,

do not have an insurable interest. The shareholder only owns a right to share the profits and a share of the assets when the

corporation is wound up

Macaura v. Northern Assurance Co Ltd. (1952)Jurisdiction UK (HL)Facts The appellant was the owner of an estate, the respondents were five insurance companies

with whom he contracted insurance against fire on timber which he kept on the estate. The appellant had assigned all of the timber to a company: Irish Canadian Saw Mills Ltd. The company paid L42000for the timber and issued the appellant with 42,000 shares at L1 per share. No further shares were ever issued. The timber was destroyed by fire and the appellant sought the insurance payment.

Issues Did the appellant have any insurable interest in the goods subject to the insurance policies?Were the respondents at liberty to raise the contention that he held no such interest?

Holding No. Yes.Ratio The appellant could only have insured as a creditor or shareholder of the company, but

neither of these avenues is available: no creditor can ensure the furniture of his debtor, and no shareholder has any right to property belonging to the company. Neither a simple creditor nor a shareholder has any insurable interest in a particular asset which the company holds.

Comments 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

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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 existenceSeparate legal entity—RULE LATER REJECTED (Kosmopoulos)

Kosmopoulos Distinguished from Macaura because he is the sole shareholder

o Look at shareholding concentration 1 of 3 or 1 of 5 might not have an insurable interest, but a sole shareholder certainly does Law on corporate veil-piercing p. 145 (I think) Sole shareholder does not have a property interest in the corporation’s assets: need to show you

stand to benefit from the existence of the asset and stand to suffer prejudice from its destruction. Problem with re-conception of insurable interest?

o Creditors essentially have the same interest as a shareholder.o What if there are hundreds of shareholders?o Important to define limits!

Kosmopoulos v. Constitution Insurance Co. (1987) Jurisdiction SCCFacts Kosmopoulos entered into a lease for premises in Toronto. From there he operated a

businesses under the name of Spring Leather Goods. It was carried on as a sole proprietorship and eventually incorporated. K, however, continued to think that he owned the store and its assets. Documentation pertaining to the business made no reference to the company but only to “K carrying on as SLG.” The lease also remained in his name. K went on to obtain insurance for the contents of the business premises. Even though the insurer knew that the insurance was intended for the company, the insured was described as “K operating as SLG” on the policy. Naturally, a fire broke out causing damage to the assets and premises. K sought the insurance payment and the insurance company refused to pay him saying he had no legal or equitable interest in the company’s assets. K claims that the corporate veil should be lifted as, when this is done, it becomes clear that that the company’s property was K’s property.

Issues Should the corporate veil be lifted?Holding Yes.Ratio - The separate entities principle is not enforced when it would yield a result too flagrantly

opposed to justice.- Wilson J expands the concept of insurable interest: K, 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 therefore had an insurable interest in them capable of supporting the insurance policy.

- McIntyre J does not agree to overly expand the concept of insurable interest. Instead, he notes that modern company law now permits the creation of companies with one shareholder, so that the identity between the company and the sole shareholder and director is such that an insurable interest in the company’s assets may be found in the sole shareholder.

Comments “The doctrine laid down in Salomon v. Salomon & Co. … has to be watched very carefully. It has often been supposed to cast a veil over the personality of a limited company through which the courts cannot see. But that is not true. The courts can and often do draw aside the veil. They can, and often do, pull off the mask. They look to see what really lies behind.”

Rejects Macaura—sole owner of single-shareholder, single-owner company has insurable interest in company’s assets

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"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."

Lee Controlling shareholder and managing director. Also an employee. Compare with Thorne in partnerships Corporations are capable of entering into employment contracts in its own rights and it may

contract with constituents. (Saw this in Solomon when Solomon lent money to the corporation). Logical consequence of what is laid out in Solomon.

You can wear multiple hats. Important to find out “what hat he was wearing” at the time of the accident. He was acting in the course of his employment contract, not in his managerial duties.

o Difference with partnerships, where this is not possible! Corporations can enter into contracts in their own rights, regardless of the identity of the person on

the other side of the deal.

Lee v. Lee's Air Farming Ltd. (1961) [NZ] 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.

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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.

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

Majority shareholder/director/employee can wear many hats w/out conflict.

Veil Piercing

Limits upon limited liabilityo Given the ease with which corporations can be created, it is possible to pierce the

corporate veil and hold constituents personally liable for debts and obligations that would ordinarily be the corporation’s own debts and obligations.

Some patterns where courts are more likely to set aside the personalityo Courts very rarely set aside corporate personality.o Wilson in Kosmopoulos says courts are reluctant but there are situations

Cases of well-supported allegations of fraudulent conduct by principles of the corporation through the corporation

Where the company was clearly and intentionally under-capitalized (so it would not meet its liabilities)

Tort claims where the director, officer or shareholder has committed an intentional tort or tort of inducing breach of contract where the victim of the tort was not an intentional creditor (did not mean to deal with the corporation)

Was not incorporated for a bona fide business purpose, rather, to pursue an illegal end or avoid legal obligations

o Something like a test – can depend on jurisdictions Constituent has to have control over the corporate entity. Some cases set the bar

very high: he must have complete or total control over the corporation Where does the power to disregard corporate personality come from?

o Equity, not the statute. o Equity courts have inherent jurisdiction to prevent injustice or miscarriage of justice or

abuse of rights.

Liability for inducing breach of contract

When can an individual be deemed to be acting in the corporation…

Who might those individuals be? Must they be constituents who received authority to act on behalf of the corporation under the constitution of the corporation or may they be persons who have actual control (factual power) irrespective of any authority that may or may not be conferred upon them by the corporate constitution?

CML tort of inducing breach of contract comes from Quinn v Leathem

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Language suggests that one is liable not only for inducing breach but interference with contractual relationships without justification.

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]

Most of what a corporation does, it does through contract. Persons with whom the corporation deals usually have contracts with outsiders. Where a corporation has breached a contract with a party, it will be liable for breach of contract. There is a further question: whether and when the directing minds of the corporation may be fixed with personal liability for causing the corporation to breach the contract. There is always somebody making the decision that the corporation will breach. Can this person be held liable?

Might be alleged, also, that the corporation is said to induce breach between a constituent and third party. Might also be said that corporation induced breach of contract between third parties.

In all of the cases, core question: who ought to bear the liability for inducement of breach? Corporation, directing minds, or both?

This tort presents an opportunity for creditors to circumvent limited liability protection.

Garbut Coll v Henderson - 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".

Did the corporation, through the agency of Henderson, induce breach of contract by Henderson? –

Yes TEST for inducing breach

o Quinn and Leathem test Interference with contractual relationships without justification

o Notably broad: embraces any kind of interference with a contract. Even if your meddling does not lead to a breach, you are liable. Need to be willful or deliberate: intentional tort.

Here: the corporation, through Henderson, knew that by employing Henderson, it was interfering with Henderson’s contract with the other school.

Any corporation is a separate legal person that acts through the agency of a directing mind. If through this agency, it interferes with a contract to which it is not a party, it should be held liable.

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

Plaintiff real estate agent contracted to procure a property for the defendant Belzbergs.

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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”.

Issue is when a directing mind can be held liable for inducing breach of contract between a creditor and a corporation.

Modern testo To establish liability for inducing breach, there must be:o Interference in execution of the contract, execution is not confined to procurement of

a breach, it extends to a case where a third person prevents or hinders a third party to perform his contract even though it might not be a breach

o Interference must be deliberate: person must know of contract or at any rate, turn a blind eye to it, and intend to interfere with it

Directing minds are agents of the corporation, but the principle is not in a position to control the agent. Corporations only act through agency and while agency usually entails liability lies with the principle, in corporate agency, agents who act for corporations should not be allowed to use corporate personality as a shield to escape personal liability for causing corporations to breach contracts.

The brothers interfered with the contract between Westmount and Einhorn by siphoning out all the assets.

General question raised by the case: Is this case reconcilable with Solomon?o Corporations regularly have to consider a breach of contract. There is a fear that the

directing minds will be held liable every time. Directors have a fiduciary duty to act in the interest of the corporation, but sometimes it can be in their best interest to breach.

McFadden v 481782 Ontario Ltd - Principals induced breach by fraudulent conveyance. Liable as agents of corporation. 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.

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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:(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.

Limit on liability of employeeso To be liable, has to be acting outside the scope if his authority. This comes from Said v

Butt If he is acting bona fide in the scope of his employment, he cannot be held liable

for inducing a breacho Why do we have this limit?

Business decisions may involve breaching contracts in the interest of the company.

Original justification is in the law of agency: acts of an employee as an agent of her employer are to be taken as the acts of the employer. The acts should be seen as the acts of the principle

Another reason: lies in the realm of justification, inasmuch as an active inducement may be done if is justified – doing her best for the corporation

o Has been extended to directors and officers at CML, a director or officer has a duty to act in the best interest of the

company. Acts of inducement are justified where they are taken as a duty. But

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where he or she doesn’t act under such a duty (as for example, does not act bona fide under his authority), the act is no longer justified

o Why was this not available to the Taylors? They were officers and directors but were not acting properly to advance

PMAC’s interest. They acted in their personal interest. Is there a begging of the question of normative priority?

o ?!

Pocklington - Traits of inducing breach

369413 Alberta v Pocklington 2000 ABCAFacts: Gainers Ltd. was a meat packing company, controlled by P. P got favourable treatment from government when his business started to fail. He had a family company, Pocklington Holdings Ltd. (P was the main shareholder/ director of PH). When gainers got into trouble, it got a bailout from the AB government. AB agreed to give an extension for Gainers to pay back $5 million owing. But AB wanted a guarantee. Gainers offered AB shares in a sub-co 350151 AB. The sub-co owned land that was valuable. The day before AB was going to take over 350151 (because Gainers defaulted on their loan), 350151 was transferred to PH, and ownership of the land was passed over (sold for $100). Apparently, the guarantee was made by Gainers, not by 350151, so once the company was transferred to PH, they had no duty to AB government. The AB government sued Gainers, and P.

Held: P was found liable for inducing breach of contract (the contract being the guarantee). P knew about this, he caused Gainers to breach that contract, which caused losses to AB government. It was not justified because it was not in the company’s interest to do this because the company was facing bankruptcy. When a company is facing bankruptcy, the director had to think about the creditor’s interests, not the shareholder’s interest. If the company was not facing bankruptcy, then the director could have argued that he was doing this for the best interest of his company.

1. Existence of contract2. Knowledge of contract3. Breach of contract by contracting party4. Defendant acted to induce breach5. Defendant by his conduct intended to cause that breach

a. How do you establish this?i. Willful or deliberate conduct is not required

ii. It may be inferred when breach is a necessary or reas. fore. of conduct, regardless of whether breach is the primary object of conduct

iii. Can be inferred from willful blindness. Have to investigate to avoid this.iv. Justification defence – defence is available when the defendant caused the

breach while acting under a duty imposer by law1. Onus to disprove justification is on the party claiming inducement

6. Defendant acted without justification7. Plaintiff suffers damages

Defence not available: he did not inquire. In case of insolvency, interest of the corporation should be identified as the same as interests of

the creditors. o Subsequently rejected by courts

Strong protection for directors and officers inducing breach but acting under a duty. A person trying to circumvent limited liability has to show that the elements of the tort are made out and have to show defence of justification is not available.

ADGA Systems v Valcom

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ADGA Systems International inc. v. Valcom Ltd. (1999 Ontario)

Action against director and two senior employees of V for inducing breach of contract and breach of fiduciary duty. Raided employees of pl in order to win a contract.

Are they personally liable assuming actions were directed to best interests of ADGA? Can the action proceed?

‐ Suggests directors / ppl controlling corporation can still be liable if acting in best interests of corporation in inducing a breach if they are dealing with an involuntary creditor

‐ It is NOT necessary to establish directors acting in their own interests for personal liability ‐ Even if performing the “very essence” of their job does not relieve an employee of personal

liability

Yes are personally liable because 1) their conduct was intentional 2) not dealing w/ voluntary creditors

ADGA Systems v. Valcom Ltd. (Ont. C.A. 1999, text p.341) “It is well established that the directing minds of corporations cannot be held civilly liable for the actions of the corporations they control and direct unless there is some conduct [on their part] that is either tortious in itself or exhibits a separate identity or interest from that of the corporation such as to make the acts or conduct complained of those of the directing minds” ADGA Systems, citing Normart Management v West Hill

There were 2 companies, both were trying to get a contract with correctional Service Canada – K for providing security system for prisons. AS had been doing this contract before but it was time to renew the K so CSC asked for bids for the new K – AS bid for the contract, as did Valcom. Valcom didn’t have any employees qualiQied to do the job so the chair and senior ofQicers persuaded the employees of AS to come over to Valcom. Out of these 45 employees, 44 of them went over to Valcom and only 1 was left. Valcom won the K. ADGA tried to sue Valcam + chair + senior ofQicers for tort of inducing breach of contract.To show this tort: have to show that the tortfeasor knew there was a contract and they purposely tried to get the party to breach their K – have to show some kind of intentional breach. The corporation was liable because these 3 people were counted as the directing mind and will of this corporation and had persuaded the employees to leave AS and join Valcom. But the chair and senior ofQicers argued that they themselves shouldn't be personally liable for this tort because they were just acting in the best interest of the corporation and they should be treated as separate entities. Pointed to Lennard’s case: the directing mind and will are no different than the corporation – they are the corporation, so how can they be found separately liable for the tort if they are no different than the corporation?

Held: There was evidence that these 3 people knew they were committing a tort and because they had the intention to commit a tort, and they made that tort their won, they could be found liable personally for it as well. Both corporation and 3 senior people would have been found liable for inducing breach of K.

Question: In what situation would the corporation be found liable, but not the directors? If an employee committed the tort – more likely to be vicarious liability, not directing mind and will. Have to look at the particular tort nvolved and what kind of intention or knowledge it requires, but it would be a situation where the people who are the directing mind and will don’t know that this is happening and they couldn’t reasonably have known that it was happening, ex. If there was another director who didn’t know what was happening – they would still be counted as the directing mind and will because of their senior position but if they couldn’t reasonably have known, then they personally would not be liable.

How far does the defence of justification go? What are its limits?o Has been extended to directors to prevent circumvention where they are making business

decisions on contracts where the corporation is party. (p.180)

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o Does not extend to the point of excusing for torts committed against involuntary creditor (usually: victims of negligence, property torts). These are called involuntary creditors because they are not involved in a mutually consensual relationship. Because of that, these creditors cannot be said to have entered in a relationship with the corporation on terms of limited liability.

o Claims of inducing breach of contracts are usually brought by voluntary creditors. the Said v Butt defence makes sense because they chose to enter into contracts on the basis of limited liability. With voluntary creditors, personal claims are a threat against limited liability. But with involuntary creditors, corporation interferes in a contract to which it is not party and therefore the parties have not consented to this limited liability. Their concern is strictly not to be harmed by others.

o Directors and officers, even if they act in the best interest of the corporation, will be held personally liable for tortious behavior regarding third parties.

o Defence of justification does not apply to involuntary creditors. Biggest takeaway:

o Rains in the protection under defence of justification Can only protect against claims brought by voluntary creditors. They can still be exposed to liability to third parties if they commit a tort vis-à-

vis parties not implicated with the corporation.

Involvement in Breach of Trust When may the corporation be deemed liable for breach of trust? When may the directors be personally liable for their involvement in breach of trust?

Primary liability Acts under excessive authority Breach of duty

Secondary liability – only this will be considered With third parties involved with the trust

Corporations and directing minds can be held liable on two grounds:

1. Knowing assistance a. Broader basis of liabilityb. Accessory liability for breach of trust against any 3 rd party who knowingly assists or

participates in a breach of trust by a trustee or fiduciary2. Knowing receipt

a. Liability arises where property received by a third party with the knowledge that the property was received through breach of trust. This third party is liable to repay for the loss

These originate in trust law. Cases focus on Knowing assistance liability What state of the mind is the accessory (who could be a corporation or a directing mind) required

to have to be found liable for knowing assistance? How is the state of mind of a corporation to be determined in these cases? Is the state of mind of the fiduciary material to liability? (we are concerned with accessory

liability).o It doesn’t matter what the state of mind of the fiduciary is

Air Canada v M&L Travel Ltd

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the terms between AC and ML indicate a clear trust relationship arising out of the contract 3 certainties test – to find a relationship to be a trust relationship

o certainty of intent parties must intend to establish a trust above and beyond their contract

o certainty of subject matter must be able to identify the trust property

o certainty of the object of the trust must be able to identify at least one beneficiary of the trust to have a trust

No express bar on mingling of property was not determinative Liability for breach of trust

o For a trustee - Need to establish primary breach. Has a duty of the trustee been breached? – duty of loyalty, duty of care, duty to account for trust property

o How may 3rd parties be found liable? May be found primary liable as a trustee if they represent themselves as a trustee

or undertake without authority trust powers Accessory liability

Knowing receipt is not applicable on the facts Knowing assistance

o TEST “assist with knowledge in a dishonest and fraudulent

design” Must be fraudulent and dishonest breach

English authority says the breach has to be fraudulent and dishonest

Some Canadian cases say the focus in these cases shouldn’t be on the fault of the fiduciary, it should be on the fault of the accessory.

o You could be liable for knowing assistance in an innocent breach

SCC says – English side, but in determining state of mind of the corporation, you look at state of mind of the directing minds.

o If the breach is innocent, fiduciary is NOT liable

Fraud: “taking of a risk to the prejudice of another’s right …….”

Must have knowledge of that breach Actual knowledge, recklessness of willful

blindness (carelessness not enough) Have to know about the existence of the

trust AND what the breach of trust is. Personal benefit can be a factor but isn’t automatically determinative. If the trust is established by statute, you are DEEMED to know.

o Here, by placing the money in their general account, they put AC’s money at risk, and the directing minds knew this when they acted.

o Directing minds personally directly caused the breach by placing the money in their general accounts and they had actual knowledge of this

Artificial – it is strange we use the same facts for the 2 steps of the test, one applying them to the state of mind of the corporation and then to the personal knowledge of the directors.

Air Canada v. M&L Travel Ltd. Director directly caused breach of trust, had knowledge of it;

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(1993) 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 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

When can a parent company be found liable as an accessory for a breach of trust committed by a subsidiary?

Transamerica Life Insurance Co. of Canada v Canada Life Assurance Co (1996 Ont) 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’ Veil will not be lifter on the broad basis of justice and equity, Respect for the authority in Solomon

require a more demanding approach 3 circumstances where the veil could be pierced

o Where the court is construing a statute or a contracto Court satisfied that the company is a mere façade to enable the incorporators to advance

their own interests (Einhorn and Pocklington have a similar situation although it is not decided on this)

o Where it can be established that the company is an authorized agent of its controllers. Usually, a subsidiary is not an agent from its parent corporation, but sometimes it might be, and in

that kind of case, veil-piercing is adequate on the law of agencyo When can this be found?

Complete control of the parent over the subsidiary Has to be complete domination such that the subsidiary does not

function independently – everything is controlled by the parent company

Subsidiary is nothing more than a conduit used by the parent to avoid liability This is conduct akin to fraud. It is a mere shield of liability for the

parent company. Here Canada Life is not under the complete control – it was run by independent vice-presidents Not enough to prove the parent/subsidiary relationship to have known assistance and hence

accessory liability.

Transamerica Life Insurance Co. of Canada v. Canada Life RULE FOR LIFTING THE

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Assurance Co. (1996)

CORPORATE VEIL - When can a parent company be found liable as an accessory for a breach of trust committed by a subsidiary?

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 showna. that there is complete domination andb. 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.

Thin Capitalization When the corporation is solvent, do incorporators and directing minds bear personal responsibility

in law for ensuring that the corporation has enough capital to meet its actual liabilities or reasonably foreseeable liabilities?

Most assets of the companies are borrowed (debt) and not invested. Dangerous for creditors, especially unsecured.

Policy problem: incorporators will intentionally set it up with little capital and drain capital on a regular basis to take advantage of limited liability. Should corporate personality be set aside in these cases?

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Walkovszky v Carlton Limited liability is a privilege – it is not without its limits. Courts will disregard the corporate form

to prevent fraud or achieve equity. These circumstances include cases where a directing mind acts for himself rather than for the corporation.

In this case, no recovery because there is no evidence that Carlton is acting for himself and not for the corporations.

Just because there are many corporations, it isn’t a reason to pierce the veil more than if there had only been one.

What about the fact that the capital wasn’t sufficient: thin capitalization isn’t enough to disregard the corporate form.

DISSENTo Corporations intentionally undercapitalized to avoid liability that would surely happen,

and this should be seen as an abuse of the corporate form Comments

o For definition of “fraud” – see Iacobucci J. in ACo Some jurisdictions have established minimum capitalization ratios (not CAN, not USA,

not ENG) – people don’t agree on what the ratio should be. o Intentional undercapitalization (as opposed to accidental) should be a separate tort

according to some legal scholars. This doesn’t seem to be going anyway

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 dismissed; 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]

Henry Browne & Sons v Smith

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Should incorporators be held liable for the debts of an intentionally undercapitalized corporation? NO

o Presumption in favor of corporate personality – entails limited liability.o Notice was provided to the creditors with the fact that they were dealing with a

corporation – voluntary creditorso Corporate personality will almost NEVER be disregarded if the creditors have notice that

they are dealing with the corporationo IMPLICATION

Voluntary creditor + notice = legal personality never disregarded Notice overwhelms any policy concerns – voluntary creditors are presumed to

be responsible for investigating the insolvency of the corporation. If they don’t, their problem.

The Great Debates What is the purpose of the corporation? – More specifically, what and whose interests is the

corporation to serve? What is the corporation? Entity, institution, structured set of relationships?

Implications for ancillary questions Function and values of the corporate law in general Allocation of power within the corporation Function of, and values served by, mandatory principles of corporate governance Function of and values served by remedies

Scholarly Views

Question usually arises in the context of conflict. The conflict may be o Internal – between or amongst constituents (e.g. minority v majority SHs, conflict in the

BoD)o External – between corporation (as directed in the interests of Shs) and outsiders

Interests Of The Corporation

“Shareholder primacy” view The claims

o Interests of the corporation are considered primarily with the interests of the shareholders and aggregate. SHs have the interest in having the biggest return on their investment. This yields a strong decision making norm for managers. In every decision they take, they have to be taken with the intention of maximizing profits for SHs. This can be for short term or long term.

o Outsiders – impact the corporations have should only be considered if the impact on outsiders is relevant to the profitability.

Proponentso Berle - all powers granted to the corporation are only exercisable for maximizing profits

Normative implicationso Internal conflict – interest of SH and aggregate trumps the interest of a particular SH.

Take the decision for the SHs as a group. o External conflict – the interest of the SH as a group trump the interests of outsiders. Most

outsiders deal with the corporation on the footing of contract and they are in no better position then anyone else: they bear personal responsibility to protect their own interests.

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o Interests of general public – these are important but it is the role of the government to protect their interests through laws of general application. It is not a corporate law concern.

“Stakeholder balancing” view Claims

o Interests of the corporation are in flux. The interests of the corporation have to be determined on an ongoing basis by directors.

o In deciding where the interests lie, it is appropriate to balance the interests of SHs, employees, creditors, general public, local community, government, etc. Have to have mind to profit, but directors are not legally obligated to maximize profits. Directors are attentive to the general socio-economic context

Notable proponentso Dodd - Corporate managers are guardians of all the interests that a corporation affects

Normative implicationso Internal conflicts – nothing to tell us on how to resolve these conflicts. Refer us to the

corporate constitution. o External conflicts - Not obligated to advance the interests of the SHs to the extent of

other groups. Not obligated to grant priority to the interests of the SHs. Managers look beyond the corporation and look at the interests of others affected by this conduct

Nature Of The CorporationWhat is the corporation?

Nexus of contracts (contractarian view) Corporation is nothing more than a nexus of contracts. Contractarians argue that the corporation

comes into existence through the initiative of incorporators. We wouldn’t have corporations without incorporators organizing in a corporation. Its ability to produce goods requires capital that is supplied by SHs and requires management expertise. Original incorporators set the purpose of the enterprise to which their capital is devoted and leave it to managers to determine the appropriate means to attain these objectives. From an economic perspective, the governing terms are those established by contract by the incorporators in the incorporating documents. The corporation becomes vital through other contracts (for factors of production) that are secured by the corporation as a legal person itself.

IN short – look at how corporations come into being and achieve their purpose, you see nothing but contract. SO, fair to say the corporation is nothing but contract.

It is private ordering: it comes into existence through private choices Dominant view in the USA (with shareholder primacy)

Entity of the corporation – concession theory Dominant in the rest of the world Corp is a legal institution arising through State concession. Legal status is essential to understanding what it is. It is an institution in the eyes of the law. It is

not a mere organizing point from contractual relationships even if corps allow to do this (but so do partnerships!).

We can’t understand the distinctive features (limited liability, personality) without attending to the role of the State. These features come from State decisions. They are a revocable privilege granted to incorporators on the perceived benefit.

Corps would not exist but-for State decisions and State ratification of the organization. Terms of association – it may be that we allow the incorporators to decide much, but these terms

of association are subject to being revised by the State through statute. Most significant rules are mandated by the State and cannot be contracted around.

State regulatory authority should trump private ordering

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Judicial consideration

Dodge v Ford Was legitimate for the Board to reinvest, was not legitimate to not make special dividend

payments. An order was made to pay special dividends. Reasons

o Statements on shareholder primacy A business corporation is organized and carried on primarily for the profit of

stockholders. Manager discretion is in the choice of means to attend that end, not change the end itself.

o Can a corp be charitable in its purpose? Wherever in doing so, pursuit of these ends are justified by the fact that it will

help maximization of profitso Scope of director authority

Almost unlimited discretion in business decisions, including expanding productive capacity, but this does not extend to substituting other ends to the corporation – has to be to maximize profits.

o Foreshadowing of a rule of American corp law – business judgment rule: business decisions made for business reasons, courts will defer because they are not business experts. This is why it refused to interfere with the decision to reinvest for expansion.

It still interferes for payment of dividends, there is still enough money to reinvest AND pay special dividend

COMMENT - Is SH primacy as reflected here “attractive”?o Benefits – recognizes that you don’t have corporations without proper motivation (make

money), gives a clear decision rule for managerso Cons – rule is inflexible, fails to take any account of contexts in which corporations act,

public interest: this view of corporations encourages excessive risk-taking at cost to outside stakeholder groups

Residual uncertaintyo Doesn’t answer the question of profit horizon. If managers look at profit maximization,

do they look at short term or long term? NOW, people answer this by the long-term profitability (BCE). If this is the

case, the accountability advantages diminish, because there is risk associated with forecasting uncertainty.

Dodge v. Ford Motor Company (1919)Jurisdiction MichiganFacts Henry Ford, as the controlling director and shareholder of Ford Motor company decided

not to distribute any dividends apart from the regular ones (despite huge profits) for a period of time so that he could invest that money in expanding the company’s production plant/capacity. "My ambition," said Mr. Ford, "is to employ still more men, to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes. To do this we are putting the greatest share of our profits back in the business.“

Issues Must Ford distribute dividends? What purpose should the corporation serve?Holding Yes. The purpose of the corporation is to benefit its shareholders.Reasoning The court does not purport to know Ford’s business better than he does and even

accepts that his stated ambitions might be sound in terms of the larger objectives for the business.

Nevertheless, a business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain

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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 shareholders in order to devote them to other purposes.

Interview with Ford in the Detroit News: “And let me say right here, that I do not believe that we should make such an awful profit on our cars. A reasonable profit is right, but not too much. So it has been my policy to force the price of the car down as fast as production would permit, and give the benefits to users and laborers, with surprisingly enormous benefits to ourselves.”

o In Court, the following cross-examination took place:- Counsel for Dodge: [D]o you still think that those profits were awful profits?- Ford: Well, I guess I do, yes.- Counsel: And for that reason you were not satisfied to continue to make such awful profits?- Ford: We don’t seem to be able to keep the profits down.- Counsel: . . . Are you trying to keep them down? What is the Ford Motor Company organized

for except profits, will you tell me, Mr. Ford?- Organized to do as much good as we can, everywhere, for everybody concerned. . . . And

incidentally to make money.- Counsel: Incidentally make money?- Ford: Yes, sir.- Counsel: But your controlling feature . . . is to employ a great army of men at high wages, to

reduce the selling price of your car . . . and give everybody a car that wants one.- Ford: If you give all that, the money will fall into your hands; you can’t get out of it.

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."

Shlensky v Wrigley Note - have to show fraud, illegality or conflict of interest to bring a derivative action Principle of majority rule

o Any decision made in the corporation by a collectivity (SH or BoD) is a decision subject to vote for the majority. A minority voice may disagree, but the Courts will say that this

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fact alone is not in itself a basis for interfering with the decision made based on the majority case

Business Judgment ruleo Better authority for this rule than Fordo Entrenched in US corporate lawo Under this rule in the US, extreme deference shown by the courts to business judgments

made by directors. This is shown by legitimacy and conducts. Courts lack the competence to involve themselves

o See Wheeler decision, Davis v Louisville Gaso What about Dodge? – Distinguished. Here, had a decision involving unlawful

substitution of the ends of the corporation. The part relating to interfering with the reinvestment, the court deferred.

o There must be fraud or breach of good faith to justify courts interfering in business decisions of a corporation

Applicationo Court refuses to interfere because Plaintiff did not prove that decision to install the lights

amounted to negligence. o Legitimate for the BoD for economic reasons, to pay attention to property value and the

impact on the local community We can see judicial reluctance to interfere in internal conflicts unless there is illegality. Courts will

usually defer.

Shlensky v. Wrigley (1968)Jurisdiction IllinoisFacts Wrigley is the president and majority SH of the Chicago National League Ball Club which

operates the Cubs, a baseball team, and Wrigley Field where the Cubs play home games. The Cubs are not doing so well and a minority shareholder wants to bring a derivative action alleging negligence and mismanagement because Wrigley did not install the necessary infrastructure in Wrigley Field for the Cubs to be able to play night games. Other teams play night games and are more profitable than the Cubs, and the plaintiff asserts that Wrigley is precluding the Cubs from being more profitable by declining to introduce night games. Wrigley, on the other hand, claims that introducing night games would have a bad effect on the neighborhood.

Issues Does the plaintiff’s complaint state a cause of action?Holding No.Reasoning

o Court is not satisfied that the motives assigned to Wrigley and the other directors are contrary to the best interests of the corporation and the stockholders.

o The effect on the surrounding neighborhood might well be considered by a director who was considering the patrons who would or would not attend the games if the park were in a poor neighborhood

o Furthermore, the long run interest of the corporation in its property value at Wrigley Field might demand all efforts to keep the neighborhood from deteriorating.

o “We do not mean to say that we have decided that the decision of the directors was a correct one. That is beyond our jurisdiction and ability. We are merely saying that the decision is one properly before directors and the motives alleged in the amended complaint showed no fraud, illegality or conflict of interest in their making of that decision.”

o “While all the courts do not insist that one or more of the three elements must be present for a stockholder’s derivative action to lie, nevertheless we feel that unless the conduct of the defendants at least borders on one of the elements, the courts should not interfere.”

o No evidence that night games would improve the corporation’s position.o Court uses BJR / reverse of Dodge. Defendant’s arguments, though not great, were

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considered acceptable.

Corporate Purpose

Peoples v Wise – VERY IMPORTANT CASE Determining the interests of the corporation

o Clear rejection of shareholder primacy by the SCC Should not be read simply as the interests of the SHs

o Directors decide what the interests of the corporation are. Various other factors are relevant: employees, consumers, suppliers, etc.

o Directors determine what the interests of the corporation are and do so by giving fair consideration to the interest of all relevant factors.

o Implications of this – shareholders cannot claim IN CANADA to have priority. But there is some authority that SH at least deserve to have their interests recognized and weighed.

Shifting interestso Pocklington suggests that interests of the employees take significant importance if the

company is going to go “belly up”. Might shift the duty of managers.o The court rejects this. The duty never changes. The balancing of interests may shift, but

the fundamental legal obligation stays the same: interests of the corporation. Is stakeholder balancing sound?

o Concern – it sounds good, but it is more difficult for stakeholders to hold managers liable for mismanagement. It would be easier to get to disloyalty or negligence if the rule was maximizing profits.

In other Jurisdictionso In Delaware, the ultimate US incorporation state, the courts have suggested that

stakeholder balancing, in the end, might be appropriate.

Peoples Department Stores Inc. V. Wise (2004)Jurisdiction SCCFacts In the context of determining an insolvency law question, the SCC discussed the scope of

duties of directors and officers both for the financially healthy and distressed corporation.Issues To whom do the directors and officers owe a fiduciary obligation?Holding To the corporation, and not merely the shareholders. From an economic perspective, the

best interests of the corporation means the maximization of the value of the corporation.Ratio - CBCA 122(1) (a): The fiduciary duty: requires directors and officers to act honestly

and in good faith with a view to the best interests of the corporation.- CBCA 122(1) (b): The duty of care: imposes a legal obligation upon directors and

officers to be diligent in supervising and managing the corporation’s affairs.

The Statutory Fiduciary Duty- Directors and officers must avoid conflicts of interest with the corporation. They must

avoid abusing their position to gain personal benefit. They must maintain the confidentiality of information they acquire by virtue of their position.

- There may be situations where a profit must be disgorged although not gained at the expense of the company, on the grounds that a director must not be allowed to use his position to make a profit even if it was not open to the company to participate in the transaction.

- Liability to account does not depend on proof of an actual conflict of duty and self-interest.

- However, it is not required that directors and officers in all cases avoid personal gain as a direct or indirect result of their honest and good faith supervision or management of the corporation. In many cases, the interests of directors and officers will innocently

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coincide with those of the corporation, especially if they are also shareholders.- In so far as the statutory fiduciary duty is concerned, the phrase “the best interests

of the corporation” should be read not simply as the best interests of shareholders.- Various other factors may be relevant in what directors should consider in soundly

managing with a view to the best interests of the corporation.- This includes employees, the community, shareholders, suppliers, creditors,

consumers, governments, and the environment- In resolving competing interests, it is incumbent upon the directors to act honestly and

in good faith with a view to the best interests of the corporation- In assessing the actions of directors, it is evident that 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. If unsuccessful, it will not qualify as a breach of the statutory fiduciary duty.

- The fact that creditors’ interests increase in relevance as a corporation’s finances deteriorate is relevant to the exercise of discretion by a court in granting standing to a party as a complainant under s.238(d) of the CBCA as a “proper person” to bring a derivative action in the name of the corporation under ss. 239 and 240 of the CBCA, or to bring an oppression remedy claim under s.241 of the CBCA.

The Statutory Duty of Care- Three elements of art. 1457 of the CCQ are relevant to the integration of the director’s

duty of care into the principles of extra-contractual liability: who has the duty (every person), to whom is the duty owed (another), and what breach might trigger liability (rules of conduct).

- Directors and officers come within the expression “every person”- The word “another” can include creditors.- The interpretation can be harmoniously integrated with the wording of the CBCA.

Unlike the statement of the fiduciary duty which specifies that directors and officers must act with a view to the best interests of the corporation, the statement of the duty of care does not refer to an identifiable party as the beneficiary of the duty. Instead, it provides that every director and officer shall exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

- If a breach of the standard of care, causation, and damages are established, creditors can resort to 1457 to have their rights vindicated.

- S. 122(1)(b) requires more of directors and officers than the traditional common law duty of care. It is an objective standard, which means that the factual circumstances surrounding the actions of the director or officer are relevant (contextual approach), while their subjective motivations pertain to the statutory fiduciary duty.

The Business Judgment Rule- It might be tempting for some to see unsuccessful business decisions as unreasonable or

imprudent in retrospect. Because of this risk of hindsight bias, Canadian courts have developed a rule of deference to business decisions: the Business Judgment Rule.

- The court looks to see that the directors made a reasonable decision, not a perfect one.- Decisions must be reasonable in light of all the circumstances about which the directors

and officers knew or ought to have known- In order for a plaintiff to succeed in challenging a business decision, he has to prove that

the directors acted a) in breach of the duty of care and b) in a way that caused injury to the plaintiff

Comments Choudhury: The extra-contractual duty of care should not be applied to the duty of care in corporate law. There is no gap in the CBCA here AND we are not dealing with a provincially incorporated company. In corporate law, the duty of care simply entails following certain processes in reaching decisions. Therefore, the duty of care is owed exclusively to shareholders. (Ontario has changed its relevant legislation to reflect this: art. 14 of the OBCA). According to the SCC, the duty of care is now owed to everyone

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(customers, creditors, shareholders, environment, etc.).

o The first duty has been referred to as the “fiduciary duty.” It is better described as the “duty of loyalty.”

o The second duty is commonly referred to as the “duty of care.” Generally speaking, it imposes a legal obligation upon directors and officers to be diligent in supervising and managing the corporation’s affairs.

BCE Affirmation of Peoples Comment on profit horizon: the Court favors the long-term horizon

Duty of Care (BCE v. 1976 Debentureholders (SCC))

o The duty of care is not owed solely to the corporation, and thus may be the basis for liability to other stakeholders in accordance with principles governing the law of tort and extra-contractual liability

o Section 122(1)(b) of the CBCA does not provide an independent foundation for claims. However, courts may take this statutory provision into account as to the standard of behavior that should reasonably be expected

Corporate Liability

In Tort and Criminal Law

Personal v Corporate liability for civil wrongdoingso Limited liability as a shield from personal liability

Especially in the case of unintentional torts Different for intentional torts where directors and officers can be found liable if

the wrong is defined as an accessory to the principal wrong CCQ1457 – creates heightened risk that directors will be personally liable for

unintentional “torts” especially negligence where it arose in the course of business and where it can be said to be the result of a decision made by a directing mind or may reflect the inadequate directing mind’s supervision of an employee.

The Two Theories Of Corporate Liability

When and how is liability fixed on the corporation by its representatives? Does liability and ought liability to turn on the question whether a purported representative of the corporation actually had authority to act as a representative of the corporation under the terms of that corporation’s constitution?

Where intent is an element of fault: further question. Does the law provide a coherent basis on which to ascribe intent to corporate persons?

Personal Liabilityo Corporation attracts liability directly as a legal person through a directing mind or

corporate brain. They act and reason through corporate brains and may attract liability personally.

o How?

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Contract – liability is direct and personal. The corporation personally through a directing mind will negotiate and bind itself to a contract.

In tort and crim, liabilities are imposed, not undertaken. They are direct and non-consensual. The corporation personally attracts liability through the conduct and intent of the directing mind. For the purpose of the law, the directing mind is the corporation.

Agency Liabilityo Corporation attracts liability always indirectly as a legal person by standing in a

relationship of agency with its directing minds that can act for it.o It does not make sense to identify the corporation and directing minds. Directing minds

had to receive authority. To bind the corporation they had to receive this power.o How does liability work?

In contract – liability is indirect and consensual. Agent acting in the scope of authority will negotiate and enter into a contract on behalf of the corporation. The principal (corporation) will be bound.

In tort – liability is indirect and non-consensual. Agent commits a wrongful act within the scope of their employment. The principal is exposed through vicarious liability (respondeat superior).

Status of common law

Both theories. Personal liability underlies criminal liability and sometimes tort liability. . Agency liability underlies contract liability and some tort liability.

Establishing intent

Negligence: no need to determine the actual state of mind. We go with agency liability. Intentional torts require an actual state of mind. Can require false statements made with malice, for

example. Liability for these intentional torts or criminal liability have to be personal, not vicarious. Need to

find the intention of the directing minds. Liability for mens rea must be personal

o In the US, criminal liability for corps is based on the agency theory

The Rhone Fault may be attributed to a corporation through a directing mind of the corporation. Question whether a given person said to be a directing mind should in fact be considered a

directing mind is a question of mixed fact and law. o Legal issue: identifying which functions ground corporate identification. What kind of

authority does one have to possess?o Factual: who in the corporation carries out these functions. Does the individual possess

that authority or not? Here the captain was not a directing mind. How do we identify a directing mind?

o Have to be senior corporate officer or member of the board Does this approach privilege form over substance? Formal authority and not what the individual

actually does? o We should give a substance over form approach. What matters is not the “title” held but

rather the function performed. A manager is not a directing mind if in fact, he has limited discretion in the exercise of managerial authority. Can be so that someone with an impressive title is not a directing mind and someone without said title is. Need to have managerial autonomy.

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o What kind of authority do you need to have? – Cannot merely apply corporate policy. Need executive managerial authority. Contract between executive manager and administrative manager. (not a directing mind).

o More than one person can have a directing mind.

The "Rhone" v. The "Peter A.B. Widener" (1993)

Test for corporate criminal liability – identification theory, i.e. 'directing mind' – 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 documentso 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

Is the test broad enough? Does it make sense to exclude administrative managers?

Defenses to corporate liability

Dredge & Dock Possible defenses

o Directing minds acting beyond authority

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Valid defense. Principle of attribution of criminal actions through agency only operates where the directing minds is acting in the course of the corporation’s business. Not corporate liability for conduct of a directing mind if the directing mind was acting beyond his authority. The act must be done while carrying out assigned functions in the corporation to have corporate liability.

o Directing minds acting contrary to instruction This is NOT a valid defense. It would be too easy to avoid liability. Corporation

could just say “ do not break the law” and it would be absolved of liability. Issuance of instructions not to do something would be relevant for strict liability offences because of the due diligence defense. It is unclear what more a corporation could do.

o Directing minds acted in fraud of the corporation of for personal benefit This is a valid defense, subject to caveats.

For fraud - Provided that directing mind can be shown to have acted totally in fraud of the corporation

For personal benefit - Only available if the corporation received NO BENEFIT from what the directing mind did.

Policy question: should we hold corporations as organizations criminally liable at all?o Attacking the money is the only way to deter. o 3 objections

Retribution doesn’t apply in respect to corporate crimes. No direct link between sanction and wrongdoing. Wrongs are committed by representatives. Retribution requires criminal punishment should only be decided to punish the person doing the wrong.

Deterrence – supposes that the prospect of criminal sanction has direct behavioral consequences discouraging crimes. Unclear if possible sanctions discourage criminal behavior for corporations because the sanction is in the form of fines and the burden will be borne by shareholders, not the people who’ve committed the wrong. Punishing the innocent.

Reduction of recidivism – this goal supposes that the imposition of criminal sanction will provoke feelings of guilt, and having been convicted, will be less likely to break the law again because of the feelings. But the corporation has no conscience. It is incapable of feeling guilt, regret etc. Those feeling these things can come and go in the corporation.

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.

"[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 …

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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 mindo was within the field of operation assigned to him;o was not totally in fraud of the corporation; ando 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.

Strict liability offences

For these offences, if the Crown proves the actus reus, corporation will be found liable unless it can show that it has exercised due diligence and took reasonable care.

Fitzpatrick’s Fuel Identity doctrine merges different entities. Limits. No every wrongful act of a directing mind can be attributed to a directing mind. He dealt with clients on behalf of the corporation. This is enough to make him a directing mind,

because he represented the company in his dealings with the public. The defenses in Dredge do not apply Conduct may hence be attributed to the corporation Is this consistent with precedent?

o Seems to contradict The Rhone completely. What happened to the test for figuring out directing mind? Had no governing executive authority over the corporation.

It seems dealings with the public, here, were deemed sufficient

R v Fitzpatrick’s Fuel Ltd. (2000 Newfoudland???)

Def ran a gas bar. An employee sold beer to a minor. Def has one shareholder also sole director, sole officer. Selling liquor to a minor is a strict liability offence. Sole director had instructed employees not to sell to minors and had posted signs.

Was the employee a directing mind, for the purpose of his actions being the actus reus?‐ The employee was the one who provided services of the company to the public, is specifically authorized and instructed for that

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Employees acts were (cites test from Canadian Dredge)

1) Within the field of the operation assigned to him 2) Not totally in fraud of the corporation3) Partly for the benefit of the corporation

The employee was the one who provided services of the company to the public, is specifically authorized and instructed for thatEmployees acts were (cites test from Canadian Dredge)

Employee is a directing mind, corporation is guilty. Corporation committed the actus reus

‐ Fitzpatrick’s Probably decided this way for public policy reasons ‐ Could probably import the same logic into a mens rea offence case but would

have to show intent too, cause basically these 3 steps is showing he is a directing mind, consider policy issues as well, this is strange case anyway cause it ignores policy making

Amendments to the Criminal Code – CB p. 236

Establishing actus reuso Conduct of any employee

Establishing mens reao Identifying the corporate mindo Offences requiring proof of criminal intento Offences requiring proof of criminal negligence

Liability in Contract Law

Working with the agency liabilityo deemed to assume liability through binding representations made in the name of the corp

by authorized agents Corporation never directly concludes a contract. It is always indirect – an agent is interposed

between corp and outsider. Authority of a corporate agent to bind principal may be limited or subject to terms. Agency

relationship in corp law is unique: corporation is an artificial person, it has no inherent capacity of its own to set its purposes (to guide the agents in their actions).

Authority of agents in this context are dictated by the corporate constitution, in the CBCA or in the QBCA, articles of incorporation, bylaws and USAs.

o caveat – for lower level inside agents, for outside agents – these can bind the corporation but only through strict contract between themselves and the corporation.

Two questions Is the capacity to bind by contract limited by the constitutional capacity of the corporation itself ( à

reviser) is the capacity of the rep to bind corp in K limited by the terms in which said rep has been granted

authority.

Historical problems

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When faced with a K that its directors wish to avoid, a corp can make 2 argumentso ultra vires argument – the particular contract is ultra vires to the corporation because the

corporation is not capable to enter in the contract.o Authority argument – a particular contract was unauthorized because the representative

did not have the particular authority to bind the corporation for this contract. Because of this, it should be considered null and void.

Policy question – who should bear the risk that an agent has exceeded bounds of his authority? Should it be shareholders? creditors?

o Tension between regard for fidelity of corporate constitution and regard for protecting the reasonable expectation of parties through contract.

o Response of the law Moved from strict adherence to subordination of the corporate constitution

Constitutional restriction on capacity

Canadian Pickles Corporation incorporated through a Special act Argues loan was ultra vires to the corporation – held it was Application of this doctrine depends on the corporation constitution.

o CML corporations (created by royal prerogative – executive branch) UV doctrine does not apply to this type of corporations They are taken to have all the powers of a natural person. An act can therefore never be ultra vires

o Statutory corporations (enacted by legislative bodies – special acts or general statutes) Presumption that the doctrine applies. Corporations have only the powers expressly granted to them in the statute. If it acts beyond its powers, the actions are ultra vires How do we establish that the conduct was ultra vires?

Interpretation of the statuteo Memorandum corps – contractarian view – uv doctrine is applicableo Special acts corporations – uv doctrine is applicableo Modern statutorty corps (CBCA, QBCA, OBCA, etc)

uv doctrine has been abolished CBCA – s. 15(1)

Why? – sound policy and common sense – affords protection to no one: corporations would broaden their “object” clauses = no more concern for this. Also, investors invest in many different corps, not only one. Exposure to risk is thus lower.

Creditors would think they had an enforceable contract, would rely on it to their detriment, because it could then be found to be uv.

Purpose of the uv – after investing your money, directors would act accordingly to what you agreed to when you invested.

Judges did their best to circumvent the uv doctrine. They would read “object” clauses very broadly to prevent the uv doctrine from applying.

Communities Economic Development Fund v. Canadian Pickles Corp. (1991)

Ultra vires is abolished, but still applies to Act corporations (created by official act for specific purposes)

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

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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.)

Statutory reform

CBCAo s. 15 – have all the rights of a natural persono ss. 6(1)(f) and 16(2)

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o s. 16(3)o s. 17 – no constructive noticeo s. 18 (1) (2)o If directors pursue an unauthorized action, remedy lies in s. 247, which orders

compliance with the articlesA corporation cannot assert against outsiders that the corporation acted outside its capacity, except if the third party knew or ought to have known the corporation was acting outside the scope of its capacity.

QBCAo ss. 12-15o permits incorporations to limit the purposes to be pursued by the corps. s. 5(9)

S.460 – equivalent of CBCA 247

Actual authority of Agents

The nature of actual authority arises as a result of the relationship between the agent and the principal. The conduct of one of

these vis-à-vis third parties has no bearing on establishing actual authority or not (Freeman, Lord Diplock)

The scope of actual authority Look at the dealings between the parties themselves Business practices Agreements

The basis of actual authority Directors and officers.

o In modern statutes – actual authority (s. 102 of the CBCA). This authority can be delegated (s. 115 - within the board: managing director). S. 121 – board can delegate to officers

Lower level employees and outside agentso Primary source of authority is contract with the corporation (employment, mandate).

Scope of authority will usually be made explicit. Where it is not, look at industry practice and how the parties have acted.

Ostensible Authority

Freeman & Lockyer The principal must make a representation and the contractor must rely on this representation The TEST

o Representation by the corporation to the outsider that the agent has authority to enter in a contract of that kind on behalf of the corporation

o This representation must be made by someone who had actual authority to manage the business of the corporation generally or actual authority with regard to the subject matter of the representation

o The outsider must have relied on this representation and must have been induced by it to enter in the contract.

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.

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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?

In Freeman and Lockyer v. Buckhurst Park Properties (Mangal) Ltd., Diplock L.J. explained that an "apparent" or "ostensible" authority was a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted upon by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the "apparent" authority, so as to render the principal liable to perform any obligations imposed on him by such contract.

Schwartz Trial judge found no actual or ostensible authority. When will the representation be binding on the principal?

o Recognizes there must be representation, by the principal to the third party and reliance. The existence and scope of ostensible authority have to be established by looking at the

relationship between the principal and the outsider. Under K’s in 76 and 78 (between Rideout and maritime) – Rideout is an employee with a title of

regional superintendent. The authority attached is not very clear, but these contracts specifically excluded his authority to bind Maritime Life.

83 – position shifted. no longer an employee. Rideout was only authorized to solicit clients, but not bind the company.

As the relationship evolved, it is clear the Rideout never had the actual authority to enter into contracts on behalf of Maritime life.

So NO actual authority Ostensible authority?

o No holding out by Rideout save a receipt issued by Rideout in his capacity as regional superintendent and was made out on Maritime Life letterhead. Allowing this receipt on paper with the company letterhead was enough to be considered a representation of authority. Even if the receipt had been issued 6 years before, it was not an issue because Schwartz couldn’t have known that the situation had changed.

DISSENT -o No evidence of reliance on the part of Schwartz. No evidence that the investment was

made because of the reliance on the receipt. Evidence points to an ongoing relationship. If we find the receipt a representation, there is still no reliance.

Schwartz v Maritime Life Assurance Co.

Schwartz is the outsider, in ’84 gave Rideout, the agent, $100K to make an investment in def, principal. Rideout had no actual authority to enter into contracts of insurance on behalf of Maritime. By ’83 he wasn’t even an employee anymore. Apparent authority?

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(1997 Nfld CA)Initial investment was made in ’79 when he was “Regional Superindent” and later agent and employee. There was a letter (’78) on company letterhead. But even then didn’t have actual authority to do this.

Should Maritime be liable on basis of apparent authority? ‐ For apparent authority, principal must make some representation to the outsider of

apparent authority ‐ Letter of ’78 was sufficient evidence of apparent authority because Schwartz hadn’t been

informed of any changes in contractual relationship between Rideout and Maritime

Maritime is liable on the basis of apparent authorityDissent:‐ Lack of reliance by Schwartz on Maritime’s representation, no causal connection between the representation and the loss

Comments According to Freeman – there must be a representation made by the Corp through someone with

actual authority!o We rely a lot, in day-to-day lives, on business cards and letterheads to make sure a person

is truly an agent of who they claim to be. (ish) CCQ on authority of agents

o under CCQ agency powers cannot be conferred on others. The actual authority of mandatories is a matter of construing the terms of the relationship between the parties

o 2163 – allows third parties to rely in good faith on the representations of a mandate (or?)

Statutory reform?

CBCA – Section 18 (1) and (2)

QBCA – s. 12-14

Corporations comes to existence through incorporation.

Incorporation What are the formalities requisite to the birth of a corporate person? What are the core implications of incorporation for the capacity of a corporation in its own right to

fulfill its business destiny?

Date of incorporation

Registration is ordinarily initiated in the form of a written application. It can be initiated under provisions for continuance and for amalgamation. Provisions for continuance allow an existing corporation to move from one jurisdiction to another. Amalgamation allows two or more corporation to form a new corporation: it is an entire new entity; the initial corporations cease to exist. We will only focus on original applications for new corporations.

Dealing with the CBCA – the CBCA director must issue a certificate of incorporation where an application has been filed and it meets the minimum requirements. See section 8 of the CBCA. A corporation is

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deemed to exist on the date shown on the certificate (s. 9). The date shown is either the date on which the director receives the completed application or any date thereafter specified by the applicant (s. 262 (3).

QBCA – incorporators may specify a date and time of existence. A QBCA is constituted as of the date and time showed on the certificate (s. 10).

Under both statutes, the date shown will be the reception of the application if no date is specified.

Where the date of incorporation is contested, it will be the date on the certificate. See s. 256(2) CBCA.

CPW Valve Incorporated companies enjoy personality by virtue of legislative choice and that is reflected in the

terms of various incorporation statutes. The date of incorporation has to be considered in light of the statutory framework according to which corporate beings are brought into existence.

Where is the date of incorporation to be fixed? Certificate is one possibility, submission of application is another (CBCA director have no discretion to refuse if requirements are met), the date the application is accepted and certificate issued is another.

For the purpose of contract law, the date we look at is the actual date of incorporation – certificate issuance date – in this case, June 16

Law of contract lies outside the ambit of the corporate statute. Issue of validity is a question of whether there was a legal person capable to contract. Here the

contract supposedly occurred on June 15th but the certificate was issued on the 16th so no contract. On the one hand, the statute says the certificate provides conclusive proof. Contractual disputes lie

outside the purview of the corporate statute. Contract values incline in favor of direct assessment of facts material to validity and performance. This suggests you need to go beyond the certificate. This means the certificate should be treated as one piece of evidence amongst others.

BREF - The actual date of incorporation (date of issuance of the certificate) is the relevant date where the date of incorporation is material to a contract dispute.

C.P.W. Valve and Instrument Ltd. v. Scott (1978 Alta CA)

Scott agreed to purchase items from CPW by June 16 ’71 and the agreement contemplated that Scott and S&V Fluid Ltd would be incorporated as of this date. S ordered item on June 15, applied for incorporation on the same day. Certificate was sent to S by letter dated June 16, and was backdated to June 15. CPW, in breach, argued that contract was void because there was no corporation on June 15.

‐ Statute here, Companies Act says certificate of incorporation is ‘conclusive proof ... that the company is a company... and that ‘from the date of incorporation mentioned in the certificate’ the corporation is a corporation

There was no corporation on June 15 to enter into the contract – it had “no legal existence” p 284

Clarity through statutory reform?o QBCA ss. 10 & 38 (any action against corp, records are proof of the contents amiss any

evidence to the contrary) Presumptive rule in the QBCA: certificate gives proof of date of incorporation,

but this is a rebuttable proof

Constitutional minimums

CBCA s. 5(1) – incorporators

o age of majorité, sane and solvent s. 6 – contents of articles

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o name, location, number of directors, details on the share structure (number and classes of shares), restrictions on the business

s. 7 – deliveryo must be signed and delivered to the registered office and the names and addresses of any

directors s. 261.1 – fees

o pay the application fees

QBCA ss. 3-4 – founders/incorporators

o one or more people including corporations may be founders of a corporation No requirements of age, mental capacity or solvency – (makes sense because a corporation can

incorporate another one) s. 5 - draft articles have to be filed

o articles need to include: name or number of corporation, names and addresses of founders, details regarding share structure including any restriction on transfer of shares, indication of min and max number of directors and also restrictions on business objectives

s. 8 – filing requiremento have to file the names and addresses of the directors, address of head office, declaration

of compliance with rules of QBCA regarding corporate names s. 9 – delivery

o Articles have to be signed by founders and submitted with all documents and a fee to the Registrar.

The Corporate Name

CBCAo s. 10(1) – signifierso s. 12 – prohibited names

CBCA Regulations s. 25, 26, 27 (not obscene), 30 (distinctive, not too general or merely descriptive)

QBCAo s. 20 – signifierso s. 16 – prohibited names

Pre-Incorporation Contracts

Incorporators and others involved might want to arrange some business matters before the corporation to ensure good startup. Pre incorporation business is complicated because it becomes a legal person only through incorporation. CPW offers a bright line response: corps can only enter into binding contracts once they are incorporated.

CML position – a corporation cannot be bound by a contract entered into prior its incorporation. Logical implication of legal personality.

Inconvenient and maybe unfair because it defeats the expectation of a third party who understood himself entering into a contract with the corporation through the representation of an agent (of the corporation that does not yet exist!)

Kelner v Baxter It is not enforceable as against the corporation but it was enforceable against the agent.

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No corporation – no corporate liability. Reiterates the bright line rule. Even if there is ratification of the contract by the corporation, ratification is ineffective. Still no liability.

When, if ever, is an agent liable in a pre-incorporation contract?o Suggestion is that he will always be liable if the agent knew the corporation wasn’t yet

incorporated. – This is the general rule.o This case says that liability and the agent is based on personal intent. The agent and the

outsider must have intended that he be personally bound.

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 Here, both parties thought the corporation had been incorporated Need proof of the intent to be personally be bound. Was present in Kelner, isn’t here.

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.

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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 HOWEVER, if both parties thought the co. was in existence, presumption that the parties

did not intend the promoter to be liable. Statutory Reform

Strategy is twofoldo Try to make agents personally liable, notwithstanding traditional rules of contract and

intento Try to make ratification valid

CBCA s. 14o (1) - ?o (2) - enables ratificationo (3) - ?o (4) – allows agent to contract out of personal liability through express provision in the

contract Problems

o Welling is skeptical: leaves traditional principles of CML ineffective

1394918 Ontario Ltd. v. 1310210 Ontario Inc. (2002)

Repudiates Westcom. Rights of pre-incorporation contractor transferred to 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.

Under the CVL

Pre-incorporation contracts in civil lawo Liability of agents - 320CCQo Ex post ratification – 319CCQ

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319. A legal person may ratify an act performed for it before it was constituted; it is then substituted for the person who acted for it.

The ratification does not effect novation; the person who acted has thenceforth the same rights and is subject to the same obligations as a mandatary in respect of the legal person.

320. A person who acts for a legal person before it is constituted is bound by the obligations so contracted, unless the contract stipulates otherwise and includes a statement to the effect that the legal person might not be constituted or might not assume the obligations subscribed in the contract.

Corporate management

The Role of ManagementPreoccupation with directors have caused an eclipse of the focus on officers, despite the fact that officers yield far more power and influence in terms of what the corporation does.

Director primacy v managerialismo Managerialism: Officers ought to wield power over the corporationo Director primacy: directors enjoy primacy within corporations

Historically, has been the dominant view. Under statute, in CML and corporate law, the director enjoys

special privileges. CBCA and QBCA – directors are the locus and pinnacle

of corporate control. CBCA 102(2). QBCA 112. Under both statutes, directors enjoy primacy. They have

managerial and supervisory control. Primacy is enjoyed against other constituents. They enjoy this power unless it is taken away through USAs (not in large corporations, typically).

Directors are not accountable to officers. They are not accountable to shareholders save through shareholder voting.

Officers are recipients of managerial authority but through delegation from the board. Delegation is allowed by statute. CBCA 121a) and QBCA 112 & 116.

There are certain limits. CBCA 115 (3) is an example of powers that cannot be delegated.

QBCA has the same powers of the CBCA and a few more. BoD has the transfer of unpaid shares (not in CBCA because CBCA does not allow for unpaid shares), QBCA 118

Directors retain a residual authority over the power exercised by officers. Even where delegation has occurred, directors are

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obligated to supervise the officers in their exercise of delegated power. They do this with:

Review financial statements Set by-laws Establish strategic objectives and plans for reaching

these objectives Examine corporate performance

Obligations between directors and officers are co-extensive: directors and officers under CBCA, QBCA and CCQ are subject to the same duties: duty of care and duty of loyalty.

In theory, directory primacy is also the champion. The traditional model of corporate governance says that the corporation is managed for the benefit of its shareholders only and is managed by directors appointed by and subject to the control of shareholders. Directors hire officers. The Board will ensure that officers will effectively fulfill their function in allowing the corporation to fulfill its objects.

There is a challenge however: the separation of ownership and control in large corporations. This concept is set up by isolating 3 functions: holding proprietary interests in the enterprise, power of the enterprise, act with respect to the enterprise (are its agents).

Before the industrial revolution, corporations were small and all 3 functions would be performed by the same person or by a small group of partners or family members.

Later on, firms grew and it would be common to find power and property co-existing in one person (classic capitalist) but he would hire a manager or officer who would do the agency tasks.

In the 20th century, power and proprietary interests in firms were become separate. As widely held firms became popular and corporate investment grew, shareholders became passive investors and lost all power. This divergence is the historical origin of the problem of the separation. This is reflected in statute: directors don’t have to invest to be directors. Shareholders contribute the capital and have a residual interest and an expectation of profit. In this sense, shareholders own the corporation, but don’t have control over it.

Advantages And Disadvantages Of Investor Passivity Advantages

o Provide capital to be put to business purposes they find interesting by trusting people with business expertise

Problemso Directors wield control on behalf of the shareholders. Risk that the

control will not be wielded faithfully in the interest of the shareholders.

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o Problem lies with agency costs. Lacking the natural incentives of owners of enterprises to maximize the return, directors not owners might divert value when exercising their powers by being lazy, negligently, or take advantage for personal profit and the corporation.

o RESPONSE? At CML and later under statute – imposition of rigorous legal

obligations: duty of care makes them liable for carelessness, duty of loyalty makes them liable for diverting profits or opportunities for profit. These duties provide redress for agency costs.

Wrinkle – rise of the professional managerial class. Power and agency have gradually merged. Officers are not mere agents: they receive through delegation a lot of powers. Increasingly, officers have become ascendant.

Law responds by expanding the duties to officers.

Most theorists still endorse director primacy. But in endorsing this, we are relying on directors to protect the interests of the corporation by overseeing officers.

IN PRACTICE Director primacy is a myth. In practice, managerial primacy.

o The BoD is supposed to set goals for the corporation and come up with action plans to realize these goals. They are supposed to establish policy (through by-laws).

In fact, directors don’t do this. They pass by-laws drafted by officers.

Directors are not capable of doing this. They lack firm-specific expertise to come up with long-term plans and don’t know enough about the specific business in which the corporation is competing. Officers have the knowledge to do this.

At most, directors can merely approve positionso Supervision of officers is traditionally BoD function

They don’t really do this. Directors do not closely scrutinize the conduct: they lack understanding of the conduct. Directors also lack the will to question officers and their decisions because the directors don’t have the competence to ask intelligent questions (so say nothing for fear of lacking stupid).

o If this is true, cause for concern If directors are not in control, no one is ensuring that officers are liable to the corporation. They are merely senior employees! If directors aren’t supervising officers, no one is. BoDs are commonly subject to capture from the officers. Independent directors are handpicked by officers. Most boards are composed of friends of the officers.

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o Shareholders cannot effectively control the appointment of directors and hence cannot ensure that the officers are serving the corporation.

Controls?o Institutional investors (those who are truly powerful and have stakes:

banks, pension funds, etc.) These will have the incentive and sophistication to be active

shareholders. They can apply meaningful pressure to improve performance and the average investor can free ride on the work done by the others because we have the same concerns as them.

Problem with this: many corporations don’t have significant institutional investors.

Also, these investors might not have the incentive to stay investors for the long run (e.g. only stay investor for a couple of months)

o Market controls Managerial market

The more a professional managerial class grows, the easier it is to replace an underachieving manager. They will also be concerned with their reputation, and will be less likely to divert value.

Markets signals Markets communicate signals to investors. Assumption

that stock markets accurately value firms and accurate firm value is reflected in share price. If you assume that stock market valuation is accurate in real time, share price will show a pattern of decline as the result of mismanagement.

This will push passive investors to be concerned and become more active, or to sell shares. This will discipline the managers.

PROBLEM – confidence in the underlying economic hypothesis has been undermined. Some notable economists doubt whether the market accurately values firms. Supposing it does, share price still doesn’t tell us a whole lot of how the firm is managed. Share price can be an indication of too many factors to rely on it to judge management.

Market for corporate control Relies on accurate signaling of managerial performance

in the market. When the stock value of the shares starts to go down, it signals something wrong with firm performance. If a competent investor investigates this, a

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raider will place a hostile bid. Specialists of takeovers are looking to profit by taking over, replacing managers and reselling short term. The fear of loss of jobs through hostile takeovers will deter managers of diverting profit.

In Canada Different context: many of our large corporations are closely held; our

market is therefore different.

Assuming Management Positions Qualifications of Directors

o Minimum qualifications CBCA 105(1) QBCA 108 – natural persons not incapable CCQ327 supplements QBCA108 – minors and insolvents can’t

o Residency CBCA ss 105(3), (3.1), (4) QBCA – none WHY have them anyway? Anachronistic? –

o Number of independent directors – not employee or officer as well. If it is an issuing corporation, it needs at least 3 directors, 2 of them independent

CBCA 102(2) QBCA 106

o Elections and appointments Initial application

CBCA 106(1) and (2) QBCA 107

Subsequent elections CBCA 106(3) QBCA 110

Term CBCA 106(3) (4) and (5) QBCA 110

Nomination - (infrequent in Can) CBCA 137(4) QBCA s 198

Class voting CBCA 111(3) (4) QBCA 147-48

Cumulative Voting CBCA 107 QBCA 111

Casual vacancies

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CBCA 111 QBCA 153

Removal CBCA 109 QBCA 144

DEFECTSo CBCA 18(d) and 116o QBCA 13(3) o CCQ328

Suggestions that there may be limits to the curative power of s. 116: ‐ Morris v Kanssen (1946 England) – There was a section in the articles of association

similar to 116 – One of the two directors of a company claimed another man had been appointed as a third director at a meeting that never existed, and he went on to act as director - Held: there is a difference between an appointment in which there is a defect and no appointment at all, this was the latter

Oliver v Elliott (1960 Alta SC)When replacing corporate directors, instead of replacing individually, tried to replace 4/5 at once, so appointed by only the 5th, (insufficient quorum), and later replace 2/5 of them again.Were the appointments valid? The two directors were regularly appointed (second appointment) but by ‐

directors who themselves did not properly hold officeThe act of appointment of the invalidly elected directors was validated by s. 116, but not for directors seen as simply usurping office [as in Morris v. Kanssen] (second 2 valid, first 4 not)

-> The curative sections like [CBCA s. 116] are likely effective only to cure defects in the appointments of those who assume their duties with some colour of right

Management Compensation Canada

o CBCA 125o QBCA 117

The trend was defended by economists (before the 2008 crisis). As being part of normal economic development Prominent dissident: Harvard law prof claimed that executive pay does not

track increases in better economic performance

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It rather reflects an agency-costs problemo Solution: need to reform SH voting to make SH power meaningful and

reform exec compensationo Need to do smth that interests of executives in their big pay is more

aligned with the interests of SHo Supervisory burden of the Board has not been effectively borne

Indemnification Permissive provision

o CBCA 124 (1) and (3)o QBCA 160

Mandatory provisiono CBCA 124(5)o QBCA 159

Insuranceo CBCA 124(6)o QBCA 162

Managerial Accountability

The Duty of Care

Day to day matters are wielded b managers through delegation from the BoD. It may be wielded responsibly, but also negligently with harm being caused to the corporation (economic loss) or to outsiders.

Negligence committed by directors and managers is usually in the form of carelessness.

Policy is more concerned with shirking – failure to live up to one’s own responsibilities. It could be not to show up to Board meetings, failure to review documents, failure to engage in meaningful discussion and analysis at the meeting, failure to capitalize on business opportunities to limit foreseeable liabilities, to exercise proper oversight of employees, to take steps to implement business strategies. – In these cases, directors and officers KNOWN they should be doing something.

The duty of case does not represent a mere extension of principles of negligent liabilities, nor does it represent a mere extension of negligent principles governing professional liability.

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Origin Common law – from equity, and the law of trusts. Analogies drawn between

trustees and their power of trust and directors and their power over the corporation. Because trustees have a duty of care, directors should have the same duty because both have analoguous positions: they are governing someone else’s property.

CCQ322 – directors of legal persons must act with prudence and diligence in administering the affairs of the legal person.

Scope Duties falling under the scope of managerial authority actually wielded by

the officers and directors Difference for officers and directors

o Officers Might be described in contract (rare in large corps) Courts have to figure out what the officer actually did in

practice. Matters of business strategy, purchase and asset allocation

decisions, finance, budgeting, debt financing, bookkeeping, operations and production management, human resources management.

Whatever relates to their own specific mandate

o Directors Broad managerial authority and different functions, including

supervision of officers

Duty of care does not extend outside the scope of their office. Does not extend to personal capacities. Where the director or officer is found to be acting in his personal capacity, ordinary negligence principles apply.

Beneficiary Corporation is the sole beneficiary of the duty of care Conduct of directors and officers can bring harm to others than the

corporationo To the extent that others are injured, recourse for that person is under

ordinary negligent law, and therefore directors and officers are protected by the limited liability protection offered by the corporation model.

Duty of care is a strictly a principle of corporate governance that regulates the conduct of corporate managers from an INTERNAL point of view.

o This view has prevailed in Canada. Has it been changed?

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Standard of care Requires directors and officers to act reasonably in exercising their authority

over the affairs of the corporation. What does reasonable mean?o What is the expected standard and what are the elements of care?

In corporate law, the standard of care includes three elements Diligence

o Attentiveness to one’s managerial obligations. By obligations, we mean employment obligations – what you are supposed to be doing.

Care o Foresight of harm that might be reasonably expected to occur through

a course of conduct that you take pursuant Skill

o Corporate managers, particularly officers, are often retained to manage corporations on account of the skill they have: knowledge and experience. Activities must be done in light of this skill.

The DoC therefore requires directors and officers to exercise diligence care and skill in their activities.

What does it mean to use reasonable care?

The standard of care has changed a lot. It started out as a very weak standard, it was then strengthened by statute and has since been clawed back with the business judgment rule.

Common Law

It was so weak it was rarely found to have been violated. The weakness reflected a posture of judicial deference. Judges lacked knowledge and institutional authority to judge business decisions. They would not do so unless there was evident dishonesty or an obvious procedural flaw.

City Equitable Fire insurance

Re City Equitable Fireo A director need not exhibit in the performance of his duties a

greater degree of skill than may reasonably be expected from a person of his knowledge and experience.

o A director is not bound to give continuous attention to the affairs of his company. His duties are of an intermittent nature to be performed at periodical board meetings and at meetings of any committee of the board upon which he happens to be placed.

o In respect of all duties that having regard to the exigencies of

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business and the articles of association may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly.

o Directors and officers have to show some degree of skill and diligence but the conduct must be assessed subjectively taking into account what they knew and what skillset they were bringing

Brazilian Rubber Plantations Liable for gross negligence but the standard is a subjective one – take into

account knowledge, experience and skill in deciding whether they should be held liable

Have to keep in mind that directors are not bound to bring any specific knowledge or skill to office.

Carter Savings Bank Marquis was made a director at age 6 months old. Showed up for his first

meeting at the age of 21 and never attended again. Bank got into trouble, but Marquis was not found to have violated his duty.

Modern times Standard of care under statute

o Reform to make the duty meaningful CBCA 122(1) (b) – QBCA 119 equivalent

Soper Hybrid standard, but in reality he articulates a subjective standard:

reasonableness is judged according to the individual knowledge and experience.

Degree of attention required? – Not continuous attention, but total passivity and irresponsibility is not permitted. One who acts irresponsibly by failing to appear at every meeting does so at his own peril. Degree is somewhere in the middle

Nature of the standard – flexible standard because it is subjective. It requires attention to the capacities of each individual director and particular circumstances I which decisions were made.

At peace with the CML – it advocates a subjective flexible standardo Concern about expecting too much of the directors

Soper v Canada (1997 ??? FCA)

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Corporation hadn’t been making income tax deductions from employees’ pay and remitting them to Receiver General. Went bankrupt. Under Income Tax Act director can avoid liability for failing to deduct and remit if he/she ‘exercised the degree of care, ...’ (same as s. 122(1)(b)). Soper was director of bankrupt corporation, crown sought to make him liable.What is the standard to which the directors are held? This standard of care is partly objective, reasonably prudent person, partly ‐

subjective, judged considering own knowledge and experience (Peoples disagrees below) – not that of a trustee Directors not required to give continuous attention to the business‐ Directors permitted to rely upon officials in the corporation‐ Here, director was an experienced business person, so would be held to level of‐

skill expected of such a person, should have inquired about whether sufficientfunds were being withheld to cover tax liability once he had notice of $ issues Director is liable for failure to deduct and remit taxes.

Too much flexibility can make a standard meaningless. The concern with a fixed and objective standard is a legitimate one because businesses administered by directors and officers vary in terms of what they do. Qualifications that are possessed and appropriate to the business hence also vary. Cannot treat directors as a single homogenous group.

Some suggest we should get rid of the duty or some of the requirements, e.g. the skill. Would it be better to nullify this sill requirement? – nothing has been done about this.

Peoples Standard of case was very low at common law. It has been reinforced by

statute. The standard is subjective but contextual. o Primary facts – whether the course of conduct and the decision made

and the reasons why the decision was made Business judgment rule

o Courts unwilling to second guess business decisions – they are often made under pressure in a business life rife with risk and uncertainty as the result of incomplete information available

o Under the rule, the court looks to see that the decision was a reasonable one (not a perfect one) provided that the decision is reasonable, the court ought not substitute its opinion for the one of the Board.

o Raises questions regarding relation between business judgment rule and duty of care.

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Does the business judgment rule circumscribe the scope of the duty? Moderate the standard of care?

Causationo Did the decision create the harm?

Defenseso They relied on an executive team (now 123(5) of the CBCA). Tried to

show the decision was made in a good faith reliance. Here, DoC applies but does not result in liability because of the

circumstances: they did as best as they could and the decision was not the effective cause of the harm

Noteso The QBCA makes it clear that the duty of care runs to the corporation

aloneo Is it a proper case? It is brought by the trustee in bankruptcy, not the

creditors.

Peoples Department Stores Inc. v Wise (2004)Jurisdiction

SCC

Facts In the context of determining an insolvency law question, the SCC discussed the scope of duties of directors and officers both for the financially healthy and distressed corporation.

Issues To whom do the directors and officers owe a fiduciary obligation?

Holding To the corporation, and not merely the shareholders. From an economic perspective, the best interests of the corporation means the maximization of the value of the corporation.

Ratio - CBCA 122(1) (a): The fiduciary duty: requires directors and officers to act honestly and in good faith with a view to the best interests of the corporation.

- CBCA 122(1) (b): The duty of care: imposes a legal obligation upon directors and officers to be diligent in supervising and managing the corporation’s affairs.

The Statutory Fiduciary Duty- Directors and officers must avoid conflicts of interest with the

corporation. They must avoid abusing their position to gain personal benefit. They must maintain the confidentiality of information they acquire by virtue of their position.

- There may be situations where a profit must be disgorged although not gained at the expense of the company, on the grounds that a director must not be allowed to use his position to make a profit even if it was not open to the company to participate in the transaction.

- Liability to account does not depend on proof of an actual conflict of duty and self-interest.

- However, it is not required that directors and officers in all cases avoid personal gain as a direct or indirect result of their

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honest and good faith supervision or management of the corporation. In many cases, the interests of directors and officers will innocently coincide with those of the corporation, especially if they are also shareholders.

- In so far as the statutory fiduciary duty is concerned, the phrase “the best interests of the corporation” should be read not simply as the best interests of shareholders.

- Various other factors may be relevant in what directors should consider in soundly managing with a view to the best interests of the corporation.

- This includes employees, the community, shareholders, suppliers, creditors, consumers, governments, and the environment

- In resolving competing interests, it is incumbent upon the directors to act honestly and in good faith with a view to the best interests of the corporation

- In assessing the actions of directors, it is evident that 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. If unsuccessful, it will not qualify as a breach of the statutory fiduciary duty.

- The fact that creditors’ interests increase in relevance as a corporation’s finances deteriorate is relevant to the exercise of discretion by a court in granting standing to a party as a complainant under s.238(d) of the CBCA as a “proper person” to bring a derivative action in the name of the corporation under ss. 239 and 240 of the CBCA, or to bring an oppression remedy claim under s.241 of the CBCA.

The Statutory Duty of Care- Three elements of art. 1457 of the CCQ are relevant to the

integration of the director’s duty of care into the principles of extra-contractual liability: who has the duty (every person), to whom is the duty owed (another), and what breach might trigger liability (rules of conduct).

- Directors and officers come within the expression “every person”

- The word “another” can include creditors.- The interpretation can be harmoniously integrated with the

wording of the CBCA. Unlike the statement of the fiduciary duty which specifies that directors and officers must act with a view to the best interests of the corporation, the statement of the duty of care does not refer to an identifiable party as the beneficiary of the duty. Instead, it provides that every director and officer shall exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

- If a breach of the standard of care, causation, and damages are established, creditors can resort to 1457 to have their

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rights vindicated.- S. 122(1)(b) requires more of directors and officers than the

traditional common law duty of care. It is an objective standard, which means that the factual circumstances surrounding the actions of the director or officer are relevant (contextual approach), while their subjective motivations pertain to the statutory fiduciary duty.

The Business Judgment Rule- It might be tempting for some to see unsuccessful business

decisions as unreasonable or imprudent in retrospect. Because of this risk of hindsight bias, Canadian courts have developed a rule of deference to business decisions: the Business Judgment Rule.

- The court looks to see that the directors made a reasonable decision, not a perfect one.

- Decisions must be reasonable in light of all the circumstances about which the directors and officers knew or ought to have known

- In order for a plaintiff to succeed in challenging a business decision, he has to prove that the directors acted a) in breach of the duty of care and b) in a way that caused injury to the plaintiff

Business Judgment Rule (à travailler/completer)

Arises in US jurisprudence – not clear what the rule is in Canada Very robust rule in the USA. It has been interpreted as excluding negligence

liability except in cases of gross negligence The rule undermines the DoC basically bringing us back to the underlying

principle in the CML, where gross negligence was needed. Some argue there is a presumption of good faith when a director makes a

decision – this would undermine the duty of loyalty too Rule may be stated as following – where there is no evidence of fraud,

illegality or conflict of interest, the directors are presumed to have acted in good faith and on a reasonable basis. Thus, there will be no liability for breach of the duty of care or duty of loyalty.

In the USA, now mostly procedural. If they have followed procedure in their decision, it will normally be insulated, as long as the directors have followed proper process.

In Canadao Recognition of a robust rule is very unlikely – contrary to legislative

intent (no presumption)o Status is unclear in Canada

Policy questions

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o Shifts over time suggest that there is indecisiveness. Some think we should get rid of it because it encourages risk aversion to the detriment of the corporation. Market mechanisms are enough to ensure directors and officers are sufficiently aware of the risks.

see CB p. 506

RECAP – managerial accountability mandatory duty of care but over time it has not always taken very seriously

(very low in CML, more in CBCA, then back down with business judgment rule)

Inconsistent treatment of duty of care raises the question whether or not we need this duty.

o USA thinks strong DoC is not advisable – entails strong risk aversion and will be detrimental to market

Have been tempered after 2008 crisiso Canada – not clear what the thinking is

Business judgment rule is too unclear in Canada to truly know its impact.

Fiduciary duty

Corporate fiduciary relationshipso Sealy’s view (old)

Analogous to relationship between trustee and cestui Over time, courts decided certain relationships were

sufficiently analogous to trustee and cestui to bring upon fiduciary relationship

But fiduciary is not a definitive concept – fiduciary relationship is nothing in law. A general definition is unavailable

Some categories have been recognized for having fiduciary status: relationship between corporate managers and corporation is one of them. The law does not explain why but for practical purposes, there is no confusion: the relationship is fiduciary.

Key feature: possession of true discretionary power over the interests of the beneficiary. Directors enjoy considerable discretionary power of corporations.

See section 102 of CBCA – residual powerso CVL conception

No concern for this – it has historically attached fiduciary like obligations to certain types of relationships (managing the affairs of a legal person is one of them). The law attaches fiduciary consequences to certain categories without much

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concern for if the underlying relationship constitutes a certain category.

o Modern view Relationship is a fiduciary one. Status fiduciary relationships Characteristics of fiduciary relationships

o Implications? Certain obligations arise

Duty of loyalty originated in equity and is constituted by 2 rules applying to all fiduciaries in all circumstances.

Conflict ruleso Conflict of interest rule

A fiduciary shall not permit her own interests to conflict with those of her beneficiary.

o Conflict of duty rule (2 masters rule) Fiduciary shall not take on fiduciary duties to others that may

conflict with their duty to the beneficiary

Duty of loyalty has been introduced in the statutes CBCA 122 (1) (a)

o No language of conflict rules – reference to honesty and good faith. Statutory language and judicial interpretation suggests something might have been lost in translation in the incorporation to statutes. Some risk of confusing duty of loyalty and substantive conflict rules with the duty of good faith arising in contract and corporate law. This usually focuses on process.

o Also a concern that the language displaces the concern for conduct and focuses on motive of the fiduciary. Were they honest / acting in good faith.

o Consensus view – no difference was intended, should be seen the same as the one arising from equity

Peoples Factual basis for claim of disloyalty? – Wise brothers are said to have placed

a burden on Peoples and hence favoring the interests of Wise stores, original company.

Are creditors entitled to claim directly against officers for breach of 122 (1) (a)?

o No Did the Wise brothers act disloyally?

o No Reasons

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o Relationship between managers and corporation is fiduciary. This is established.

o In characterizing the relationship, emphasize the power officers have over the corporation. Considerable power over use of resources.

o Content of duty Cites KLB – content of DoL is variable. Usually encompasses the 2 conflict rules. But the implications

of these rules is a character of the underlying relationship. Certain duties are not fiduciary – duties associated where their

office (employment type duties) are not fiduciary. Duty of care is not a fiduciary duty. It is imposed on fiduciaries but not a fiduciary duty itself.

o What does the duty of loyalty require? What does the court say? To prove loyalty – act in the best interests of the corporation,

maximization of the value of the corporation can be a way to show this.

For the best interests of the corporation, rejects shareholder primacy, accepts stakeholderism.

Must avoid conflicts of interests, must avoid abusing position to gain personal benefit, maintain confidentiality of information acquired by virtue of position, must serve the corporation selflessly, honestly and loyally.

o How do we establish this duty? Prove disloyalty? Does a beneficiary have to prove improper motive or does the

existence of an actual or potential conflict suffice? Good faith, honesty, seem to go to motive Others, conflict rules, confidentiality, seem to go to

conduct. A lot of cases suggest that breach of conflict rules is a key

factor. Others suggest a key factor is motive – all circumstances can be

examined to determine if officer is acting honestly in good faith.

Peoples seem to indicate motive is key. – resonates with statutory language but does not with common law fiduciary rules and SCC jurisprudence. Many cases of liability for breach of conflict rules without the “motive” requirement.

o Beneficiary of the duty Creditors and shareholders are essential to corporations.

Directors and officers maintain control through investment of capital and the officer wields power over a group.

Directors and officers receive their power from shareholders and creditors, but these are not beneficiaries of the duty. This isn’t explained why not.

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CBCA grants powers over the corporation – power is wielded in the legal sense by express provision of the statute.

Puzzle – duty runs to the corporation, but the corporation doesn’t have interests of their own: they are attributed interests by real people. Need to look at the interest group.

IN deciphering the interests of the corporation, cannot equate them to the shareholders. Directors decide where the interests lie and by doing this, directors have the power (not ob) to consider various stakeholder groups.

Neither shareholders nor creditors have direct recourses against officers under 122 (1) (a)

In Quebec

QBCA and CCQ on content of the duty of loyaltyo CCQ 323-324o QBCA?o Content is clearer

Beneficiary identity problem Prophylactic function of the DoL – reference to the conflict rules. They

historically have been very broad: not only actual conflicts, but also potential conflicts. Typically have to avoid any actual or possible conflict. They are prophylactic because the rules are concerned not with actual influence, but rather an appearance of distorted judgment.

CBCA 123(5) is a defence to loyalty claims

Remedies Disgorgement(?) of profits

o …. Regardless of whether there is corresponding loss. Profit stripping remedy.

o This is the remedy that makes fiduciary liability claims very tempting. Equitable damages

o beneficiary has suffered a loss as a result of the disloyalty. They are in the nature of compensatory damages to redress loss.

o Are not ordinary compensatory damages because they don’t have the same restrictions (e.g. remoteness)

Recisiono Any contract between fiduciaries on the behalf of the corporation can

be rescinded on the basis that the fiduciary was acting for self interest Constructive trust

o Any property misappropriated is to be held on trust

Improper purposesHave exercised a power they have but for improper purposes

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Two incompatible approacheso Corporate constitutional approach

Focuses on the purposes for which managers hold specific powers. Question of construction: why were they given this power and has it been exercised consistently with the intent?

Hogg v Cramphorno Fiduciary approach: propriety in the exercise of managerial power has

to be understood in fiduciary terms Focuses on overriding fiduciary constraint: whether the power

is exercised by a manager in a good faith effort to advance the interests of the corporation.

Hogg v Cramphorn Interference with shareholder control is not a proper purpose. Cannot issue

shares to dilute voting power. Directors cannot issue shares to maintain themselves in control or to defeat the wishes of a majority of shareholders. This is true even if they believe that by issuing shares they are acting in the best interests of the company. The decision to accept the takeover lies with the shareholders, not the Board.

Balance of power – protects shareholders and their powers Limit on fiduciary obligations – corporate constitution trumps obligations. THIS IS NOT THE LAW IN CANADA

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

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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.

Improper purpose doctrine

Where directors are given a particular power, they can't go and use that power for a purpose that was not originally intended.

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 Rejects the rule in Hogg v Cramphorn If majority of shareholders want to go one way and directors another, there

is a conflict. What do we do?o Have to understand the improper purpose doctrine in fiduciary

principles. Jurisdiction the courts have to review exercise of manager actions has to be based on some impropriety. Directors ought to be allowed to find out who is seeking control and why. If they believe there will be harm to the corporation, they will not be found to have acted disloyally.

Have to distinguish primary and subsidiary motives – directors will always have an interest in keeping their position. They have to be able to show reasons for the decisions they made and there must be reasonable grounds for the beliefs that they were acting in the interests of the company. If there are no reasonable grounds, there the directors would be found to have acted with improper purpose.

Noteso Conflict between control of the corporation by majority shareholders

on the basis of the right to vote (shares) and the powers and fiduciary responsibilities of directors. Shareholders act in their personal interests, directors have a legal obligation to act in the interests of the corporation.

o Are there limits to this? What can directors do? o Decision is effective if proper purpose, voidable if improper purpose.

Teck Corp. v. Millar (1972)

Same deal; directors diluting sharesRejects improper purpose doctrine and Cramphorn

"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).

o Hogg ruling that directors may not allot shares to frustrate a takeover attempt, even if

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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.

Specific circumstances of breach of loyalty

Usually involve a conflict between personal interests of manager and corporate interests.

o Violation of the first no-conflict rule. What is the typical kind of cases where there is a violation? 4 types

1. self-dealing cases – fiduciary during the course of relationship with beneficiary enters into a legal transaction with the beneficiary as other party and having done so for pecuniary gain

2. misappropriation of property, information of opportunities – fiduciary abused his relationship by taking property, information or a chance for profit that “belonged” to the company

3. Entrenchment and enrichment cases – fiduciary has used her powers to retain her position and economic benefits associated and having done so irrespective of the interests of the beneficiary

4. secret profits – fiduciary has in some way used her position to gain a secret profit (corporation doesn’t know about it) – usually involves taking advantage of access to confidential information

Self-dealing cases

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Contractual arrangement between fiduciary and beneficiary in which the fiduciary is acting for profit. Interest of the beneficiary in obtaining a profit may conflict with the interest of the fiduciary. Might try to extract more than they should.

Self-dealing is not inherently detrimental to the interests of the beneficiaries. In some cases, maybe self-dealing affords the beneficiary the only or the best means to realize their interests because maybe the fiduciary is in a position to provide something not available to the beneficiary on the market, or to provide more favorable terms.

Dominant thinking, however, is that there is a prophylactic purpose – it addresses a risk of harm with the prospect of a conflict. This concern for corrupted judgment explains the traditional view

o CML – flat prohibition on self-dealing is strictly enforced (Aberdeen Railway) – no matter if good for corporation

o 324CCQ – director shall avoid placing himself in any situation where personal interests might conflict

Over time, courts recognize that in certain circumstances, self-dealing might be good. Should liability for breach of fiduciary duty based on self-dealing be forgiven? Requirements for forgiveness

o Disclosureo Approval or consent to the conduct (by board or shareholders)o Fairness for the interests of the beneficiary

Northwest Transportation v Beatty Beatty was a majority shareholder and director. BY voting as majority

shareholder, he effectively ratified a self-dealing decisiono Recognized that company needed a ship, this ship was adequate, no

other boats were available, the price for the ship was fair (profit hence, was fair).

Minority shareholder sues saying that Beatty should disgorge profits because of disloyalty through self-dealing

Transaction was voidable under rule in Aberdeen Does ratification by shareholders of self-dealing decisions stand? Ratification is not rendered ineffective by voting of the majority shareholder

also the fiduciary Reasons

o There is a prohibition for self-dealingo They can be enforced however if they are affirmed or adopted

Have to be brought to the Board or shareholders fairly Is it unfair or improper because the disloyal fiduciary is

the majority shareholder? – No because he is exercising rights he actually has. This does not mean he is bringing the proposition to the board or shareholders by unfair or improper means?

o If adopted, no longer voidable

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NOTESo We have to consider what Beatty did by ratifying the purchase of boat.

In corporate law, one can wear different hats (fiduciary and shareholder). When acting as a shareholder, there is no fiduciary obligation to the corporation. A shareholder can act in his own personal interests because they do not have a fiduciary duty.

o Perverse result? – Individual has to act selflessly in his capacities as directors. He may commit a legal wrong and yet escape the consequences by excusing himself as majority shareholder? – What protection is there for the interests of the corporation? They are left without a remedy here. Possibility for the minority shareholders to bring a claim for oppression. Though this is true, it does nothing for the corporation itself.

o In Teck, we see fiduciary obligations trump majority rule. Here, majority seems to trump fiduciary duty.

o Did the facts make for bad law? The transaction might have been the best thing for the corporation to do, hence less importance awarded to the fact that he made a profit.

o Conflicting authority Different approach to shareholder ratification (Earl) – for

ratification to be effective, you need unanimous shareholder approval (150 y-o case for ONCA)

Statutory Reformo CBCA s. 120

Disclosure (of personal interests) Immediately for officers, next board meeting for

directors Content – specific as to the nature of interests and

extent of interests Where one is a party to the contract, officer or director

of a party to the contract, otherwise you possess a material interest

o Material if relevant to the decision (pretty vague) Ongoing disclosure is possible – provide and update a

list of positions and relationships that might come up Board/shareholder approval

If Board director, cannot vote, but can be in discussions (sub 5)

Either Board or shareholder can approve the K by majority vote (sub 6)

Reasonableness/fairness Transaction itself has to be fair and reasonable (no

gross profits, for e.g.)

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Objective – look at market and good or service providedo QBCA ss. 122-133

Scope 126 – requires explicit disclosure even if the transaction

would not normally require Board approval (resolves ambiguity in CBCA regarding minor transactions)

Board/shareholder approval 127 – interested directors are prohibited from voting

AND ATTENDING the board meeting (different from CBCA)

If all Board members are conflicted, transaction can only be approved by shareholders (not anticipated in CBCA)

133 – allows non-interested shareholders to ratify the self-dealing transaction. Even if there was not proper disclosure, can still be approved by majority (whereas supermajority in CBCA)

Transaction in the interests of the corporation Seems to require the transaction in light of the

corporation and what was trying to be established. More consistent with the fiduciary duty of directors and officers. – this is as opposed to objective market look in CBCA

Appropriation of opportunity, information, property

Director has misappropriated business opportunities (for profit) will be considered

If a manager is going to do anything in respect of an opportunity, they have to pursue that opportunity on behalf of the corporation, or let it go.

Cook

Example of diversion and bad faith...Cook v Deeks (1916 Ont JCPC)Four men were directors and SH’s of a corporation. In order to exclude one of the men from future business deals, three of the directors created a new company. They negotiated a new contract with CPR, and secured it for that new company.

Was securing the contract for the new company, while they were the directors of another company that wanted it, a breach of fiduciary duty? The 3 had “deliberately designed to exclude, and used their influence and position‐

to exclude, the company whose interest it was their first duty to protect” Defendant directors ordered by court to turn over all benefits from the contract to‐

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the corporation The court’s comments that the directors cannot make “a present to themselves”‐

merely by getting the shareholders to ratify the director’s breach of their fiduciary

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

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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.

Regal New directors sue former directors on the basis of breach of fiduciary duty.

Bad faith was never alleged. Any opportunity for profit that comes to the fiduciary through his position as

fiduciary comes under the scope of the rule Directors could have seeked shareholder approval for ratification but they

didn’t so they are liable NOTES

o SCC has adopted the rule in Regalo Strict rule because it is defficult to determine if they were acting in

good faith or in their own interest

Peso Silver v Cropper Significance of prior refusal

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.

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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?

Canaero Resigning doesn’t automatically insulate from liability

o Even after resignation, if it has been prompted by the wish to acquire the opportunity, there will be liability – why? you can’t renounce at will you fiduciary obligations

Canadian Aero Services Ltd. v. O'Malley (1974)

Factors in determining whether someone seized the corporate opportunity

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:

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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

Gravino v EnerchemThis was a small market dealing with maritime transport of petrochemicals in Quebec. Gravino and Carson were directors and officers of ETI and tried to negotiate deal with Ultramar to lease 3 oil tankers. G and C resign and set up Petro-Nav, and then secure contract with Ultramar. ETI brings action for breach of fiduciary duty

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against G and C.Did G and C misappropriate a maturing business opportunity? This opportunity had long been on the horizon and was “very far from having‐

reached the final stage in negotiations” when G and C resigned A business opportunity “must be more than a concept of mere possibility”‐ In a small market, a simply possibility will be known to all the players‐ Signed the contract 9 months after resigning - gives some idea of the “relative‐

degree of maturation of the business opportunity”

No. The final contract was “too different” from the earlier one to be considered the result of it, and too much time had passed Takeaway from Gravino – ‘the resigning fiduciary is not forbidden forever from‐

setting up a competing business’ p 388 Directors have been allowed to keep buildings they bought that the corporation‐

might also have been interested in Burg v Horn (1967), lower duty if officer? Remedies: May be damages, account for any profit, or constructive trust (property acquired by manager is held on trust for the corporation) As long as there is no dishonesty or bad faith (Cook v Deeks), SH’s can probably‐

ratify to authorize actions (Regal, Phipps)

Gravino Opportunity must be mature to establish liability

o Has to be more than a hypothesis or plan or idea Factors

o Same as in Canaero Countervailing policy considerations

o Public interest in free and open competition in marketso Personal interests in earning a living with the skill and knowledge

they have at their disposal Application

o Not like Canaero because defendants did not appropriate an opportunity that belonged to ETI

No appropriation of property or clients, just use of information material to a business opportunity

This information was not a mature business opportunity in the hands of ETI

Small market, other players knew about this opportunity Did not take confidential or strategic information when they

left Defendants quit and acted as competitors Defendants not bound by non-competes and were legally free

to compete Opportunity seized was different from that pursued by ETI

because ETI had not progressed in its negotiations. Notes?

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o Look at position or office held – directors officers and senior employee

o Ripeness of corporate opportunity – pretty specific: specific product for specific use for specific client in mind

o Relation to the opportunity – pretty close: were working on this file for ETI

o Amount of knowledge possessed and circumstances in which it was obtained

o Time – short period of time after resignationo Circumstances under which relationship was terminated – can we

question that the relationship was terminated because of possibility with other company?

REVIEW Self dealing – shift from a categorical bright-line rule prohibiting these

transactions and making them void. They are now permitted provided there is advance disclosure of interests, consent by the board or shareholders and the transaction substantively (under CBCA) fair and reasonable or (under QBCA) in the interests of the corporation.

Misappropriation – fiduciary takes for himself an opportunity belonging to the corporation. Rule is strict. Difficulty is whether the opportunity belongs to the corporation. List of factors in Canaero case.

Entrenchment Fiduciary is using his powers as an officer to retain his position in the

corporation and is doing so irrespective of the interests of the beneficiary. Suing on the basis that they haven’t exercised their power properly? How does the duty of loyalty constrain management acting within their

powers in the context of a hostile takeover that a corporation is facing?

Nature of entrenchmento Alleged that a manager has exercised any power they have in order

primarily to secure their position in the company against some kind of effort to kick them out, usually a takeover bid

Hostile Takeover Bids (HTB)o If bid is for more than 20% of the shares, it is a takeover bid (if you

already have 15 and are going for the remaining 5, still takeover)o These are understood as a market mechanism to ensure sound

management. If the corporation is well run, raiders won’t be attracted. They want to takeover the company, fire unsound management, and realize within a short term a return, and then sell out

o Latent conflict of interest facing the Board. Incumbent managers have an interest in job security that potentially conflicts with the interests

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of the corporation of being soundly managed. Also affects shareholders – any deficiency waters down on the shareholders in terms of costs (values of the shares and dividends)

o Managers have several tools to resist a hostile bid Issue more shares to try to shift voting power to dilute the

power of those people who might vote to accept the bid (will often dilute the value of shares)

Seek a friendly bid (white knight) – try to find another bidder that is friendly (they won’t fire you). If you can’t find one, third option (will not look at this)

Poison pill – existing shareholders buy stock at a discount. May alter voting rights, basically will result in a shift in control rights that come attached to the shares. Ultimate purpose is to render the shares unattractive (will not look at this)

Nature of the conflicto How does the existence of the conflict shape legal constraints on the

management actions? Can’t have a simple application of loyalty rules because the conflict is latent in the context of a HTB

o How can they respond? Still governed by the duty of loyalty requiring that the

response to the bid be in the best interests of the corporation

In Teck – management resistance to a bid is not automatically a breach. It may be justifiable on the basis of the managers’ duties to act in the long-term interests of the corporation, provided that managers acted with reasonable grounds for the belief that the takeover will be harmful to the interests of the corporation.

Olympia & York v Hiram Walker No breach Proper purpose, fiduciary duty and issuance of shares

o Any time that a board issues shares to interfere with the exercise of shareholder voting rights in the context of a takeover bid, it is void because of improper purpose. But the outcome is based on motive. Here the managers are not acting in self-interests; they were found to be acting in the protection of the long-term interests of the corporation

o In Cramphorn – good faith is irrelevant, look at the corporate constitution, why do the managers have said power?

Supporting evidenceo How can we establish managers have acted based on a reasonable

belief? Find some independent advice. If you can point to independent

advice (financial or legal) saying the deal is bad, can rely on it.

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In the absence of positive evidence of bad faith, courts will apply the business judgment rule

Significance of latent conflicto Court acknowledges the conflict but says that it can be ignored

provided that the evidence relating to the decision-making proves the conflict remained latent.

o Directors here were motivated by desire to maximize return for all shareholders and that this is at least some part of the interest of the corporation. The actual value of the shares was not recognized in the market value. The real value was not reflected in the bid.

Noteso How should we identify corporate interests?

Corporate interests are to be identified with those of the shareholders in aggregate. Line in the USA. In USA – duty becomes to maximize the value at sale for stockholder return. Called the auction rule. In CANADA, no single blueprint showing how to respond. Some say we need a bright-line rule giving clear guidance on what to do. Some suggest there ought to be a law saying the board has to create an independent committee that decides. Others say we need to develop the motives for rejecting the bid.

o Obstacles to review: can be difficult to justify why we chose one bid over another. There are a lot of contingencies particular to the bids that make it difficult for a court to compare bids because they don’t have this expertise.

Olympia & York Enterprises Ltd. v. Hiram Walker Resources Ltd. (1986 Ont)

Gulf Canada was proposing a takeover of Hiram Walker. The directors of HW created a new corporation, and the new corporation sold shares to HW and used the money it raised to acquire 48% of the HW shares. The new corporation paid more for the shares than Gulf was offering, and defeated the bid. (HW raised the money to buy the shares of the new corporation by selling their liquor division). Board effectively used corporate assets to defeat the bid.

Had the board entered into a transaction for an “improper purpose” (to maintain control, rather than pursue the best interests of the corporation)?

‐ Providing the directors have acted in good faith, on what they believed on reasonable and probable grounds, to be the best interests of the corporation, they have not breached their fiduciary duty Court found that there was no evidence of management entrenchment‐ C‐ ourt accepted board of HW’s rationale that the “intrinsic value” of the HW shares

were not recognized in the market value of the shares, and the SH’s would beunfairly deprived of this premium if the sale to Gulf went through Cites ‐ Teck, directors are only under a general duty to act in the best interests of the

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corporation, and this may include defensive tactics to a takeover bid – heredirectors argued best interests was to raise value of shares through defensive tactic Actions of the directors were upheld, acted in best interests of corp, no management entrenchment attempt

Maybe in Olympia the low market price of the stock reflected bad management, maybe the “intrinsic value” argument was a cover for management entrenchment Note: have already established that arguably there is no more ‘proper purpose’ doctrine - Teck

Conflicts of duty – Multiple loyalties

If there is no direct conflict, it is not seen as a conflict at all. Can be an in-house conflict is a director is appointed to represent a specific

class of shareholders. These are nominee directors. Nominee directors are no different from ordinary directors in respect of their legal obligations: they go to the corporation.

Independent directors Law is fundamentally concerned with board independence. Concerned with

the impact of the quality of decisions and clouded judgment. Director independence

o The Ideal Director exclusively focused on the interests of the

corporation, only wants to advance the interests of the corporation and has no regard for her own interests

o The reality True and complete faithfulness is impossible. Boards are not usually set up with independence in mind.

Directors may be and often are officers of the company too (inside directors). The notionally independent directors (outside directors) often have a personal financial stake in the company. They often have direct personal ties to officers (family members, friends, old classmates, business associates, etc)

Directors are only scarcely truly independent. This fact raises complications when the independence of the board is at issue, for example, response to a takeover bid. There is a latent conflict.

Dealing with realityo Some way to improve Board independence? One response is to take

the decision away from directors who have the greatest interests in the decision: establish a sub-committee of independent directors. Removal of decisions from a full board is a popular response

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Brant v KeepRite Has ICM violated a fiduciary duty to minority shareholders in KeepRite?

o Noo Minority SH claimed that there was a fiduciary duty owed by the

controlling shareholders. o The relationship has not been recognized as fiduciary however – no

strong authority for this proposition.o Although majority shareholders have real effective control over the

corporation because of their shares, they don’t have authority to act for minority shareholders. When exercising their control rights, they are simply exercising rights attached to their own personal property (the shares) and you can exercise rights over your own property self-interestedly.

Was the review of the transaction properly conducted?o Yes – it was independent. Independence directors of KeepRite were

independent – not officers of ICG or ICM. They had been installed in KeepRite before ICG acquired initial interest.

o Role of independent directors Did not look around for other deals. Did not review pertinent documentation Did not evaluate the transaction properly because no ongoing

valuation Court rejected all these claims – it had reviewed pertinent

documentation and was not necessary to conduct a valuation, nor was it necessary to seek alternative deals. The role of the committee was circumscribed to the benefits and costs of the transaction.

A court will not differ to the recommendation of the committee on the question of the independence of the committee

Brant Investments Ltd. v. KeepRite Inc (1991 OCA)

KeepRite sells AC units. IGC (Inter-City Gas) acquired 64% of KR, and transferred them to ICM (Inter-City Management), it’s subsidiary. IGC and ICM make heating equipment. Then KR purchased 20M in assets from ICM. This purchase was approved by an independent committee of KR. Minority SHs of KR are concerned that KR paid too much for these assets because of IGC and ICM’s control.

Did the directors commit oppression in purchasing the assets from ICM? (Was the adoption of the independent committee’s recommendations in the best interests of the corporation?)

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‐ The independent committee was independent, no evidence of involvement w/ IGC

‐ Court notes that independent directors 1) considered other alternatives, and 2) obtained an independent consultant’s report

‐ This was sufficient grounds for the court to apply the “business judgment rule”

‐ The court deferred to the recommendation of the independent directors

Purchase upheld

Comments on Independent Committees Rise of these, especially after Enron Independent auditing committees – review financial reports and this

committee will deal with outside auditors Concern of actual independent – it depends on the criteria These criteria are quite general and lax

o Directors might not have an interest directly, but they are rarely truly independent – they know the other directors

o Also concern about competence. Giving power to independent committees that might not be well qualified to make these decisions because they lack inside information about the company’s management. Can’t evaluate proper strategies.

o Objections raised to judges deferring to sub-committees Should we defer

Limited ambit of CBCA 120 Permissiveness of common law (can forgive a breach and accept transaction)

o Consent based on full information can ratify – foregoes liability Fully informed = more than info at a general meeting

o Some egregious breaches will not be forgiven Puzzle in ratification – seems strange shareholders can forgive a breach of

duty of loyalty to the corporation because the duty is owed to the corporation, not to them. But who else can ratify? Directors? – they are the ones breaching…

Statutory constraints for ratification (away from the CML laxness)o CBCA

242(1) 122(3)

Subject to USA, no provision in a K, articles, by-laws or a resolution relieves a director of the duty…

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Bars ratification except for self-dealing transactionso QBCA

440 (parallel to 242(1)) Derivative actions will not be stayed or dismissed solely

because shareholders approved the action. Liability can be sought notwithstanding approval

120 Omits officers here. Suggests mandatory duties that

can’t be relieved for directors. Officers might be fine to ratify

Bars ratification except for self-dealing transactions

Majority Rule

How is control allocated amongst constituents? In what form is it exercised? How far does that control reach? To what extent does legal power enjoyed by constituents translate into real effective and meaningful control?

How and to whom are those who enjoy control accountable for the way control is exercised? What remedies may be called upon to redress acts in excessive authority or wrongs associated without misuse or abuse of authority?

Shareholder control and voting rights Exert significant market control through transactional activity. Decisions to

buy and sell shares. This informs market price for shares and corporate managers are very sensitive to short-term fluctuations in share price.

Share price is affected by various factors. Managers who prove themselves responsive to market based expectations manage the market – their fear of fluctuation affects the decisions they make

Legal power shareholder have are limited Voting – only real legal power and means of exercising control

This is indirect control and highly specific. Indirect because voting gives no direct input on matters

of business policy or practice. Specific in contrast to BoD – can only vote on very

specific matters reserved for voting, for instance: electing directors and removing them, fundamental changes to the corporation, approve amendments to by-laws, elect an independent auditor

Majority rule In most matters, the vote of the majority determines

action. Sometimes, in heightened importance situations, we have super-majority rule or unanimity rule. Apart

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from unanimous written agreements, the power to vote can only be exercised in a meeting.

Perennial problems of shareholder control

Dealing with conflictso Re governance – majority and minority may disagree about where the

corporation ought to go. o Re property – shareholder voting right are attached to property (of

the shares) Conflict over majority and minority may implicate issues of

ownership – the conflict may involve expropriation of shares or interference with a property right in shares.

Possible to create classes of shares with no voting rights or super-voting rights. (e.g. in large family based corps, members of the public may have no voting right)

Derivative action remedy – an aggrieved shareholder brings a claim alleging the corporation has been wronged

Oppression remedy – minority shareholder claims majority shareholder are disregarding the interests of the minority

Shareholder empowerment Sometimes, shareholder control is overstated. In law and theory, SH have

extensive control over important things. In reality, at least in widely held corps, shareholder power is largely a myth because of SH passivity (very widespread) and SH ignorance (don’t know what they are voting about).

In wake of 2008 crisis, new focus on making SH voting power more effective. Some people think it is a good idea to increase SH power, others think it is an awful idea.

o Granting more powers More effective and more extensive SH power will mean greater

managerial accountability. Less risk of disloyalty and greed, and the result will be higher return to shareholders

Just fulfills a promise we made by giving them the voting rightso Critics

Increasing power is not necessarily good. Increased SH power will make managers more obsessed with market expectations and short-term fluctuation in hare value rather than long-term true value. Blinders they already operate with only become more intense. Will ignore interests of third parties and only think of SH because of accountability to them – will ignore employee interests, for example.

Reforms are not likely to do all that much for the average investor (with few shares) because people with small holdings have incentive to do nothing but hope for the best. Costs of informed voting are too high to make it worthwhile to get

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informed and vote intelligently. Why bear the costs when we can free ride institutional investors?

Shareholder Meetings

General Principles Problems of abuse of power of majority and problem of inaction of SH Reform efforts in the 1970s lead to the development and expansion of the

oppression remedy. In Canada, SH passivity has attracted little attention, but there have been some reforms to the CBCA that make Canada more accommodating than most jurisdictions: they have more voice and more control.

Corporate law has focused a lot on general meetings for accountability to shareholders. There has also been an expansion of ancillary rights (e.g. right to call meetings, right to present proposals, expanded rights to information, encouragement of greater involvement in the elections process through encouragement of proxy voting)

Kinds of meetings Annual general meeting - s.133 (a)

o Director shall call a meeting not later than 15 months after the last one

o First meeting within 18 months of incorporationo If directors don’t call it, it can be called by SH or courto Key matters

106(3) Approval of by-laws (103(2)) Approve appointment of auditors (162(1)) Presented with financial statements and auditor’s report

(155(1)) SH proposal (137)

Special meeting - 133 (b)o Called by directors o Amalgamation, continuance, amendment of articles (this is what

usually comes up) Requisitioned meeting 143(1)

o Called by SHo Must have at least 5% shareholding stake in corporation (143(1))o Often involve removal of directors, voting on controversial by-law,

shareholder proposal having attracted interestso Corporation has to pay (143(6))

Court ordered meeting (144)o When no one wants to call a meeting but court feels a meeting should

be held

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o Doesn’t happen very often

Notice132-138 CBCA

Timing and direction (135(1)) and Regs s 44 between 21 and 60 days Must be given to each SH who can vote, each director and auditor. Not clear if

SH not entitled to vote are entitled to notice

Content (135(6))o Any special business has to be disclosed, e.g. other than the usual

ancillary rightso 175(2) – notice has to be given specifically for any amendment to the

articles

Case law on adequacy of notice

Garvie v Axmith Sufficiently detailed such that the SH can reach an informed decision on how

to act Garvie v. Axmith (1961 Ontario) - the SH must be provided with “sufficient

information to enable the common SH to appreciate the full and complete result of the adoption” of the resolution (some SH’s brough action for resolutions to be declared invalid on grounds that they were not given adequate notice of the meeting)

Location

Has to be held in jurisdiction, or elsewhere if agreed upon by all SH who can vote

In CBCA – at the head office (unless otherwise agreed upon)

Upper Canada Resources In Re Upper Canada Resources Ltd. and Minister of Consumer and

Commercial Relations the corporation’s articles provided for meetings outside of Ontario, but failed to specify where they might be held - court held that a meeting held in Calgary was thus void (even though there was no evidence of bad faith and it was apparent that the majority would still approve the measure in question)

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o ‘it is a fundamental underlying assumption fo our corporation law that meetings of shareholders may be of significance, even where one shareholder of group of shareholders owns a predominant proportion of the shares’ p 435

Voting

Quorum – 139(1) and (4)o Unless by-laws provide otherwise, quorum is established where

majority of voting shares are present (person or proxy)o (4) for sole shareholder

Method of voting – 141o By hando By balloto Electronically

Importance of procedure

MacDougall v Gardiner

MacDougall v Gardiner (1875 England)(Crazy decision that makes no sense and would never happen in Canada)

The company’s articles gave the chair the power to adjourn a general meeting of the SH’s on the consent of the meeting. The articles further provided that the chair had to take a poll if demanded to do so by five SH’s. An extraordinary meeting of SH’s was called for the purpose of removing the chair (was called by a collection of minority SH’s). The chair stacked the meeting with SH’s who held only a few votes. A motion was put forth to adjourn (before the chair could be removed), and a show of hands suggested consent to the motion. Although requested by five SH’s, the chair refused to conduct a poll (contrary to the articles).

Should the chairman’s conduct be declared unlawful, and an injunction be ordered to prohibit the directors from concluding a proposed transaction?

‐ The duty to run a proper meeting is owed to the corporation and not to the shareholder

‐ So the corporation would be the proper plaintiff, and the majority do not want the corporation to pursue this

‐ Court takes the view that it should not waste time on difficult

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minority shareholders complaining of technical defects in meeting, when it is clear that the majority will prevail - Ruling for Gardiner.

Pender v Lushington

Chair refusing to count votes of shareholders who bought more shares to get more votes.

Shareholders sue Court says shareholders were entitled to sue personally because individual SH has

personal standing because it was on a voting irregularity

Pender v Lushington (1877 England)

The articles of association provided that no SH would be entitled to more than 100 votes total. At an extraordinary general meeting, the chairman refused to register some votes because the SH’s holding them had only acquired them in order to increase the voting power of the transferor. An individual shareholder is permitted to have standing to complain about an irregularly held meeting

Did the chairman act unlawfully in not registering the votes?

‐ Here, an individual shareholder was permitted to have standing to complain about an irregularly held meeting (diff from MacDougall).

-Shift from MacDougall that involves a changing emphasis (from majority rule to minority protection). Recognizes abuse of procedure can unfairly prejudice SH. Important in securing shareholding rights.

-Articles have been violated, nullified the meeting, sent parties back to redo the meeting even though seemed that the majority would get the same result

- The minority just might be able to sway enough votes, the court cannot know for sure; the proper procedure gives the minority a chance to speak and to vote

Proxy Voting Entitlement – 148(1)

o Establishes a right to appoint a proxy

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o 148(4) – can cancel proxy authorization in advance of meeting or can show up and vote themselves

Requirement to solicit - 149(1)o Corporations have an obligation to solicit proxy votes. Must solicit for

management to be authorized to act as a proxy. Unless fewer than 50 SHs. Solicitation form has to be sent out with notice of meeting.

Persons who may be proxieso Any person nominated by the SH. Often are management personnelo Problem that they are solicited – in solicitating proxy, management

can harness support for their proposals and their management position. This diminishes the power to monitor.

Response - Those opposed to management can also solicit proxy

Regs 54-69 – Management must make is clear SH can name whomever he wants. Can indicate how to vote on each issue and proxy has to follow this.

Directors are usually proposed as a slate – have to vote for the slate altogether

Duty of proxy – 148(1)

Shareholder proposals Gives SH greater autonomous voice. SH can submit proposals to fellow SH for

SH approval. If SH acting as a body approve a proposal, proposal can have a persuasive (not binding) effect on management

Said to disrupt the absolute agenda control of management over meetings No restriction on substance of these proposals CBCA framework s. 137 (1) for entitlement and (5) for limits

o In order to have proposal included, SH must hold prescribed number of shares (regs 44-49: at least 1% of corp shares of 2000$ worth of shares for at least 6 months).

o Limits Corp not required to circulate proposal if the primary purpose

of the proposal is to force a personal claim or redress a personal wrong.

Not required to circulate proposal if it does not relate in significant way to corporate business

Uncertainty over effect of proposalso Not binding on management but management looks bad if they don’t

follow it

Ordinary Business Ordinary business is at annual meetings

First – election of directors

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106(3) – can elect directors with simple majority (50% +1) Variations on simple majority rule (107, 111(3), 145.1)

o Can have class voting (very common) – 50% +1 within the class Powers of court – 145(1) and (2)

o Court has broad discretion for orders in election of directorso No evidence this is routinely used

Approval of by-laws Directors can make or amend by laws. These are only valid pending approval

at the following meeting (103(2))

Financial disclosure Duty to present – s 155 Duty to maintain and disclose records – s. 157(1) and (2)

Appointment of auditor Requirement of certification – s. 161 Disclosure to auditors – s. 170(1) and (2)

o Auditor can request information Right to appoint – s. 162(1)

o SH have a right to appoint the auditoro Issue is auditor independence:

Can be involved in management consultation. Fear they are not doing adequate auditing because management consultation is much more lucrative

Waiver of right to appoint – s. 163o By unanimous consent

Extraordinary Business Removal of directors

o Entitlement s. 109(1) Simple majority vote If cumulative of class voting scheme for the election, same has

to go for removal Ratification of self-dealing transactions

o Capacity and limits – s. 120 (7.1) Constitutional amendments

o Entitlement (s. 173(1)) Articles can be amended by special resolution (2/3 vote).

Articles may set the bar higher (e.g. requiring unanimous vote)o Notice – s. 175(2)

Details have to be giveno Amendments targeting classes – s. 176

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If amendment affects a particular class of shares, that amendment has to be approved by special resolution (2/3 vote) even if that specific class doesn’t usually have voting right.

Sale of corporate assets – s. 189(3) Need shareholder approval by special resolution (2/3 vote) if substantial

sale and non-voting classes are entitled to vote (because of their residual interests)

Winding up Voluntarily dissolved by special resolution at annual meeting – s. 211(1)

QBCA highlights Improvements

o Increasing SH voiceo Reducing bureaucratic aspects of SH meetings

Highlightso Notice of SH meetings – s. 165

10 dayso Proxy voting – s. 172

Authorization is valid for a year subject to revocation (instead of every meeting)

o SH meetings, venue – ss. 174-75 Can participate by video, phone (as in CBCA) but also allows

entire meetings to be held virtually (has to opt-in in the by-laws). Might increase participation.

o SH meetings, SH voice – s. 187 Right to speak at meetings

o SH meetings, SH proposals – ss. 194-206 Only private corps with over 50 SH Max of 5 per person and 500 words each

o SH requisitioning of meetings – s.208 Minimum SH requirement is 10% (instead of 5 in CBCA)

o Corporate disclosure - s. 225 Can present them at the meeting, no need to circulate in

advance

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Shareholder accountability: an introductionHow and to whom are SH accountable? Majority shareholders accountable to minority shareholders?

1. At common law

Allen v Gold Reefs Powers enjoyed by SH have to be exercised bona fide for the company as a

whole. Controlling SH have to consider likely outcome of decision for the Corporation.

NOTESo Problem with this rule – Unclear limit of how it can be reconciled with

the idea SHs act on their own behalf when they vote.o Shift toward oppression

Allen v Gold Reefs of West Africa Ltd. (1900 England )

Zuccani owned a number of fully paid-up shares and non-paid-up shares in the corporation, (could “call” on shares). Z passed away, his estate was composed mostly of paid-up shares. Articles of incorporation provided that the corporation had a lien for all liabilities of shareholder on any shares which were not fully paid-up, but not those that were fully paid. Corporation tried to amend its articles to give itself a lien on Z’s fully paid-up shares. Extraordinary meeting of shareholders called to pass a special resolution amending the lien article – this is detrimental to minority (Z’s estate)

Can the majority give itself a lien over Z’s fully paid shares without his consent?

‐ Suggests some limits on what majority can do, must exercise power “bona fide for the benefit of the company as a whole”

-Yes, the majority can do this because they are acting for the benefit of the corporation as a whole

- Issuing shares for less than full value w/ right to “call” on SH is no longer permitted under the CBCA s. 25(3). Still allowed under QBCA 53.

Greenhalgh

In Greenhalgh minority is losing opportunity to control the composition of the corporation, and the shares are being purchased by a third party

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(stranger) The minority may also be losing an opportunity to acquire control of the

corporation at a fair market value, which may also be less than what the third party is willing to pay

Case illustrates that the apparent limits on the voting of the majority was largely ineffective in protecting the minority SH’s

Greenhalgh v Arderne Cinemas Ltd. (1951 England)

The corporation’s articles of association stipulated that the corporation’s shares shall not be transferred to an outside party if any SH is willing to purchase the shares at a fair value. The corporation’s managing director and owner of a majority of the shares, wanted to sell his shares to a third party. A special resolution was passed at a meeting of the SH’s to allow a SH to sell shares to a third party with the assent of the SH by ordinary resolution. (Managing director held majority of shares, could ensure ordinary resolutions passed). G, a minority SH, brought an action for a declaration that the resolutions were void

Was the special resolution void?

‐ The test is whether the shareholders honestly believe the move is in the best interests of the company as a whole

‐ Dafen’s objective test of the interests of the company as a whole was rejected

‐ Further, the “company as a whole” is the shareholders, at least as represented by the hypothetical individual shareholder

‐ In considering the best interests of the corporation, SH can consider his/her own interestResolutions were valid, were passed bona fide and the purchase price paid for the shares was fair

2. Under statute

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Minority Protection

Representative (or derivative) action, compliance and restraining order and oppression remedy are the remedies. Each of these remedies have developed out of a concern to provide valuable protection to minority shareholder, but they also serve to protect others such as the corporation itself, outsiders, ordinary creditors.

To the extent that these devices can be invoked by outsiders, it is a stretch to refer to them as principles of corporate governance. Most outsiders don’t care how the corporation is governed: they are only concerned with the consequences of corporate conduct. It is probably more adequate to speak of these remedial devices as such, and not as principles of corporate governance. They are used to redress harm or inequitable conduct that may have been imposed on any given person through the corporate structure.

Corporate law remedies – Standing

CBCA 238 / QBCA 439 – govern the question of standing for the purposes of ALL CORPORAYE LAW REMEDIES. Caveat – section 237 CBCA expressly permits creditors to bring an application for a compliance and restraining order (enforcing the terms of). In the QBCA, equivalent provision is s. 460 (any interested person). Standing rules are broader for compliance and restraining orders.

S. 238 defines standing by providing who is a complainant A “complainant”

o Named individual: registered current or former holder or beneficiary holder of a security

o Any current or former directoro Any other proper person in the eyes of the court.

s. 439 QBCA Holders of bonds or securities in private company are excluded (not publicly) The any proper person is here a person “that has the quality or the interest

required to bring an application”o Courts may look more closely at the nature of the applicant’s personal

stake or interest in the corporation or in a transaction with the corporation.

Under both statutes, shareholders, current and former directors, holder of debt securities (even if through a trustee) are all in.

Employees don’t have standing, former shareholders, creditors (that don’t have registered debt obligations) are out, only to the extent that they may not be found

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proper person. They don’t have automatic standing, but on a case by case basis, it is possible for them to be granted standing if it is “just and equitable”.

First Edmonton Place Is the applicant a complainant? Yes by virtue of being a proper person for the

derivative action but not for the oppression claim How does one establish standing? There is no test for determining who

qualifieso It is determined through exercise of discretion of the court. o Discretion is granted for a particular purpose so it can be limited by

virtue of this purpose: power to do justice and equity where a person who would not otherwise be a complainant ought to be allowed to bring a claim that would not be remedied or to get redress.

How do we engage “justice and equity”o You could show that a wrong has occurred that would not otherwise

be remedied through a personal action because you can’t sue, say in contract.

o You show that the wrong reflects a problem of managerial or shareholder accountability. – Derivative action ensures managerial accountability.

o The applicant must be a person who could reasonable be entrusted with the interests of the corporation.

The view that you need to have personal economic interest has been rejected.

For an OPPRESSION claimo Need to lead the court to believe some evidence of unfair prejudice or

disregard for the interest of a security holder, director, shareholder. How do creditors establish that they are proper persons for OPPRESSION

CLAIMo Where it is alleged that directors or officers have defrauded the

corporationo Where it is alleged that D of O caused the corporation to breach an

underlying expectation between the corporation and the creditor Here

o Derivative action – yes proper person Breach of fiduciary duty because of conflict of interest. They

took the money out of the corporation. Who else would sue on behalf of the corporation? It wouldn’t be remedied!

o Oppression claim – standing denied Some evidence of fraud but no evidence that is was

perpetrated against First Edmonton Place. It was fraudulent regarding the numbered corporation. FEP was dealing with the corporation, not the lawyers personally and hadn’t investigated if the company was well-capitalized

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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.

Sands motor motel, crown had standing because of unpaid tax bill Biothech electronics – no standing Richards – a new SH has standing even if the conduct occurred before the

purchase of shares Concrete – employee does not have standing for oppression claim if claim

based on wrongful dismissal

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Derivative action

Claim brought on behalf of the corporation to redress a wrong against the corporation itself. This can be a tort, breach of k, breach of fiduciary duty, breach of confidence, etc.

The person who gets standing has to act in the interests of the corporation. They are serving its interests, not their own. Any remedies awarded are hence awarded to the corporation (presumptively, courts can order that remedies be paid out to individuals) because the wrong has been done to the corporation.

It is required given the artificial nature of legal personality. They are capable of attracting rights and of suffering legal wrongs where rights are violated, but they can’t enforce their rights on their own. Just as agents execute business interests, representatives exercise the legal interests. Where the BoD acts, there is no need for representatives. Directors have independent authority to bring actions on behalf of the corporation (no need for authorization). But it may happen that the appointed agents refuse to talk action, especially if the action is premised on wrongdoings of the agents. Generates a problem: corporation may suffer a legal wrong (the costs being borne by shareholders) that could go unremedied if directors don’t act.

QBCA 445-447 & CBCA 239-240

CBCA Entitlement – 239(1) Limits – 239(2)

o Court has to be satisfied that Complainant have given notice of minimum of 14 days and

directors have not done anything, that the complainant is acting in good faith Has to be in the interests of the corporation that the action be

brought Powers of the court – 240

o very broad – may at any time make any order it thinks fit, including but not only, authorization of complainant to control the action, give directions for the conduct of the action, direct any amount to be paid to former and security holders or its subsidiary, order the corp to pay legal fees of the complainant

QBCA Entitlement – 445

o virtually the same as CBCA Limits – 446

o Same as the CBCA too Powers of the court – 447

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o DIFFERENCEo Specifically provides for categories of orders

Concern that court has the power to amend articles, by-laws USAs and hence revise functioning of the corporation

Can order removal of directors and can appoint new oneso Controversial powers because allows court to derogate from the

rights enjoyed by insiders.

These actions are typically a remedy for minority shareholders. Minority protection is however not the immediate purpose underlying a derivative action. The purpose is that is enables redress to be pursued for wrongs done to the corporation. To the extent that these wrongs also harm SH, a remedy may protect SH too by deterring future wrongdoings or if compensation paid directly to them is ordered.

Derivative actions v Personal actions Actions are not usually concerned about the company. Individuals that feel

they haven’t had their voice heard or that there own interests have been harmed are usually the motive.

Courts typically look through the corporate structure to the wrongdoing alleged.

Courts recognize derivative actions are not a forum for arbitration of personal claims

Personal interests usually underlie these actions, but must still allege a wrong to the corporation. Courts police boundaries between derivative and personal actions.

Farnham Determining the nature of claims. Even where statements are poorly stated,

courts recognize some might be concurrent claims. If it is possible to isolate a derivative claim, courts will recognize that and order it to pursued the proper way.

Breach of fiduciary claims go to corporation, not the SHs and is hence derivative in nature.

Options of rectification are either strike and amend the statement of claims, or strike the claims with leave to amend or dismiss the action without prejudice to properly stated claims

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.

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Goldex Mines Redress for wrong to the corporation has to be obtained through derivative

actions Important to distinguish personal wrongs from wrongs to the corporation.

o A personal action cannot be brought on the fact that the value of the share has gone down.

o If the injury you suffer rises independently from the corporation, you might have a personal claim. It has to be independent from the economic loss related to the corporation.

Minority SHs are entitled to protection irrespective of legal wrongs that may or may not be established against the corporation. The principle of majority rule is balanced by the requirement for the majority to act fairly and honestly.

o Is this similar to making majority SH fiduciaries? – In KeepRite it was said majority SH are not fiduciaries. No, not a fiduciary standard.

Breach of a statutory duty gives rise to a personal action, here – information has to be sent to shareholders. But this is intrinsically linked to the corporation too. Can bring a personal claim and apply for standing to bring a derivative action, but cannot do both together.

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.

Where a claim involves concurrent wrongs (personal and derivative based), the personal wrong can be severed and pursued separately. Then decide if you also want to bring the derivative action.

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Pre-Requisites

Noticeo CBCA 239(2) (a) & QBCA 446

Have to have 14 days before bringing the action Notice does not have to be particularly detailed as to content

regarding nature of the claims and supporting facts (because they don’t necessarily have access to evidence and relevant information) – see Armstrong in casebook. Pointing out general area of concern is sufficient

Good faitho CBCA 239(2)(a) & QBCA 446

Not clear what GF means in this context. No real content, not obvious what you say to prove you are

acting in good faith No case law on this, very vague Unlikely to prevent a claim

In the corporation’s interesto CBCA 239(2)(c) & QBCA 446

Appears to be in the corporate’s interest (court’s POV) Any evidence of a clear and egregious violation of an

established right held by the corporation is enough to establish prima facie that it is in the corporation’s interests.

Courts can use the BoD’s inaction as a factor saying the claim isn’t important – look at the independence of this decision-making

Will also look at ratification (or not) although approval is merely a factor, not decisive in and of itself – 242(1)

Onus is quite low – need only be an arguable case (requirement, after all, is only an appearance of best interests).

Oppression

Common law equitable concept. At common law, it was only available in highly specific cases. It was only available in egregious, fraudulent abuse of power to the detriment of a minority shareholder. It was highly exceptional limit on the majority rule. It could only be invoked by minority shareholder in abuse of bad faith. Extremely rare – seen as an attitude of respect for the majority rule. Price of deference to corporate constitution meant lots of abuse wasn’t being redressed.

Modern statutory oppression remedy is completely different and much more robust.

o QBCA is narrower than CBCA remedy

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Statutory sections

Standing: CBCA ss. 241(1) & 238 / QBCA s. 439o QBCA registrar does not have standing nor do holders of debt security

in private corporations Grounds for remedy CBCA s. 241(2) / QBCA s. 450

o QBCA – same as CBCA but omits “unfair disregard of the interests”. Not clear how significant this omission is. Can be significant because supposedly the broadest category for claiming under the oppression remedy in the CBCA

o Whose conduct are we concerned with? Directors Constituents

o Whose interests are protected? CBCA – individual directors, individual officers, creditors,

security holders But creditors do not have standing under 238, will have

to establish “proper person” standing QBCA – creditors are excluded and do not receive protection

Has been believed that creditors have been litigating opportunistically under the oppression remedy (taking advantage of it). Generally, creditors should be responsible for protecting themselves.

Powers of the court CBCA s. 241(3) / QBCA s. 451o They aren’t defined or circumscribedo Courts have essentially unlimited powers and they can issue any

remedy they see fito A court may NOT order a payment be made to shareholders if it would

prejudice the ability of the corporation to pay the liabilities it owes (this is the real protection creditors get)

Shareholders only have a residual claim whereas creditors have a contractual claim.

Breadth of the remedy

o 3 standards under statute

Don’t have a meaning in law. Courts have defined these and in doing so, have kept in mind the remedial nature of the remedy. The standards were not intended by legislators to function as liability rules per se, they aren’t norms capable of guiding conduct. They are instead standards intended to signal the availability after something has happened.

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Judges have virtually unchecked powers to fashion remedies. Courts may amend by-laws, issue securities (things directors presumptively have), may order the corporation be wound up, amending articles of incorporation (shareholder powers). Essentially have unlimited authority over the corporation and its constitution.

This seems to signal a new vision of the court’s role. Signals an active role in regulating corporate affairs: wherever interests have been unfairly affected, the courts can engineer a response, and this may involve traditional remedies (as is usually the case), but it can do much more.

See pp. 514-515 & 537o Oppression

Historically means “consequences that are especially harsh or burdensome”. Looking at impact on the interests of the complainant.

“Burdensome, harsh and wrongful” – Mayer (1959) Line of English cases that interpret is more narrowly: harsh

consequences required with additional proof of bad faith/fraud.

o Unfair prejudice “Detrimental or damaging to the applicant’s right or interest

and inequitable or unjust” – Diligenti (1976)o Unfair disregard (only under CBCA, not QBCA)

Interests of the complainant have been unfairly overlooked and set aside

“Unjustly or without cause, pay no attention to, ignore or treat as of no importance the interests of security holders, creditors, directors or officers of a corporation” – Stech v Davies (1987)

Westfair Foodso All the common shares were held by a sole shareholder. In changing the

policy, he was effectively expropriating corporate assets and lending them back to the corporation. Because his debt was secured, it would take priority over the other shareholders.

o Are we looking at intent of the actions or outcome?o We are focusing on outcome, not intent. The remedy turns on effect.

While bad faith might be relevant, it is not a pre-requisite for the remedy.

o Impact on majority rule and scope: o Scope: governs all activities of the corporationo MR: the legislator intended to modify the majority rule

o Principles of corporate governance define rights and obligations of constituents. They articulate decision-making structure. Oppression remedy allows that we look through the corporate structure. Behind it, there are

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individuals with rights and expectations that are not submerged in the corporate structure.

o Remedy requires expectations generated by these relationships. Has the company acter in accordance with these expectations? Contrasted with fiduciary duties of managers

o Meaning of oppressiono Provisions say classes mentioned in the act are to be treated fairly by

the corporation. Concern with being too specific. Repetition of overlapping ideas is concern from the parliament that they been interpreted narrowly. How can we be more specific about what is required to avoid liability?

Act in the interests of shareholder in aggregate. o What interests are protected by the remedy?

It doesn’t protect all the interests of the complainant. The only protected ones are those engaged by expectations you have that were nourished by the corporation or constituents.

We regulate by the expectations one party encourages. We protect the interests made vulnerable by expectations

raised by the corporation or constituents through its/their conduct or representations

o Relevant evidence?o All words and deeds of the parties on an ongoing basis are relevant.

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

Westfair Foods Ltd. v. Watt (1991 Alberta CA)

The corporation had 2 classes of shares. The preference shareholders were limited to a fixed annual preferred dividend ($2 per share) but were entitled to share in surplus assets, including earnings, in the event that the corporation was wound up. Historically, the corporation retained much of its earning, and paid low dividends to common shares and

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the required amount only to preferred shareholders. This policy changed, most earnings began to be given out as dividends, and common shareholders now received much higher dividends than the preferred shareholders. Now there were fewer retained earnings to be divided up upon (a theoretical) wind up.

Are the preferred shareholders entitled to relief under the oppression remedy?

‐ (lower court found it was oppressive, ordered class A shares be purchased by Westfair at a judicially determined price, sole shareholder who held all the common shares was effectively expropriating the corporate assets, by paying such large dividends, and then lending this same money back to the corporation as secured debt, changing his interest in the company from equity (with less security upon windup) to secured debt)

‐ The preferred shareholders (by opting to be paid dividends in lean years, when the common shareholders would receive nothing) did not have a reasonable expectation to share in future profits, no expectation corp would retain majority of earnings

‐ Court will consider the extent to which these shareholder expectations have been nourished by word or deed (giving rise to reasonable expectations) Policy not oppressive, but manner in which it was introduced was, upheld judicially ordered sale

Deluce Holdings v Air Canada Identifying expectations

o Mutual expectations of good faith in acting in the interests of Air Ontario

o Contrary to the expectations that employment would be terminated to allow AC to trigger its option. Should he be terminated, it should be for cause, in the interests of Air Ontario.

Oppression remedy considers interests, not legal rights in its application Fiduciary duty and oppression

o The directors nominated by AC had a FD to Air Ontario (normal fiduciary duty under 122 CBCA), even if AC effectively controlled AO’s BoD

AO’s BoD allowed itself to be used and acted in the interests of AC not AO

o BUT, they also had a duty in favor of Deluce Holdings from SH to SH which was the basis of the reasonable expectations.

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On the same facts, there is breach of FD (could lead to a representative action) and a case for oppression

Bad faith is not essential Don’t have to prove material injury, provided that there was a reasonable

prospect of loss. Terms of a contract trump other evidence in determining what reasonable

expectations are. Indicia of oppression

o Lack of valid corporate purpose for conducto Unreasonable failure to act at arm’s lengtho Discriminatory treatment of some SHso Inadequate disclosure of information

Deluce v Air Canada (1992 Ontario)

AC had 75% of Air Ontario shares, Deluce the other 25%. AC had 7 “nominee” directors, Deluce 3. USA said AC could acquire Deluce’s shares when last Deluce family member terminated employment. AO terminated them, said cause of conflict of interest & they were too costly, & AC calls for arbitration to determine value of shares. Court found they were terminated so AC would get 100% of AO.

Did AC’s conduct constitute oppression?

‐ Court held that s. 241 goes beyond “oppression” but also conduct that is “unfairly prejudicial” and “unfairly disregards” the interests of Deluce - broader grounds than oppression

‐ Court finds that it was not the intention of the parties to permit AC to trigger its call on the Deluce shares at will in this way

‐ Only a termination in the best interests of Air Ontario can constitute “termination” with the meaning of the USA – Deluce had ‘reasonable expectation’ that this was the case

‐ ‘reasonable expectations’ – not ‘wish list’ but expectations part of “compact of the shareholders”

‐ Courts may consider relationship between the SHs

‐ When assessing directors conduct, consider what was ‘uppermost in their minds’ AC’s conduct was oppressive and unfairly prejudicial to Deluce and their interests under the USA. Court ordered a stay of the arbitration proceedings

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Note: wrongful dismissal alone will not justify oppression, unless the interests of the employee are “closely intertwined” with his interests as shareholder & trying to exclude him

BCE v 1976 Debentureholders Conflict between SH and debenture holders, Board is not liable because one

group has been privileged over another. In competing interests, if conduct can be justified for corporate interests, there is no oppression.

On appeal, oppression issue is not decidedo BoD has to take into account the non-contractual interests of the

debenture holders. It is not enough that they be merely considered, the BoD has to actively protect the interests of the debenture holders by taking steps to minimize adverse impacts on the debenture holders. Because it did not do this, it acted unfairly.

SCC finds no oppressiono Had a duty to consider the interests, but the reasonable expectations

of the debenture holders were defined in their contracts, and the contractual terms attached to the debentures were respected.

o Conflicting approaches to oppression? 2 approaches

Emphasize a strict reading of the categories in the CBCA Focused on principles of fairness and reasonable

expectations. This one has dominated. Favored approach combines both. One should look at the

principles underlying the categories. One must then determine if the conduct falls under the 3 categories

o STEP 1 – Determine the reasonable expectations of the parties. Have they been breached

o STEP 2 – If they have been breached, have the expectations been actionably violated? Not all violation is actionable. Is has to fall under oppression, unfair prejudice or unfair disregard.

BCE (2008 SCC)(again)

Teachers Pension offered to purchase all BCE shares. The proposed sale would mean BCE would acquire major new debt, would reduce value of bonds held by various debenture holders of BCE. Debenture holders protested, held directors breached fiduciary duty to corporation by favoring its shareholders over its debenture holders.

Did the directors’ actions constitute oppression of the debenture holders? Did they have reasonable expectations this would not happen?

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Terms in s. 241 (oppression, unfair prejudice, and unfair disregard) cannot be put in “watertight” compartmentsBest approach:

(1) Look at reasonable expectations of SHs

(2) If a breach of reasonable expectation is established, then consider whether conduct is oppressive, unfairly prejudicial, or unfair disregardOppression is equitable, fact specific, conduct oppressive in one situation may not be in another

Examining ‘reasonable expectations’

‐ Not every unmet expectation will give rise to a claim under s. 241

‐ Focuses on fairness and equity rather than legal rights

‐ Key factors include:

. 1) Commercial practice Departure from normal business practices that has the effect of undermining exercise of legal rights may give rise to a remedy

. 2) Nature of the corporation (widely held, sophisticated? Closely held?)

. 3) Relationship between the parties (family? Friendship?)

. 4) Past Practice (Westfair) Note: practices can change over time, and where valid commercial reasons exist for the change, and it does not undermine the complainant's rights, there is no reasonable expectation that there will be no change

. 5) Preventative steps available? (to protect self)(e.g. should have got personal guarantees from directors in First Edmonton)(USA?)

. 6) Representations and agreements? (e.g. public statements)

7) Fair resolution of conflicting interests (not SH primacy)

‐ BCE had issued explicit warnings to debenture holders not to develop expectations that BCE would always retain investment grade ratings

‐ Complainants could have protected themselves by negotiating appropriate contractual terms

‐ They are sophisticated parties

‐ Directors did consider their interests, that’s all they had reasonable expectations that they would do, met obligations

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‐ Commercial practice confirms that these types of leveraged buyouts are not uncommon

Nature and size of corporation also undermines claim of reasonable expectations

‐ Based on history of relationship, it was foreseeable that an arrangement of this type might occur

‐ (failed at (1) so didn’t have to consider (2))

Actions of the directors did not constitute oppression, debenture holders did not have a reasonable expectation that BCE would protect their interests and put forth a plan of arrangement that would maintain the investment grade trading value of their debentures

Relationship between oppression remedy and derivative action

Going back to First Edmonton

Under QBCA, this goes nowhere because QBCA does not protect creditors HELD: no standing for oppression remedy Background to statutory remedies

o Achieve a balance between those who have competing interests in a same corporation. Shareholder was little more than an aspiration under common law.

o Deliberate choice of omitting creditors in QBCA: concern that heightened litigation (driven by creditors) would cause contractual uncertainty.

Discretionary nature of the remedyo Express intention of Parliament that courts get broad discretiono Expansive view of the courts role in balancing interestso Introduction of this remedy is a deliberate departure from the

principle that courts don’t intervene in business management Relationship between derivative action and oppression remedy

o They have one thing in common: all corporate law remedies in some sense are concerned in substantial part with problems of abuse of power. This is the underlying theme. The different remedies go to differences in the abuse of power

Oppression = focus on abuse of de facto power or legal power

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that causes injury or prejudice to the interests of a stakeolder (named within the remedy)

Function of remedy: gives the court wide discretion to remedy any corporate conduct that is unfair. It provides a broad basis for liability with enormous potential for controlling corporate behavior

Scope of remedy: very broad (intentionally) but some definition of scope is vital. How is it defined?

o Abuse of power in relationships marked by inequality. Underlying relationship needs to have inequality. Relief not available where power and authority are equally divided. Not available to assist those on equal footing.

o Has to be applied with respect shown to the principle of majority rule. This is the presumptive norm and the courts will be looking for evidence that the majority have acted in a way that is abusive and exacerbates an existing inequality.

Focus is made on conduct, not intent. Looking at the 3 grounds for the remedy, inclined to

take a favorable approach looking to general fairness Derivative Action = focuses on fiduciary breaches, abuse of

power that results in a legal wrong to the corporation Compliance order (247CBCA) = focuses on acts contrary to the

terms of the corporate constitution How do we find evidence of fairness?

o Look at History and nature of the corporation Essential nature of the relationship between corporation and

Complainant Type of rights affected General commercial practice

o In assessing these factors, look at the underlying expectations of parties within the scope of their relationship, focusing on the complainant. Could the complainant have protected himself? Have the complainant’s PROTECTED interests been harmed?

More about CREDITORSo These interests have recognition under ABCA (case at bar) and CBCAo Assumption they will negotiate to protect their interestso Management must retain some freedom to make decisions that may

and likely will harm creditors’ interests. There might be sound business reasons to breach contract. It can’t be the case that any breach of contract or corporate decision that results in damage to the creditors can be redressed by oppression remedy.

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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

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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Hercules Managements v Ernst & Young

Auditor’s duty goes to she shareholder as a group to make sure they are accountable to the corporation. No duty to the shareholders personally in their personal interests. Duty for shareholders as a group acting for the corporation

Personal v Derivative actionso They can arise concurrentlyo SH cannot raise personal claims in respect to harm done to the

corporation (use DA)o Where separate en distinct claim, a personal action may lieo No basis for a personal claim here. Claims were derivative in

substance Identifying corporate interests

o Auditors owe a duty of care to the corporation AND to SHs AS A GROUP acting for the corporation.

o Corporate interests may be identified with the interests of SHs as a group.

SH controlo Usually, voting rights are incidents of property rights of shares. La

Forest suggests SH wield power over the corporation on behalf of the corporation, acting for the corporation and not for themselves. IN supervising management, SH must be seen to be acting as a body in respect to the corporations interests rather than individuals acting for their own ends. They assume what can be seen as a managerial role.

o Consequence of this view as that SHs as a group are fiduciaries for the corporation.

o Normally though, we distinguish managerial power and SH power. o Assuming La Forest is wrong, implications on the case? It would seem

the distinction he wants to draw between personal and derivative actions are flawed. If SH do not hold their powers for the benefit of the corporation and for themselves, negligent preparation of reports material to voting rights would not seem to amount to a wrong to the corporation, but rather a wrong to the SHs. Maybe they are affected as a group but that is beside the point.

Fiduciary duties are owed by managers to the corporation. They are not owed by shareholders. Oppression is a broad remedy however. The primary concern is not one of ensuring quality corporate governance. FD are designed to ensure managers exercise their duties. Oppression seeks to protect reasonable expectations against unfair treatment. FD are principles of corporate governance

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Hercules Managements Ltd. v. Ernst & Young (1997 SCC)

Shareholder alleges was injured by an inaccurate report prepared by accountants.

Does auditor owe duty to SH personally or just to the corporation?

‐ Where wrongs have been done to the corporation, the corporation is the proper pl, not the SH, don’t owe duty of care to SH if doing audit for corp

‐ If shareholders rely on negligent report in making decisions for the corporation, they do so as a group acting in the interests of the corporation

Just the corporation. Shareholders not acting as individuals.

Oppression and Remedies

Naneff

There is oppression but remedy was inadequate Scope of remedial discretion

o Discretion is essentially unlimited and power or appellate review is based on error in principle. In this case, there is such an error.

Factors in exercising discretiono Can only be exercised for the specific purpose of RECTIFYING

oppression, not about deterrence.o Rectification implies correcting an imbalance, not reversing it. o Only protects the interests of named groups in the statute. Any

rectification can only be made with the person’s interests as member of said group.

Here, first remedy gave an opportunity to Alex he never could have reasonably expected to hold.

Naneff v Con-Crete Holdings Ltd. (1995 Ont CA)

Father had a successful business, and he made his two sons (Alex and Boris) equal owners of the common shares. The father retained complete control through redeemable voting preferred shares, and these shares gave him the power to declare dividends. There was a falling out with A, and the father decided to remove A from the business and exclude him from any participation in the business. Trial court found

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the father’s actions were oppressive and ordered that the business be sold as a going concern, with any the parties being entitled to purchase it. The father was unhappy with this remedy, as it gave A the opportunity to acquire the business himself.

What is the appropriate remedy?

‐ Discretionary powers in the oppression remedy can only be used to rectify oppressive conduct

‐ Cannot be used to protect applicant’s interests in roles other than those related to the corporation, (shareholder, creditor, director, or officer), e.g. son

‐ Trial judge’s remedy did more than rectify the oppression, it gave to A an opportunity he never reasonably expected: the chance to have full control of the family business – (don’t interfere more than necessary) Court substituted an order to have the father and B acquire A’s shares at fair market value

BCE v 1976 Debentureholders

BCE (2008 SCC)(again)

Teachers Pension offered to purchase all BCE shares. The proposed sale would mean BCE would acquire major new debt, would reduce value of bonds held by various debenture holders of BCE. BCE said that the terms of the holders’ debentures would be respected. There were however no terms on assumption of additional debt or change of control by Bell Canada in the debenture contracts. The bid proposed the BCE SH a 40% premium on the shares but also $30b in debt and the value of debentures would be reduced by 20%. Debenture holders protested, held directors breached fiduciary duty to corporation by favouring its shareholders over its debenture holders (planning arrangement issue), and claiming oppression.

Did the BCE directors’ actions constitute oppression, i.e. fail to comply with the reasonable expectations of the debenture holders?

Terms in s. 241 (oppression, unfair prejudice, and unfair disregard) cannot be put in “watertight” compartments

Conflicting approaches (???), but this seems to be the best one, says the court. This isn’t entirely true, or at least unclear why it was necessary to go through this, but it nevertheless it gave the court leeway to do what it wanted.(1) Determine what the reasonable expectations of SHs are and whether they have been breached(2) If a breach of those reasonable expectations is found (meaning that we must consider whether there are conflicting interests at play, as there was here btw debentureholders and directors), was that breach actionable?

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Examining ‘reasonable expectations’ Not every unmet expectation will give rise to a claim under s. 241 Focuses on fairness and equity rather than legal rights: in general, “fair treatment” is most

fundamentally what stakeholders are to reasonably expect Reasonableness: the holding of that expectation must be reasonable, considering

1. Commercial practice Departure from normal business practices that has the effect of undermining exercise of legal rights may give rise to a remedy

2. Nature of the corporation (widely held, sophisticated? Closely held?)3. Relationship between the parties (family? Friendship? Contractual?)4. Past Practice (Westfair) Note: practices can change over time, and where valid commercial

reasons exist for the change, and it does not undermine the complainant's rights, there is no reasonable expectation that there will be no change

5. Preventative steps available? (to protect self)(e.g. should have got personal guarantees from directors in First Edmonton)(USA?)

6. Representations and agreements? (e.g. public statements)7. Fair resolution of conflicting interests (not SH primacy)

Application Oppression is conduct that is coercive and abusive – suggests some kind of bad faith, but unduly

burdensome and harsho Not too clear whether bad faith is in fact necessary

Reasonable expectation (the soft version – that BCE directors would consider the position of the debentureholders and their interests in keeping the debentures’ trading value) was accepted by the CA, SCC agrees

The evidence shows that the directors considered the interests – so the reasonable expectation was fulfilled, but no further commitments were given

o They were sophisticated partieso BCE had issued warnings cautioning the debentureholders not to form expectations about

retaining investment grade ratingso BCE engaged in a fair and reasonable bidding process – attracted three bids which were all

leveraged buyouts. All of them would have incurred a lot of debt and thus probably would all have affected the debentureholders negatively

o There was nothing that BCE ought to have done to prevent this situation, shit happens Nowhere is there evidence to show that BCE ought to have maintained the debentures’ investment

trading value

BCE had issued explicit warnings to debenture holders not to develop expectations that BCE would always retain investment grade ratings

Complainants could have protected themselves by negotiating appropriate contractual terms They are sophisticated parties Directors did consider their interests, that’s all they had reasonable expectations that they would do,

met obligations Commercial practice confirms that these types of leveraged buyouts are not uncommon Nature and size of corporation also undermines claim of reasonable expecations Based on history of relationship, it was foreseeable that an arrangement of this type might occur (failed at (1) so didn’t have to consider (2)) Actions of the directors did not constitute oppression,

debenture holders did not have a reasonable expectation that BCE would protect their interests and put forth a plan of arrangement that would maintain the investment grade trading value of their debentures

Notes Some have thought BCE creates a stricter test for the oppression remedy

o Clear retreat from regard for reasonable expectations more structured test now = stricter

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It means greater deference to Boards of directors’ decisionso “triumph of procedural over substantive fairness”o If management can demonstrate that interests of all stakeholders were considered, they

will be protected in their decisions made, notwithstanding the fact that they have disappointed expectations of some of them

o Some say that the Court lost its way and failed to encourage other courts to police corporate governance and missed the point of the oppression remedy?

Court recognizes that there is a practical norm that directors will manage with a view to increase share value

Law v equity (???)o Equitable remedy – discretionary power will turn on the factso But we were told in other cases we should look at expectations and not legal rightso Tension btw contractual rights of stakeholders and any non-Kal expectations that may

come up in the course of the relationshipo K defines the reasonable expectations? No – need to go beyond that

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Important statutory provisionsI. Forms of Business AssociationsA) Partnerships – common lawOntario Partnerships Act

CCQ

2 2186 Description and nature: persons carrying on a business in common with a view to make a profit! (Q) “spirit of cooperation”, combining property and sharing profits, requirement of contract

3 2186 Rules for determining existence of partnership vs joint tenancy or co-ownership

4 Lender not entitled to any recovery until claims of other creditors are satisfied

5 2225 Firm = partnership collective; may sue and be sued in its own name, despite not being a legal person

6 22192220

Power of partner to bind firm! (Q) 2208 use of property in accordance with destination of the firm, partners amy oppose transaction entered into on behalf of firm

7 2215 al 2 Partners bound by acts done in firm’s name

8 Partner using firm’s credit for private purposes = personal liability

9 Notice to the firm that it will not be bound by a certain partner’s act is binding

10 2221, 2246 Joint liability for obligations while the person is partner; J&S after partner’s death for outstanding obligations(2) LLP: limited partners not liable for negligence of other partners in the partnership’s business, or any debts incurred while the partnership is a LLP (3 and 3.1) limitations to limited liability (4) limited partner not proper party to action (5) does not apply to extra-provincial LLPs

11 Liability of firm for wrongs, to the same extent as the partner’s liability

12 Misappropriation of money received for or in custody of the firm: firm liable

13 Partners jointly liable as regards each other, and J&S for all liabilities of the firm while he is a partner

15 2222 Liability for holding out as a partner, even if not partner;! (Q) 2222 al 2 partnership not liable unless it gave reason to believe the guy was a partner

16 Admissions/representations of partners are evidence against the firm

17 Notice to acting partner = notice to the firm

18 2221 Liability starts upon becoming a partner! (Q) partner liable for partnership’s obligations contracted before he became a partner

20 Mutual rights and duties of partners may be varied by consent (express or inferred from course of dealings)

21 2208 (1) Partnership property (2) devolution of land (3) co-ownership of land purchased with joint profit made from another land

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22 Presumption of partnership property where bought with partnership money

24 22022205

Rules as to interests and duties of partners: equal share in capital, indemnification by firm, obligations to take part in mgmt….! (Q) indemnification: requirement of good faith

25 2203, 2209, 2229

No expulsion of partner! (Q) if a non partner acquires a share in partnership by onerous title without consent from others, any partner may exclude him within 60 days of learning; 2229 downright expulsion is possible by majority vote

26 2226, 2227, 2228

Retirement from partnership at will, must give notice

27 Presumption of continuance after expiry of term, arising from continuance of business

28 Duty as to rendering accounts: true and full info

29 Accountability for private profits, extends to survivors and representatives of deceased

30 2204 Duty of partner not to compete with the firm

32 2230 Dissolution by expiry of term or at will

33 Dissolution by death or insolvency of partner

34 Dissolution by illegality of business

35 Dissolution by the court if partner is incapable or it affects prejudicially the carrying on of the business, discretion!

36 2234 Outsiders entitled to treat apparent members as such even though a change in constitution has occurred

B) Partnerships – civil law

II. Nature of the Co.A) Corporate constitutionCBCA QBCA

146 USA

146(1) 213 USA: modifying or removing directors’ powers and transferring them to SH

146(5) 214 Transfer of rights, obligations and liabilities

215 Disclosure of existence to Registrar

216 Names of transferee SH to be disclosed if all director powers are removed

146(2) 217 Sole shareholdership

146(3) (4) 218 Constructive party, notice to transferees

219 Termination

146(6) 220 Transferees’ discretion may be fettered

247 460 Restraining/compliance order –! (C) “complainant or creditor” (Q) “any interested person”

301-303 CCQ Legal persons have civil rights

B) Corporation = legal person

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CBCA QBCA

15(1) 10 Capacity, rights, privileges of a natural person; legal personality;! (Q) date of constitution is on certificate of registry

45(1) 224 SH immunity for Co. acts! (Q) SH debtors to the Co. for unpaid amount on share capital

25(3) 53 C: No issuance of partly paid sharesQ: issuance of partly paid shares is possible

III. Corporate liabilityB) In contract lawCBCA QBCA

16(3) 13 Ultra vires doctrine abolished

17 12 No constructive notice

18(1) 13 No defence if Co./agent “held itself out” /(Q) presumption that directors and officers are lawfully carrying out their duty

18(2) 14 Exception: if outsider ought to have known of the situation by virtue of its relationship with the Co. or the agent

15 With respect to outsiders, presumption of acting in compliance with documents

IV. Incorporation

5 4 Incorporators, may be bodies corporate

3 One or more founders

6(1) 5 Form and contents of articles of incorporation

6(3) 7 Special majorities in articles or USA prevail over Act

8 List of directors, addresses, other documents must be filed with articles, unless list has been provided on application under LPE

7 9 Articles and all documents + (Q) fee must be delivered! (C) fee provided for under 261.1

8 Issuance of certificate mandatory; exception if notice to Director indicates the Co. would be incompliant with Act

9 10 Date on the certificate OR date of issuance of certificate (if it is backdated for example)! (Q) date/time on certificate confers legal personality

10(1) 16, 20 Corporate name must include “Ltd” or smth (exemptions exist) / Q requirements insist on non-confusion and not falsely misleading! (Q) much more specific

10(5) 19 Publication of name on all communications emanating from the Co.

12(2), 13(1) 25 Direction to change name; revocation possible if no compliance after 60 days, certificate of amendment necessary! (Q) registrar must notify all persons concerned before directing name change and give opportunity to submit observations

38 Documents of the Co. are proof of their contents subject to contrary evidence

14(1) 320 CCQ Personal liability for A who contracts on behalf of Co. before it comes into existence

14(2) 319 CCQ Adoption of pre-incorporation K

14(3) Court may enforce obligations under pre-inc K against Co. and the person who contracted on behalf of Co., whether or not adopted

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14(4) 320 CCQ K may exclude personal liability

V. Corporate managementA) The role of managementCBCA QBCA

102(1) 112 Duty to manage and supervise officers, subject to any USA

102(2) 106 Number of independent directors

103 113 Power to make, amend, repeal by-laws, subject to SH approval; SH can propose by-laws

114 Substantially similar by-law must be confirmed by SH

105(1) 108 Qualifications of directors

106 110 Notice, (3) subsequent elections, (4)staggered terms, (5)no stated term, (6)incumbent directors, (7)vacancy among candidates, (8)appointment, (9)effect of appointment

106(2) 107 Initial term of office

106(3) 110 al 1 Subsequent election and term

106(5) 110 al 3 No stated term

106(8) 153 Additional directors appointed – may not exceed 1/3 of the number elected at previous meeting! (Q) only for reporting issuers or Co.’s with 50+ SH

107 111 Cumulative voting

109(1) 144 Removal by SH – ordinary resolution

111(4) 148 SH filling vacancy! (Q) articles may provide for special ways

111(3) 147 SH filling vacancy for director elected by special class SH

115 112 al 2 Delegation to a managing director or a committee but with limited power

118 Limits on delegation – more extensive than (C)

116 13(3) Curative provision for irregularly appointed directors or defect in qualification, provided they have some colour of right (cannot legitimate inexistent appointment)

121 116 Officers

124 159 Indemnification by Co. of directors and officers against all costs and expenses related to judgements, derivative actions, subject to the director/officer acting in good faith, not having been found at fault by a court! (Q) includes mandataries

124(4) 161 Indemnification in case of derivative action against director

124(5) 160 Reimbursement of monies to Co. if court not satisfied of director’s good faith

124(6) 162 Insurance may be purchased

125 117 Fixing remuneration of directors, officers, employees! (Q) only directors and officers

158 Exclusion of liability for obligations like unpaid wages of employees if director raises due diligence defence

137(4) 198 Nomination proposal by SH, 5% SH threshold

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B) Management’s obligations

119 154 J&S liability of directors for unpaid employee wages, subject to stringent conditions! (Q) prescription is longer, notice the “or”

122(1)(b) 119 Duty of care! (C) seems to apply generally to everyone, Q restricted to the Co.

322 CCQ Duty of care imposed on directors – general (would apply to CBCA Co.’s in Quebec)

1457 CCQ General regime of civil responsibility; applies as a complement to CBCA to define std of conduct

122(1)(a) 119 Duty of loyalty

322 al 2 Honesty and loyalty in the interest of the Co.

323 Directors may not mingle corporate property with their own

324 Duty to avoid conflicts

120(1) 122 Disclosure of nature and extent of interests

123 Situations of conflict where disclosure mandatory

120(2) 124 Time for disclosure by director: first meeting possible! (Q) as soon as he becomes aware of his interest

120(3) 125 Time for disclosure by officer! (Q) ASAP

120(4) 126 Time for disclosure in case of transaction not requiring board approval (same for directors-officers)! (Q) ASAP disclosure even if no board approval required

120(5) 127 No voting on resolution to approve the K! (Q) director may not even be present

128 Rest of directors (excluding the one with an interest) can constitute quorum

120(6) Continuing disclosure

129 If all directors have to abstain, K may still be approved by SH through ordinary resolution

120(6.1) 130 Access to disclosures

120(7) 132 Avoidance standards, provided the K was reasonable and fair to the Co. when approved! (Q) “in the interest of the Co. when approved”

120(7.1) 133 Approval of the K by SH by special resolution “ratifies” the conflict, provided the Co. was reasonable and fair to the Co. when approved! (Q) by ordinary resolution, “in the best interests of the Co. when approved”

120(8) 131 Court powers upon request from SH or the Co.: set aside K or require director/officer to account for profits made

325 CCQ Self-dealing is allowed provided director immediately discloses; he must also refrain from voting or participating in discussions about it

326 CCQ Failure to disclose properly, transaction may be nullified or director must render account; 1-yr prescription

122(3) 120 No exclusion of liability for breach of duty to act in accordance with the Act! (Q) “their obligations” in general

440 Evidence of approval of breach by SH not decisive; may be taken into acct in an action for dissolution order (only C), derivative action or oppression

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VI. Majority rule

CBCA QBCA

103(1) 113 Amendment of by-laws by directors by ordinary resolution

103(2) 114 SH approval of the amendment! (Q) even though it is substantially the same as an amendment previously rejected

106(3) 110 al 1 Election of directors at annual meetings for 3-yr terms

143 Despite expiry of term, director remains in office until he resigns or gets re elected

153 Directors of publicly traded Co.’s may elect directors themselves, provided their number < 1/3 of directors elected at previous annual meeting

107 111 Rules for cumulative voting; note the term is only for one year if director elected by cumulative voting

109(1) 144 Removal of directors: ordinary resolution at a special SH meeting (subj to cumulative voting 107(g))! (Q) vacancy created may be filled at this meeting or the next board meeting

111(3) 147 Filling vacancy for class directors: by remaining directors elected by that class (exceptions)! (Q) 145: so long as they have quorum + class SH may fill vacancy at a special meeting called by them for that purpose

146 If no quorum, directors still in office must call special SH meeting, if not the SH may do it

111(4) 148 Restrictions on how to fill vacancy: exclusive vote of class SH

114 134 ss Directors may call directors’ meetings, subject to notice and quorum rules

120(7.1) 133(1) Avoidance of liability for conflict of interest if K approved by SH by special resolution at annual meeting! (Q) ordinary resolution of SH who do not have an interest

132 164, 174, 175 Place of meetings: in by-laws or at discretion of directors or SH

132(5) 174 Electronic meetings allowed

132(4) 175 Participation by electronic means

187 Chair allows SH to speak for a reasonable amount of time about business of the Co. (not to address personal grievances)

133(a) 163 Directors call first meeting <18mth after Co. is born

133(b) 163 al 2 Subsequent meetings <15mth after preceding one, but <6mth after end of preceding fiscal yr! (Q) nothing about 6 mth rule

133(2) 207 Call of special meetings at any time

135(1) 165 Notice of meeting to SH, directors and auditor! (Q) does not mention auditor

135(6) 167 al 2 Notice of special business coming up at the meeting, in sufficient detail

135 (generally)

174-190 Conduct of SH meetings

137(1) 194-206 SH proposals: (1) general – “any matter” (1.1) persons eligible (1.2) info to be provided (1.3) info not part of proposal (1.4) proof (2) proposal must be in Px circular (3) supporting statement with Px circular (4) Nomination of directors: 5% shareholding threshold (5) exemptions

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from Px circular obligations eg if proposal is to remedy a personal claim or does not relate to business ! (C) requirement that it be clearly apparent (5.1) Co. may refuse proposal if SH fails to continue to hold requisite no. of shares (6) no liability for Co. (7) notice of refusal (8) court application by person re refusal (9) court application by Co. re permitting circulation with Px circular (10) Director entitled to notice if court application

139(1) 176 Quorum: majority of shareholding

139(4) 177 One SH meeting

141 183 Voting: show of hands or ballot

141(3,4) 184 Voting by other means, electronic voting

142 178 Resolution in lieu of meeting, must be filed, proof of vote result! (C) unless a ballot was demanded

143(1) 208 SH requisition directors to call a meeting if >5% shareholding! (Q) must have > 10% shareholding

211 No meeting can be called if business has already been discussed, not within the powers of the SH…

143(4) 209208

SH calling meeting if directors fail 21 days after being asked! (Q) 10% shareholdership threshold to call a meeting

143(6) 210 Reimbursement of expenses by the Co. for calling, requisitioning and holding a meeting

144 193 Court-ordered meetings

145.1 Pooling agt

145(1) 454 Court review of election (director or auditor), on application from Co., director or SH, regarding any controversy. Doesn’t say for what motive

145(2) 455 Powers of the court in reviewing an election

147 Px definitions

! (C) NOTE: the statute makes an offence of non-complying with proxy provisions, subject to lifting the corporate veil

148(1) 171 Px holders can be SH

148(3) 172 al 3 Valid only for the one meeting / (Q) Lapse one year after date indicated on the form but can be longer

148(4) 172 al 3 Revocation by depositing an instrument at the office of Co., at any time

148(5) 167 al 1 Deposit time for Px present at the next meeting

170 Px – general

152(2) 173 Px has same rights as SH appointing him! (Q) if Px has conflicting instructions from more than one SH, may not vote by show of hands

149 Management solicitation: send a form of proxy to each SH entitled to vote (2) exception if Co. is not publicly traded (3) offence; no corporate veil

150 Conditions for valid solicitiation: Px circular to be sent to all SH, directors and auditor (1.1, 1.2) exceptions: <15 SH or public broadcast (3) offence; no corporate veil

151 Exemption from requirements at 149 or 150 by Director, publication of exemption

153 ? Intermediary SH must send copy of circular to beneficial owner of shares (2) cannot vote on the shares he beneficially owns unless

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specifically instructed by owner (5) beneficial owner must be nominated Px holder if he requests and has requisite documentation (6) failure to comply does not render any meeting void (8) offence; no corporate veil for intermediary

154 Restraining order possible if proxy form contains untrue statement: restrain solicitation, requiring correction of form, adjournment of meeting (2) notice to Director

155(1) 230 Presentation of financial statements, report of auditor at annual meeting

157(1) 228 al 1 Keeping of financial statements for Co. and all its subsidiaries at the registered office

157(2) 228 al 2, 3 SH may examine the statements! (Q) Co. may deny examination if the value of the subsidiary is minimal, SH may apply to court for review of that decision

157(3) 229 Co. may apply to court to bar examination of the statements

161 None Qualification of auditor (2) independence (3) duty to resign (4) disqualification court order (5) exemption from disqualification

162(1) 231 Appointment of auditor by ordinary resolution, new one each annual meeting

162(4) 232 Remuneration fixed by ordinary resolution of SH, if not directors may fix it

163 239 Private Co. may resolve not to appoint an auditor, but unanimously

170(1) 233 Auditor may request present or former directors, officers, employees and mandataries to provide any info! (Q) positive duty to facilitate examination

170(2) 233 al 2 Directors may be provided with that info and must furnish it to auditor

173(1) 241 Amendment of articles (fundamental changes) by special resolution (2/3 majority)! (Q) SH may permit the directors not to proceed with the amendment

175(2) 375 Notice of meeting where a proposal for amendment is submitted must set out the amendment and state that dissenting SH may get payment for their shares if proposal is approved (190)

176 191 Class voting for amendments relating to limited subjects (basically when class SH rights are affected prejudicially) (6) the amendments are approved once the class SH have adopted them by way of special resolution

192 Change in share capital (affecting one class) subject to approval by special resolution, unless the change affects all of the shares in the same manner

189(3) 272 Sale, lease or transfer of all or substantially all of Co.’s property is subject to SH approval

189(8) 272 SH approval of sale, lease, transfer of all property by special resolution

211(1) 304 Directors of SH may propose voluntary liquidation of the Co.

VII. Minority ProtectionA) Standing and the representative action238 439 Definition of complainant: past or present security holders, directors or

officers, the Director of any other “proper person”! (Q) any other person who has the “interest required”, registrar does not have standing

242(1) 440 Derivative action may not be dismissed by reason only of the approval of SH (“ratification of breach”) but it may be considered as evidence

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239(1) 445 Leave to commence derivative action on behalf of the Co.

239(2) 446 Prerequisite steps: notice, good faith, appear to be in interests of the Co. Only need to make an arguable case of a wrong done! (Q) when all the directors are named as defendants, no notice required

240 447 Powers of the court as to conduct of the action and amounts payable when adjudged! (Q) orders can be made re: amendment of articles, replacement or appointment of directors, directing undertaking of an investigation

449 Applicant entitled to access all relevant info, deemed to be representative of the Co.

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