1

BUSINESS ASSOCIATIONS CAN

INTRODUCTION

• Types of business: sole proprietorship, partnerships, and corporations. • A corporation is an artificial person. It is treated as a person in the legal sense, even though it is not a

person outside of legal analysis. • Company - an organizational form that the law recognizes for the purposes of coordinating the

activities of people who provide the inputs that are necessary to carry on a business that is designed to earn profit. That is part law, part economics.

• Company law is concerned w/ 3 main groups:• Shareholders• Directors• Creditors

• Specifically: • how one becomes a member of one of these groups; • how one ceases to be a member; • regulating the relations between them (e.g., shareholders as against directors; creditors as against

shareholders) and• regulating the relationships within the groups, for example, between majority and minority

shareholders and between secured and unsecured creditors. •

CHARACTERISTICS OF COMPANY LAW IN COMMON LAW

1. Separate Corporate Personhood/Distinct Entity2. Limited Liability 3. Specialised Management4. Shareholder Control 5. Transferability of Shares

LECTURE NOTES:

1. Separate Corporate Personhood Unavoidable, inevitable consequence of incorporation - true of every company, whether large or

small. Fundamental to conceptual structure of company law. While personhood facilitates other core features – e.g. limited liability and transferable shares – it

sometimes complicates legal analysis - an additional “person” has to be taken into account. Relations between the key groups – directors/managers, shareholders and creditors - not generally

directly contractual but mediated through the “company” e.g. directors obligations are owed to

2

company, not individual shareholders; and individual shareholders generally do not have rights against directors – their rights are against “company”.

“Company” acts as a sort of ‘focal point’ for all these relationships. Functionally, this eliminates need for individual contracts among multiple parties in interest and the further need to re-do contracts whenever there is a change in personnel..

Conferring legal personality sometimes a temptation to treat company as if it were a natural legal person instead of an artificial one - attribute ‘interests’ to it which, in the nature of the case, it cannot possibly have.

“Interests of the company” shorthand for interests of one or more groups of natural persons who have legal relations with it, e.g. directors owe fiduciary duties to “the company”. Meaning? In our law, typically, members/shareholders.

2. Limited Liability Refers to the liability of the company and the fact that creditors’ rights are against company assets

only, not against personal assets of the shareholders. “Limited Liability Company” a common but misleading expression. The liability of the company is not limited at all – company assets available to full extent to creditors. It is the liability of the shareholders that is limited.

Separate personhood facilitates limited liability - easy to distinguish business assets (owned by the company) from personal assets (owned by the shareholders/directors). It guarantees limited liability. If a third party has a contract with company as a separate legal person, liability on the contract is confined to the company and its assets - does not extend to natural persons – directors/shareholders - and their assets.

Guarantee particularly significant if company “insolvent” – i.e. assets insufficient to meet claims of creditors – shareholders not liable to contribute.

Policy reason for limited liability - encourages investment by those who do not wish to be involved in management.

Countervailing consideration - limited liability may permit, or even encourage, opportunistic behaviour by controllers of company as against its creditors, for example, by disposing of assets which the company was represented as owning when credit extended. This not in interest of shareholders generally: may increase cost of credit – higher interest than if shareholders’ liability not limited.

Challenge for company law is not simply to implement limited liability but design a set of rules which achieves the desired benefits of limited liability (encouraging shareholder investment) and at the same time reduces or even eliminates opportunistic behaviour as against creditors.

3. Centralized Management In companies of any size not surprising that management is not left with the shareholders but

entrusted to a small group of managers – reasons flexibility, cost, expertise. Main occupation of individual investors may be entirely unrelated to business. Partly, also, motivation or rather lack of it. Shareholder who is one of, 1,000 shareholders may have no motivation to invest much time in working out the correct answer to a question confronting shareholders, but rather to free-ride on the efforts of the others. If all behave this way, none will prepare properly. The dynamics of small group decision-making, which will govern decisions of the managers, are entirely different.

But law does not require a centralized management structure. In general there is considerable freedom to develop appropriate structures and to divide powers between the shareholders and the

3

board in the most convenient fashion, e.g. a company with few shareholders can decide that it does not need a centralized management structure - shareholders may be few enough that they could also be directors/managers.

Strangely, company law in Canada says relatively little about the qualifications (and disqualifications) of directors, at least in the case of private companies. The Jim Pattison Group, based in Vancouver, is described on its website as “the second largest private company in Canada”, with sales in 2012 of $7.5 billion and more than 35,000 employees working at almost 500 different locations worldwide and engaged in the automotive, media, packaging, food sales and distribution, magazine distribution, entertainment, export and financial industries. The Group does in fact have a board of directors all of whom seem to have impressive credentials. But this is not required by law. Should this be a matter of concern?

Contrast companies traded on public markets, which are subject to increasing regulation of who their directors are and what they do.1

4. Shareholder ControlTraditional company law view - shareholders are ultimate repository of authority. This is reflected in control over the company’s: constitution; management; and surplus assets. Control over constitution The key (but not the only) constitutional document is in British Columbia called the ‘articles of

association’ or “articles” (or, in the case of corporations incorporated federally or in Ontario, the bylaws). They deal with the internal governance of a company.

Their content is not generally prescribed by law. Instead, because of the primacy accorded to freedom of contract, the law tends to contain default rules only, that is, rules that apply unless the interested parties make a contrary or different agreement. The articles are thus a critical source of the governance rules for the company. In British Columbia the legislation includes a “model” set of articles that apply except to the extent that different provision is made.

Articles under control of shareholders. Content, and changes to content, require shareholder approval.

Control over management Intimately related to control of constitution. Company law does not generally prescribe in detail and minutely the way in which power and

authority is to be distributed as between shareholders and directors. This is in general left to shareholders to decide but the law also allows shareholders to remove directors from office by following certain special procedures.

Control over surplus assets In general, directors may only distribute surplus assets to shareholders, or to satisfy a legal claim

against the company, or otherwise to further the company’s business. The shareholders’ primary entitlement to surplus results from the combination of two features of

company law:o in the case of a company that is a going concern their contracts will define their rights –

though common shareholders rarely have a right to participate while the company is a going concern – depends on discretion of directors who are obligated to act “in the best interests of the company”;

1 This regulation is generally found in the securities laws administered by regulatory bodies such as the stock exchanges and provincial securities commissions and not in company law.

4

o in the case of a company going out of business, law does not allow a payment to anyone that is not in satisfaction of a legal claim.

o company to make voluntary severance payments to its employees – no legal claim and no claim based on goodwill Since the payments are not in satisfaction of any legal claim on the company and a company which is ceasing to trade has no need to generate goodwill amongst its workforce, such payments were held to be unlawful at common law.

o The entitlement of shareholders to a participate in a surplus while the company is a going concern depends In fact, companies tend to be extremely cautious in granting legally enforceable entitlements to dividends to ordinary shareholders.

Assets must be used to further business of legal person (i.e. in “company’s best interests”). Our corporate law deeply committed to principle of shareholder control (i.e. the shareholders and

their interests are the virtually exclusive objects of legal affection. But the principle is, at least in the minds of some, controversial and has been challenged. They

advance a “stakeholder” argument the nub of which is that the economic power of corporations and their impact or influence over the lives and work of citizens, demands a reconsideration of shareholder primacy. This discussion continues – most often in connection with the relationship between corporations and their employees.

5. Transferability of Shares Transferability crucial for two reasons:

o flexibility and liquidity for investors. o governance considerations - the company may function more smoothly if a dissatisfied investor

(or one who simply needs cash) is able to leave the company rather than remain as a carping minority.

Generally, corporate funds may not be used to provide liquidity to investors. Investment, once made, is “locked in”, i.e. investor loses control over funds contributed.

Use of corporate funds to provide liquidity only available, in the absence of contractual entitlement, in limited circumstances narrowly defined to protect interests of other shareholders and of creditors. o promotes stability in the resources available to the company. If the funds used to provide

liquidity for its investors, there would have to be a higher degree of liquidity of corporate assets to ensure corporate development

o note: separate legal personhood facilitates liquidity through the market for shares. Disposition of the investor’s interest in the company, (i.e. a share), does not involve a transfer of underlying business assets which are owned by the company and not by the shareholders

o One can contract for liquidity – redeemable shares – but precisely because they weaken the company’s control over its assets they tend to be rare.

Despite importance of market and liquidity, company law does not guarantee:o existence of a market; oro outside a market, that shares may be transferred freely – consents, restrictions, may apply

which reflect valid purposes.

NOTE: Only separate personhood is inevitable and unavoidable. The other core features can be avoided by appropriate provisions in a company’s constitution or contracts with the company or its shareholders.

5

Relationship between Core Features and Corporate Size Very small companies most likely not to display the four optional core features. For example: Ms Smith and Mr Jones incorporate Smith & Jones (Home Renovations) Ltd, to run a

small home renovation business. o Each agrees to subscribe for one share for which each pays $1. There are no other

shareholders. They control the company.o Business financed with funds borrowed from bank which insists on personal guarantees from

Smith and Jones. To this extent anyway, they do not have the benefit of limited liability. o They appoint themselves the only directors. Indifferent to whether they make decisions as

shareholders or as directors. There is complete unity of shareholding, board membership, and management in this company. No centralized management separate from the shareholders.

o The articles require (a) consent of all existing shareholders to admission of new shareholders and (b) if an existing shareholder wishes to sell his or her shares, they must first be offered to the other existing shareholders. No free transferability of shares.

o Smith and Jones in total control disposition of surplus funds. Smith and Jones have acquired control not because they have made a major financial investment

but because they are the people who will get and do the work which the company is set up to carry on.

Contrast, at the other end of the size spectrum, companies such as Telus, Teck, Bell and Rogers, all with shares traded on public markets, each of which has thousands of shareholders, none of whom has given any personal guarantee of the company’s debts or liabilities; the board of each is clearly distinct from both the shareholders and the senior management of the company; and the shares are freely transferable from both the shareholders’ and the company’s point of view. As far as the law is concerned, the shareholders also control the company in the ways defined above – at least in theory. However, by way of contrast with Smith & Jones Ltd, the sheer number of the shareholders raises a serious question whether the difficulties the shareholders will face in coordinating their actions mean that in fact they are incapable of exercising the control the law confers upon them.

Nearly all public companies and a substantial number of private companies, display the five core features.

Interaction among Core Features1. Sometimes compete – so a solution that implements one feature may impair attainment of another,

e.g Placing broad range of decisions in hands of shareholders would expand their control but at a

likely cost of efficiencies derived from centralized management, so more likely to be found in small private rather than large public companies.

Consequently, for public companies there is likely to be a search for techniques which provide the benefits of shareholder control without at the same time imposing greater costs by way of loss of the benefits of centralized management.

2. Correlation between corporate size and presence of all five core features not accidental. As companies grow, capital needs of business likely to increase – invite public participation

through risk (common) capital; Public shareholders:

o More likely to invest if they can subsequently dispose of their shares on a market and if they benefit from limited liability

6

o Unlikely to want or have ability to manage, leading to centralized management;.o Having provided investment with no legal guarantee of a return, are likely to want the

power to remove the management if business unsuccessful.

PARTNERSHIPS

****Why would I choose a limited partnership over corporations? For tax reasons

GENERAL• Not federal, but regulated by provinces or territories.• Definition

• legal institution which arises where two or more persons carry on a business together with a view to a profit.

• BC Partnership Act 2 Partnership is the relation that exists between persons carrying on business in common with a view to profit. (Nowhere does that definition say anything about a contract).

• Is it essential that one receive the profits to be a partner? What is the definition of a partnership? There is no legal requirement to share the profits, as long as the participants are acting in concert.

1) The statute talks about a relationship - relationship is a key part of the legal understanding 2) The statute does not describe the legal nature of the relationship, and in particular, it does not

explain, whether the relationship gives rise to a separate entity or is merely a business who never become anything more than an aggregation of people doing that.

• BCPA 3 excludes companies from definition of partnership. • Governing documents: There is usually a written partnership agreement and also partnership

legislation.• Partnerships are not a separate legal entity. • Partners cannot be employees of a partnership (Thorne v. NB (WCB)). Unincorporated associations do

not enjoy the attributes of separate legal personalty that would enable a partner to be an employee of a partnership. In this sense, the partnership is no different than a sole proprietorship, where the proprietor may not serve as an employee of the proprietorship business because the proprietorship has not legal personality separate from that of the proprietor.

• Partnerships can be:• General Partnership• Limited Partnership• Limited Liability Partnership

• BCPA 7 Liability of Partners – note no limited liability

7

1) A partner is an agent of the firm and the other partners for the purpose of the business of the partnership.

2) The acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he or she is a member bind the firm and his or her partners, unless(a) the partner so acting has in fact no authority to act for the firm in the particular matter, and(b) the person with whom he or she is dealing either knows that the partner has no authority,

or does not know or believe him or her to be a partner.• In some circumstances partnerships appear to possess a separate identity e.g. for tax purposes. S.

96(1)(a) of the federal Income Tax Act.

Thorne v. NB (Workers’ Compensation Board) (1962) – Partners cannot be employees of a partnership; Partnership is not a legal entity separate and distinct from the identities of its partners. F: Thorne and Robichaud were partners in a lumbering and sawmill business. Thorne was injured during course of his duties and applied to WCB for compensation. Claimant argued partnerships should be regarded as legal entities or persons distinct from their component members and that, in consequence, the firm of which he is a member was capable of entering into a contract of employment with him. I & H: Was Thorne a workman employed by the partnership within the meaning of the Workmen’s Compensation Act so as to entitle him to compensation thereunder? No. there is no separate entity in the case of a partnership.

Miah & Others v. Khan [2001] – Acts carried out by potential business partners in the preparatory stages of a partnership can qualify as a partnership when the activity actually embarked on is part of that venture. F: Respondents, wanting to open a restaurant business approached Khan, who agreed to put up the necessary capital for a 50 percent share of the profits, the remainder to be shared by the Miah group and a sleeping partner. About two months before the restaurant opened, Mr Khan fell out with the other partners and exited the venture. The parties had taken a number of steps towards opening the restaurant before they fell out: for example, they acquired the freehold of premises identified as suitable for the restaurant, obtained planning permission, entered into contracts for the laundry of table linen and secured a loan of £60,000 from a bank. The respondents carried on the business without settling their account with Kahn. Khan wanted his share. The Court of Appeal held by a 2-1 majority that no partnership existed in this case on the grounds that, to quote Thorpe LJ, the partners could not be said “to be carrying on the business prior to the date upon which the restaurant opened for the consumption of meals on the premises”. I & H:• Can acts done in the preparatory stages of a partnership qualify as a partnership? When does the partnership relationship

start? Yes• The House of Lords held, unanimously, that the Court of Appeal had applied the wrong test in asking whether the restaurant

business had commenced: what is important is not whether there is trading, but whether the partners have embarked on the business activity in question. Lord Millett said that merely establishing the business vehicle and the management structure is not enough, but embarking on any commercial activity, such as acquiring property or incurring liabilities, towards the joint venture is.

• Lord Millett pointed out that there “was no rule of law that the parties to a joint venture do not become partners until actual trading commences”. Rather, Lord Millett held that for the purposes of the definition of partnership in s 1(1) of the Partnership Act 1890, “the work of finding, acquiring and fitting out a shop or restaurant begins long before the premises are open for business and the first customers walk through the door. Such work is taken with a view to profit, and may be undertaken as well by partners as by a sole trader.”

NOTES:In applying the Khan v Miah test, it is important to closely analyse the particular business venture the parties have agreed to carry on, and then ascertain whether the activity actually embarked on is part of that venture. In other words, Khan v Miah is not authority for the proposition that any type of preparatory activity triggers a partnership.

Fasken Martineau DuMoulin LLP v. BC (Human Rights Tribunal), 2012 BCCA – A partnership is not, in law, a separate entity from, but it is a collective of, its partners, and as such, cannot, in law, be an employer of a partner. F: McCormick, 65, partner at Faskens, sought relief from the BC HR Tribunal - under s.13 of the Code - mandatory retirement. The tribunal’s jurisdiction was at issue. Faskens was an extra-provincial limited liability partnership. BCHRT and a Supreme

8

Court chambers judge on judicial review decided that for the purposes of human rights legislation, a partnership may be treated as a separate legal entity from its partners and as the employer of a partner, with the result that the Tribunal has jurisdiction to hear a complaint by a partner of discrimination in his employment. The partnership appealed, claiming HRT did not have jurisdiction to hear the complaint, because in law a partnership is not a separate entity from its partners, and cannot in law employ a partner.I & H: Whether a partner in a limited liability partnership is an employee of the partnership for the purposes of claiming the protection of the human rights legislation from age discrimination. - No.

RELATIONSHIP OF PARTNERS TO EACH OTHER(a) the personal nature of partnerships - partnerships come into being through agreement or conduct

of parties. Partnership legislation does not provide for third parties to gain the full rights of partners on the assignment of one partner’s rights to a third party. A partnership is dissolved on the death or insolvency of a partner.

(b) fiduciary character - nature of the relationship between partners requires them to implicitly trust each other since in the absence of agreements to the contrary any partner may find the partnership without having to obtain the consent of the other partners. Fiduciaries must discard all considerations other than single-mindedly acting in the best interests of the partnership collective regarding that collective’s interests relating to the partnership venture. A fiduciary who accepts a secret profit must disgorge it to the firm - Olson v. Gullo.

(c) reciprocal agency - the partnership is a form of reciprocal agency, since each partner may both be bind and be bound by the actions of the other partners. An agency is a voluntary arrangement whereby a person, called the principal, may appoint another, called the agent, to engage in certain activities on the principal’s behalf. It is possible to restrict the ability of partners to bind the partnership by agreement; such restrictions will be effective, however, only where a third party contracting with the firm has knowledge of the restrictions on a partner’s liability to bind the firm.

(d) presumptive equality - equality in sharing profits and losses, and managing the business. However, there is no requirement that all partners have equal rights and obligations within the partnership.

(e) consensual nature - partners have the ability to contract out of default provisions in partnership legislation. Consensualism requires unanimity among the partners to effect such change.

Olson v. Gullo [1994] ON CA – Where a partner obtains a profit in breach of fiduciary duty, that profit is to be disgorged and given to the firm. F: Gullo and Olson were equal partners in a partnership formed to develop a tract of land. Gullo through Gullo Enterprises Ltd., bought and sold, for his own account and not for the partnership, a 90 acres parcel of land in this tract and made a $2,486,940. profit on this transaction. TJ awarded the whole of the profit to the P. I & H: Did Olson and Gullo have a partnership agreement? Yes. If so, did Gullo breach his fiduciary duty to Olson by surreptitiously purchasing the parcel of land and aiming to keep the profit? Yes. Did the TJ err in awarding the P the entirety of the profit instead of half of the profit? Yes. The Ontario legislation provides that if a partner dishonestly makes a profit, which is to be given over to the “firm”. “The profit in question is that of the partnership.. To exclude the wrongdoer would be to effect a forfeiture of his or her interest in this partnership property”. Trial judgment was varied to give the P only half of the profit. The effect of this was that the D got to keep half of the profit. COMMENTS:Case is illustrative of the good faith partners owe to each other. Also an illustration of how sometimes the application of equitable principles can lead to unfortunate results. Forces court to devise other solutions e.g. punish guilty partner in costs.

RELATIONSHIP OF PARTNERS TO THIRD PARTIES

Each partner is liable for all partnership contracts, debts, and torts during the ordinary course of the partnership. It is possible to restrict the ability of partners to bind the firm via a partnership agreement. However, restrictions are only effective if the third party contracting with the firm has knowledge of the restrictions on the partner’s ability to bind the firm.

9

(a) pre-partnership liability - partners are not liable for debts incurred pre-partnership. Exception: Since partnership assets belong to the firm rather than to the individual partners, the new partner’s contributions to the firm can be used in satisfaction of debts incurred by the partnership before the new partner became a partner.

(b) liability as a partner - a partner is liable for the debts of the partnership. Partnership liability is not always jointly held. Joint liability: (i) 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, and (ii) the misapplication of money or property of a third party received for or in custody of the firm.

Potential defences: (i) partner acting on behalf of firm had no authority and third party knew that the party had no authority to engage in acts or third party did not know the partner was a partner or (ii) third party did not believe that the partner was a partner at the firm.

(c) holding out liability - a way that non-partners can bind the firm - is akin to a form of estoppel - where a person represents or knowingly allows the representation that he or she is a partner in a firm, that person cannot later be heard to say that he or she is not a partner of that firm in face of potential liability.

(d) liability after withdrawal from partnership - where a partner leaves the partnership, that partner will retain liability as if he or she continued to be a partner absent adequate notice to third parties. • The actual notice of a partner departing a partnership trumps technical reliance on the provisions

of partnerships legislation with regard to parties that had had dealings with the firm prior to the retirement of the partner in question.

• A retiring partner will retain liability to third parties who had had dealings with the firm prior to the partner’s retirement unless:• actual notice is given to the third party as in Clarke v. Burton;• the third party never knew that the retiring partner was a partner, or;• the partner retired from the partnership because of insolvency or death.

(e) posthumous partner liability - Partners’ estates are not liable for partnership liabilities incurred after death.

Clarke v. Burton (1958) ON – R:1. While the retirement of a partner in no way affects his rights or obligations to strangers in respect of past transactions, yet

if one not known to be a partner retires, the authority of his late partner to bind him ceases on his retirement although no notice of it be given.

2. A known partner who has retired from the partnership will be liable for debts of the partnership contracted after his retirement until notice is given even though the creditor has had no dealings with the firm prior to dissolution C.P. Reid & Co. v. Coleman Bros. (1890)

3. When an apparent partner retires or when a partnership between several known partners is dissolved those who dealt with the firm before the change tool place are entitled to assume that no change has occurred until they have notice to the contrary - Huffman v. Ross [1926].

4. If a creditor did not know that a particular partner was a partner and that partner retired then, as from the date of his retirement, he ceases to be liable for partnership debts contracted by the firm to such person - Tower Cabinet Co. v. Ingram [1949]; Eagle Show co. v. Thompson (1956).

5. If notice can be established, no matter by what means, it is sufficient. No formality is required. F: P brought action to recover money due for goods supplied and services rendered to the Ds, Burton’s Insulation and Roofing. William Burton registered a partnership in his and his son Charles’ names. They became estranged and ceased to do business together but failed to file a dissolution of business. P thought that Charles was an employee and not the partner. Following the dissolution of partnership the P continued to supply to goods and services and invoices were issued in the name of Burton’s Insulation and Roofing. Charles told the P that he had disassociated himself from William.

10

I & H: What is the liability of Charles Burton? He is not liable. In the first place, P never considered D to be a partner, and second, P had full knowledge that the D had severed all connection with his father and was in business for himself. This would have constituted notice even if P had known D was a partner. ANALYSIS:The doctrine of estoppel does not apply. Doctrine of estoppel: “Where A has by his words or conduct justified B in believing that a certain state of facts exists, and B has acted upon such belief to his prejudice, A is not permitted to affirm against B that a different state of facts existed at the time.” - Maclaine v. Gatty [1921].

NOTES• The actual notice of a partner departing a partnership trumps technical reliance on the provisions of

partnerships legislation with regard to parties that had had dealings with the firm prior to the retirement of the partner in question. A 3rd party cannot reasonably claim to have relied upon a retired partner continuing to be a member of the partnership where it is demonstrated that the 3rd party knew that the retired partner was no longer associated with the partnership.

• What is adequate notice? Depends on whether the parties had prior dealings with the firm.• If prior dealings, a retiring partner will retain liability to 3rd parties unless:

• actual notice is given to 3rd party - Clarke v. Burton;• 3rd party never knew the retiring partner was a partner; or• the partner retired from the partnership because of insolvency or death.

• If no prior dealings, the 3rd parties may treat any “apparent member” of the firm as a continuing member of the firm for liability purposes absent adequate notice of the partner’s retirement from the firm under s. 36 of the ON Partnerships Act.

DISSOLUTION OF PARTNERSHIPS• Automatic dissolution (BCPA 35 & 36):

• if partnership is for a fixed term, partnership dissolves upon expiry of that term;• if partnership was formed for a specific undertaking, it dissolves upon the completion of that

undertaking;• if it is for an undefined term, partnership dissolves upon notice of intention to dissolve by one of

the partners;• and absent a contrary intention, a partner’s death, bankruptcy or dissolution will dissolve the

partnership. • Illegal to continue operating• Court order (BCPA 38) - due to mental incapacity, breach of contract, partner’s behaviour prejudicially

affects confutation of business, or when circumstances compel it so as to get a just or equitable outcome.

LIMITED PARTNERSHIPS

• LP is a partnership in which certain of the partners have limited liability. A limited partnership is a hybrid of a partnership and a corporation.

• BCPA 50 – at least one partner must be a general partner and at least one partner must be a limited partner.

• BCPA 51 – Liability of a Limited Partner – a limited partner is not liable for the obligations of the limited partnership except in respect of the amount of property he or she contributes or agrees to contribute to the capital of the limited partnership.

11

• Liability to Creditors – BCPA 64 A limited partner is not liable as a general partner unless he or she takes part in the management of the business.

• It is formed by filing – the filing will serve as notice to that world that all of the participants in this business do not have unlimited liability.

LIMITED LIABILITY PARTNERSHIPS

• LLP – limited liability w/o separate personhood. • Limited Liability for Partners – BCPA 104

1) Except as provided in this Part, in another Act or in a partnership agreement, a partner in a limited liability partnership

(a) is not personally liable for a partnership obligation merely because that person is a partner, (b) is not personally liable for an obligation under an agreement between the partnership and

another person, and (c) is not personally liable to the partnership or another partner for an obligation to which

paragraph (a) or (b) applies.2) Subsection (1) does not relieve a partner in a limited liability partnership from personal liability

(a) for the partner's own negligent or wrongful act or omission, or(b) for the negligent or wrongful act or omission of another partner or an employee of the

partnership if the partner seeking relief(i) knew of the act or omission , and(ii) did not take the actions that a reasonable person would take to prevent it .

3) Subsection (1) does not protect a partner's interest in the partnership property from claims against the partnership respecting a partnership obligation.

• BCPA 102 A change in the partnership does not affect the partnership's status as a limited liability partnership.

INCORPORATION OF A COMPANY

GENERAL

General• Formation of Companies

• Relative ease – one or more persons may make companies by putting together relatively simple documents.

• Note the use of the word persons — even a corporation can incorporate another company by producing the documents in questions.

• Corporate Name• Governed by general law of trademarks and CL of “passing off”. • All corporate statute require that the corporate name include a word indicating that a corporation

is being described e.g. corporation, incorporated, and limited. • A number for the company is automatically issues. The Director can then change it to a verbal

name. He does not need shareholder approval for this, which is required for any other name change.

• Corporate Constitutions: minimal requirements

12

• Application to create a corporation must contain draft articles for that corporation. • CBCA 6 - name of corporation, location of head office, number of directors, details of the share

structure, and any restrictions on the business of the corporation must be set out in the articles. • BCBCA 11 & 12 - require filing of similar “Notice of Articles” and “Articles”.

• Continuance • Continuance – procedure whereby a corporation incorporated in one jurisdiction emigrates and

establishes a new home. - Not merely doing business in another jurisdiction. • A typical requirement (e.g. CBCA 187(1)) is that a corporation seeking to immigrate be “so

authorized by the laws of the jurisdiction where it is incorporated”.• Amalgamation

• Legal idea of amalgamation is much narrower than the corresponding business idea. • Under CBCA 181 – 186 and corresponding provisions in other reformed statutes, 2 or more

corporations “may amalgamate and continue as one corporation”. Effect: old corporations cease to exist as separate entities; only one corporation remains. It is governed by its own set of articles, which must be sent to Director as part of process. Director issues a certificate of amalgamation to complete the process.

•Steps to Incorporate a Company in BCTo incorporate a company in B.C., one or more persons (called “the incorporators”) may form a company by completing the following steps:

1) reserve the company’s name with the Corporate Registry;2) enter into an incorporation agreement;3) establish the company’s articles; and4) file an Incorporation Application with the Corporate Registry.

REGISTRATION

Procedure• Registration involves submission of application to incorporate - if application is in order, official must

approve it and issue a certificate of incorporation. Only in PEI the official has discretion. • CBCA officer = Director• Certification of incorporation - document signed and returned to the incorporators by the Director and

may conveniently be analogized to your own birth certificate. • Incorporation birth date set by CBCA s. 9: “A corporation comes into existence on the date shown in

the certificate of incorporation.” If the date on the certificate does not match the date it was issues = problems.

• Scenario: The defendant placed an order on June 15 and signed as a corporation. Certificate of incorporation issued on June 16 but bore date of June 15. In light of S. 256(2) of CBCA, the date of incorporation would be April 15 b/c s. 256(2) says that the certificate is conclusive proof of the facts stated in it. The only time this can be challenged by outside evidence is when a corporation is being dissolved.

• To what extent is a civil servant’s dating of a document conclusive evidence of the date of incorporation? The cases seem inconsistent.

Evidence of Incorporation

13

BCBCA 18 Whether or not the requirements precedent and incidental to incorporation have been complied with, a notation in the corporate register that a company has been incorporated is conclusive evidence for the purposes of this Act and for all other purposes that the company has been duly incorporated on the date shown and the time, if any, shown in the corporate register.

Incorporationon on the date and time shown in the corporate register(1) The commencement of corporate life is on a defined date. Prior to that, it does not exist.

BCBCA 20 – Pre-incorporation contracts? (2) Once incorporated, and entered onto the register, the lawfulness of its incorporation and its

corporate existence cannot be challenged.

Letain v. Cornwest Exploration Co. [1961] SCCF: K required P’s “causing a company to be incorporated” prior to October 1, 1958. P’s application for letters patent had been submitted on September 18; the letters patent were not issued until October 20, but were backdated to September 25. I & H: Did the plaintiff comply with the terms of a contract between the plaintiff and the defendant? SCC held that s. 133 of the Canada Corporation’s Act did not render inadmissible the P’s evidence that the certificate had been backdated for the purposes of determining whether the contract had been breached.

C.P.W. Valve and Instrument Ltd. v. Scott [1978] – Evidence of when the certificate of incorporation was actually issued can be admitted to prove whether the parties had performed their contractual obligations.F: Certificate of incorporation was backdated by a day. C.P.W. sued Scott for damages for breach of covenant to purchase unit by a certain date. Scott and S. & V. Fluid Gauge Ltd. counterclaimed, alleging CPW had repudiated the agreement by its letter of June 24. CPW wanted to tender evidence proving that certificate of incorporation was backdated b/c it was signed by the Registrar on June 16. TJ did not admit evidence on basis of s. 27 of Alberta Companies Act and Letain v. Cornwest Exploration Co. Ltd. (1960). CPW is appealing this I & H: Did TJ err by not admitting the evidence? Yes. Whether terms of distributorship contract were fulfilled in respect of order for gauges. What is the scope and operation of s. 27 of the Companies Act, which declares conclusiveness of a certificate of incorporation? “[D]uring the whole of the time period of June 15 S & V Fluid Garage had in fact no legal existence. It is not possible in law for a non-existent person to perform a legal act such as purchasing a quantity of goods. It follows that the purchase order purportedly given by S.&V. Fluid Garage Ltd on that day had not legal validity at any moment of the critical period prior to June 16 and cannot be relied on by Scott as performance of his obligation under the distribution agreement.”

See section on Pre-Incorporation Transactions.

TYPES OF CORPORATE CONSTITUTIONS

(1) What are the constitutional documents of the corporation? (2) What is the basis of the powers held by the different internal groups?(3) What is the nature and availability of the grievance mechanism for ensuring compliance with the

corporate constitution?

(a) Charter corporations - created by royal prerogative 1. constitutional documents: charter - governing document. When the charter is only a skeleton,

corporate by-laws will be needed to flesh out the detail. Corporate by-laws are easier to change than charter.

2. basis of power: Charter. Interpretation of charter will be important. 3. grievance mechanism: need standing, the common law had a proceeding (and a writ) called

scire facias, by which a charter could be forfeited for non-compliance; this could be used against a charter corporation to seek the forfeiture of the charter, which (if successful) would mean the end of the corporation.

(b) Special act corporation - created by legislation e.g. Canadian Red Cross Society

14

1. constitutional documents: the relevant Act. It is usually more detailed than the charter and explicitly provides for the enactment of by-laws. By-laws are easier to change than the act, which requires legislative intervention.)

2. basis of power: Act - construction of Act is necessary to determine distribution of powers. 3. grievance mechanism: may be provided explicitly in the Act.

(c) Letters patent corporations - incorporated under registration statute that adopts charter corporation as its model. Only PEI still has this now. The government retains discretion in the creation of the corporation, unlike the other two forms of registration statute corporations.

1. constitutional documents: letters patent and statute it was created under. The statute may provide for the creation of by-laws, which are subordinate to both the letters patent and the statute. Amendment of letters patent will require a “special majority” vote of shareholders; usually 2/3 majority.

2. basis of power: set out in statute. Usually board of directors has managerial power, the shareholders elect the directors.

3. grievance mechanism: not usually provided for in the letters patent. Canadian court used to adopt the contractarian model followed by the English courts.

(d) Contractarian companies - “English model companies”/“memorandum and articles” companies. - registration as of right. limited liability. In Canada only Nova Scotia and BC retained this model.

1. constitutional documents: governing statute, memorandum of association/“notice of articles” and articles of association. The memorandum corresponds to the charter and the articles to the by-laws. BCBCA s. 19(3). - constitution is treated as a contract among all of the shareholders and the company.

2. basis of power: shareholders. However, in BC directors may be given managerial power BCBCA s. 136. but the contractarian nature of the corporation is re-asserted in s. 137, which provides for the articles to allocate some or all of those managerial powers to the shareholders, or anyone else. - unanimous shareholder agreement - all power flows from the shareholders, so it is up to them whether they give the power to the directors or anyone else.

3. grievance mechanism: “oppression remedy”. Although BC and Nova Scotia retain the contractarian model, they have followed the division of powers jurisdictions by adding a range of grievance procedures, including a procedure specifically aimed at the enforcement of the corporate constitution (BCBCA s. 228).

(e) Division of powers corporations - dominant in Canada but does not apply in BC, PEI, and NS. There is no discretion to refuse to register the corporation.

1. constitutional documents: Articles of Incorporation. - similar to memorandum of association. It is difficult to change, requiring a 2/3s majority.

2. basis of power: statue expressly divides powers between shareholders and directors. The directors have managerial power and shareholders have power to elect directors and particular powers in other situations. Provision for by-laws. Also may be “unanimous shareholder agreement”.

3. grievance mechanism: discretionary oppression remedy, a mechanism by which a share holder can ask a judge to allow the shareholder to enforce a right that belongs to the corporation, forces the corporation to offer a way out to outvoted shareholders, and “compliance and restraining order”. - Note - S.B.C.A - Roles v. 306972 Saskatchewan Ltd., - gives standing to complain to “a complainant or a creditor”

Practical Differences(a) the location of particular constitutional provisions• The type of constitution in issue can determine the proper place for a given provision.

15

• In most jurisdictions when a new statute was enacted, corporations were required to be “continued” under the new statute. Continuation is a kind of corporate emigration: the corporation leaves the old statutory system and enters the new one. This requires the creation of a new corporate constitution, under the new statute.

• Are the provisions in the Articles of Associations enforceable if they were not specifically authorized by the statute?

(b) Constitution Shopping: The permissibility of particular constitutional provisions. • The ability to include different provisions depends on the type of constitution. Such flexibility as

the law allows is often utilized in favour of making it more difficult to remove directors from office. Management usually has more control over the terms of the constitution than do the shareholders.

• The contractarian model is more flexible.

ARTICLES Notice of Articles – BCBCA 11 Unless this Act provides otherwise, the notice of articles of a company

must(a) be in the form established by the registrar,(b) set out the name of the company,(c) set out the full name of, and prescribed address for, each of the directors,(d) identify the registered office of the company by its mailing address and its delivery address,(e) identify the records office of the company by its mailing address and its delivery address,(f) set out, in the prescribed manner, any translation of the company's name that the company

intends to use outside Canada,(g) describe the authorized share structure of the company in accordance with section 53, and(h) set out, in respect of each class and series of shares, whether there are special rights or

restrictions attached to the shares of that class or series of shares and, if there are or were special rights or restrictions, set out the date of each resolution altering those special rights or restrictions that was passed on or after, and the date of each court order altering those special rights or restrictions that was made on or after,

(i) if the company is a pre-existing company, the day on which this Act comes into force, or(ii) if the company is not a pre-existing company, the date on which the company is

recognized under this Act. BCBCA 12(1) A company must have articles that

(a) set rules for its conduct,(b) are mechanically or electronically produced, and(c) are divided into consecutively numbered or lettered paragraphs.

BCBCA 12(2) The articles of a company must(a) set out every restriction, if any, on

(i) the businesses that may be carried on by the company, and (ii) the powers that the company may exercise,

(b) set out, for each class and series of shares, all of the special rights or restrictions that are attached to the shares of that class or series of shares,

(c) subject to subsection (5), (i) set out the incorporation number of the company,

16

(ii) set out the name of the company, and (iii) set out, in the prescribed manner, any translation of the company's name that the

company intends to use outside Canada. BCBCA 12(4) Without limiting subsections (1) and (2), a company may, in its articles, adopt, by

reference or by restatement, with or without alteration, all or any of the provisions of Table 1 and, in that case, those adopted provisions form part of the articles. (– you can do whatever you like, to make life easier for you, here is a set of them and you can use them or change them as you wish. But when all has been said and done, you must have a set of Articles that addresses the kinds of internal governance issues that the model governance articles in table A contain.)

EFFECTS OF INCORPORATION Shareholder power – BCBCA 17 On and after the incorporation of a company, the shareholders of

the company are, for so long as they remain shareholders of the company, a company with the name set out in the notice of articles, capable of exercising the functions of an incorporated company with the powers and with the liability on the part of the shareholders provided in this Act.o Interesting use of language – shareholders of the company are the company.

Separate corporate personality – BCBCA 30 – A Company has the capacity and the rights, powers and privileges of an individual of full capacity.o Note the ease with which a separate corporate entity can be created.

Ultra vires doctrine has no application to the companies incorporated under these statutes.

PRE-INCORPORATION TRANSACTIONS

General• Since a corporation does not come into existence until the date on the certificate of incorporation, it is

impossible for a supplier to contract w/ corporation prior to that time. Notwithstanding this legal impossibility, incorporators have made arrangements for goods and services to be supplied between the time the idea of incorporation is conceived and time of issue of certificate of incorporation.

• In any pre-incorporation transaction situation there will be two active parties, “A”, usually an individual involved in the incorporation process, purports to act on behalf of the future corporation. “O”, an outsider who is not involved in the incorporation process, intends to buy from or sell to the future corporation. The 3rd party, the future corporation, is as yet only a figment of the parties’ imagination.

Common-Law Position• If a contract is to be created through the interaction of A and O, it is they who must be the parties.

There must be a common intention that A is to be personally liable on the contract. • Where a person (A) contracts on behalf of any proposed corporation/non-existent principal, he is

personally liable on the contract/pre-incorporation transaction. A 3rd party cannot by a subsequent ratification relieve him from that responsibility (Kelnar v. Baxter). [Here both parties knew the co did not exist and so were contracting as principals].

• However, if the contracting parties mistakenly believed that the corporation already existed, A is not liable in contract (Black v. Smallwood).

• Not only is A not liable in contract where A and O mistakenly thought corporation existed, but he is also not entitled to the benefits of the agreement. – (Newborne v. Sensolid (Great Britain) Ltd.)

17

• A corporation cannot become bound by adopting as a contract a pre-incorporation agreement concluded on its behalf (Spillar v. Paris Skating Rink Co.; Natal Land and Colonization Co. v. Pauline Colliery Syndicate).

• Someone who falsely claims to have authority to act as an agent can be made liable for breach of warranty of authority. • This cause of action does depend on establishing a K between P & D. Damages are measured as

though there was such a K. O is not simply entitled to any loss suffered through the transaction. Rather, his damages will be measured by the position he would have been in if A had the authority that A claimed to have. Thus, if A’s corporate principle is insolvent, O will likely get nothing, on the basis that even if A had authority, O’s contractual rights against the principal would have been worthless. It follows that if A’s principle does not exist, again O gets nothing: (Wickberg v. Shatsky).

• Breach of warranty can be proved even if A did not know that he lacked authority e.g. if he thought the corporation existed). Damages cannot usually be collected for innocent misrepresentation. So claim for breach of warranty of authority seems an example of the CL’s enforcing a promise (express or implied as to A’s authority) but w/o any requirement for consideration to support that promise.

• O could also sue A in fraudulent misrepresentation (deceit), which requires showing that A knowingly made a false statement, and that O relied on it and suffered a loss as a result.

• Negligence is also a possibility. In either case, O is entitled to be put in the position he would have been in if the misrepresentation has not been made, which appears to mean that O can recover any loss he has suffered. If A wants to allege that O suffered no loss because O would have behaved the same way even if the misrepresentation had not been made, then the onus of proof will like on A: (Rainbow Industrial Caterers Ltd. v. CNR Co. [1991] SCC).

• O may also have rights based on unjust enrichment. Where there is a transfer of wealth (money, goods, or services) by mistake, there is, in general terms, a right of recovery. This includes transfers which were intended to be pursuant to a contact where it turns out that there is no contract (Delman v. Guaranty Trust Co. of Canada)

• Even if there was no mistake (for e.g, O knew there was no corporation), if the enrichment was transferred in anticipation of a contract that did not materialize, there is a right of recovery (William Lacey (Houstow) Ltd. v. Davis)

Statute • BCBCA 20 Subject to subsections (4) (b) and (8), if, before a company is incorporated, a person

purports to enter into a contract in the name of or on behalf of the company,(a) the person is deemed to warrant to the other parties to the purported contract that the company

will (i) come into existence within a reasonable time, and (ii) (adopt, under subsection (3), the purported contract within a reasonable time after the

company comes into existence,(b) the person is liable to the other parties to the purported contract for damages for any breach of

that warranty, and(c) the measure of damages for that breach of warranty is the same as if

(i) the company existed when the purported contract was entered into,(ii) the person who entered into the purported contract in the name of or on behalf of the company

had no authority to do so, and(iii) the company refused to ratify the purported contract.

18

• These sections deem A to warrant to O that the corporation will be formed and that it will adopt the contract w/in a reasonable time. They also say that A will be liable to O if the warranty is breached, and that the measure of damages will be the same as if the corporation had existed but had given no authority to A and had refused to ratify the contract.

• Note that these sections provide expressly for an unjust enrichment-like liability of a corporation that received a benefit under a pre-incorporation transaction, but fails to adopt the transaction within a reasonable time.

CORPORATE PERSONALITY

GENERAL A corporation is recognized in law as a legal entity separate and distinct from its shareholders

(Salomon v. Salomon). A shareholder/director can also be an employee of the co (Lee v. Lee’s Air Farming Ltd. - case

considers whether a person who was the governing director and controlling shareholder of a corporation as well as its chief pilot, could be an employee of the corporation for the purposes of workers’ compensation legislation.)

Perpetual succession – flows from separate corporate personality. The corporation begins its life on a fixed date. It can only come to an end by a deliberate act of murder. Changes in the character of its principal actors do not affect its existence – even if all shareholders and directors accidently die.

“The acts of a company’s … directors, managers, secretary, and so forth, functioning within the scope of their authority, are the company’s acts.” (Daimler Co. v. Continental Tyre and Rubber Co.)

Salomon vs. Salomon [1897] – A corporation is recognized in the law as a legal person, and is a legal entity separate distinct from its shareholders – limited liability F: Aron Saloman incorporated his leather merchant & wholesale boot manufacturing business by registering memorandum of associations required by governing statute. Another legal requirement was that there be at least 7 shareholders. Aron was managing director & owned 20, 001 shares of 20,007. He gave a share each to his wife and children. He lent the company money through debentures. The debentures were issues to B as security for a loans. Upon a default of payment, B sought to enforce his security against the corporation’s assets. After payment (which included selling the factory), there was only 1,055 left.I & H: Who should be paid first, the unsecured creditors or Aron Saloman, as a secured creditor? Was Aron liable for the company’s debts? Aron should be paid first b/c (since he is not liable for his company’s debts, he is legitimately regarded as a secured debtor) he is a secured debtor and that takes priority over other debtor. C: Aron Salomon was separate from the corporation and not liable for the debts. COMMENTS:• Prof: He almost never uses the word person in the way we have been talking about corporations but it is regarded as a

foundation case. • The most significant feature of corporation is the segregation of business profits and losses from the personal accounts of the

individual participants. • Apart from establishing the separate personality of the corporation, Salomon also confirmed that corporate registration

statutes mean what they say. The statute required seven shareholders, and the courts below interpreted this as meaning seven “substantial” shareholders, rather than six holders of one share and one holder of 20, 0001.

• What was the business transaction? He contracted with the company.• Debenture - term used generally to describe a piece of paper that evidences a loan and the loan itself is often described as a

debenture. It creates a debt. It is sometimes without collateral. That was not the case for Mr. Saloman - he took collateral.

1925 Indian Idol Case JCPC – Hindu idol under CL considered to be a separate legal person.

19

F: WM left an idol to his 3 sons, each of whom would be sole manager for 1/3 of the year & stipulated idol was not be to be removed from its place of worship. One son sought to move idol. Other two argued on property rights basis that this could not be done. I & H: Do 2 defendants have a proprietary claim that prevents appellant from moving idol? No. Was P entitled to move idol? The court appointed a “next friend”, a lawyer so court could better determine what would be in idol’s best interests. Idol existed for the family and not the manager. • This is similar to how corporations are viewed - using the equitable concept of fiduciary duties. The CEO can be relied on to

protect the interests of the legally personified corporation but where his interests comes into conflict, equitable rules are imposed to protect the corporation’s legal rights and duties.

INSURABLE INTEREST IN COMPANY’S ASSETS Company assets are owned by the company. Neither a simple creditor nor a shareholder in a

company has any insurable interest in a particular asset which a company holds (Macaura). A parent corporation holding a controlling interest in the shares of a subsidiary corporation had a

“business interest” in the subsidiary’s assets, but that it held no insurable interest therein (General Accident Fire Life Assurance Corp. v. Midland Bank Ltd)

However, a sole shareholder, though lacking any propriety interest in the corporation’s assets, has an “insurable interest” in them (Kosmopoulos).

A director can also be an employee of the company (Lee’s Air Farming)

Macaura v. Northern Assurance Co. [1925] – Neither a simple creditor nor a shareholder in a company has any insurable interest in a particular asset which a company holds. (Rule only applies where not wholly owned by claimants). F: Fire damaged timber on Macaura’s property. He had already sold this timber to the company of which he was almost 100% shareholder. Insurance was in his initial business’ name not his new company’s. Insurance companies refused to pay claiming appellant no longer owned the timber, and so had no insurable interest. It was the company’s. I & H: Did appellant have any insurable interest in goods the subject of the policies? No. Appellant could only insure either as a creditor or as a shareholder in the company. As a creditor his position appears incapable of supporting the claim. Same goes for a shareholder - A shareholder must be independent of the extent of his share interest. “No shareholder has any right to any item of property owned by the company, for he has no legal or equitable interest therein. He is entitled to a share in the profits while the company continues to carry on business and a share in the distribution of the surplus assets when the company is wound up”.

Kosmopoulos v. Constitution Insurance Co. of Canada [1987] SCC – A sole shareholder, though lacking any propriety interest in the corporation’s assets, has an “insurable interest” in them. F: Kosmopoulos, a Greek immigrant, incorporated his leather goods store and was the company’s sole shareholder and director. The lease of the business continued in the same name and was never assigned to the corporation. The insured under the insurance policy covering the business continued to be shown as “Andreas Kosmopoulos O/A/ Spring Leather Goods”. A fire broke out in an adjacent store and damaged the store. Insurance companies sought to deny K ’s claim for damages suffered. TJ: Distinguished from Macaura - In Macaura there were more than 2 shareholdes, here the P is the sole owner of company.H: 1. Company was a legal entity distinct from Mr. Kosmopoulos. It, and not Mr. Kosmopoulos, legally owned the assets of the business. 2. Macaura rule can be modified on a case-by-case basis. Mr. K has an insurable interest in the assets capable of supporting the insurance policy and is entitled to recover under it. “[A]n insurable interest in the Company’s assets may be found in the sole shareholder.”COMMENTS: Kosmopoulos held: concept of “insurable interest” was broader than in earlier cases. A sole shareholder, though lacking any proprietary interest in the corporation’s assets, had an “insurable interest” in them. The result is that the corporate personality point from Macaura was upheld, but the insurance law point was broadened. This conclusion on the issue of corporate personality was affirmed in Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co., [1996] ON CA.

Lee v. Lee’s Air Farming Ltd. [1961] N.Z.J.C.P.C. - Director can also be an employee.F: Deceased killed while piloting an aircraft belonging to corporation in course of aerial top-dressing operations. S. 3 of NZ Workers’ Compensation Act provided for compensation for an employee. Deceased was controlling shareholder and was appointed as governing director and employed at a salary as its chief pilot. I & H: Whether position of the deceased as sole governing director made it impossible for him to be the servant of the company in the capacity of chief pilot of company. “There was no such impossibility. There appears to be no greater difficulty in holding

20

that a man acting in one capacity can give orders to himself in another capacity than there is in holding that a man acting in one capacity can make a contract with himself in another capacity.” “It is well established that the mere fact that someone is a director of a company is no impediment to his entering into a contract to serve the company. If then, it be accepted that the respondent company was a legal entity … [there is] no reason to challenge the validity of any contractual obligations which were created between the company and the deceased.” “One person may function in two capacities”“The company and the deceased were two separate and distinct legal persons.

Notes• The theory of corporate personality cuts two ways. On its face, it says that certain acts are acts of the

corporate person. What this implies, though, is that such acts are not acts of any individuals who might have been involved in some way. Assume that a corporation, under the control of its directors and therefore indirectly of its shareholders, enters into a contract. The corporation is liable on the contract. If, however, the act of contracting was also treated as an act of the individuals involved, then they too would be liable on the contract, which would make nonsense of the theory of corporate personality.

• It would seem to follow that if an act is a corporate act, it cannot generally also be an act of the individuals involved. Salomon, for instance, decided that a corporate act is not the act of an individual merely because that individual is a controlling shareholder. Lee v. Lee’s Air Farming Ltd. shows, however, that just because an individual is a controlling shareholder and a director of a corporation, he does not thereby forfeit his individual personality. He can act in different capacities within the corporate structure. Thus, if Lee, acting as the “sole governing director”, had caused the corporation to commit a tort, then presumably that would be a corporate tort, and it would seem to follow that Lee would not personally have committed a tort. On the other hand, it was perfectly possible for Lee, acting in his personal capacity, to become an employee of the corporation.

• Lee demonstrates that what needs to be ascertained is the capacity in which the individual in question is acting, or which “what” the individual is wearing, at the relevant point in time in order to determine liability. How can we determine this?

Berger v. Willowdale A.M.C. (1983) ON CA – sole shareholder can be personally liable in tort. F: F was the president and sole shareholder of a corporation. One of the corporation’s employees slipped on the sidewalk when leaving work after a snowstorm. The evidence established that the sidewalk had not been adequately cleared. The applicable legislation, the Worker’s Compensation Act 1970 gave compensation for such work related injuries, but prevented tort actions against the employer. The injured employee sued F. I & H: Is F liable in negligence to the employee? If so, what was F’s duty of care?Majority: F was liable for the tort of negligence on the facts. Dissent: F had violated his obligations to the corporation, but owed no duty to the plaintiff.

STANDING TO SUE FOR WRONGS TO COMPANY

Rule: Shareholders cannot claim a loss that is a direct result of wrong to the company

• Since company is a separate legal entity, its rights and obligations may differ from shareholders. Only the company and not shareholder has standing to bring an action for wrongs done to the company (Foss v. Harbottle).

• Shareholder needs an independent relationship and an independent loss to have standing to bring a claim. Claims in respect of losses stemming from an alleged inability to oversee or supervise management are really derivative and not personal in nature … shareholders cannot raise individual claims in respect of a wrong done to the corporation. (Hercules Management, SCC)

21

• Where a shareholder has been directly and individually harmed, that shareholder may have a personal cause of action even though the corporation may also have a separate and distinct cause of action (Goldex Mines Ltd. v. Revill).

• BCBCA 227 (1) For the purposes of this section, "shareholder" has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section.

• BCBCA 227 (2) A shareholder may apply to the court for an order under this section on the ground(a) that the affairs of the company are being or have been conducted, or that the powers of the

directors are being or have been exercised, in a manner oppressive to one or more of the shareholders, including the applicant, or

(b) that some act of the company has been done or is threatened, or that some resolution of the shareholders or of the shareholders holding shares of a class or series of shares has been passed or is proposed, that is unfairly prejudicial to one or more of the shareholders, including the applicant.

Hercules Management v. Ernest and Young et. al 1997 SCC – P needs to have both an independent relationship and an independent loss to have standing to bring a claim. F: Auditors prepared inaccurate financial statements, H: SCC held that the plaintiffs had an independent loss (they made investment decisions relying on the financial statements), but no independent relationship with the accountants (the financial statements had not been prepared for the purpose of making personal investment decisions, but for the purpose "of allowing the shareholders, as a group, to supervise management and to take decisions with respect to matters concerning the proper overall administration of the corporation" (para. 56)). SCC applied Foss v. Harbottle to deny the plaintiffs’ claim in Hercules.ANALYSIS:“One final point should be made here. Referring to the case of Goldex Mines Ltd. v. Revill 1974 CanLII 433 (ON CA), (1974), 7 O.R. (2d) 216 (C.A.), the appellants submit that where a shareholder has been directly and individually harmed, that shareholder may have a personal cause of action even though the corporation may also have a separate and distinct cause of action. Nothing in the foregoing paragraphs should be understood to detract from this principle. In finding that claims in respect of losses stemming from an alleged inability to oversee or supervise management are really derivative and not personal in nature, I have found only that shareholders cannot raise individual claims in respect of a wrong done to the corporation. Indeed, this is the limit of the rule in Foss v. Harbottle. Where, however, a separate and distinct claim (say, in tort) can be raised with respect to a wrong done to a shareholder qua individual, a personal action may well lie, assuming that all the requisite elements of a cause of action can be made out.”

Robak Industries Ltd. v. Gardner, 2007 BCCA – need independent loss to have standingF: • Lepinski was the president and a director of Getty Coper since 1992. Lepinksly had a wholly owned subsidiary called Robak

Industries. Robak was a substantial shareholder in Getty and also owned a mineral property known as "Getty South". • In 2003, Robak entered into an agreement with Getty to sell 50% of the Getty South property to Getty in exchange for shares

and the agreement also provided that Robak was going to be the controller of the development of both Getty’s share of Getty South and Robak’s share of Getty South. The development was going to be in the hands of Robak. (fair deal?).

• In 2004, the respondent, Robert Gardner became a director of Getty. • The appellants allege that Mr. Gardner and others planned to seize control of Getty by discrediting and ousting Mr. Lepinski,

undoing the Agreement, and acquiring one hundred percent of Getty South, while increasing their own shareholding in Getty. They allege that Mr. Gardner set out to implement his plan with the assistance of the respondents, Ross Glanville & Associates and Ross Glanville, and others.

• Gardner: the deal Lepinski did with Robak was a fraud and a racket — caused Getty damage and so I am going to sue you for it. – the only persons who are allowed to commence litigations are the board of directors, Gardner is simply a shareholder.

I & H: Did the appellants have standing to bring the action? No, the appellants do not have an independent loss to bring an action and claim damages. LECTURE COMMENTS:• the company that was the subject of the lawsuit was a client of the Professor’s - the Getty property is located in Kamloops

area.

22

• Saloman & Co - the corporation is an entity distinct from its members. Part of the compensation he wanted was for diminution of shares. When a wrong has been done to the company, the only proper P is the company. Even though incidentally or … derivatively you have suffered a loss, the harm inflicted on the company caused loss to you by reasons of your ownership - therefore your loss is derived from the company’s loss.

• the requirement that you sue through the company avoids a multiplicity of lawsuits. Elaboration of the doctrine of corporate personality starts to have defensible policy justifications.

STANDING UNDER THE CANADIAN CHARTER

• Corporations are usually regarded in law as “persons” by Interpretation Act.• However, the Interpretation Act does not apply to the Charter (Law Society of Upper Canada v.

Skapinker, SCC)• s. 2(b) freedom of expression applies to corporations (Slaight Communications Inc. v. Davidson, SCC;

Irwin Toy Ltd. v. Quebec; RJR MacDonald v. Canada, SCC)• S. 8 of the Charter applied to corporations (Hunter v. Southam Inc.,SCC)• In order to make full answer and defence s. 7 applies to corporations (R. v. Agat Laboratories). • A corporation has standing under s. 15 if standing has been granted on other grounds (Little Sisters

Book & Art Emporium, SCC)

CORPORATE VEIL THEORY

• Doctrine of corporate veil - situation in which judges have presumed to ignore the existence of the corporate person and fixed liability on the managers or the shareholders.

• What are these situations? – Where it would be flagrantly opposed to justice. • corporation is formed for a wrongful or unlawful act, where its officers are engaged in wrongful or

illegal activities, or “where the company is a mere agent of a controlling corporator, it may be said that the company is a sham, cloak, or alter ego, but otherwise it would not be so intended” – Clarkson Co. Ltd. V. Zhelka [1967] SCC.

• “There are undoubtably situations where justice requires that the corporate veil be lifted … [I]t 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 please son some loosely defined “just and equitable” standard …. [T]he 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. The first element “complete control” requires more than ownership. It must be shown that there is complete domination and that the subsidiary company does not, in fact, function independently … 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’?” - Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. [1996] Gen. Div.

• The general principle behind corporate veil theory is that a corporation is to be analyzed by analogy to the individual human being.

• Maintaining fidelity to the separate legal identity of the corporation from its shareholders does not necessitate the slavish adherence to an acontextual and absolutist vision of the corporation. Rather, it ought to allow for analysis of the effects of the corporate form on commercial realities that corporate statutes may not have adequately accounted for. … The relative wars with which incorporate may be obtained potentially .

• The attempt to foist liability upon a corporation’s investors by invoking corporate veil theory is an attempt to circumvent the implications of incorporation.

23

• Stubart Investments Ltd. v. The Queen - SCC determined that a corporate affiliate that was established solely for tax planning purposes and demonstrates no bona fide business purpose did not justify piercing the corporate veil.

• Unfairness on its own is not a sufficient justification for dismantling the corporate structure. Instead, a reasoned and legally sustainable basis for ignoring the legal implications of incorporation must be demonstrated. For this to exist, the inequitable conduct must be shown to be inextricably linked with corporate activity and inimical to the purposes for which the separation of corporate and shareholder liability is granted through incorporation.

Test for Piercing the Corporate Veil (Transamerica Life Insurance). 1. Is the subsidiary company completely dominated and controlled by its principal? Must show more

than mere ownership – must show that it does not operate independently. 2. Is the subsidiary being used as a shield for fraudulent or improper purpose? is there ‘conduct akin to

fraud that would otherwise unjustly deprive claimants of their rights’?

Clarkson Co. v. Zhelka 1967 – F: Selkirk ran several Companies, including Industrial Ltd. and Fidelity Real Estate. Industrial bought land, paid for with cash advance from Selkirk’s other Co. Then sold land to Selkirk’s sister, Zhelka, for a $120,000 promissory note. Zhelka mortgaged it, went into default, and got $9,000, which ended up in Fidelity’s account. Selkirk went bankrupt and trustee Clarkson tried to sell the assets to pay the debts. The trustee wanted to claim the $9,000, saying that the land, registered in Zhelka’s name, was held in trust for Selkirk, that Industrial was a mere agent and alter ego for Selkirk. I: Is the conveyance fraudulent and should the veil be lifted, and land sold back to pay the creditors? A: Gift to Zhelka is reversible because it was fraudulent: no consideration, with intention of hiding asset from creditors. Land and $9,000 belong to Industrial. If it can be shown that the Co is a mere agent of a controlling corporator, it may be said that the Co is a sham: This is a question of fact, and should be done sparsely. The agency has to be flagrant. • Having a controlling or total share in a Co does not make a Co an agent of a controlling company or person • Present case is on the line, but not quite close enough to flagrancy. • There is no evidence that the Industrial was ever used to defraud the creditors or as a sham and a cloak. It is a legit Co, albeit it questionable in some ways. • Despite the fact that the conveyance is found to be fraudulent, the resulting trust goes back to Industrial Ltd.. So does the $9,000. • There are no Canadian cases that have found a Co to be an agent of the SHs, though it could be possible. C: Money stays with IndustrialCOMMENTS:• Reverse of Salomon: here going after the corporation thru the individual. • useful summary on p 92 of when the veil can be lifted:

• “if a Co. is formed for the express purpose of doing a wrongful or unlawful act, or, if when formed those in control expressly direct a wrongful thing to be done, the individuals as well as the Co are responsible to those to who liability is legally owed....

De Salaberry Realties Ltd. v. M.N.R. 1974 Fed Tax – Complete examination of the CO as a whole is needed to determine if the corporate veil should be lifted - especially in the case of grandparent, parent and multiple sister COsF: Tax Appeal Board: PL profits selling land alleged to be purchased for shopping centre development. COs in question form a pyramid structure, with a grandparent CO managing parent COs, + network of sub-subsidiary land-holding COs. New sub-subsidiary incorporated for every few purchases.I: Are these CO really just agents of the larger CO, and so should the corporate veil be lifted? A: Some factors that the court considers: • The people that are approached by potential customers are an indication as to the centre of policy and decision- making in

each CO. Here the buyers went to the parent and grandparent COs instead of the actual land-holders. • Despite the fact that shares of the sub-subsidiaries were only valued at $10, these COs were making purchases of land in the

millions of dollars which indicates strongly that the COs are merely an instrument of its grandparent. • The individual COs did not have the money to operate on their own, without having to rely on each other. Because of this

they had no free will and had no commercial viability.• There was no horizontal interaction between lowest COs: all of their dealings were vertical with the parent COs.• All of the boards of directors of the COs were appointed by the parent COs.

24

• They were not engaged on daily basis in commercial operations, but were simply engaged in holding property.C: The court finds this to be a “group enterprise” - legal individuals in the eyes of the law, but for tax purposes, the court looks at the whole structure. Ruling: The veil is lifted.• tax officials want to ignore corporate form and tax accordingly (treat them as a unit.)• could use as authority for lifting veil in similar circumstances but realistically this is more to do with taxation than anything

else. • p 124-5 SCC divided on point: Stubart Investments etc bona fide “Business Purposes Test” from US - not adopted in Canada• complexity: probably the more complex the structure the more suspicious it looks to the cts. particularly but not exclusively

to tax context.

Lynch v. Segal 2006 ON CA – family law context – cts will not enforce the separate entities notion where ‘it would yield a result too flagrantly opposed to justice, convenience or the interests of the revenue”.F: L is S’s ex, seeking maintenance and child custody. S has set up shell corporations purporting to be held by ‘mysterious high end foreign investors” which owned his ppty, in fact he was the beneficial owner of the pptys and capitalI: Is it appropriate in this case to go behind the corporate veil?A: Here “the corporations are completely controlled by one spouse for that spouse’s benefit and no third parties are involved.” S is “using the corporate structure for the sole purpose of disguising his property so that his spouse and children would have no claim against him”H: beneficial owner of capital and land and therefore, shares aside, the interest can be vested in the wife• Ct might look at statutes, family law or fraudulent transactions, there are sometimes other mechanisms besides lifting corp

veil but here that’s what they used.

Big Bend Hotel Ltd. v. Security Mutual Casualty Co. [1980] BCSC – corporate veil pierced to establish pattern of behaviour of corporation. F: Kumar was the president and sole shareholder of the plaintiff corporation. The corporation contracted for an insurance policy with the D to insure a hotel, the sole corporate asset. The hotel burned down. Kumar had previously been the president and principal shareholder of another corporation whose hotel had burned less than 3 years earlier. The defendant insurers denied coverage on the basis that the P or its agent at the time of the application for insurance fraudulently omitted to communicate the circumstances that were known to be material to the insurers in order to enable them to judge of the risk to be undertaken. H: “Here Vincent Kumar clearly omitted to disclose a fact which he knew was material to the insurers and such failure to disclose is fraudulent. In these circumstances, it is appropriate to lift the corporate veil; equity will not allow an individual to use a company as a shield for improper conduct or fraud.”

LIMITED LIABILITY & CORPORATE OBLIGATIONS

GENERALBalancing act: waive formalities required by the corporate constitution, or, thwart some outsiders' civil liberties and transactional expectations?

A person can incur obligations in 3 ways:1. Personally -- duties to other people recognized in tort or contracts2. Consensual liability through agency — your agent contracts according to your instructions;

you're liable for obligations incurred by your agent. Liability is consensual in that you authorized your agent to bind you.

3. Non-consensual liability — your agent commits a tort within the scope of the agency, then you are liable to the victim on the basis of vicarious liability/respondeat superior. Liability is non-consensual in that you did not want it. Agent is liable in tort as well.

25

COMMON-LAW TEST

• Usually corporations can be held vicariously liable for the torts of its agents. • Exceptions: criminal liability and certain cases in tort. • Many criminal acts are criminal only if MR, the elusive guilty mind, can be proved on the part of the

accused. One person is not criminally liable vicariously for the acts of another. • Rare tort cases where VL cannot be invoked.

• If a corporation is named defendant and some mental state of D must be proved, then somewhere in the corporate organization must be found a human mind which possessed the relevant mental state, and which can rightly be said to have been functioning at the relevant time as the mental component of the corporate activity in question.

Identification Theory/ Directing Mind & Will Test• concerned with identifying a particular corporate brain that could be said to have been operating as

the corporate brain in particular circumstances. It led to the conclusion that the brain was the corporate brain, so the corporation incurred liability personally.

• Used in most criminal and a few tort cases. • ID doctrine only operates where the action taken by the directing mind

o was within the field of operation assigned to him;o was not totally in fraud of the corporation; ando was by design or result partly for the benefit of the company .

• “In order to trigger [the identification theory’s] operation and through it corporate criminal liability for the actions of the employee (who must generally be liable himself), the actor/employee who physically committed the offence must be the “ego”, the centre” of the corporate personality, the “vital organ” of the body corporate, the “alter ego” of the employer corporation or its “directing mind”. - Canadian Dredge & Dock Co.

• question of whether someone is the “directing mind” of a corporation is a question of mixed fact and law - The Rhone.

• Whether impugned individual has been delegated 'governing executive authority' of co. w/in scope of his/her authority, i.e. whether 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. (The Rhone)

• "reasonable likelihood" test whether the exercise of particular duty by a ship-owner would have prevented the impugned damage. (The Rhone)

• “Key factor which distinguishes directing minds from normal employees is the capacity to exercise decision-making authority on matters of corporate policy, rather than merely to give effect to such policy on an operational basis.” (The Rhone)

The “Rhone” v. The “Peter A.B. Widener” [1993] SCC - test for corporate criminal liability - identification theory i.e. ‘directing mind’ - responsibility for decision re: corporate policyF: Ship’s captain crashed barge. Captain employed by Great Lakes Towing Co, who also owned vessel. Barge owners wanted to sue GL. GL sought to limit its liability under s. 647(2) of Canada Shipping Act - allows ship owner to limit tort liability that would normally attach to it under vicarious liability. Provision operates to limit liability only if damage caused w/o “actual fault or privity” of ship’s owner. If owner at “actual fault”, it bears unlimited liability. I & H: Is Master of appellant’s tug a directing mind of the corporation? Whether Captail Kelch’s faults are essentially actual faults of Great Lakes by reason of his position within the corporate hierarchy of the appellant. No, Captain Kelch was not a directing mind of Great Lakes b/c he was not delegated governing executing authority over management and supervision of Great Lakes’ fleet. The authority remained with Captain Llyod. He did not influence corporate policy.

26

Lecture Comments: How do we determine whether GL has been guilty of actual fault or privity? How high in the hierarchy do you have to go? As long as he had delegation of authority and his decisions affected policy level decisions.

Corporate Defence• where the employee directing mind was on “a frolic of his own” = no VL - Canadian Dredge & Dock

Co. v. The Queen [1985). • 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.”- Canadian Dredge & Dock Co.

• "[The] act in question must be done by the directing force of the company when carrying out his assigned function in the corporation. It is no defence to the application of this doctrine that a criminal act by a corporate employee cannot be within the scope of his authority unless expressly ordered to do the act in question. Such a condition would reduce the rule to virtually nothing."

• "Acts of the ego of a corporation taken within the assigned managerial area may give rise to corporate criminal responsibility,

o whether or not there be formal delegation;o whether or not there be awareness of the activity in the board of directors or the officers of

the company; and …o whether or not there be express prohibition."

• Question: whether there is, in fact and in law, any controlling difference between a directing mind acting in fraud of the corporation and a directing mind acting on behalf of the corporation as its managerial arm but doing so for his own benefit.

• Were the charge in question a charge of fraud, there would clearly be no benefit to the corporation, and indeed the design of the dishonest employee was aimed squarely at reducing the financial stature of the employer. The employee would be guilty of fraud and the victim of that fraud would be the company. It is otherwise, however, where there is benefit to the corporation, in whole or in part, from the unlawful acts of its directing mind.

• "Where the directing mind conceives and designs a plan and then executes it whereby the corporation is intentionally defrauded, and when this is the substantial part of the regular activities of the directing mind in his office, then [the manager's] energies are … directed to the destruction of the undertaking of the corporation. [He] ceases to be the directing mind and the doctrine of identification ceases to operate."

• "Where the criminal act is totally in fraud of the corporate employer and where the act is intended to and does result in benefit exclusively to the employee-manager, the employee-directing mind, from the outset of the design and execution of the criminal plan, ceases to be a directing mind of the corporation and consequently his acts could not be attributed to the corporation under the identification doctrine."

• ID doctrine only operates where the action taken by the directing 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 .

27

• In Canadian Dredge & Dock Co. the 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 corporation was liable.

CRIMINAL LIABIITY

1. CRIMINAL LIABILITY: Mens Rea Offences• Whenever a corporation is convicted of a mens rea offence, one element of proving corporate guilt

will be to identify some individual in the corporation as a criminal. • The directing mind and will test was first developed in Lennard’s Carrying Co. and then quickly

applied by analogy to question of whether a corporation was guilty of MR offence. • Junior officers could also count as the directing mind and will, so long as the person has “governing

executive authority”. As interpreted in The Rhone this means “… the courts must consider who has been left with the decision-making power in a relevant sphere of corporate activity.”

• In Canadian Dredge & Dock Co. - SCC clearly rejected idea that there could be any defence on the basis that the conduct in question was carried out contrary to express instructions from the corporation. “If the law recognized such a defence, a corporation might absolve itself from criminal consequence by the simple device of adopting and communicating to its staff a general instruction prohibiting illegal conduct and directing conformity at all times with the law.”

• However, there is a defence if the relevant individual was acting entirely for his own account and against the interests of the corporation. The defence is limited to the situation where the corporation was not intended by the individual to derive any benefit from them. “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 employer-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” (Canadian Dredge)

• The CL directing mind and wills test does not allow aggregation of multiple individual minds.

Statutory Reform: Bill C-64Purpose: to make it easier to prosecute large corporations. Defines which individuals in the co. will provide the mens rea element. A "senior officer" must be found:• "a representative who plays an important role in the establishment of an organization's policies

or is responsible for managing an important aspect of the organization's activities"▪ Incl. directors, chief executive officer, chief financial officer

CC. s. 22.1 : In respect of an offence that requires the prosecution to prove negligence, an organization is a party to the offence ifa. A representative of the corporation is “acting within the scope of his authority”; andb. "the senior officer who is responsible for the aspect of the organization's activities that is relevant

to the offence departs … markedly from the standard of care that, in the circumstances, could reasonably be expected to prevent a representative of the organization from being a party to the offence."

• Proof of only criminal negligence instead of mens rea/intention:

CC s. 22.2:

28

In respect of an offence that requires the prosecution to prove fault — other than negligence — an organization is a party to the offence if, with the intent at least in part to benefit the organization, one of its senior officersa. acting within the scope of their authority, is a party to the offence;b. having the mental state required for the offence, directs representatives to commit the

prohibited act or make the omission; orc. knowing that a representative of the organization is or is about to be a party to the offence, does

not take all reasonable measures to stop them from being a party to the offence.

(actus reus satisfied by any individual involved in the corporation committing the act) Statute still requires that the senior officers have the intention of at least partially benefiting the corporation. Specific treatment of corporations for sentencing and probation: CC s. 718.21 - 732.1(3.2)

R. v. Global Fuels, 2013 QCCS 4262 (CanLII). ** available in French only

2. CRIMINAL LIABILITY: Non-Mens Rea Offences • Non-MR offences:(a) absolute liability offences - automatic primary responsibility. Corporation is treated as a natural

person. (b) strict liability offences - establishment of AR subject to defence of due diligence - R. v. City of Sault

St. Marie [1978] SCC. The corporation is treated as a natural person. The liability is not vicarious but primary.

• “Corporate responsibility in both strict and absolute liability offences has been found to arise on the direct imposition of a primary duty in the corporation in the statute in question, as construed by the court.” - Canadian Dredge.

• A corporation can be held liable for a strict liability offence committed by one of its employees if “the natural person who represents that company and who “acts” as it in providing any of the services delivered by the Company is the employee specifically authorized and instructed for that purpose.” (R. v. Fitzpatrick’s Fuel Ltd.)

R. v. Fitzpatrick’s Fuel Ltd. [2000] NJ Prov Ct. F: The corporation, Fitzpatrick’s Gas Bar, was charged with selling beer to a minor. Peter Fitzpatrick = sole shareholder, sole director, and sole officer. There were two employees, who worked alternating shifts, alone and unsupervised. One of the employees, Zamzam sold 6 bottles of beer to 17 year old Evan Brennan. Zamzam said that he knew of the prohibition against selling beer to minors and had followed all procedural requirements. I & H: Despite the care exercised by its sole officer, director, and shareholder, Peter Fitzpatrick, should the Company still be held liable for the wrongful actions of Parviz Zamzam? Yes, Peter Fitzpatrick was the directing mind, but it was Zamzam who the public dealt with. “the natural person who represents that company and who “acts” as it in providing any of the services delivered by the Company is the employee specifically authorized and instructed for that purpose.” Zamzam’s actions satisfied the three part criteria laid down in Canadian Dredge.

NOTES & QUESTIONS:1. In a strict liability offence, the Crown does not have to prove mens rea. Does it follow that neither

s.22.1 nor s.22.2 of the CC apply, so that the CL principles govern?2. The Rhone which seems to have been ignored in R. v. Fitzpatrick’s Fuels Ltd. said that the test for the

“directing mind and will” was to find a person who had “governing executive authority over the management and operations”. Did Zamzam satisfy this test? - No. Why did Handrigan J. note

29

Zamzam was the person that people dealt with when they transacting business with the corporation? Does that make a person a “directing mind and will”?

3. On the other hand, did the Crown have to prove that Zamzam was the directing mind and will? Since it was a strict liability offence, the Crown only had to prove that the corporation committed the actus reus. Although mens rea cannot be attributed to a principal or an employer via the doctrine of VL, perhaps an act can. On this theory, Handrigan J.’s conclusion that Zamzam “represents that company and who “acts” at it in providing any of the services delivered by the Company” may have been necessary to show that the corporation committed the actus reus.

Meridian Global Funds Management Asia Ltd v Securities Commission, [1995] UKPC(<http://www.bailii.org/uk/cases/UKPC/1995/5.html>)R: A servant’s authority to carry out an act and his knowledge of that act is not a sufficient basis for attribution of that act and knowledge to the company. F: A group of individuals intended to purchase 49% controlling holding of a NZ publicly traded company, ENC and use ENC’s own assets to finance this venture. However, they needed money to purchase these shares. These funds came from an investment fund, Meridian, facilitated by Koo (CEO) and Ng (senior portfolio manager). They contracted on behalf of Meridian, through Hwang & Yusoff, to buy a parcel of shares in Malaysian and Indonesian companies from ENC for S21 million and at the same time to resell the same shares to ENC for a slightly greater price. Payment for the purchase was made to Hwang & Yusoff on 30th October and payment for the resale was to be made by ENC on 19th November. ENC did not own the shares in question and the persons who purported to sell on its behalf had at that stage no authority to do so, but Meridian paid the money and on 9th November Hwang & Yusoff used $18.2 million to buy the shares in ENC. But the scheme to pay Meridian back out of ENC's money on 19th November was frustrated by the independent directors of ENC, who imposed conditions on the use of the company's funds with which the predators could not comply. Unable to get their hands on the company's money, they had to unwind the scheme as best they could. Koo, on behalf of Meridian, agreed to release its rights under me original funding arrangements and accept instead a payment and undertakings from Hwang & Yusoff. The net result was that the funds under Meridian's management suffered a loss, which the Australian parent company had to make good to the beneficial owners of the funds when the affair was discovered some six or seven months later.According to NZ securities legislation, anybody acquiring a substantial interest in a publicly traded company must disclose this information and obviously this was not done. I & H: Is Meridian in breach of its statutory obligations by failing to report? Are Koo and Ng directing minds of Meridian? Meridian is not liable. Koo and Ng are not directing minds - were acting in their own interests and not in the corporation’s interest. A: Lord Hoffman:

Any proposition about a company necessarily involves a reference to a set of rules. A company exists because there is a rule (usually in a statute) which says that a persona ficta shall be deemed to exist and to have certain of the powers, rights and duties of a natural person. But there would be little sense in deeming such a persona ficta to exist unless there were also rules to tell one what acts were to count as acts of the company. It is therefore a necessary part of corporate personality that there should be rules by which acts are attributed to the company. These may be called "the rules of attribution".

The company's primary rules of attribution will generally be found in its constitution, typically the articles of association, and will say things such as "for the purpose of appointing members of the board, a majority vote of the shareholders shall be a decision of the company" or "the decisions of the board in managing the company's business shall be the decisions of the company". There are also primary rules of attribution which are not expressly stated in the articles but implied by company law, such as "the unanimous decision of all the shareholders in a solvent company about anything which the company under its memorandum of association has power to do shall be the decision of the company": see Multinational Gas and Petrochemical Co. v. Multinational Gas and Petrochemical Services Ltd. [1983] Ch. 258.

These primary rules of attribution are obviously not enough to enable a company to go out into the world and do business. Not every act on behalf of the company could be expected to be the subject of a resolution of the board

30

or a unanimous decision of the shareholders. The company therefore builds upon the primary rules of attribution by using general rules of attribution which are equally available to natural persons, namely, the principles of agency. It will appoint servants and agents whose acts, by a combination of the general principles of agency and the company's primary rules of attribution, count as the acts of the company. And having done so, it will also make itself subject to the general rules by which liability for the acts of others can be attributed to natural persons, such as estoppel or ostensible authority in contract and vicarious liability in tort.

The company's primary rules of attribution together with the general principles of agency, vicarious liability and so forth are usually sufficient to enable one to determine its rights and obligations. In exceptional cases, however, they will not provide an answer. This will be the case when a rule of law, either expressly or by implication, excludes attribution on the basis of the general principles of agency or vicarious liability. For example, a rule may be stated in language primarily applicable to a natural person and require some act or state of mind on the part of that person "himself", as opposed to his servants or agents. This is generally true of rules of the criminal law, which ordinarily impose liability only for the actus reus and mens rea of the defendant himself. How is such a rule to be applied to a company?….“One possibility is that the court may come to the conclusion that the rule was not intended to apply to companies at all; for example, a law which created an offence for which the only penalty was community service. Another possibility is that the court might interpret the law as meaning that it could apply to a company only on the basis of its primary rules of attribution, i.e. if the act giving rise to liability was specifically authorised by a resolution of the board or a unanimous agreement of the shareholders. But there will be many cases in which neither of these solutions is satisfactory; in which the court considers that the law was intended to apply to companies and that, although it excludes ordinary vicarious liability, insistence on the primary rules of attribution would in practice defeat that intention. In such a case, the court must fashion a special rule of attribution for the particular substantive rule. This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc. of the company? One finds the answer to this question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy.

The fact that the rule of attribution is a matter of interpretation or construction of the relevant substantive rule is shown by the contrast between two decisions of the House of Lords, Tesco Supermarkets Ltd. v. Nattrass [1972] A.C. 153 and In re Supply of Ready Mixed Concrete (No. 2) [1994] 3 W.L.R. 1249. In Tesco the question involved the construction of a provision of the Trade Descriptions Act 1968. Tesco were prosecuted under section 11(2) for displaying a notice that goods were "being offered at a price less than that at which they were in fact being offered ...". Its supermarket in Northwich had advertised that it was selling certain packets of washing powder at the reduced price of 2s 11d, but a customer who asked for one was told he would have to pay the normal price of 3s 11d. This happened because the shop manager had negligently failed to notice that he had run out of the specially marked low-price packets. Section 24(1) provided a defence for a shop owner who could prove that the commission of the offence was caused by "another person" and that:-….

Their Lordships would therefore hold that upon the true construction of section 20(4)(e), the company knows that it has become a substantial security holder when that is known to the person who had authority to do the deal. It is then obliged to give notice under section 20(3). The fact that Koo did the deal for a corrupt purpose and did not give such notice because he did not want his employers to find out cannot in their Lordships' view affect the attribution of knowledge and the consequent duty to notify.

It was therefore not necessary in this case to inquire into whether Koo could have been described in some more general sense as the "directing mind and will" of the company. But their Lordships would wish to guard themselves against being understood to mean that whenever a servant of a company has authority to do an act on its behalf, knowledge of that act will for all purposes be attributed to the company. It is a question of construction in each case as to whether the particular rule requires that the knowledge that an act has been done, or the state of mind with which it was done, should be attributed to the company. Sometimes, as in Ready Mixed Concrete and this case, it will be appropriate. Likewise in a case in which a company was required to make a return lor revenue purposes and the statute made it an offence to make a false return with intent to deceive, the Divisional Court held

31

that the mens rea of the servant authorised to discharge the duty to make the return should be attributed to the company: see Moore v. I. Bresler Ltd. [1944] 2 All E.R. 515. On the other hand, the fact that a company's employee is authorised to drive a lorry does not in itself lead to the conclusion that if he kills someone by reckless driving, the company will be guilty of manslaughter. There is no inconsistency. Each is an example of an attribution rule for a particular purpose, tailored as it always must be to the terms and policies of the substantive rule.

LECTURE COMMENTS:• The difference between the analysis in Widener and Meridian is Widener takes the directing mind to a

higher level of the corporate hierarchy.• In Fitzpatrick Judge did exactly what Lord Hoffman in Meridian was suggesting needed to be done. • In Meridian it did not make sense to focus on senior management who knew nothing about the

venture.

AGENCY THEORY

A corporation can be liable in tort and breach of contract through actions of its corporate agents.

General• Agency may arise by express agreement between principal and agent or by implication from their

dealings. • A principal is liable for torts committed by his agent within the scope of the agency. If you can show

that a corporation was acting as the agent of another person, you will have the prospect of making that person liable for what the corporation has done. This does not involve ignoring the corporation’s separate personality.

• The relationship of controlling shareholder and corporation does not in general constitute a relationship of principal and agent (Salomon).

• If the courts make use of the agency concept to circumvent Salomon, they must distinguish between the situations where the corporation is acting as an agent of its controlling interest from that where the controlling interest is merely exercising the prerogative of control. Distinguishing these situations requires an examination of the capacity in which the shareholder was acting. Unless that shareholder acted in a personal capacity, then there will only be one person invoked in the business - the corporation.

• When is a corporation an agent of its controlling interest? When is an individual acting in a personal capacity?

• Apthorpe v. Peter Schoenhofen Brewing Co. (1899) - an American subsidiary was considered to be an agent for its English parent for tax purposes.

** corporate group - is a collection of parent and subsidiary corporations that function as a single economic entity through a common source of control

Criteria on Establishing Agency between a Subsidiary and its Controlling Shareholder (to be applied in a corporate group situation) (Smith, Stone, and Knight Ltd.):(1) Were the profits treated as profits of the parent company? (2) Were the persons conducting the business appointed by the parent company? (3) Was the company the head and brain of the trading venture?(4) Did the company govern the venture, decide what should be done and what capital should be

embarked on the venture?

32

(5) Did the company make the profits by its skill and direction? (6) Was the company in effectual and constant control?

Smith, Stone and Knight Ltd v. Birmingham Corp. [1939] – Criteria for agency relationship in a group situation. F: P corporation held property in land, which it rented to its subsidiary corporation. City of Birmingham expropriated the land under a statute which required compensation to be paid to estate holders who carried on business on the land, but allowed the City to evict tenants without compensation. P claimed compensation on the grounds that it and not the subsidiary was carrying on business on the premises, through the agency of the subsidiary. P had run the business by itself prior to turning the operation over to the subsidiary. H: Subsidiary had no business of its own. The business was that of the parent company. Therefore, it was entitled to compensation. COMMENTS:Corporate structure: Parent company: since the effect of the subsidiary was to put us in a position where we could no longer carry on business we are entitled to claim, entitlement of the parent company to be compensated for the loss of assets in its subsidiary. • Smith, Stone has rarely been followed. Generally regarded as so unusual in facts.

CORPORATE CONTRACTUAL LIABILITY

• Breach of contract• Defences:

• Ultra vires/ incapacity – corporation didn’t have the capacity to enter into the contract and therefore, cannot be held liable on the contract. Corporate capacity limited by objects? - restrictions on the creation of contractual obligations. BN: doctrines of ultra vires and constructive notice were abolished.

• Agency – person who contracted on behalf of the company was not an agent of the company.

A. CORPORATE INCAPACITY(a) Restrictions in the Corporate Constitution • Restrictions in the corporation constitution on the creation of contractual obligations.• Ultra vires abolished, but still applies to Act corporations (created by official act for specific purpose

(Communities Economic Development Fund v. Canadian Pickles Corp. [1991] SCC). • CL companies: “The actions of CL corporations are not invalid b/c they are outside the stated objects

of a corporation… Legal action may be taken against a CL corporation if it acts outside its objects, but the acts are not invalid.” (CEDF v. Canadian Pickles).

• Statutory companies: A statutory corporation can only do what it is expressly or impliedly authorized to do by statute. “[C]orporations 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.” (CEDF v. Canadian Pickles). • HVR (re: Bonanza Creek), if appropriate language is used, 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".

33

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."

• Constructive notice: Since a company’s memorandum of articles is public record, people who have dealings with the company cannot claim to be ignorant of restrictions that are contained in the company’s constitution. They are deemed to have knowledge. • Where a company contracts outside of its jurisdiction and breaches the contract, the other party

may not be able to claim remedies for breach of contract b/c of having constructive notice that company was acting outside of its jurisdiction. Constructive notice supports ultra vires - Re: Jon Beauforte (London) Ltd. [1953].

• CBCA & BCBCA s. 30 - reverse the presumption that corporations have limited capacity. Abolished the ultra vires doctrine and doctrine of constructive notice which applied not only to questions of capacity i.e. vires but also questions of authority i.e. power of agents.

(b) Statutory Reform of Corporate Incapacity

Contrast:

CBCA: 15. (1) A corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person.BCBCA: 30. A company has the capacity and the rights, powers and privileges of an individual of full capacity.• Identify limitation on individual capacity that are simply inapplicable to artificial persons. Limitation

that we think about: age, sanity - mental disability. • What is the effect of the omission of those words in the CBCA .. maybe in a Charter sense.

CBCA: 16. (2) A corporation shall not carry on any business or exercise any power that it is restricted by its articles from carrying on or exercising, nor shall the corporation exercise any of its powers in a manner contrary to its articles.(3) No act of a corporation, including any transfer of property to or by a corporation, is invalid by reason only that the act or transfer is contrary to its articles or this Act.vs.BCBCA 33(1) A company must not(a) carry on any business or exercise any power that it is restricted by its memorandum or articles from carrying

on or exercising, or(b) exercise any of its powers in a manner inconsistent with those restrictions in its memorandum or articles.(2) No act of a company, including a transfer of property, rights or interests to or by the company, is invalid merely because the act contravenes subsection (1).

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

• (the fact that a document is filed at the public registry or is available from the corporate officers - does not constructively create notice to persons dealing with the corporation of any limitations.)

vs. CBCA 18. (1) No corporation and no guarantor of an obligation of a corporation may assert against a person dealing with the corporation or against a person who acquired rights from the corporation that(a) the articles, by-laws and any unanimous shareholder agreement have not been complied with;

34

(2) Subsection (1) does not apply in respect of a person who has, or ought to have, knowledge of a situation described in that subsection by virtue of their relationship to the corporation. [***Note: constructive notice used - past dealings with company]

• Rule in Royal British Bank and Tuiguand: I f everything appears to be regular, you are entitled to assume that it is regular . Where somebody says that I am authorized on behalf of ABC corporation to do X.. and it turns out that he could have been authorized to do X if a there was a resolution — the 3d party was entitled ot rely on an appearance of regularity . • CBCA 18 just dispenses with the defence that internal procedures have not been complied with.• Basically, a corporation should only do what its Articles allow it to do. However, if the corporation acts

outside of its jurisdiction under CBCA 18(1) it cannot hide behind the restrictions of its articles in order to avoid corporate liability. An exception to this is if the other party knew or ought to have known that the company was acting outside of its jurisdiction but went ahead and contracted with it anyways - here constructive notice supports ultra vires .

• What’s left after the statutory reform? Simple agency law problems. • Did the person who purported to act on behalf of the company do what he claimed to do?

(c) The Canadian ConstitutionA corporation might be deprived by contractual capacity by a deficiency of legislative power in the incorporating jurisdiction. This residual application of the ultra vires rule evolves from the federal nature of the Canadian constitution. Any matter beyond the legislative capacity of a parliamentary body cannot be pursued by a business corporation owing its existence and scoop of activities to laws, whether general or particular passed by that legislative body.

Communities Economic Development Fund v. Canadian Pickles Corp. [1991] SCC – F: Plaintiff corporation, CEDF, set up by The Communities Economic Development Fund Act, "to encourage the optimum economic development of remote and isolated communities within the province" (re: s. 3). Loaned defendant co. $150,000, shareholders guaranteed the loan. Defendant was not in an isolated community. Defendant defaulted. CEDF sued Defendant corporation on loan and sued O’Donnells on the guarantees. I & H: Is the loan ultra vires? Can a corporation set up by special legislation conduct business outside its stated objects? What are the consequences of violation of the Act? Depends on whether the corporation was created by statute or common law. “The actions of a CL corporations are not invalid b/c they are outside the stated objects of a corporation… Legal action may be taken against a Cl corporation if it acts outside its objects, but the acts are not invalid.” “[C]orporations 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.”• CBCA & BCBCA s. 30 - reverse the presumption that corporations have limited capacity.

Re: Jon Beauforte (London) Ltd. [1953] - constructive notice supports ultra vires.F: A company set up to manufacture women’s gloves, began making veneered panels. This was clearly not within the objects clause, though it was reflected on the new letterhead which described the business as “Veneer Panel Manufacturers”. The letterhead was used to place an order for a supply of fuel. The company went into liquidation and the liquidators refused to pay the fuel bill. I & H: The fuel merchants had clear notice that the company was ‘carrying on for and for which the fuel was required was that of veneered panel manufacturers’. They had constructive notice of the contents of the memorandum of association and so they had notice that the transaction was ultra vires the company.

35

B. CORPORATE AGENCY• Proving a civil transaction with a corporation is easier than proving a corporate crime. One need not

prove that the corporate mind was directly involved in the particular transaction. Corporate contracts and other transactions creating civil obligations are analyzed on the basis of agency principles.

3 key players in corporate agency analysis1. the corporation2. agent who potentially acted on corporation's behalf3. outsider/third party who negotiated w/ the agent

Object: Whether the agent can be proved to have been the appropriate type of agent through whom to arrange the contracts of the sort negotiated.

Note:Before a person can be bound to a contract, he or she must have capacity to enter into the contract. A capacitated principal, whether corporate or otherwise, is bound where it appoints a particular agent to conclude a particular contract and that agent does so. At the other end of the spectrum, a person cannot create a contract between 2 parties merely by claiming in his dealings with one of them that he is the agent of the other. What is required is the creation, between principal and agent, of an agency relationship, on which the other contracting 3rd party can rely, and by which the principal will be bound

How may a Company enter into a Contract?1) Directly, through a board of directors - by virtue of act, they have authority to do this (all the

directors will sign) — BCBCA 136; CBCA 102.2) Authority delegated (by directors) to a select director or directors (so not all have to sign), an officer,

or agent — BCBCA 137 & 146; CBCA 18

When is the corporation liable for contracts made as a result of commitments given by persons purporting to act on the corporation's behalf?• Eisner contracts w/ furniture co. for desks, signs on behalf of Disney as its CEO• Reasonable to expect that Disney Co. ought to be bound by CEO's contract• HVR, just before, Disney passed resolution forbidding executives from making contracts re: furniture

purchases.• What if the Simba mascot made the contract?• Reasonable to assume low-level employee had authority to contract on behalf of employer?• The corporation will only be bound by the actions of an agent if it can be demonstrated that the

agent had authority to enter the type of contract in question. i.e.(1) Actual authority, or(2) Ostensible/apparent authority

(a) Actual Authority at Common Law• Agent authorized by corporation to enter into particular transaction(s). Actual authority is based on

the agreement between corporation and agent. This relationship may be created by by-laws, articles of incorporation, employment contract, etc.; any could delegate authority to engage in conduct.

• An agent may get actual authority in one of three ways:(1) express actual authority (2) implied actual authority (3) authority given retroactively by principal’s ratification or adoption of what the agent did in

excess of his actual authority.

36

1. Express actual authority• Authority stated in writing in companies articles or expressly stated in contract with agent e.g.

bound resolution or company articles delegating powers, or in company’s contract with agent (Helv-Hutchinson).

• Outsiders can assume that articles and bylaws have been complied with respect to how corporation can be bound CBCA 181(a); BCBCA 146(1)(a) unless he knew OR by virtue of his relationship to the company, ought to have known otherwise CBCA 182; BCBCA 146(2); 1349418 Ontario – (articles of co said that any K must be signed by president AND secretary or president alone (H&C) – S tried to bind co w C’s signature only (c just secretary) –crt: S knew enough about co’s internal rules that he ought to have known that C could not sign and bind the co w/out H’s signature as well).

2. Implied Actual AuthorityEven though not directly stated, actual authority can be implied through

1. Typical in Course of Business: in this type of biz, this is how k’s are made; appointment to a particular corporate office (e.g. CEO where it is assumed you have power)

2. Past Authority: company allowed a person to act in a certain capacity before, so it is assumed that they can act in this capacity again (Hely-Hutchinson: R (chair of company) signed contract with S on behalf of company. S wanted co to fulfil but co said R didn’t have authority to sign Ks. Court said company had to fulfil because R had authority to sign Ks on behalf of co in the past.)

3. Implied authority through appointment of director • Board as a whole has power to manage co (BCBCA 136).• Managing Director alone can do what board authorizes & has wide powers to bind company

under common law, but cannot act alone in respect of “critical matters.” (Hely-Hutchinson)• One Director/officer or Chair acting alone (or any one director or officer alone) normally has

no authority to enter into contracts without authority of the board, unless implied by prior company conduct (Hely-Hutchinson)

(b) Ostensible/ Apparent Authority at Common Law• is agency by estoppel. The conduct of the person sought to be liable as a principal is such as to

estoppe him from denying that a particular person is his agent or had the authority which that person claimed to have.

• Corporation represents to third party that the agent (w/ whom the third party dealt) had the authority to bind the corporation.

o Authority of the agent as it reasonably appeared to the third partyo Representation can be express or implied from a corporation's conducto Ostensible authority often arises where a particular person holds a particular office in the

corporation.• Ostensible/ Apparent authority = someone who lacks authority to bind a corporation CAN bind the

corporation if someone who possesses actual authority to bind the corporation HOLDS OUT to the outsider contractor that this person is authorized BCBCA 146 (1) c and CBCA 18 (1)d

• Representation can be by words or by behaviour/conduct or by lack of action after-the-fact (e.g., the person who has actual authority is in the room while the other person is signing the K and says nothing. OR finds out later and does nothing about it) Freeman & Lockyer

• Outsider will be able to rely on BCBCA 146 (1) c and CBCA 18 (1)d UNLESS they have knowledge OR by virtue of their relationship to the company, ought to have knowledge that the person could not bind the co wrt to this area of business. CBCA s 18(2) BCBCA 146(2)1349418 Ontario (articles of co

37

said that any k must be signed by president AND secretary or president alone (H&C) – S tried to bind co w C’s signature only (c just secretary) –crt: S knew enough about co’s internal rules that he ought to have known that C could not sign and bind the co w/out H’s signature as well)

• Person making the representation does not have to be of very high authority, as long as there is evidence that they are normally the person who conducts that area of the business (CanLab C had no authority at all & no representation by co that he had any auth, so Canlab NOT bound; 66-69: fraud continued, and Canlab bound by K’s as there was a representation made in 66 by someone who had auth from Canlab that Cook could make such orders (ostensible auth))

Test for Ostensible Authority (Freedman and Lockyer)1) Representation to third party that the agent had authority to bind the corporation.2) Representation comes from someone w/in corporate structure w/ authority to make such a

representation.3) Representation must have induced the third party to enter into a contract w/ the corporation; i.e.

third party actually relies on representation.

• Constructive notice - imposes an estoppel that prevents anyone from denying knowledge of the contents of registered documents to which it applies.

Freedman and Lockyer v. Buckhurst Park Properties [1964] – Test for ostensible authority:1. 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.)2. Representation comes from someone w/in corporate structure w/ authority to make such a representation.3. 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 corporationANALYSIS:• “An ‘apparent’ or ‘ostensible’ authority, … is 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 on 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. To the relationship so created the agent is a stranger. He need not be (although he generally is) aware of the existence of the representation. The representation, when acted on by the contractor by entering into a contract with the agent, operates as an estoppel, preventing the principal from asserting that he is not bound by the contract. It is irrelevant whether the agent had actual authority to enter into the contract. … All that the contractor can know is what they tell him, which may or may not be true. In the ultimate analysis he relied either on the representation of the principal, i.e. apparent authority, or on the representation of the agent, i.e. warranty of authority…. The representation which creates ‘apparent’ authority may take a variety of forms which the commonest is representation by conduct, i.e. by permitting the agent to act in some way in the conduct of the principal’s business with other persons.”

Canadian Laboratory Supplies Ltd. v. Engelhard Industries of Canada Ltd. [1979] SCC – Person making the representation does not have to be of very high authorit y , as long as there is evidence that they are normally the person who conducts that area of the business. F: P, CanLab, regularly buys platinum from Engelhard and resells scrap metal to Engelhard. Cook, a sales agent of CanLab, misled Engelhard into selling platinum to CanLab and then buying it back from Cook. As Cook manipulated the CanLab’s purchasing procedures, CanLab unwittingly paid for the platinum, and Cook pocketed the payments from Engelhard. I & H: Whether Cook has ostensible authority to sell the platinum back to the D. Yes he did, following a 1966 conversion between a representative of the D and one Snook, a purchasing agent of the P. Snook referred the D to Cook. From that time onwards the P held Cook out as being authorized to implement the transaction in question. ANALYSIS:To establish ostensible authority,• Representation to third party that agent had the authority to bind the corporation, from someone other than the alleged

agent in the transaction [despite obiter: agent's own representations might be sufficient].

38

• Did CanLabs represent to Engelhard that Cook had this authority? If so, when/by whom did representation occur? Engelhard made inquiries re: Cook's authority to the VP operations, Fabian; and to the purchasing agent, Snook.

OBITER:***Indoor management rule - outsiders need not inquire into whether internal corporate procedures have been correctly followed. — a limitation on the supposed reach of constructive notice.

Schwartz v. Maritime Life Assurance Co. [1997] CA – If in prior dealings the principal has caused a representation that a person is acting as his agent to a 3d party, and when the person ceases to act for the principal no notice is given to the 3d party, the principal may be held liable for any subsequent dealings made in its name by its ex-agent. F: Maritime Life sued by Schwartz. Schwartz, gave Rideout $100,000 for investment with Maritime. Rideout misappropriated the monies. Schwartz claimed George Rideout and/or George Rideout & Associates Ltd. was an agent of Maritime for the purpose of receiving monies for investment from Mr. Schwartz. TJ found that Rideout had no authority, either actual or ostensible to bind respondent. I & H: “There is absolutely no evidence of anything occurring in that time frame as between Rideout and the appellant or as between the respondent and the appellant which would or should have disabused the appellant of that conviction. He was never informed that Rideout was no longer its Regional Superintendent or, indeed, with respect to the entering into contracts, that Rideout was not merely an agent for the purposes of soliciting applications for life insurance and no more.”LECTURE COMMENTS:** Read judgement carefully

1394918 Ontario Ltd. v. 1310210 Ontario Inc., [2004] – Outsider will be able to rely on BCBCA 146 (1) c and CBCA 18 (1)d UNLESS they have knowledge OR by virtue of their relationship to the company, ought to have knowledge that the person could not bind the co wrt to this area of business.F: Corporation with 2 shareholders with equal number of shares. Stern, an outsider, had previously signed an agreement that both shareholders had signed. In all dealings shareholder A seemed to be the shareholder in control. Only shareholder A signed an amendment to the agreement. H: Despite, S’s perception that Shareholder A was DM and principal shareholder, it was held that S’s knowledge of the past practice of the corporation should have informed him that both shareholders should sign any amendment. Reliance was also placed on documents that S had in his possession (but had not examined) that demonstrated that both shareholders were equal.

(c) Statutory Reform: Constructive Notice & Indoor Management Rule• What if a corporation's constituting documents (Articles of Incorporation, etc.) set out constraints on

exercise of corporate power?• Authority/ability of directors, officers to carry out acts w/in their own capacity• Historically: b/c the Articles were publicly filed documents, THF available to third parties,• Third parties THF deemed to have knowledge/'constructive notice' of contents of Articles. If Articles

included constraints on corporate power, third parties deemed to have knowledge of that constraint. e.g.:o Articles allow corporation to exercise power only if certain steps are followed (e.g. contingent

upon certain percentage of shareholder approval). Third party enters contract w/ corporation, doesn't get paid.

o Third party: officer who entered contract on behalf of co. had ostensible authority to do so, b/c directors represented such. Third party relied on that representation.

o Re: Doctrine of constructive notice, the third party could not have reasonably relied upon that representation, b/c they were deemed to know about the restriction in the Articles.

• Creates another risk for the third party: you better check contracting co.s' articles!• HVR, re: new Indoor management rule (CBCA 17 & 18; BCBCA 146):• The third party is not deemed to know of any in-house restrictions on officers'/directors' authority.• Third party is entitled to assume that all necessary internal corporate steps referred to in the

constituting documents have been properly complied with.

39

• Corporations will not be permitted to 'assert' certain facts against the third partyo If the third party alleges actual authority and the corporation presents no admissible evidence (re:

OBCA 9) to disprove it and makes no statements in denial of it, the case can only proceed on the basis that the allegations were admitted to be true.

• Whether a corporate agent had actual authority will depend on the facts.• Whether the third party can establish the prerequisites to ostensible authority, and thereby preclude

the corporate principal from denying the truth of some representation, will also depend on the facts.

CBCA : No constructive notice17. No person is affected by or is deemed to have notice or knowledge of the contents of a document concerning a corporation by reason only that the document has been filed by the Director or is available for inspection at an office of the corporation.Authority of directors, officers and agents18. (1) No corporation and no guarantor of an obligation of a corporation may assert against a person dealing with the corporation or against a person who acquired rights from the corporation that(a) the articles, by-laws and any unanimous shareholder agreement have not been complied with;(b) the persons named in the most recent notice sent to the Director under section 106 or 113 are not the directors of the corporation;(c) the place named in the most recent notice sent to the Director under section 19 is not the registered office of the corporation;(d) a person held out by a corporation as a director, officer, agent or mandatary of the corporation has not been duly appointed or has no authority to exercise the powers and perform the duties that are customary in the business of the corporation or usual for a director, officer, agent or mandatary;(e) a document issued by any director, officer, agent or mandatary of a corporation with actual or usual authority to issue the document is not valid or genuine; or(f) a sale, lease or exchange of property referred to in subsection 189(3) was not authorized.Exception(2) Subsection (1) does not apply in respect of a person who has, or ought to have, knowledge of a situation described in that subsection by virtue of their relationship to the corporation. [Mark II Outsider]

BCBCA:146(1) Subject to subsection (2), a company, a guarantor of an obligation of a company or a person claiming through a company may not assert against a person dealing with the company, or dealing with any person who has acquired rights from the company, that(a) the company's memorandum or notice of articles, as the case may be, or articles have not been complied

with,(b) the individuals who are shown as directors in the corporate register are not the directors of the company,(c) a person held out by the company as a director, officer or agent

(i) is not, in fact, a director, officer or agent of the company, as the case may be, or(ii) has no authority to exercise the powers and perform the duties that are customary in

the business of the company or usual for such director, officer or agent,(d) a record issued by any director, officer or agent of the company with actual or usual authority to issue the

record is not valid or genuine, or(e) a record kept by or for the company under section 42 is not accurate or complete.(2) Subsection (1) of this section does not apply in respect of a person who has knowledge, or, by virtue of the person's relationship to the company, ought to have knowledge, of a situation described in paragraphs (a) to (e) of that subsection.

40

CORPORATE TORT LIABILITY

A. INDUCING BREACH OF CONTRACT • “a violation of a 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.” - Quinn v. Leathem [1901]

• This is not lifting the veil, but making someone directly liable for the tort. It relates to the principle of “separate legal entity”, because the tortfeasor is often someone who controls the corporation that has entered into the contract.

• What if a corporation is alleged to have either violated a contractual term or knowingly induced the breach of contract? • If the corporation breaches a contract, it can be sued for breach of contract and its officers, if they

had knowledge, could be sued in tort for wrongful procurement of breach of contract and of actionable interference with the corporations contractual relations (Einhorn v. Westmount Investments Ltd.)

• If an employee breaches a contract, he can be sued in contract, and if the company and its officers had knowledge, they can be sued in tort. (Gabutt Business College Ltd. v. Henderson Secretarial School Ltd.)

Elements of Tort of inducing breach of contract: (369413 Alberta v. Pockling):

• contract - A and B (a corporation) have a contract;• knowledge - C (a director/controller of B) knows of the contract;• inducement - C persuades B to breach contract with A, causing losses to A (usually benefit of breach

will go to C or a business that C controls); • C intended to cause the breach - no justification;• C has committed tort of “inducing” breach of B’s contract with A. C can be held liable for damages/losses caused by that breach. B is also liable but B may not have assets to pay damages, so you have to sue C for the tort. You can sue B for breach of contract but you can sue inducing a breach of contract (two different actions).

• Examples of inducement to breach a contract:• siphoning off assets from a corporation to another company to avoid payment - Einhorn;• giving a potion to a singer to cause her to become sick and be unable to perform her contract to

sing - Torquay;• taking away tools essential for use in performance of contract - D.C.Thomson & Co. Ltd. v. Deakin

[1952];• transferring assets so as to keep it out of reach of a creditor - Pockling.

Exception

Acts of inducement to breach a contract can be justified if they are undertaken under a compulsion of duty to the company.

41

• As in the agency context, the tort of inducing breach of contract requires two persons: a breacher and an inducer. If the breacher is the corporation and a shareholder is alleged to be the inducer, must it be shown that the shareholder acted in a capacity other than as a shareholder? Yes.

• 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); Weir v. Bell.

• If the shareholders to a company are inducing a breach of contract for a purpose that is outside the scope of a compulsion of duty to the company, they cannot claim protection as the corporation’s agent for such an act. - McFadden.

• If an agent commits an illegal or wrongful act outside of the scope of his authority, the principal corporation is not legally liable for the consequences. - McFadden.

Garbutt Business College ltd. v. Henderson Secretarial School Ltd. [1939] ABCARATIO: Where the company and its agents continue to employ a person who by being employed by them is in breach of a contract, it is immaterial whether the inducement was willful or intentional. It is enough that there was knowledge of the breach and a continued employment by the company and its agents. FACTS: Henderson had a restrictive covenant in his long-standing employment contract with the P corporation. Contract restrained him from engaging in or managing a rival business college in Calgary for 5 years. H resigned and incorporated a rival business college that used his surname as part of the corporate name and contracted with him to teach there. All the new corporation’s shares were held by H, except for 3 held by his wife and daughter. Enrolment at the P’s college declines as students flocked to the Henderson name. TJ awarded damages against H for breach of contract. ISSUE & HOLDING:The restraining covenant was upheld. The defendant corporation was liable for inducing the breach of contract y its shareholder. ANALYSIS:(Harvey CJA)Although the corporation was used as a cloak, it is still a separate entity. It is not to be held liable for H’s breach of contract and so does not have to pay damages for the breach. If the corporation is held liable, it can only be held liable for tort. The company and officers knew that H was breaching his contract. It does not matter that they did not ‘wilfully induce’..”nor do I think wilfulness beyond knowledge is essential.’. (Ford JA)“Where there is a valid and enforceable contract between A, and B, and C, without justification, induced B to break his contract, A, subject to the rule that the same damages may not be recoverable twice, may sue for and recover damages both against B and C in one action in which they are joined as defendants. The remedies are, however, based upon different causes of action, that against B, being for breach of contract and the other for the tort of inducing the breach.” “While it is not possible to define exactly what is meant by inducement, the employing or continuing of the employment of H by the defendant corporation at a salary or share of profits is clearly an inducement and a continuing one. I think also that the pleadings which alleges that the defendant corporation “wrongfully employed” its co-defendant is sufficient to put in issue the claim for damages arising form the tort committed.” LECTURE COMMENTS:• H violated the terms of his covenant and so he is preamble liable for breach of contract. The claim

against the company is for causing/facilitating him to commit the breach of contract.

42

• The principal was not designed for cases like this and so shouldn’t be an o• Is this a denial of the principal or a recognition of the principal, and an argument that it is a rejection? • There is a kind of emotional attachment to the Salomon case. • There is a preference against lifting the corporate veil - we need something more.

Einhorn v. Westmount Investments Ltd. (1969) Sask. QBRATIO: Where the agent is “at all material times in complete care and control of” the company and the company breaches its contract, the agent can be liable for inducement. FACTS:Einhon accused the Belzbergs of inducing the corporate defendant to breach its contract with Einhon. The administratix of the estate of Jacob Einhorn, hereafter Einhorn, brought an action for wrongful procurement of a breach of contract and of actionable interference with Einhorn’s contractual relations with the corporate defendant against the Belzbergs as individual defendants. Einhon had a contract with the the corporate defendant, Westmount Investments Limited (of which the Belzebergs were “at all material times in complete control of”) to help it in procuring property in exchange for a maximum of $20,000. He fulfilled his end but he did not receive any payment. Instead, the Belzbergs siphoned off all the assets from Westmount and transferred it to another corporation they owned. Einhorn’s estate is suing for a commission under the terms of an agreement and the Belzebergs & Westmont refuse to pay. ISSUE & HOLDING:Does the statement of claim disclose a cause of action? The defendant shareholders were held to be potentially liable for inducing a breach of contract by the corporation of which they were shareholders. APPLICATION: (1) Is there a breacher and an inducer?(2) Were the individual defendants in complete control of the company? LECTURE COMMENTS:• Westmount is liable for breach of contract. But they don’t have the property to cover. • Einhorn sued Belzebergs as well for tort of inducing the breach of contract. • “Ordinarily, an agent is subject to the control of another person, his principle. A company perforce is

only able to at through its agents and servants. Consequently while company directors are referred to as “agents” the cold fact is that they control the company. As the directors pull the strings so the company must of necessity jump. Particularly is this true where, as here, the individual defendants were in “complete control” of the company. This Court in the exercise of its common law jurisdiction in the field of tort considers the realities of the situations which come before it for decisions, and the Court is not restricted in so doing because individuals carry out intentional tortious acts through the medium of a puppet corporation whose every action they control. Individuals guilty of intentional tortious acts do not escape personal liability by this device of clothing themselves in a corporate veil of their own spinning.”

• it was unnecessary to invoke the corporate veil - Professors. • It is critical to understand the reasoning process or lack of it

McFadden v. 481782 Ontario Ltd. (1984) ONHCRATIO:If the shareholders to a company are inducing a breach of contract for a purpose that is outside the scope of a compulsion of duty to the company, they cannot claim protection as the corporation’s agent for such an act.

43

If an agent commits an illegal or wrongful act outside of the scope of his authority, the principal corporation is not legally liable for the consequences. FACTS:P was employed under a contract by a Canadian business owned by PMAI. After PMAI sold the business to PMAC, P continued to work there and the TJ found an implied contract of employment. PMAC sold the business back to PMAI and terminated P’s employment. The Taylors, PMAC’s sole shareholders and directors, caused PMAC to pay them $32,500 which left PMAC with no money - and therefore, unable to pay anything to P. ISSUE & HOLDING: Are the Taylors personally liable to P (for inducing breach of contract) for the amount awarded against the defendant company? Yes, they acted in their own self-interest and outside of the scope of their authority as agents for the company. The Taylors intentionally gave themselves money to ensure that they would have the money they were entitled to without any allowance for funds otherwise owing by the company to the P. They did not act in a compulsion of duty to the company so as to exempt personal liability. ANALYSIS:“In short, if an officer or director of a corporation is to be relieved, as an agent, of the consequences of his otherwise tortious act of inducement, it is not because he is the company’s alter ego. Rather, it is because in so acting he acts under the compulsion of a duty to the corporation. His act is thus justified. But where he does not act under such a duty, as for example, where he fails to act bona fide within the scope of his authority, his act is no longer justified, and he becomes liable. The corporation remains insulated from the legal consequences of such an act, inasmuch as the director or officer has acted outside the scope of his authority.”APPLICATION:(1) Was there a breacher and an inducer? • Was there a breach of contract?• Was this breach induced by an agent of the company? Or the company itself?

(2) Can the inducement be justified? • Was the inducer acting under a compulsion of a duty to the principal corporation? • Was he acting within the scope of his authority?

LECTURE COMMENTS:• paragraph on page 168. • 369413 Alberta Ltd. v. Pocklington [2000] ABCARATIO:Elements of inducing a breach of contract:1. existence of a contract;2. knowledge or awareness by D of the contract;3. breach of contract by a contracting party;4. D induced the breach;5. D, by his conduct, intended to cause the breach;6. D acted without justification;7. P suffered damages. FACTS:Pockling was the sole shareholder and director of Gainers, a meat-packing company, and Gainer’s Properties Inc., which owned all of Gainers’ land, plats, machinery and equipment. Pockling and the province of Alberta had a bailout agreement under which Alberta was granted a secured charge against all Gainers’ and Gainers Properties assets. When Gainers defaulted on both its Master Agreement and its loan agreement with Lloyds Bank the parties hammered out a 90-day stand still agreement. Alberta

44

agreed to give up $5 million of security it held on the Gainers’ Properties Assets, in favour of Lloyds Bank. Pockling would make up this $5 million by a guarantee to Alberta for that amount, secured by a $5 million first mortgage on lands in Calgary and Edmonton, known as the Carma Lands. At that time the Carma Lands were owned by another Pockling Compnay, Hartford Properties. Due to a statutory restriction, Hartford could not directly transfer the asset to Gainer so a shell company, 350151 Alberta was created Gainers acquired shares in this company, then 350151 acquired the Cama Landsfor $1.9 million and granted a guarantee to Albert and finally 350151 secured the guarantee by a $5 million mortgage in Alberta’s favour registered against the Carma Lands. These arrangements were documented in a Standstill Agreement and accompanying collateral security documents. Pockling transferred the 350151 shares from Gainers to Pocklington Holdlings, putting it out of reach of Alberta. (since Alberta could only seize Gainer’s assets for realization of debts). Albert argued that this transfer was in beach of the original loan agreement between Alberta and Gainers. Gainers had agreed to not sell or otherwise dispose of its assets without prior written consent of Alberta, except in the ordinary course of business. Alberta sued Pocklington for intentionally inducing Gainers to breach its contract with Alberta. ISSUE & HOLDING:ANALYSIS:• Intent

• can be inferred when the consequences of the conduct were a necessary or reasonably foreseeable result, because ‘people are presumed to intend the reasonable consequences of their acts’ - South Wales Miners’ Federation v. Glamorgan Coal.

• when D is reckless or willfully blind to a breach. can include cases where D failed to seek advice or employ means available to obtain the necessary knowledge.

• Justification:• “Directors of companies owe duties to the corporation; they are obliged both to common law and

under statute to act in the best interests of the company… Therefore, when the interests of the company are best served by breaking its contractual commitments, the director’s act of inducement is justified because it is “taken as a duty” … The rationale for this defence is that a director acting in compliance with a duty imposed by law should not be personally liable because the director’s act induced breach of the company’s contract.

• “But if the director is not complying with that duty, the rationale for relieving personal liability disappears. Although the director may have acted in the name of the company, justification is not available as a defence.”

APPLICATION:LECTURE COMMENTS:• Pocklington owned the Oilers and traded Gretsky b/c he thought that was in the best interests of the

club. Club was in bankruptcy. • Pocklington was a pass master at complicated trasnactions where he always preserved an edge for

himself. • Alberta - you borrowed money from us, our loan was secured on assets, you transferred the shares

owned by you in Gainers to his own company for a $100. the loan was about 4.8 million at that stage, Gainers had agreed not to sell or transfer assets without Alberta’s consent. The government doesn’t sue the borrower, but Pocklington . What you did caused the borrower to breach its contract with us and you induced that breach.

• note only part of judgement that is of interest is under the heading justification. • Finding of court - under evidence: page. 174.

45

• The court sets up a test that if the directors are doing what is in the best interests of the company, including avoiding the debts - unless the director has some self-motivation to defeat the interests of a creditor.

ADGA Systems International Inc. v. Valcom Ltd. [1999] RATIO:FACTS:ADGA and Valcom submitted bids to get a contract with Corrections Canada to provide security system for prisons. One of the conditions of the tender was that the tendering party provide names of 25 senior technicians together with their qualifications. Since ADGA had had this contract before they had 45 such employees. Valcom had none. Its director and two senior employes persuaded 44 of ADGA’s technical staff to let them submit their names and to work for them if Valcom won the tender. Valcom’s tender was successful and ADGA brought a claim against the director and employees for tort of inducing breach of contract. The 3 defendants were successfully able to bring a motion for summary judgement seeking to dismiss the claim against them. ADGA is appealing this judgement. ISSUE & HOLDING: Whether, on the assumption that the D Valcom committed a tort against ADGA, Valcom’s sole director and employees can be accountable for the same tort as a consequence of their personal involvement directed to the perceived best interests of the corporation. yes, they can be held accountable. There was evidence that these 3 knew they were committing a tort and because they had the intention to commit a tort, they could be held personally liable. ANALYSIS:Said v. Butt:“I hold that if 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 thereby been broken … Nothing that I have said today is .. inconsistent with the rule that a director or a servant who actually takes part in or actually authorizes such torts as assaults, trespass to property, nuisance, or the like may be liable in damages as a joint participant in one of such recognized heads of tortious wrong.”“…officers or employees of limited companies are protected from personal liability unless it can be shown that their actions are themselves tortious or exhibit a separate identity or interest from that of the company so as to make the act or conduct complained of their own.” - ScotiaMcLead

KNOWING ASSISTANCE IN BREACH OF TORT

PERSONAL LIABILITY OF DIRECTORS/OFFICERS

• If some kinds of conduct lead to the conclusion that individuals were acting as individuals rather than as the corporate, then not only could such individuals be liable for inducing corporate wrongdoing, they could also be directly liable for individual wrongdoing.

• After you have found the corporation liable for a tort or crime, you then need to look at whether the director or officer has also committed the tort or crime. Did they have the intention/mental element to commit the tort/crime? The courts are going to look at whether the director or officer themselves knew that they were committing the tort or the crime and whether they themselves satisfy the

46

elements of the tort/crime as individuals. If so, then, they are separately going to be liable/guilty for the tort/crime, in addition to the corporation.

• Liability for corporation torts: Even if directors/officers act in corporation’s best interests, they can be held liable for torts. “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 v. Valcom Ltd. 1999 ONCA citing Normart Management v. West Hill).

• Liability for Corporate Crimes: Directors/officers can be held personally liable, along with the corporations, if they satisfy the elements of the crime (Canadian Dredge & Dock co. v. The Queen, 1985 SCC)

BUSINESS JUDGEMENT RULE

• A legal principle that makes officers, directors, managers, and other agents of a corporation immune from liability to the corporation for loss incurred in corporate transactions that are within their authority and power to make when sufficient evidence demonstrates that the transactions were made in good faith and with reasonable skill and prudence.

• In assessing whether or not the directors and officers have met their statutory and fiduciary obligations the court gives deference to their business decisions. The decision does not have to be the prefect decision, as long as it is one of a reasonable range of alternatives.

MANAGEMENT

• Corporate management = board of directors + corporate officers. • Functions in any economic pursuit:

(a) holding proprietary interests in the enterprise;(b) exercising power over the enterprise; and(c) acting with respect to the enterprise

• Directors: Myth & Reality• Usually company management establishes the objectives, strategies, and policies, in most large

and medium-sized companies as opposed to boards of directors. Directors do not in fact ask discerning questions in or out of board meetings. The president and not the directors usually selects the next president.

• rise of mergers and acquisitions - corporate raiders seek out poorly managed businesses. • rise of the institutional shareholder - shareholder who holds enough shares that his voting power

cannot be ignored by management — shareholder control. • principles of corporate governance e.g. manager’s fiduciary duty to corporation. • While officers often have more management power than directors, legal analysis has historically

paid more attention to the position of directors. In legal analysis, an officer is an employee. The

47

legal relationship between the corporation and an officer (e.g. President) is a master-servant or employer-employee relationship. There is no legal requirement that a corporation have officers, or indeed that it have any employees. But a corporation needs at least one director. A director is not an employee of the corporation. The corporation is a legal person but on its own it cannot make decisions. Somebody needs to decide how it will behave.

• The corporation as an employer tells officers what to do; the directors are the ones who decide how the corporation behave.

Sources of management power(a) directors (have vast amounts of residual power)

- Canada Business Corporations Act, s. 102(1): Subject to any unanimous shareholder agreement, the directors shall manage, or supervise the management of, the business and affairs of a corporation.

- BC Business Corporations Act, s.136(1): The directors of a company must, subject to this Act, the regulations and the memorandum and articles of the company, manage or supervise the management of the business and affairs of the company. (directors may delegate day-to-day management to officers).

(b) officers (acquire delegated power from directors)- Canada Business Corporations Act, s. 121

Elections and Appointments(a) Number of positions - Canadian statute require at lease one director and at least 3 for corporations

“offering securities to the public” CBCA, s. 102(2).(b) Procedure -

• “first directors” are named in the application for incorporation — until the first shareholder’s meetings.

• Elections are usually one vote per share unless the constitution provides otherwise. • Election to staggered terms; statute may limit the term e.g. CBCA, s. 106(3): max 3 years; s. 106(5):

the default term is one year; but see s.106(6). • class directors - reserves one or more positions on the board of directors elected solely by a

particular class of shareholders. • Cumulative voting - another way of substituting proportional representation for strict majority

rule. It allows each shareholder to cumulate all the votes attached to her shares in a multi-director election, and divide them as she sees fit among the candidates. The effect is to give minority shareholders who know what they are doing the opportunity to concentrate their votes and elect some candidates, rather than casting futile votes for a losing candidate at each position.

• The appointment of officers is generally subject to must less regulation since, in theory, they are merely senior employees. The board of directors may designate corporate “officers” and then to fill them. BCBCA, s. 141.

(c) Casual vacancies - A quorum of board of directors is usually statutorily empowered to fill vacancies occurring on the board through resignation, disqualification or death. The statute may contemplate, however, that the articles will give this power to the shareholders; and the statute may give it to the shareholders where there is not a quorum of directors e.g. CBCA, s. 111(4), and BCBCA, s. 134 - allowing an inquorate board to act for this limited purpose.

(d) Removal - Canadian statutes provide a power for shareholders to remove directors, with some care taken

to prevent this from being weakened by the corporate constitution e.g. CBCA ss. 6(4), 109;

48

BCBCA, s. 128(3). Special rules are included to deal with directors elected through cumulative or class voting.

TRANSFERABILITY OF SHARES

Share Transfers (pgs. 601-606)• Shares are a form of property held by the shareholder. • Shares are usually transferable. • Shareholder is owed obligations by:

• the transferor;• the corporation;• subsequent transferees;• anyone else in the world.

• Shares (property in question) vs. share certificates (pieces of paper that evidence the existence of shares and serve as transfer instruments).

• Restricting transfer• (a) Whether transfer is restricted at all• (b) Whether an attempted transfer is caught by the restriction or outside its scope and thus

effective. • Share transfers are sometimes made subject to the approval of the board of directors.

Edmonton Country Club Ltd. v. Case (1974) SCC RATIO:FACTS:The articles of association said that “no shares in the company .., shall be transferred to any person without the consent of a majority of the Directors, who may refuse such consent … in their unfettered discretion”. The plaintiff claimed there was no such share transfer restriction. ISSUE & HOLDING:Whether a company incorporated under the Companies Act of Alberts can give its directors such a power. Under the Companies Act, the restriction “is not ultra vires the company … The power to refuse to consent to a transfer of shares was reserved to the directors upon incorporation of the company, by the contract contained in the articles, and is not something now sought to be imposed upon unwilling shareholders.”The restriction was unobjectionable. LECTURE COMMENTS:•

• The corporation as transferee• Is a corporation required to have any shares?• What if no shares are never issued?• What if the company authorizes two classes of shares, X = unrestricted rights; Y= redeemable but

otherwise unrestricted, only Y shares are issues, all Y shares are redeemed..?• What if the corporation buys back all the shares from the shareholders?

• Effecting transfers: the diminishing role of share certificates in Canada

49

• A share certificate is an instrument to facilitate a share transfer. • A shareholder who is the owner of a share certificate with his name on it endorses (affixes his

signature) the back of the certificate. He transfers possession of the certificate to the transferee The transferee shows the endorsed certificate to the corporation that issued the shares (and the share certificate) and demands that the corporation enter her name on the share register. The corporation deletes the name of the transferor from the register, inserts the transferee’s name, issues a new certificate in the transferee’s name and destroyed the old certificate. At some point during the process, the share was transferred.

• With the dawn of personal computers, the above is more complicated. • certificates, fi they exist at all, are stored in vaults by “depositories” like Canadian Depository

for Securities Ltd. (CDS).• the issuing corporation knows only about the depository, and has no direct relationship with

people who think they are the corporation’s shareholders;• the depository maintains book-entry records of trades made by stockbrokers on behalf of

investors in the stock marker;• all such investors are regarded as holding unallocated portions of a pol of fungible bulk;• newly enacted provincial statutes create an entirely new form of property called a “security

entitlement”; and • the inter-relationships among various players in the corporate securities game are to be

regulated under provincial statutes adapted from Article 8 of the American Uniform Commercial Code.

• Corporate law is generally facilitative; it permits incorporators to incorporate a corporation that suits their needs. Securities law is restrictive: it restrains corporations form acting in ways that are perceived to be against the public interest. Securities law is a separate area of study from corporate law and highly regulated.

SHAREHOLDER CONTROL

MAJORITY RULE

MINORITY SHAREHOLDER PROTECTION

EXAMPossible Essay Questions1) Query whether there might be a 6th core characteristic at the heart of company law being that “for

profit” is the sole legally permissible motive? 2) Movie: The Corporation.

a. Separation of the evil corporation from those decent people running. If corporation is a person, then that person, that is the corporation, would be a psychopath as defined by the

50

Hare’s checklist. Why are we tolerating a psychopath? Is there something structural about corporations that creates inevitably evil results? If so, is there something that can be done?

b. Is there a link between calling a company a person and the evil effects? There aren’t good and bad people - there are good and bad structures/environments. Think about how systems shape good and bad. The corporate form is a structure /environment with values (for profit only is an explicit value).

3) Corporate veil theory. Where does the judicial power to ignore the existence of the corporation come from? Judicial activism. Note direction of the law. Holding shareholders and management accountable. Cannot hide behind separate corporate personhood. – The attempt to foist liability upon a corporation’s investors by invoking corporate veil theory is an attempt to circumvent the implications of incorporation.

4)

Notes on “Fiction”, “Realism” and Legal Analysis• Fiction theory - although no sane human being could seriously conceive of corporations as really being

persons, we pretend by legal fiction that they are. A corporation has legal rights and obligations. • To classify the corporation as a legal entity is to consign it to legal treatment by analogy.

EXAM• not designed to trick you. • understanding of principles and policy not familiarly of detailed statutory provisions. • some policies are reflected in statutory provisions. • display extent of ability of understanding of informing principles of subject.

• separate personality of the corporation. • how does it influence individual problems? • Prof not interested in someone citing provisions of the CBCA. But it is of interest - principles that

exist outside the statute that modify the statute. • not testing the details• But may say: here is the provision of XYZ Companies Act. Explain what it does. You ability to

explain it will be a function of your understanding of the underlying principles. • draft resolution• advise X whether he can do Y