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A. INTRODUCTION

1. What is a Business?

Casebook 1-14 VanDuzer 1-24

Basic Forms Of Business Organizations

Canadian corporate law recognizes 3 types of businesses:1) Sole Proprietorships2) Partnerships

a) General partnershipsb) Limited Partnershipsc) Limited liability partnerships

3) Corporations

All businesses carry on some commercial activity , and in doing so, become the focus of a variety of relationships involving a number of stakeholders that are regulated by a wide variety of laws designed to achieve a range of public policy objectives:

Stakeholders in Business Organizations

Financial Creditors (e.g. Banks) Trade Creditors Shareholders Public Employees

Employees governed by employment contracts, employment standards and health and safety legislation

Commercial Activity Customers Directors and Officers Government

Businesses need money which is provided by the owners of the business or third party investors or lenders, like banks. Businesses engage in actions in pursuit of a profit all of which involved some measure of risk/reward. The owners use the money for the purposes of the business, including buying inputs for their products from suppliers, and paying their employees. Businesses sell their products, whether they are goods or services, to customers. All these activities are carried out through employees to some extent. Businesses pay taxes and their success or failure affects the health of the economy. The activities of businesses affect communities in which they operate, including their impact on

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the environment. All businesses need someone to manage these relationships with investors, suppliers, customers, the local community and government.

Corporate Law

One of the major concerns of business organizations law is the relationship of owners and managers to the business and to each other. We look at what rights the sole proprietor, the partner, and the shareholder have to manage the business themselves and to monitor and control others who manage on their behalf. We also look at what remedies are available to owners where management is acting in a manner that is inconsistent with the best interests of the business (e.g. paying themselves excessive compensation or shirking their responsibilities)

The second major concern of business organizations law is the responsibility of the business organization, the owners, and the managers to the other stakeholder groups. The focus of business organizations law in this regard is narrow because for the most part, relations between non-shareholder stakeholders and business organization is governed by other types of laws:

Employment contracts; Regulatory laws including employment standards and health and safety legislation.

The relationships between a business and its trade creditors (e.g. suppliers of goods and services to the business), financial creditors (e.g. banks), and customers are not the subject of business organizations law either but are dealt with under various other categories of law, such as contract, tort, property, commercial, and criminal law.

Business organizations law is concerned with the narrower issue of when the business organization is liable for the obligations created under these other areas of law, and provides certain limited and specific kinds of protection for creditors and customers, and addresses the extent to which management is permitted or required to take their interests into account in its decision making.

Businesses operate within a web of relationships involving a number of stakeholders that are regulated by a wide variety of laws designed to achieve a range of policy objectives. Business organizations law focuses primarily on a subset of these relationships – those between shareholders, managers and business.


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Sole Proprietorships

Sole Proprietorships : one owner who has both prerogative and responsibility of making all the ultimate decisions concerning the business. The sole proprietor is the sole owner of the business and the only person entitled to manage it. Both legally and practically, there is no separation between the sole proprietorship business organization and the person who is the sole proprietor. One consequence is that the sole proprietor may not be an employee of the business. A sole proprietor cannot contract with him/herself.

Characteristics:

Oldest and simplest form of business organization; Consists of one owner, owns all the assets sand owes all liabilities of the business; No legal distinction between the individual and business (not a separate legal entity); Sole proprietorships tend to small and localized; Sole proprietor is the sole/single owner of the business and is the only person entitled to

manage it; Sole proprietor may not be an employee of the business and cannot contract with herself; Greatly outnumber corporations in Canada; All benefits of the business accrue to the sole proprietor and all obligations of the

business are his/her responsibility; The business is not incorporated.

Formation:

they come into existence whenever an individual starts to carry on business for her own account without taking the steps necessary to adopt some form of organization, such as a corporation.

Because there is no distinction between the sole proprietorship and the person who is the sole proprietor, all benefits from the business accrue to the sole proprietor, and all obligations of the business are his/her responsibility. This has several important implications:

Contracts: The sole proprietor is exclusively responsible for performing all contracts entered into in the course of business, including sales contracts with customers, loans made to the business, contracts with suppliers, and employment contracts.

Torts: The sole proprietor is exclusively responsible for all torts committed by her personally in connection with the business, and he/she is vicariously liable for all torts committed by employees in the course of their employment.

Unlimited personal liability: Personal Assets: All the sole proprietor’s personal assets, as well as those contributed to the business, may be seized in fulfilment of the obligations of the sole proprietor’s business.

Income Tax: The income or loss from the business is included with the income or loss from other sources in calculating the sole proprietor’s personal tax liability.


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Advantages of Sole Proprietorships:

Simplicity and ease of creation; Easy to dissolve; the sole proprietor simply ceases to carry on business. Dissolution,

however, has no effect on liabilities incurred in connection with the business while it was being carried on;

Sole proprietors retains all profit (minus operating expenses); The income or loss from the business is included with the income or loss from other

sources in calculating the sole proprietor’s personal tax liability; The main reason why many businesses are carried on as a sole proprietor is likely a tax

one. Most start-up businesses incur losses at first and they can be written off against the proprietor’s income from other sources. As a corporation is a separate entity, its losses cannot be written off against its owners’ income from other sources. SPs can be incorporated later once it begins to earn money.

Disadvantages of Sole Proprietorships:

SP accepts unlimited personal liability: All of the sole proprietor’s personal assets as well as those contributed to the business, may be seized in fulfilment of the obligations of the sole proprietor’s business. If the business is sued for more than the value of its assets, all of the individual’s personal assets are at risk;

As the scale of the business and its liabilities increase, this exposure to personal liability becomes an increasingly important disincentive to using this form of business organizations. High liability risk (versus corporation that provides protection against personal liability);

While directors and officers can try to manage their risk of liability through insurance or provisions in contracts with customers and suppliers, incorporation is cheaper and, in most respects, more effective.

Difficulty in raising money and capital. Every business needs money to get started and additional investment to grow. It is not possible to divide up ownership of the SP, so the only method of financing is to borrow money directly. Partnerships and corporations permit a wider range of investment possibilities;[in practice unlimited personal liability and limited financing options mean that the SP is used only for relatively small businesses]

SP cannot be an employee of business; SP cannot contract with themselves; SP is exclusively responsible for performing all contracts entered into in the course of the

business The sole proprietor is exclusively responsible for performing all contracts entered into in

the course of the business (i.e sales contracts with customers, loans made to the business, contracts with suppliers, and employment contracts

SP is exclusively responsible for all torts committed by her personally in connection with the business, and he/she is vicariously liable for all torts committed by employees in the course of their employment;


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For income tax purposes, the income or loss from the business is included with the income or loss from other sources in calculating the sole proprietor’s personal tax liability;

The main reason why many businesses are carried on as a sole proprietor is likely a tax one. Most start-up businesses incur losses at first and they can be written off against the proprietor’s income from other sources. As a corporation is a separate entity, its losses cannot be written off against its owners’ income from other sources. SPs can be incorporated later once it begins to earn money.

Sole proprietor responsible for all torts committed by him/her personally in connection with the business, and liable for all torts committed vicariously by her employees in the course of their employment.

Advantages of Sole Proprietorships Disadvantages of Sole Proprietorships

The ease with which such a business may commence or be dissolved;

Modest expenses involved in starting it up;

Retain all profits (minus expenses); Income tax: deduct start-up costs.

Unlimited personal liability; Unincorporated owner is fully

liable/responsible for all debts and other obligations incurred by his business [regardless of how carefully he segregates it from all his other activities];

No separate personality; All personal assets and those contributed

to the business may be seized in fulfilment of the obligations of the sole proprietor;

Sole proprietor responsible for all torts committed by her personally in connection with the business, and liable for all torts committed vicariously by her employees in the course of their employment;

Limited range of investment possibilities .

Name Registration:

The name of the sole proprietorship may have to be registered under business names legislation in each province in which it carries on business if it is;(1) carrying on business; and (2) using a name other than the name of the proprietor (OBNA, s.2(2)).

If a person puts their business under a name different to their own, they will have to register this legally under the Business Names Act. Otherwise do not have to meet any formalities as a sole proprietor. So for example, Anne Kumar would not have to register is she were carrying on a http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:37 PM

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convenience store business using only her own name, but would be required to do so if she chose instead to use the name World’s Best Milk and nuts or Kumar’s Milk and Nuts.

A sole proprietor may also register voluntarily (OBNA, s.4).

Advantages and Incentives to Registration

In Ontario, if you do not register when required to, without reasonable cause you are committing an offence and liable for a fine up to $2000 (OBNA, s. 10(2)). If you fail to register, you may not sue in Ontario for an obligation incurred in connection with the business except with leave of the court (OBNA, s.7). The court must grant you leave to sue if your failure to register was inadvertent. There is no evidence that the public has been deceived or misled, and, at the time of application to the court, you have registered (OBNA, s.7(2)).

Ensure that there is a public record that creditors and others can search to find out the identity of the person behind the business name who will bear responsibility for any obligation of the business;

Reduces the likelihood of confusion in the marketplace;

Discourages others who search the register from using your registered name or something similar, and also reduces confusion in the marketplace. This is one reason to register even if you are not obliged to.

You also get a right to up to $500 statutory damages against any person who registers a name that is deceptively similar to your registered name and that causes any injury to you (OBNA, s. 6). Where a plaintiff in an action brought under the OBNA is successful, the court must also order the cancellation of the offending registration. The availability of statutory damages and cancellation encourages sole proprietors to police the registers themselves which will help to protect the integrity of the register.

Registration doesn’t mean no one else can use the name. This kind of proprietary right is protected only in specific circumstances under provincial passing-off laws and federal trade-marks law. These laws create specific kinds of rights that you may have in connection with someone using a name that is confusingly similar to yours.

Failure to Register

Cannot sue in Ontario to enforce business obligation (OBNA, s.7) unless you are registered;

Liable for a fine of up to $2000 (OBNA, s.10).


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Partnerships

Partnerships: Partnerships come into being as a matter of law when two or more persons carrying on business together with a view to profit (OPA, s.2).

History: The law of partnerships developed as part of the English common law in England. Eventually the law was codified in the English Partnership Act of 1890. All provinces, other than Quebec, have partnership legislation based on this English statute (e.g. Ontario Partnerships Act (OPA)).

Characteristics of Partnerships

Partnerships involve more than one person. As a result there is a need for rules to govern the relationships among partners and to third parties;

Relations to each other - Default Rules : The OPA sets out a framework of rules in s 20-31 (Default Rules). These are not mandatory (OPA, s.20). The Default rules provide a kind of standard form agreement that apply unless the partners agree to something else. The default rules are typically modified , supplemented , and replaced by rules agreed on by the partners in a contract between them called a partnership agreement. This gives partners the flexibility to put in place an internal structure customized to their particular needs.

Relations with third parties : Partnership statutes govern when a partnership is liable to a third party (OPA ss6-19), and these rules are mandatory.

Principle of mutual agency: each partner is an agent of the partnership, meaning that each of the partners may bind the partnership when acting in the usual course of the partnership business (e.g. OPA, s.6). This effectively allocates to the partners the risk of unauthorized behaviour by an individual partner.

Caveat: Third parties cannot rely on the ability of a partner to bind the partnership where the partner does not have authority, perhaps because of a restriction in the partnership agreement.

Registration of name : all partners must register their names under the provincial business names legislations (OBNA, s. 2(3).

Income tax : the income (or loss) of the business is calculated for the partnership by adding up all of the partnership’s revenues and deducting its expenses. Each partner’s share is allocated to him/her according to the partner’s entitlement under the partnership statute or the partnership agreement and is included in his/her personal income tax calculation.

Not a legal entity : Like sole proprietorships, partners directly carry on business themselves. The Partnership is not a legal entity separate from the partners. therefore a partner cannot enter into a contract of employment with the partnership (e.g. contract with himself); All benefits of the partnership business accrue directly to the partners and all partners

are personally liable for the obligations of the business. Each partner is liable to


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perform all contractual obligations agreed to by other partners in connection with the partnership business, even if the partner did not consent to the obligation.

All partners are liable for all torts committed by partners in connection with the business and vicariously of their employees in the course of their employment.

Liability: Once liability for an obligation has been established, each partner is liable to the full extent of the obligation. All his/her personal assets, not just the assets that the partner has committed to the business, may be seized to satisfy the obligation;

Equal Contribution: Each partner is liable to contribute equally to any obligation owed by the partnership to a third party (e.g. OPA, s.24) unless they agree to some other allocation. The allocation among the partners has no effect on third parties. A creditor or tort victim may proceed against and recover the full amount of his/her claim from any or all of the partners.

General partnerships:

also have ease of formation and dissolution, general lack of formalities, great flexibility in designing the internal managerial structure of the business. They suffer the same weaknesses as the sole proprietorship such as unlimited liability of each partner jointly or jointly and severally for all debts and obligations.

Limited partnerships:

a partner can limit their liability by becoming a limited partner pursuant to the provisions of one of the provincial limited partnership Acts, but this involved scrupulous abstention from playing any part in the discretion of the business.

Limited liability Partnership (LLP):

Professional firms (e.g. law and accounting) can exclude their liability for the negligent or other described wrongful acts of a partner by registering as a Limited Liability Partnership (LLP) and meeting other statutory requirements, without losing their right to remain active partners as is true in a limited partnership.


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Corporations

Corporations: Do not come into existence simply by virtue of one or several people starting a business. Creation, called incorporation, occurs upon making a filing with the appropriate government authority and paying the requisite fee. Incorporation may be under the federal Canada Business Corporations Act (CBCA) or under the corporate statute in a province or territory (e.g. OBCA). The corporation is entirely a statutory creature (filed with government authority), but licence rules still apply. Upon incorporation, the filing made by the corporation becomes a matter of public record (no registration required).

As with partnerships, it is possible for shareholders in a corporation to customize their relationship to the corporation and each other. They may augment or replace the statutory scheme through provisions in the various components of the corporate constitution. (the articles and by-laws of the corporation, and resolutions of directors and shareholders) as well as through contracts among shareholders, called shareholders agreements.

Upon incorporation, the corporation’s filing becomes a matter of public record. No registration under provincial business names legislation is required for corporation unless they use a name different from their corporate name.

Licencing requirements are the same for corporations as sole proprietorships.

Characteristics

Separate Legal Existence:

Unlike the sole proprietorship and the partnership, the corporation is an entity endowed with a separate legal existence. The corporation has its own legal personality, which is separate from that of its shareholders, directors and officers. This means that the corporation itself :

Carries on business; Owns property; Possesses rights; and Incurs liability related to the business.

Therefore corporations can sue and be sued in their own name, and can enter into contracts even with its own shareholders. Shareholders have a bundle of rights, through their ownership of shares, but they do not own the business carried on by the corporation or the corporation’s property. The rights and liabilities of the corporation are not the rights and liabilities of the shareholders (versus sole proprietors and partners carry on business, own property, possess its rights, and are directly responsible for its liabilities).


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Separate legal existence has three other important implications?

1. A shareholder can be an employee and a creditor of the corporation because there is a legal entity, separate from the shareholder;

2. Corp has perpetual existence because it is distinct from the people who are shareholders and is not affected by any changes in deaths or retirement of its members;

3. For income tax purposes, the corporation is taxed separately at the corporate level. Shareholders will only pay tax when they receive something such as a dividend or some other distribution of assets.

Shareholders Have Limited Liability:

Shareholders are not liable for debts or other obligations of the corporation (this alone can make the corporation the preferred business vehicle for investors and entrepreneurs). In fact, shareholders have no liability at all for the obligations of the corporation. They are not directly liable for the obligations of the corporation and their maximum potential loss is limited to the amount they have invested. They are said to have limited liability because their maximum loss in connection with their investment in the corporation is limited to the value of the money, property or services they have transferred to the corporation in return for their shares. Limited liability, in effect, shifts some of the risk from the shareholders to other stakeholders.

Agency:

The corporation can only act through individual “agents” of the corporation. Agents include directors, officers, and anyone else who may act on behalf of the corporation in relation to outsiders. Like a partnership, a corporation will be bound by a contractual commitment to a third party when the agent who negotiated it is actually authorized by the corporation to enter into the commitment on the corporations behalf or reasonably appeared to have such authority.

The law imposes liability on the corporation for crimes and torts committed by its agents when the agent can be said to be acting on behalf of the corporation, unless some particular mental state must be shown as an element of the tort or crime, such as an intention to commit the tort or crime. In such a case, the courts determined that the corporation is liable only if the agent who has this mental state can be considered to be acting as the corporation itself for the purposes of committing the tort or crime.

Recent amendments to the Criminal Code have broadened the circumstances in which the actions of agents can result in the corporation being criminally responsible.

Separation of Ownership and Management:


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The rights and obligations of managers and those with interests represented by shares of the corporation are legally distinct. Corporations are managed by a board of directors which is elected by shareholders by majority vote, and by officers, who are appointed and delegated responsibilities by the directors. Shareholders do not participate in the management of the corporation.

In small corporations, these legally distinct roles are played by the same people—the shareholders are also the directors and officers. As the business gets larger, directors and officers are less likely to hold all shares of a corporation, though often they do hold shares. Large corporations like RIM have thousands of shareholders, including their officers and directors.

Issue/Concern: How shareholders can control, management and ensure that management acts in the interests of shareholders. The CBCA and other provincial statute imposes obligations on management to act in the best interests of the corporation and prohibit managers from favouring the interests of one group of shareholders over another.

In small corporations: need for formal accountability mechanisms is minimal; In large corporations: need for formal accountability is higher. As soon as a manager has

less than 100% of the shares of corporation, he/she can benefit from indulging in perquisites at the expense of the corporation(e.g. excessive salary). There is also a risk that because management receives most of its income from the corporation’s activities, it will be reluctant to cause the corporation to take risks. Shareholders by contrast, are more likely to want the corporation to take possible beneficial risks, since their exposure to loss from the corporation’s activities is much less.

Because of the sometimes conflicting interests of management and shareholders, corporate law contains a variety of legal mechanisms designed to ensure that management is accountable to shareholders without constraining the freedom that management needs to be able to do its job of running the business in the most effective way:

Corporate democracy: shareholders have the collective power to elect the directors and to remove the, and, thus, are able to influence the directors’ decisions, including their choice of officers. Also, certain fundamental changes cannot be made to the corporation without shareholder approval.

Directors’ and officers’ duties: the law protects the interests of shareholders by imposing a duty on managers to act in the best interests of the corporation and to take reasonable care in performing their responsibilities.

Shareholder rights to information: Shareholders have certain rights of access to information, which help them to know whether management is performing its duties

Shareholder remedies: shareholders have certain remedies in the event that management fails to perform its duties.

Shareholders do not want managers of the corporation to be negligent in managing the corporations business. The common law, the CBCA (s 122 (1) (b)) and most provincial corporation statutes impose a duty of care on managers. Shareholders also do not want management to be engaged in activities that put its interests ahead of those of the corporation and http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:37 PM

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the shareholders, nor would they want management to favour one group of shareholders over another. To address these types of problems, the common law, the CBCA and OBCA impose obligations on management to act in the best interests of the corporation and prohibit managers from favouring the interests of one group of shareholders over another (e.g. CBCA, s.122(1) (a)). This fiduciary duty requires managers to act in the best interests of the corporation. Corporate statutes provide that minority shareholders may obtain relief of the majority shareholders cause the corporation to act in a manner that is unfair or oppressive to the interests of the minority, or if management acts in a manner that is oppressive (e.g. CBCA, s.241).

Other Forms and Methods of Carrying on Business

Special forms of corporations:

there are some businesses that can be carried on only through special kinds of corporations incorporated and governed under statutes which combine many of the features of the general corporate law with other provisions imposing a scheme of regulation on these businesses. Banks can only be incorporated and operated under the federal Banks Act. Insurance businesses must be incorporated and are governed by either federal or provincial legislation regulating the insurance business.

Joint Ventures:

are neither a distinct form of business organization no a relationship that has any pecise legal meaning. They refer to a wide variety of legal arrangements in which two or more parties combine their resources for some limited purpose, for a limited time, or both.

A joint venture may be established by a contract in which the joint venturers agree that they will do certain things to carry out their common purpose.; by two people carrying on business together, in which case the joint venture is a partnership; or two or more people forming a corporation to carry out their common purpose.

Strategic alliances:

have no precise legal meaning and is used to refer to a wide variety of relationships between business organizations involving more or less legal formality and greater and lesser degrees of working together among the alliance participants. A joint venture or a partnership may be referred to as a strategic alliance. These are less involved relationships (e.g. an agreement to do research and developments together, to market products jointly, or simply to share information.

Licences: are purely contractual relationships under which one part the licensor, agrees to permit another, the licensee to use something usually some form of intellectual property such as a patent, trademark, or copyright, in return for compensation, usually in the form of a royalty. They are most common in franchises (e.g agreement by a trade-mark owner (e.g. McDonald’s) to allow someone to use its trade-mark.


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To commence certain types of business, sole proprietorships must obtain a licence from the appropriate levels of government:

Liquor licences: restaurants, bars, clubs, cafes; Drivers licences: taxis; Real estate licences; brokers; Securities dealers

Franchises:

are purely contractual relationships under which the franchisor gives the franchisee the right to operate its business “system” in return for a set of fees.[*Refer to pg 21 for key elements of legislation (Van Duzer)]. The parties typically provide in their agreement that their relationship does not constitute a partnership or a joint venture.

The basic term of the relationship consist of a licence in which the franchisor gives the franchisee the right to use its trade-marks in selling goods or services associated with the franchisor and promises to provide certain assistance in running the franchised business, including training. In return, the franchisee agrees to operate the franchised business in accordance with the standards of the franchisor and to pay certain fees based on the sales of the business.

Franchises are complex arrangements that tend to be offered on a take it or leave it basis by the franchisor. So, franchisees may not fully appreciate the nature of the risks associated with the franchise Ontario has enacted legislation that imposes obligations on franchisors for the protection of current and prospective franchisees:

Duty of Fair Dealing: Franchisors have a minimum obligation to deal fairly with franchiseesandProspective franchisees. Franchisors must act in good faith and in accordance with reasonablecommercial standards.

Disclosure: Franchisors must provide a disclosure document containing prescribed informationto prospective franchisees regarding the nature of the franchise business and the risks associatedwith it.

Withdrawal Right: Any franchisee who signs a franchise agreement has a right to withdrawFrom the agreement within 60 days of signing the agreement OR franchisee may withdrawwithin 2years if disclosure docs were never given.

Damages for Misrepresentation: Franchisees have the right to damages for any misrepresentation in disclosure documents.

Right to Organize: Franchisees have the right to organize themselves to deal collectively withThe franchisor


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‘Distributorships:

do not have precise legal meaning. Business people may say that a distributorship exists when one business agrees to sell another’s product. The distributor buys the products for itself and then resells them on them on its own behalf. A distributor often provides a warranty service.

Business Trusts:

Trusts are used for a wide variety of purposes in business (e.g. mutual funds, real estate investment funds (known as REITS). They are often set up to have many of the features of a corporation.

To create a trust, a settlor gives title to property to someone else (called the trustee to be held for the benefit of a third person (called the beneficiary) on terms specified by the settlor. One way to create a form of business using a trust would be for investors to give money to trustees for the purpose of acquiring assets to be used to carry on business for the benefit of the investors (e.g. the investors are both the settlors and the beneficiaries.

Challenges: There is no statute comparable to federal and provincial business corporations statutes to provide a set of rules to govern trusts. Everything must be crated in the document that creates the trust called a declaration of trust. While this means that trusts are flexible, it also means that setting up a trustcna be time consuming and expensive. Legal and tax advice may be required and a significant amount of work may be needed to draft a trust declaration

The rules regarding beneficiaries is more complex than those that are applicable to shareholders . While shareholders generally are not liable for obligations of the business being carried on by the corporation, the same is not always true for trust beneficiaries.

Tax treatment: even though trusts are not separate legal entities, they are taxed as if they were. But if all the trust income is paid out to the beneficiaries, then the income is taxed in the beneficiaries’ hands and not the trust. Because it was worried that widespread use of income trusts would severely reduce tax revenues, the federal government amended the Income Tax Act, effective January 1, 2007 to eliminate the tax benefits of structuring a business as an income trust. Now income trusts are treated as a corporation with the result that it must pay tax on the income it receives from the corporation , even if the full amount is transferred to the trust unit holders. This has made income trusts much less attractive.


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B. PARTNERSHIP

2. What is a Partnership?

Casebook 4-24VanDuzer 28-49Partnerships Act 1-5, 45 (rules of equity and common law apply)Business Names Act, 1, 2, 6,7,10

The Partnership:

Is a legal relationship that exists between two or more people carrying on business together. Agreements between partners supplement and often replace the rules that govern partners’ internal relations and address some of the liability risks created by the rules that deal with when partnerships are liable to outsiders.

History of Partnership Law

Partnership law determines when a partnership is created and the resulting legal consequences. Originally partnership law developed as part of the English common law (e.g. English Partnership Act 1890). All provinces (except Quebec) have partnership legislation based on this English statute (ie. Ontario Partnerships Act (OPA) and a Limited Partnerships Act or provisions dealing with limited partnerships)

In Canada, the provinces have constitutional jurisdiction to enact laws regulating partnerships under section 92(13) of the Constitution Act 1867, which gives the provinces jurisdiction in relation to “Property and Civil Rights.”:

Statute; Case law; Partnership agreement; Rules of equity: the Ontario Partnership Act is not a complete code and s.45 provides that

the rules of equity and common law applicable to partnerships continue in force except so far as they are inconsistent with the express provisions of the Act.

Formation:

When two or more people carry on business in common with a view to profit (OPA, s.2). The partnership is not a legal entity separate from its partners; thus partners cannot be employees or creditors nor have any contractual relationship with the partnership (Re Thorne and New Brunswick Workman’s Compensation Board).


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Name Registration

All general and limited liability partnerships (LLPs) must register under Ontario Business Names Act (s.2(3) (see Sole Proprietorships).

3 Kinds of Partnerships in Ontario:

General partnership Limited Liability Partnership (LLP)

Limited Partnership (LP)

Each partner has unlimited personal liability

OPA, s. 6, 10-13

Same as General Partnership

EXCEPT

Each partner is not liable for debts, obligations, or liabilities of partnership or of another partner arising out of negligence or another wrongs of another partner, employee, etc

EXCEPT

A partner remains liable for: his own negligence or

wrong negligence or wrong by

a person under the partner’s direct supervision or control

the negligence of another partner, employee etc, that is

crime or fraud, or the partner knew or

ought to have known of the negligence or wrong and did not take actions that a reasonable person would have taken to prevent it

(OPA, s. 10, 44.1)

At least one general partner (unlimited personal liability) and one limited partner (liability limited to amount contributed to partnership)

OLPA, s.8, 9


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General Partnership: Governed by the Ontario Partnerships Act (Provincial Act, no Federal Act)

3 Scenarios:

3 people open restaurant, want to operate as a partnership, all have equal control/responsibility. Person gets injured at the restaurant and sues. Business did not have insurance. Each of them will be liable to an unlimited degree for that law suit.

2 people open a restaurant, 1 other will invest (silent partner). Financed by sleeping partner plus a bank loan. Person injures themselves, sues, no insurance. 2 active partners can be sued. Silent partner can also be sued to an unlimited degree. If you are a partner you will be liable in a general partnership no matter if you are an active or silent partner. Bank is not liable.

2 active partners, 1 other will loan money. They structure the loan so they only have to pay interest when the business makes a profit and don’t have to pay the loan off until the partnership ends. Person gets injured and sues. 2 active partners are liable. Other lender-are they a partner (unlimited liability) or a lender (not liable)? Professor argues that small lenders should not be held liable the same as banks since

the lenders had no control over the business; A loan structured as this creates the presumption that there is a partnership however it

can be rebutted by looking at the intention of the parties from the whole facts of the case.

The Legal Nature of Partnership:

OPA, s.2 provides that a partnership exists any time there are : “persons carrying on a business in common with a view to profit.

Not a distinct legal entity

Like a sole proprietorship in that partners themselves carry on business directly; the partnership is not a legal entity separate from its partners. It is a relationship, separate from and between the partners. Consequence: each partner is liable to the full extent of his person assets for debts and other liabilities of the partnership business. Therefore a partner may not be an employee by entering into a contract of employment with the partnership (therefore contract with himself), nor can he/she be a creditor.All benefits of the partnership business accrue directly to the partners and all partners are personally liable for the obligations of the business. In an absence of an agreement to the contrary, the continued existence of the partnership depends on the continuing participation of the partners. If a partner leaves the partnership, it is terminated.


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Re Thorne and New Brunswick Workman’s Compensation Board:

A partner cannot be an employee of the partnership, therefore you cannot get workman’s compensation. Partnership is not a separate legal entity; versus

Lee v Lees Air Farming Ltd-s

Similar scenario (but corporation case), person was sole employee/some owner in a corporation. The business was incorporated therefore the sole employee is eligible for compensation because a corporation is separate legal entity.

All of the partners have unlimited liability (general partnership).

If one partner commits a tort, all of the partners are jointly and severally liable for the damages and their personal assets can be seized to meet the liability. Once liability for an obligation has been established, each partner is liable to the full extent of the obligation

(a) All personal assets may be seized to satisfy the obligation;(b) a creditor or a tort victim may proceed against and recover the full amount of her claim

from any partner or all of the partners

Tax Advantage: of a general partnership is the ability to take advantage of tax losses by offsetting them against other income. Partnership agreements can also be structured in such a way as to allow for a great deal of flexibility.

Treated as a Collective Entity:

A partnerships is often called a “firm and the name under which the partnership carries on business is called the firm name;”

For income tax purposes the income or loss from the partnership business is calculated at the firm level, adding up all the revenues of the partnership business and deducting all the related expenses. The partnership is not taxed as a separate entity on this income, it is allocated to the partners in accordance with their entitlements to profits under the partnership statute or the partnership agreement and must be included as part of their personal income in their individual returns. The partner’s share of the income or loss from the partnership business must be included even if all profits are reinvested in the business and no cash is paid out to the partner.

Actions against a partnership may be commenced and must be defended using the firm name. Any order made against a partnership may be enforced against the property of the partnership as well as against the property of any persons who was served personally and either did not deny being a partner or was adjudged to be a partner.


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OPA, s.5: persons who have entered into partnership with one another are collectively called a firm, and the name under which their business is carried on is called the firm name

Agency/Fiduciary Duty:

Two areas of law that affect it:

(1) The fiduciary duty partners owe to each other (honestly, good faith, disclosure etc.);(2) Agency- Every partner is an agent for every other partner and is also an agent for the firm itself. Agency is the policy that the common law courts express for imposing unlimited liability on anyone found to be a partner is fundamental principle of the law of agency; if a business is being carried on by someone (called an agent) on behalf of someone else (called the principal), the principal should be responsible for the obligations of the business.

Related justification (agency): protecting the reasonable expectations of creditors. In accepting a commitment on behalf of a partnership, a creditor should be able to rely on the personal creditworthiness of each person who is , or appears to be , carrying on the business.


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Definition of Partnership:

OPA s. 2:Partnership is the relation that subsists between persons carrying on a business in common with a view to profit, but the relation between the members of a company or association that is incorporated by or under the authority of any special or general Act in force in Ontario or elsewhere, or registered as a corporation under any such Act, is not a partnership within the meaning of this. [e.g. painting business with a friend for summer –share responsibilities, profits and expenses]-‘persons’ includes corporations, two corporations could form a partnership-Shareholders of a corporation are not partnerships (second part of OPA, s. 2 definition)

One practical problem for business people and the lawyers who advise them is to know when a partnership relationship will be found to exist. Persons carrying on business may be willing to accept the risk of unlimited liability associated with being a partner because of other benefits of the partnership form (such as the ability to deduct losses from the partnership business against income from other sources for tax purposes), or because they can manage risk in some way. In the case law, the issue of whether a person is a partner usually arises where the partnership business has become insolvent and a creditor is looking for someone with assets to claim against. The creditor then argues that a particular person with assets should be liable for the obligations of the business because he/she is a partner. Lawyers need to be aware of the circumstances in which a partnership will be found to exist in order to ensure either that their clients:

(a) Do not inadvertently become involved in a relationship where they will be found to be a partner; or

(b) That they take appropriate steps to manage the risk of being found a partner (Risk management strategies are discussed later).


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“Carrying on a Business”

“Carrying on a Business”: Giving meaning to “carrying on a business” is the least difficult challenge in the definition.“Business”: is defined as including “every trade, occupation and profession” (OPA, s.1).

Thrush v. Read, [1950]

These broad, non-exhaustive words have been defined as encompassing any on-going activity or even a single transaction (although partnerships are usually going to be an on-going transaction.

Khan v. Miah (UK), [2001]:

A restaurant business that had never even opened its doors constituted partnership. The preparation was enough:

Acquiring the real property for the restaurant premises; Buying and taking delivery of the furniture; Entering into a credit agreement to purchase a carpet; Contracting for the laundry of table linen; and Advertising the restaurant.

Were found to constitute carrying on the restaurant business and the persons engaged in these activities were held to be partners. But a simple agreement to carry on business at a future time is not sufficient. The issue is whether the partners have done enough to justify a conclusion that they have commenced the business which they agreed to carry on.

The idea of carrying on business together usually suggests the need for an enduring relationship, but even that factor may be inconclusive. There is probably no partnership if two competitors simply cooperate on an isolated transaction, as when a pair of software companies split the cost of a research project.


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Spire Freezers Ltd. v. The Queen, [2001 SCC]

A partnership may arise even in relation to a single, time-limited activity.

In general, business is less likely to be found if the people involved are merely passive investors, such as people jointly owning an apartment building and collecting rent. In this case, the passive receipt of rents could be a business satisfying the requirement for the existence of a partnership.

Hickman Motors Ltd. v. The Queen, [1997 SCC]

The receipt of rent under a number of equipment leases could constitute a business.

Although this case did not address the issue of whether a partnership existed, it was cited in a more recent Supreme Court decision as authority for the proposition that the passive receipt of rents could be a business satisfying the requirements for the existence of a partnership (Spire Freezers Ltd. v. The Queen).


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“In Common”

“In Common:” these words mean that the putative partners are carrying on business together, based on some kind of agreement that can be:

(a) Written(b) Oral (c) Implied

Robert Porter & Sons v. Armstrong, [1926 Whether this agreement exists is determined objectively, in the sense that persons may be characterized as partners without their knowledge.

Weiner v. Harris, [1909]

….and even contrary to their own intention, so long as the court decides that the circumstances show the existence of an agreement.

Adam v. Newbigging, [1888], Lansing Building Supply Ltd. Ierullo, [1990]

The agreement must demonstrate an intention to participate in a relationship that fits within the definition of partnership, but whether the parties describe themselves as partners or not in their agreement is not conclusive. Nor is an express provision in a written agreement denying that the partners intended to be partners.

Such provisions may help clarify the intended effect of other clauses of the parties agreement where such clauses are not clear, but, in every case, courts must pay attention to all the facts, including the rights and obligations created by the parties’ agreement, their conduct, and any other relevant circumstances.

Green v. Harnum, [2007]

Addressed what is needed to establish the existence of an agreement.

Facts: two men signed all the documents relating to the acquisition of a fishing boat, which was to be the primary asset of a fishing business in which they both participated—though to varying


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degrees. They borrowed in equal amounts to finance the acquisition. They set up bank account for the business into which they paid 1/3 of their revenue from fishing and out of which they paid expenses. Both had signing authority on the account. The other 2/3 of the funds, as well as any funds remaining in the account after the expenses were paid, were split between the two of them. The two men also signed a declaration of partnership that was filed under a federal government program.

Held: the Court of Appeal for Newfoundland and Labrador found a partnership, even though the parties had never entered into any agreement as such.

Red Burrito Ltd. v. Hussain, [2007]

A partnership will be found where even though the parties had not fully implemented their agreement, it was clear that they planned to carry on business together and did so.

Facts: two parties, Red Burrito and Hussain, entered into a letter of understanding which provided that they would incorporate a corporation, in which each of them would be equal shareholders, to carry on a restaurant business under Hussain’s management. The business was to operate in premises that, at the time of the agreement, were leased by Hussain and used by him to carry on a grocery store business. The parties agreed that the lease would be assigned to the new corporation and the premises would be renovated to make them suitable for the restaurant under the supervision of Hussain. Red Burrito advanced a substantial amount of money to finance the renovations. The corporation was to have a separate bank account. The corporation was never incorporated, no bank account was ever set up, and the lease was never assigned. Nevertheless, the restaurant did open in June 2006, but due to a breakdown in the parties’ relationship, Hussain locked out Red Burrito in early August 2006. After Red Burrito was locked out, it received no income or benefit from the restaurant. Prior to that event, the expenses of the restaurant were paid out of the restaurant’s revenues.

Held: In these circumstances, the court found that even though the parties had not fully implemented their agreement, it was clear that they planned to carry on business together and did so. In the court’s view, this was sufficient to conclude that a partnership had been formed.

Cressman Foster Health Facility Inc. v. Furniss [2006]

Where a partnership agreement is drafted but not signed, there is insufficient evidence of a partnership business

Held: The court found that a partnership existed with respect to the sharing of the profits from the business because the parties had followed a practice of sharing profits over a number of years. The court found that there was an “income partnership,” but not an “ownership partnership” based on the terms of the unsigned agreement, which contemplated each partner having an ownership in an optometry business.


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Surerus Construction and Development Ltd. v. Rudiger, [2000]

No partnership will be found where the alleged partners have not agreed on the date the partnership was to be commenced, or the distribution of one of the putative partners, even where there is evidence that the parties consider themselves partners and have acted as such, including by holding themselves out as partners.

Facts: in a dispute between two business people, one alleged that there was a partnership between them.

Held: The court found that there was no partnership because the alleged partners had not agreed on the date the partnership was to be commenced, or the distribution of one of the putative partners. The court reached this conclusion even though there was evidence that the parties considered themselves partners and had acted as such, including by holding themselves out as partners.

These cases show that no formal agreement is necessary to find an agreement to carry out a business within the meaning of the definition of partnership. A court will infer an agreement form the parties’ behaviour. But, for a court to do so, the agreement must be given effect through actions directed to carrying on a business. As well, in order for the agreement to be effective in creating a partnership, it must extend to all the essential elements of a partnership.


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“View to a Profit”:

The words “view to a profit simply mean that the undertaking is not for the purpose of carrying out charitable, social, or cultural purposes. A partnership need only have a view to profit. There is no need to actually make profits. Two recent SCC have clarified the requirement that investors must have a “view to profit” for a partnership to come into existence.

Definition of Profits: Profits (revenue) minus expenses. This means all monies or capital received in connection with the business minus wages and all monies paid to earn the revenue [i.e. money spent on wages or to acquire the goods or services sold]

Case-by-case basis: how much “business” has to be left for the courts to find there is a view to profit [depends on the facts of each case]:

Spire Freezers Ltd. v. The Queen

Profits made by the business over several years was indicative that there was a view to profit [even if they couldn’t cover the loss]. Substantial assets = view to profit

Facts: a partnership was established to develop a luxury condominium project and operate a low-rent apartment complex. Through a complicated series of transactions, Spire acquired a 50% interest in the partnership from Peninsula Cove Corporation, one of the original partners. In a subsequent transaction, the other original partner, BCE Developments., sold its interest in the partnership to a number of other investors. It then bought the condominium development from the partnership for a price that created a $10,000,000 loss in the partnership.

Spire’s main purpose in acquiring an interest in the partnership was to deduct its share of that loss against its other income and thereby reduce the income tax that it had to pay. Along with the other new investors, Spire continued to manage the apartment complex, which earned profits over a number of years, although not enough to offset the $10, 000,000 loss. Revenue Canada refused to allow Spire to deduct the loss. It argued that Spire was not a partner because it was never carrying on a business “with a view to profit” [because they never actually profited].

Held: that Spire was a partner and allowed the deduction. They did intend to carry on the business, and they did have a view to profit even though they couldn’t cover the loss. A partnership need have only a view to profit. Even if Spire’s main purpose was to deduct partnership losses, it also intended to carry on the business of the apartment complex. And even though the profits from that business were not sufficient to make up the $10,000,000 loss, that did not mean that the business was not being carried on with a view to profit. The remaining business was not just “window dressing.” Spire had an ownership interest in a substantial asset and performed significant management activity.

Reason for Judgment: SCC said Spire was a partner because there were profits made by the business over several years under the governance of Spire and other investors, even if they were not enough to make up the losses, the business was still being carried out with a view to profit.


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The court reached the opposite conclusion in:

Backman v. The Queen, [2001]

Latest Supreme Court decision on Partnership Law. Unlike Spire the remaining assets in the partnership were nominal and little management was required. So SCC found that there was no partnership because there was no business being carried on with view to profit [no view to making a profit]. In this case, the remaining assets in the partnership were nominal and little management was required.

Facts: A business invested in a partnership to take advantage of the deductibility of the partnership losses. A partnership in Texas owned apartments building, which was worth less than they paid for it. They could have just sold it and taken their losses. They wanted to unlock some value in the building, get some money back from the government for this market loss. So they said they’d sell the building in effect, and sell the partnership to some Canadians, value they pay will be somewhere between what is worth and what a tax deduction on a capital loss would be worth. In other words Canadian government will subsidise the loss. The Canadians would sell the apartment building back to them, they would set their loss against their other income and Canadian government would give the Canadians the money Had to prove they were a partnership to the government in order to get the money back from

the government. This tax structure only works if as a matter of law the Canadians really are a partnership at

the time the apartment building is sold. Is it enough to say I’m in a partnership today, and then sell the building back and the partnership ends tomorrow?

They tacked on another asset (another property) so there would be something other than the apartment building that they continue to hold, so it would make the partnership look like its still an existing partnership.

Issue: Was it a partnership? Supreme Court gave the company the benefit of doubt on every point

of the law that it was a partnership.

Held: Don’t have to have a new business – can take over an existing business Doesn’t need to be one of long duration – “can exist for a single transaction” Need an intention to make a profit, but need not be your primary purpose – e.g. tax avoidance

can be the primary purpose as long as you have at least an ancillary purpose of wanting to make a profit.

Intention to make a profit doesn’t even need to be big enough to actually get back the money you put in.

Reason for judgment: SCC found that there was no partnership because there was no business being carried on with a view to a profit. The remaining assets were nominal and little management was required.


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But despite these generous findings, the court says they see no intent to carry on the apartment business to make a profit as they sold it at the instance they owned it. Did not find a partnership.The other property—they said this business doesn’t look like its being carried on in the partnership, the partners hadn’t put anymore money in it, didn’t know about it really. SC was not satisfied they met the test thus the tax department did not have to pay them out.Court says intention doesn’t mean what word you use; it’s the facts that show intentions. Doesn’t matter if you say out loud you are in partnership or not. Doesn’t matter what you said, it counts what you did.


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Factors Indicating Partnership

The OPA sets out guidelines to assist in determining whether persons are carrying on a business together. (OPA, s.3). ]

(None of these factors are in and of themselves determinative) Sharing of Profits [Cox and Wheatcroft] Sharing responsibility for losses including guaranteeing partnership debts [W v MNR] Jointly owning property[A.E. LePage] Participating in management Controlling partnership business [Pooley, Volzcke] Stating intention to form partnership in contract [W v MNR] Making government filing showing partnership (eg. Registration under business names

legislation, tax returns) Access to information regarding the business: signing authority for contract and Bank

Accounts Contributing money, services, or property as capital (especially if contribution is

complimentary to the contribution of others for the purpose of running a business) [Pooley]

Holding oneself out as a partner Full time involvement in business [Volzske] Use of a firm name, perhaps in advertising firm having its own personnel and address

*if any exist lawyers should tell clients to be aware of the risks of partnership!!!! Because of the risks of being found a partner clients must be aware of all responsibilities and risks

Managing the Risk of Being Found a Partner

Problem: the difficulty in defining precisely the circumstances in which a partnership may be found to exist. This has important implications for lawyers advising their client. If a client wants to avoid being a partner, the lawyer will have to give careful consideration to the relationship his/her client intends to enter to see if there is a risk of a partnership being found. If there is a risk of the partnership being found, the client should eb advised to take whatever steps are available to avoid this consequence:

contractual provisions stating the nature of the relationship; structural changes to the relationship itself; holding partnership interest in a corporation; creating indemnification provisions in the agreement; and whether he/she will be compensated for any residual risk of partnership liability).


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Profit Sharing [OPA, s.3]

Definition of Profits: Revenues (all monies received in connection with the business) less expenses (all monies paid to earn the revenue: e.g. for acquiring the goods or services soldIf a person is sharing profits, that person is also concerned about how the business is being managed, and how expenses are being managed, therefore this stake in the effectiveness of management means that the sharing of profits is more suggestive of being in business together. Also, an interest in profits is a residual claim, similar to a shareholder’s interest in a corporation. Profits are what is left after all other claims on the business are paid. So, a person who shares in profits is like other kinds of business owners. Similarly, agreements to share losses as well as profits are strongly indicative of partnership.

Waugh v. Carver, [1793]

The sharing of profits test was found to be too broad! [Cox v Hickman; Waugh v Carver]

Since this old case, the principle indicia of carrying on business in common has been whether profits were shared. This rule is set out in section 3.3 of the OPA:

Receipt by a person of a share of the profits of a business is proof, in the absence of evidence to the contrary, that the person is a partner in the business, but the receipt of such a share or payment, contingent on or varying with the profits of a business, does not of itself make him or her a partner in the business.

Section 3.3 does not say that sharing profits alone is conclusive evidence that a person is a partner in the absence of evidence to the contrary. This provision doesn’t quite create a rebuttable presumption, but almost. Something more is required, but it is not clear what this is. In order to flesh out what is required, it is necessary to consider the caselaw.

Cox v. Hickman, [1860] HL

it was established that the fundamental characteristic of the relationship of partnership is mutual agency: a partnership exists where each person alleged to be in the partnership carries on the business on behalf of the other alleged partners.

New agency test: Is the business being carried on for the interest of those claiming to be partners?

Prior to this case, including the leading case of Waugh v.Carver, had held that sharing of profits was conclusive of partnership. The sharing of profits test was found to be too broad because http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:37 PM

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there are a variety of relationships in which profits may be shared but where it is not accurate to say that theparties are carrying on business together. Courts in this case changed test, said sharing profits is not the only indicator, it’s a presumption that can be rebutted. In this case it was rebutted.If you want to determine if partnership exists you have to look at the intent of the party. Sharing of profits is not the key indicator to whether there is a partnership.

Section 3.3(a)-(e) illustrates a list of relationships that should not give rise to an inference of partnership even though there is sharing of profits:

Debtor-creditor; Employment Remuneration ( profit sharing plan); Annuities paid to spouses or deceased partners; Vendor and purchaser relationships.

The most difficult of these to distinguish is the Debtor-Creditor and determining when a person is a partner as opposed to a creditor of a business has proven difficult, whereas the other categories are relatively straightforward (Cox v. Wheatcroft; Pooley v. Driver).


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Debtor/Creditor Relationships

Cases in this category deal with claims by a creditor of an existing partnership against persons the creditor alleges are partners. In each case, the reason the creditor pursued the claim is that the acknowledged partners were insolvent

Cox v. Hickman, [1860] HL

Excellent example of a sharing of profits where a partnership relationship was found not to exist. It also illustrates the difficulty of drawing a clear distinction between creditors and partners in many situations.

Facts: B. Smith & Sons, an iron works business in financial difficulty, entered into an arrangement with its creditors under which the property of the business was transferred to certain trustees who were appointed by the creditors to operate the business. The debtors retained beneficial ownership in that, if all the debts were paid, they would receive anything left over. The creditors were given the right to make rules for the conduct of the business, and could choose to wind it up, that is, sell off all the assets and distribute the resulting proceeds.Several creditors, including Cox and Wheatcroft, were appointed trustees. The trustees will collect income from partnership, use it to pay off debt, once its paid off they’ll give the business back to be dismissed. An arrangement was worked out, that the creditors [including cox and wheatcroft] were appointed trustees and these trustees received legal title of the business [but the residual interest stayed with BS&S] and the profits were then dispersed by the trustees to the creditors. After all the debt was paid off, the business would be transferred back to BS&S. The creditors had power to appoint and remove trustees, power to put an end to business if not enough profits, make rules and give directions to trustees as to how the business was to be run. While the business was being operated by the trustees, it became indebted to Hickman. Hickman was a poor unpaid supplier. Hickman sued Cox and Wheatcroft (deep pockets) alleging that they, along with the other creditors, were partners in a partnership carrying on the ironworks business (B&S). They claimed this was indicated by the fact that they were sharing the profits.

HL Held: Cox and Wheatcroft were not partners. Sharing profts, was not sufficient for a finding of partnership. to find a partnership involving Cox and Wheatcroft, the business had to be carried on for the benefit of Cox and Wheatcroft as principals. The business was not being carried on for the benefit of the creditors, but rather for BS&S [after all it is their debt] and the creditors are simply claiming the amount owed to them. Here the trus reloationship was debtor and creditor. [Note that the English CA applied the same test but came to different conclusion. They said that the business was being carried on for the benefit of the creditors because they were receiving the money and had control over the management of the business]

This case shows that even accepting the agency basis of partnerships, it can be difficult to determine if a partnership exists. It raises the question of the relevance of the involvement of an alleged partner in the business.


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Pooley v. Driver, [1876]:

Loan doesn’t make you a partner

OPA s. 3(d): “ the advance of money by way of loan to a person engaged or about to engage in a business on a contract with that person that the lender is to receive a rate of interest varying with the profits, or is to receive a share of the profits arising from carrying on the business, does not of itself make the lender a partner with the person or persons carrying on the business or liable as such, provided that the contract is in writing and signed by or on behalf of all parties thereto.”

Facts: Partnership between Borrett and Hagan carrying on a grease, pitch and manure enter into a partnership agreement that provided among other things, that the capital (total amount contributed to the business by partners) of the partnership would be split between Borrett and Hagan and persons “advancing money by way of loan” (referred to as “lenders”) and that profits were to be paid to Borret, Hagan and the Lenders in accordance with their interests in the capital. The partnership agreement also contained a “loan agreement” with lenders to fund 20 units of their business. Specifically wanted to create a relationship where the lenders would not be considered partners because of the liability issue. So they specifically used the language inthe loan agreement “advance of money by way of a loan”. Pooley is owed money by the business and so they sue “lenders” [Driver] because business is insolvent.

Held: The court found that there didn’t appear to be any functional difference between this loan and capital which a partner would put in, thus the so called lender will be liable as a partner. This rather complex relationship was expressly designed to ensure that the Lenders were not found to be partners.

OPA, s.3.3(d) provides as follows: the advance of money by way of loan to a person engaged or about to engage in a business on a contract with that person that the lender is to receive a rate of interest varying with profits, or is to receive a share of the profits arising from carrying on the business, does not of itself make the lender a partner with the person or persons carrying on the business or liable as such, provided that the contract is in writing and signed by or on behalf of all parties thereto.

By identifying the lenders as person “advancing money by way of loan” and giving them a return that depended on the profits of the partnership, Borrett and Hagan sought to fit the Lender within this provision.


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Factors suggesting partnership:

Lenders have interest in capital just like the interest of the partners is indicative of an ownership claim rather than a creditors claim;

Lenders ability to enforce the covenants of the partnership agreement gives them a degree of participation and control of the business that would be unusual for lenders, though not for partners.

Lenders get share in profits; Having the return on the Lender’s investment vary with the aggregate amount invested in

the business is highly unusual for a lender but not for a partner The provision terminating the relationship of any Lender who goes bankrupt might not be

unusual for a partnership in which the solvent partners would not want the trustee in bankruptcy of the bankrupt partner succeeding to the rights of a partner, but would be highly unusual for a lender.

It would be highly unusual for a lender to be required to pay back all profits received as well as its original investment if there were insufficient partnership assets otherwise to pay off all other creditors

Coincidence of the loan and partnership terms suggests that the Lenders were partners.

These were all things that the court said would be “abnormal” in the case simply of a “loanagreement”. The court must take into account various factors in determining whether a a relationship is a debtor and creditor relationship, including the degree to which the alleged partner is involved in or has control of the business and the nature of her financial relationship with the business.


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Co-Ownership

OPA, s. 3.1: holding property in some form of common ownership does not, of itself, create a partnership in relation to the property, even if the co-owners share profits made from the use of the property (joint tenancy, tenancy in common, joint property, common property, or part ownership does not itself create a partnership).Unlike partners, co-owners are not agents of each other. One co-owner cannot bind another. Each co-owner is at liberty to deal with his/her interest as his/her own without the consent of the others. Conversely, the ability of a partner to transfer his/her interest in the partnerships limited. In a partnership the firm’s property is held jointly as an asset of the business. No partner has the right to deal with the property separately. The partner’s right is a to a division of the profits, not to any particular property of the partnership business (partners have no right to property in specie (e.g. in its existing form).

Mere fact that co-owners intend to acquire, hold and sell for a profit does not mean that are partnership. Must be something more than profit sharing. Some management or other business activity must exist. Management alone is not indicative as there is a certain level of management that is inherent to co-ownership. Need to look whether the co-owners are dealing w/ his or her individual interests. Right of co-owner to deal with his/her individual interest in property separately =incompatible with intention that be partnership [AE LePage].

Ask: whether “the intention of the co-owners…was to ‘carry on business’ or simply to provide by an agreement for the regulation of their rights and obligations as co-owners of a property?”

A.E. LePage v Kamex Developments, [1977]

The mere fact that property is owned in common and that profits are derived does not mean that they are partners, partnership is evaluated by looking at the intention as disclosed by all the facts of the case.

Facts: co-owners of real property were held not to be partners, even though in addition to co-ownership, the parties had put into place the following arrangements:

profits were to be paid to each co-owner in proportion to his/her interest and each was liable to pay any deficiency in the same proportions;

no co-owner could sell his/her interest without offering it first to the other co-owners (a “right of first refusal”); and

any sale or other dealing with the property required approval by majority vote of the co-owners.

Claim for commission under an exclusive listing agreement. The agreement specified that the property was to be held by the defendant corporation in trust for the appellants in proportion to their interests as set forth therein At some stage the property was listed for sale in an open listing. March signed the agreement on behalf of the appellants. He was not authorized by the appellants to sign the exclusive listing agreement and his act had not been approved by them.The question in this case is whether the appellants constituted a partnership and, if so, whether the defendant March signed the listing agreement as a partner binding the partnership.http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:37 PM

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Factors suggesting co-owners and not partnership in this case were: They kept separate their respective beneficial interest in the property for income tax

purposes. Their agreement stated that they could offer a right of first refusal to other co-owners in

the event of sale of their property The key is factors that suggest they have separate interests identified in the property, their

intention must suggest this. The intention was to be co-owners.

Held: that the ability of the co-owners to deal with their individual interest separately was incompatible with an intention that the property became part of a partnership, since partners have no right to dispose of interests in partnership property. The right of first refusal was not considered to be inconsistent with the co-owners’ basic right to deal with their respective interests. The co-owners intention to keep their property separate was confirmed by their individual treatment of their respective interests for income tax purposes. They made individual decisions regarding whether to deduct the capital cost allowance (CCA). Because the court did not find them to be partners, when one of them purported to enter into a listing agreement for the sale of the property without authorization of the others was not binding on the co-owners.

Where, in addition to co-ownership and sharing profits, there is substantial participation in management of the co-owned property, a partnership will likely be found.

Thrush v Read:

Distinction between partnership and co-ownership: there mere fact that co-owners intend to acquire, hold and sell a building for profit does not make them partners.

Reason for judgment: there is no such intention to carry on a business. The intention of the parties to maintain their rights as co-owners of the property is clear and beyond doubt from the document.


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Participation in Management

It is difficult to be precise regarding how much activity is required to be added to co-ownership in order to create a partnership: Involvement in management may transform co-ownership into partnership.

Volzke Construction v. Westlock Foods Ltd.

Rule 1: Management need not amount to control.Rule 2: Common participation in financing the business, dealing with tenants concerns, joint bank account, shared costs and profits was held to be indicative of a partnership between co-owners of a shopping centre.

Facts: Two owners of shopping centre [Bonel owned 80% and Westlock Foods owned 20%.] The two hired Volzke to do construction work but he wasn’t paid. Volzke sued claiming a partnership and thus liability against both Bonel and Westlock. Court held there was a partnership.

Identified that in this case they were partners They were sharing the profits on an 80/20 basis. They spoke of each other as partners. The sending of prospective tenants, the on the spot looking after constructions

repairs, the shared bank account.

Reasoning: There was a joint bank account; shared costs and profits, talked about each-other aspartners; sent customers to the other; repair of the premises. Management need not amount tocontrol, these factors combined indicated enough participation that a partnership was found.


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Agreeing to be a Partner

W. v M.N.R, [1952]:

Participation in the management is not necessary.

Facts: Firm of Lawyers. The widows and daughters of a number of deceased partners in a law firm claimed that they were partners in the firm. Partnership agreement incorporated the widows and daughters ofdeceased partners. Were the widows and daughters partners? They had no part in therunning of the business and made no contributions, but the partnership agreement said that theywere partners [this arrangement was done for tax purposes, put senior partners in a lower taxbracket]. Revenue Canada had challenged the status of widows and daughters because it objected to the taxation of the partnership profits in their hands. In its view, the partners working in the business, who were paying tax at a higher marginal rate, should have been liable for tax. The W and D said they would be responsible for the losses [in the agreement]. Was this enough?Held/Ratio: Yes this was enough, participation in the management or other contribution is not necessary. It was sufficient that the widows and daughters had entered into an agreement in which they were identified as partners and acknowledged, albeit not in the operative part of the agreement, that they were liable for losses as well as entitled to receive any profits.

Surerus Construction and Development Ltd v Rudiger:

In order for an agreement to be effective in creating a partnership it must extend to all the essential elements of a partnership.

Reasons for judgment: the court found that there was no partnership because the alleged partners had not agreed on a date the partnership business was to be commenced, or the contribution of one of the putative partners. The court reached this conclusion even though there was evidence that the parties considered themselves partners and had acted as such.


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3. How does a partnership carry on business?

Casebook 24-26VanDuzer 49-54Partnership Act 20-31, 36

The Legal Relationship of Partners to Each Other: (OPA 20-31, 36)

Partnerships involve one or more people therefore rules are needed to govern relationships between partners. In most cases, the nature and characteristics of the partners relationship to each other will be specified in their partnership agreement.

Implications:

Contracts: each partner responsible for all obligations-regardless of which partner actually commits the partnership to doing it.

Torts: each partner responsible for tortious acts of self or employees or other partners. Unlimited liability: each partner has unlimited personal liability. Once liability is

established, it is the liability of all the partners and any individual partner can be liable for the full liability. (based in part upon the common law notion of agency).

Partners do have certain protections:

Legally: (a) partnership agreements can implement management and control procedures [i.e. two signatures on a cheque]; (b) the law of partnership requires that every partner has a legal obligation to act in the best interest of the firm and not to put their own interest ahead of the firm [Fiduciary Duty]; and (c) personal liability can be limited if the partnership is a limited liability partnership.

Practically: (a) relationships of trust and confidence usually exist as between partners, especially in smaller partnerships; and (b) opportunities for informal monitoring usually exist, especially in smaller partnerships.


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Default Rules

The OPA s, 20-31 provides a framework of rules to govern the parties’ relations to the extent that they have not been addressed by an agreement. The default rules create a sort of standard form agreement that applies unless the partners create their own, which makes it easier to set up the business as a partnership by reducing the need for the parties to create a set of rules from scratch

The default rules are typically modified, supplemented, and replaced by rules agreed on by the partners in a contract between them called a partnership agreement (OPA, s.20).

Advantage: This gives partners the flexibility to put in place an internal structure customized to their particular needs. The value of the default rules depends on how closely they approximate what partners will want.

The Most Important Default Rules in the OPA

Each partner shares equally in capital and profits and must contribute equally to any losses (OPA, s.24.1);

Each partner is entitled to be indemnified in respect of (a) payments made or (b) liabilities incurred in the ordinary course of business or to preserve the business or property of the partnership (OPA, s.24.2);

A partner is entitled to interest at 5% per year on excess contributions (OPA, s.24.3); A partner is not entitled, before the ascertainment of profits, to interest on capital (OPA,

s.24.4); Each partner has a right to participate in management of the partnership business (OPA,

s.24.5); No partner is entitled to remuneration for acting in the partnership business (Partners are not

employees; they only get profits not salaries (OPA, s.24.6); Admission of a new partner requires unanimous consent (no person may be introduced as a

partner without the consent of all existing partners)(OPA, s.24.7); Cannot change the fundamental nature of the business unless everyone agrees (any change in

the nature of the partnership business requires unanimous consent) and decisions regarding ordinary matters are decided by a majority of partners (OPA, s.24.8);

Each partner has equal access to the partnership books. The partnership books are to be kept at the place of business of the partnership, or the principal place, if there is more than one, and every partner may, when he or she thinks fit, have access to and inspect and copy any of them (OPA, s.24.9);

No majority of partners may expel a partner unless a power to do so has been conferred by express agreement between the partners (Cannot expel a partner unless you have unanimous agreement between partners (OPA, s.25);

Any person who takes an assignment of a partner’s interest has no right as a partner, except to receive the share of the partnership profits (OPA, s.31);

Any partner may terminate the partnership by giving notice (OPA, s.26-32); Any variation of the default rules requires unanimous consent (OPA, s.20).http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:37 PM

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While typically changes to default rules are made by express agreement, they need not be. The default rules may be displaced by conduct, but the conduct must show a clear intention to displace the rules.

Advantages of the Default Rules

(a) Encourage people to engage in business by reducing transactions costs (though the extent of benefit depends on how closely the Act’s standard form contract resembles what people would otherwise agree to); and

(b) Gives parties flexibility to customize a partnership relationship to reflect their particular circumstances. The idea is to save the parties time and effort in setting up a partnership.

Disadvantages of the Default Rules

:they often do not fit the needs of partnerships; primarily because they are based on the archetypal conception of partnership: a partnership in which there are a small number of partners, all participating equally, all participating in management. This is often not the case, in which case, the rules are a trap for the unwary (because in absence of contrary agreement, the default rules apply).

Guiding Principles of Partners’ Relations with Each Other

Personal Character

Partnerships are “unstable relationships,” so a well drafted agreement will contain provisions with respect to the admission of new partners and the retirement of old ones, the effect or death or bankruptcy, the distribution of responsibilities, the provision of capital and the division of losses and profits. Deals with the effect of the assignment of a partner’s interest in the partnership (OPA, s.31). The partnership automatically dissolves on the death or insolvency of a partner (OPA, s.33).

ConsensualismRule of unanimity: Mutual rights and duties of partners, whether ascertained by agreement or determined by the Act, may be varied only by the consent of all the partners (OPA, s.20). The rule of unanimity also governs the admission of new partners (OPA, s.24.7) and any changes in the fundamental character of the partnership business (OPA, s.24.8). No majority of partners can expel a partner unless the power to do so has been expressly conferred in the partnership agreement OPA, s.25).

Exception: allows majority opinion to prevail in “ordinary matters” connected with the partnership business (OPA, s.24.8).


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Equality (reciprocal basis of partnership)

Reflected in the partner’s right and obligation to share equally in the profits and losses (financial) of the partnership business (OPA s.24.1), the right to participate in the (management) of the business (OPA, s.24.5). In practice, such equality rarely occurs. Typically, partners make unequal contributions of capital and services to the business. Each partner’s interest in the partnership and the returns each partner expects on his/her contributions tend to vary accordingly. In all but the smallest partnerships, the partners will delegate certain management functions to particular partners or committees of partners because the participation of all partners in all decisions would be unduly cumbersome. Because there are likely to be significant differences between what partnership legislation provides in its default rules and what the parties’ expectations and intentions are, the default rules can be a trap for the unwary. Thus, it is essential to know what the default rules are and that they are changed by agreement where appropriate.

Fiduciary Duty

By common law, partners owe each other (and the partnership) a fiduciary duty: they must deal with the partnership and with their partners in the utmost good faith. Partners must never put their personal interests ahead of the interests of the partnership (Hitchcock v. Sykes). Although there is no general expression of this duty in the OPA, it is well established in the common law that the fiduciary duty is a guiding principle of partnership law.

No express Fiduciary Duty, however, the OPA creates specific obligations consistent with thisgeneral duty (OPA, s.28-30):

Duty as to rendering true accounts and full information (OPA, s.28): each partner is bound to render “true accounts and full information (full and accurate disclosure)” of all things affecting the partnership to any partner or the partner’s legal representative, such that the partnership is made fully aware of the nature and significance of the activities (McKnight v. Hutchison, 2002).

Account for private profits: every partner must also account to the firm for any benefit derived by the partner without consent of the other partners from any transaction concerning the partnership or from any use by the partner of the partnership property, name or business connection. These benefits include those derived by the partner from “any transaction concerning the partnership or from any use by the partner of the partnership property, name, or business connection (OPA, s.29(1)), and any profits made by competing with the partnership business.” (OPA, s.30).


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Extends to survivors and representatives of deceased (OPA, s.29(2)) :This section applies also to transactions undertaken after a partnership has been dissolved by the death of a partner and before its affairs have been completely wound up, either by a surviving partner or by the representatives of the deceased partner.

Duty of partner not to compete with firm (OPA, s.30): If a partner, without the consent of the other partners, carries on a business of the same nature as and competing with that of the firm, the partner must account for and pay over to the firm all profits made by the partner in that business.

Right of access to documents: Each partner has the right to access documents prepared by and for the partnership (Dockrill v, Coopers & Lybrand Chartered Accountants, 1994).

The precise content of the fiduciary duty depends on the facts of the case:

Rochwerg v. Truster, [2002]

A partner must render true accounts and full information to partnership (OPA s.28) and account for profits (OPA s.29).

Facts: a partner in a firm of accountants became a director of one of the firm’s clients. He also purchased 8000 common shares and acquired options to purchase 24,000 more for a nominal price. The partner disclosed the directorship and paid the directors’ fees he received to the partnership. He did not disclose his investment because he believed that it was a private transaction.

Held: The Ontario Court of Appeal held that his duty under OPA, s. 28 required him to have disclosed the investment because it affected the partnership. He was required to account for the profits he made from the shares and options because they were a benefit derived from the partnership business connection for the purposes of OPA, s.29. It was not necessary to show that the partnership suffered a loss as a result of the partner’s activites.

Mohammadamin v Zameni, [2000]

A partner’s non-competition clause continues beyond the period of termination of the partnership.[remember this is all default-can be changed with a partnership agreement]

Facts: Zameni sold his interest in the partnerships auto parts business and then set up a competing business nearby. Held this was a breach of his fiduciary duty not to damage the goodwill of the partnership.


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Olson v. Gullo, [1994]

Partners must account for profits to the partnership (OPA, s.29(1)).

Facts: Partner who sold part of the real property owned by the partnership had to pay the profits of the sale over to the partnership based on section 29(1) as well as common law principles of fiduciary duty.

Held: The partner in breach of his duty receives a benefit from the breach because, as a partner, he shares in the profits when they are paid over to the partnership.

By agreement, partners may exclude certain activities from the full operation of the fiduciary duty (McKnight v. Hutchinson, 2002). (e.g. the partners may agree that one of them carry on the business similar to that carried on by the partnership, but in another city, without having an obligation to account for profits she makes from the business. Such an agreement may serve the practical function of preventing arguments over whether the individual partner’s activities had the effect of appropriating opportunities belonging to the partnership or whether the individual partner’s activities had the effect of appropriating opportunities belonging to the partnership or whether the partner was competing with the partnership. Any such limitation is likely to be interpreted narrowly as an exception to the fiduciary duty (McKnight v. Hutchison , 2002).


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Partnership Property

Under the OPA partnership property consists of:(a) all property contributed to the partnership; and(b) all property acquired on behalf of the partnership or for the purpose and in the course of the partnership business (OPA, s.21(1)):

OPA s.21: Partnership propertyAll property and rights and interests in property originally brought into the partnership stock or acquired, whether by purchase or otherwise, on account of the firm, or for the purposes and in the course of the partnership business, are called in this Act “partnership property”, and must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement.

“Partnership Property” even though partnership isn’t an entity, property is partnership property. Every partner has an interest in all of the property not a particular item ie. 1 chair isn’t assigned to each, you have an interest in all of it.

Once property becomes partnership property, it must be held and used exclusively for the purposes of the partnership and in accordance with the terms of the partnership agreement (OPA, s 21(1)).

Where property is bought with money belonging to the partnership, it is deemed, in the absenceof evidence to the contrary, to have been bought on behalf of the partnership (OPA, s.22).

Example: You use your own money to buy a computer for use at the firmInterpretations:

1. Considered capital and it would be considered excess capital [if others had not done the same thing] to you would be entitled to 5% on this2. Consider the money a loan, and not a capital contribution3. Indemnification for expenses4. If you aren’t successful with arguing the above, the computer may be considered partnership property and you would be out the money (we don’t want this to happen!!!)

Where property is treated as partnership property, it becomes partnership property even if title is retained by an individual partner (i.e. a partner cannot sell property that he owns once it has become partnership property.) Thus, partners should secure by agreement that individual property remain as such, even if used in partnership business.

In effect, a partner loses his/her beneficial interest in property contributed to a partnership. If for example, a partner agreed to use a car he/she owned exclusively to carry on the partnership business, it would become partnership property. He/she could not sell the car without the consent of his partners, even though he remained the legal owner.


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The rules with respect to what is partnership property and what can be done with it may be changed by agreement. Where partners intend to continue to have a personal interest in property used in the partnership or acquired with partnership money, it is important to ensure there is a clear written understanding as to the partner’s individual interest.


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Liability of the Partnership to Third Parties

Casebook 26-34VanDuzer 54-63Partnership Act 6-19

Basic Rules

Unlike the default rules governing the internal relations of partners, the rules governing the relationships between the partnerships and third parties are mandatory are mandatory in the interests of ensuring that persons dealing with partnerships are protected (OPA, s.6-19). Provisions that address the risks associated with liabilities to third parties may be included in the partnership agreement. These provisions include internal monitoring and control mechanisms to:(a) reduce the likelihood of unwanted liability; and/or (b) provide for indemnification.

In general, All partners are liable for all liabilities of the partnership.

Agency law (OPA s.6): Partnerships become liable in contract when, based on principles of agency, someone who is an agent of the firm enters into a contract on its behalf. Under the OPA, each partner is constituted an agent of the firm (OPA, s.6), which means that the acts of a partner in the usual course of business bind the firm (OPA, s.7). The rule doesn’t apply where the partner in fact has no authority and the other person knows that the partner has no authority or does not know or believe them to be a partner (OPA, s.9). There is no partnership liability for acts outside the usual scope of the business. What is the scope of business will depend on the nature of the business activity in which the partnership is actually engaged.

A partnership is liable for torts and other wrongful acts or omissions of its agents or employees (OPA, s.11). Liability arises where the partnership authorized the wrong or ratified it after it was committed. The firm is liable where the wrong was committed by the agent or employee in the ordinary course of the business of the firm. Where liability is established, the firm is responsible for all damages to same extent as the partner.

Ernst & Young Inc. v. Falconi, [1994]

Partners may even be liable for the fraudulent acts of their partners.

Facts: the estate of a partner in a law firm was held liable for the acts of another partner who assisted bankrupt clients with fraudulently disposing of their property contrary to the Bankruptcy Act. The fraudulent activity was held to be in the ordinary course of the law firm’s business.

Held: the test is: “whether the unlawful acts are of the sort that would be within the scope of the partnership if done for legitimate, as opposed to illegitimate, purposes as seen from the perspective of the overall business of the partnership.”


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It was sufficient that the partner used the assets and facilities of the law firm to perform services normally performed by a law firm in carrying out the transactions and, as a result, the creditors of the firm’s clients suffered a loss.

Dubai Aluminium Co. Ltd. v. Salaam, [2003] HL

Law firm partnership was liable for the dishonest acts of one of the partners.

Facts: to assist some clients of the firm to accomplish a fraud, the partner gave them advice and prepared documents for them.

CA: determined that the partnership should not be held liable since the firm had not authorized the activities of the partner, and that it was not the part of the business of the firm to plan, draft and sign sham agreements to give effect to a dishonest scheme.

HL (on appeal): determined that the question was not whether the dishonest conduct was specifically authorized by the firm, but rather whether the partner was authorized to engage in conduct of the same general kind as the dishonest conduct. So long as the dishonest conduct was sufficiently closely connected to acts that the partner was authorized to engage in, the conduct may be regarded as done in the course of the business of the firm (in this case the test was met).

The SCC recently considered the nature of partnership liability for civil wrongs in

3464920 Canada Inc. v. Srother, [2007]

Liability of the firm under the partnership statutes is not limited to common law torts. The statute expressly refers to liability for a “wrongful act or omission.” This broad language includes breach of fiduciary duty, among other things.

Facts: a partner in a law firm breached his fiduciary duty and the terms of his retainer to a particular client of the firm—Monarch—when he took a direct financial interest in another client, Sentinel, that was a competitor of Monarch’s.

Held: this conflict meant that there was a substantial risk that the partner would not fulfil his duty to zealously represent Monarch’s interest. The firm was completely innocent of the fiduciary breach because it had no knowledge of the partner’s actions. Nevertheless, the court held that the firm was still responsible because the partner’s act was so closely connected with the business of the firm as to be within the ordinary course of its business. The firm was liable, along with the partner himself, for the profits and other benefits that the partner received from the relationship with Sentinel and the profits that he received that related to the work that the firm did for Monarch. The court rejected the argument that the firm should be insulated from liability based on the general tort principle that a firm should not be liable where a partner was on frolic of his/her own. The court said it was not possible to separate the partner’s wrongful act from the ordinary business of the firm.


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The time at which the liability arises is critical for determining who is responsible for it.

Liability Prior to Partnerships

There is generally no liability (OPA, s.18 (1)), except where a claim that arose before you were a partner settles after you join the partnership. So then your interest in the firm will decrease as a result of the claim being settled. Thus, it is prudent for a person joining a partnership that has already been carrying on business to seek disclosure of any contingent liabilities of the firm and an indemnification commitment from other members of the firm for any losses suffered if the firm has to satisfy a liability that arose before he became a partner.

Liability while a Partner

In general, partners are liable only for obligations incurred while they were partners in the firm. While someone is a partner, there is joint and several unlimited liability (OPA, s.10-13), which continues after retirement (OPA, s.18(2)) and is binding on a partner’s estate (OPA, s.10). All obligations of the firm are obligations of every partner who was a member of the firm at the time the obligation arose. A partner is an agent of the partnership, meaning that partners are liable for:

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

Contractual Obligations (joint liability):

incurred by a partner carrying on, in the usual way, business of the kind carried on by the partnership (OPA, s.10), except where: (a) the partner had no authority in fact; and(b) the third party dealing with the partner knew of the lack of authority or did not believe him to be a partner (OPA, s.6).

Example: Partner signed a lease for office space. So if there was a prior agreement that the partner had no authority to do this (no authority in fact) and the leasee either a) knew the partner had no liability or b) did not know or did not believe him to be a partner, there will be no liability. If the partner actually had the authority, it does not matter what the knowledge or belief of the third party is; there will be liability.

Torts (joint and several liability):

committed in the ordinary course of the partnership or wrongs committed with the authority of all partners (OPA, s.11), including the tort of fraud, in which case the test is whether the unlawful act (fraud), if legitimate, would be within the ordinary course of the firm business (Ernst and Young v. Falconi-firm provided advice on how to commit financial fraud-held liable). When One partner commits a tort, all are held liable. Effect of (OPA s.10 and 11) together. The http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:37 PM

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acts of every partner bind every other partner in contract and in tort. Plaintiff can sue only one person or all partners, will tend to sue the deepest pocket. Third party can get their money first, then the partners sue each other for being sued.

A partnership is liable for torts of its agents of employees (OPA, s.11): Liability arises where the partnership authorized the wrong or ratified it after it was committed. The firm is liable where the wrong was committed by the agent or employee in the ordinary course of the business of the firm. Where any tort liability is established, the firm is liable for all damages to the same extent as the partner.

Joint and Several v. Joint Liability:

Liability of individual partners for torts under the OPA, s.11 is joint and several pursuant to OPA, s.13, while liability for “debts and obligations of the firm” is only joint under OPA, s10. The distinctions between these two kinds of liability have been all but eliminated under modern rules of civil procedure. The original common law rule was that, where liability was only joint, a creditor of a partnership who obtained a judgement against one partner would not be able to take action against any other partner, even if he was unable to recover the judgment amount from the partner he originally sued (Kendall v. Hamilton). If liability was joint and several, the creditor would not lose her rights against the other partners. This rule has been abolished in Ontario by s.139(1) of the Courts of Justice Act, 1990. A creditor who obtains an order against a partnership in such an action may apply to the court for leave to enforce it against any partner who has not previously been an individual party to the suit.

Indemnification: A partner is liable even though he/she may have a right to be indemnified by the partner who incurred the obligation for the firm. Indemnification where a partner has paid a partnership obligation is provided for in the OPA, s24, and is often dealt with in partnership agreements. Any right to indemnification is irrelevant because the purpose of imposing liability is to ensure that the third party is compensated.

Liability After Partnership

Generally there is no liability where a creditor did not know someone was a partner prior to retirement (s.36(3)); or the creditor is given actual notice unless a creditor dealt with the partnership before a partner’s retirement.

A person who deals with the firm for the first time after the retirement of a partner is entitled to hold an apparent member of the firm liable (PA, s.36(1)) unless, there was no notice of retirement in Ontario Gazette (s. 36(2)) and was holding out by or on behalf of D (s. 15(1)).

An apparent member is a member who is apparent to the person dealing with the firmand may be apparent either:

(a) by the fact that the customer has had dealings with them before; or(b) because of the use of their names on the letterhead, or from some sign outside the door, orbecause the customer has had some indirect information about them (Tower Cabinets).

3) The Partner left because they died or were insolvent.http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:37 PM

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To protect against future liability, the leaving partner should:

give actual notice to anyone who dealt with the firm while he was a partner; publish notice in the newspaper and the Ontario Gazette; obtain indemnity from the remaining partners\

o instruct the partnership that he not be held out as a partner and draft an agreement to this effect

o -If a “name partner”, ensure indemnity since the continued use of the name constitutes holding out if done with consent


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Holding Out and Related Sources of Liability (OPAs.15)

Note: This section has implications for retired partners. Partners’ Relations with Third Parties is one of the most litigated aspects of partnership law-the problem usually arises when the partnership (assuming there is a partnership to begin with) is insolvent and a creditor is trying to secure payment of its debt.

Basic Rule:

A person may be held liable for the obligations of a partnership even though he/she was never a partner or was not a partner at the time the partnership incurred the obligation, if he/she was held out as a partner. OPA s.15 imposes liability on a person held out as partner:

Every person who by rods spoken or written or by conduct represents himself/herself or who knowingly suffers himself or herself to be represented as partner in a particular firm, is liable as a partner to any person who has the faith of any such representation, given credit to the firm, whether the representation has or has not been made or communicated to the persons so giving credit by or with the knowledge of the apparent partner making the representation or suffering it to be made.

Example of representations that may give rise to liability under this provision include: The use of a person’s name in the firm name, on a sign at the premises of the firm, or on the firm’s invoices or letterhead.

An essential element of the holding out is that the person held out must knowingly permit it. It is not sufficient if the person was negligent or careless by failing to ensure that he/she was not held out as partner (Tower Cabinet Co. Ltd. v. Ingram, 1949). The person held out does not have to know that the holding out was to the particular person who advanced credit to the firm. Knowledge of a general holding out, such as in advertising is sufficient.

To establish liability based on holding out, the person who advanced credit to the firm must have relied on the holding out in doing so (Bet-Mur).

Holding out is to person who advances credit to the firm on the faith of the holding out(reliance) [National Building Society v. Lewis- Employees name was on the letter head [not inthe firm name]. This was holding out, but no reliance, so not liable].

Persons liable by “holding out”15. (1) Every person, who by words spoken or written or by conduct represents himself or

herself or who knowingly suffers himself or herself to be represented as a partner in a particular firm, is liable as a partner to any person who has on the faith of any such representation given credit to the firm, whether the representation has or has not been made or communicated to the persons so giving credit by or with the knowledge of the apparent partner making the representation or suffering it to be made. R.S.O. 1990, c. P.5, s. 15 (1).http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:37 PM

http://www.e-laws.gov.on.ca/html/statutes/french/elaws_statutes_90p05_f.htm#s15s1


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Continuing business after death of partner(2) Where after a partner’s death the partnership business is continued in the old firm

name, the continued use of that name or of the deceased partner’s name as part thereof does not of itself make his or her executor’s or administrator’s estate or effects liable for any partnership debts contracted after his or her death. R.S.O. 1990, c. P.5, s. 15 (2).Rights of persons dealing with firm against apparent members

36. (1) Where a person deals with a firm after a change in its constitution, the person is entitled to treat all apparent members of the old firm as still being members of the firm until the person has notice of the change. R.S.O. 1990, c. P.5, s. 36 (1).-if you haven’t been notified they’re not a partner you can sue them.

Notice(2) An advertisement in The Ontario Gazette shall be notice as to persons who had not

dealings with the firm before the dissolution or change so advertised. R.S.O. 1990, c. P.5, s. 36 (2).Estate of dead or insolvent partner, how far liable

(3) The estate of a partner who dies, or who becomes insolvent, or of a partner who, not having been known to the person dealing with the firm to be a partner, retires from the firm, is not liable for partnership debts contracted after the date of the death, insolvency, or retirement. R.S.O. 1990, c. P.5, s. 36 (3).

National Building Society v. Lewis, [1998]

A retired partner is liable to every person who has dealt with the firm prior to his retirement for obligations of the firm incurred after retirement unless:

1. Actual notice of the retirement is given to the person (OPA s.36(1)).

2. The person never knew that the retiring partner was a partner (OPA s.36(3))

3. The partner left the firm because he became insolvent or died (OPA s. 36(3)

OPA, s.15(2): provides that a partner who dies is not liable for obligations of the firm arising after death even if the partner’s name continues to be used in the firm name

Facts: Client of the firm relied on a title opinion from the firm in granting a mortgage. The title opinion turned out to be wrong and the firm was held liable for negligence. The client argued that a lawyer employed by the firm should be personally liable on the basis that he was held out as a partner, but the employee had no involvement in the transaction but was identified on the firm letterhead in a manner that suggested he was a partner.

Held: in the absence of any proof that the client has relied on the employee being a partner, liability for holding out did not arise. The client had relied on the opinion—not on the employee being a partner.







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Judicial Reasoning: One of the most common situations in which a holding out may occur is when a partner retires. In such a case, there may be various conflicting interests at stake. The retiring partner is generally interested in limiting her liability for obligations arising after retirement. Persons who dealt with the firm prior to the retirement and who innocently continue to rely on the creditworthiness of the retired partner in their dealings with the firm would expect to be able to continue to hold the retired partner liable unless they were told about the retirement. There would be no such expectation, however, if these old clients of the firm never knew that the retiring partner was a member of the firm or that the person was partner.

Those that deal with the firm for the first time after the retirement could not reasonably expect to hold the retired partner liable in the absence of some representation to t hem that she is a partner at that time.

In many cases, the retiring partner’s name will be part of the firm name and the continuing partners will have an interest in the continuity of the firm name to ensure that any goodwill associated with it is not lost after a named partner’s retirement (Dominion Sugar Co. v. Warrell, 1927).

Use of the firm name is likely to be found to be holding out, sufficient to render the retiring partner liable for obligations arising after retirement. Lawyers should recommend that retired partners limit their liability for obligations arising after retirement (OPA s.36). A retired partner is not liable to such persons if a notice that the partner has retired has been published in the Ontario Gazette (therefore new clients are deemed to have notice. (OPA, s.36(2)). The retiring partner’s name can still be part of the firm name, and so use of the firm name is

likely to be found to be a holding out, sufficient to render the retiring partner liable for obligations arising after retirement.

A partner who dies is not liable for obligations of the firm arising after death even if the partner’s name continues to be used in the firm name (OPA, s.15(2))

Clients who deal with the firm for the first time after retirement are entitled to hold liable any person who is an apparent member of the firm including a retired partner (OPA, s.36(1)).

“Apparent

” means “apparent to the person dealing with the firm “so as to give to that person the impression that the person is the partner.

“Apparent partner:

A person will be an “apparent partner” if her name is used on letterhead, signs, invoices, or signs at the business premises, or if an express representation is made that the person is a partner. A person may also be an apparent partner if his/her name appears as a partner in a registration filed under the OBNA, or if his/her membership in the partnership is notorious because, e.g., he/she is extremely well known.


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Also, OPA, s.36(3) provides that a retiring partner is not liable to any person who deals with a partnership after the retirement who did not know that the person was a partner.

The net effect of these provisions is that the retired partner will be liable for any obligation incurred by the partnership to a person dealing with the firm for the first time after her retirement only if the action making her an apparent partner also constitutes a holding out within the meaning of OPA, s.15. In other words, she must hold herself out or knowingly permit herself to be held out as a partner.

Tower Cabinet Co v. Ingram, [1949]

Unintentional holding out does not attract liability under OPA s.15.

Facts: Ingram was a partner whose name was used on a firm (whose name Merry’s/ Christmas) letterhead after his retirement, but without his permission and contrary to his express instructions. The partnership was registered under the Registration of business Names Act 1916 as being carried on by the appellant and Christmas, who had no authority from the appellant to use the paper and its use was in direct conflict with the arrangements made on the dissolution of the partnership. Failure to give notice when a man has ceased to be a partner. Holding out can include words spoken or written or by conduct represented himself as partner. There is no evidence of such a representation. Representation by Christmas that Ingram was still a partner in the firm. Was this partnership actually known to the plaintiffs either by general report or by direct communication? Held : a third party who dealt with the firm for the first time after Ingram’s retirement and received the letterhead could not hold Ingram liable because there had been no holding out for the purposes of OPAs. 15. Ingram had not knowingly suffered himself…to be represented as a partner in the firm.” In the absence of a holding out, OPA, s. 36(3) had the effect of insulating Ingram from all liability for obligations of the partnership incurred after his retirement. To all persons who did not have knowledge that he was partner prior to the date of his retirement. In other words, the plaintiff could have succeeded only if, prior to Ingram’s retirement, he had known that Ingram was a partner in the firm. Being an “apparent” partner at the time the plaintiff first dealt with the firm was not enough. The rules relating to a partner’s liability are:


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D is a member of the partnership in 2006Time--------------------------January 2006--------------------------------January 2007--------------------------------------

No liability (OPA, s.18(1)) except holding out that D a partner either by D or permitted by D (OPA, s.15(1)). Obligation arises and there is an execution against the partnership property Ontario Rules of Civil procedure, r 8.06(1).

Unlimited Liability (OPA, s.6, 10-13) continues after retirement (OPA, s.18(2)) and is binding on estate (OPA, s.10).

No liability (implicit in (OPA, s.10 and 36(3)) unless creditor dealt with the firm before retirement except where the creditor did not know D was a partner prior to retirement (OPA, s. 36(3)) or is given actual notice of retirement, and where the credit6or dealt with the firm for the first time after D’s retirement (there was no notice of retirement in Ontario Gazette) (OPA, s.36(2) and there was holding out by or on behalf of D (OPA, s.15(1)).

But never liability after D dies or becomes insolvent (OPA, s. 15(2)).

So, What should a retiring partner do to minimize liability for obligations of partnership after her retirement?

advertise retirement to as many clients as is feasibly possible. publish a notice in Ontario Gazette (the Ontario Gazette is the official publication of

the Ontario Legislature). In effect, new clients of a firm a deemed to have notice of any retirement so advertised;

registration amended in OBNA; Ifhe/she agrees to allows name to be used, she should insist on a reliable

indemnification from other partners in case she incurs any liability. Document his/her instructions to the remaining partners that notice be given to ensure

that liability based on holding out cannot be claimed; Have name removed from firm name.

And, what should a person contemplating dealing with a partnership do to assess the creditworthiness of a partnership?

As partnerships get bigger, involving more and more people as partners and employees, practical protections break down. In the large law and accounting firms, for example, few partners are


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actively involved in all aspects of the business of the partnership or even know all of their fellow partners, and formal monitoring mechanisms must be established. The law of partnerships was developed to address small businesses and has little in the way of specific provisions designed to address the needs of the large modern partnership. an alternative to a partnership agreement in some cases is a limited liability partnership.

Risk Management in PartnershipsUnder this special form of general partnership individual partners are not personally liable for the “negligence, wrongful acts or omissions, malpractice or misconduct’ of their partners or of employees or other agents of the firm unless:(i) the wrong was committed by a person who was an employee or agent under the partner’s supervision and the partner’s supervision and the partner failed to provide adequate and competent supervision, as would normally be expected of a partner in the circumstances; or (ii) the partner knew of the act or omission and failed to take reasonable steps to prevent it. The firm remains liable for all such acts or omissions. Each partner remains liable for his/her own negligence. All partners remain personally liable for obligations other than negligence and the listed wrongs. Except for this distinctive scheme regarding liability, the LLP is the same as a general partnership.

A distinctive feature of the Ontario regime is that, even if a partner or employee is not under the partner’s direct supervision, the partner may still be liable in two circumstances:

The act or omission of the partner or employee is criminal or constitutes fraud (even if there was no criminal act or omission; or

The partner knew or ought to have known of the act or omission and did not take the actions that a reasonably prudent person would have taken to prevent it (OPA, s.10(3.1)).

In Ontario, a partnership must meet the following requirements to become a LLP:

The partners must sign an agreement designating the partnership as a LLP; The business of the partnership is the practice of a profession governed by statute which

permits a LLP to practice the profession; The governing body of the profession requires the partnership to carry a minimum

amount of liability insurance; The partnership is registered under the Business Names Act; and the partnership name

contains the words “limited liability partnership,” LLP, L.L.P. or their French equivalents (OPA, s.44.1-44.4).

Several professions in Ontario meet these requirements (e.g. lawyers governed by the Ontario Law Society Act) and most large law and accounting firms in these jurisdictions have now become LLPs.

4. Dissolution of the Partnershiphttp://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:38 PM

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VanDuzer 66-68Partnerships Act 26, 32-44

Since the partnership is not a legal entity separate from its partners, it is inherently fragile. This means that in the absence of agreement to the contrary, it can be dissolved easily and in multiple ways. Many of these provisions may be varied by agreement and typically are changed to render the partnership more stable.

Unless the partners have agreed otherwise, the partnership is terminated in the following circumstances:

If formed for a fixed term, on the expiry of fixed term, (OPA s.32(a))(Pooley); If not formed for a fixed term, on notice by one partner to all the others (OPA s.26 and

32(c)). If formed for a single adventure or undertaking, on termination of the adventure or

undertaking (OPA s.32(b)); and On the death or insolvency of any partner (OPA s.33(a)).

Inability of partner to continue to work:

The partners may also provide that the inability of a partner to continue to work in the partnership. Partners may agree that dissolution should occur if any partner permits his share of the partnership property to be charged for his/her personal debts (OPA, s.33(b).

Illegality

Termination occurs regardless of any agreement by the parties if it becomes illegal for the business of the partnership to be carried on by the members of the partnership (eg. The disbarment of all the lawyers in a law firm) (OPA, s, 34).

Court Order:

The OPA provides that a court order may order dissolution on a wide variety of grounds, including:

mental incapacity of partner; illegal acts; persistent breaches of partnership agreement; irreconcilable differences between partners (divorce); catch-all ground: a court may order dissolution when, in the opinion of the court, it is just

and equitable to do so.


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Breakdown of mutual trust and confidence:

Courts have set a relatively high standard for the exercise of their discretion to dissolve a partnership on this last ground. A court might be disposed to order dissolution where there has been a complete breakdown of mutual trust and confidence in the partners that would preclude all hope of reconciliation or future cooperation or where the partners were deadlocked on how to operate the partnership.

OPA, s.44: provides a skeleton of a process to deal with the settlement of the many claims needing to be dealt with on dissolution. Debts and liabilities to persons who are not partners are paid first out of the assets of the firm, then advances of partners (other than capital) and finally, capital is returned. If there is a shortfall after the debts and liabilities to non-partners are paid, then whatever is available to distribute to partners is apportioned based on the loans from the partners. Next, if any assets still remain, they are distributed to partners in proportion to their claims to share in the capital of the firm. Anything left over is distributed to partners in accordance with their entitlement to profits. The statutory scheme may be fleshed out in a partnership agreement.


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5. Partnership Agreements

VanDuzer 68-76

General

The OPA provides only the barest framework of rules for the regulation of the relation among partners and conduct of the business of a partnership and for particular partnerships, the default rules may inappropriate. Thus it is commonplace for partners to enter into a partnership agreement to create their own tailored agreements according to their specific needs, though in some cases no formal written agreement may be prepared. Reasons for entering into a Partnership Agreement

To modify the default rules (OPA, s.20-33) either to replace them or to supplement them by extending and tailor them to the particular needs of the partners, through their agreement, the partners can provide a structure for operating the partnership where the legislation is silent or where the partners want something different from what it provides

To respond to the mandatory provisions of the provincial partnership legislation, especially those providing for liability to third parties, by structuring the relations among partners to address liability among partners, and to create reporting, monitoring, and control mechanisms to manage liability risk.

To reproduce provisions of provincial partnership legislation for partner’s information. One might do this so as to give notice to the partners; or simply to inform them. They should know what the rules are when entering into partnership.

Selected Elements of partnership agreements and Commentary

Name

A partnership may carry on the business using any name it likes. Professional partnerships often use the names of individual partners in the firm name, though many large firms use the names of deceased partners in the interests of continuity. The name of the partnership raises a number of issues in addition to the practically important and often sensitive question of whose name appears in the firm name. Names are a complex subject. OBNA, s.6 : name should be registered.

Ownership Issues: The name of the partnership forms part of goodwill of business and belongs to the partners. In the absence of some provision in the partnership agreement, each partner may be entitled to use the name on the dissolution of the firm. So, it is desirable for the partnership agreement to address who is entitled to use the firm name in the vent that there is a change in membership or dissolution of the partnership. To avoid conflict, the partners may agree that, on the withdrawal of partner, neither the withdrawing partner nor the remaining partners may use the firm name. where a “name’ partner is retiring from the business or profession, or dies, the http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:38 PM

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firm may want to continue to use the name because of the reputation or prestige associated with it. In such a case, the partnership agreement may provide for the continued use of the name. If so, the agreement should address the resulting liability risk for the retiring partner described below.

Liability Issues: The use of a person’s name as part of the firm name with his knowledge constitutes holding that person out as partner within the meaning of provincial partnership statutes. Any person so held out after he/she leaves the partnership will be liable to persons dealing with the firm after his/her departure. Accordingly, if a person’s name is going to be used after he/she leaves; the remaining partners of the firm should agree to indemnify him/her against any such liability. This agreement will have no effect on his/her liability to third parties, but it gives him/her a right to recover any amount he/she has to pay from her former partners. Since a deceased partner’s estate is not liable for obligations of the partnership after he/she leaves the partnership, there is no need for an indemnity in cases where a partner dies and the firm continues to use the deceased partner’s name in the firm name. Partners should therefore ensure that the a) name is changed or b) that they gave notice and c) that they are indemnified. [Wont affect their liability to third parties but gives him the right to recover the amount he has to pay from former partners].

Registration Issues: Under the ONBA, partners much register their firm name (OBA, s.2(3)). In choosing a name, it is advisable to search the register maintained in the province as well as trade directories and other sources of information to ensure that the name chosen or a similar name is not already being used by someone else. Use of a name that conflicts with someone else’s name may expose the partnership to loss of goodwill if it subsequently has to change its name and possibly liability for passing off and trade-mark infringement. Registration of a name that is the same as or deceptively similar to another person’s registered name can give rise to a claim for damages under the OBNA, s.6.

Description of Business

Each partner is an agent of the partnership capable of binding the firm to obligations within the usual course of the firm’s business. Each partner’s authority as an agent is thus limited by the nature of the business undertaken (OPA, s.6). The scope of each partner’s authority to bind the partnership to a third party will be determined by what the partnership actually does rather than by any limit in the partnership agreement, unless the third party has knowledge of the limit (OPA, s.6 and 9).

A description of the business is not expressly required by the OPA, but might want to be addressed. It makes clear what activities are to be considered to be carried on for the benefit of the partnership, and thus helps avoid disagreements in the future about what income earned by the partners must be paid to the firm. E.g. in a law firm, the partners may want to provide expressly that the business includes teaching a law school course or writing papers, so any fees are income of the partnership. Such a provision gives specific content to partner’s obligation to account for all benefits derived from any use by a partner of the partnership property, name, or business connection (OPA, s.29) and helps to avoid conflicts over what is personal and what is partnership income. For the same reason, many partnership agreements provide that each partner http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:38 PM

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will devote his/her full time and attention to the business without the consent of the other partners. If there are specific business activities of partners that they carry on outside the firm business, identifying them as permitted will help to avoid future disagreements. Legally, permitting activities that would otherwise be a breach of a partner’s fiduciary duty allows the partner to engage in them without fear of being required to account for any profits made (McKnight).

Describing the business also gives substance to partners’ non-competition obligations. A partner’s fiduciary obligation obliges him/her not to compete with the partnership business and that he/she must account to the partnership for all profits made if he does (OPA, s.29). Many partnership agreements also contain provisions prohibiting partners from competing with the business for a period of time and in a limited geographic area after they leave the partnership. So long as the obligation is reasonable in the sense that it is limited to protecting the legitimate commercial interests of the firm, it will be enforced (Reservoir Group Partnership v. 1304613 Ontario Ltd).

Describing the scope of the partnership business provides the basis for the firm to claim against a partner for liabilities imposed on the firm as a result of unauthorized actions by the partner that are outside the firm’s defined business. Typically, an agreement would allow the partner’s to seek indemnification from any partner who saddles the partnership with a liability outside the business of the firm.

o Clarifies the parties’ intentions regarding activities that the partnership will engage in(PA, s.29) and thus what activities the partnership is entitled to by individual partners inthe event of a breach.

o Helps define the scope of non-competition obligations (PA, s.30), which should beextended to apply to a period after a partner leaves the partnership.Establishes basis for contribution and indemnity

o Won’t affect liability to third parties , courts will determine this based on the actual activities and not the description in the business

o Helps avoid conflicts over what is personal and what is partnership incomeo Each partner’s authority as an agent is thus limited by the nature of the business

undertaken.o Each partner is an agent of the partnership capable of binding the firm to obligations

within the usual course of the firms business. o The scope of each partner’s authority to bind the partnership to a third party will be

determined by what the partnership does rather than by any limit, unless the third party has knowledge of the limit. This can help disagreements in the future about what income earned by the partners must be paid to the firm.

Membership and Dissolution of the Partnership

The admission of a new partner is one of the most important decisions for a partnership and often one of the most difficult. The default rules provide that all partners must consent to the


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admission of a new partner (OPA, s.24.7) and expulsion of partners (OPA, s.25); and that the retirement of a partner dissolves the partnership (OPA, s.26, 32).

Because the contributions of partners are usually not equal, this requirement for unanimity is often changed to some lesser degree of agreement, perhaps weighted by each partner’s economic interest in the partnership. It is also common to articulate some of the criteria for admission, such as years of experience.

Partnership statutes are silent on the arrangements for admission. Issues such as what capital contribution new partners will be required to make and how to determine the new partner’s interest in capital and share profits should be addressed in the agreement.

The expulsion of a partner is prohibited under default rules (OPA, s.25), so many agreements provide for expulsion on the vote of some specified majority. The partnership agreement may set out certain other rules governing the circumstances in which partners must leave the partnership. It should be provided that the partnership is not dissolved and some formula should be established for determining how the departing partner is to be paid his/her share of capital and profits and how he/she is to be compensated for any work in progress to which he/she has contributed but which has not yet been billed.

Issues to Consider:

Whether there should be a lesser degree of consent (since it is not efficient to alwaysrequire unanimity);

Whether there are any criteria for admission (e.g. time spent, billable hours) or forexpulsion (e.g. age, malfeasance);

Whether expulsion or retirement should not dissolve the partnership; When and how a departing partner should be paid his entitlement to be paid out of capital

(and for work that has not been billed) and share of profits on retirement or expulsion (OPA, s.42(a)).

Capitalization

Capital: the amount contributed by the partners to the firm is called capital. Partnerships need money to set up costs of setting up the business and operating expenses. In the absence of a specific agreement as to what is each partner’s share in capital, all partners share equally (OPA, s.24.1). Capital contributions and partner’s entitlements to capital should be dealt with in the partnership agreement, which can lay out how much future partners must pay, or if more capital is needed how much each partner will put forth, and the circumstances in which capital may be withdrawn can be addressed. It is common in law firms for capital contributions of new partners to be used to return capital contributions of more senior partners. The agreement may also provide for some way to keep track of each partner’s aggregate contributions over time. Each partner will be entitled to receive his/her share of capital when he/she leaves the partnership.


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Under the OPA, no interest is paid on capital, but partners who advance capital beyond what they are committed to advance in the partnership agreement are entitled to 5% interest unless the partners otherwise agree (OPA, s.24.3).


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Issues to Consider:

How initial and subsequent contributions are determined and whether there are respectiveObligations to contribute;

The process for a return on various events, e.g. retirement (often the contribution of a new partner will pay out old partner);

Whether the rule on returns on excess contributions [5%] should be raised, lowered orexpunged.

Arrangements Regarding Profits and Their Distribution

The default rules provide that profits are to be divided equally (OPA, s.24.3 &24.4). This is almost always changed to allocate a share equal to contribution to firm. Each partnership must take into account and what weight to give to each for the purpose of allocating profits.

There can be both direct and indirect contributions (e.g. law firm partnerships). Some kinds of contributions typically considered in law firm partnerships:

capital contributions; billable hours worked; hours worked on matters that were not billable; fees billed and collected; total billings to new clients introduced to the firm by the partner; total billings to clients of which the partner is in charge; business development;These can change the entitlement of a partner (most firms make an evaluation on an annual basis).

Issues to Consider:

Almost always changed by agreement to allocate to a partner a share commensuratewith their contribution to the firm

There are many different kinds of contributions [capital, billable hours, fees billed andcollected etc.]

Management

Default rules provide that all partners are entitled to participate in the management (OPA, s.24.5 and 24.8) including having access to partnership books (OPA, s.24.9); that decisions on ordinary matters be made by a majority of partners (OPA, s.24.8); and that changes to the nature of the business require unanimous consent of all the partners (OPA, s.24.1).Management relations vary tremendously in their nature and complexity depending on partnership size and other variables.

OPA doesn’t have procedures for partnerships to act collectively. Rules regarding such procedures (notice, quorum, meetings) are usually included in a partnership agreement, including who may sign cheques and contracts.http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:38 PM

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Partnerships size changes sometimes and therefore default rules can be altered. As it grows the decision making is delegated to a committee of partners, a single partner, or in some very large firms a professional manager who is not a partner.

Management arrangements are an important way in which the risk created by mutual agency can be addressed. Restrictions on who can sign cheques can reduce liability for the firm and partners. But remember that these mechanisms will have no effect on avoiding liability to a third party where they are contravened; to the extent that they are implemented in practice they will tend to prevent liability from arising (where one partner fails to observe requirements imposed in the partnership agreement, the other partners will have a claim for breach of contract and perhaps grounds for dissolution (OPA, s.35(d)).

Issues to Consider:

Delegation and allocation of power (e.g. not unanimous decision making. Eitherappoint a management committee or majority consent).

Risk management – authorization and control procedures (e.g. two partners to signcheques; opinions or contracts must be approved by another partner or committee etc).Note: Doesn’t affect liability to a third party, only an internal mechanism.

Dissolution

OPA allows partnerships to be dissolved easily and in a variety of ways. Dissolution on the death or insolvency of a partner and on notice from one of the other partners are usually excluded and replaced by a provision requiring either unanimous consent or the consent of a specified majority for dissolution.

The statutory scheme under OPA, s.44 outlines the procedure for the settlement of claims needing to be dealt with on dissolution may be fleshed out in an agreement.


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Default Suggestions

Name

Partnership can use any name it likes

Ownership: each partner can use the name upon dissolution.

Liability: Goodwill is attached to the name, if a partner leaves, the name can still be used, but liability will be attached.

Registration: All names must be registered under the BNA.

Use name of partners Ownership: address who

can use the name upon dissolution. Best to agree that upon withdrawal neither leaving partner , not partnership may use the name.

Liability: need an indemnification agreement if name is continued to be used. Does not insulate against liability, but at least partners forced to indemnify

Registration: do a name search, do not get trapped in passing off to TM infringement.

Description of Business

No need to describe business.Liability to 3rd party flows from what the business actually does, not what the PA says.

Fiduciary duty prevents a partner from competing with the partnership.

Only income earned as part of the partnership business goes into partnership assets.

Describing business helps if there are disagreements re income earned.

Can stipulate that all profits derived from use of partnership property, name etc, is for partnership.

Competition issues can be settled if partner leaves, but must be reasonable in time and location (Bassman)

Indemnification clause for liabilities that a partner incurs outside of the defined business of the firm.

Membership ofPartnership

All partners must consent to a new partner.

Expunging a partner = dissolution.

No mention of what is required for a new partner to join.

Consent structure can be modified to reflect each partners capital contribution.

Criteria for admission can be established (experience etc)


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Criteria for share in capital and profits.

Criteria for expunging a partner; consent, age for retirement, incapable to work. Also how leaving partner should get his share of capital back.

Capitalization

All partners share equally in the capital (s.24.1 OPA)

Each partner is entitled to his share in the capital when he leaves the partnership.

No interest is paid on capital advanced, loans to partnership get 5% unless all partners agree otherwise.

Need to agree on what the initial capital contributions will be for each partner – also may be a basis for additional future contributions.

Example: if more money needed, each partner contributes more based on their share etc.

In Law Firms: capital from new partners used to return capital to more senior partners.

Agree on process to distribute capital to partner who is leaving.

Loans to the partnership, or consent for increased interest.

Profits Distribution

All profits divided equally among partners (s.24.1)

Change to reflect contribution to partnership.

Many types of contributions, need to address which to take into account.

Management

All partners entitled equally to share in management.

Decisions on ordinary matters by majority, nature of business need everyone’s consent.

No procedural rules for how to act.

Decision making structure to reflect unequal economic interests, make committees etc.

Procedural stuff for quorum and notice.

Restrictions on who can signContracts and bind the partnership.

Easily via default rules. Exclude death and http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:38 PM

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Dissolution Death, insolvency, court

order etc.insolvency.

Require some majority to dissolve.

Specify other events that would lead to dissolution


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6. Other Types of Partnerships

Casebook 34-40VanDuzer 76-79Partnerships Act 2, 3, 32(b)

Joint Ventures

Joint Ventures

relationship with no legal meaning. They are neither a distinct form of business organization nor a relationship that has any precise legal meaning. A joint venture is a difficult concept as a matter of law although they are very common as a business vehicle. It is unclear whether they are partnerships or a distinct form of business entity. The legal consequence of a joint venture relationship that is not a partnership is not clear.

It is used to describe a relationship among two or more parties who agree to combine their money, property, knowledge, skills, experience, time or other resources for some common purpose. “Joint venture is used loosely to refer to all sorts of legal arrangements given to effect in corporations and partnerships and relationships based exclusively on contract. Usually the joint venturers agree to share profits and losses from the venture, and each has some control over it.

Distinguishing feature:

arrangement is set up for a limited time, for a limited purpose, or both but confusing because partnerships can also be for a limited time.

Joint venture:

Precise definition is difficult [depends on their actual intention]Founded entirely on an agreement between the partiesPooling of skilled and experienced personnelParties combine their resources usually consisting of capital knowledge skill and services in the furtherance of a project or undertaking, usually agreeing to share the profits and the losses and each having some degree of control over the venture

Concentration of economic resource, knowledge and skill

requisite to the accomplishment of large scale construction projects such as public buildings, national monuments and similar structures, bridges, tunnels, super highways and tool roads, power dams, canals and seaways, electric energy projects, atomic reactors and other power sources to mention but a few of the typical results of joint ventures


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Used as a means for conducting trade and commerce.Common undertaking and community of interest.

Association created by co-owners of a business undertaking, differing from partnership (if at all) in having more limited scope. In all important respects, the joint venture is treated as a partnership

Partnership—concerned with carrying on a businessJoint venture—usually restricted to a specific project

A joint venture could be carried on through a corporation (each business a shareholder), a partnership (each business a partner) or through contract (each governed by the respective regulations).

The main issue: is to what extent are there legal consequences associated with the joint venture outside those specifically provided for in the agreement creating the relationship.

Central Mortgage &Housing Corp. v. Graham, [1973]

Where a joint venture has the following characteristics, the joint venturer isresponsible for all of the obligations of the joint venture [e.g. same liability attached as a partnership].

Joint Venture Test

1. Contribution by both parties of money, skill, property or knowledge to a common undertaking

2. Joint interest in the subject matter 3. Mutual control and management

4. Arrangement limited to one project 5. Expectation of profit, and

6. Mutual sharing of profit

Facts: CMHC and Bras D’Or entered into an agreement where CMHC provided financing for ahousing project and BD carried out the project. CMHC was involved in the project from the start by providing financing to cover the full cost of the project. There was a contribution by both parties of money, property, skill and knowledge to a common undertaking. They also had mutual control and management of the enterprise during the construction of the house and in the sales. Graham bought one of the houses from B (emery). After taking possession, Graham stopped paying his mortgage because of defects in the house. CMHC commenced foreclosure proceedings and Graham counterclaimed for damages based on the defects, alleging that CMHC was liable for the defects because it was a joint venture with the seller B.


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Ratio: the arrangement between Central mortgage and Bras D’Or can be characterized as a joint venture. This relationship satisfied the characteristics of a joint venture and CMHC was liable for the obligations of the fellow venturer Bras D’Or.

Note: This case has never been overruled and was held to be good law by the SCC in Bow Valley. But, in no other Canadian case outside Nova Scotia has a joint venture been found to have the partnership-like legal characteristics attributed to it in CMHC v. Graham. This may be because if all if all incidents of a joint venture listed above are present, a partnership will be found in most cases. It is important to remember that what is often cited as the key identifying feature of a joint venture, limitation to a specific project can also occur in partnerships.

Some courts have held that parties to a joint venture owe to each other a fiduciary duty to each other in relation to the activities of the joint venture. This duty means that joint venturers cannot put their individual interests ahead of the joint venture, and an obligation not to disclose confidential information provided by one joint venturer to the other for the purpose of the joint venture.

Wonsch Construction Co. v. Danzig Enterprises Ltd, [1990]

Fiduciary duty of joint venturers prevents them from making a profit but fiduciary duty will not be found in all joint ventures. There must be unjust enrichment.

Facts: Wonsch had entered into a joint venture agreement with Danzig to build and operate an apartment and office complex. Wonsch was responsible for the construction of the4 complex and in the course of fulfilling its obligation incurred substantial indebtedness to the National Bank of Canada. Danzig negotiated an assignment of the debt owned by Wonsch, paying the Bank significantly less than the full amount, and immediately sued Wonsch for the full amount.

Held: The court held that Danzig owed a fiduciary duty to Wonsch which precluded it from trying to make a profit from dealing in Wonsch’s debt incurred for the purposes of the joint venture.

But a fiduciary duty will not be found in all joint ventures. The courts have held that a fiduciary duty will be found only where one party is vulnerable in some was to the unilateral power or discretion of the other. In general, there must be some inequality of bargaining power resulting in an unfair agreement (Visagie v. TVX Gold).

Judicial reluctance to find that a fiduciary duty exists in a joint venture relationship has increased over time.


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Limited Partnerships (LP)

Casebook 41-51VanDuzer 79-86Limited Partnerships Act 2-5, 8-12, 14, 17-22, 24-26, 32

Limited Partnerships (LPs)

A limited partnership must meet the general definition of a partnership, and consists of 2 classes of partners:

a) At least one General Partner(s) and b) At least one Limited Partner(s) (OLPA s.2(2))

Specialized vehicle

designed to fulfil the needs of particular investors who want to be able to share in partnership profits but limit their liability for partnership losses. In most cases, limited partners are not interested in participating in management. Their investment is passive in nature. In Ontario limited partnerships are governed by the Limited Partnerships Act (OLPA) and to the extent that the Act is silent, the Partnerships Act and the common law.

Every limited partnership must consist of at least one general partner with unlimited liability and one limited partner with limited liability (OLPA, s.2(2)), and are formed simply by filing a declaration under OLPA, s.3. In OLPA, s.3(2) the declaration need only set out the name and address of the firm. The declaration expires after five year sunless renewed. The limited partnership does not have separate legal existence. A limited partnership formed under the laws of another jurisdiction will be recognized in Ontario subject to compliance with the statutory provisions.

General partner (typically corporations):

Have all the rights and powers and is subject to the same restrictions and unlimited person liability as a partner in a general partnership (OLPA, s.8).

Limited partners (typically individuals):

have the right to share in profits and to have their contribution returned (OLPA, s.11 and 15). They have liability limited to the extent of their contribution (or an amount agreed to contribute) and have limited ability to participate in the partnership, which typically involves scrupulous abstention from playing any part in the discretion of the business. (OLPA, s.9-10) offers investor protection for limited partners. Limited partner gets limited liability (you can’t lose more than you promised to invest or did invest). OLPA, s.10 states that a limited partner has the same rights as a general partner to:http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:38 PM

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Limited partners rights:

to share in profits (OLPA, s.11) and have their investment returned (OLPA, s.15); to inspect books and make copies; to obtain full and true information regarding the limited partnership; to obtain dissolution by court order (OLPA, s.10) to transfer their limited partnership interest on consent of all the partners (OLPA, s.18); unless there are not enough assets to pay all prior claims, withdraw their contribution

(OLPA, s.15): on dissolution; at the time specified in the partnership agreement; on 6 months’ notice if no time is specified; or on the unanimous consent of all partners.On dissolution, creditors are paid first, then the limited partner and then the general partner.

Limited partners have limited liability;

only the amount they have agreed to invest is at risk to the partnership’s liabilities. In return for this limited liability, limited partners cannot take part in control of the partnership business. If they do, they lose their limited liability. The only reason limited partnerships are used is because of the combination of limited liability with tax loss flow-throughs.

Note: Distinguish from limited partnerships from shareholders in corporations. In limited partnerships, they can still be sued, but only to the extent of their contribution to the partnership. Shareholders cannot be sued individually but as a result of the corporation being liable, they can lose their investment.

What engages the liability of the LP is him/her taking part in the control of the business?

A limited partner does not become liable as general partner unless, in addition to exercising her rights and powers as a limited partner, he/she takes part in the control of the business. If a limited partner takes part in the control of the business, he/she become liable under the statute as a general partner including unlimited liability to the extent of her assets.

Interests in a limited partnership are called units and are to be distributed to the public for the purposes of provincial securities laws. Thus, a disclosure document (called a prospectus) must be prepared and distributed to investors who have a civil claim for any misrepresentation in it.

OLPA, s.12 says a limited partner may transact business with the limited partnership but cannot hold a security interest in its assets and cannot receive anything from the limited partnership if it is insolvent. Unlike a general partner a limited partner may be an employee of the partnership (OLPA, s.12). If the limited partner “takes part in the control of the business” (OLPA, s.13(1)) or allows her name to be used in the firm name (OLPA, s.6(2)), he/she loses their limited liability. http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:38 PM

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Difficult Issue (Advising v. Management):

when the general partner is a corporation and individual limited partners are involved as directors, officers, employees or shareholders in the corporation. In these circumstances the limited partners may very well be taking part in the control in the limited partnership. When will it result in losing the limited partners limited liability?

Haughton Graphic ltd v Zivot, [1986]

Any time a limited partner was an employee, officer, or director of a corporate general partner and, in that capacity, took part in the control of the business, he/she loses his limited liability protection because he has now become a general partner and is liable personally as a general partner for the obligations of the partnership

Facts: Zivot was a limited partner as well as the controlling shareholder and president of the corporation that was the general partner (so he was both the general partner and limited partner). He admitted that he was the directing mind of Printcast, that he was responsible for it, and that he managed it;a limited partnership under Alberta law, for the purpose of launching a magazine called “goodlife.” Sign up local affiliates and supply them with common editorial material.

Principal players: Printcast (the LP); Lifestyle (the general partner); Zivot and Marshall (2 of the LPs)

Through Zivot’s’s efforts, $250,000 of money was obtained from investors in 1981. At the beginning of January 1982, Printcast went into business.

step one: sign up affiliates in various cities Princast went into bankruptcy, leaving the Haughton Graphic unpaid for the printing of three

issues of Goodlife.

Held: Zivot was personally liable as a GP on the basis that he took part in the control of the limited partnership business.

Can Zivot be held liable? Zivot was taking part in control and management because he identified himself as the President of Printcast, what more clear indication could you have of a a human being taking control than that? He’s taking control in his own personal capacity. Professor thinks this is an easy example of LP taking part in control. Bad final paragraph in judgment p.119 :“to hold the defendants liable in this case mans that a person who is an officer or director of the corporate general partner in a limited partnership would always be fixed with unlimited liability for the debts of the LP on the ground that he is the person who has control of the corporate general partnership.” The section only applies to a person who, in addition to being an officer/director/senior employee or other directing mind of the corporate general partner, seeks also to take advantage of personal limited liability as a limited partner. In other words the section will only apply if two conditions are met:

the person is a limited partner; They take part in the control of the business of the limited partnership.


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Since Zivot was also a substantial shareholder in Haughton, it may be possible to argue that the right approach is that limited partners may act as employees, officers and directors of corporate general partners and take part in control without losing their limited liability, unless they also control the corporate general partner.

Nordile Holdings Ltd v Breckenridge, [1992]

Where individual limited partners act only in their capacities as directors and officers of a corporate general partner, they are not liable as general partners.

Held: Contract entered into between lender and LP, operative term of contract – parties hereto agree that obligations of LP shall not be personally binding upon any of the LP but shall only be binding upon and resort may only be had to the property of the LP or the GP of the LP. Even if LP law doesn’t work that way, the law in the contract works that way that there is no right to sue.So either way Mr. Breckenridge wins.

So, the conventional understanding is

If you are a LP, it is ok to be involved as a director, officer or employee of the corporate general partner, AS LONG AS you are not also the major shareholder.

Scholars observe that these two cases cannot be reconciled. Prof doesn’t understand why? Was there an express agreement in the first case that he was acting in the capacity as an officer? NO. Was there a contract that stated that it wont be personally binding? NO. Professor thinks the two cases are definitely different.

Exam question—Why are they not reconcilable? He wanted the answer to discuss this, not take his side that they are reconcilable.

Any time a LP was an employee, officer, or director of a corporate general partner in that capacity, took part in control of the business, she would be liable personally as a general partner for the obligations of the partnership. Where individual limited partners act only in their capacities as directors and officers of a corporate general partner, they are not liable as general partners.

A limited partner’s interest is transferable,

but the transferee has the full rights of the transferor [ie becomes a substituted limited partner] only if all partners consent or if the transfer is in accordance with the partnership agreement: (OLPA s.18).

Limited partners have the right to receive repayment of her investment in certain circumstances:

on dissolution of the limited partnership at the time specified in the partnership agreement


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on 6 months’ notice, if not time is specified in the partnership agreement on the unanimous consent of all partners: (OLPA, s.15(1))

No return of a limited partner’s investment may occur if there are not enough assets to pay the claims of all creditors (OLPA, s.15(2)).

Dissolution of a limited partnership

occurs in the same circumstances as for a general partnership—death, incompetence, and retirement of a general partner—unless at least one general partner remains, the partnership agreement provides for continuation of the business of the limited partnership, and all the partners agree to continue (OLPA, s.21). A limited partner is entitled to have the limited partnership dissolved where:

all limited partners withdraw (OLPA, s.23); court order (OPA, s.35); a limited partner’s contribution is not returned when required; or the assets of the limited partnership are not enough to pay the liabilities ( OLPA, s.15(4)).

A declaration of dissolution must be filed when the limited partnership is dissolved or upon the withdrawal of all limited partners (OLPA, s.23).

Can be a general partner and a limited partner (OLPA, s.5(1).

Why do you want to do this?A general partner’s liability can only be unlimited, and becoming a limited partner has no effect on this liability. A general partner may want to be a limited partner in order to participate in distributions of losses and profits, and any distribution of assets on dissolution to the same extent as limited partners with respect to the limited partnership units that it owns.

Tax effects

One of the most common reasons for investing in limited partnerships is to receive a share of tax losses generated by limited partnerships business. Sharing losses may be attractive to individuals with high incomes form other sources. The losses will be deductible against that income, with the effect of reducing the individual’s overall tax liability.

This encourages investment in an identified industry by adjusting the rate at which a business may deduct capital cost allowance (CCA) on certain equipment used in the industry. CCA is an amount that may be deducted from income under the Income Tax Act. Notionally, CCA deductions are permitted to reflect the reduction in the remaining useful life of the equipment (e.g. film, mineral exploration and manufacturing industries). Businesses in these industries will be able to create tax losses in their first years of operation by taking large deductions for CCA. By investing in limited partnerships that are engaged in these businesses, investors will be able to


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deduct the losses resulting from CCA deductions against their other income to reduce their overall tax liability.


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Limited Liability Partnerships (LLPs)

Casebook 51-53VanDuzer 63-66Partnership Act 10, 44.1-44.4

A limited liability partnership (LLP) is a special form of general partnership, except that individual partners are liable only for their own negligence and not that of (a) other partners; or (b) employees, unless directly supervised by the partner (OPA, ss.10, 44.1) So 3rd parties still have recourse against a) Firm and b) Offending Partner (just not the

personal resources of other partners not involved in the wrongful act). Individual partners are not personally liable for professional negligence of their partners/employees unless the partner directly supervised them

the firm remains liable individual partners are liable for their own negligence

In Ontario partnerships must meet the following requirements to become an LLP:1. Partners must sign an agreement designating the partnership as a limited liability

partnership2. The business must be one that is allowed 3. Governing body of the profession requires the partnership to carry a min amount of

liability insurance4. Must be registered under the Business Names Act5. Must have LLP in the firm name.

LLPs are an American invention

The legislation was inspired by the loan and saving crisis in the US in the 1980s when law firms, especially in Texas and California, were being sued for their partners’ alleged involvement in the mismanagement and wrongful diversion of loan and savings associations’ funds. Partners in accounting firms shared the same concerns.

In Canada

LLP legislation was first enacted in Ontario in 1998 in the form of amendments to the Ontario Partnerships Act. Alberta, has since followed suit and many other provinces are studying the issue. In Ontario, only professional firms may form LLP’s. The professional governing body must give permission and there must be minimum liability insurance. So far, only accountants and lawyers can do so in Ontario although Alberta allows a broader range.

For Professionals Only!

LLPs allow some professionals such as lawyers and accountants to limit their liability for negligence. Individual partners are not personally liable for the professional negligence of their


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partners or of employees or other persons unless the partner directly supervised them. Instead, the firm remains liable whereby individual partners are liable for their own negligence

Professional firms (lawyers and accountants) can exclude their liability for the negligent or other described wrongful acts of a partner by registering as a Limited Liability Partnership (LLP) and meeting other statutory requirements, without losing their right to remain active partners as is true in a limited partnership.

A limited liability partnership is a relatively new concept that not all provinces have adopted. They were designed to deal with the problem of professional firms facing unlimited tort liability for the errors and omissions of one member.

Liability of LLP

Partners are not personally liable for the “negligence, wrongful acts or omissions, malpractice or misconduct” of their partners or of employees or other agents of the firm unless:

1. the partner failed to provide adequate and competent supervision as would normally be expected of a partner in the circumstances and a wrong was committed by a person who was an employee or agent under the partner’s supervision; OR

2. the partner knew of the act or omission and failed to take reasonable steps to prevent it. The firm remains liable for all such acts or omissions. Each individual partner remains liable for own negligence.


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Other types of businesses

Special forms of corporations: (Banks and Insurance). There are some businesses that can be carried on only through special kinds of corporations incorporated and governed under statutes which combine many of the features of the general corporate law with other provisions imposing a scheme of regulation on these businesses.

Eg. Banks must be incorporated and operated under the federal Banks Act and Insurance Businesses must be incorporated and are governed by either federal or provincial legislation regulating the insurance business.

Strategic alliances: no precise legal meaning. They refer to a wide variety of relationships between business organizations involving more or less legal formality and greater and lesser degrees of working together among the alliance participants. less involved relationships (e.g. an agreement to do research, market products jointly, share

information) a joint venture can be a strategic alliance

Distributorship: (Costco).No precise legal meaning. Distributor buys the products for itself and then resells them on his own behalf. Business people may say that a distributorship exists when one business agrees to sell another’s product. The distributor may provide warranty service.

Business Trusts: (Mutual funds and real estate investment funds (REITs) Settlor gives title to someone else, trustee, to be held for the benefit of a third person, beneficiary on terms specified on settlor. Investors to give money to trustees for the purpose of acquiring assets to be used to carry on a business for the benefit of the investors [investors are both the settlors and the beneficiaries]

Everything must be created in a document that creates the trust, often called a declaration of trust. While this means that trusts are very flexible, it also means that setting up a trust can be time consuming and expensive. Legal and tax advice may be required and a significant amount of work may be needed to draft the trust declaration

Trusts are taxed—because it was worried that widespread use of income trusts would severely reduce tax revenues , the federal government amended the Income Tax Act, effective January 1st 2007 to eliminate the tax benefits of structuring a business as an income trust


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C. THE CORPORATION

7. Introduction

VanDuzer 90-98

Introduction to Corporate Law

Corporations are entirely statutory creatures: Upon incorporation, the filing made by the corporation becomes a matter of public record (no registration required), which is filed with government authority. However, licence rules still apply.

The current form of corporate is outlined by asking the following questions:

What is the constitutional competence of the federal government and the provinces in relation to corporations?

To what extent is the Charter of Rights and freedoms applicable to corporations? What is the current process of incorporation in Canada? What is the function of corporate law and what policies underpin it? What is the nature of the separate legal existence of the corporation?

Historical Note on Canadian Corporate Law

Before the 1800s, there were only two types of incorporation: royal prerogative, which was done by the Crown issuing letters patent sometime referred to as “Royal Charter”, Only a small number of Royal Charters were granted by England in 1670. These corporations were created for colonization purposes as much as for trade, did not resemble modern business corporations; and special or general act of the legislature (this was rare).

Early Canadian statutes followed a registration approach. In 1849, statutes were passed in Upper and Lower Canada allowing for the incorporation of companies for the purpose of building roads and bridges. It was later adopted for businesses (e.g Hudson’s Bay Company, Colonization purposes: trade, mining, shipbuilding, manufacturing and chemical businesses) through an expeditious process that did not depend on the exercise of the royal prerogative. Incorporation was obtained by the registration of prescribed documents in the country in which the work was to be done. But, the companies did not resemble modern business corporations. They were organizations set up for a limited purpose, and did not provide their shareholders with limited liability.

In 1850, Canada enacted a statute that allowed incorporation for mining, shipbuilding, manufacturing, and chemical businesses through an expeditious process that, like the 1849 Acts, did not depend on the exercise of the royal prerogative. Incorporation was obtained simply by the registration of certain documents. Corporations under this new Act had two of the following


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characteristics: separate legal personality and limited liability (but in contrast to modern corporations, their life was limited to 50 years).

In 1862 the Companies Act (UK), (1862) was passed, replacing the 1855 Act, and was based on registration approach; it provided for incorporation on the filing of the documents required by statute: memorandum of association and articles of association. This Act continues to provide the model for contemporary English law and subsequently became the model for Canadian legislation in some jurisdictions.

For some reason Canada reverted to a model based on incorporation via an issue of letters patent by the Governor General in Council. Issuing letters patent was a discretionary act of an official of the state. It was followed in the federal incorporation statute enacted in 1869 and in PEI, NB, Quebec, Ontario, and Manitoba. In contrast, by 1900 NS, NFLD, Saskatchewan, Alberta, and BC had enacted corporation legislation providing for incorporation through filing a memorandum and articles of association following the English registration approach.

Conceptual Differences Between the Registration and Letters Patent Approaches:

Letters patent:

Discretionary act of the crown (not really used anymore, but still in limited provinces). A letters patent corporation is deemed to have the rights and powers of a natural person. Rules are set out in the corporation’s by-laws or in the statute itself. Directors derive their power from the statute, though some derogation in favour of the shareholders is permitted. It is unclear whether shareholders have residual authority, which may be important where a dispute has arisen between a shareholder and the corporation. This method was abandoned in 1967, and favoured the registration system.

Because letters patent corporations do not have to file their by-laws with the state, much less information concerning the internal working of such corporations becomes a matter of public record. This was especially important prior to the enactment of modern corporate statutes because persons dealing with the corporation were deemed to have notice of what was on public record regarding a corporation. This doctrine of constructive notice meant that people dealing with the corporation (e.g. creditors) were deemed to know about all the internal approval and other requirements that had to be satisfied before an obligation was properly authorized by an enforceable against a corporation.

Much of the structure of the corporation is provided by the corporate statute, though this structure may be changed by the parties in the articles or an unanimous shareholders’ agreement (USA). The directors are directed to manage or supervise the management of the business and affairs of the corporation (CBCA, s.102(1)). The act provides that these powers may be delegated, subject to certain limitations( CBCA, s. 115 (1) and (3)) and it grants certain limited rights for shareholders to have a say in how the corporation is managed.

Registration


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Incorporation must be granted by the state so long as the documents filed satisfy the statutory requirements. A corporation under the registration system has only the powers provided for expressly or by implication in the articles. No exercise of government discretion is required. In effect, this meant that actions of memorandum corporations were sometimes attacked as outside their corporate powers, or ultra vires. The incorporators have to provide a set of rules in the memorandum and articles of association governing how the corporation is to function internally; who is authorized to act for the corporation; how the shareholders and directors exercise power; and so on.

Because more of the internal procedures of memorandum corporations were part of the public record as compared to letters patent corporations, there was greater risk that memorandum corporations would be able to escape liability for obligations incurred on their behalf by claiming that their internal procedures had not been followed. the memorandum and articles of association of memorandum corporations constitute a contract between the members and between the corporation and the members. This contract has two major consequences:

1. the memorandum and articles of association are the primary source of the allocation of powers between the directors and the shareholders;

2. the director’s act as delegates of the shareholders, and any power not granted to the directors in the memorandum and articles or the statute remains in the shareholders.

Many of the basic rights and obligations of the shareholders are provided for in the memorandum and articles of association, which are considered to be a contract between the corporation and the shareholders as discussed above.

Important practical implication

The shareholders of a registration corporation can sue civilly for breach of the memorandum articles, though their entitlement to damages is limited, whereas shareholders of letters patent corporations must rely, primarily on statutory remedies provided. In practice the remedies introduced in the CBCA provide much better protection for shareholders’ interests than contractual remedies in memorandum corporation jurisdictions.

Throughout most of the 20th century, Canadian registration and letters patent statutes changed very little. Then in 1970, Ontario engaged in a wholesale amendment of its corporate law (OBCA). Based on the Lawrence Committee Report in 1967, the Ontario Legislature finally abandoned the letters patent system in favour of a registration system. Under the new Ontario Act incorporation was effected by filing a simple document called “articles of incorporation”. In 1975, the federal government implemented its own new corporate law statute: the Canada Business Corporations Act (CBCA). It adopted articles of incorporation approach along the same general lines as the new Ontario act, but went much further in protection of minority shareholders.

CBCA provided greater flexibility in structuring the corporation by changing mandatory rules

into rules that applied except to the extent that the incorporators agreed to change them (called “default rules”).


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Constructive notice and the doctrine of ultra vires were abolished; and shareholders were permitted, by unanimous agreement, to assume some or all of the powers of the directors, thus altering the statutory division of powers.

A new wave of corporate law reform in Canada began with major amendments to the CBCA that came into force in 2001:

Highlights of the 2001 Amendments to the CBCA

1. Requirements for Canadian resident directors reduced from 50% to 25% for most corporations

2. Solvency and capital-impairment tests for giving financial assistance to shareholders, directors, officers and employees removed

3. general “due diligence” defence created for certain statutory liabilities4. circumstances in which corporation may indemnify directors and officers for liabilities

incurred or obtain insurance against such liabilities broadened 5. provisions permitting electronic communication with shareholders, electronic voting and

electronic participation in meetings introduced6. circumstances in which shareholders may make a proposal to put matters on the agenda

for shareholders meetings substantially revised7. rules restricting the manner in which shareholders may communicate with each other

relaxed8. rules regarding unanimous shareholder agreements clarified and strengthened9. improved rules on pre-incorporation contracts as discussed in the following section

Ontario made substantial changes to its Business Corporations Act effective August 1 2007. Many of these track the amendments to the CBCA, including reducing the minimum requirement for Canadian resident directors to 25%, expanding the “due diligence” defence and providing better rules for electronic meetings.

Highlights of the 2007 Amendments to the OBCA

1. Reducing requirements for Canadian resident directors to 25%;2. Expanding the circumstances in which a due diligence defence and indemnification are

available to directors;3. Providing rules that permit electronic communications;4. Relaxing requirements applicable to shareholder communications;5. Introducing new rules for shareholder proposals and unanimous shareholder agreements6. The OBCA now specifies that the statutory duty of care owed by directors is solely for

the benefit of the corporation. Based on the Supreme Court of Canada’s holding in (Peoples Department Stores) the duty owed by directors and officers of CBCA corporations may benefit creditors and other corporate stakeholders

7. Under s.126(2) OBCA a majority of directors meeting must be held in Canada, unless the articles or by laws provide otherwise. There is no equivalent restriction in the CBCA. [this difference may be mitigated by simply including an exception in the by-laws or


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articles as permitted by the OBCA. Alternatively, the directors could take decisions by all of them signing a written resolution rather than having a meeting at all.

There continues to be a strong English influence present in the Canadian cases dealing with the basic concepts and doctrines we share with the UK arising from our common law traditions. As noted the predominant model for corporate law statutes in Canada is American, and the extremely close business ties between the USA and Canada; the influence of American precedents is strong and increasing (but there remain significant differences between the form and content of the regulation of corporate behaviour and the business contexts in the two countries in which the corporations operate.

Securities law forms a fundamentally important complement to corporate law, especially for corporations whose shares are traded in public markets. Like corporate laws, securities laws deal with requirements for corporate government structures, standards for director behaviour, and disclosure of information to shareholders.


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Constitutional Matters: Division of Powers

Casebook 62-64, 160-162VanDuzer 98-112

Jurisdiction to Incorporate

Once business people have decided to incorporate, they have to decide whether to incorporate under any one of Canada’s provincial or territorial corporate statutes or can choose to incorporate under the federal corporate statute, the CBCA. (e.g. only those incorporated under CBCA have the constitutional right to incorporate anywhere, no matter where they carry out business. But practically all provinces/territories allow you to incorporate in any province, no matter where you carry out business. So as a practical matter, if the CBCA was repealed tomorrow nothing would change, everything would still continue practicing the same.

If foreign businesses want to operate business in Canada with no Canadians on board, the CBCA/OBCA won’t allow it, they would need to go to BC, PEI, NWT, where specific jurisdictions allow this to happen.

Provincial incorporation

Under s. 92(11) of the Constitution Act 1867 the provinces have jurisdiction over the “incorporation of companies with provincial objects.” This does not restrict the nature of the corporation’s business operation, not does it impose an effective limit on the territory within which corporation operates. Provinces can and do incorporate corporations with no restriction on what they can do or where they can do it. A province is not capable of endowing a corporation with the right to carry on business in any other jurisdiction including any other province. This means is that the most a province can do is grant a company the capacity to carry on business in another jurisdiction (but not the right). The corporation will be able to carry on business on the other jurisdiction only if it obtains the permission of that jurisdiction through extra-provincial licensing schemes.

Extra-provincial licensing

Regimes allow corps incorporated under the laws of another province or a foreign jurisdiction to obtain a licence to carry on business on the filing of certain basic information and a fee. Although the decision to grant a licence is discretionary, licences are rarely refused, except


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where the name of the corporation seeing to do business in a province is likely to be confused with the name of the business already being carried on in the province. As a result the mobility of a provincial corporation at least within Canada is almost unrestricted.

As long as the province allows another provinces corporation to operate there, they can operate there. All provinces have reciprocal agreements. In Canada there is nothing like the Delaware phenomenon. The CBCA in fact has pushed corporate law in the opposite direction of uniformity, rather than diversity. CBCA, s.4 states this as one of its goals for the Act. Canada doesn’t have many large public corporations and so economically it wouldn’t be wise for even the smallest province to expend significant resources in an effort to attract a disproportionate share of incorporation. Canada’s smallest populations tend to be far removed from the financial centres of Canada, unlike Delaware being close to New York.

Federal Incorporation:

The Constitution Act, 1867 grants the federal government limited powers to incorporate corporations operating in specific fields, such as banks, but contains no express general power of incorporation. There is no specific provision in the CA 1867-2002 generally enabling the federal government to incorporate companies. The federal government has power under POGG; and federally incorporated companies have jurisdiction to operate in all provinces (no license required).

Citizens insurance co of Canada v. Parsons, [1881]

It was held that such a power was implicit in the federal government’s residual jurisdiction to “make laws for the peace, order, and good government of Canada, in relation to all matters not coming within the classes of subjects by this act assigned exclusively to legislatures of the provinces.”

Held: The privy council reasoned that, since the provinces have been given the jurisdiction to incorporate corporation with provincial objects the federal government must have jurisdiction to legislate in relation the incorporation of corporations with objects to be carried out in more than one province. Federal jurisdiction in the peace, order and good government clause of s.91 CA (POGG). Apart from POGG the federal government also has ancillary incorporation powers under several of the specific heads of s.91.

Multiple Access ltd v. McCutcheon:

There must be an actual conflict between them to trigger the paramountcy doctrine.

Federally incorporated corporations have a right to carry on business in each province. This means that they cannot be prevented from carrying on business in a province as a result of its name being confusing one already in use in the province or for any other reason (this is one reason that the federal government conducts a much more careful review of names proposed for corporations to be incorporated than most provinces. Upon commencing business in a province, http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:38 PM

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federal corporations are required to file information similar to that required of a provincial corporation in an application for an extra-provincial licence. So, in practice, there is often little difference in the treatment of federal and provincial corporations.

Jurisdiction to RegulateProvincial regulation of federal corporations

To what extent can a provincial government regulate a federally incorporated corporation? The answer depends on traditional division of powers jurisprudence. Provinces cannot legislate solely in relation to the status or powers of a federal corporation., in other words, provinces cannot legislate restrictions on the powers of federal corporations (e.g. removing liability).

Provinces cannot directly regulate intra-corporate relations, such as those between directors and shareholders, or require a federal corporation to use a name other than its corporate name for business purposes in the province because of the risk of confusion in the provincial marketplace between the corporation’s name and the name used by a business already being carried on in the province (Reference Re Constitution Act, 1867).

Business activities of federal corporation enjoy no immunity from provincial control and restrictions. Provinces cannot directly regulate the status or powers of a federal corporation. This means that the provinces cannot legislate restrictions on the powers of federal corporations. Provincial legislation will be invalid if it amounts to a total or substantial prohibition of the federal corporation’s prospective or subsisting charter activities.

Provinces can legislate to directly affect the way in which federal corporations exercise their powers if two requirements are met:

The legislation can be justified as primarily in relation to a provincial head of jurisdiction in s. 92 of the Constitution Act 1867 (e.g. securities); and

The legislation is not inconsistent with federal law (double aspect).

If the second requirement is not met, the provincial law will be ineffective to the extent of the inconsistency based on the doctrine of paramountcy (Multiple Access Ltd, v. McCutcheon).

Provinces have jurisdiction to regulate most aspects of business activities, including the ability of a business to sell securities, their relations with their employees, and the contracts they enter into. A federal corporation is subject to provincial regulation to the extent that it is involved in these business activities.

Securities Legislation is designed to protect Ontario investors may be validly enacted under the provinces jurisdiction to legislate in relation to property and civil rights under s.92 (13) of the Constitution Act, 1867 so long as it is not inconsistent with federal corporate law. Provincial securities legislation that regulates the way in which securities of a federal corporation are sold in the province by requiring sales through provincially registered dealers has been upheld as validly enacted and not inconsistent with federal law. By contrast, legislation giving provincial regulators a discretionary power to prohibit the sale of securities by federal corporations or http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:38 PM

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permit sales only if conditions are met, such as changes to the basic characteristics of the corporation set out in its articles –even if enacted in the interests of protecting investors—has been held to be inconsistent with federal corporate law, which gives corporations the right to issue securities. The provincial legislation was struck down to give effect to the paramount federal legislation.

Name Registration Statutes

Aare examples of valid provincial legislation that can affect federal corporations. Their purpose is to provide the public with means of ascertaining the identity of the person legally responsible for a business that is conducted under a name other than the corporate name. This is a matter of civil rights in the province, and such registration requirements can be imposed on federal corporations.

Provinces can legislate solely in regards to a head of s.92 of the Constitution Act even if it ‘sterilizes’ a federal corporation (Canadian Indemnity Co) such as:

Labour law Contract law Securities Name registration statutes Relations with employees Much industry specific-legislation,

Even if the effect is indirectly, to affect the way a federal corporation carries on business. The indirect effects may even extend to sterilizing the federal corporation by prohibiting it from carrying on business.

To summarize a province cannot enact legislation that operates directly to affect some essential aspect of a federal corporation, but provinces have jurisdiction to regulate most businesses and their activities, including their ability to sell securities, their relations with their employees, and the contracts they enter into. A federal corporation is subject to provincial regulation to the extent that it is involved in these business activities.

Federal Regulation of Provincial Corporations

Since most businesses are on the jurisdiction of the provinces, federal regulation of provincial corporations may be thought of as somewhat less important than the provincial regulation of federal corporations and it has generated little jurisprudence. Even though the federal government cannot legislate directly in relation to the status or power of provincial corporation, it can directly affect how the corporation functions if founded in valid s.91 power (POGG):

Telecommunications Interprovincial transportation

Professor Hogg: federal government may not regulate provincial corps directly in relation to their corporate status or characteristics. It may however directly affect the way in which http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:38 PM

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provincial corps exercise their powers if the legislation can be justified as primarily in relation to an area of jurisdiction assigned to the federal government.

Regulation of Extra-provincial Corporations

Involve extra-provincial licensing schemes where each provincial government is competent to legislate in ways that affect the status and characteristics of such an extra provincial corporation for the purposes of its operation within the province. The Federal government may legislate so as to affect the status and characteristics a foreign or provincial corporation operating outside its jurisdiction of incorporation.


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The Charter

Incorporation brings into existence a new legal person whose rights and obligations may be thought of as analogous to those of a human person including:

Corporation’s separate legal personality; Corporations are creations of the state.

Can corporations invoke the protections of the Charter and to what extent?

Since 1982, courts have approached these questions on a right-by-right basis, taking into account both the wording of the Charter provision and the nature of the right. Denying a corporation any rights under the Charter may prejudice those individuals who have a stake in it. Some language the charter uses is broad enough to include corporations such as the rights granted on being charged with an offence (s.11) and certain mobility rights under s. 6(2) are granted to every person and may extent to corps, since corps have the capacity, rights, powers and privileges of a natural person under most corporate legislation.

Overview of Charter Cases on the Rights of Corporations

Standing

A corporation will have standing to invoke the Charter if its rights have been infringed by legislation or actions of the crown When a corporation asserts that a Charter right has been infringed, the approach of the courts has been first to ask if the corporation falls within the defined class of right holders. If they do, then the court engages in a purposive analysis to determine of the right in question is one that can be exercised by a corporation. If both these questions are answered yes, and the right has been breached, then the court considers whether the government action that infringes the right can nevertheless be upheld as a reasonable limit “prescribed by law as can be demonstrably justified in a free and democratic society.” In accordance with section 1 of the Charter.

The defining language used in relation to some rights excludes corporations: Right to vote (s.3) Mobility right: Right to enter, remain, in and leave Canada (s.6(1)), Minority language rights (s.23) are conferred only on “citizens” (Since corporations

cannot obtain Canadian citizenship, apparently they cannot benefit from these rights).

“Every Individual

” is entitled to equality rights under section 15. Although it may seem obvious that a corporation is not an individual, several arguments have been made to the contrary and there have been inconsistent judicial statements on the issue of whether corporations benefit from equality rights.


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Other language used in the Charter is broad enough to include corporations. The rights granted on being charged with an offence (s.11) and the right to move to, take up residence in and gain livelihood in any province under s.6(2) are granted to “every person” and may extend to corporations, since corporations have the capacity, rights, powers, and privileges of a natural person under most corporate legislation (e.g CBCA, s.15(1)).

Parkdale Hotel Ltd v. Canada (A.G), [1986]

A person does not include a corporation for the purpose of enjoying the mobility right under section 6(2), on the basis that the purpose of the provision was not the protection of the corporation.

Section 6(2)(b) was considered in Canadian Egg Marketing Agency v. Richardson, (1998) but no conclusion was reached regarding whether a corporation could exercise this right.

Some courts have held that section 11 rights can be exercised by corporations since they can be charged with offences (R. v. Unity Auto Body Inc.), the content of the rights is much weaker (e.g. section 11(b), the right toi be tried within reasonable time, has been held to apply to corporations but only to a limited extent (R.v. CIP Inc.). The presumption of prejudice associated with delay is weaker than for a natural person. The right is infringed only if the delay in getting to trial was such as to deny the accused corporation the ability to make full answer and defence to the charges. This right is already guaranteed under section 11(d), the right to presumed innocent and to be tried before and impartial tribunal, which likely applies to corporations. Thus, the protection under 11(b) as interpreted by the courts may not represent a significant additional benefit to a corporate accused.

Pre-Charter case: R. v. N.M. Paterson & Sons Ltd., [1980]

The right against self-incrimination, now protected under section 11(c) of the Charter, did not prevent a manager of a corporation from being compelled to testify at a trial of the corporation. There has been no definitive ruling on the applicability of section 11(c) to corporations.

Key question: whether a person who, in effect is the corporation for the purposes of the offence, in the sense that he/she was in control of the corporation, can be compelled to testify against the corporation or whether this would violate the right against self-incrimination.

R. v. Amway Corp, [1989]: Justice Sopinka suggested that even in this situation, employees are compellable to testify against the corporations they work for.

Re PPG Industries, [1983]: with regard to the right to a trial by jury guaranteed by section 11(f), it was held that a corporate accused charged with an offence under the Combines Investigation Act did not have the right to a trial by jury.


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Application of the Charter:

The Charter defines classes of persons who benefit from Charter rights in different ways:

Every Citizen [Right to vote, Minority language rights, Certain mobility rights] Do not protect corporations

Every Individual [s. 15] No definitive judicial statement but would seem corporations ARE NOT

individuals

Every Person [Rights granted on being charged with an offence] Courts have taken a purposive approach, i.e. could the framers have intended

to grant this right to corporations? s. 11(b) [Right to be tried w/in a reasonable time] Applies but in a limitedextent s. 11(c) [Right against self-incrimination] No definitive ruling but has

been suggested that employees are compellable to testify against the corporations they work for.

Question is whether a person who in effect is the corporation for the purposes of the offence, in the sense that she was in control of the corporation, can be compelled to testify against the corp. or whether this would violate the right against self-incrimination?

Section 1 Several judicial statements suggest that there is a different balancing for

corporations [example of s. 2 where commercial expression may be easier tojustify infringing in the s. 1 phase than the more important types of expression].

“Everyone” (s.2, 7, 8-12): defines those who have the protection of some of the most important provisions of the Charter:

The fundamental freedoms of thought and expression, conscience and religion, peaceful assembly, and association guaranteed under section 2;

The right to life liberty and security of the person guaranteed under section 7; The rights against arbitrary search and seizure guaranteed under section 8; The right not to be arbitrarily detained or imprisoned under section 9; The rights on arrest under section 10; The right not to be subject to cruel and unusual treatment under section 12.


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“Everyone does not inherently include corporations:

no protection for freedom of religion (s.2) (R.v. Big M Drug Mart) no protection under. 7

“Everyone” includes corporations: They do enjoy freedom of expression, guaranteed by s.2(b) some protection for freedom of expression (Irwin Toy, RJR McDonald] (s.2(b)) protection under s. 8 [unreasonable search and seizure-(Hunter v. Southam)

R. v. Big M Drug mart Ltd., [1985]

Corporations do not have the right to freedom of religion.

Held: the law was held to be an infringement of s.2(a) because it compelled the observance of the Christian Sabbath. Justice Dickson held that although s.2(a) of the Charter did not apply to corporation, Big M Drug Mart could invoke the right as a defence to a criminal charge because “no one can be convicted of an offence under an unconstitutional law”

Irwin Toy Ltd. v. Quebec (Attorney General), [1989]

s.7 doesn’t apply to corporations. Corporation cannot be imprisoned, or lose its life; it cannot enjoy the right to life, liberty and security of the person guaranteed under section 7.

Held: that because a corporation cannot be imprisoned or lose its life, liberty and security of the person guaranteed under section 7.

This decision was confirmed by Supreme Court of Canada in R v Wholesale travel Group Inc. However, corporate accused does have the right to make a full answer and defence to the charges against it, a right that is protected under s.7; and corporations are entitled to protection against unreasonable search and seizure under section 8.

The protection available to corps is subject to the balancing requirement contained in section 1: a provision infringing a Charter right will nevertheless be upheld if it is a “reasonable... limit prescribed by law as can be demonstrably justified in a free and democratic society”. Several judicial statements have suggested that the balancing required by section 1 should be different if the person whose rights have been infringed is a corporation.

R. v. Agat Laboratories Ltd., [1998]:

It was held that a corporate accused does not have the right to make full answer and defence to the charges against it, a right that is protected under section 7.http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:38 PM

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Vann Media Inc. v. Oakville (Town), [2008]

Corporations have the right to freedom of expression, guaranteed by section 2(b).

Facts: a corporation challenged a municipal by-law severely restricting the location of billboard advertising within the municipality.

Held: the restrictions on the use of billboards were a violation of section 2(b), and that the by-law could not be justified under section 1. On appeal, the only issue was whether the by-law could be justified under section 1. The Ontario Court of Appeal, applying the test from R. v. Oakes, [1986] found that there was a rational connection between the restrictions on billboards and the town’s pressing and substantial objectives of minimizing urban blight and reducing distractions to promote drivers safety. The COA found that some of the limitations in the by-law went beyond what was necessary to minimally impair the corporation’s right to freedom of expression.

Example: a provision limiting signs to heavy industrial areas was not justified. Others, such as requirements to have billboards meet the same requirements for being set back from roads as buildings, were justifiable because they outweighed the deleterious effects on the corporation’s rights.

Not all cases in which corporations claim a violations of section 2(b) are concerned with commercial speech.

Toronto Star Newspapers Ltd. v. Canada, [2009] Corporations have the right to freedom of the press and expression.

Facts: Toronto Star and others successfully challenged a publication ban in relation to bail proceedings relating to several accused charged with terrorism-related offences.

Held: The Ontario Court of Appeal found that the ban violated the right of freedom of expression and the press.

Canadian Egg Marketing Agency v. Richardson, [1998]

Corporations have the right to freedom of association guaranteed by section 2(b), although in a limited sense.

Facts: the SCC considered a claim by a corporation that its freedom to associate was being infringed by territorial restrictions on where it could market its eggs. The right to associate was treated as a right that could be exercised by the corporation, though the issue was not specifically addressed by the Court. However, the egg marketing by the defendants was not found to be protected by that right, even though the Court recognized that it was impossible for the corporation to market eggs by itself.http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:38 PM

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Held: protecting a right to associate to market eggs would be tantamount to protecting the activity itself, which went beyond what was intended by the creation of the right. There has been no caselaw on the applicability of the other fundamental freedoms to corporations.

Corporations are entitled to protection against unreasonable search and seizure under section 8 (Hunter v. Southam).

It is not obvious how the rights under section 9 protecting against arbitrary detention and imprisonment or the rights under section 10 on being arrested can be applied to corporations. That may explain why there is no caselaw on the application of these provisions to corporations.

The protections available to corporations under the Charter is subject to the balancing requirement contained in section 1: a provision infringing a Charter right will nevertheless be upheld if it is a “reasonable limit prescribed by law as can be demonstrably justified in a free and democratic society.” Several judicial statements have suggested that the balancing required by section 1 should be different if the person whose rights have been infringed is a corporation.

Reference Re S.94(2) of the Motor Vehicle Act (British Columbia), [1985]

Mr Justice Lamer suggested in obiter that an exception under s. 1 could more easily be justified in such a case “even if it be decided that s.7 does extend to corporations, I think the balancing under s.1 of the public against the financial interests of a corporation would give very different results from that of balancing the public interest and the liberty or security of the person of a human being.”

This relative hostility to corporations claiming Charter rights was also expressed in strong terms by the dissenting justices in

RJR-MacDonald Inc. v. Canada (AG), [1995]

Expression solely for the purpose of financial gain from selling a product (cigarettes) with known deleterious effects on public health, was deserving of only narrow protection under the Charter.

Held: the court struck down the federal government’s ban on tobacco advertising and promotions and said that The courts must consider the expression in its factual and social context. Because of the harm of tobacco and the profit motive underlying its promotion, cigarette advertising was described as being entitled to very low degree of protection under section 1 of the Charter.

Even where a particular Charter provision has no application to corporations, a corporation may argue that a government measure is unconstitutional because it would violate the rights of an individual in certain circumstances


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Where a corporation has been charged with a penal offence and an individual charged with the same offence could successfully argue that the provision creating the offence violated her rights under the Charter in some way, the provision will be struck down as it applies to the corporation on the basis that no one may be convicted under an on unconstitutional law (R. v. Big M Drug Mart). This doctrine applies equally where the corporation is the subject of a civil suit (Canadian Egg Marketing) but will not be available to a corporation if the provision is expressed to apply only to corporations (Wholesale Travel).


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Incorporation Process

Van Duzer p 112-116CBCA 5, 6, 8, 9, 15/ Interpretation Act 20OBCA s 4, 5, 6, 7, 15/Interpretation Act 27

What is a business Corporation?

The CBCA does not apply to: Banks, which are governed by the Bank Act; Insurance Companies, which are governed by the Insurance Companies Act; Trust and loan companies, which are governed by the Trust and Loan Companies Act; Associations under the Co-operative Credit Associations Act (CBCA, s.3(4)).

The incorporation process:

If a business wants to carry on using a corporation they must file certain prescribed material with the branch of the federal government or the provincial government having responsibility for incorporation. To incorporate under the CBCA, it is necessary to file the following with the Corporations Directorate of Industry Canada:

Articles of incorporation (s.6, Form 1); Initial Registered Office Address and First Board of Directors (s.19(2), 106(1) Form 2); Notice of directors (s.106, Form 6); A name-search report on the proposed name of the corporation; and The fee of $250 (currently the fee is reduced to $200 if incorporation is done online. The

fee for incorporation under the OBCA is $360 ($300 if done online) plus a service provider fee).

The articles are the most important because they set out the fundamental characteristics of the corporation: name, class and number of shares authorized to be issued, number of directors, restrictions on transferring shares, and any restrictions on the business the corporation may carry on.

Once the documents are filed with the fee, the Director appointed to administer the CBCA issues a certificate of incorporation to which the articles are attached, certifying that the corporation was incorporated on the date of the certificate (CBCA, s.8-9). The corporation comes into existence on the date of this certificate (CBCA, s.9). The directors named in the Initial Registered Office Address and First Board of Directors hold office until the first meeting of shareholders where an election of directors is held (CBCA, s.106 (2)).

The provisions in the articles may be changed only by articles of amendment filed with the director after approval by a special resolution of shareholders. (A special resolution is a resolution is a resolution signed by all shareholders or passed at a meeting of shareholders by a


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majority of not less than 2/3 of the votes cast by shareholders present and voting at the meeting (CBCA, s.2(1)).

On incorporation the business may commence carrying on a business. The business may be a new one, or an existing business may be transferred to the corporation. Unlike a partnership, there is no need for a corporation to carry on business; its existence derives exclusively from issuance of the certificate under the statute. Several more steps are required before the corporation is fully organized:

1. The directors should have a meeting and pass a resolution to issue shares to the shareholders;

2. At the first meeting typically directors will adopt arrangements for carrying on formal legal business of the corporation, including how notice of meetings of directors and shareholders will be given, who may sign contracts, what constitutes a quorum for meetings, and what the offices of the corporation (e.g. president and secretary) will be. These arrangements are usually set out in a by law;

3. To take effect a by-law must be passed by the directors, but continues in effect only if it is passed by the shareholders in the next meeting following approval by directors (CBCA, s.103) (because making, amending and repealing by-laws ultimately requires shareholder approval, including these arrangements in a by-law serves to entrench them as part of the corporation’s constitution;

4. At the first meeting directors will pass resolutions dealing with organizational matters such as appointing officers and making banking arrangements such as authorizing certain people to sign cheques on behalf of the corporation. Once the shares are issued, it is common, though not necessary, to have a shareholder’s meeting at which any by-laws approved by the directors are voted on and an auditor is appointed.

5. A final organizational step that happens in corporations with few shareholders is that the shareholders enter into an agreement to govern their relationship with each other. Shareholders may to customise the way in which the corporation is governed by agreeing to alter the rights and obligations provided for in the CBCA, like how shareholders’ voting rights can be exercised and rules for share transfer.

In order to determine what rules govern a corp., its shareholders, directors and officers, it is necessary to take into account not just corporate statute and case law, but also the elements of the corporate constitution identified above:

Articles of incorporation; The by-laws; Director’s resolutions; Shareholders’ resolutions; Shareholders’ agreement.

All these documents are agreed to by the directors and shareholders, or both and represent, in that sense, private arrangements between them. The documents (other than directors’ resolutions and minutes of directors’ meetings) must be maintained by the corporation at its registered office (CBCA, s.20) in minute books and shareholders and creditors must be given access to them http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:38 PM

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(CBCA, s.21). Articles and any other document filed with the Director, such as Initial Registered Office and First Board of Directors, are placed in publicly accessible record


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Function of Corporate Law

Van Duzer 116-125 A business organization is used to run a business and is described as a nexus of relationships among stakeholders in the business:

Shareholders/owners; The managers (officers and directors); Employees; Creditors (both trade and financial); Customers; The public (especially the local community in which the corporation operates); Government.

Thus, it is important to understand what function corporations and corporate law fulfil in relation to these stakeholders. In general corporate law operates to encourage people to invest money in starting, maintaining and expanding businesses using a combination of mandatory and enabling rules and protections for the interests of other stakeholders.

The Basic corporate finance model:

posits that people are most likely to invest when risks are low and expected returns are high. Returns make take the form of interest on a loan, dividends on shares, an increase in the

price of shares, or something else Risk may be thought of as the likelihood that the expected returns will be received in

light of the range of possible returns the investor could receive.

Rational investors will invest only if the expected returns are sufficient. Risk and expected returns affect investment decision making. A business opportunity will become more attractive for investors as the returns increase or as the risk associated with those returns diminishes, or both. Corporate law does both and so operates to encourage investment. It also contains certain provisions that provide protection for other stakeholders though this is very much a secondary purpose of corporate law. The main legal ways in which the interests of other stakeholders are protected through regulation in other areas (such as commercial law, labour law, products liability law, environmental regulation, and so on).

Corporate Law Increases Returns by Decreasing Costs: Like partnership law, corporate law provides default rules tht apply to govern the relationship between the corporation and its shareholders in the absence of some other rule being agreed upon by the corporation and its shareholders and is expressed in the articles, by-laws, or a shareholders’ agreement. Thus, corporate law provides a sort of standard form contract that parties setting up a corporation may adopt, in whole or in part, or may replace with their own arrangements. It reduces transaction costs of setting up a corporation. http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:38 PM

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Corporate Law Decreases Shareholder risk

Limited Liability: Shareholders are often said to have limited liability for the obligations of the corporation, but this is really only a somewhat inaccurate way of saying the most a shareholder can lose is the amount of her investment. Corporate law provides that a shareholder is not directly liable for the debts and obligations of the corporation at all. Only the corporation is responsible for the obligations arising out of the business it carries on This is a consequence of the corporation being a separate legal person. By limiting shareholders’ potential loss, corporate law reduces the risk associated with investing. It caps the worst possible loss at 100% of the shareholders’ investment. Capping the risk encourages investment.

It is important to note that limited liability for shareholders does not eliminate risk but shifts it to other stakeholders, such as employees and creditors. Protecting shareholders against liability for the corporation’s obligations means limiting the pool of assets that others may claim against those belonging to the corporation. The result is that there is a greater likelihood that there will be insufficient assets to pay creditors, employees and others with financial claims against the corporation. Thus, limited liability strikes a balance between the interests of shareholders and those of claimants against the corporation—balance that favours shareholders.

Mandatory Rules Protecting All Shareholders

Corporate law reduces the risk of investing in a corporation by imposing certain mandatory rules designed to protect shareholders from abuse by management. Where management is not carried out by the shareholders themselves, there is a risk that managers will act to benefit their own interests instead of the corps and shareholders. Corporate law seeks to ensure that management is accountable through various mandatory rules. In addition to giving shareholders the power to determine collectively who becomes a director, corporate law imposes:

Standards of behaviour on directors and officers (fiduciary duty to act in the best interests of the corporation: (CBCA s.122(1) (a));

Shareholder monitoring of directors and officers (disclosure of financial information :(CBCA s.155 (1))

Remedial procedures if management misbehaves: (e.g. a compliance order: CBCA s.247).

Thus, corporate law decreases risk and increases expected returns for shareholders to the extent that they prevent directors and officers from enriching themselves at the expense of the corporation or shirking their responsibilities.

Mandatory Rules Protecting Minority Shareholder

Since corps operate on majority rule, any person or group of persons who has control of a majority of the votes attached to the corporation’s shares has control of the corporation. Such a person can control who are elected as directors and the outcome of shareholder votes. Because they are elected by majority vote, there is a risk that the directors will favour the interests of a http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:39 PM

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majority shareholder over those of the minority in exercising their power to manage the corporation. To guard against the risk of causing a majority shareholder from entering into a favourable contract with himself, mandatory rules require a two-thirds majority for what are deemed fundamental changes to the corporation, such as the sale of “all or substantially all the property of a corporation”: (CBCA, s.189 (3)), and give minority shareholders a right to be bought out if they disagree with the outcome of a vote approving such changes:(CBCA s.190)

Minority shareholders are entitled to seek relief if the directors or the corporation act in ways that are “oppressive or unfairly prejudicial to or that unfairly disregards” their interests: (CBCA, s.241). All these shareholder protection devices decrease the risks associated with minority shareholder investment and are likely to increase expected returns. Because they impose limits on control by majority shareholders, they increase the risks and decrease the returns for majority shareholder investors correspondingly:

Mandatory rules require a 2/3 majority for shareholder approval of certain fundamental changes to the constitution (s. 189(3)).

Mandatory rules give minority shareholders a right to be bought out if theydisagree with the outcome of a vote approving such change (s. 190).

Balancing Mandatory Rules Protecting the Non-shareholder Stakeholders (i.e. creditors)These mandatory rules represent intervention in the marketplace to shift the risks associated with business activities carried on by a corporation back to the corporation and the shareholders.

Limits on Limited Liability: Limited liability is designed to encourage entrepreneurship by shifting the risk of business activity from shareholders to other stakeholders (CBCA, s.45).

Creditors’ claims: managers may not pay dividends to shareholders if it is insolvent. (CBCA, s.42). This indirectly benefits the creditors and others with financial claims against the corporation like employees by ensuring that assets needed to pay those obligations are not transferred to shareholders.

Personal Liability of Directors and Officers for:

Torts: Other rules impose personal liability on management (e.g. torts). Once source of personal liability for managers is torts. Directors and officers may be held liable for torts committed in connection with the corporation’s business where they have some involvement in the activity constituting the tort. There is a conceptual distinction between imposing liability on corporate managers - directors and officers - and imposing it on those putting their money at risk - shareholders. Liability is imposed based on the policy that individuals should be responsible for their torts.

Unpaid wages: directors are liable for unpaid wages in certain limited circumstances (CBCA, s.119). They may also incur liability under federal and provincial statutes for amounts withheld form employee wages that the corporation has failed to remit to CRA. A finding of liability means that the manager is guilty of an offence and subject to a fine or imprisonment


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Other Rules Protecting Non-Shareholder Stakeholders

Name restrictions: CBCA and other corporate law statutes require all corporations to have as part of their name a word or abbreviation which indicates that the business is being carried on by an entity with limited liability. Under the CBCA, every corporation’s name must include one of the following: Corp, Ltd or Inc: (CBCA, s.10(1)):

Part of the name must include indication of limited liability (i.e. Inc. or Corp or Ltd.); this must be displayed on all contracts, invoices, negotiable instruments (CBCA, s.

10(5)); A corporation may use another name , but the other name must not include one of the

listed legal elements so people dealing with it do not believe they are dealing with a different corporation;

The full corporate name must appear as well; Failing to comply with the requirement to set out the full corporate name on the listed

documents is an offence (CBCA, ss.10(5) and 251).

No minimum investment and Restrictions on use of Corporate Funds:Statutes in Canada no longer require any minimum investment by shareholders (called “capitalization”); a corporation may issue one share for $1. This can encourage frivolous incorporations, but money invested by shareholders does not create a pool against which creditors and others may claim. It will be used for the purposes of the business, such as to purchase assets or to pay expenses; and rules have been designed to prevent certain uses of corporations’ assets that will render it unable to pay its obligations.

Canadian statutes also impose rules designed to prevent certain uses of a corporation’s assets that will render it unable to pay its obligations. The CBCA contains restrictions on the use of corporate funds and distributions to shareholders. The corporation cannot:

Issue shares on credit (CBCA s.25(3)); Pay dividends; Redeem or repurchase shares, Make payments on the exercise of certain shareholder remedies Pay commissions in connection with the purchase of shares (CBCA, s.41); Pay indemnities to directors and officers to reimburse them for liabilities incurred in

connection with fulfilling their responsibilities ( CBCA, s.124)

If the directors had reasonable grounds to believe the corporation is insolvent or would be made insolvent by the distribution (CBCA, s. 34, 35, 36, 190(26) and 241(6)). Directors are personally responsible for any payment made in contravention of these rules (CBCA, s.118) if they meet one of the two tests:

1. Solvency Test-Corporation is or would be made insolvent;2. Capital Impairment Test-Realizable value of the corporation’s assets would be less than its liabilities and stated capital for all classes of shares.


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Oppression (s. 241(2)):The corporation and its directors may be liable if they act in a manner that is “oppressive to or its unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer: (CBCA, s. 241(2)).

The class of persons who can seek relief includes: “any other person who, in the discretion of the court, is a proper person to make an application” (CBCA, s.238). In an increasing number of cases, creditors and other types of claimants have been permitted to seek relief under this provision.

The range of relief the court may grant is virtually unlimited, and personal liability has been imposed on directors and shareholders.

Fiduciary Duty

Each director and officer has a fiduciary duty to act in the best interests of the corporation and a duty to exercise reasonable care, diligence, and skill in discharging her obligations: (CBCA, s.122(1)). SCC confirmed that fiduciary duty is owed exclusively to the corporation but that the duty includes the obligation to take stakeholder interests into account (BCE Inc. v. 1976 Debenture Holders, [2008]). This encourages socially responsible behaviour. In this case, the court confirmed that the standard of care in the CBCA may have to be met in relation to other stakeholders as well as shareholders.

Public Filings

Corporate statutes provide for certain filings so that people dealing with a corporation will be able to find out something about its activities. The articles, initial registered address, and First Board of Directors become matters of public record once filed. Whenever any of the information in any of these documents changes, a new filing must be made. As well, certain annual filings must be made under the laws of the jurisdiction in which incorporation took place. For example, an annual return with certain basic information must be filed under the CBCA (s. 263, Form 22).

Corporations doing business in a province, whenever they were incorporated, must also make certain information filings. E.g. a corporation doing business in Ontario must file an initial return and annual return. Corporations that have distributed their shares to the public must file their financial statements under the CBCA, s.160). Additonal filings for public corporations are required under provincial securities laws.


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Corporate Law and Securities Law

VanDuzer 464-473

Securities Regulation: They are complex, special rules that apply only to corporations that have sold their shares to the public. Securities are issued by business organizations to investors in order to raise the money they need to carry on their business. Securities are the funds contributed by investors in exchange for securities constitute the capital of a business and may be used to:

Buy production equipment; Inventory; Other assets needed to start a new business or to expand.

Securities law involves special rules that apply only to public corporations. Provincial securities laws include a basic scheme of securities regulation based on the Ontario legislation that regulates the:

Issuance of securities by businesses Marketplace in which securities are traded once they are issued

The main goal of securities regulation is to promote the fair and efficient operation of securities markets with a view to encouraging investors to make their money available to businesses by paying their securities. Each province has a law concerned with regulating the marketplace for the trading of securities with a view to protecting investors from:

Unfair Improper fraudulent practices Ensuring that securities markets function fairly and efficiently so that investors will have

confidence in their operation and be encouraged to invest: (OSA, s.1.1) This requires disclosure by businesses that issue their securities so that buyers and sellers in the market make their decisions on an informed basis.

The CBCA contains few provisions that parallel some of the provisions of provincial securities laws. These provisions are enacted under the federal government’s jurisdiction over corporate law and apply only to corporations governed under the CBCA. (This means that if a CBCA-incorporated corporation offers its shares for a sale in the province, both the CBCA and the provincial securities laws will apply.

The 5 Aspects of Securities Regulation

1. Securities market participants: investment advisers and securities dealers such as BMO Nesbitt Burns, Scotia McLeod, who make a business of being involved in or advising regarding securities transactions, are subject to registration requirements and are regulated to ensure that they meet high standards of integrity competence, financial solvency and responsibility.


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Provincial regulators also oversee the activities of so called self-regulating organizations (SROs) that regulate the operations and practice standards of their members.

2. Disclosure: Requirements for businesses offering securities to the public to disclose timely and accurate information about the securities and their businesses when the securities are first offered for sale, and thereafter on a regular basis, as well as whenever something happens that is likely to affect the value of the securities.

3. Insider Trading: Rules governing securities trading by directors, officers, significant shareholders, and other insiders of corporations. Due to special knowledge such people have about the corporations they are associated with, insider trading of securities is closely regulated under provincial securities laws to ensure that these individuals do not take advantage of information that has not been publicly disclosed.

4. Takeover Bids: The regulation of bids to take over control of a public corporation by buying its shares. The Ontario Securities Commission (OSC) prosecutes offences under the OSA. Under its public jurisdiction the OSC may order that a person’s registration as a securities market participant be terminated, trading case in the shares of a particular corporation or by a particular person, or a person resign as a director or officer of a corporation and the person be prohibited from becoming a director or officer of a public corporation in Ontario for the future: (OSA s.127(1)). Such takeover bids are regulated under the OSA to ensure that shareholders have a meaningful opportunity to participate in any bid that is made and that they are fairly treated.

Much of the detailed rules regarding disclosure by securities issuers, exemptions, and other aspects of securities regulation are contained in the OSC rules, and the minister of finance has residual power to reject rules proposed by the OSC (OSA, ss. 143.2 and 143.3).

5. Corporate Governance Rules: (Best Practices and public disclosure). Responsibility of a specialized agency; the OSC prosecutes offences under the Ontario Securities Act (OSA). It has wide discretion to make orders itself relating to marketplace activities:

Terminate a person’s registration; Order trading to cease; Compel a person resign as director: (OSC, s.127(1)).

National Policy Statements are issued by the Canadian Securities Administrators (CSA) an unofficial body to which all provincial and territorial regulators belong. These statements represent an effort by securities regulators to co-ordinate their activities and to promote uniformity and predictability in securities market regulation across Canada. The CSA also issues National Instruments that are to be adopted and implemented by provincial jurisdictions either as rules or regulations having binding legal effect.

If a CBCA-incorporated corporation offers its shares for sale in a province, both the CBCA and the provincial securities laws will apply. One of the first issues we will address is the difference in the scope of application of corporate and securities laws.


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Distinctions Between Corporate Law and Securities Law:

Corproate Law Securities Law Both

1) Scope of application:

Current shareholders corporation.

Shares.

Prospective investors and current investors.

Securities: broad claims against corporation.

Creditors and stakeholders

2) Enforcement:

Corporate statutes allows government to enforce the law, but it doesn’t its left up those parties affected.

Ontario Securities Commission has broad discretionary power (quasi-judicial power) regulate corporate activity.

Only recently there has been concern for corporate governance.

Disclosure to shareholders in meetings being fair to minority shareholders.

3) Substantive law: Corporate laws: incorporation, shares

Securities law.


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Scope of Application: Corporate and securities law differ in their scope of application. Corporate laws of jurisdiction are concerned only with corporations incorporated in that jurisdiction and those laws apply to the corporation and its shareholders whether or not the corporation operates in that jurisdiction or the shareholders are resident there.

Securities laws are concerned with all business organizations, not just corporations, selling or offering to sell securities to investors within that jurisdiction regardless of the jurisdiction under which the business organization was created. Securities laws are directed towards prospective investors and much as current shareholders, whereas for the most part of corporate law affects only current shareholders of a corporation.“Securities” include a much broader array of claims against a corporation than shares.

Enforcement: Securities regulators such as the OSC have broad discretionary powers to ensure participants in the securities markets are acting in the public interest: (OSA, s.127). In some provinces, especially Ontario, the securities commission actively uses its administrative and quasi-judicial powers to regulate corporate activity.

Substantive Law: Corporate law addressed a number of areas not dealt with in securities laws, including the nature of the corporation, the enabling rules regarding nature of shares are not addressed at all by securities law. Securities laws are typically mandatory in nature and deal with a number of areas not covered in corporate statutes:

The regulation of professional securities markets participants Requiring disclosure by business organizations that have issued or are issuing their

securities to the public.

In the interest of investor protection, securities laws have evolved to overlap with corporate law in many ways:

Both govern the disclosure that must be made to shareholders in connection with meetings, and both are concerned with ensuring that corporate decisions are made in ways that are fair to minority shareholder interest;

A federal corporation must comply with the CBCA and the securities law requirement in each jurisdiction in which its securities holders are resident or in which it offers its securities which relate to, for example proxy solicitation and contents of proxy circulars;

Provincially incorporated corps must comply with the requirements of their jurisdiction of incorporation as well as the securities laws of each jurisdiction in which their securities are held or offered.

Because of differences in the scope of application and overlaps in the substantive requirements in corporate and securities laws, many corporations, especially those with shareholders in more than one province are subject to multiple sometime different requirements. The complexity and costs associated with distinct provincial and territorial securities regulation schemes has caused corporations and securities market participants to lobby for a single set of requirements. There http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:39 PM

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have been proposals to create a single regulator. In June 1996, there was a proposal to establish a national securities regulator to replace the various provincial regulators. If it had been implemented, this agreement would have greatly simplified compliance with securities requirements in Canada.

In January 2009, the minister of Finance announced the creation of the Canadian Securities Regulator Transition Office, which began operations in July 2009. The mandate of the new office is to “ensure an effective transition to a Canadian securities regulator” and develop a federal securities act. Progress has been made and continues to be made to reduce the burden of multiple securities regulation regimes in Canada. Through the CSA, Canadian securities regulators are continuing to work toward harmonizing provincial and territorial requirements. In 1999, the CSA also implemented the mutual reliance review system (MRRS) under which since 1999 the analysis and actions of one securities regulator are accepted by regulators in other provinces. More recently, all provinces except Ontario, replaced the MMRS by implementing a “passport system” under which a business may file a prospectus, obtain an exemption, or register as securities dealer or other market participant in any Canadian jurisdiction.

What is a Security?

Securities are issued by business organizations to investors in order to raise the money they need to carry on their businesses. The funds contributed by investors in exchange for securities constitute the capital of a business and may be used to buy production equipment, inventory, and other assets needed to start a new business or to expand an existing business.

Security is defined broadly to ensure that the protection for investors provided by securities legislation is not avoided (OSA s.1(1)) and are not restricted to:

Shares Debt obligations, such as bonds, which are traded in public markets at market prices Options to purchase shares Units in limited partnerships Mutual funds Investment contract

In general a security is any “evidence of title to or interest in the capital assets, property, profits, earnings or royalties of any person or company.” (OSA) The Ontario Securities Act’s definition then goes on to provide a non-exhaustive list of 16 examples of securities including an “investment contract” which exists whenever the following criteria are met: an investment of money is made in a common enterprise with an exception of profit solely from the efforts of others. The common enterprise requirement means that the return to the investor is related to the ability and skill of the person to whom the investor entrusts his funds.

Each province has a law concerned with regulating the marketplace for the trading of securities. Markets in which securities are traded are often referred to as “capital markets” because selling securities is one of the ways in which businesses raise capital for use in their activities.


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Pacific Coast Coin Exchange of Canada v Ontario (Securities Commission)¸ [1975]

Investment contracts are securities.

Issue: was whether the contracts for the purchase of silver on particular terms should be considered securities

Held: SCC concluded that, because the returns to the purchasers depended on these managerial strategies working successfully and Pacific Coin remaining solvent, the purchase contracts were investment contracts and therefore fell within the definition of security.

Regulation of Securities Dealers and Other Professional Participants in the Market:

Professional securities market participants assist in bringing together those with money to invest and businesses seeking to raise funds. They are regulated by the SROs to which they belong as well as through requirements in the Ontario Securities Act that they be registered. The main categories of securities-market professionals are:

Underwriters: Market intermediaries that assist businesses in selling their securities in two main ways:Firm Commitment Underwriting: they may undertake to buy the entire issue of securities from a business seeking to raise money and they try to resell the securities to its clients and others in return for a commission, this is called “firm commitment underwriting”. Underwriters take the risk that purchasers for the securities will not be found.Best Efforts Underwriting: Alternatively underwriters may commit only to marketing the securities on behalf of the issuer called “best efforts underwriting”. Here the underwriter has no responsibility for any securities that it cannot find a buyer for.

Brokers: Act on behalf of others in buying and selling of securities, also called traders. Dealers: Trade in securities for themselves as principles. Advisers: Advise people regarding purchases of the securities.

As noted the primary method of regulating securities-market participants is to require then to register as a condition of their participation in securities markets (OSA s.25). Certain categories of people such as lawyers do not need to register as advisers so long as any investment advice provided is solely incidental to their principal business or occupation: (OSA s. 34(b)).

Regulation of the Distribution of Securities

Simplest way to sell is for the management of the business to negotiate the sale of securities with investors directly; eventually this will be on a higher scale as the business grows. When a business and its financial needs have reached a certain scale, it may seek to sell its securities directly to a small number of institutional investors, like banks, trust companies, insurance companies and pension funds. These transactions are often facilitated with a securities broker.When large amounts of capital are needed and the issuer decides to sell securities to the general public, the issuer will engage the services of an underwriter, both for advice and marketing.http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:39 PM

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Prospectus Requirements:

Under the Ontario Securities Act a prospectus must be prepared and filed before a person can trade in the security; if the trade constitutes a “distribution” and no exemption is available:(OSA s.53). A prospectus is a long detailed document that must provide “full true and plain disclosure of all material facts” about the securities offered (OSA s. 56).

Each of the following kinds of trades is a distribution:

An issue of previously unissued securities; A disposition of any securities by a control person; A trade in previously issued securities that were acquired under an exemption from the

prospectus requirements :(OSA s. 1(1))

To fulfil prospectus requirements, it is necessary to prepare and file a prospectus with the securities regulators in each provincial jurisdiction in which it is intended to offer the securities for sale. Each securities regulator must issue a receipt for the prospectus. When the final prospectus is filed and a receipt has been issued by the regulator, the securities can be sold.

Exemptions from prospectus requirements

Securities laws provide various exemptions from the requirement to provide prospectus disclosures. In the absence of these exemptions the prospectus requirements would make it impractical for small-medium sized businesses to raise money other than by borrowing from a financial institution. Any new issuance of shares would be a distribution requiring prospectus disclosure, no matter how few investors were involved or how little capital was being raised:

An exemption is available where securities involve little risk to the investor such as Canada Savings Bonds (OSA S 73(1)a)

An exemption is also available if the purchaser does not need the protection of the securities legislation, perhaps because it is a registered securities dealer, a financial institution or the government. These sorts of purchasers are “accredited investors” under the OSA (s 72(1)(a), OSC Rule 45-501 s1.1. They are deemed sufficiently sophisticated to protect their own interests and do not need the protection of mandatory disclosure obligations. There is also an exemption from registration in connection with trades in securities of a “closely held issuer” defined as an issuer meeting the following criteria after the trade

Finally it is possible to apply to the OSC for an exemption from the prospectus requirements if a trade does not fit within any of the specific exemptions (OSA s.74).


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Resale RestrictionsUnder a “closed system” either a prospectus must be filed in relation to the securities of the issuer or a specific exemption must be found in order for the securities to be issued. Once prospectus requirements have been met and securities issued, they may be resold, subject to certain limitations:

If no prospectus is filed and securities were issued under an exemption, they may be resold only pursuant to another exemption.

The only exception to the requirement of an exemption is if the issuer of the securities has become subject to the public disclosure obligations under the Ontario Securities Act.

If securities are sold under an exemption, the purchaser cannot resell them freely. Under the closed system securities acquired under an exemption may be sold only by filing a prospectus in relation to the securities or after the issuer has been a “reporting issuer” for a minimum period of time (called the seasoning period) and, in some cases, after a specified time period (called a restriction period) has expired.

In general under the resale rules, securities may be resold freely, so long as:

The issuing corporation has been a reporting issuer for at least a seasoning period of either four months, if the issuer is a “qualifying issuer” or twelve months for all other issuers, and

A restricted period beginning at the date of the initial exemption trade or the date that the issuer became a reporting issuer, whichever is later, has expired.

o Restricted periods are 4 months for qualifying issuers, and 12 months for all other issuers.

Civil Liability: Prospectus The OSA imposes civil liability on the issuing corporation, the underwriter, the directors, and any officer who signed the prospectus for any misrepresentation in the prospectus (OSA s.130).Where a prospectus contains a misrepresentation, a purchaser may claim rescission (may return their securities to the issuer and receive their money back), or damages against the underwriter who sold her the securities and damages against the other possible defendants.

A defence is available for persons, other than the issuer, if they made adequate inquiries such that they had reasonable grounds to believe that there was no misrepresentations (OSA ss130 (5),131, 132). This is called due diligence defence. The issuer can escape liability only if it can show that the investor knew of the misrepresentations at the time of the investment (s.130 2).

Continuous and Timely Disclosure Once a corporation has become a reporting issuer, it has certain mandatory “continuous” disclosure obligations to ensure that he buyers and sellers have sufficient up to date information to make informed decisions. http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:39 PM

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Continuous disclosure requires issuers to distribute to security holders certain financial information as well as certain information in connection with annual and special meetings of securities holders.

Insider TradingNot all information is public, however, some information may be known only to senior management, the directors, or others closely associated with the issuer. If the public disclosure of such “inside information” would have an effect on the price of an issuer’s securities, any one in possession of such information will have an advantage over other traders. The perceived unfairness of this inequality of information in the marker has led to securities laws regulating what is referred to as “insider trading”. At common law, there was no prohibition on insider trading.

The Statutory SchemeStatutory schemes governing insider trading are really complex. In most provinces the scheme has the following elements:

An obligation on insiders to report their trades; Prohibition on trading with undisclosed information; Liability to the issuer for profits made by persons from trading with undisclosed

information; Liability to other traders in the marketplace for damages suffered as a result of trading

with person with undisclosed information; Quasi-criminal liability imposed on persons trading with undisclosed information,

including fines and imprisonment; Administrative sanctions on persons trading with undisclosed information, such as being

banned from trading securities.

Depending on the jurisdiction, trading rules may be found in corporate statutes, in securities statues or both. Since the amendments in the 2001 Act, the CBCA only imposes prohibition on trading with insider information and only in certain circumstances.

Definition of Insider:Who does the scheme apply to? Ontario Securities Act defines who are insiders:

The corporation issuing the securities; Directors and senior officers of the corporation; Directors and senior officers of subsidiary corporations and corporations that are

themselves insiders, and Persons who own more than 10% of the shares of the corporation or who exercise control

over more than 10% of the votes attached to shares of the corporation (OSA s1(1)).


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Reporting ObligationsInsiders are free to buy and sell securities in the corporations. They must, however, report all trades they make (OSA s.107). Under the Ontario Securities Act, reporting obligations apply only to insiders of reporting issuers.In Ontario, reports must be filed with the Ontario Securities Commission within 10 days of the date on which a trade is made by an insider or by which a person became an insider (OSA ss 107 (1) and (2)).

Regulation of Trading with Insider Information

Scope of applicationOSA prohibits insiders and certain other persons in a special relationship with a reporting issuer from:

Trading with information regarding a material change or a material fact that has not been generally disclosed;

Disclosing insider information to someone else (a “tippee”) who may profit by trading with such information (OSA S76.) Breach of this prohibition can lead to:

Fines; Imprisonment; Administrative sanctions from the Ontario Securities Commission; Civil liability.

Liability attaches to any person or corporation in a “special relationship” with a reporting issuer. Such special relationships may arise in a wide variety of circumstances including: Under the CBCA, all these persons are defined as insiders (CBCA s131(1), (3) & (3.1).

Prohibition on Trading with Inside InformationEvery person in such a special relationship with a reporting issuer, as defined, may not purchase or sell the issuer’s securities with knowledge of a material fact or of a material change concerning the issuer that has not been generally disclosed.

any person that trades with this info or gives a tip is guilty of an offence under the Ontario Securities Act s. 76 and 122);

any “tippee” that trades with the information or passes it along is also liable.

Liability may be avoided if the person in the special relationship can prove that she reasonably believed that:

The material fact or change had been generally disclosed; or The material fact or change was known or ought reasonably to have been known to the

seller or purchaser (OSA s76(4), OSA regulations s 175 (5).

Reasonable mistake of fact is also a defence that has been established in case law. A “tippee” can also avoid liability if she reasonably believed that the person from whom she received the http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:39 PM

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information was not in a special relationship with the issuer (OSA s.76(5) (e)). Any person who contravenes this is liable to imprisonment for 2 years (OSA s122(1) or a fine. The Ontario Securities Act can also enforce administrative sanctions.

Civil Liability: Insider TradingUnder both the CBCA and OSA an insider or other person in a special relationship, including a “tippee”, who trades with insider information is liable to compensate the seller or the purchaser, as the case may be, for damages resulting from the trade (OSA s134(1); CBCA s 131(4).

Liability may be avoided if:

The person in the special relationship can prove that she reasonably believed that the material fact or change has been generally disclosed; or

The material fact or change was known or ought reasonably to have been known to the seller or purchaser (OSA ss134(1) CBCA s131(4).

Similar rules govern the liability of an insider or other person in a special relationship who gives a tip. She is liable to compensate any person who thereafter sells securities of the reporting issuer to or buys such securities from the “tippee”. The same defences mentioned above are available (OSA s134(2) (Reasonable belief and due diligence). The “tipper” may also avoid liability if the info was given in the necessary course of business (OSA s134 (2) (f) (g); CBCA s131 (6)(c)).

Takeover BidsTakeover bid occurs when someone (the bidder) makes an offer to some or all shareholder of a public corporation (the target). A takeover occurs when control over management of a corporation or another issuer changes. A shareholder may solicit the votes of other shareholders with a view to changing the board of directors and having new management team put into place; if successful, this change in management would be a takeover. Takeover can also be accomplished through various kinds of consensual transactions, such as amalgamations, acquisition, but generally, they are done on a take it or leave it basis, no negotiating.Takeover bid occurs when an “offer to acquire” outstanding voting or equity securities of a class is made and the acquisition would result in the bidder ending up more than 20% of the outstanding securities of that class (OSA s.89(1)). Where a person already owns 20% or more of the outstanding securities of any class each additional purchase is a takeover bid. An offer by a corporation to acquire its own securities is also a takeover bid, usually referred to as an “issue bid.”

In order to make a takeover bid, the bidder must prepare a disclosure document called a takeover bid circular and send it to all securities holders to who the bid is made, the target corporation, and the securities authorities in each jurisdiction (OSA ss90, 100, OSA regulations s170 form 2).Alternatively the bidder may make a public announcement. All material must be filed with the Ontario Securities Commission.

The bidder, directors and anyone else who signs the takeover bid circular are civilly liable for any misrepresentation in the circular (OSA s131). Persons other than the offeror, have a defence if they show that they had reasonable grounds for believing that there was no misrepresentation. http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:39 PM

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Tthe bidders’ only defence is that the security holder of the target, knew of the misrepresentation (OSA s131(4).

Once the bid is made, it must remain open for acceptance by the “offeree” securities holder for at least 35 days (OSA s95(2)). Securities tendered under a takeover bid must be taken up by the bidder within 10 days of the expiry of the bid and must be paid for within 3 days thereafter (OSA ss95(9) and (10)). All shareholders must be offered identical consideration (OSA ss97 (1), and (2))

Sometimes competing takeover bids will be made for a target corporation. This is highly desirable.

ExemptionsVariety of transactions that would otherwise be takeover bids are not subject to the requirements described above. The general objective here is to exempt certain transactions where the burden of complying with the complex scheme of takeover bid regulation is likely to exceed the benefits to investors:

Most common exemption relied upon is for the acquisition of securities of a closely held corporation;

Exemption also available for the acquisition of a controlling block of securities from up to 5 shareholders so long as the offer price does not exceed the market price by more than 15% (OSA s03(1)(c)).

“Normal course purchases”: Any acquisition of securities by a person with 20% of the securities of a particular class falls within the definition of takeover bid and so would be subject to the full requirements above.

Securities laws exempt purchases of up to 5% of the securities of a class within 12 month period at the market price (OSA s93(1)(b)).

An exemption is also available where only a relatively small number of holders of securities subject of a bid are in Ontario and the bid is regulated elsewhere. This is referred to as de minimus exemption

Provincial securities laws require disclosure regarding takeover bids. Prior to 2001 amendments, they were also regulated under CBCA. With these amendments, the federal government no longer regulates takeover bids.

Compulsory AcquisitionsWhere a takeover bidder has successfully acquired the overwhelming majority of the shares of the class subject to the bid, the bidder has a right to acquire the remaining securities it does not own. Under the CBCA and OBCA if a bidder has acquired 90% of the securities of a class subject to a takeover bid, not counting those held by the bidder when the bid was made, within 120 days of making the bid, the bidder is entitled to put the holders of shares not tendered to an election. The shareholders must either transfer their shares to the bidder on the terms of the bid or notify the bidder that they demand to be paid fair market value for their shares (CBCA s206; OBCA s188). In addition, where a bidder has acquired 90% if a class of shares, any shareholder who has not tendered her shares is entitled to force the target corporation to acquire her shares.


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8. Nature of the Corporation

Van Duzer 125-129Casebook 68-95CBCA 6, 10, 15, 45(1), 212OBCA 10, 92(1)Forms 1, 2, 3, 6Business Names Act 1, 2, 6, 7,10

Nature of Corporation:

Artificial being; Invisible; intangible; Existing only in contemplation of law.

Separate Legal Existence and Limited Liability

Incorporation brings into existence a new legal person and the rights and obligations may bethought of as analogous to those of a human person. CBCA s.15(1) provides that a “corporation has the capacity and subject to this act, the rights, powers and privileges of a natural person”

Salomon v. Salomon & Co., [897]

Famously cited for the proposition that a corporation’s legal personality is separate and independent from its shareholder’s personalities. Formal recognition of private companies and their being relieved from requirements placed on public companies.

2 basic propositions:

1. Corporations have separate legal existence apart from the personalities of its shareholder;2. No requirement that shareholders must hold their shares beneficially and therefore no

objection to a one-person corporation.

Facts: Salomon is a sole proprietor. Salomon set up a corporation for his shoe and boot business (leather merchant). At the time he had to have 7 shareholders, so he gave his family each one share. Then he put the business into the corporation in exchange for 20,000 shares and debentures. Essentially he was still running the business the same as before, he had virtually all the shares. But you cannot simply decree my business is now a corporation, you have to create the business first then sell the business to the corporation. Important legal steps. His business was worth about $10,000. He sold it for $40,000, gross overvalue. He was going to get paid partly in shares and partly in debentures of $10,000 (just an I owe you) in corp. This debenture was then secured on all assets of the business; you get the first charge on everything the business owns. First claim on every asset (e.g. If he goes bankrupt, he has given himself the first charge on the entire business (10,000 is the worth of the business), so he gets it all before other


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creditors can. As a result, after the transfer, he held the vast majority of the shares and was in effective control of the corporation as well as being a secured creditor.

After a while the business accrued creditors and went under and was wound up. A liquidator was appointed and liquidation forced the sale of the company’s assets. If the secured claim of Salomon were paid first, as normally would be, there would have been no assets left out of which to pay the other creditors who were unsecured. So, because Salomon was owed 10,000 debentures (which are required to be paid out first as a secured credit) he was to be paid out first and left all the other creditors in the cold.

The liquidator claimed that in the corporation was a sham was a mere alias or agent of Salomon whereby Salomon was carrying on business in another name. It was argued that Salomon was still personally carrying on the business as the principal and that the corporation was merely his agent for doing so. Since the corporation was only acting on his behalf as an agent, Salomon’s claim under the debentures was really a claim against himself and unenforceable.

Held: HOL rejected the liquidator’s claim. It held that what Salomon had done was exactly what was required of the Companies Act and that all the requirements of the Act had been complied with. The structure worked and that Salomon was entitled to get paid first. It also held the creditors own fault in not realising this. HOL felt business people need to know how to protect themselves. Salomon went through all the steps and so we should treat the Corporation as a separate legal entity; and if that separate legal entity has chosen to contract with Salomon with the result the he gets paid before all the other creditors, so be it.

What the court is NOT saying, is that you can incorporate for the purpose of defeating known creditors. (on the facts the court found that this corporation was set up legitimately and was not for the purpose of getting out of known debts). Fact that the HOL endorsed this scheme was very dramatic at the time.

Prof suggests there are other aspects that made it so famous:

It legitimated a practice that we know from documents was common in UK at that time; this was incorporating corporations under Companies Act 1862 in a way that was exploiting some loopholes. The act required every corporation to have 7 shareholders, so often 7 people who had nothing to do with business would pretend to be shareholders in order to get a corporation set up.

Salomon’s aggressive use of his strategy – if you’re a sole proprietor where all assets/liabilities are your own, it’s not possible to somehow get yourself in a position where you get to keep some of the assets and some of your creditors go wanting. If there aren’t enough assets in your business to pay them you are going to have to dip into something else. He found a way to make himself a preferred creditor of his own business assets. He got to keep stuff whilst some of his creditors went unpaid. This made him strongly criticized.


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2 key consequences of Salomon: (1) the separate legal existence of the corporation means that a shareholder may also be a creditor or even a secured creditor of the corporation (2) a corporation owns its own property; the shareholders have property like rights in the corporation through their shares, but no property interest in the assets of the corporation.

The bundle of rights that shareholders will have depends on the provisions set out in the corporation’s articles and the corporate statute. Shares represent a claim to the residual value of the corporation after the claims of all creditors have been paid (where there is only one class of shares, it must have this residual claim).

The courts considered the nature of the residual claim represented by shares of corporation in:

Kosmopoulos v. Constitution Insurance Co. of Canada, [1983]

General rule: corporation is a legal entity distinct from its shareholders (Salomon v Salomon);

The law on when a court may disregard this principle by “lifting the corporate veil and regarding the company as a mere “agent” or “puppet” of its controlling shareholder or parent corporation follows no consistent principle. The separate entities principle is not enforced when it would yield a result too flagrantly opposed to justice, convenience or the interests of the revenue. Those who have chosen the benefits of the incorporation must bear the corresponding burdens.

Facts: Kosmopoulos owned a leather goods store at 652 Yonge St, Toronto. He incorporated Kosmopoulos Leather Goods Limited under “Spring Leather Goods.” Kosmopulos gets advice that he should use a corporation to carry on the business, but he doesn’t really understand the implications so he carries on some of the affairs in the name of himself instead of the corporation (in this case specifically the insurance was taken out in his name but also took the bank account out in his own name and leased the property in his own name). Bank account was personally guaranteed by Mr. Kosmopoulos. He was not careful to distinguish his personal rights and obliigations from those of the corporation and, as a result, the insurance of the assets of the corporation’s business was taken out in his name rather than the name rather than the name of the corporation.

A fire started next door to the leather goods store and the premises and contents sustained damage from fire smoke and water. The building burnt down and when he tried to claim the insurance, the insurance company refused; claimed that the assets were in the name of the business and the policy was in the name of Kosmopulos, and he did not have an insurable interest in the company (because it is its ownseparate legal entity).

Held: The SCC rules that Kosmopoulos had an insurable interest due to his interest as the sole shareholder in the residual value of the corporation’s assets that gave him such a substantial stake in those assets. Confined the rule in Macuara (HOL) that shareholders cannot have an insurable interest in a corporation. Stated that his interpretation was that to the extent that the http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:39 PM

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SCC had accepted that case, it had only done so where there was more than one shareholder. Where there is a sole shareholder, there can be an insurable interest.Note that the court here was not willing to disregard the separate legal personality (one of the things Kosmopoulos argued) so instead they found an insurable interest regardless.

Modern corporate law now permits the creation of companies with one shareholder. The identity then between the company and that sole shareholder and director is such that an insurable interest in the company’s assets may be found in sole shareholder. So, where there are 3 shareholders -- no insurable interest, but sole shareholder -- insurable interest

Since a corporation is a separate entity, a shareholder may be an employee of the corporation in which he holds shares just as he may be a secured creditor:

Lees v. Lees Air Farming Ltd., [1960]

Application of the separate legal entity principle: It is possible to be both a shareholder and an employee. It is a parallel case to the Thorne v New Brunswick case (cannot be a partner and an employee separately, partnership isn’t separate legal entity).

Facts: Lee had incorporated a sole shareholder corporation. Mr. Lee was only human being, but because it was incorporated it was able to be separate legal person in law. Appellant’s husband formed the respondent company for the purpose of carrying on a business of aerial top dressing. He held all the issued shares of the company with the exception of one. He was killed while piloting the company’s aircraft. Example of how seriously our law takes the separate legal entity concept.

Held: Lord Morris: the substantial question is whether the deceased was a “worker” within the meaning of the Workers Compensation Act 1922, and its amendments. Was he a person who entered into or worked under a contract of service with an employer? 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. There is no reason, in this case, why a contract of service could not also be negotiated. It would be the company and not the deceased giving orders since Salomon applies. Control would remain with the company whoever might be the agent of the company to exercise it. The company and the deceased were separate legal entities. Thus contractual relations established between them and the company was entitled to give an order to the deceased

Once important implication for lawyers of the separation between the legal personality of the corporation and its shareholders is that a corporation may need to be provided with legal advice separately from the shareholders. The interests of a majority shareholder, a minority shareholder, and the corporation itself may come into conflict in some circumstances.

Question: what public policies are served in permitting a sole incorporator from wearing different hats?


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Arguments: Is it right for people to be able to obey responsibilities, do we need to balance responsibility of people for their own debts against benefits to economy if we allow limited liability? Hansmann and Kraakman argue that you could make a case for proportionate liability for

shareholders, they found it hard to see that shareholders would just walk away after the corporation has just committed gross torts. You would be at least responsible for your proportionate share.

Concepts of separate legal entity and limited liability are sometimes thought of as the same, that limited liability is a necessary part of separate legal entity. Simply because the law believes you are not responsible for the debts of other people.

The first general incorporation statute in England provided for incorporation but did not provide for limited liability.

Limited Liability/”Shareholder Immunity”

Originally meant the concept in Limited Partnerships Act – meant an investor would only be liable for the debts and obligations of corporation to the extent they have paid or agreed to pay. Professor says the term needs to be changed today to “shareholder immunity, “ implying that the person cannot be sued for anything.

Why do we allow Limited Liability?

Encourages risk taking—if everyone was unlimitedly liable people would be worried about going into business, then our economy would slow down.Problem: It suggests that risk taking is always better than not risk taking. That isn’t true, there’s an optimal level of it but not infinite level of risk-taking. There is a cost to our economy for risk taking as well.Another problem: also suggests entrepreneurs are inherently risk adverse, but in reality entrepreneurs tend to be the least risk adverse in society.

Reduces monitoring costs of managers-- Fishel and Easterbrook – in the scheme of limited liability shareholders don’t have to spend all time monitoring your managers to make sure they don’t make a mistake so you don’t lose everything. This is good because it results in specialization, the person who is good at running the business does it, and those that are good at investment do that.

Reduces the cost of monitoring other shareholders -- It matters who the other investors are, if you are the wealthier investor your unit means less to you than it does to the other investors as your chance of loss is higher than those who don’t invest much. Limited liability solves this problem, doesn’t matter who your other shareholders are.

Allows for the Free transferability of shares -- in limited liability company that can trade independent of identity of their owners helps keep managers honest through the market for corporate control. For a long time there has been a worry that in large corps where shareholders are spread out all over the world if managers are slacking that shareholders can’t really do anything about that as there’s no way for them to get together and one shareholder doesn’t have http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:39 PM

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enough interest to do something about it. If the managers of a corp are too naughty the values of the shares of the corporation will fall. Some businessman out there will make a takeover bid for the corporation because it’s at a good price for the moment, fire all the managers and they will make a lot of money. The key is this not happening, but rather the managers being aware and worried that this could happen – thus they will work hard so the price of the shares will stay up. The market itself disciplines managers. This only works if an acquirer can make a credible threat (buy up all the shares).

Makes public markets possible -- limited liability means shares can be valued in public markets based entirely on information about the company itself. Cash flow of company is important since shareholders aren’t actually tied to shares.

Portfolio diversification – is only possible if you have limited liability. If you didn’t have limited liability then you wouldn’t want to go to several companies, higher chance of losing everything.

Allows for managers to make optimal investment decisions. A corporate manager should be trying to get the best possible return for given level of risk but if shareholders are exposed to unlimited liability manager can’t do that as there will be certain projects that are just too risky. Can’t take the best probability; have to take it subject to the constraint that I’m not wiping out my shareholders. Limited liability removes this constraint. Limited liability for sole shareholders is simply a politically based argument; get small corps to like you.

Most tort liability to which small business will be exposed is likely to be covered by insurance. Advantage of limited liability for torts is mitigated by insurance.

In case of creditors for your main one you are likely to have unlimited liability anyway.

Limited Liability Protecting Non-Shareholder Stakeholders

Name requirements: The CBCA and other corporate statutes require all corporations to have as part of their name a word or abbreviation which indicates the business is carried on by an entity with limited liability. Corporate statutes have certain rules protecting the assets of the corporation for the benefit of creditors and others with claims against a corporation.

Oppression: The corporation or its directors may be liable if they act in a manner that is “oppressive to or is unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer” :(CBCA s.241(2)). This provision was intended primarily to protect shareholders in small corporations and has been used extensively for this purpose.

The class of persons who may seek relief, however, includes “any other person who, in the discretion of the court, is a proper person to make an application” :(CBCA s.238). Liability for oppression is another way in which the protection of limited liability may be lost, because the range of relief the court may grant is virtually unlimited

Limited Liability Protecting Other Stakeholders


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Limited liability is a creation of the law designed to encourage entrepreneurship by shifting the risk of business activity from shareholders to other stakeholders. Despite the express statutory grant of limited liability (CBCA s.45), the courts have arrogated to themselves the power to disregard the separateness of corporate legal personality. But there is no consistent principle (Case-by-case basis).

The separate legal existence of the corporation was authoritatively confirmed by the HOL in Salomon v. Salomon. This has several important implications:

Directors, officers, and shareholders of a corporation have limited liability; That someone is a director is no impediment to his entering into an employment contract

with the company (Lee v. Lee’s Farm); A (sole) shareholder can be a creditor, whether unsecured or secured (Salomon v.

Salomon), as long as the creation of the debt or the granting of the security interest is not effected to defeat the claims of other creditors [fraudulent];

A (sole) shareholder has an insurable interest in the assets of the corporation (since anyone has an insurable interest in property who derives a benefit from its existence or would suffer loss from its destruction) (Kosmopoulos).


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Disregard of Corporate Legal Personality of CorporationsPiercing the Corporate Veil

Van Duzer 129-139Casebook 110-120, 123-132, 138-145CBCA 45(1)OBCA 92(1)

Separate Legal Personality:

Separate legal personality is one of the essential legal consequences of incorporation. The company is always an entity distinct from its incorporators. Courts rigidly adhere to the notion of separate legal personality. It is the principal way in which the risk of business activity is shifted from shareholders to other stakeholders. It has often been used to cast a veil over the personality of a limited company through which the courts cannot see. But that is not true. Although courts “rigidly adhere” to the separateness of the corporate personality, they have refused to accept it in a variety of situations as described below (Big Bend Hotel v. Security Mutual Casualty Co. (1980). The doctrine of Solomon can be easily abused and corporate personality can be used as a veil behind which to shield conduct prejudicial to the corporation’s creditors and others. The courts can and often do draw aside the veil. They can and do often pull off the mask. They look to see what really lies behind and there are a small number of cases where the courts are willing to disregard the corporate veil. Doesn’t destroy the separate existence for all purposes, only for the limited purpose of granting relief to the creditor against the shareholder.

The courts typically refer to disregarding the separate personality of the corporation by piercing the “corporate veil.” Lifting the corporate veil disregards the separate legal existence of the corporation in relation to some specific claim, usually the claim of the creditor of the corporation whose claim would not be paid because the corporation has insufficient assets to satisfy it. Disregarding the corporation in this way does not destroy tis separate existence for all purposes, but only for the limited purpose of granting relief to the creditor directly against the shareholder. The cases in this area “illustrate no consistent principle.” Veil is rarely been pierced in public corporations.

Normal Justifications for Piercing the Corporate Veil:

Private corporations with one person having immense control (i.e shareholder control); Thin Capitalization (not used often in Canada); Disregard corporate formalities (true as a matter of reality but is stupid as a matter of

policy) Just and equitable grounds; Sham, façade; Corp used for fraud; Complete domination by shareholder;


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Thin or inadequate capitalization (didn’t put enough money into corporation to cover debts you expected there to be) – but there are no cases where this in its own is enough, will need to be in conjunction with something else;

Group enterprise – the corporation was part of larger group of corps and will treat them all as wrong;

Intentionally undercapitalize for the purpose of avoiding responsibility; Set up a flimsy corporation to escape personal liability; Bad faith; Abuse of the corporate privilege; When the equitable owners of the corporation treat the assets of the corporation as their own; Add or withdraw capital from the corporation at will; They hold themselves out as being personally liable for the debts of the corporation; When they provide inadequate capitalization; Insubstantial assets to cover the cost of insurance premiums; Trifling capital; Tax avoidance.

Although courts rigidly adhere to the separateness of corporate personality, they have refused to accept it in the the situations described below. In these cases, the courts disregard the separate existence of the corporation in relation to some specific claim would not be paid because the corporation has insufficient assets to satisfy it. Disregarding the corporation in this way does not destroy its separate existence for all purposes, but only for the limited purpose of granting relief to the creditor directly against the shareholder. Yet the cases in this area “illustrate no consistent principle.”

For the Express Purpose

It is only when the company is formed “for the express purpose” of doing a wrongful or unlawful act that the corporate veil will be lifted.

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

Its Just not Fair

Courts have held that they have the power to ignore the separate existence of the corporation where to fail to do so would yield a result which is “flagrantly opposed to justice.” (Kosmopulos). They will disregard the separate corporate personality when maintaining the separate personality would be opposed to justice (e.g. simply unfair to deny a creditor a right to claim against a shareholder). It is not clear what this means and there is no easy way to predict when a court will be provoked to act on this basis (uncertain scope).


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Leads to Unpredictability in the Courts

: How can judges say the statute says this but I don’t agree with it today? The judges aren’t saying they’re striking the law down, they are just saying they don’t like it today.Kosmopoulos v Constitution Insurance Co. – “I have no doubt the veil could be lifted in this case to do justice.” But it doesn’t get lifted in this case; he wins on other grounds. This case is a good example of compelling facts where all sympathy is for plaintiff but they refuse to life the corporate veil. The language from this court starts to appear in Canada judgements for being able to lift the corporate veil until the case of Transamerica Life Insurance v Canada Life Assurance.

Transamerica Life Insurance Company of Canada v Canada Life Assurance Company, [1996]

Any uncertainty in this standard does not give the court carte blanche to disregard the corporations’ separate personality.

Held: “There are undoubtedly situations where justice requires that the corporate veil will be lifted. The cases and authorities already cited indicate that it will be difficult to define precisely when the corporate veil is to be lifted, but that lack of a precise test does not mean that the court is free to act as it pleases on some loosely defined “just and equitable standard.”

(One can say courts are more sympathetic to claims made by 3rd parties, such as creditors and tort victims, than to those by shareholders who benefit from separate corporate personality? In Kosmopolous, the corporate veil was not lifted at the request of the sole shareholder in order to give him an ownership interest in the assets of the corporation that would have allowed him to recover insurance proceeds for the loss of the corporation’s assets.

Meditrust Healthcare Inc. v. Shoppers Drug mart, (2002):

A parent corporation was not allowed to claim damages for loss of goodwill in connection with actions injuring the business it carried on through subsidiaries, the court refused to disregard the separate legal existence of the corporations to allow the parent to claim for injuries to the subsidiaries.

There are cases in which the courts have disregarded the separate legal existence for the benefit of shareholders (DHN Food Distributors Ltd. v. Lodon Borough of Tower Hamlets, [1976]. Also, where creditors or other third parties seek to have the separate personality of the corporation disregarded the courts are more likely to disregard separate legal personality if doing so results in liability being imposed on another corporation rather than on an individual (DeSalaberry Realties Ltd. v. M.N.R, (1974). In many cases, there is some element of unfairness in the way the corporation is being used, combined with one or more of the other grounds described below.


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Objectionable Purpose

Courts will disregard the separate corporate personality when the corporation is used for some objectionable purpose (i.e. where a corporation has been formed in order to do something thatwould be illegal or improper for the individual shareholders to do personally, or in order to reduce taxes paid to CRA, the courts have been willing to disregard the corporation’s separate legal personality in some circumstances.).

Fraud:

where the shareholder uses the corporation to effect a purpose or commit an act that he/she could not effect or commit on his/her own.

Big Bend Hotel v. Security Mutual Casualty Co., (1980)

Failure to disclose his personal fire loss history constituted fraud.

Facts: Kumar had fire-loss prevention insurance that was cancelled as a result of a previous claim. He incorporated a corporation to own a hotel and took out insurance in the name of the corporation and failed todisclose his previous personal fire loss. He had the corporation apply for fire insurance instead of applying himself. A fire damaged the hotel and its contents and a claim for compensation was brought against the hotel’s insurance company. Kumar’s failure to disclose his personal fire loss history was fraudulent and the court refused to uphold the corporations claim on the basis that they treated the claim as being made by Kumar personally.

Held: Kumar’s failure to disclose his personal fire-loss history was fraudulent. The corporation’s sole purpose was to disguise the fraud and so the court refused to permit the corporation’s claim, in effect treating the claim as if it had been made by Kumar personally.

This case is one circumstance where fraud was held to be a basis for disregarding separate corporate existence involves using the corporation to affect a purpose or commit an act that the shareholder could not effect or commit on her own.

Misrepresentation as to the Identity of a Corporation

B.G. Preeco I (Pacific Coast) Ltd. v Bon Street Holdings Ltd., [1989]Fraudulent representations by a director, officer, or shareholder that a corporation has sufficient assets to meet its obligations will result in personal liability for fraud for the director, officer or shareholder.

Defendants acted on behalf of the corporation Bon Street Developments in negotiating the purchase of property. The vendors were aware that Bon Street Developments had substantial assets. Purchasers had been warned the officers of company are risky. They did a search on the http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:39 PM

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company and the properties they owned, saw they had assets. However, just prior to closing the defendants changed the name of the corporation to Bon Street Holdings and the name of another corporation w/o assets to Bon Street Developments. The contract was signed w/ the newly named Bon Street Developments [w/o assets]. They effectively switched the companies so Bond St. developments now owned nothing so if it defaults there is nothing there to sue. Court said this is terrible but won’t pierce the veil on these facts. Court has pierced it for much less. The new Bon Street development Ltd defaulted on the contract to buy the property.

Held: Court held them liable of fraud but refused to disregard the separate personality based on the fact that the fraud did not relate to the identity of the corporation, but only to its assets.

This case provides an interesting example of a practical difference between liability in tort for fraud and liability for breach of contract in terms of the damages available. Contract damages are intended to put the innocent party in the same position he would have been in if the tort has not been committed. Plaintiffs had pursued their claim that the separate existence of the corporation should be disregarded and liability for breach of contract should be imposed on the original company or on the individuals involved, on the bases that the breach of contract claim against the new company was worthless and the measure of damages for the fraud judgement against the individuals was much less than the damages that might have been obtained for breach of contract

Breach of Contract

Guilford Motor Co. Ltd. v. Horne, [1933]

Incorporating a corporation to carry on a competing business and seeking to attract the employees customers constitutes fraud.

Facts: the defendant entered into an agreement not to solicit the customers of his former employer. He incorporated a corporation to carry on a competing business and sought to attract the employer’s customers.

Held: Even though he held no shares in the corporation, the court, held that the corporation could not be used to permit the defendant to avoid his contractual obligations and ordered that the corporation cease soliciting the employer’s customers.

Rogers Cantel Inc. v. Elbanna Sales Inc., [2003]

The court will pierce the corporate veil to ensure the effectiveness of a non-competition obligation.

Facts: the non-compete clause was in a contract between Rogers and Elbanna. Elbanna was a corporation controlled by Annable, the main individual through whom the corporation’s obligations were to be performed. Annable became involved in another corporation that entered into an agreement with a competitor of Rogers. Annable was not a shareholder in this second


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corporation but was actively involved in its activities, including soliciting customers on behalf of a Rogers competitor.

Held: Quebec COA found that the actions of Annable violated Elbanna’s non- competition obligation, in effect, treating Elbanna’s obligation as if it was a personal obligation of Annable. (in this case itself, the main issue was whether the actions of Annable constituted a legal justification for Roger’s termination of its contract with Elbanna. The COA said it was).

Fraud also arises where assets are transferred to a shareholder for the purpose of rendering the corporation incapable of performing an obligation that is owed to a third party. Representation to a third party that the person the third party is dealing with is not the corporation but an individual or perhaps another corporation that has substantial assets. In order for a court to disregard the separate existence of the corporation to impose liability on a shareholder, however, the fraud must be such as to misrepresent the identity of the corporation, not merely some attribute of the corporation such as its assets.

Reduction of Taxes

Historically, courts have been sympathetic to arguments that the use of a corporation to reduce taxes is an improper purpose. In some cases, courts have held that such a purpose is grounds for disregarding the separate existence of the corporation. The “interests of the Revenue” have been considered to be a special case in need of protection (Kosmopoulos).

DeSallaberry realties Ltd. v. M.N.R., [1974]

Where the corporation is created in order to reduce taxes paid, the courts have been willing to disregard separate legal personality in some circumstances.

Was the money earned by the corporation income and therefore taxed at income tax rate or capital gain and therefore taxed at capital gain rate?

Facts: a case decided in the early 1970s, the court disregarded the separate legal existence of one large corporation in a large corporate group. This case concerned income tax assessments for the years 1963-1965. It had been argued that a sale of land by the corporation was an isolated transaction such that the proceeds should be characterized as a capital gain. At the time of the transaction, capital gains were not subject to tax. The Bronfman (great-grandparent corporation) and Steinberg families owned a number of affiliates and subsidiaries totalling 13 companies creating a pyramid of corporations. The directors and officers s of each of these subsidiaries, sister companies were the same persons; the objects of the companies are similar; they are managed by the parent company and therefore under their influence. The appellant is an instrument of his parent company and its grandparent company in purchasing and selling land.

DeSallaberry was a single subsidiary at the bottom of a very large pyramid of corporations. The way it all worked is that the basic business was buying and selling real estate. When the top tier wanted to buy a piece of property they would use a lower tiered subsidiary who would then resell http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:39 PM

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for proceeds. So the question became whether the profits was “capital gains” [not part of a business- and no capital gains tax] or as profits of a business and subject to corporate tax. Top tier tried to argue that DeSallaberry had a separate legal personality and thus the profits were capital gains because they were not part of a corporate business. Government’s argument was the profits were the result of income from the business being carried on by the whole group and not the individual subsidiary. Court agreed w/ Revenue Canada

They structured their development so at the bottom there were little companies that would buy one piece of company, tried to characterize for tax purposes that they bought this one property, sold it at big profit because couldn’t use it for what they wanted to use it for. This would be a capital gain. But if you looked at the whole scheme of things with the entire corporation, it was seen that it wasn’t just this one transaction, there were several transactions going on.

Held: when one disregarded the separate existence of the corporation, it became clear that the sale was part of a business of buying and selling land being carried on by the whole group of corporations under common control, so the proceeds from the sale were income from a business and fully taxed.

Stubart Investments Ltd. v. M.N.R., [1984]

In 1988 the Income Tax Act was amended to introduce what has been called the “General AntiAvoidance Rule” (s. 245(2)). This provision allows the Canada Revenue Agency to disregard transactions if they are abusive tax-avoidance transactions. Transaction is a tax-avoidance transaction if it is entered into without any real purpose other than obtaining a tax benefit. Such an avoidance transaction is abusive if it results in a misuse of some specific provision in the Income Tax Act or the provisions of the Act or the provisions of the Act read as a whole.

Held: SCC signalled that the courts should be less willing to disregard the separateness of the corporate personality in the interests of imposing tax liability even where no business purpose for the corporation is shown, other than minimizing tax liability.

Complete Control by Shareholder

Clarkson v Zhelka

The 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.

Facts: was dominated by shareholder, but wasn’t enough to lift the veil. Terms sham, mere agent was used. Close call but we will not lift the corporate veil. Common wisdom always was that courts were very reluctant to ever lift the corporate veil.

Held: 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


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independently. The second element relates to the nature of the conduct: is there “conduct akin to fraud that would otherwise unjustly deprive claimants of their rights?”

Transamerica -- stands for the propositions that we must not be too loose for lifting the corporate veil.

Wildman v. Wildman, [2006]

The courts will lift the corporate veil when a person is in complete control of the corporation and the business and does not distinguish between corporate and personal assets.

Facts: Mr. Wildman was the sole shareholder, director, and officer of a corporation carrying on a successful landscaping business and he was in complete control of the corporation and the business and did not distinguish between corporate and personal assets. By determining how and when money was paid to him by the corporation, Mr. Wildman prevented support from flowing to his spouse and children.

Held: the OCA found that the corporation could be made responsible, as well as Mr. Wildman for and order for spousal and child support, including substantial arrears and costs. Following some other family law precedents (Baum v. Baum), the court held that it would be flagrantly opposed to justice to allow him to use the separate existence of the corporation to avoid his family law obligations.

Agency

Courts will disregard the separate corporate personality by the principle of agency, by finding that the corporation is merely acting as the agent of someone else, usually the controlling shareholder.Conceptually, the corporate form is not disregarded by holding that it is an agent. Rather, the business of the corporation or whatever activity gives rise to the claim by a third party is determined to be carried on not by the corporation directly but only as an agent of the controlling shareholder e.g:

Sham Cloak Conduit Alter ego

Agency Main test for the existence of this form of agency is “whether there is extensive control by theshareholder over the corporation” (factors set out in Smith, Stone and Knight v. Birmingham]


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Smith & Stone Factors Agency Test

The main test for the existence of this peculiar form of agency is whether there is extensive control by the shareholder over the corporation:

1. Were the profits treated as profits of the shareholder?2. Was the person conducting the business appointed by the shareholder?3. Was the shareholder the head and brain of the trading venture?4. Did the shareholder govern the adventure and decide what should be done and what

capital should be committed to the venture? 6. Did the shareholder make the profits by its skill and direction?7. Was the shareholder in effectual and constant control?

However, these factors not conclusive-must also ask what the purpose of thecorporation is. In addition to the above factors must show that there was no legitimate

business purpose.

Applying these criteria it can be said that the profits were treated as profits of the parent company. The parent company is the head and brain of the trading venture; the policy is established by the parent company; the capital to be brought in the venture was decided by the parent company.

Corp law issue:

on what basis would we say this corp is not legitimate? Is it just part of this bigger group enterprise? All the instruments of the parent company. No room for any free will on part of the corp (e.g. there is nothing independent about the company). The basis of courts decision is cant find in this little company at the bottom that makes it independent or autonomous, is bound hand and foot to its parent company.

Problem is that all of these statements could have been made in Solomon case. Solomon’s company was an instrument of Aaron Solomon. All characteristics in this case of piercing the corporate veil are exactly the facts of Solomon’s case which defines the corporate veil. Solomon’s case was one in which it was very unfair to let him structure the business in the way he did to avoid paying creditors, yet the courts let him do it, the justness and equitableness of the case was never discussed.

Extensive and even complete control by a single person, however, is contemplated in the CBCA, so the existence of control satisfying the test in Smith cannot in any way be conclusive. Where subsidiaries are used, the degree of control by the parent corporation may range from absolute, such as where the same person owns 100% of the parent corporation and is the sole director and officer of the parent and the subsidiary, to minimal, such as where a subsidiary operates as if it


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were independent. There is nothing in any corporate statute which suggests that any particular degree of control is inappropriate or prohibited.

Alberta Gas Ethylene Co v M.N.R, [1989]

Smith does not stand for the proposition that one must ignore the separate existence of a subsidiary corporation when the seven criteria are met: one must ask for what purpose the corporation was incorporated and used and consider the overall context in which the obligation to the third party arose.

Gregario v Intrans-Corporation, [1994]

Where the court is able to find that a subsidiary had been set up for a legitimate business purpose, disregarding the separate existence of the subsidiary is inappropriate.Held: that the policy behind holding a parent corporation liable is “to prevent conduct akin to fraud that would otherwise unjustly deprive claimants of their rights.”

Other Factors

Lack of respect for corporate form: (Walkovsky (YES-but didn’t exist on the facts);Newtonbrook Plaza (NO))

“Thin” capitalization (Desalaberry (YES); Walkovsky (NO))

Inadequate or thin capitalization: occurs when the shareholders’ investment in a corporation is inadequate to meet its anticipated obligations.

Shell company—Canada does not require any minimum capitalization when incorporating. This is not true in many other jurisdictions. Shell company just means a company that is legally incorporated but has no assets, this is legal in Canada.

Why should we need minimum capitalization?Prof says it doesn’t mean anything, would only apply to one day in corps life. It would have to be an ongoing capitalization requirement, otherwise can drop all capital after day of incorporation.If we did have an on-going regime we would have the worst of all worlds, worse than limited liability as shareholders would have to be coming up with money when there is no exposure.

Rockwell v. Newtonbrook Plaza

If you don’t keep good corporate records, then that’s a reason as disregarding the corporate veil. If you don’t treat it as a corporation you don’t deserve to get the protections of a corporation. Never used by itself as a justification though. Prof doesn’t agree with this case – indoor management rule, what you do within your business should have nothing to do with 3rd parties.


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Facts: Kelner and Cooper practiced law. They also set up a corporation [Rockwell] in which they each held one share and the remaining 24 shares were held by Planet Development Ltd. [in trust for Kelner]. There was a judgment made against Rockwell for a land-deal gone bad. However, thecompany had no assets [$31.75]. The P’s made a motion to be paid personally by Kelner. The TJheld that “Kelner was the actual contracting party and that he was the actual litigant and Rockwell was only a nominee to hold title.” [There were no resolutions for any of the legal actions; The deposit was advanced by Kelner and his partner from their own funds and wentdirect to the P w/o going through the bank account of the corporation; none of the financial transactions went through the bank accounts]. Ont CA reverse the TJ finding. The contract was made in the name of and with the company alone. Although it is true that there was no record of anything in the corporate books regarding the transactions, this only indicates that the handling of the corporate records was slipshod.

Walkovsky v. Carlton

Whenever anyone uses control of the corporation to further her own rather than the corporation’s business she will be liable for the corporation’s acts. The courts will disregard the corporate form and pierce the corporate veil whenever necessary to prevent fraud or to achieve equity

Facts: Walkovsky was severely injured by a taxi-cab owned by Carlton. Carlton was claimed by Walkovsky to be a stockholder in ten corporations, each of which had two cabs in its name, and only the minimum insurance required by law is on each cab. Walkovsky claimed against all seemingly independent corporations as “stockholders” alleging that they were operated as a single entity in a multiple corporate structure that was attempting to defraud members of the public from insurance claims [thin capitalization]. Held: The operating companies were simply instruments for carrying on the business of the defendant without imposing on it financial and other liabilities:

Corporation is a fragment of a larger corporate combine which actually conducts the business;Corporation is a dummy for its individual stockholders who are in reality carrying on the business in their personal capacities for purely personal rather than corporate ends. Either circumstance would justify treating the corporation as an agent and piercing the corporate veil to reach the principle. It is one thing to assert that a corporation is a fragment of a larger corporate combine which actually conducts business [such as DeSallaberry-where the larger corporate entity would be held financially responsible] It is another to assert that the corporation is a “dummy” for its individual stockholders who are in reality carrying on business in their personal capacities for personal rather than corporate ends [being alleged here-where the stockholder would be personally responsible]. However, there is no allegation that he was conducting business in his own personal capacity. Had there been evidence that Carlton was shuttling personal funds in and out of corporations “without general regard to formality and to suit their immediate convenience”, such a “perversion to the privilege to do business in a corporate form” would justify imposing personal liability on the individual stockholder”[opposite of what was said in


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Rockwell]. To sustain an imposition of personal liability the complainant must establish fraud—this was not satisfied in this case.


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Negligence in Tort

Often courts are not very clear about whether they are talking about fairness, objectionable purpose, or agency as the basis on which they are disregarding the separate legal existence of the corporation, even though they are conceptually distinct. In several cases liability has been attached where the misrepresentation was not fraudulent and even in the absence of the usual contract law requirement that the representation be relied on. Some tort cases occur for no reason other than you need to get recovery for involuntary claimants.

Wolfe v Moir

Officer of a corporation that operated a roller skating rink was held personally liable for negligence when a skater got injured.

Held: basis of court’s decision was that the business was advertised using the officer’s name, and not the corporation’s name, in contravention of ABCA.

Non-competition/Non-solicitation cases

Gilford Motor Co Ltd v Horne

That the corporation could not be used to permit the defendant to avoid his contractual obligations and ordered that the corporation cease soliciting the employer’s customers.

Facts: Horne had entered into an agreement not to solicit the customers of his former employer. He incorporated a corporation to carry on a competing business

Rogers Cantel Inc v Elbanna Sales

Courts will pierce the corporate veil when a non-competition obligation is violated.

There was a non-competition obligation between Rogers and Elbanna (run by Annable). Annable became involved in another corporation that entered into an agreement with a competitor of Rogers.Quebec CA: said that the actions of Annable violated Elbanna’s non-competition obligation, in effect, treating Elbanna’s obligation as if it was a personal obligation of Annable.


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9. Incorporation: Considerations and Process

Casebook 163- 173Van Duzer 146-147, 161-185CBCA 2(6), 2(7), 2(8), 102(2), 114(8), 117(1), 126 (1), 139(4), 142(1), 149(2), 160, 174(1), 263OBCA 1(6), 1(1) (27), 101(4), 104(1), 111, 115(2), 126(2)

The Process of Incorporation and Organization

Under most Canadian corporate statutes, a corporation may be incorporated by one or more corporations or individuals, or a combination of both. Although there are no qualifications that must be met by corporate incorporators, under the CBCA individual incorporators cannot be any of the following:

Less than 18 years of age; Of unsound mind as found by a court in Canada or elsewhere; or Have the status of bankrupt (CBCA, s.5).

Creation (called incorporation): occurs on making the following:

Step 1: Choose to incorporate under:

1. CBCA: Federal2. OBCA: Provincial

Step 2: File the following prescribed material with the branch of the government in the chosen jurisdiction that has the responsibility for incorporations. Forms that you fill out, once stamped by government, becomes the documents of incorporation.

Either the CBCA or OBCA must grant you incorporation; there is no discretion. As long as you do all the formal requirements incorporation is a right. CBCA/OBCA are registration statutes –there is no discretion to turn you down.

Under the CBCA it is necessary to file the following materials with Corporations Canada:

Articles of incorporation (s. 6, Form 1); Initial registered office address and first board of directors (s.19(2) and s. 106, Form 2) A name-search report on the proposed name of the corporation, along with certain

supporting information; and The fee of $250 ($200 if done online).


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Step 3: Once the documents are filed with the fee, the Director appointed to administer the CBCA issues a certificate of incorporation: (CBCA, s.8 and 9).

The corporation comes into existence on the date of this certificate: (CBCA, s.9) The directors named in the notice of directors hold office until the first meeting of

shareholders where an election of directors is held: (CBCA s106 (2))

On incorporation the business may commence carrying on a business. Unlike a partnership, there is no need for a corporation to carry on business; its existence derives exclusively from issuance of the certificate under the statute (several more steps are required before the corporation is fully organized):

Articles

Articles of incorporation (Form 1, s.6 CBCA): articles are the most important because they set out the fundamental characteristics of the corporation:

Name; Province or territory within Canada where its registered office is to be situated; Class and number of shares; Number of directors; Restrictions on issuing, owning or transferring shares; Restrictions on the business the corporation may carry on; Other provisions

The Jurisdiction Where the Registered Office is to be Located

Under the CBCA it is necessary to identify in its articles the province in Canada where the registered office of the corporation is to be situated (Form 2). It need not be the head office, but a place within the jurisdiction at which the records of the corporation are kept (CBCA, s. 20(1)) and which may serve as the address for correspondence with the CBCA Director and for service documents (CBCA, s.254). The province specified for the registered office may be changed only by amending the articles (CBCA, s.173(1)(b)), which requires approval by special resolution of shareholders and filing articles of amendment (Form 4).

Note: A special resolution is a resolution signed by all shareholders entitled to vote on the resolution passed at a meeting of shareholders by a majority of not less than 2/3 of the votes cast by shareholders present and voting at the meeting (CBCA, s.2(1)). There is no need for a corporation to amend the articles if it moves its registered office out of the place identified in the articles, so long as the office remains in the same province or territory as the place identified in the articles.

A change in the address within the province or territory specified in the articles may be made with the approval of directors. Where the directors approve such a change, a Notice of Change


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of Registered Office must be filed with the director within 15 days of the date of the change (CBCA, s.19(4).

The registered office of a provincial corporation must be located inside the incorporating province in the municipality or geographic township specified in the articles (e.g. OBCA, s.14). The municipality or township in which the registered office is located may be changed by special resolution of the shareholders (OBCA, s.14(3). Articles of amendment need not be filed, though filing notice of change indicating the new address is required. In Ontario, such a notice is required under the Corporations Information Act. The address of the registered office within the municipality or township may be changed by the directors without shareholder approval (OBCA, s.14(3).

General Practice is to incorporate provincially in the province where the corporation expects to carry on business if no significant extra-provincial operations are envisaged, and to incorporate federally if the corporation expects to conduct business in several provinces

Factors Affecting Choice of JurisdictionDisclosure Obligations:

Each jurisdiction imposes certain obligations to disclose information regarding the corporation and the people in it. Disclosure may be a concern for competitive, personal or other reasons. In Canada, disclosure doesn’t play a significant role in the selection of a jurisdiction because information filings are similar in all jurisdictions.

Examples of Disclosure Obligations Imposed by the CBCA:

Filing Annual Return, s.263, Form 22

Corporate name; Corporation number (assigned on incorporation); Taxation year end; Date of last annual meeting (or written resolutions in lieu of annual meeting); Whether the corporation is a distributing corporation; Whether there are more than 50 shareholders; Whether a unanimous shareholders agreement is in place; Jurisdictions in which the corporation carries on business.

Any time there is a change in the address of the registered office, a notice must be filed (Change of Registered Office Address (Form 3), Change Regarding Directors (Form 6).


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Examples of Disclosure Obligations Imposed by the OBCA:

Filing: Initial return and annual return Corporations Information Act: (s.2(1) and 3.1)

Corporate name; Ontario Corporation Number (assigned on incorporation); Date of incorporation (or amalgamation if later); Name and address for service of documents for the directors and the 5 most senior

officers of the corporation; Date of election or appointment of directors and the 5 most senior officers and Canadian

residency status of directors; Name of anyone ceasing to be a director or officer and date of departure ; Any change in any of this information since the last return filed.

A corporation must make filings in every province where it carries on business outside its jurisdiction of incorporation. This means that a federal corporation must register in every jurisdiction in which it carries on business. E.g. upon commencing business in Ontario, a corporation, whether incorporated federally or anywhere else, must file an initial return under Corporations Information Act (s.3(1)), which requires disclosure of information similar to that required for corporations incorporated in Ontario In addition to the information listed above, all extra-provincial corporations must disclose the following:

Name of the jurisdiction in which the corporation was incorporated, continued or amalgamated, whichever is the most recent;

Address of the corporation’s head or registered office; Date on which the corporation commenced or ceased activities in Ontario (continued on

next page) Name and office address of the corporation’s chief officer or manager in Ontario and the

date the person assumed or ceased to hold this position; Address of the corporation’s principle office in Ontario; Any immediate former names of the corporation and if the corporation is required to have

an agent for service, the address of the agent ;

Extra-provincial corporations must file an annual return confirming the same information (Ontario Corporations Information Act, s.3.1). Whenever information in an initial or annual filing changes a new filing indicating the change is required within 15 days (Ontario Corporations Information Act, s.4). Failure to make required filings and filing untrue or misleading information are offences under the Corporations Information Act. Under some provincial statutes , the failure to file also deprives a corporation of the right to sue in the province in connection with the business being carried on by the corporation except with leave of the court (Ontario Corporations Act, s.18).


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Where the corporation will carry on business

Provincial incorporation means that a corporation may carry on business in another province, but only if it obtains a licence under the extra-provincial licencing legislation in place in the province. Licencing is discretionary, but is rarely refused unless there is a problem with the corporation’s name. Licensing of Corporations is the same as for sole proprietorships.

Under the Ontario Extra-Provincial Corporations Act, 1990 (OEPCA), corporations incorporated under the laws of other Canadian provinces or in a territory are exempt from the requirement to obtain a licence. Permission to carry on business as a corporation in Ontario is granted by the Act. Certain provinces have reciprocal arrangements under which a corporation incorporated under the laws of one need not obtain a licence to carry on business in the other. But all corporations incorporated in foreign jurisdictions must obtain a licence.

Where a corporation is required to obtain an extra-provincial licence, it must submit:]

An application; A name –search report; A certificate setting out that the corporation is valid under the laws of its governing

jurisdiction; An appointment of an agent for service in the province it wants to do business; Required Fee.

Agent for service

is a person in the province who is authorized to accept service of documents on behalf of the corporation in connection with any lawsuit in which the corporation is involved. This requirement is intended to ensure that persons dealing with the corporation in the province are able to commence civil proceedings to pursue any claim against the corporation.

The obligation to obtain an extra-provincial licence arises when a corporation begins to carry on business in a province. “Carrying on business” varies from province to province (e.g. soliciting business in the province and having a listing in a local telephone directory (ABCA, s.277).

In Ontario, a corporation carries on a business if:

It has a place of business in Ontario; Holds an interest in real property; or Engages in business in the province (OEPA, s.1(2)).

A corporation is deemed not to be carrying on business if it is only taking orders or buying or selling goods or services through travelling representatives, advertisements or mail. (OEPCA, s.1(3)).


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Failure to obtain a licence when one is required to do so under a provincial extra-provincial licensing statute is an offence. Liability extends to and includes the corporation and any person who carries on business in the province, directors, and officers who authorized, permitted, or acquiesced in the offence (OEPCA, s.20). In Ontario, an unlicensed extra-provincial corporation may not own land (OEPCA, s.22). Where a business is intended to be carried on across the country or, at least, in several provinces, federal incorporation avoids provincial licencing requirements and so may be desirable but the information filings described in the previous section must be made in each jurisdiction in which a federal corporation carries on business. Information filings must be made in each jurisdiction in which a federal corporation carries on business. This means that, in most situations, the effective compliance burden is not very different regardless of the jurisdiction of incorporation.

Liability for Provincial Tax

Tax liability is not affected by its jurisdiction. Provincial income tax is based on the income earned by the business. As a result tax is not usually a significant consideration in choosing a jurisdiction in which to incorporate.

Provisions of Corporate Law

In Canada, there has never been competition among jurisdictions for incorporating businesses like the United Sates. Instead, uniformity is one of the express objectives of the (CBCA, s.4). The Canadian tradition has been to promote greater uniformity among the provincial and federal corporation laws than in widening the gap between them. As a result, since the CBCA was introduced in 1975, almost identical statutes have been introduced in Ontario, Alberta, Saskatchewan, and Manitoba and corporate legislation in Newfoundland and New Brunswick is based on the CBCA model. Quebec has its own scheme, but, in many respects, it is similar in effect to the CBCA; and PEI retains a letters patent statute.

Typically, the practice of most lawyers is to incorporate under province where business is to be carried on and to incorporate federally if the business will be conducted in more than one province. Differences in fees will have a significant effect; CBCA is $250 ($200 for online), OBCA is $360, BCBCA is $350.

Recognition

If a business is to be carried on outside Canada, it may be preferable to incorporate under the CBCA. Foreign persons doing business with the corporation may be unfamiliar with the law of the provincial or territorial jurisdictions.

Continuance

After a decision is made regarding the jurisdiction for incorporation, it is possible under the corporate laws of most jurisdictions to migrate from one to another jurisdiction (CBCA, s. 187-88; OBCA, s.180-1; BCBCA, s. 302-311; ABCA, s.188-89). In Canada, this migration is called http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:39 PM

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continuance. This may have tax advantages because it has shifted its business operations to the new jurisdiction.

Class and number of shares

The articles define the classes of shares the corporation is authorized to issue. They set out the name by which each class of shares is to be identified (e.g. common shares) as well as the “rights, privileges, restrictions, and conditions” of each class, such as whether they vote, receive dividends, or share in the distribution of the assets of the corporation on its dissolution after the credits are paid.

In many small corporations, there is only one class of shares, typically named “common shares”, which vote and are entitled to receive dividends declared by the board of directors and the remaining property on dissolution. Corporations may have other classes of shares with different characteristics. In general, the bundle of characteristics belonging to each class of shares will determine their price and their attractiveness to investors with different sorts of preferences.

It is also necessary to specify the number of shares the corporation may issue. Shares are issued by directors, but they can issue shares only up to a maximum amount provided for in the articles. Additional shares may be issued only after amending the articles to raise or to remove the limit. This amendment requires shareholder approval by special resolution.

Why? In some circumstances, limits may be desired. If, for example, shareholders want to avoid having additional shares issued by the directors to dilute their proportionate interest in the corporation, they may want the maximum number of shares authorized to be issued set at the total number of shares to be held by them. If no limit is specified, the corporation may issue an unlimited number of shares. In the interests of ensuring the maximum flexibility, it is common practice not to impose a limit.

Number of Directors

Under the CBCA it is necessary to specify in the articles the number of directors or a minimum and maximum number (CBCA s.6(1)(e)). Where a minimum and maximum are chosen, the number of directors may be determined by special resolution of the shareholders. Also, the minimum and maximum number of directors stated in the articles amy be changed only by amending the articles.

Why? The choice of the appropriate number of directors will depend on variety of factors specific to each corporation, including the sale of the company’s business, the desire of shareholders to be members of or to be represented on the board, and the desirability of involving people with no relation to the corporation as directors on the board—perhaps because they have some relevant expertise or experience.

Corporate statutes impose certain requirements: under the CBCA, corporations that have distributed their shares to the public must have 3 directors, at least 2 of whom are not officers or


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employees of the corporation or affiliated corporations, all other corporations need to have only one director (CBCA, s.102(2)).

Restrictions on Issuing, Transferring or Owning Shares

Restrictions may be imposed on the issuance of shares. Such constraints must be conspicuously noted on a corporation’s share certificates: (CBCA, s.49 (10)). In the absence of a restriction on share transfer, shares are presumed to be freely transferrable, unlike partnership interests. It is common for corporations with few shareholders to have some kind of transfer restriction in the articles, which specify what rights the shareholders have in relation to the distribution, voting rights etc (CBCA s.6(c) and (d)).

Why? In such corporations, each shareholder has a strong interest in having some control over who the other shareholders are. The shareholders typically work in the business and will not want their fellow shareholders selling out, not will they want to have another person involved as a shareholder without their consent. Also, shareholders are likely to want as much flexibility to sell their own shares. In a corporation with few shareholders, this flexibility is especially important because it is often difficult for a shareholder to find a buyer. There is no ready marketplace in which the shares of such a corporation may be priced and sold.

When drafting share transfer restrictions, shareholders typically try to strike a balance between their interest in controlling who the other shareholders are and their interest in having the fewest restrictions on their right to sell their own shares. In the articles, the usual restriction is one requiring the directors or a specified majority of shareholders to consent to the transfer.

“Right of first Refusal:” requires that any shareholder who wants to sell his/her shares to give the other shareholders a right to buy from them first before the shares may be sold to a third party.

“Pre-emptive Right:” Restrictions may be imposed on the issuance of shares as well. The CBCA permits the inclusion in the articles of a right for each existing shareholder of a corporation to purchase any new shares to be issued in proportion to his holdings of shares prior to the issuance of shares to anyone else (CBCA, s.28). Such a right is referred to as a “pre-emptive right”.

Another kind of restriction on transfer or issuance defines the class of acceptable shareholders. E.g. a corporation might want to prohibit transfers outside the existing group of shareholders to ensure that the corporation continues to qualify under a government program requiring Canadian ownership. is to prohibit transfer outside the existing group of shareholders..

Restrictions on the Business the Corporation May Carry On

Under the CBCA it is not necessary for the incorporators to describe the activities in which it will engage in Canada. There is no room to mention this on the form. In s. 6(1)(f) CBCA there is a space to write down what the corporations will not do in the restrictions section. The corporation has all the capacity, and subject to certain limitations in the corporate statute, the http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:40 PM

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rights, powers, and privileges of a natural person (CBCA, s.15). What may be included in a by-law is virtually unrestricted: (CBCA, s.103(1)).

Why? In order to avoid the risk of ultra vires activities, it is common practice not to include in the articles any restriction on the business the corporation may carry on. The rule that ultra vires obligations are unenforceable against the corporation has been largely eased under the CBCA. If a restriction is included in the articles, the CBCA provides that the corporation is forbidden to act in a manner contrary to the restriction (CBCA s. 16(2)). Shareholders may seek relief from any contravention of such a provision if its effect on the shareholders is “oppressive, unfairly prejudicial to or unfairly disregards [their] interests (CBCA, s.241(2)). Also, both shareholders and creditors may apply to a court for an order restraining the corporation, or anyone acting on its behalf, from acting in a manner contrary to the articles or directing compliance with the articles (CBCA, s.247).

Fee

A corporation does not come into existence simply by virtue of one or several people starting a business. Creation (called incorporation) in most Canadian jurisdictions occurs upon making a filing with the appropriate government authority and paying the requisite fee:

CBCA: $200 (Online) $250 (Paper)

OBCA: $360 : $300 and another $60-80 for business name registration under the Business Names

Act/NUANS

All jurisdictions charge a fee on incorporation; CBCA is $250, $200 if incorporation documents are filed electronically. OBCA is $360 (or $300 if incorporation documents are filed electronically). In Ontario, online incorporation must be through a private service provider that charges an additional fee.

Other Provisions Included in the Articles:

A variety of other provisions are sometimes put in the articles. The CBCA contemplates that the articles may deal with the following types of matters:

Requirements for super majorities of directors or shareholders to approve certain decisions (CBCA, s. 6(3) and (4);

Limitations on the rights to purchase shares (CBCA, s. 34 and 35), Liens on the shares of shareholders who are indebted to the corporation (CBCA, s.

45(2)), The quorum for directors’ meetings (CBCA, s.114(2))

In addition any provision permitted by the CBCA to be included in a by-law may be included in the articles (CBCA, s.6(2)). What may be included in a by-law is virtually unrestricted (CBCA, s.103(1)).http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:40 PM

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Articles: can be amended only by a special resolution of shareholders requiring approval by 2/3 of shareholders voting. (A special resolution is a resolution signed by all shareholders entitled to vote or passed at a meeting of shareholders by a majority of not less than 2/3 of the votes cast by shareholders present and voting at the meeting. Articles are a matter of public record.

By-laws: require approval by a simple majority only and are not matters of public record.

Why? Many lawyers suggest that the content of the articles should be minimized in order to:

Simplify the process of incorporation; To avoid the need to amend the articles later if changes are desired; To limit public disclosure of internal corporate arrangements.

Other Documents required to be Filed on Incorporation

In addition to the articles, in order to incorporate under the CBCA, the incorporators must file a:

Initial Registered Office Address and First Board of Directors, which includes:

(a) a notice of directors and(b) a notice of Registered Office

This notice lists the directors and their addresses and indicates whether they are resident Canadians. The CBCA requires that at least 25% of the directors be resident Canadians :(s.105(3)) The notice also indicates he street address at which the registered office is located.

Why? The only reason for a separate document containing this information is to permit updated notices to be filed each time the information on directors or the address of the registered office changes. (CBCA, s.19(3) and 113) without amending the articles. Under the OBCA, the address of the registered office and the identity, address, and Canadian residency status of the directors are contained in the articles. Also, under the OBCA, it is necessary for each director named in the articles to have consented to act as a director, in writing and within 10 days. Without such consent their election is not effective. The corporation must keep a copy of the signed consent at its registered office.

There is no need to amend the articles when the directors or the registered office address change. It is sufficient to file an information document called a Notice of change under the Corporations Information Act, s.4.

All of these documents (other than director’s resolutions and minutes of director’s meetings) must be maintained by the corporation at its registered office: (CBCA, s.20), usually in a minute book and shareholders and creditors must be given access to them: (CBCA, s.21). Records may be kept outside Canada if the corporation provides access to them in Canada. Shareholders and creditors must be given access to them, except for minutes of meetings and resolutions of directors. These documents are usually bound in hard copy form in something called a minute http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:40 PM

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book though the CBCA permits them to be retained in “any system of mechanical or electronic data processing or any other information storage device that is capable of reproducing any required information in intelligible form within a reasonable time: (s.22(1)) Articles and any other document filed with the CBCA director , such as the Initial Registered Office Address and First Board of Directors, are filed in a publicly accessible record maintained by Corporations Canada.

Completion of Incorporation

Once the documents required by the CBCA are properly filed along with the fee, the director appointed to administer the CBCA issues a certificate certifying that the corporation, the articles of which are attached, was incorporated on the date of the certificate (CBCA, s. 8 and 9). Corporations come into existence on the date of the certificate (CBCA, s. 9). The directors named in the Initial Registered Office Address and First Board of Directors hold office until the first meeting of shareholders (CBCA, s.106(2)). The provisions in the articles may be changed only by articles of amendment filed with the director after approval by a special resolution of shareholders.

Lawyers routinely incorporate corporations for their clients but now there are also a variety of commercial services offering to do incorporations more quickly and cheaply.Why? There are many issues and pitfalls associated with incorporation, which is only the first step in organizing a business so consideration must be given to the desirability of professional advice.

Post Incorporation Organization (in by-laws)

This refers to what happens upon incorporation. Upon incorporation, the corporation may commence carrying on business. Unlike partnerships, there is no need for a corporation to carry on business; its existence derives exclusively from the issuance of the certificate under the statute (Campbell v. Taxicabs Verrals Ltd. (1912)). Several more steps are required, however, before the corporation is fully organized:

First Directors’ Meeting:

The CBCA provides an agenda for the first meeting of directors (CBCA, s.104) :

Issue shares to shareholders

The directors should have a meeting and pass a resolution to issue shares to the shareholders.

Why? The issuance of shares is essential since, until the shares are issued , the only persons who may act for the corporation are the directors named in the Initial Registered Office Address and First Board of Directors. Should anything happen to the, the corporation would be unable to act. This problem does not exist under the CBCA because it was remedied when the act was amended in 2001 to provide that, in instances where the directors have resigned or have been http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:40 PM

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“removed” and not replaced, any person who manages or supervises the management of the business and the affairs of the corporation is deemed to be a director for the purposes of the act (CBCA, s.109(4) and (5) (lists exceptions)). This reform follows a similar provision in the OBCA (s.115(4)). There is no requirement to be paid into the corporation for shares issued.

There is no need for a corporation to issue share certificates, though shareholders have a right to receive one on request: (CBCA, s.49 (1)).

Adopt arrangements for carrying on business

Once the shares are issued, a shareholder’s meeting (within 15 months of incorporation) is usually held at which the directors will typically adopt arrangements for carrying on the formal legal business of the corporation, including the following:

Appoint officers Make banking arrangements (authorizing bank account and designating signing authority

to sign cheques (CBCA s.104(1)). Requirements for directors; Procedure for meetings of directors Remuneration and indemnification of directors Designation and specification of duties of officers Procedure for meeting of shareholders Procedure for payment of dividends Financial year of the corporation Designation of those persons who may sign documents on behalf of the corporation

These arrangements are usually set out in a by-law. The risk/problem associated with creating by-laws is that corporate law rules are changed more and more frequently and by-law provisions that track a corporate statute may become out of date.

To take effect a by-law must be passed by the directors, but it continues in effect only if it is passed by shareholders at their next meeting following approval of the by-law by the directors (CBCA, s. 103). Because making, amending and repealing by-laws ultimately requires shareholder approval, including arrangements in a by-law serves to entrench them more firmly than dealing with them by a simple resolution of the directors, though not as much as including them in the articles.

By-laws must be approved by a simple majority of shareholder votes represented at the meeting (CBCA, s.103(2)). For small corporations with few shareholders, this meeting typically takes place immediately after the directors’ meeting. The CBCA provides that certain elements of its default rules may be changed only by a by-law (e.g the location, notice of, and quorum for directors meetings (s.114), the location of shareholder meetings (s.132), quorum (s.139), and the voting procedures (s.141)). All other matters may be dealt with in a resolution passed by directors. It is common practice, however, to deal with these matters in a general by-law, which is like a handbook on corporate procedures. By-laws provide a more complete compendium of applicable rules.http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:40 PM

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A final organizational step that often occurs with few shareholders is that the shareholders enter into an agreement to govern their relationship with each other. Shareholders may wish to customize the way in which the corporation is governed by agreeing to alter the rights and obligations provide for in the corporate statute:

Vote their shares for certain people as directors; Circumstances in which shares may be transferred, such as giving each shareholder a

right of first refusal.

Considerations Relating to the Scale of the Corporation

Corporations are used by businesses ranging from small operations involving a single person as shareholder, director and employee to huge multinational concerns with thousands of shareholders and employees. The terms, “public corporation”, “private corporation”, “widely held corporation”, “closely held corporation” are used to distinguish corporations having large number of shareholders from those having a few.

To be effective corporate law rules must be responsive to the often very different requirements of business enterprises of different scales. Consider the fundamental issue of how management will be made accountable to shareholders? Large corporations require rules of governance that impose formal legal mechanisms to ensure that management is held accountable to shareholders.

Why? Many public corporations have large number of shareholders, most of whom have a relatively small stake in the corporation. Relative to its total value. Such corporations are managed by professional managers, with little direct participation from shareholders, and require rules of governance that impose formal legal mechanisms to ensure that management is held accountable to shareholders.

Thus, the OBC distinguisheds between “offering” and “non-offering” corporations. Offering corporations are those that have offered their shares/securities to the public., which means that it has:

Filed a prospectus; Has or had securities listed on the Toronto Stock Exchange (OBCA s.1 (1) and (6)).

Non-offering corporations are all corporations not caught by the above definition. OBCA has certain provisions that apply only to offering corporations, such as:

Management’s obligation to send shareholders information about the corporation and the items on the agenda for shareholders’ meetings as well as form allowing them to send in their vote without attending in person (OBCA, s.111). The form is called a “form of proxy” and the sending of information is called “mandatory proxy solicitation.”

The minimum number of directors is 3: (OBCA, s.115(2)).http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:40 PM

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At least 1/3 of the directors must be officers or employees of the corporation or any of its affiliates (OBCA, s.115(3)).

They must have their financial statements audited and file them with the OSC (OBCA, s.149 and 156).

Must appoint an audit committee of the board of directors, a majority of whom are not officers or employees of the corporation or any affiliated corporation, responsible for reviewing the financial statements of the corporation and reporting to the full board (OBCA, s.158(1) and (2)).

CBCA also has certain provisions that apply only to distributing corporations, such as:All distributing corporations must:

Have must have 3 directors, at least 2 of whom are not officers or employees of the corporation or an affiliate of the corporation (CBCA, s.102(2), s. 2(2) (definition of affiliate);

Appoint an auditor and an audit committee of at least three directors, a majority of whom are not officers or employees of the corporation: (CBCA, s.162 and 171); and

File its financial statements with Corporations Canada (CBCA, s.155, 160 and 171(8)).

Insiders of such corporations, like directors and officers, must comply with rules regarding their trades in shares (CBCA, s.126)

All corporations with more than 50 shareholders, whether distributing corporations or not, and all distributing corporations must comply with mandatory proxy-solicitation requirements: (CBCA, s.149 (1) and (2)].

Advantage: of the OBCA and CBCA schemes is that it is easy to know where or not a particular corporation is subject to a higher level of obligation; the criteria are specific. Relying on rigid, technical criteria to distinguish corporations of different sizes means that these definitions tend to be both under-inclusive and over-inclusive . For this reason, and because the differences in the rules that apply are fairly few, the schemes in Canadian statutes cannot be said to approximate distinct, comprehensive codes for small and large corporations.

Public Corporations have certain implications for the incorporation and organization of the corporation:

The articles will not contain a restriction on share transfer because the shares will be widely held and freely transferable;

No shareholders agreement involving all shareholders will be necessary, because there will be too many shareholders for such an agreement to be feasible; and

The by-laws will have to contain more elaborate provisions regarding shareholder meetings since there will be more shareholders.

Note: In most cases, at the time of incorporation and for some time period after, corporations do not issue shares to the public. Only after the corporation has carried on business successfully for a time and a public issue of its securities is feasible, the articles and by-laws can be changed and any shareholders’ agreement terminated in anticipation of public issue and.http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:40 PM

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One-Person Corporations

Concern: holding of meetings (meetings require two or more persons). Most acts accordingly provide that where a corporation only has one shareholder she alone may constitute a meeting. The same rule applies to a corporation that has only one director.


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Corporate Names

Casebook 173-175Van Duzer 148-161CBCA 6(1)(a), 10-13, Regulations 17-34OBCA 8-12, Regulations 1-22

Names

The problems associated with corporate names are both legally complex, and practically important. Practically, it is difficult to find a name that is not already in use. Once an enterprise chooses a name and uses it, it begins to have value associated with it. A name may be recognized by customers or business customers as indicative of prestige, product quality or service. The financial value based on its use may be substantial. This value is commonly referred to as goodwill. The use of the name by someone else may be severely damaging to the goodwill associated with the name.

Policy: the protection of the legitimately created goodwill of a particular business against appropriation by others. There is also a general public interest in the regulation of names. The courts have said that “the danger to be guarded against is that the person seeing or hearing one name will think it to be the same as another which he has seen or heard before.” Thus, name regulation seeks to prevent confusion in the marketplace.

Legally, name regulation is a tangle of provincial and federal jurisdictions (CBCA, OBCA, Federal Trademarks Act, which grants rights in names based on their use in association with goods and services. Provincial common law protects certain interests in names through the tort of passing off.

Legal Framework for the Use of Corporate Names.

Case-by-case basis; Ensuring the public will not be misled by confusingly similar corporate names. The statutory provisions vary from province to province (CBCA s.10-13, OBCA s.8-9); CBCA s.11(2) and OBCA s.8 also allow the use of assigned unique number names; Protection of the public against deception (OBCA ss 9(1)(b) and CBCA s. 12(1) and

Regulations Part 2; Reduce likelihood of deception, confusion; Even where companies are engaged in different lines of business, they will not be

allowed to use similar names which might lead the public to believe they are associated with each other;

Passing off and trademark legislation


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Corporate Law Rules Regarding Names

Section 10 CBCA: name must end with cautionary suffix [e.g. Inc. to warn public that they are dealing with a limited liability entity].

CBCA, s10(1): the word “Limited”, “Limitee”, “Incorporated”, “Incorporee” or “Corporation” or the corresponding abbreviations “Ltd” “Ltee” “Inc.” or “Corp” shall be part, in addition to any use in a figurative or descriptive sense, of the name of every corporation, but a corporation, may be legally designated by either the full or the abbreviated form.

CBCA, s. 10(6): it is possible for a corporation to carry on business under another name as well as its proper corporate name (eg. Fred’s Fancy Fine Foods may be used instead of Restaurant Holding Company Inc. The name used cannot contain the legal element of “Inc” etc. The full corporate name must still always be set out in “all contracts, invoices, negotiable instruments and orders for goods or services issued or made by or on behalf of the corporation.

The starting point for understanding the legislative scheme is section 12(1)(a), which provides that a CBCA Corporation may not be incorporated with or carry on business using a name that is “prescribed, prohibited or deceptively misdescriptive.” If a name is contrary to this provision, the Director who administers the CBCA, may refuse to incorporate a corporation that proposes to use it or, if the names is already being used, by a corporation, order that the name be changed (CBCA, s.12(2)). Under the OBCA, a hearing must be held before any name change is ordered (OBCA, s. 12(1)).

The CBCA Regulations set out both absolute and qualified prohibitions for the purposes of section 12.

Names that may never be used are those that are :

obscene: (CBCA Regulations, s.23) exclusively entitled (ie. “United Nations, and “air Canada”:(CBCA Regulations, s.21) without consent :(CBCA Regulations, s.22, 26) not distinctive enough or are confusing (CBCA Regulations, s.24).

DistinctivenessCBCA Regulations, s.24 sets out criteria where a name is not distinctive enough and is confusing. Under the OBCA, a name is not also distinctive if it is “too general.”

CBCA Regulations, s.24 sets out criteria where a name is not distinctive and cannot be used if it is:

Only descriptive, in any language, of the quality, function, or other characteristics of the goods or services in which the corporation deals or intends to deal (e.g. Apples Inc., for a seller of apples);


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Primarily or only the name or surname used alone of an individual who is living or has died within thirty years preceding the request for the name (e.g. Pierre Trudeau Inc.); and

Primarily or only a geographic name used alone (e.g. Japan Inc.)

Exception: to this prohibition permits the use of names that are not inherently distinctive but that, through use, have acquired a secondary meaning (e.g. General Motors Inc.). In other words if a name has been used in Canada for so long that it has obtained a level of recognition which distinguishes it from its competitors, it is not prohibited. Usually to ensure a name is distinctive, it must combine a distinctive element with a descriptive element. The whole name must be descriptive (CBCA Regulations, s.19).

Why? This question of distinctiveness is not simply a technical legal issue. It is very important to business. There are already many similar and general names in the marketplace. A highly distinctive name is likely to be noticed and remembered and his, therefore, more valuable.

A corporate name is confusingly similar to a trade-name or trade-mark if its use would likely lead to the inference that the business carried on under the corporate name and business carried on under the trade-name or trade-mark are the same (CBCA Regulations, s.18).

CBCA Regulations, s.25: sets out a list of factors to be considered in assessing whether a corporate name is confusingly similar to a trade-mark or trade name:

Inherent distinctiveness (whole or element of the corporate name); Length of time the corporate name has been in use; Nature of the goods, services, or business associated with the name; Likelihood of any competition between the two parties; Nature of the trade (e.g. wholesale or retail); Degree of resemblance between the corporate name and the trade-mark or trade name in

appearance or sound; Territorial area in Canada.

I. Browns Packaging Inc. v. Canada (Consumer and Corporate Affairs), [1982]

The name I. Browns Packaging Inc was not confusingly similar to Brown’s Bottle (Canada) Ltd. Descriptive elements were different “Packaging” and “Bottle”. This difference along with the initial “I” rendered the names distinguishable.

Facts: court considered an appeal made from a decision by the Director appointed under the CBCAI. Browns designed packaging products for a small number of customers whole Browns Bottle acted as a distributor for various packaging products. Although these were found not to be identical, court determined there was some overlap as they bought from some of the same suppliers and sold to some of the same customersTwo businesses bought from some of the same suppliers and sold to some of the same customers.


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Held: Since the market was a specialized one with few purchasers, there was little likelihood of confusion, and no actual confusion was established. Descriptive elements were different “Packaging” and “Bottle”This difference along with the initial “I” rendered the names distinguishable. Court also noted that at common law, a person has the right to use his own name; therefore the director’s decision should not be changed.

Sections 27 through 31 of the CBCA Regulations contain further rules about the possible confusion of names, including what the corporation must do is confusingly similar to the name of another corporation where another Corporation has not carried on business for at least two years (s.28), or where a corporation is taking over the business of another corporation and intends to use the name that the other corporation used (s.30). In general, the Corporation that wants the name must get the other corporation to (i) consent to the use of the name and (ii) undertake to dissolve or to change its name.

Misdescriptive Names

Names are also prohibited if they are “deceptively misdescriptive” Section 32 of the CBCA Regulations defines what is meant by this term. A corporate name is deceptively misdescriptive if it misdecsribes, in any language:

The business, goods, or services with which it is proposed to be used The conditions under which the goods or services will be produced or supplied, or the

persons to be employed in the production of supply of those goods or services: or The place of origin of those goods or services (e.g. “Made in Canada Mugs Inc.” if the

corporations mugs were not made in Canada)

A Corporation must use its full legal name including the legal part, on all “contracts, invoices, negotiable instruments and orders for goods or services issued or made by or on behalf of the corporation: (CBCA, s.105(5)).

Why? Where individual or on behalf of the corporation in carrying on a business but fails to clearly use the legal meaning of the corporation, the individual may be found personally liable for obligations of the business.

Commercial Tire Supply Ltd. v. Tanney, [2000]

Liability is not automatic. It depends on the facts of each case. If an individual does not take reasonable steps to ensure that she is perceived as representing a corporation rather than herself as an individual, she risks personal liability to a person that she deals with.

Facts: the defendant failed to set up a corporate name on the credit application and cheques, used to pay what were later claimed to be corporate debts, or otherwise indicate that the corporation was responsible for a credit obligation.

Provincial Registration and Licensing rules Regarding Names


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Each province regulates names used to carry on business within its borders (e.g. Ontario Business Names Act).Corporations carrying on business in Ontario using a name other than their full corporate name must register their other name under the Ontario Business Names Act.

Why? Failure to do so means that the defaulting party cannot maintain an action in the courts of Ontario in connection with an obligation of the business. With the consent of the court, an action may be permitted to proceed if (i) the failure to register was inadvertent (ii) there is no evidence that the public has been deceived or mislead and (iii) at the time of the application to court, the name has been registered (OBNA, s.7) Failure to register is also an offence (s.10), but enforcement is rare.

OBNA, s.6 provides an incentive to private enforcement of the Act (up to $500 damages)

Provinces also regulate the use of corporate names by corporations incorporated outside the province through their extra provincial licensing regimes. Corporations incorporated in other provinces or outside Canada must obtain permission in the form of a licence to carry on business (in Ontario, corporations incorporated in other Canadian jurisdictions are permitted to carry on business in Ontario without individually applying for a licence (Extra Provincial Corporations Act, s.2). Federally incorporated corporations, however, have a right to carry on business in any province.

Reference Re Constitution Act, 1867, s.91 &92 (1991): It has been held by the Manitoba Court of Appeal that a province has no jurisdiction to refuse to permit a federal corporation to use its corporate name, since use of its name relates to the status of the corporation. The court had to consider to what extent a province is competent to regulate a federal corporation’s use of names other than its corporate name and any trade-mark it owns. It held that the provincial power to regulate the use of a business name depends on whether the corporation conducts business inter-provincially or wholly within the province. Only in the latter case may the province regulate the use of the name.

OBNAs.2: requires registration of a business name used by a federal corporation were within the constitutional competence of the province regardless of the nature of the corporation’s businessA province has no jurisdiction to restrict the use of a trademark by a corporation out of concern that the trademark is similar to a business name in the use in the province. Trade-marks are a matter within federal jurisdiction.

Trade-marks Act Rules Regarding Names

Trade-mark: is a word, phrase, or symbol used in association with goods or services (Coca-cola). A Trade-name for the purposes of the Trade-marks Act is simply a name used by a business. Use of a mark in association with goods or services in the marketplace gives the owner certain rights to use the mark exclusively in association with the goods and services, and the right to claim damages. Registration of trade-marks is not required but is provided for under the Trade-Marks Act, and gives the registrant certain benefits. A trade-name for the purposes of the


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Trade-marks Act is simply a name used by a business, and is not a trade-mark unless it is used also to identify the goods or services of the business.

The words must be used as a trade mark to identify goods or services to be valid; It is not clear whether a finding that one corporate name is confusingly similar to another

under corporate law means that the trademark contained in the second name is also being infringed. Thus, a corporation may be able to obtain an order under the relevant corporate law directing someone to change its corporate name because use of the name is confusing, but it may not be able to obtain damages for infringement of a trademark;

The remedies are very different. Trademark infringement action: may entitle the plaintiff to damages and an

injunction directing the defendant to cease using the trademark and to deliver any goods bearing the mark.

Corporate statutes: results only in a direction to the corporation to change its name;

The Federal Court has jurisdiction over trademark matters, whereas corporate names disputes under the CBCA must be resolved, first, before the Director appointed under the CBCA and, then, on appeal, in provincial superior courts.

Passing –OffA person carrying on business under a name has a common law right to seek an injunction (damages may also be claimed) to prevent someone else from selling products in a manner that is likely to deceive purchasers for the products into thinking they are purchasing the first person’s products, thereby depriving her of profit. “Passing off” actions may now also be brought under section 7 (b) of the Trade-marks Act

Supreme Court of Canada has held that to succeed in a passing-of action the plaintiff must show:

The plaintiff’s business has a reputation or goodwill at the relevant time; The defendant has made a misrepresentation in the course of trade to prospective

customers to the effect that there is a connection between the business of the plaintiff and that of the defendant. There is no requirement that the misrepresentation be deliberate and proof of intent to injure in not required, so long as injury to the plaintiff’s business was a reasonably foreseeable consequence of the misrepresentation

The misrepresentation must cause actual damage to a business or the goodwill of the plaintiff, or be likely to do so

Greystone Capital Management v Greystone Properties

To establish passing-off the plaintiff must prove that it has a reputation and there is likelihood the public is being deceived.

Facts: Greystone Capital Management (Capital) has started carrying on a business of soliciting investments under its corporate name in BC in 1994. Several companies related to each other began carrying on similar and competing businesses, each using the word Greystone. The court http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:40 PM

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found that before the defendant’s had begun at him or her ato use the Greystone name, Capital has established a reputation in the investment community inBC, even though they had no office or even a telephone listing in the province.

Held: the adoption of corporate names incorporating the word “Greystone” constituted a misrepresentation by the defendants that their businesses were connected with Capital’s and that some people had confused the businesses. The court ordered the defendants to change their corporation names to names that did not include the word Greystone within four months.

Brick’s Fine Furniture Ltd. v. Brick Warehouse Corp, [1998]

Passing off can be used only to protect a business against others operating in the region in which the plaintiff carries on its business. Once a trademark is registered, a court must recognize the plaintiff’s right to use the mark across Canada.

Facts: Dispute between the national furniture retailer Brick Warehouse Corp. (Brick Warehouse) and a furniture business in Winnipeg called Bricks Fine Furniture Ltd. (Brick Fine Furniture). Brick’s Fine Furniture challenge d the Brick Warehouse’s right to use its corporate name before the director appointed under the CBCA. At about the same time, Brick Warehouse sued Brick’s Fine Furniture in the Federal Court for infringing its trademark “Brick”, which it had registered in association with furniture. Bricks Fine Furniture counterclaimed against Brick Warehouse alleging passing off contrary to s.7 of the Trademarks Act Held: Federal Court of Canada resolved the issue by requiring both parties to post signs in their stores indicating that they were not associated with one another (an arrangement that remains in place fifteen years later).

Names and the Incorporation Process

A name-search must be obtained and submitted with the other documents required for incorporation.

Why? The name search is to ensure that the name chosen for incorporation is not confusingly similar to names already in use. Incorporation under the laws of a particular jurisdiction does not mean that the jurisdiction is conferring any absolute proprietary right to the name.The incorporator takes the risk that he may be required to change the corporation’s name if it is deceptively similar to a trade name, trade mark, or corporate name already in use (CBCA, s.12), or be sued for trade-mark infringement or passing off. (Some provincial jurisdictions no longer even review the required name search. The obligation to get one is imposed simply to ensure that incorporator has done the search.

BC: a name must be pre-approved and reserved by the provincial Corporate Registry.


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Federal: The federal government agency responsible for incorporation, Corporations Canada carefully reviews name searches and will not permit an incorporation to go ahead if it has concerns about the name

Why?This review provides assurance that the name is available and that problems with its use will not arise in the future. It is advisable to “pre-clear” the name by taking advantage of the possibility of reserving the name for up to 90 days in advance of incorporation (CBCA, S.11). By doing so, if Corporations Canada has any concerns about the name, there is an opportunity to address them in advance of the proposed incorporation date.

NUANS Database (Newly Upgraded Automated Name Search)

NUANS database, search all the names, it tells you whether or not your name is confusingly similar. It is a name-search report on the proposed name of the corporation. The NUANS database includes corporate names, trade-marks, and business names from across Canada. It is necessary to request a search that is “biased” meaning weighted in favour of the jurisdiction chosen for incorporation.

A name search is not required if the incorporators are content simply to have a number assigned by the corporate regulator as the name for the corporation (e.g. 123456 Ontario Inc.)

Numbered company: company that has as its name the number assigned to it by the ministry. If you don’t want to pay for a NUANS search and don’t need a corporate name. I.e. holding companies, don’t have any business with the public. Media sometimes gets suspicious – but really they’re not trying to conceal their identities because numbered companies do not give you anonymity, you can just do a corporate search and find out who they are on the public file.

Why? This may be attractive if the corporation will be carrying on no business in which public recognition would be an asset, such as simply holding a portfolio of private investments, or where a suitable name cannot be found. (Where a corporation is incorporated with a numbered name, the directors may amend the articles to adopt another name without the approval of shareholders, a requirement for any other amendment (CBCA,s. 173). A corporation with a number name may use another name so long as it complies with provincial registration requirements, and corporate law rules requiring the use of the full corporate name on contract, invoices, and other documents.

Persons seeking to incorporate under the CBCA must submit a Corporate Name Information Form or otherwise provide certain information relating to the name they have chosen to assist Corporations Canada with its assessment of whether the name is available. The following questions must be addressed:

What type of business will the corporation carry on? Where will the business be carried on? What type of clients (e.g. consumers, retailers, etc)? What is the derivation of any distinctive elements of the name? Will the corporation be related to business with similar names?


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Will the corporation have a foreign parent corporation with a similar name?

Pre-Incorporation Contracts

Casebook 180-181, 195-206Van Duzer 186-192CBCA 14OBCA 21

What is the effect of contracts entered into on behalf of a corporation before the date if its incorporation? Answer: Sometimes a person typically referred to as an agent or promoter, will purport to enter into a contract with a third party on behalf of a corporation that has not yet come into existence. Such a pre-incorporation contract may occur when there has not been a time to set up the corporation. In these circumstances, several difficult issues arise:

Is the agent liable to perform the contract personally? Is the corporation liable if it adopts the contract after it comes into existence? If the corporation becomes liable, does the agent cease to be liable?

Examples of Pre-Incorporation Contracts:

Both parties to the contract (the promoter and the contracting party) know that the company has not yet been incorporated;

The promoter knows that the company has not yet been incorporated but the contracting party does not;

Neither party to the contract knows that the company has not yet been incorporated; the promoter mistakenly believes that the company has been incorporated and the contracting party relies on the promoter’s representations;

Promoters cases: promoter is person who is going to enter into contract on behalf of corporation yet to be formed. Purpose of these cases is to determine whether the corporation should be bound by a contract simply because the promoter has forced it to be bound, in light of the fact that the corporation does not actually exist.

Common Law

Anglo-Canadian law does not recognize the existence of a corporation until a certificate of incorporation has been issued. Under common law, it was clear that the corporation was not liable for contracts purported to be entered into on its behalf before it came into existence and could not be made so by any unilateral act of adoption or acceptance afterwards. For the corporation to be liable there has to be a new contract between the corporation and the third party (Kelner v Baxter). There needs to be fresh consideration. Such a contract would require a post-incorporation exchange of promises between the corporation and the third party.


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3 policy questions:

1) Should companies be bound by pre-incorporation contracts made on their behalf ?2) If a company is to be bound by a contract made before the company comes into

existence, what class of persons should have that authority?3) Why does CBCA s.14(2) only enable a corporation to adopt a written pre-incorporation

contract when the OBCA s.21(2) does not adopt this restriction?

Agent Liability

Liability of the agent depends on the intention of the parties (which is often not clear), as determined by the courts based on all the circumstances. The problem is that although it is possible for the parties to state clearly whether the agent is to be liable, they seldom do. In many cases the intention of the parties is ascertained by the courts from very refined interpretations of the language the parties use in the contract (e.g. some cases held that the agent was not liable if the contract signed by the agent was expressed as made “by” the corporation, but he was liable if the contract was said to be made “for” the corporation.

Kelner v. Baxter, [1866]

If the parties both knew that the corporation was not in existence, a presumption arises that the parties intended that the agent would be personally liable (in this case Baxter).

Facts: Wine merchant offers to sell wine to individuals on behalf of a corporation. Three individuals did form the corporation after the contract is made. But the corporation becomes bankrupt. The corporation purported to adopt the contract.

Issue: If the wine merchant must rely on corporation, he/she will be unpaid, but if they can rely on the individuals they will be paid.

Held: No theory in law that allows the corporation to adopt and ratify a pre-incorporation contract because the corporation could never be a party to the contract since it doesn’t actually exist. The court held that the corporation intended to enter into a binding contract; and since there is no theory of law allowing such an action, we must infer this intention onto the individuals, so they were held liable for the contract. Baxter gets screwed!

Black v. Smallwood, [1966]

If the parties both think that the corporation exists no such presumption arises and the parties’ intention had to be determined from all the circumstances.

Facts: Black entered into contract with Smallwood who purported to act on behalf of Western Suburbs Holdings Pty Ltd. –both believed the corporation was incorporated. Smallwood signed http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:40 PM

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the contract as director of the corporation. In fact, the corporation had not been incorporated. When Black sued Smallwood alleging he was personally liable, the court held that he was not. Since the parties both believed that the corporation was in existence, the court determined that they had not intended Smallwood to be personally liable.

Held: Where the agent knew that no corporation was in existence, but the third party believed that she was dealing with an existing corporation through the agent, one might think that no contract could arise because there would be no consensus between the parties. Some courts have reached his conclusion (Wickberg v. Shatsky, (1969). Nevertheless, courts often have held the agent liable in contract in these circumstances. Even if the contract cannot be enforced against the agent, the third party may be able to claim damages against the agent where she can show a misrepresentation by the agent that she was acting for a corporation which induced her to enter the contract to his/her detriment.

Issue: Newborne, Black v Smallwood

Prof calls these non-incorporation cases, in these cases the promoter did not sign the contract as a person on behalf of the corporation, he signed the contract with the corps name. There was no corporation, he signed as though the corporation existed. Courts in both cases took the view that this situation was materially different to Kelner v Baxter, if you sign in name of non-existent corporation this is not as in Kelner a human being signing and binding themselves. This is a corporation signing so no-one is bound, no one has to pay. Third party has no remedy.

Discussion emerged what distinguishes these cases from Kelner v Baxter, does liability turn on the words you happen to use in the signature block of your contract? The notion that so much would turn on the words used was troublesome for modern contract times. Seems to be too arbitrary. Results change in CBCA, then OBCA, statutory provision that tried to regulate the common law treatment of pre incorporation contracts. Prof says the provisions don’t work, its because the very subject of it cannot be dealt with in corporate law. So s.14 CBCA, S21 OBCA: they don’t work because they just cant really be resolved the odd problems of pre-incorporation contracts in a statute, no fault of the drafters, is just an inherent problem.

Section 14 of the CBCA (applies only to written agreements):1) Agent liable unless agrees to contrary.2) If corporation comes into existence and adopts, then agent relieved of liability

Statutory Rules, s. 183) 3rd party may apply to court for apportionment of liability between agent and

corporation. This is intended for the situation where corporation adopts contract but has no money (Landmark Inns- Agent no longer wanted to go through with lease so created a corporation w/ no money and the corporation adopted contract, then agent said he was no longer liable.

Landmark Inns of Canada Ltd. v Horeak

To relieve a person of personal responsibility, the contract must contain something more. As CBCA, s.14 says: the cotnract must contain an express provision that a person who enters into a http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:40 PM

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written contract in the name of the company before it comes into existence is not personally bound by the contract.

Facts: Interpretation of (s.14 CBCA). Optical and contact lens business, South Albert Optical and Contact Lenses Ltd. Action for damages arising out of the alleged breach by the defendant of a contract to lease certain premises in the plaintiff Shopping Centre in Regina. Defendant signed the offer to lease. Horeak and partners met in 1979 and decided not to lease plaintiff’s premises, but rather to lease premises in Regina’s Southland Mall instead. Lease would not be proceeded with.

Held: Horeak having entered into a written contract in the name of South Albert Optical Lenses Ltd before it came into existence is personally bound by the contract unless the provisions of s.14(2) or (4). The refusal to proceed with lease resulted in the plaintiff being awarded six months lost rental from 1979-1980 ($1,792.99)CBCA, s 14 codifies the law on pre-incorporation contracts.

Remaining Problems with the Statutes:1. CBCA only applies to written contracts

OBCA applies to oral and written2. If corporation never incorporated what rules apply?

One proposition is to use the conflict of laws rules for the jurisdiction of the courts. Another proposition is for the court to determine “where did the parties intend to

incorporate?” No answer yet from the courts

3. Requirement for a “contract”? 2001 Amendments to CBCA eliminate problem – includes “purporting to enter contract” Re OBCA – held contract not requirement (Szecket v. Huang)

4. When does adoption occur? (Sherwood Design Services)

Test for Adoption Under the CBCA and OBCA: Several cases have addressed what is required for adoption of a pre-incorporation contract. In Design Home Associations v. Raviv (2004) the court had to interpret the words “any action or conduct signifying an intention to be bound,” the test for what constitutes adoption for the purposes of the CBCA and OBCA. Under both the CBCA and OBCA, adoption must be within a reasonable time following incorporation.

TMD Investments Led. v. Fiddleheads Café Inc. (2007): held that starting to pay rent under a lease, beginning almost one year after incorporation, did not signify an intention to be found within a reasonable time.

Ontario Select Committee on Company Law, Interim Report (1967)

No pre-incorporation contract is binding upon the company, no matter how or by whom the contract is made. For the company to be bound by such a contract a new contract must be made between the newly-incorporated company and the contracting party. A corporation may ”adopt” or “ratify” a promoter contract made on its behalf prior to incorporation.


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Sherwood Design Services Inc. v. 872935 Ontario Ltd., [1998]

Under both the CBCA and OBCA, adoption must be within a reasonable time following incorporation.

Facts: King entered into K w/ Sherwood Designs on behalf of a business to be incorporated.King went to lawyers and said that he needed a corporation to close the transaction. Law-firm had“shelf” corporations in existence, so lawyer drafted the resolution, resignation and re-election ofKing etc. [everything needed to transfer] and a letter explaining that the incorporation would behappening by the time of closing day and sent to Sherwood. King decides not to close the deal.Later on, the shelf corporation was transferred to another client. Then, Sherwood decides to suethe shelf corporation based on the allegation that the letter, drafting of transfer etc. amounts to anadoption of the contract by the shelf corporation. Problem is that the shelf contract is now owned by anotherclient. There was an adoption. It was important that lawyers letters should be relied upon, andthe letter appeared that there was an adoption by the corporation.(Dissent: The transferdocuments were never executed :. No adoption).

The vendor alleged that the agreement to buy the property was pre-incorporation contract that had been adopted by the corporation based on the sending of the draft documents by the purchaser’s lawyers

Issue: in the case was whether the letter by the purchaser’s lawyers to the vendor’s lawyer, indicating that the shelf corporation would complete the transaction and attaching drafts of the documents necessary to complete the purchase, should be viewed as an adoption of the contract by the shelf corporation.

Held: The Ont. CA held that the communication was sufficient evidence of the corporation’s intention to be bound

Statutory ReformCommon law rules were unsatisfactory for many reasons. In many cases, third parties were denied relief based on highly artificial conclusions regarding the parties’ intention. More importantly, the inability of the corporation to adopt contracts made for its benefit was often manifestly inconsistent with what the parties, in fact, intended. As a result, statutory reform has been attempted in most jurisdictions. Section 14 of the CBCA attempts to reform the law to make the individual agent liable in most circumstances and to permit the corporation to adopt contracts made on its behalf before it came into existence.

The elements of the scheme are as follows:


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A person who purports to enter into a contract with a third party by or on behalf of a corporation before it comes into existence is personally bound to perform the contract and is entitled to its benefits;

If a corporation comes into existence and adopts the contract, the corporation is bound by and is entitled to the benefits of the contract and the agent is no longer bound by or entitled to the benefits of the contract;

The third party may apply to a court for an order fixing both the corporation and the agent with liability (joint, joint and several, or apportioned), regardless of whether the corporation has adopted the contract or not;

The third party and the agent may agree in the contract that the agent is not bound by the contract in any event.

Now agents bear the risk of all liability prior to adoption of a contract, unless the agent’s liability is expressly excluded by the agent and the third party, in which case the risk of non-adoption is transferred to the third party.This arrangement reflects the view that the agent is usually in a position to ensure that the corporation is incorporated and adopts the contract, and so can manage the risk of non-adoption more effectively that the third party

Key Points:

1) The CBCA and the corporate laws of Alberta, Manitoba, and Saskatchewan apply only to written contracts. By contrast, the OBCA, NBBCA, AND QCA do not distinguish between oral and written contracts, while the corporate laws of BC, NS AND PEI do not address pre incorporation contracts at all. This difference may lead to anomalous results. (e.g. if an agent enters into oral pre incorporation contract and then incorporates an Ontario corporation for the purpose of fulfilling the contract, the corporation can adopt the oral contract made by him and he is relieved from liability. But if he incorporates a federal corporation, it cannot adopt the contract and his liability is determined by the common law).

2) If a corporation is never incorporated, it is unclear what rules should apply to determine the respective liability of the agent and the corporation.

3) The language used in some of the corporate statutes is problematic. Section 21(1) of the OBCA for example says that the agent is liable if she “enters into an oral or written contract in the name of or on behalf of a corporation before it comes into existence...” A close reading would suggest that it is necessary to determine that a contract exists for the section to have any application. OBCA, s.21(2) permitting the corporation to adopt a contract made for its benefit, applies only if there is a contract, suggesting that adoption is permitted only where the agent is bound personally to a contact under common law rules.

Szecket v Huang. Ontario court of Appeal held that the intention of section 21 was to replace the common law and that it was not appropriate first to ask if there was a contract at common law before applying the statutory schemehttp://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:40 PM

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Finally, the courts have been reluctant to grant relief under the provision permitting a court to hold the agent wholly or partly liable after the contract has been adopted by a corporation. The provision was intended to provide a remedy in circumstances where the agent has arranged to have the contract adopted by a corporation with insufficient assets to satisfy the obligations under the contract.

Bank of Nova Scotia v. Williams, [1976]

The court refused to exercise its discretion because the third party entering the contract was not misled as to whom it was really contracting with and who would be responsible for performing the obligations under the contract.


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10. The Corporation in Action

Liability of Corporation for Crimes and Torts

Casebook 147-159VanDuzer 195-207

It is often helpful to think the corporation having legal characteristics similar to those of natural persons. However, it is necessary for corporate persons to act through human agents. Corporations acting through agents can enter into contracts and commit crimes and torts. The rules governing corporate liability are fundamentally important to all of the stakeholders in the corporation because they determine the legal consequences of the corporation’s behaviour in the market.

In imposing contractual liability, the courts have focused on whether the individual whose actions are alleged to have given rise to corporate liability was an agent of the corporation with authority to incur liability on behalf corporation. By contrast, to impose liability on a corporation for a crime or tort, but courts have asked whether the person could be considered to be the same as the corporation for the purpose of the activity alleged to constitute the crime or the tort.

Recently, the Criminal Code of Canada (C-46) was amended to substantially broaden the circumstances in which Corporations may be held criminally responsible.

Criminal Code-Bill C-45: The New Standard for Corporate Criminal Liability in the Criminal Code

Bill C45- Amendment to Criminal Code. s22.1, 22.2 – today the principles on which a corp can be criminally liable. Makes it easier to prosecute a corp for crime even if cant identify one individual for it.

-enacted in response to the 1992 Westray Mining disaster in Nova scotia where 26 miners lost their lives-the tragedy was aid to have been caused by the mining company’s non compliance with health and safety requirements-fundamental change-new regime of criminal liability that applies not only to corporations, but unions, municipalities, partnerships and other associations of persons-prosecutors no longer have to prove fault in the boardrooms or at the highest levels of corporation; the fault of even middle managers may suffice-expands the net of corporate and organizational liability


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Senior officer (broadly defined)

need not be a “directing mind” as defined under the common law—means any person who either plays an important role in setting the corporation’s policies or is responsible for managing an important aspect of the corporation’s activities. May be split between multiple representatives of a corporation

Representative

means a director, partner, employee, member, agent or contractor of the organization-this definition includes any person who acts on behalf of the a corporation

Applies to all forms of business organizations

No case law-so will likely be informed by the Common LawLiability of corporation triggered by specified actions of a “senior officer” (a representative who)plays an important role in the establishment of a corporation’s policies, or

Is responsible for managing an important aspect of the corporation’s activities” andCompare w. “directing mind”: arguably places the bar a little higher, now has to play a role in the establishment.

Fault based offences [s. 22.2]:

Exist where the senior officer, acting at least in part to benefit thecorporation and acting within the scope of their authority [same as CL]:a) is party to an offenceb) has the required mens rea to be party to the offence and directs the work of others so that they commit the offence [allows for split in the mens rea and actus reus-not found in CL];c) knows that a representative is about to be party to an offence and doesn’t take reasonable measures to stop them [positive duty to act-not found in CL]

Corporate liability for fault-based offences is now triggered in 3 distinct circumstances:

1. A senior officer, acting within the scope of their authority is a party to an offence2. A senior officer having the mental state required to be a party to an offence and acting

within the scope of their authority, directs the work of the other representatives of the corporation so that they commit the act or omission specified in the offence

3. A senior officer, knowing that a representative is or is about to be party to an offence, does not take all reasonable measures to stop them from being a party to the offence

-the offence is committed by a person who has the requisite guilty mind


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-what it means for a senior officer to depart “markedly from the standard of care that, in the circumstances, could reasonably be expected to prevent a representative from being party to [a negligence based] offence” will undoubtedly be the subject of much litigation

Negligence based offences [s. 22.1]:

In order for a corporation to be a party to an offence you need:1) One of its representatives is party to the offence OR2) Two or more representatives engaging in conduct that if engaged in by one person

would have made that person a party to the offence AND3) a senior officer departs MARKEDLY from the standard of care that could

reasonably be expected to prevent them from being party to an offence.

Sentencing: when sentencing the court must take into account:

Any advantage realized Degree of planning – the duration and complexity Impact of sentence on viability of organization Cost to public authorities. Regulatory penalties Penalties imposed on representatives Measures taken to reduce likelihood of recurrence.

Liability of Corporations for Crimes

2 major issues:

(1) why should corporations be held criminally responsible at all?(2) under what circumstances should criminal responsibility be ascribed to corporations,

particularly in the case of mens rea offences?

No Soul to damn: no body to kick—

means that no mens rea can be attributed to a corporation. It seems unlikely that a conviction for a criminal offense would have the same deterrent effect on a soulless Corporation as it would have on an individual. Imprisonment of the corporation itself is not possible and, if a fine is imposed on a corporation, its shareholders, employees, and others with financial claims against the corporation will suffer. A substantial Fine usually hits the pockets of those who are least to blame: the shareholders of the convicted corporation or the corporation’s employees if the sanction is severe enough.

Yet corporations commit real crimes such as anti- trust violations, racketeering, drug money laundering, financial frauds and industrial pollution. For a time, the courts held that corporations were immune from criminal liability. More recently, the courts have developed rules on the basis of which corporations may be convicted of criminal and regulatory offenses.


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Absolute Liability Offences

These offences require only that the accused engaged in certain proscribed behaviour (e.g. driving tickets).No state of mind or mens rea needs to be shown, and no defence is available once the behaviour has been proven. The accused cannot argue that he/she made and honest mistake

Why? They are designed to encourage compliance with some regulatory scheme and address behaviour that is not criminal in nature. Corporate liability for an absolute liability offence arises when a person who engages in the behaviour does so on behalf of the corporation. Even all acts of employees in the course of their employment will give rise to corporate liability for such offences.

Absolute liability offences punishable by imprisonment have been held to be unconstitutional as violating section 7 of the Charter – the right to life, liberty, and security of the person – with respect to the individual accused (Reference re: Section 94(2) of the Motor Vehicles Act (1985). Since a corporation does not have a s.7 right. A corporation charged with an offence may challenge the constitutionality of the offence if it would violate the section 7 rights of an individual accused (R. v. Wholesale Travel Group Inc., (1991). In such a challenge were successful, the corporation could not be held liable for committing the offence.

Why? The effect of the Charter is that many absolute liability offences are now treated as strict liability offences, meaning that the accused can avoid liability if he can show he exercised reasonable care in the circumstances by using the due diligence defence.

Strict Liability Offences

Are subject to a defence that the accused acted reasonably in the circumstances, often referred to as a “due diligence defence.” The fault required to be shown is negligence. Once it is proven that the act was committed, the burden is on the accused to show on a balance of probabilities that it was not negligent.

Presumption of Strict Liability: the SCC recently said that offences should be presumed to be strict liability offences unless a due diligence defence is expressly negated by the legislative provision creating the offence

It is difficult to articulate precisely what is required to meet the standard of teaching “due diligence.” It is malleable concept, the content of which is fact specific.

R. v. MacMillan Bloedel, [2002]

Due diligence is established where the accused took all reasonable steps to avoid committing the offence.


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Facts: concerned a fuel spill that was caused by pipe corrosion that contravened provincial environmental law.

Held: the corporate accused could avoid liability either where the cause of the events constituting the offence, in this case, the corrosion was not reasonably foreseeable or, if the accused knew or ought to have known of the hazard, where the accused took all reasonable steps to avoid committing the offence. The court found that corporate accused in this case exercised due diligence because it was not aware of the corrosion and could not have foreseen it.

R. v. Petro Canada (2003): the accused need not prove the cause of the skill to take advantage of the defence. If the exact cause of the spill is unknown, however, the accused must show that it took all reasonable care to avoid any foreseeable cause.

R. v. Sault Ste Marie (1978): For a corporation to rely on this defence, the person who must exercise due diligence on behalf of the corporation is someone who can be considered to be the directing mind and will of the corporation such that she may be considered to be the corporation itself . This will be the person or persons who have responsibility for the business of the corporation in the area in which the offence occurred. The concept of the “directing mind and will” of the corporation had been used by the courts traditionally to determine whether a corporation is liable for a mens rea offence.

Offences Requiring Mens Rea

Most criminal offenses require that the accused have a degree of knowledge or intention, referred to as mens rea, before it can be a conviction. Early common law cases held that a Corporation could not be convicted of an offense requiring mens rea. Now, liability has been found on the basis of the “identification theory.”

Under this theory, criminal liability may attach if the person having the necessary mental state and committing the crime has the identity of the corporation; in other words, she is the corporation for the purposes of the behaviour constituting the offence. Typically, the natural person will be criminally responsible as well (because the natural person is the corporation for the purposes of committing the offence, it is not possible for him, at the time to conspire with the corporation to commit the offence).

The Criminal Code was amended effective 31 March 2004 to alter the rules used to determine when a corporation is criminally responsible; expanding the categories of persons whose actions can trigger corporate criminal liability. This is described as revolution in the criminal liability of corporations.

Identification Theory

-a corporation is an abstraction-it had no mind of its own


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-its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation-acting and directing will-culpable intention (mens rea) and their illegal act (actus reus) were the intention and the act-the element of mens rea in the corporate entity: establishes the “identity” between the directing mind and the corporation which results in the corporation being found guilty for the act of the natural person, the employeeVital organ of the body corporateDirecting mind: officer or senior management employee as the corporation’s primary representative through whom the party acts speaks and thinks

Directing Mind and Will Doctrine/Criminal Liability—(No vicarious liability for criminal law)

Doctrine of directing mind and will – so people so high ranking they are they very essence of the company. They are the directing mind and will. When those people do something, the corporation is acting. This became crucial to a limited set of tort liability claims, but most tort claims can be done through agency principles but where it became very important was criminal liability as we do not have vicarious liability for this.

Only way Corporation could ever commit a crime was from directing mind and will, so doctrine originates in tort but became important in criminal.

Always talking about in these cases was whether the individual should go to jail, but is the corp ALSO guilty? Not, instead individual will always be liable for crime but will it ALSO be liable? If it is someone of directing mind and will corporation will be guilty.

The Common Law Test

Ask: Is the human actor who committed the crime a vital organ or a directing mind and will of the corporation? Any person who has governing executive control over an area of the corporation’s business or affairs is considered to be the corporation in relation to that area.

Problem: There may be many directing minds. There is no need for the directing mind to have general decision making power over all aspects of the corporations business. Not only the president or the board of directors may be the directing mind; each person responsible for discrete aspect of the corporation’s business may incur criminal liability.

The person is the “directing mind and will” in an area if:

discretionary power to make policy and/or decide how to implement it in that are [inwhich the criminal activity took place] (supervisory, executive or management power);

if within area of responsibility - does not matter if criminal act not authorized or evenexpressly forbidden by corporate policy –the risk is the corporation’s to make surethat employees don’t commit the crimes] (e.g. Waterloo Mercury-)

The area of responsibility can be defined functionally, geographically or otherwise (Waterloo Mercury).


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R. v. Waterloo Mercury Sales Ltd. [1974]

Liability was imposed on a corporation’s sales manager for causing odometers to be turned back, because he was found to be the directing mind of the corporation for the purposes of the criminal activity.

In essence the test is whether an employee has been delegated, expressly or by implication the authority to design and supervise the implementation of corporate policy, as opposed to only the authority to carry out such policy.

Held: Corporation held to be responsible for turning back the odometers on the cars they were selling. They were held liable because the person who had authorized/directed the criminal activity had management/supervisory power in that discrete area [used car sales] and thus was considered the directing mind and will.

The car dealership had a policy against turning back odometers, but the court held that this did not absolve the dealership from responsibility.

Exception: directing mind “acting totally in fraud of the corporation”. The corporation gets no benefit and fraud a substantial portion of regular activities. VERY HIGH STANDARD (almost impossible to meet (Canadian Dredge and Dock).

Why? The result of holding corporations liable for acts by people in the area of their responsibility is that the corporation bears the risk associated with unauthorized activity. It is not clear whether there is anything a Canadian corporation may do to avoid liability. In the UK it has been held that a corporation will be able to avoid liability involving the actions of a manager if it has in place an adequate system for selecting managers, takes sufficient care to train managers, and has a system for supervising and controlling them (Tesco Supermarkets Ltd.v. Nattrass,(1972)). The Tesco case has been cited in a number of Canadian cases holding that, as a result of such a system of supervision and control, a manager could not be considered to be a directing mind and will of the corporation (Sault Ste. Marie).

Criticism: Canadian courts have criticized Tesco on the basis that it set too high a standard for finding that a person is the directing mind and will of the corporation (R. v. Canadian Dredge and Dock Co.,(1985)).

R. v. Safety-Kleen Canada Inc., [1997]

A truck driver employed by a waste disposal business was not the directing mind and will of the corporation and thus the corporation was not liable for the driver’s actions in transporting hazardous waste without the necessary authorization. http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:40 PM

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Facts: The driver was the corporation’s only representative in a large geographical area and was responsible for collecting waste, billing, completing documentation, maintenance, and responding to calls from customers and regulators.

Held: The COA found that notwithstanding these responsibilities, the driver did not have any managerial or supervisory functions with no influence over the corporation’s policies.

Actions by employees giving rise to corporate liability are not limited to those taken in the course of their employment. That is, in accordance with the terms of their contracts of employment. The corporation is responsible for any act by a directing mind in the general area of her responsibility, even if not specifically authorized by a corporate rule or policy. Indeed even if there is a corporate rule or policy prohibiting the action, that is no defence to corporate liability.

Can there be corporate liability where the person alleged to be the directing mind of the corporation was acting in his own interests and against the corporation’s? Leading case on corporate criminal liability:

R. v. Canadian Dredge and Dock Ltd., [1985]

The directing minds were not engaged in a scheme to deprive their corporations of all benefits associated with the dredging contracts and so the corporations were liable.

Facts: Several corporations were charged with fraud. They agreed in advance on who would submit the lowest bid to do dredging work at an inflated price. The lowest bidder would make payoffs to the others and subcontract some of the work to them. This fraud was negotiated by senior officers of each of the corporations.Sometimes an officer would keep for himself a portion of the payoff that was supposed to go to his corporation.The corporations argued that the identification theory could not operate when the alleged directing mind is perpetrating a fraud on the corporation in this way.

Held: The court accepted that, where a person ceases completely to act in the interest of the corporation and acts “totally in fraud of the corporate employer” appropriating to herself all the benefits that should have gone to the corporation, the identification theory should not operate. However on the facts of this case, the requirements of this very narrow exclusion were not met.

Oger v. Chiefscope Inc., [1996]

A corporation was not responsible for the fraud of two individuals who were the directing minds of the corporation because all of their actions were for their own benefit. They stripped the corporation of all of its assets, including those obtained fraudulently. The court determined that the individuals were not acting as the corporation.


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Liability of Corporations in Tort

A corporation may be liable in tort both vicariously and directly, in the sense that the corporation itself is found to be committing the tort.

Vicarious Liability

Corporations may be vicariously liable where a tort has been committed by someone acting on behalf of the corporation. In such a case, the person is liable for the tort, but the corporation may be vicariously liable as well where two criteria are met:

Requirements: The person committing tort must:

1. There is a relationship of master and servant between the person and the corporation. In other words, the person must have the legal status of an employee, not an independent contractor

2. The person committing the tort was acting in the course of her employment, and not on a frolic of her own.

Ask: Was the employee was acting within the course of her employment?

Why? It is necessary to remember that a director and officer of the corporation is not an employee simply because she is a director or an officer. In many cases, especially in smaller corporations, the directors and officers will be in employment relationships with the corporation, but this legal relationship is distinct from their relationship as an officer or director.

Direct LiabilityThe corporation may be directly liable for a tort if the person committing the tort is not merely an employee but can be considered the directing mind and will of the corporation in such a way that the acts done are the acts of the corporation itself. Direct liability has been imposed on essentially the same basis as described for the imposition of criminal liability under the common law.

Lennards Carrying Co. Ltd v. Asiatic Petroleum Co Ltd., [1915]

Direct liability was imposed where the boilers of a ship owned by the corporation proved defective and the cargo was lost. Since this person was the directing mind and will and responsible manager of the corporation for the purposes of taking care of the ship the corporation was held liable to the owner of the cargo for its loss.

Held: HL held that the person who was negligent in not knowing about the defective boilers was the responsible manager of the ship.


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Nelitz v. Dyck, [2001]

Facts: an insurer made an appointment for an insured person to visit a chiropractor in connection with the resolution of the person’s claim against the insurer. The insurer directed the person to submit to an examination by the chiropractor, but neither the insurer nor the chiropractor sought or obtained her written consent to the treatment or advised her that she had the right to refuse the treatment. She sued the chiropractor and the insurance company for the battery.

Held: The Ontario COA held that the insurance company was not vicariously liable for the actions of the chiropractor because he was an independent contractor. The court held that the insured could be held directly liable on the basis that it retained the chiropractor to commit the tort. The insurer avoided liability because the court found that the insured person had consented to the examination.


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Corporate Agency (Liability of Corporations in Contract)

Casebook 249-262VanDuzer 207-221CBCA 16(3), 17-8OBCA 17(3), 18-9

General Rule

A corporation can only act through natural persons to conclude contracts and otherwise enter into transactions. A person acting on behalf of someone else is referred to as an agent, and the law dealing with the ability of such a person to bind the corporation in contract is a branch of the law of agency.

Why? The law of agency is hard to apply because of the size and complexity of many organizations. Agents will include officers and directors and in some cases sales people, purchasing clerks. Also, the way agents get their authority to act on behalf of the corporate principal is not always easy to pinpoint.

The rules regarding corporate liability in contract attempt to balance:

(a) the corporation’s interest in avoiding liability for unauthorized acts of agents with (2) a third party’s interest in being able to rely on an agent having authority to act on behalf of the corporation with undertaking a minimum of investigation.(The rules aren’t really all that great at giving us a bright-line test for agency. So, for “big-ticket” transactions, agency is usually assured-harder situations are the every day transactions)

The issue of authority comes up most often in circumstances in which the corporation has refused to perform its obligation to a third party on the basis that the agent had no authority to bind the corporation and the third party sues the corporation. Any rule about the authority of agents must take into account that it may be impossible for the third party to determine if the actual authority has been given to an agent because authority may be conferred in a document to which the party has no access.

Why? In large transactions, the parties will do a significant amount of investigation to insure that the person executing the agreement has the authority to do so. But the vast majority of transactions between third parties and corporations, are entered into without the third party enquiring whether the person has authority to bind the corporation. Fortunately, most transactions occur without the issue of authority arising.

The issue of authority: Comes up in cases where the corporation has refused to perform its obligation to a third party on the basis that the agent had no authority to bind the corporation, and the third party sues the corporation.


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Common Law Rules

General Rule: The person who falsely represents that he has authority may be liable for breach of warranty or fraudulent misrepresentation, but the corporate principal is not. Where the agent has some connection with a corporate principal—some ability to act on the corporation’s behalf—the general rule is that an agent cannot bind the corporation unless she has some kind of authority from the corporation to do so.

At common law, the following types of authority were recognized:

Actual authority: The agent is actually authorized by the corporation to enter into the obligation sought to be enforced against the corporation.

It is a legal relationship between the corporation and the agent that may arise as a result of powers being conferred on the agent by statute, the articles, the bylaws, a resolution of the board of directors, the terms of an employment contract, or some other delegation within the organization of the business. The directors delegate their authority to the officers, who delegate it to employees, contractors, and others. Actual authority includes authority expressly given and authority that is implied.

SMC Electronics Ltd. v. Akhter Computers Ltd., [2001]

A third party dealing with an agent may be unaware of the person’s actual authority, but any agreement entered into with the third party is binding on the corporation, if it falls within her actual authority.

Held: a person with the job title “director of sales” has the implied authority to conclude a significant commission-splitting arrangement with another supplier on the basis that entering into such an agreement on behalf of the corporation was reasonably incidental to a job with this title.

Why? A careful third party will want to know that the person she is dealing with has actual authority, but in many cases it is difficult to achieve this because they will not have access to the internal corporate records or other private documents that create the authority (only powers in the articles and the corporate statute are matters of public record). As a result of this difficulty, third parties must rely on apparent authority.

Apparent authority: also called “ostensible authority” this authority is created by a representation by someone on behalf of the corporation to a third party that the person the third party was dealing with has authority to bind the corporation. It was the authority of the agent as it reasonably appears to the third party. It is s a legal relationship between the corporation and the third party created by a representation on behalf of the corporation that the agent has authority to contract with the third party. -The representation may be express, or implied from the conduct of the corporationActual authority may or may not exist, what matters is the representation.


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Supplies Ltd. v. Engelhard Industries of Canada Ltd., [1979]

Behaviour of an employee that constitutes a representation amounting to apparent authority will be binding on an employer corporation.

Facts: Cook had arranged to have his employer, Canadian Laboratory Supplies, purchase platinum from Engelhard. Cook received the platinum and then sold it back to Engelhard as used platinum and then pocketed the money. Cook had no authority to buy the platinum on behalf of Canadian Laboratory Supplies. In litigation over whether the contracts under which Canadian Laboratory Supplies bought platinum from Engelhard were enforceable, Engelhard claimed that the corporation had clothed Cook with apparent authority through the representation by Snook, the purchasing agent for Canadian Laboratory Supplies. Englehard called Snook after payment by CLS for some of the platinum shipments were late. Snook only said that he did not know anything about the purchases and referred them to Cook.

Held: the SCC held that Snook’s conduct amounted to a representation that Cook had authority to act on behalf of the corporation in relation to the platinum contracts and so the contracts were binding on CLS.

The final requirement before a third party may rely on apparent authority is that the representation must have induced the third party to have entered into the contract with the corporation

Where a corporation appoint some person to hold a certain position, the courts have held that putting someone in a particular position constitutes a representation that the person has the authority usual for that position.

Why? What is usual is determined by reference to the authority of agents in similar position in similar corporations. Agents with titles like vice-president may have widely varying degrees of authority in different industries and even within an industry (where a party can prove that an agent has actual authority, it is not necessary to address or prove apparent authority).

Three things needed at common law for apparent authority to exist (Freeman v. Lockyer):

1) Representation of “usual authority” either express or implied (e.g. a representation that aperson is in a position which would usually carry with it such authority);

2) Made by person with actual authority (usually doesn’t produce a problem but technicallyit is hard for the third person to ever know for certain that actual authority by the personmaking the representation exists).

3) And relied on by third party.

In order for a third party to rely on apparent authority, the representation creating it must be made by someone with actual authority to make such a representation. For example, in Canadian Laboratory Supplies, a minority of the SCC found that Snook’s actions did not create


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apparent authority on the basis that Cook was not a manager and had no authority to represent that Cook had authority to enter into the platinum contracts.

The final requirement that must be satisfied before a third party may rely on apparent authority to impose liability on a corporation is that the representation creating the apparent authority must have induce the third party to enter into the contract with the corporation (this is rarely hard to prove).

Principle of Corporate Agency

Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd., [1964]

Where a party relies on a representation made by an agent, the corporation will be held liable.

Facts: Buckhurst corporation has been formed by Kapoor and Hoon to purchase, develop and resell a large estate. Kapoor and Hoon and a nominee of each of them made up the board of directors. The articles of the corporation permitted the appointment of a managing director, but this was never done. To the knowledge of the board, however Kapoor acted in that capacity. Kapoor hired a firm of architects in connection with the development of the property for sale. Architect’s did their work but were not paid and they sued the corporation for their fee.

Held: COA held that by permitting Kapoor to act as a managing director, the board had represented that he had authority to enter into business contracts, in the normal course of business. Since the articles conferred full management powers on the board it had actual authority to make this representation. The court found that the architects had relied on Kapoor being authorized to contract on behalf of corporation when they entered into the agreement. As a result the corporation was held liable for the architect’s fee.

Common Law Restriction (abolished):

a claim by a third party could not succeed if she knew of some restriction on the authority of the agent. All persons dealing with a corporation were deemed to have knowledge of any restriction on the authority of an agent which was contained in any publicly filed document.

In order to balance the risks that the rule of “constructive notice” created for third parties dealing with corporations, the courts developed a qualification that is referred to as the “indoor management rule” or the “rule in Turquand’s case”. Under this rule a person dealing with a corporation has no obligation to ensure that a corporation has gone through any procedures required by its articles, by-laws, resolutions, contracts, or policies to authorize a transaction or to give authority to a person purporting to act on behalf of the corporation . Compliance with such procedures is a matter of internal or “indoor” management with which outsiders do not have to concern themselves. If a provision in a public document grants authority only on certain conditions, the third party does not need to enquire whether the conditions have been satisfied.


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Statutory Reform

When the CBCA was enacted in 1975, it abolished constructive notice and codified and supplemented the other common law rules described above (CBCA, s. 17 and 18).

Constructive notice abolished: CBCA, s.17 provides that no person is deemed to have knowledge of any document relating to the corporation “by reason only” that the document has been filed with the Director and so is a matter of public record.

Common law rules codified and expanded-Statutory Rules:

CBCA, s.18 codifies some of the basic rules. It denies corporations the ability to rely on certain kinds of defects in the authority of a person purporting to act on behalf of a corporation in entering into a contract with a third party where a claim is made by a third party to enforce the contract. This makes it easier for third parties to succeed in their claims against corporations.

Section 18(d): codifies an aspect of the common law rules. If a corporation makes a representation to a third party by holding someone out as a director, officer or agent, the corporation cannot deny that the person is duly appointed or that she has the authority customary or usual for such a director, officer or agent.

The main purpose of these provisions is to ensure that corporations cannot escape their obligations to third parties because of internal corporate restrictions on authority or their failure to follow their own procedures. Third parties do not have to worry about whether internal corporate housekeeping is in order. It is the corporation’s responsibility to ensure public records are up to date, and bears the risk if they are not.

All of these provisions are based on the common law indoor management rule: third parties should not have to worry about whether internal corporate housekeeping is in order. The corporation is responsible for ensuring that its agents respect internal restrictions and procedures.

Section 18(2): Third parties dealing with a corporation cannot benefit from these protections if they were aware of the defect in the authority of the person they were dealing with or they ought to have known of the defect in the authority of the person due to their “relationship to the corporation”

Example: Most share certificates are valid if they are signed by the president and the secretary of the corporation. It is usual in most corporations to authorize someone else, often a third party transfer agent, to deliver share certificates to the shareholder. Under s. 18(e) as long as a shareholder receives his share certificates, the corporation cannot claim that the share certificate is not valid.

Ruben v. Great Fingall Consolidated, [1906]


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Under s. 18(e) as long as a shareholder receives his share certificates, the corporation cannot claim that the share certificate is not valid.

Facts: the secretary of a corporation who was responsible for issuing share certificates arranged to borrow money from a bank on the security of 5000 shares he claimed to own. He created a share certificate for 5000 shares in the name of the bank delivered it to the bank to hold as security, and received the loan. The secretary did not own the shares. He had forged the signatures of two directors and affixed the corporate seal.

Held: the forgery rendered the issuance of the certificate a nullity; it was not simply a matter of internal management with no effect on third parties. The secretary’s authority was only to issue the share certificates not to create them, so the secretary could not have actual authority, thus there was no representation cloaking him with apparent authority. The bank could not claim to hold a security in the shares. (were the case decide under the CBCA, the bank would have been able to rely on the certificate as valid by virtue of s.18(e).

Morris v. Kanssen, [1946]

Where the action of director or officer is not saved under this provision, the director or officer may still be found to have apparent authority. A corporation cannot rely on a director or officer not being “duly appointed “ unless the third party knew or ought to have known of the situation”

Facts: a director continued to act after his term expired.

Held: the director was found not to have been appointed rather than irregularly appointed where the “office has been from the outset usurped without the colour of authority.”


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11. Shares and Shareholders

Casebook 696-713VanDuzer 225-228CBCA 24, 25, 48, 49, 50, 51, 55, 60, 257OBCA 22, 23, 53, 54, 56, 67, 143, 266

One of the primary ways in which corporations finance their activities is by issuing shares. Sometimes raising money by issuing shares is referred to as “equity financing” as distinguished from debt financing, which involves raising money by borrowing it.

What is a share?

A share is a bundle of rights against a corporation. Although a share is personal property, the it represent s in the corporation is neither a property right in the corporation’s assets (Macaura v. Northern Asurance Co., (1925) nor is a proportionate interest in the corporation itself (Bradbury v. English Sewing Cotton Co. Ltd., (1923). Even though shareholders are sometimes referred ot as the owners of the corporation, this is not technically accurate. The particular rights, privileges, restriction, and conditions of each class of shares are set out in the articles. The characteristics of a share determine the risk and returns associated with the holder’s investment. Share characteristics determine the degree and control a shareholder has over the corporation through the voting rights attached to her shares, her right to share in the profits when distributed, and to receive its property when it dissolves.

Share provisions in a corporation’s articles are often drafted to provide a bundle of rights that will be attractive to prospective shareholder investors and may be customized to meet an investor’s specific needs. In corporations with few shareholders, share provisions are kept simple for several reasons, one being that it will be more expensive to have complex share provisions drafted. Highly customized provisions may not meet the needs of future investors and articles of amendment to change the provisions may be required before they are willing to invest. Shares with unusual specialized characteristics may be hard to sell for the same reasonBecause articles are public shareholders may not want the specific nature of their investment reflected in the share provisions.

Basic Rules

Basic rights associated with shares are as follows:

To vote at any meeting of shareholders; To receive dividends declared by the board of directors; and On dissolution of the corporation, to receive the property of the corporation remaining

after creditors and any other persons with clams against the corporation are paid.

Where a corporation has only one class of shares, the rights of the holders of shares of that class are equal in all respects and must include each of the three basic rights listed above: (CBCA s. http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:40 PM

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24(3)). If the articles provide for more than one class of shares, then each of the basic right must be possessed by at least one class of shares (CBCA s.24(4)). If the articles are silent on the right to vote, then each share has one vote (10 shares equals 10 votes) (CBCA s.140 (1)) Where a corporation has multiple classes of shares, all such shares are presumed to have equal rights, regardless of class, except to the extent specifically provided in the articles.

Each owner of a share is entitled to a share certificate (formally represents ownership of shares). If a corporation is authorized to issue more than one class of shares, or more than one series of shares, the characteristics of the class or series must appear on the certificate or a notice must appear stating that there are particular characteristics and that copies of the text of such characteristics may be obtained from the corporation (CBCA, s. 49(1) and (13)). Unless a shareholder requests one, there is no need for a corporation to issue a share certificate, and in order to reduce paperwork, many smaller corporations do not bother. This practice is now expressly authorized under the OBCA and the BCBCA, which provide that the directors of a corporation can determine the shares of any class are “uncertificated” (OBCA, s.56(2) & (3)). If they do so, they must send a written notice to shareholders with the information that would otherwise be required to be on the certificate.-the directors of a corporation can determine that shares of any class are uncertificated

Securities register: a record of ownership of all shares issued by a corporation, called a securities register must be maintained as part of the corporate record at the registered office or any other place in Canada designated by the directors (CBCA, s. 20 and 50). An entry in a securities register or a share certificate issued by a corporation is proof, in the absence of evidence to the contrary that the person in whose name the share is registered or the holder of the certificate is the owner of the shares described in the register or in the certificate. (CBCA, s.257 (3))


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Characteristics of Shares

VanDuzer 228-244CBCA 24(3) (4), 42, 43, 115(3) (d), 118OBCA 22(3), (4), 38, 127 (3) (d), 130

Classes

Class is simply a category of shares with particular characteristics. There are no requirements regarding what classes of shares a corporation may have, subject to requirement that the basic rights must exist within whatever classes of shares are created. The name and characteristics of each class are set out in a corporation’s articles.

The CBCA refers only to “shares”: (CBCA s.24). In practice, it is usual to designate one class of shares as “common shares” and give these shares the three basic rights

Usually, no dividend may be paid on common shares until the dividend entitlements of any other classes of shares are paid. In addition, no payment to common shareholders on dissolution may occur before all other claimants, including the holders of any other classes of shares, have been paid. Common shares represent residual claims; they are entitled to whatever is left after everyone else. Therefore, their value will vary with the success of the business. And they are considered the riskiest form of investment.

In small corporations, common shares may be the only class of shares, but multiple classes with a wide variety of characteristics are frequently found. Some public corporations have voting and “non-voting” and subordinate common shares. Non-voting common shares do not vote. Subordinate voting shares have fewer votes than regular common shares. In practice, this difference is accomplished by giving the regular common shares multiple votes (10) and the subordinate voting common shares only (1) vote.

Why? Usually, most of the non-voting shares are issued to the public, while the regular voting shares are retained by a small group of shareholders (original shareholders). In this way the corporation can raise capital by issuing shares without the original shareholders having to give up much control.


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Preferred Shares (fixed rate)

Usually do not vote but which have a preference relating to receiving some fixed dividend and on dissolution. Dividends are paid out on these shares first before they can be paid on common shares as expressed in the articles. A preference on dissolution usually means that all of the money paid into the corporation in return for the issuance of the preference shares must be paid back to the preferred shareholders before the remaining assets can be distributed to the holder of the common shareholders or any other class of shares. Preferred shares are attractive to an investor who does not want to have any say in the business and how its managed but is interested in a fixed return.

Why/how? preference as to dividends : some sort of stated dividend rate which reflects the amount the share would have received when the share was first issued (par value without expressly using that term). Will be paid when they can be, corporations don’t suspend paying dividends on these shares lightly – reason being the shares will become voting if don’t distribute dividends on preferred shares their credit rating will fall and their expenses will increase.

Nothing shareholders can do when these dividends do not get paid to them, dividends are not debt until declared so cannot sue. Rule works the same for these shares even though they have an extra promise to be paid out.

Advantage over bonds: no debt, if company must conserve cash can suspend payments of dividends. Advantage over bonds for shareholders: less tax on dividends. But from corps point of view is more expensive for corporation as the dividends are not tax deductible.

Because preferred shares are equity you might have thought that value of preferred shares has something to do with the value of company, but relationship of value of preferred share and success of company is typically a fairly tenuous one. What effects price of preferred shares more than anything else provided company is solvent, what will primarily affect the value of these shares is the market interest rate.

Rate: The 3%(example of preferred share rate) only has meaning relative to the market price. For preferred shares, it doesn’t matter if the company is doing super well or super bad because either way you are still only going to get 3%. It will only matter when they are doing really badly and can’t afford to pay the dividends at all.

If winding up/dissolution, the order is: creditors, preferred shareholders, common shareholders. If have no money to pay off after paying creditors then none of the shareholders get anything.

Will v. United Lankat

Preference shares that entitle the holder to a fixed preferential dividend do not entitle the holder, after having received this dividend, to participate rateably with the holders of the common or


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ordinary equity shares in any further dividend. Endorsed in International Power. No right in Canada and UK.

International Power Co v McMaster University

Preferred shareholders argue all my share conditions say is that I get a preferential return, they do not say “and nothing more.” Shares are to be treated equal in every way unless articles provide for otherwise, so preferred shares must be treated equal to common shares once the preferential pay had been done. So, they’re arguing the preferential will rank the same as common shares and that they should get a second distribution.

Courts says that’s right unless the articles provide otherwise. International Power case isn’t a recent decision of SC and will be surprising if ever see

another case in Canada on this point. This is because the articles will always say otherwise, lawyers saw the effect of this case and made certain the articles always say otherwise.

Where preference shares entitle the holder to a fixed return of capital on winding up, English authority in Scottish Insurance Corporation that such shares don’t entitle the holder after having received this fixed capital to further participate rateably with the holders of the common shares. International Power Corporation v. McMaster University decided the contrary and held there was a right, however this was before the Scottish case and this hasn’t come before the SC again.

Since this case what happens is articles say are cumulative shares and company never pays them?

Not unless their articles otherwise provide, if articles say you get them on a liquidation you get them but cases always arose in situation where they didn’t.

Courts have been prepared to interpret share conditions very liberally in order to “find” an express share condition that would entitle shareholders to receive such cumulated and unpaid dividends.

Case was so unjust that series of subsequent English cases without ever rejecting the principle, always went the other way. Re Canada Tea Co “this presumption that the shareholders aren’t entitled to the cumulated dividends may be rebutted by the slightest indication to the contrary.” But didn’t actually find this slight indication in this case.

Non-voting Preferred Shares

Non-voting preferred shares will be attractive to an investor who does not want to have any say in how the business is managed but is interested in a fixed return. On dissolution preferred shareholders get their investment back only after all loans and other prior claims have been paid. In promising a fixed return, preferred shares resemble debt, but there are some important differences between an investment in the form of debt, such as an interest bearing loan, and one in the form of the purchase of preferred shares. An investment in preferred shares is riskier because, the directors may decide that it is in the corporation’s best interest not to pay dividends, in which case a preferred shareholder will have no recourse in most circumstances. By contract, if management decided not to pay interest on a debt or to repay the principal in accordance with the contract creating the debt the creditor could then sue to recover the amount owned or even http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:40 PM

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put the corporation into bankruptcy. Because of the increased risks associated with an investment in preferred shares, investors typically require higher rates of return on preferred shares than they would require on debt.

Typically each class of shares has different characteristics

like common and preferred shares. The SCC has said that if a corporation has more than one class of shares with identical characteristics, they will be treated as a single class, meaning that all shares in both classes must be treated equally (McClurg v, Canada (1990)). The OBCA was since amended to provide that a corporation may have classes of shares that have identical characteristics (OBCA, s.22(7)).

Cumulative

Cumulative dividend means that if 3% dividend is not paid in any given year it cumulates until the next year, good protection for preferred shareholders. The longer you wait to pay dividends on preferred shareholders, the bigger the hurdle you’re goin to have to get over before paying common shares. If have hard year and don’t pay the 3% dividend to preferred shareholders, next year before any payment can be made to the common shareholders you will have to pay 6%. Worried that a lot of people in marketplace don’t understand this and so the companies just don’t actually pay the accumulation. Proposed legislation to change this.

Redeemable (buy back shares)Normally you cannot easily buy back shares, take capital out of corporation. But often preferred shared will have a redemption feature which says that the corporation can buy your shares back from you and you must sell them, you have no choice.

Reason this is attractive from corporation’s view: in 1980s when inflation was bad issue the preferred share value would be about 15% very high, they would buy them back and issue at a new rate, say 3%. The corporation will always want to redeem at the worst possible time for the investor. Because of this there are some protections made legally to ease the pain for investors. There is a certain period of time before they cant redeem i.e. there will be no redemption for first 3 years.

Retractable (Option of the Shareholder)

Retractable preferred share is one that is redeemable at the option of the shareholder. The retractable redemption is at the option of the shareholder. This is the one time you can get your capital back out of the company , where you can get the company to buy the share back from you. Shareholder will always want to do that when the market rate are higher than what they are receiving. Want to retract it so you can then invest it at a higher rate.

Redemption and retraction rights are not the same as ordinary contractual rights, there are provisions in the corporate acts based on the same logic of the S42 CBCA. Provisions that say corporation is not permitted to buy back own shares unless it can satisfy certain tests. Fact that company has issued this right to someone doesn’t change the fact that the corporation will have http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:40 PM

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to satisfy these tests. This is because debt ranks ahead of equity, must make sire creditors are protected, won’t allow money to be paid back to shareholders when not satisfied that the creditors are going to be paid back in full. Redemption and retraction rights not contractual rights, S32(2) OBCA, S36(2) CBCA subject to a s.42 type test being satisfied.

Two identical shares – one has retractibility feature, one does not. The retractibility one will be worth now as the retractibility is a feature of value.

Convertible

A conversion feature whether in a preferred share or in a bond is a feature that allows holder of fixed income security (something that pays a fixed amount e.g. 3%) to have best of all worlds. If company isn’t doing well you get your 3% a year in preference to common allows the holder to surrender their share to the company and receive in return for it a different security shareholder. If company takes off and does really well you can then convert your share and then you own a common share, the conversion price will be set at the time the share was originally issued.

Exchangeable

Exchangeable shares have been used frequently in the Canadian marketplace over the past several years as a tax effective means for non-resident publicly traded corporation to use their shares as “currency” in take-over bids of Canadian corporations. It may be possible to modify the exchangeable share structure and use it as a means for Canadian subsidies of foreign publicly-traded corporations to raise capital in the Canadian market through public offerings of exchangeable shares in a non-takeover bid scenario.

Example: American company incorporates in Canadian subsidiary solely for the purpose of making take-over bid (buy all shares) for a Canadian company. Money doesn’t go to target company, so Canadian subsidiary will pay other Canadian company for their shares If American company just used their own shares will be a capital gain, if Canadian company uses their shares it will be more of a tax benefit to them now. Exchangeable shares used frequently in this type of transaction. Original share issued by Canadian subsidiary, exchange right isn’t to get more shares in Canadian sub but in some other company other than the issuer.

Dividends

The profits of a corporation belong to the corporation and not its shareholders. The board of directors may distribute profits to shareholders by declaring a divided. Declaring a dividend http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:40 PM

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means that a resolution is passed by the directors identifying the amount of the dividend, the class of shares on which the dividend will be paid, and the payment date. Once declared this way, the dividend becomes a debt of the corporation owed to a shareholders entitled to share in the dividend (Re Severn & Wye and Severn Bridge Railway Co., (1896)).

Under the CBCA, dividends are paid to a person who is registered as a shareholder at a certain date referred to as a record date (if no record date is fixed by the directors, the record date is the close of business on the day the directors pass the resolution declaring the dividend (CBCA, s.134).

Why? The record date is important for corporations whose shares trade in public markets, with many shares changing hands daily. if no record date were fixed, and the default rule applies, a person who was shareholder at the close of business on the date the dividend was declared will be entitled to receive a dividend even if she no longer owns the shares on the payment date. This means that people buying shares after the day on which the dividend is declared will not get the dividend, and the value of their shares, as a residual claim against the corporation, will be reduced by the amount of the dividend. To ensure that everyone buying and selling shares knows about the payment of dividends and who is entitled to them, directors set out and announce the record date in advance. Any buyer who purchases a share after the record date will know that they will not get the dividend.

Each share has an equal right to receive any dividend declared by the corporation unless there are specific provisions in the articles granting different dividend entitlements. Qualification: permits a common form of dividend provision under which directors are allowed to allocate dividends to one or more classes of shares at their discretion. This is popular in corporations with small numbers of shareholders who are in the same family. By issuing different classes of such shares to different family members, directors can allocate dividends to the family member in the lowest tax bracket, reducing the family’s overall tax.

McClurg v. Canada, [1990] (SCC)

Shares can be treated differently where there is a discretionary dividend provision in the articles.

Facts: McClurg used a discretionary dividend clause in its articles share conditions to split the income form the corporation’s business between the corporation’s two shareholders, wife and husband. Amount of dividends paid in any year was based upon the respective tax positions of the shareholders as individuals. McClurg argued that such a clause which allowed shares to have to have to be paid dividends out on to one class to the exclusion of another class violated the corporate law rule that all shares of a class must be treated equally.

Held: the clause was sufficient to rebut what would otherwise be the corporate law presumption of equality between the classes of shares. Purely based on consideration of their personal circumstances of shareholders, not on circumstances of the shares. The SCC held that the classes were distinguishable because of the discretionary dividend provision itself, which contemplated that the shares would be treated differentlyhttp://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:40 PM

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Effective August 1st, 2007, Ontario amended the OBCA to expressly allow corporations incorporated under that act to have two classes of shares with identical provisions (s.22 (7)). This was meant to ensure that discretionary dividend provisions could be used to allow directors to sprinkle dividends among various classes that all have the same characteristics.

There are two invariable rules to issuing discretionary dividends:

The declaration of dividends is a matter within the discretion of the directors (this rule has two corollaries): The power to declare dividends cannot be delegated by the board of directors

(CBCA ,s.115(3)(d)) but it can be assumed by shareholders in a unanimous shareholder agreement; and

no provision of the articles or any other shareholder’s agreement can compel the directors to declare and pay dividends (Burland v. Earle, (1902)).

Dividends cannot be declared or paid if there are reasonable grounds for believing that the corporation cannot meet either of the following financial tests: Solvency Test: the corporation is, or would after the payment be, unable to pay its

liabilities as they become due; Capital Impairment Test: the realizable value of the corporation’s assets would, after the

payment, be less than the aggregate of its liabilities and stated capital of all classes.

Why? If dividends are paid in contravention of these requirements, the directors are personally liable to pay the amount of the dividend back to the corporation (CBCA, s.118(2)(c)).

Stated Capital: consists of the historical total of all money or other forms of value paid into the corporation in return for shares. Directors do not have unlimited discretion with respect to the payment of dividends. Directors may be compelled to declare dividends if the failure to so would be oppressive to shareholders (CBCA, s.241) or would breach the directors’ fiduciary duty.

Ferguson v. Imax Systems Corp, (1983).

The failure to pay dividends was held to be oppressive.

Facts: the shareholder was the estranged wife of the major shareholder. The failure to pay dividends on one class of shares was part of a concerted effort by management to prevent one shareholder from receiving any benefit of the corporation. The other shareholders were not hurt by the failure to pay dividends because they or their spouses were compensated as employees and by dividends on other classes of shares.

Shareholders of BCE Inc. recently launched a class action claiming the corporation’s decision to stop payiugn dividends was oppressive.


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Cumulative Dividends

Because the directors have the discretion not to pay dividends, one of the most important characteristics of dividends is whether they are “cumulative” or not. If a dividend entitlement is cumulative and the dividend is not paid when it is supposed to be, the entitlement continues until it is paid.

The articles typically state that no dividends must be paid on other classes of shares until all cumulative dividends have been paid and that the amount of any unpaid cumulative dividends is added to the amount that the shareholder is entitled be paid by the corporation of the share is repurchased or redeemed, or on dissolution.

Cumulative dividend means that if 3% dividend is not paid in any given year it cumulates until the next year, good protection for preferred shareholders. The longer you wait to pay dividends on preferred shareholders, the bigger the hurdle you’re goin to have to get over before paying common shares. If have hard year and don’t pay the 3% dividend to preferred shareholders, next year before any payment can be made to the common shareholders you will have to pay 6%. Worried that a lot of people in marketplace don’t understand this and so the companies just don’t actually pay the accumulation. Proposed legislation to change this.

Why? If a dividend is not cumulative and is not paid when it is supposed to be, the shareholder has no claim to it. For a dividend to be cumulative the amount of the dividend must be fixed—there must be some amount to cumulate. This discussion of cumulative dividends illustrates the importance of being as clear as possible when drafting share provisions.

Fixed dividends: specified for a particular class of shares. The courts have held that holders of shares of that class are not entitled to participate equally with the holders of shares of other classes in any other dividend declared (Re Porto Rico Power Co., (1946)).

Dividends need not be paid in cash: they can be declared and paid in the form of specific assets (called dividends in specie), including shares of the corporation. Share or stock dividends have the peculiar character that they do not reduce the assets of the corporation when they are paid. If a corporation has only one class of share the only effect of a stock dividend will be to increase the number of shares held by each shareholder. They do not deplete the assets of the corporation. If there is more than one class of shares, a stock dividend could confer a benefit on the class receiving the dividend in the form of increased votes or a larger claim to future dividends.

Stock Dividends (CBCA, s.42): do not deplete the assets of the corporation, thus there is no reason to apply the solvency and capital impairment tests before one is declared. There is nothing in the language of the CBCA provision imposing these tests that would exclude stock dividends (s.42). CBCA, s.42 (b) is not the same as shareholders equity – stated capital is just a historical record.


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If paying out the dividend today means you then cant pay liabilities there will be personal liability on the directors. CBCA, s.118(2) (c) states that directors are personally liable if they make a dividend payment contrary to this provision. Equivalent sections: OBCA, s. 130(2)(d).

Debt ranks ahead of equity!!!! If corporation was wound up tomorrow would it be able to pay all its debts? If the answer is no then you should not be distributing funds to the shareholders.!!!!!

Met the CBCA, s. 42 test on day of declaration, but then in next four weeks before paying out there is a crisis and don’t meet the test, the difficulty is that not paying out then runs afoul, a dividend is not a debt of a corporation until it is declared dividend. Shareholders have the right to sue for it. CBCA, s. 42 is only meant to apply where you are paying money or property, but stock dividend it doesn’t apply

Rights on Dissolution

As noted, the CBCA requires that at least one class of shares be entitled to receive the remaining property of the corporation on dissolution and that this is a right usually given to the common shares. Where there are multiple classes of , each share is entitled to participate on an equal basis in any remaining property in the absence of a any limitations on such entitlements, which are expressly provided for in the articles. The entitlement of each class of shares on dissolution must be addressed in drafting the share provisions.

Preferred shares: are given the right to receive only their capital back before any payment to the common shareholders but do not otherwise participate on dissolution. Capital includes unpaid cumulative dividends. Stated capital for a class is the total amount contributed to the corporation in return for shares of that class

Voting

Voting to elect directors and voting on matters requiring shareholder approval are probably the most important shareholder right. All shares carry the right to one vote unless the articles provide otherwise.-All shares within a class must have the same voting rights. Because of the principle of equality of shares, all shares within one class must have the same voting rights.

Jacobsen v. United Canso Oil and Gas Ltd., (1980)

A by-law that purported to restrict each shareholder’s votes to a max of 1000, regardless of the number of shares held, was struck down. Shareholders can agree to vote their shares in a particular way, and this is commonly done in shareholders’ agreement

Facts: By-law No.6—which provides that no person shall be entitled to vote more than 1000 shares. United Canso has only one class of shares, the present capitalization being 12 Million http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:40 PM

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common shares. Certificate of continuance was issued on October 24th, 1979. By-law no 6 setting forth the voting restrictions of a maximum of 1000 votes regardless of the number of shares beneficially held. Concerns rights of shareholders of a corporation.

Held: Initial presumption of law: all shares have equal rights and liabilities, which fall under 3 heads: (i) dividends (ii) return of capital on a winding up (iii) attendance at meetings and voting United Canso had only one class of shares (par value shares), which meant that unless that articles otherwise provide each share of a corporation entitles one vote at a meeting of shareholders.

Where a corporation has only one class of shares, the rights of the holders thereof are equal in all respects:

(a) to vote at any meeting of shareholders of the corporation;(b) to receive dividends declared by the corporation ;(c) to receive the remaining property of the corporation on dissolution; (d) the articles provide for more than one class of shares

It is only where there is more than one class of shares that different rights, privileges, restrictions and conditions attaching to shares may arise. Since it is possible and common for a corporation to have classes of shares that do not vote, there is a possibility that holders of shares that do vote may exercise their power to the detriment of the holders of those that do not. For significant changes that will fundamentally alter the nature of shareholders investments by affecting the returns, even shareholders who do not otherwise have the right to vote may feel that they should have some say. It is open to the shareholders to try and negotiate for protection by requiring that a voting right arising on in these special circumstances be included in the share provisions.

Why? The CBCA and OBCA are based on the policy to provide voting rights in these special cases as mandatory protection for all shareholders, whether they are provided in the articles or not Special vote (fundamental changes)

Under the CBCA, all shares vote on certain fundamental changes, even if they do not otherwise have the right to vote. These fundamental changes include the following:

an amalgamation (CBCA, s.183(3)); the sale lease or exchange of all or substantially all the assets (CBCA, s. 189(6)); the continuance of a corporation (CBCA, s.188(4)); the liquidation and dissolution of the corporation : (CBCA, s.211(3)).


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Class Vote (affected differently)

All shares of a class are entitled to vote separately as a class on certain fundamental changes if shares of that class will be prejudicially affected by the change in ways that are different from the ways that shares of other classes will be affected (even if they are not otherwise entitled to vote) (CBCA, s.176). these changes include:

an amalgamation (CBCA, s.183(4)); the sale lease or exchange of all or substantially all the assets (CBCA, s. 189(7)); certain amendments to the articles (CBCA, s.176).

Since these changes must be approved by a special resolution, where a class vote is required, the necessary 2/3 majority of the shares must be obtained from all shares entitled to vote and from each class entitled to vote separately as a class. If one class does not approve the change, it cannot proceed. The CBCA also provides that any shareholder who disagrees with the outcome of any such vote may opt-out of the corporation by requiring the corporation to buy her shares at their fair value (CBCA, s.190(3). This remedy, referred to as the “dissent and appraisal remedy.”

Cumulative Voting

Is a complex mechanism designed to ensure that minority shareholders can elect directors to represent them (CBCA, s.107, OBCA, s.120). It means that the number of votes each shareholder has is equal to the number of shares held multiplied by the number of directors to be elected. Each shareholder can allocate her votes to one director or to any number of candidates she chooses. The directors are determined by who gets the most votes.

Cumulative voting is provided for in the articles. There must be a fixed number of directors and each director’s term must end at the close of the first annual meeting held after their election. If directors have staggered terms, the purpose of cumulative voting would be defeated. The CBCA and OBCA provide some provisions designed to prevent cumulative voting from being defeated.

There are alternatives to cumulative voting that would also ensure that a minority shareholder would be able to have board representation (e.g. shareholders could also agree in a shareholder’s agreement to vote their shares for particular people).


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No Par Value (doesn’t exist anymore)

CBCA 24(1), (2)OBCA 22(1), (2)

All shares used to have a “nominal or par value,” which was expressed in the articles. This value was to represent the intended issue price of the shares. In practice, the issue price was not always “at par” and shares were often issued at prices above the par value (e.g. at a premium to par). The par value served not purpose because it did not disclose anything about the actual price at which the share was issued.

Nominal/par value: shares must be issued with par value in many areas of the world (par value is dollar figure on your shares), the dollar figure has something to do with the price at which the share was originally sold from the corporation. This is actually illegal in Canada under the (OBCA, CBCA s.24(1)). The reason being was because they were said to be misleading, if there’s a downturn in the market, the value of the shares will be less than that original value noted in the par value.

Why? Par value now abolished under the CBCA. CBCA, s 24(1) provides that all shares issued under the CBCA are without nominal or par value

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


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Series of Shares

CBCA 24(4), 27OBCA 22(4), 25

Because of the rule that rights of holders of shares of a class are equal in all respects, a corporation must have more than one class of shares if it wants to give different right to different shareholders. The only circumstance in which shares within a class may be given different rights is when shares in that class are subdivided into different series (CBCA, s.27).

CBCA, s.27: provides that articles may authorize issue of any class of shares in one or more series and fix or authorize the directors to fix the following characteristics attaching to the shares of each series:

Number of shares in the series; Designation of the series (e.g. a name such as “series F”); and Other characteristics in the series (e.g. the “rights, privilege, restrictions, and conditions”

In order to be able to issue shares in series, the articles must expressly permit issuing shares in series. If the characteristics of the series are not fixed in the articles, then a directors’ resolution must be passed setting the characteristics of the series. The directors must send articles of amendment to eh director appointed under the CBCA setting out the number, designation, and characteristics of the shares in the series before any such shares may be issued (CBCA, s.27(4)).

Why would a corporation want to be able to issue shares in series?

Generally, issuing shares in series is of interest only to public corporations. It permits such corporations to create shares with particular characteristics faster and more cheaply that if the corporation had to amend its articles in the usual way to create a new class of shares by calling a meeting of shareholders, to approve articles of amendment.

Why? Speed is important where a corporation wants to be able to give shares the exact characteristics that will make them attractive in the market (e.g. certain dividend rate). An opportunity to issue shares at a low dividend rate may be lost if the corporation has to call a meeting of shareholders to amend articles to create a new class of shares. By the time the


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shareholder meeting has been held, the dividend rate may have changed. Another benefit is the money saved by not having to call a shareholder meeting including legal fees for the preparation of documents to be sent to shareholders and the cost of mailing to large number of shareholders, renting rooms and so on.

Only restriction: on the use of series is that all shares of the same class must have the same priority in relation to receiving dividends and return of capital, even if they are in a different series (CBCA, s. 27(3)). The shares of all series participate rateably in return of capital (dividends).

Participating rateably: means that each share in the class receives the same proportion of whatever is distributed.


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Pre-Emptive Rights

CBCA 28OBCA 26

If the articles or unanimous shareholder agreement contain such a right, then a corporation desiring to issue shares must offer them first to the existing shareholders as a condition of being able to issue the shares. Once the existing shareholders have had a chance to buy the shares, any unsold shares may be offered for sale to others. Under CBCA, it is contemplated that the pre-emptive right would permit shareholders to purchase shares only in proportion to their existing holdings (e.g. if is shareholder holds 10 percent of the currently issued shares she would be entitled to purchase 10 percent of any new issue. Under the OBCA, there is no such restriction. And a corporation may set up the right however it likes in the articles.

Pre-emptive right (CBCA s.28)

If the articles contain such a right, then a corporation desiring to issue shares must offer them first to the existing shareholders as a condition of being able to issue shares

“I want first dibs”!!!

Pre-emptive right may be attractive for 3 reasons:

1) Avoiding dilution: allows existing shareholders dilution of their proportionate interest in the corporation.2) Constraining inappropriate issuance of shares: pre-emptive right prevents directors to issue shares for improper purposes.(e.g. issue shares to a person who will not sell to the take-over bidder (called a “white knight”)

3) Preventing issuance of shares at under value: issuance of shares for less than they are worth would water down the price of all shares, which would likely be a breach of fiduciary duty.

Important Limitation: pre-emptive rights can be exercised only by those with the ability to pay. The courts have recognized, that requiring shareholders to buy additional shares or face dilution of their proportionate interest will sometimes be unfair to shareholders who cannot afford to participate, and may give rise to a claim for relief under the oppression remedy (Re Sabex International Ltd., (1979)).


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Issuing and paying for shares

VanDuzer 244-247CBCA 25, 26, 30, 41, 118(1) (6), 123(4)OBCA 23, 24, 37,130(1) (6), 135 (4)

There is no requirement to set a maximum number of shares of a class that may be issued, though the articles may provide one. If there is a maximum, shares can only be issued up to that maximum number. In order to issue additional shares, the articles have to be amended to increase or remove the maximum number.

Why? In the interest of simplicity and flexibility, articles are usually drafted to permit an unlimited number of shares of each class to be issued. The number of shares authorized is called the “stated capital.”

The directors have the power to issue shares, and this power cannot be delegated. (CBCA, s.115(3)(c).

The process of issuing shares:

Usually starts with a subscription in which the prospective shareholder offers to buy a specified number of shares for a price.

The directors pass a resolution accepting the subscription (sometimes referred to as “allotting the shares” and issuing them.

Subject to articles, by laws and any USA, shares can be issued to any person for whatever consideration the directors determine (CBCA, s. 25 (1)). Shares may be issued for money, property or past services. If the consideration is other than money, directors are obliged to be sure that whatever is received is not les in value that the “fair equivalent of the money that the corporation would have received if the share had been issued for money” (CBCA, s. 25(4)). Pursuant to CBCA, s.118(1), if the director fails to get the “fair equivalent”, they are personally liable, to make up the shortfall, unless they could not have reasonably known that the value of the property was not sufficient (CBCA, s118 (6)) or they exercised the care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances, including relying on a professional opinion regarding the value of the property (CBCA, s.123(4).

There is no minimum investment in shares of the corporation is required as a condition of incorporation. Upon incorporation, a single share could be issued for $1, even if this was not sufficient to satisfy the anticipated obligations that would arise out of the corporation’s business. Regardless of the nature of the consideration, it must be paid in full at the time the shares could be issued. Under the CBCA, only “fully paid” shares can be issued” (CBCA, s.25(3)). Section 25(5) provides that a promissory note or a promise to pay is not property for which shares can be issued, but that certain debt obligation owed by a third party to the person who wants to buy shares can be transferred to the corporation by that person in return for shares (CBCA, s.25(5)).http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:41 PM

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Previously, directors could ask shareholders to pay more money into the corporation from time to time as the corporation needed it. Such shares were called “assessable.” Now all shares are “non-assessable.” (CBCA, s.25(2)). Stated Capital Account

A corporation must maintain a separate account for each class and series of shares it issues, recording the stated capital for each class or series (CBCA, s.26(1)).

Stated capital: for a class or series is simply the historical total of the amount paid into the corporation in return for the issuance of shares of that class or series. It is aggregated for each class or series of shares, rather than recorded on an individual share basis. Stated capital per share (or share value) is the total for the class divided by the number of shares, even if the shares of a class are issued for different prices at different times.

Stated capital is not cash; it is a bookkeeping record: once money or property is contributed to the corporation, it may be spent or otherwise used in the corporation’s business. Stated capital remains the same whether money ,property, or past services are wasted, saved, or used to increase the value of the corporation’s assets.

Stated capital must be adjusted whenever shares are issued, including the payment of a dividend in the form of a share, or reacquired by the corporation. It is relevant for calculating whether the capital impairment test has been satisfied. The capital impairment test is required to be met before certain actions, such as declaring dividends, are permitted.

It is possible to adjust stated capital with the approval of the shareholders by special resolution, subject to certain limits (CBCA, s.26(5) and 38) A corporation might want to reduce its stated capital where its stated capital exceeds the realizable value of the corporation’s assets and the capital impairment test or where the corporation wants to distribute capital to shareholders.

A corporation cannot reduce its stated capital if there are reasonable grounds for believing that:

The corporation is, or after the reduction would be, unable to pay its liabilities as they become due; or

The realizable value of the corporation’s assets would thereby be less than the total liabilities.


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Redemption and repurchase of shares

VanDuzer 247-251CBCA 30-40OBCA 28-36

General Rule

In general, a corporation may not hold shares in itself or in a corporation that controls it “parent corporation” (CBCA, s. 30). This is sometimes referred to as the prohibition on corporate incest. A subsidiary that holds shares in its parent must dispose of them within 5 years from the date it became a subsidiary of the parent or the date it became governed by the CBCA (CBCA, s.30). Historically, corporations were prohibited from buying and selling, “trafficking in” their own shares. But corporations can now buy their own shares.

Concern: if a corporation can hold its own shares, then its invested stated capital will be overstated. Shares held by the corporation itself do not represent a contribution to the value of the corporation.

2 exceptions to the rule:

1) The corporation may now hold its own shares as security or as a trustee, but it is not free to exercise the rights associated with those shares;

2) A corporation may acquire its own shares by purchase or redemption, subject to certain limitations, though when it does so, the shares must be cancelled in most cases. If the articles authorize a maximum number of shares of a class to be issued, shares that are acquired or redeemed must be restored to the status of authorized but unissued (CBCA, s.39(6)).

Holding shares as security or as a trustee

A corporation may hold shares in itself or its parent corporation as trustee or as security for a transaction if it is acting in the ordinary course of a business that includes the lending of money (CBCA, s.31). A corporation may also hold a lien on its own shares as security for any debt owned by the shareholder to the corporation (CBCA, s.45(2) and (3)).

If a corporation does hold shares as security or as a trustee, it cannot vote them unless the corporation is holding as a trustee and then only in accordance with written instructions form the beneficiary (CBCA, s.33).


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Purchase or Redemption of Shares

A corporation may want to buy back its own shares as a way of returning capital to its shareholders. This can be done on any terms negotiated by the parties so long as doing so would not breach the financial tests in CBCA, s. 34 & 35.

Why? Same financial tests as for solvency and impairment of capital, which must be satisfied for the payment of dividends (CBCA, s.34), these tests are intended to protect creditors and any shareholders of any class raking ahead of the class whose shares are being purchased. The capital impairment test is relaxed, however if the purchase is

To settle or compromise a debt claimed by or against the corporation; To eliminate fractional shares (Sometimes, as a result of a corporate reorganization, a

shareholder may end up with less than a whole share); To fulfil the terms of a contract between the corporation and a director, officer, or employee; To satisfy the claim of a shareholder, who has dissented from some action approved by the

shareholders and who is entitled, as a result to have his shares purchased under section 190 of the CBCA; or

Where the court has found oppression under section 241, to comply with a court order to purchase shares (CBCA, s 35(2)), 190, (26), 24 (6)).

The corporation can complete the purchase so long as the realizable value of its assets exceeds its liabilities, plus the amount required to be paid on liquidation or on a redemption of all shares held by holders who have the right to be paid prior to the holders of the shares to be purchased (CBCA, s.35(1) and (3).

If a corporation does buy its own shares, it must either cancel them or, if its articles provide for a limited number of shares of that class, restore them to the status of authorized but not unissued (CBCA, s.39 (6)).

Redemption

A corporation may redeem its own shares, which simply means buying them in accordance with an express term in the corporation’s articles that permits such purchases (CBCA, s. 36). Redemption of shares is another way to return invested capital to shareholders. The articles should define the circumstances in which redemption is permitted and specify the price. Usually the price is the issue price plus all unpaid cumulative dividends.

3 Ways to Redeem Shares:

1) At the option of the corporation, in which case the shares are referred to as “redeemable” or “callable”;

2) At the option of the shareholder, in which case they are referred to as “retractable”; or “putable”;


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3) Or on the occurrence of a specified event such as the expiry of a time period or the failure to pay dividends for a certain number of years.

Before a corporation may redeem any of its shares, the directors must have reasonable grounds for believing the basic financial tests for solvency and impairment of capital, discussed above are satisfied, subject to one modification. For the capital impairment test to be met, the directors need only have reasonable grounds to believe that the realizable value of the corporation’s assets exceeds its liabilities plus the stated capital for classes of shares ranking with or ahead of the shares to be redeemed.

Adjustments to stated Capital

Whenever a corporation repurchases, redeems or otherwise acquires its shares, it must deduct from its stated capital account the stated capital per share calculated before the transaction multiplied by the number of shares acquired (CBCA, s. 37 and 39).

DebtIn the CBCA and OBCA there is the heading of corporate finance—misleading , should say equity finance, these statutory provisions are only relevant to the selling of shares, not relevant to debt at all.

Every corp needs cash to operate its business. 2 basic ways of satisfying this: Internal sources: money generated in the business itself . This is not what we are

concerned with. External sources: two basic types are equity (selling shares) and debt. One key

difference between equity and debt is tax, paying interest on debt is tax deductible, and recipient of interest is taxed as ordinary income. When you issue shares dividend paid on shares are not tax deductible, if you receive dividend income you pay less tax on this.

Loans: If company wants to borrow money, can do so by negotiated loan.

Debt Securities: Another ways corps can do this that human beings don’t, this is the corps can issue debt securities. Those securities go by names like bonds, debentures, notes. No legal distinction between these names but there are conventions in the finance industry between them. E.g. bond is typically a security instrument (normally has some corporate property behind it e.g. mortgage), while as a debenture doesn’t have fixed security. But we need to know the differences. Debt securities can be sold by private placement (sale to some discrete number of buyers) or alternatively in a public offer.

Debt can be secured or unsecured. Secured meaning a lien/charge/mortgage. Unsecured is just a promise to pay.


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D. MANAGEMENT AND CONTROL OF THE CORPORATION

12. Shareholders, Directors and Officers

Casebook 207VanDuzer 254-257CBCA 103, 108, 173OBCA, 115, 119, 121, 122, 168

How powers are allocated among shareholders, directors, and officers, and how their powers are exercised?

The Legal Model: The legal model of a corporation is as follows: Directors manage business and affairs of thecorporation. Officers exercise powers to manage delegated by the directors. Shareholders areresidual claimants to the assets of the corporation but only power is to vote on election of directors and on proposals made to them. (Both the OBCA and CBCA adopt this breakdown but provide for an enhanced role for shareholders).

A Clear Division: shareholders elect directors who have power and responsibility to manage or supervise the management of the corporation; and directors appoint officers and delegate to them some of their powers and responsibilities relating to management.

Why? Shareholders’ control over who the directors are is intended to render the directors accountable to shareholders. But, in corporations with many shareholders, the powers given to the shareholders may not provide them with the practical ability to ensure that management is accountable to them. Board of directors often don’t play the pivotal role in managing the corporation. In many large corporations, the officers dominate decision making.

Management and Control under the CBCA

The traditional breakdown of power to manage and control the corporation is as follows:

Directors are responsible for managing, or supervising the management of, the business and the affairs of the corporation;

Officers exercise the power to manage delegated to them by the directors, and serve at the pleasure of the board; and

Shareholders are the residual claimants to the assets of the corporation, but their only power is to vote for the election of directors and to vote on proposals made to them (Automatic Self-Cleaning Filter Syndicate v. Cunninghame, (1906)).

Shareholders choose directors who have the power and responsibility to manage or supervise the management of the corporation. Directors appoint officers and delegate to them some of their powers and responsibilities relating to management. However, this may not always be the ideal situation in which corporations function.http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:41 PM

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Why? Shareholders are essentially passive, they have no power to initiate action related to the management directly, or to decide on any matter related to the ordinary business of the corporation except as specifically provided in the articles or by-laws.

Enhanced role for shareholders

In general the CBCA and OBCA adopt this traditional breakdown (listed above) (CBCA, s.102, 115, 121) but enhance the shareholders’ traditional passive role in several ways:

a) Shareholder approval before certain fundamental changes can occur:

Amendment of articles (CBCA, s. 173); Creation, amendment, repeal of by-laws (CBCA, s. 103). Sale, lease, exchange of “all or substantially all” of the corporate property other than in

the ordinary course of business (CBCA, s.189(3)); Amalgamation with another corporation (CBCA, s. 183); Dissolution of the corporation (CBCA, s. 211).

b) Access to Information;c) Remedies (see remedies sections).

Note: in some cases, non-voting shares get voting rights and particular classes of shares may have the right to vote separately as a class in connection with shareholder votes on these fundamental changes.

The CBCA also provides for an active role for shareholders in 2 ways:

Proposals: the shareholders can have matters put on the agenda for discussion at shareholders’ meetings, including making, amending, or repealing by laws (CBCA, s. 137 and 103(5)); and

Unanimous shareholders’ agreements (USAs): shareholders can assume all powers of the board of directors, completely altering the allocation of powers as between directors and shareholders, if they unanimously agree (CBCA, s. 146). Such an agreement may then allocate the assumed powers among the shareholders.

The CBCA gives shareholders rights of access to information, including information about past meetings of shareholders and financial record, to assist them in monitoring directors and officers and holding them accountable (CBCA, s.20, 21,143,160 and 243; Part XIX).


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CBCA provides remedies for abuse of directors’ powers to manage:

A right to apply to have the corporation’s existence terminated (s.214); A right to bring an action on behalf of the corporation, with permission of the court, for

breach by directors and officers of duties owed to the corporation (a “derivative action,” s.239);

A right to seek relief from “oppression’ of the interests of shareholders or others by the corporation or the directors (s.241);

A right to seek an order directing directors and officers to comply with or to restrain them from breaching the CBCA, the articles, by-laws, or any unanimous shareholders agreement (s.247); and

A right to seek rectification of corporate records (s.243).

Under the scheme of the CBCA, directors retain the power to manage the corporation and the shareholders’ power consists primarily of their ability to determine the composition of the board of directors and to vote on matters put to them. If a majority of shareholders are unhappy with the board of director’s management, they can replace the board at the next annual meeting or can requisition a special meeting for this purpose (CBCA, s.143 (requisition); s.109 (removal by ordinary resolution).

Challenges to the Legal Model: Problem of Ensuring the Accountability of Managers to the Goals of the Corporation

2 Main Concerns: Opportunism by corporate managers Unfettered discretion of managers

Why? As scale of the corporation increases:

“Agency costs” increases (costs associated with losses to the shareholders due to self-interested behaviour by corporate managers and expenditures on monitoring managers); and

Corporate Law rules become less effective (when they are needed most) because: Lack of sufficient information to figure out that someone is ripping off the corporation

and even if the information is there, may be hard to analyze. Collective action problems (rational apathy); Focus on board of directors not officers; Directors often do not play an effective role in

managing the corporation (Professional managers usually on the Board of Directors, and Culture of Deference Exists).

Some scholars argue that Corporate Law rules are irrelevant anyway, and that market forces are really what will control agency costs (e.g. investors will make their decisions to buy shares based upon information which is publicly available on the agency risk for a particular share), because the price of agency costs will already be reflected in the price of the share.http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:41 PM

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Not a perfect mechanism because not all information on agency risks will be publicly available;

If the above is assumed true, then there will be incentive for management to act in best interests of shareholders in order to increase the price of shares because of the risk of take-over bids because of the opportunity for bidders to buy at a low share price, fire the bad management, and increase share price.

Some basic choices regarding approach;

Making corporate governance “best practices” mandatory; A “rules based approach.” Fairly rigid; US Model has adopted this;

Identifying “best practices” and requiring corporations to report on implementation; A “principles based approach.” Reflected in current TSX listing requirements because shareholders will be able to see

whether these structures have been implemented and will be more likely to buy those shares; increase in share price.

Push in Canada to adopt this model because smaller corporations in Canada and pool of possible qualified directors smaller (rigid rules based approach too onerous and costly);

Relying on the market to do the right thing.


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13. How Shareholders Exercise Power-Shareholder Meetings and Resolutions:Shareholder Voting, Shareholder Meetings, Shareholder Proposals

Casebook 747, 755-770, 772-779, 798-803VanDuzer 258-273CBCA 20-22, 132-144,147-158, 160, Regulations 32-43, Form 22 (Annual Return)OBCA 93-106, 109-114,139, 140,144-146,154-157, 159, Regulations 27-37

Shareholders and How they Exercise Power

-Annual and Special meetings-Calling Meetings-Notice of meetings-Proxies and Proxy Solicitation-Shareholder Proposals (Michaud and Verdun Cases)-Quorum-Voting-Access to information-Auditors and Financial Disclosure-Signed Resolutions

Annual and Special Meetings

Typically they are held when management is contemplating a fundamental change in the corporation that requires shareholder approval (e.g. Amalgamation, continuance in another jurisdiction). They provide a forum for shareholders to discuss matters relating to the business and affairs of the corporation

To exercise their power to vote, shareholders must act collectively. This is, most commonly done by having a meeting at which a vote takes place on matters to be decided by them.

Why? the effectiveness and significance of shareholders’ meeting will vary depending on the scale of the corporation. For small corporations with few shareholders meetings may be a mere formality. Shareholders will be vitally involved in the day to day business of the corporation and will have input into management directly. By contrast, corporations with large number of shareholders, an annual meeting may be the only opportunity for shareholders to engage with management directly.

Caveat: often the shareholders’ meetings do not give shareholders the kind of input into corporate decision making that the CBCA and OBCA envision. This may be because a controlling shareholder determines the outcome of all shareholder votes or individual shareholders are discourages from exercising their voting rights or even attending meetings, because the small size of their investment makers the cost of doing so not worth it. If you owned 100 shares of BCE worth $1,000 and lived in Vancouver, would you travel to Montreal to attend and vote at the annual shareholders’ meeting?( Corporate law rules for shareholders meetings http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:41 PM

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have some provisions that allow shareholders in corporations of different scales to customize the rules for shareholder meetings to suit their needs).

The following are the CBCA rules regarding shareholders’ meetings (OBCA, s.93-107), indicating how they may be changed

Types of shareholder meetings

When do you have to have shareholders meeting?: CBCA, s.133

1. Annual Meetings: The first annual meeting of shareholders must be held within 18 months of incorporation. Thereafter each annual meeting must be held no later than 15 months after the previous one or 6 months after the end of the corporation’s preceding financial year (CBCA, s.133).

Why? Most corporations hold their annual meetings at the same time each year. They are identified by the occurrence of 3 main items of business:

the election of directors; the receipt of financial statements and the auditor’s report on the statements; and the re-appointment of an incumbent auditor (unless dispensed with by a USA (CBCA,

s.135(5))

2. Special Meetings: meetings to conduct any business other than these three items are called special meetings (CBCA, s 135(5)), and may be called by directors anytime (CBCA, s.133(2)). To the extent that any special business is carried on at an annual meeting it is called” annual and special meeting.”

At meeting will get an info circular, info about the company, who the directors are, financial statements, form of proxy if you can’t come personally, but still want to vote.

Criticism: These meetings are often criticized as the annual ritualistic meeting where nothing happens is a waste of time. If there is a split on something then you should have one but if there isn’t then don’t need to have one.Shareholders argue should have a meeting because the managers should have to justify themselves and face the shareholders and because although most annual meetings are short and nothing ever happens but some shareholders themselves like to put forward some things in meetings.


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Calling meetings: CBCA, s.143

The directors are responsible for calling annual and special meetings of shareholders, but shareholders holding at least 5% of voting shares may require the directors to call a meeting (CBCA, s.143). This kind of shareholder action is called a requisition.

Requisition:

must state the business to be transacted at the meeting and be sent to each director as well as the corporation’s registered office. If the directors fail to call a meeting within 21 days of any such requisition by a shareholder, any shareholder who signed the requisition may call a meeting and the corporation must reimburse the shareholder for the expenses of doing so (CBCA, s.143(4)). (Calling a meeting within 21 days does not mean that the directors must hold the meeting within that time frame. Directors must exercise their discretion as to when to hold the meeting (D’Addario v. Environmental Management Solutions Inc. (2005)).

Director are not obliged to call a meeting, but if the directors have already called a meeting or the business identified in in the requisition is improper (CBCA, s.143(4)). A director or shareholder entitle dot vote may apply to a court to have a meeting called if it impracticable to call a meeting conducted as prescribed in the by-laws or the CBCA, s.144).

Why? The courts should be reluctant to interfere in the internal affairs of corporations and should exercise their discretion to order that a meeting should be held in limited circumstances (McEwen v. Goldcorp Inc., (2006)). Meetings are costly and the courts should not intervene where the issue related to calling the meeting is really the result of a power struggle between directors and shareholders.

Place of Meetings: CBCA, s.132

Shareholders’ meeting must be at the place specified in the by-laws. If no place is specified in the by-laws, meeting must take place in a Canadian location specified by the directors, or at a place outside Canada if the location is unanimously consented to by the shareholders or permitted in the corporation’s articles (CBCA, s.132) The OBCA does not impose any territorial limitation Director’s discretion may be limited by the articles or any USA. In default must be in Canadian location, specified by directors.

If allowed by the by-laws, whoever calls the meeting may decide that it will be held by any “telephonic, electronic or other communication facility,” so long as the facility permits all participants to communicate adequately with each other during the meeting (CBCA, s.132(5)). Telephone meetings are common in corporation with few shareholders


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Notice of meetings: CBCA, s. 135 & Reg 44

Who gets to come?

Which shareholders get notice sent to them about this? Directors must fix in advance a record date, that date must be 21-60 days before the meeting. The CBCA provides minimum and maximum notice periods for meetings. Notice of meetings must be given to all shareholders of record a minimum of 21 and a maximum of 60 days in advance of the date the meeting is to be held (CBCA, s.135; CBCA Regulations, s. 44). This requirement can be waived (e.g. in an emergency). Non-distributing corporations, the notice period may be shorter if provided in the corporations articles or by-laws (CBCA, s.135(1.1)

Notice must go:

to each shareholder entitled to vote; each director; and the auditor of the corporation (CBCA, s.135 (1).

CBCA, s.135: shareholders entitled to notice are those who appear on the register on a certain date called the “record date.” This record date determines who will get invited to the meeting. If you’re not a distributing corporation you can have shorter notice period.

Why? the record date is most significant for public corporations because their shares may change hands on a daily basis. The directors may fix a record date by resolution that is not more than 60 days or less than 21 days before the meeting (CBCA, s.134; CBCA Regulation, s. 43). If the directors do not do so, the CBCA provides that the record date is at the close of business on the day immediately preceding the day on which notice is given (CBCA, s.134 (2)(a)).

Intermediary: where shares are registered in the name of an intermediary, such as an investment advisor, and the intermediary has received notice of the meeting, he has an obligation to send the information that he receives about the meeting to the beneficial owner. The intermediary is not permitted to vote the shares of the beneficial owner except in accordance with instructions from the owner (CBCA, s.153). (there is no similar provision in the OBCA.

Shareholders: The directors may set a separate record date for determining the voting rights of shareholders. If the directors do not do so, then the record date for the purpose of determining voting rights is the same as the record date for notice of the meeting or, if no such record date has been chosen, close of business on the day preceding that day that notice is given.

Why? if a shareholder has acquired his/her shares after the voting record date, he/she does not have the right to attend and vote at the meeting unless he/she has a validly executed proxy from the transferor entitling him/her to vote the shares on the transferor’s behalf (CBCA, s. 138(3) and (3.1). Under the OBCA the scheme is somewhat different. The default record date for voting is the same as the default date for notice of the meeting. A transferor who acquires her shares after the record date can still vote at the meeting, however, is she is able to prove her ownership based http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:41 PM

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on certain requirements asset out in the major amendments set out in the (s.100(1)). This scheme existed under the CBCA prior to the major amendments in 2001. Shares issued after the record date cannot vote.

Waiver of Notice: in corporations with few shareholders, notice is often waived and attendance is deemed to be waiver of notice, except when the shareholders attends to object to a transaction on the grounds that the meeting has not been lawfully called (CBCA, s.136). Where the meeting is a special meeting, the notice must state the nature of the business and the text of any special resolution that will be voted on during the meeting (CBCA, s.135(6).


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Proxies and Proxy Solicitation

Any shareholder not able to be personally present at a meeting may appoint another person, who need not be a shareholder, to represent her at the meeting and vote her shares (CBCA, s.148(1)). The appointment called a “proxy” must be writing and signed by the shareholder.

Part 13 CBCA; Historically was defined as person in place of yourself; Now means the paper that appoints the proxy; CBCA uses “form of proxy” – blank form that when filled out and signed becomes a

“proxy.” Proxy holder doesn’t have discretionary power unless you amend form, choose to give

them powers. Works as a power of attorney, making the “proxy holder” your agent for exercising your

vote at the meeting. In large public corps, management must make sure that all shareholders have an easy way

of voting by proxy. Management is required to send every shareholder a form of proxy. On the proxy for are names of people who will vote for you at the meeting.

Proxy: A Proxy is an instrument by which a shareholder appoints someone else to vote in his place.

Proxy Solicitation: refers to the obligation of directors to send proxy forms and information to shareholders. The management of the offering corporation is obliged to solicit the proxies of shareholders, but so too may any dissenters to the proposal for which the proxies are being solicited. This is exclusively a statutory right, no common law equivalent.

Only have to provide proxies if you are a public corporation or a private corporation with more than 50 shareholders.

Who is or isn’t a proxy?Proxy Test:

any shareholder not able to be personally present at a meeting may appoint another person, who need not be a shareholder to represent her and vote her shares (CBCA, s.148(1));

appointment called a “proxy” must be in writing and signed by the shareholder; proxy may be revoked at any time before the meeting, but the authority of the proxy is

limited to that conferred by the terms of the proxy; proxy has all the powers of a shareholder at the meeting; voting by proxy is a statutory right. There is no common law right to vote byproxy; and the proxy must vote according to shareholder or they commit an offence (CBCA, s.152(4)).

If an important new matter is to be voted on that was not identified in the notice of the meeting, a proxy holder cannot vote.


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Management Proxy Circular:

For all corporations incorporated under the CBCA that have more than 50 shareholders or that are distributing corporations, management must send shareholders a management proxy circular and a form of proxy (CBCA, s. 148, 149, 150). The form of proxy lists the matters to be voted and permits shareholders to identify the person who is to represent them at the meeting by checking a box indicating how their shares should be voted.

Why? If the shareholder fails to nominate someone, a management nominee is selected by default in forms of proxy sent out by management. If the shareholder fails to indicate how her shares should be voted, the default provided for on the proxy is that the shares are to be voted in favour of management’s proposals.

As the number of shareholders of a corporation grows, the proxy solicitation is an increasingly important way of enhancing shareholder participation by providing both general and specific information regarding management proposals, as well as directly facilitating the exercise by shareholders of their voting rights through the proxy.

Annual report: Under the CBCA, management is required to send annual financial statements to shareholders in connection with annual meetings, along with the report of the auditor and any other information regarding the financial position of the corporation required by the articles, by laws, or any USA (CBCA, s.155).

Management proxy circular must include:

a description of shareholders’ rights to appoint a proxy and the procedure for doing so; transactions with insiders of the corporation (e.g. affiliated corporations (defined in CBCA,

s.2(2)-(5)), significant shareholders, directors and officers);

disclosure regarding principal shareholders holding more than 10 percent of the issued shares of the corporation;

details about the directors who are proposed for election; and details about any special business to be dealt with at the meeting.

Dissident shareholders:

shareholders who disagree with management proposals may also solicit the votes of their fellow shareholders. They are entitled to obtain a list of shareholders, the shares they hold, and their addresses from the corporation and to contact other shareholders for the purpose of influencing their voting (CBCA, s.21(3) and (9)).


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Dissident proxy circular:

if a shareholder does solicit proxies, she must send one out in the form prescribed by the regulations (CBCA, s.150 (1)(b)). As of 2009, the form for such circular follows securities law requirements.

Why? These come from the CBCA and Ontario Securities Act: The 2001 amendments to the CBCA permit greater scope for shareholders to communicate with each other without triggering these proxy circular requirements. Public efforts to affect the voting of other shareholders have been relatively rare in the Canadian marketplace. They sometimes occur in connection with hostile takeover bids. When they do occur, they often take the form of advertising campaigns conducted by management and dissidents in the financial press.

Rules about proxies and proxy solicitation may be enforced in the same way as other shareholder rights. In CBBA, s. 154, it provides that a shareholder may apply to a court to restrain the distribution of a proxy circular that contains an “untrue statement of a material fact or omits to state a material fact…that is necessary to make a statement contained therein not misleading in the light of the circumstances in which it was made.” The court can also restrain the implementation of any resolution that was passed at a meeting held after the distribution of such a circular, or make any order it sees fit.

The OBCA was amended in 1999 to allow proxies and revocation of proxies to be signed electronically. Similar amendments were made to the CBCA in 2001. Notices and documents, including proxies and other shareholder communications, can be sent electronically only if the addressee has consented and designated an information system (such as an email) to receive the notice or document which is used by the sender (CBCA, s.252.3). They may be posted on the website so long as each shareholder is notified individually of the posting via the designated information system (CBCA, Regulations, s.7(2)). Electronic signatures are permitted so long as certain conditions are met (CBCA, s.252.7).


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Shareholder Proposals: CBCA, s.137

Normally, the directors set the agenda for shareholder meetings. This is true in large corporations where shareholders are remote from management. The CBCA provides a limited right for shareholders to add items to the agenda (CBCA, s.137), including the creation, amendment, and repeal of by-laws and the amendment of articles (CBCA, s.103(5) and 175(1)). Any shareholder entitled to vote may submit to the corporation notice --called a proposal—of any matter she proposes to discuss.

Four categories of proposals

1. Amendment of articles;2. Fundamental changes: By-law created, amended or repealed;3. Shareholders holding at least 5% of the shares or 5% of class voting shares may make

nominations for the election of directors;4. Residual category.

They are circulated at the corporation’s expense with the management proxy circular along with a supporting statement from the proposing shareholder, which may be a registered or beneficial shareholder. Together with the proposal and the supporting statement may not exceed 500 word.

Why? the proposal mechanism is intended to facilitate communication among shareholders at the expense of the corporation.

They are not binding on the corporation if approved. They only constitute a form of advice to management.

Proposal Eligibility

To be eligible to submit a proposal, a shareholder must continuously hold a prescribed minimum number of shares for a prescribed amount of time before submitting a proposal. Management may omit a shareholder proposal that “does not relate in a significant way to the business or affairs of the corporation.” To be eligible to submit any proposal, on any matter, a shareholder or group of shareholders must:

Hold voting shares equal to at least 1% of the total voting shares outstanding at the date the proposal is submitted or worth at least $2000 at the close of business on the day before it is submitted; and

Have held the shares for at least 6 months (CBCA, s. 137(1.1); CBCA Regulations ,s.46).

Under the 2001 amendments a beneficial holder of shares, who is not the registered owner, may submit a proposal and the corporation may require proof that these requirements are met (CBCA, s.137(1.4)).


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Exceptions: a corporation does not have to circulate a proposal in five circumstances (CBCA, s.137(5)):

The proposal is not submitted to the corporation at least 90 days before the anniversary date of the notice of the last annual meeting;

Primarily for the purpose of enforcing a personal claim, personal grievance;

Does not relate in any significant way to the business or affairs of the corporation; the proposing shareholder made a proposal within the last 2 years then failed to show up, in

person or by proxy, to speak to it at the meeting;

the same proposal was submitted to secure publicity for the purpose of promoting general, political, racial religious, social or similar causes.

Verdun v. TD, [1996]

Where a shareholder’s proposal is for a personal grievance, it will not be allowed.

Facts: Verdun was the beneficial owner of over 2000 shares of TD, but was not entitled to make a proposal. He submitted 11 proposals relating to the structure and makeup of the board of directors and procedures that the annual shareholder’s meetings. Management refused to circulate the proposals, arguing they were submitted to address a personal grievance and that Verdun was seeking to gain publicity.

Post 2001 amendments Verdun would not have been barred from making a proposal on the basis of being a beneficial shareholder.

Michaud

Where proposals submitted to redress a personal grievance; to secure publicity they will not be allowed.

Facts: the owner of one share of Royal Bank, purchased only to make a proposal, and was entitled to do so prior to the 2001 Amendments to the CBCA. Now Michaud would not have met the ownership requirement to make a proposal.

Varity Corp v. Jesuit fathers of Upper Canada, [1987] In this case the purpose of promoting general and economic, political, religious, social or similar causes was the abolition of apartheid. The court held that the company cannot be compelled to distribute the proposal. The court put the onus on the applicant to make out its case.

Facts: A shareholder sought to have a corporation circulate a proposal to have the corporation divest its investments in South Africa. Varity was a federal company. Rev. Leon Sullivan called http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:41 PM

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for disinvestment if apartheid is not dismantled. Conditions in South Africa make continued economic investments risky. Investments in a South African corporation, which produces farm implements, tractors and accessories, harvesting machinery, trailers, industrial loaders and transport systems. Varity could not guarantee that its equipment would not be used in the enforcement of apartheid laws. Proposal was to ask the board of directors to take immediate steps to terminate Varity’s investments in South Africa.

Held: Corporations are not required to comply with a shareholder’s request if it’s for : a personal claim Personal grievance (against the corporation or its directors, officers or security holders Promoting a general economic, political, racial, religious, social or similar causes

Re Greenpeace Foundation of Canada & Inco Ltd, [1984]

A proposal to institute pollution-control measures to limit sulphur dioxide emissions was held to be for the purpose of advancing an environmental cause and so falls within the exception.

Held: the corporation could also refuse to circulate the proposal because a resolution to impose restrictions on emissions, although at a different level, had been defeated at a previous meeting.While the prospects for success may be poor in an individual case, shareholder proposals can nonetheless serve an educative function by putting issues of concern to the managers. This can have the effect of putting pressure on managers and by generating public debate. As a result, shareholder participation and managerial accountability are increased. Sometimes proposals can provide a source of innovative ideas for management.

The 2001 Amendments replace the social-cause exclusion with the exclusion for matters not relating to the business or affairs of the corporation in a significant way.

The proposal mechanism has been used rarely in Canada until recently. If a proposal is passed, it is effectiveNo directors’ resolution is necessary to complete a change in the articles.

Conduct of meetings

The conduct of annual and special shareholder meetings is governed by the by-laws of the corporation, and shareholders may discuss any matter that is properly before the meeting either on the agenda or by resolution (s.137(1)(b)).

Right to Speak

Shareholders have a right to speak to the matters on the agenda;

Duty of Chairman: It is the duty of the chairman and his function, to preserve order and take care that the proceedings are conducted in a proper manner (National Dwelling Society v Sykes) The CBCA /OBCA guarantee shareholder a right of discussion only at annual meetings where the http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:41 PM

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shareholder is entitled to submit a proposal. The chairman cannot terminate the meeting to prevent such a discussion. The position of chairman is quasi-judicial

Electronic Communication

Unless the by-laws provide otherwise, any person entitled to attend a meeting may participate by means of such a communications facility if the corporation makes one available (CBCA, s.132(4)) E.g. conference calls, internet based communications. Any such person using such means is deemed to be in attendance at the meeting


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Quorum (a group or majority): s.139

Unless otherwise indicated in by-laws, a majority of shares entitled to vote, represented in person or by proxy at the meeting constitute a quorum (CBCA, s.139). Most by-laws provide that a certain number of shareholders, often only two, must be present in person or by proxy to constitute a quorum for holding a meeting.


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Voting in Meetings: (s.140,173,183,189)

Unless otherwise indicated in the Articles, by-laws, or unanimous shareholder agreement, matters will be passed at shareholder meetings by a simple majority of shareholders by a show of hands. Special resolutions require 2/3. Unless articles provide otherwise each share gets one vote and matters are decided by a majority of votes cast on any resolution at the meeting.

Special resolutions: required for amendments to articles and certain other fundamental changes, must be passed by two thirds of the votes cast at the meeting (CBCA, s.140, 173, 183 and 189). Any vote may be held entirely by means of a telephonic, electronic, or other means of communication

Voting is by a show of hands, but any shareholder may require that a ballot be taken (CBCA, s.141)

Regarding electronic voting, the gathering of votes must be verifiable, and the votes must be anonymous.


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Access to information-Auditors and Financial Disclosure

CBCA requires corporation to provide shareholders with access to certain information to enhance their ability to monitor management and to exercise their rights. A corporation must maintain certain records and allow access to them by shareholders and others including directors, officers and creditors.

Right to Corporate Information:

corporations are required to maintain specified records of financial information.

Why? Information is important for 2 reasons: It allows shareholders and securities market to evaluate the relative strengths and weaknesses

of the enterprise so that they can make informed decisions as to whether or not to invest in the company;

Shareholders are able to evaluate effectively the performance of the corporation’s directors and officers.

Specific requirements

The corporation must maintain (CBCA, s.20 (1)) and shareholders must be granted access without charge (CBCA, 21(1)) to:

the articles and bylaws (and any amendments thereto); Any unanimous shareholder agreements; minutes of meetings and resolutions of shareholders showing the resolutions passed; The Intial Registered Office Address and First Board of Directors; All notices of Changes regarding Directors and notices of Change of Registered Office

Address, and A share register showing the owners of all shares must be maintained by the corporation at its

registered office or wherever the directors decide.

Restriction on use:

cannot be used other than to influence the voting of other shareholders, re: an offer to acquire shares or for other corporate business.Public Disclosure: articles, notices of directors (including changes), notice of registered office, annual information returns, annual financial statement for distributing corps ( s.160)Directors Meetings: no right to inspect!

Each shareholder is entitled to one copy of the articles, by-laws, any USA, and any ordinary or special resolutions free of charge (CBCA, s.21(1) and (2)).

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CBCA s.20(2): requires the corporation to prepare and maintain adequate accounting records and records containing minutes of meetings and resolutions of the directors and any committee thereof. CBCA, s.20(4) requires that such records “at all reasonable times be open to inspection by the directors.”

A person wishing to examine the securities register or obtain a list of shareholders must make a request to the corporation accompanied by an affidavit (CBCA, s.21(1.1), (3) and (7)(a)). It is an offence to use the information about shareholders contrary to the restriction (CBCA, s.21 (10)).

Additional Rights Include:

rights to requisition meeting, and to ask questions (CBCA, s. 143) right to have inspectors and auditors appointed (CBCA Part XIX)

Shareholders Must Appoint an auditor

Auditor:

are chartered accountants appointed by shareholders who are charged with reviewing annual financial statements prepared by management and reporting to shareholders on whether the financial statements fairly present the financial position for the time period they cover. Auditors must be independent of management and must be properly qualified (CBCA, s.161).

Shareholders right to appoint and remove an auditor, which assess the financial statements. Not all corporations require the appointment of an auditor, but they help to ensure the reliability of financial statements and compliance with statutory requirements, checking corporate mismanagement, and developing standardized financial reporting.

A corporation must maintain adequate accounting records containing the minutes of directors’ meetings and any resolutions passed by directors (CBCA, s.20 (2)). The directors must have access to these records at reasonable times (CBCA, s.20(4)). There is no right for shareholders or others to inspect the minutes of directors meetings-corporation also required to make certain limited disclosures to the public.

Why? this exclusion reflects the exclusive allocation of management power to directors as well as any concern that if shareholders had access to records of what directors had decided commercially and competitively sensitive information might end up being accessible to competitors and the public.

Disclosure:

Under the CBCA the following items must be filed: articles (including all amendments;


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Initial Registered Office Address and First Board of Directors, Changes Regarding directors and change of Registered Office Address filings;

Annual information returns (CBCA, s.263; Form 22); Annual financial statements (for distributing corporations only (CBCA, s.160).

In Ontario, additional information filings are required under the Ontario Corporations Information Act and for public corporations under the Ontario Securities Act


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Signed resolutions and Single Shareholder Meetings

Signed Resolution:

Any action taken by shareholders must be given effect by a resolution passed at a meeting. Under the CBCA, if a class or series of shares has but a single shareholder, he alone can constitute a meeting, notwithstanding the etymological impossibility (CBCA, s.139 (4)).

Alternative to meetings: where a single shareholder or each shareholder entitled to vote, if there is more than one, signs a written resolution it will be just as effective as if it had been passed at meeting.

Why? Proceeding in this way eliminates the need for shareholders to get together to meet and to worry about notices and other formalities associated with meetings, especially if the shareholders are not in the same location.


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14. Directors and How They Exercise Power

Casebook 230-235CBCA 103,108, 173, 190, 211OBCA 115,119, 121, 122, 168, 185, 207, 208

The management of the business and the control of the company shall be vested in the directors.

Qualifications

VanDuzer 273-275CBCA 2(1) (definition of director), 2(5)(definition of resident Canadian) , 102(2), 105, 108(1)(c), 116, Regulation s.11OBCA 1(1) (definition of director),(definition of resident Canadian), 118, 121(1) (c), 143, Regulations s.26

Director:

A person is not qualified to be a director if she is

Less than 18 years of age; Of unsound mind as found by a court in Canada or elsewhere; An undischarged bankrupt; or

Not an individual :(CBCA s.105)

Even though a corporation cannot be a director, a corporation may be an incorporator (CBCA, s.5). There is no statutory requirement for directors to hold shares in the corporation, though the articles may provide for such a requirement (CBCA, s.105(2)).

Previously most CBCA model jurisdictions required a majority of directors to be resident Canadians. Now under the CBCA at least 25% of the directors must be resident Canadians (CBCA, s. 105(3)). However, in some cases, a majority of the directors must be resident Canadians these sectors are:

Uranium mining; Book publishing or distribution; Book sale; and Film distribution (CBCA, s.105(3.1)-(4), CBCA Regulation, s.16)

Why? These changes provide significant new flexibility that may be useful for CBCA corporations with foreign shareholders.


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“Resident Canadian”

is defined in s.1(1) to include Canadian citizens ordinarily resident in Canada and a permanent resident within the meaning of the Immigration Act who is ordinarily resident in Canada.

A director ceases to hold office on becoming disqualified (CBCA, s.108(1)(c)). However, any act of a director after she becomes disqualified is valid, notwithstanding the defect in her qualification (CBCA, s.116). E.g. if the board approved a contract with a third party and one of the directors was disqualified, the contract would be enforceable against the corporation.

Individuals cannot be made directors of CBCA corporations without their consent. People who are elected or appointed are deemed not to be directors unless

They were at the meeting at which the election or appointment took place and didn’t refuse;

They consented in writing either before their election or appointment or within 10 days afterwards;

They acted as directors pursuant to the election or appointment (implied consent) (CBCA s106(9))


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Election and Appointment of Directors

VanDuzer 275-277 CBCA 106, 107, 108(2), 111(1), 116, 132(1), 133(a), 135(5), 143-5OBCA 93, 94, 96(5), 100, 101, 104-107, 119, 120, 124, 128

Elections:

Upon incorporation, the articles of incorporation name the first directors. Directorsare elected by shareholders at annual meetings. The first directors of a corporation are those listed in the Initial Registered Office Address and First Board of Directors filed with the articles. They become directors at the time the certificate of incorporation is issued and incorporation occurs (CBCA s. 106(2). These directors hold office until shareholders first meeting, which must be held not more than 18 months after incorporation (CBCA, s.133). At each subsequent annual meeting, shareholders by simple majority vote elect directors. Election is by simple majority vote unless some higher level of support is required by the articles (CBCA, s.6(3)).

The term of directors cannot last more than three years. It is also possible to have different or “staggered” terms for directors. In most cases, directors must be elected annually. If no term is specified on their election, the directors stay in office only until the annual meeting following their election (CBCA, s.106(3)).

When directors are changed, the corporation must file a Change Regarding Directors form with Corporations Canada within 15 days (CBCA, s.113).

Under the 2001 amendments, where a corporation has no directors, any person who actually manages or supervises the management of the business and affairs of the corporation is deemed to be a director (CBCA s109(4)). Exceptions are an officer acting under the direction of a shareholder, lawyers and accountants providing professional services, and creditor representatives (CBCA, s.109(5)).

Shareholders have the power to remove a director by passing an ordinary resolution to that effect at a special meeting (CBCA, s.109). Where a director is elected by a particular class or series, the director cannot be removed without te approval of that class or series. a director may also be removed on the basis of a finding that the continued involvement of the director would be oppressive of the interests of shareholders (Catalyst Fund General Partner Inc. v. Hollinger , (2006)).

Filling vacancy on the board

A vacancy on the board may occur for a variety of reasons: a director may resign, be removed by shareholders, or become disqualified. -If no quorum is remaining in place or a vacancy has occurred, the remaining directors must call a shareholders’ meeting to fill the vacancy (CBCA, s.111(2)). If quorum exists then directors can just elect a new one to replace (CBCA, s.111(1)). http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:41 PM

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The articles may provide that all vacancies must be filled by shareholders: (CBCA, s. 111(4)). So long as a quorum remains, the board can still act as a board.

Significant changes, including the wholesale replacement of the board, may be effected without getting shareholder approval, if one can obtain the cooperation of both the departing and the incoming directors and follow a process of sequential resignations and appointments. The whole board may be replaced without a shareholder vote.

Why? this might be desirable if several directors wanted to resign and the board wanted to continue to operate until the next annual meeting, avoiding the expense of calling a special meeting.


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Number of Directors

VanDuzer 277CBCA 6(1)(e), 20(1)(c), 21(1), 102(2), 106(7), 107(a), 109(3), 111-4, 213(1)(b),OBCA 5(2), 120, 124-6, 128, 140, 145

How many directors must a corporation have?

Under the CBCA there is only one restriction on the number of directors. If the corporation had made a distribution of its shares to the public and those share remain outstanding and are held by more than one person, the corporation must have 3 directors, at least 2 of whom are not officers or employees of the corporation (CBCA, s.102(2)).

Private corporation can have as few as one ; Public corporation has to have at least 3, at least 2 of whom are not officers or employees of

the corporation (CBCA, s.102(2)).

Why? Typically corporations carrying on a small business have few directors, usually consisting of the shareholders. As its business grows, a corporation may expand its board to include people who are not significant shareholders but who bring to the corporation specific expertise or experience.

Number of Directors: or a minimum and maximum must be specified in the articles (CBCA, s.6 (1)(e)). The corporation may change the number or the minimum and maximum number of directors by articles of amendment. Amendments require the approval of shareholders by special resolution. There is no specific mechanism for fixing the number of directors within the articles. Usually the articles provide that the directors can determine the number of directors.

Apart from one restriction, the choice of the number of directors is a matter for the shareholders to decide.Restriction: unless otherwise provided in articles the directors do not need to hold shares.


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15. Directors’ Meetings

VanDuzer 277-280CBCA 6(3), 18, 103, 104, 114, 117, 120(2), 123(1) (2)(3)OBCA 5(4), 19, 116, 117, 126, 129, 132(2), 135

Directors’ Meetings

Like shareholder, directors exercise their power collectively, primarily at meetings. The boards of large corporations meet every three months or some time more frequently, if a major transaction, such as a change in control of the corporation is being negotiated. Board committees may also have meetings. In corporations with few shareholders, all of whom are directors, a formal director’s meeting may be held only once a year to meet the minimum requirements of the statute for calling an annual shareholder’s meeting.

At meetings directors act by resolution—just like shareholders—meaning they vote on a formal expression of some decision, such as to declare a dividend. These resolutions are recorded in “minutes” of the meeting that are included in a corporation’s minute book, just like shareholder resolutions (access to the minutes of directors meetings is limited to directors). Modern corporate statutes set out code for directors’ meetings (e.g. CBCA, s.114).

PlaceWhere: unless articles or by-laws say otherwise meetings may beheld wherever the directors want (CBCA, s. 114(1)). There is no statutory default requirement under the (CBCA s 114(1)). Under the OBCA, a majority of meetings must be held in Canada (s.126(2)).

NoticeMust be specified in the corporation’s by-laws under the CBCA. There is no default provision (s.114) Under the OBCA, in absence if any provision in the by-laws, 10 days’ notice must be given. (OBCA, s.126(9). While proper notice is required for a valid board meeting, notice may be waived and is deemed waived by attendance at a meeting, except if a director attends the meeting for the purpose of objecting to the meeting on the basis that it is not lawfully called (CBCA, s.114(6)). Notice can be waived by attendance at a meeting. A waiver of notice will only be effective if it is obtained from all directors.

Why? Practically speaking, waivers and deemed waivers of notice are extremely useful because business people often do not comply with the formalities required by the statute and by-laws. Conducting Meetings

How do directors make decisions? At directors’ meetings, as at shareholders’ meetings, certain procedures must be followed. Some minimum number of directors (quorum) must be present or no business may be carried on. A quorum may be set out in the articles or by-laws. In default of such provision quorum consists of a majority of directors if the articles specify a fixed number of directors, or a majority of the minimum number of directors permitted by the articles (CBCA, http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:41 PM

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s.114(2)). Regardless of the number required for quorum , the directors may not carry on business unless 25% of the directors present are resident Canadians:(CBCA, s. 114(3)). Moreover, for corporations operating in particular industries, where the CBCA requires a majority of the board to be resident Canadians, a majority of directors present must be resident Canadians. These requirements may be satisfied if after a meeting, the requisite numbers of resident Canadians approve any business transacted at the meeting.

If all the directors consent, they may participate in meetings by electronic communication as long as it permits them all to communicate with each other adequately during the meeting(CBCA, s.114(9)). It is common ot obtain a general form of consent to such telephone or electronic meetings forma person when she becomes a director.When business is transacted at a meeting, it must be approved by a number of directors specified in the articles or by-laws, which is usually a majority. There is no statutory default in the CBCA.

Directors can transact whatever business they like, except that at the first meeting following incorporation, the agenda is specified in Section 104. Also, directors must call an annual meeting of shareholders at least every 15 months, and directors must approve financial statements annually. Directors must also pass resolutions and authorize certain action, such as calling meetings of shareholders, issuing shares and declaring dividends (CBCA, s.115(3)).

Dissent by a director

If a director is present at a meeting, including present by telephone, he is deemed to consent to any resolution passed unless he expresses his dissent in one of the following ways:

Requests that the dissent be recorded and it is recorded in the minutes of the meeting; Sends a written dissent to the secretary of the meeting before it is adjourned; or Sends a dissent by registered mail or delivers it to the office of the corporation immediately

after the meeting is adjourned (CBCA, s. 123).

If a director votes for a resolution, she cannot dissent after the meeting. If a director is not present, she is seemed to consent if she does not, within seven days of becoming aware of a resolution, cause a dissent to be recorded in the minutes, or send a written dissent to the corporation.

Why? Purpose of these rules is to fix clearly the position that was taken by a director at a meeting in order to see if she was fulfilling her obligations to the corporation, including her duty of care and fiduciary duty. Deemed consent makes it easier to prove that a director approved a particular action which is being challenged as a breach of duty. By making it impossible for directors to avoid responsibility by declining to take a position, these provisions help to encourage the active involvement of directors in decisions of the board.

(CBCA, s.123). Cannot dissent afterwards if you vote for something. Deemed consent if not present and do not file dissent upon notice of resolution.


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Signed resolutions and single director meetings

Where a corporation has only one director, he may constitute a meeting. As an alternative to meetings the directors can pass resolutions signed by all directors (CBCA, s.117)

Why? This eliminates the need to comply with the notice requirements for meetings as well as the need to have all the directors present at one place and one time. The resolution becomes effective when it is signed by the last director.


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16. Officers

VanDuzer 280-282CBCA 16(1), 102(1), 104(1)(d), 115(1), 116, 121OBCA 17(1), 115, 117(d), 127, 128, 133

General

There is nothing in the CBCA that addresses what officers a corporation should have or what the duties of particular offices will be. Although there are no fixed rules, a common corporate structure in public corporations gives the CEO overall responsibility for running the corporation’s business, while the day-to day operations are delegated to other officers who report to the CEO.

Directors have the power to designate offices (president and secretary) and to specify the duties of those offices, which involves delegating to them the power to manage the business and affairs of the corporation. Usually this delegation is done in a by-law passed at the time the corporation is organized just after incorporation. After setting up the offices in this way, the directors may appoint people , the officers to fill them (CBCA, s.121).

The directors may further delegate matters to the officers they appoint (e.g. the authority to enter into specific transactions on behalf of the corporation (delegation will be discussed below).

CBCA Requirements for Officers:

The 2001 Amendments introduced a definition of officer as follows:

“Officer”

means an individual appointed as an officer under s. 121, the chairperson of the board of directors, the president, the secretary, the treasurer, the comptroller, the general counsel, the general manager, a managing director of a corporation, or any other individual who performs functions for a corporation similar to those normally performed by an individual occupying any of those offices.... (CBCA s. 2(1))


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Why? The introduction of th is broad definition is significant. It clarifies officers that officers are not only individuals appointed by the board but also individuals holding certain titles or performing certain functions. The OBCA has a similar definition of officer (s.1(1)).

Directors can be officers but need not be. Any person may hold two or more offices. No qualifications are required for officers except that they must be of “full capacity”: (CBCA, s.121(a)). This phrase is not defined in the Act but presumably means, at least, that officers must of sound mind. There is no such requirement in the OBCA. If the board decides to appoint a managing director, she must be a resident Canadian (CBCA, s.115(1)). An act of an officer is not invalid solely because of a defect in her qualification or an irregularity in her appointment (CBCA, s.116).

Because officers are typically given power to manage the business and affairs of the corporation, they are subject to the same duty of care and fiduciary duty as directors: (CBCA s.122).

The legal relationship created by appointing a person as an officer is distinct from any employment relationship that the person may have with the corporation, though, in practice, many or all of the duties associated with the employment contract may be coextensive with the duties of the office.

Why? this is important upon termination of the person’s involvement in the corporation. An officer can always be removed by the corporation. It is common for corporations to provide in their by-laws that officers hold office at the pleasure of the board of directors, so their appointment may be terminated at any time by a decision of directors.

An officers employment contract, by contrast, may be terminated only for cause or on reasonable notice as with any other employee. In the absence of such cause or notice, the termination of a personas an officer will usually be a breach of his employment agreement, even where the right to remove officers from their offices has been stipulated in the articles or by-laws (Southern Foundries v. Shirlaw (1926)).


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Delegation

Delegation within the Corporation

Historically, directors had no power to delegate the management of the corporation to others. The power was necessary, however, for the development of large-scale corporation. Sections 115 and 121 of the CBCA create a statutory code for delegation. Recall that directors have the power and responsibility “to manage the business and affairs of the corporation” (CBCA, s.102(1)). Directors can delegate their powers to “to manage the business and affairs of the corporation” to a managing director (who must be a resident Canadian), to a committee of directors, or to one or more officers.

The language in section 121(a), permitting delegation to officers, is the same as that giving directors their general authority to manage the corporation in section 102(1). Both refer to the power to “manage the business and affairs of the corporation.” Directors can delegate all their power to officers subject to two important limitations:

they cannot delegate the power and responsibility to supervise the management of the business and affairs of the corporation;

they cannot delegate the specific powers listed in (s. 115(3)): decisions regarding shares, including the power to issue shares, to declare dividends on shares, and to purchase or redeem shares. Decisions to approve financial statements, management proxy circulars, takeover –bid circulars, and director’s circulars.

Delegation outside the corporation

To what extent may power to manage be delegated to third parties outside the corporation? Although it may seem odd, such delegation is common

Why? E.g. many corporations grant power to manage a specific area of their business to a management company that has special expertise in the area. From an efficiency perspective, where the returns to the corporation can be improved by such delegation, management should not be precluded from adopting such a strategy.

External delegation is not dealt with in the CBCA or OBCA, but it is still allowed. The main rule is that the board of directors may not delegate completely its control over the day-to-day management of the corporation’s business; the board must retain the power to supervise the delegate in the performance of its duties.


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Kennerson v. Burbank Amusement Co. [1953]

Example of board breaching the general rule and delegated all control over the only asset it was responsible for managing—a theatre. As long as the corporation exists, its affairs must be managed by the duly elected board. The board may grant authority to act, but it cannot delegate its function to govern. If it does, the contract is void.

Facts: It attempted to transfer control over “bookings, personnel, admission prices, salaries, contracts expenses” and fiscal policies to Kennerson, the only condition being that he report to the board periodically.

Held: the court determined that this delegation conferred on Kennerson the practical control and management of the corporation subject only to a duty to report and account, and permitted no possibility of being exercised by the board. The power of the directors to manage had been “completely sterilized”, and so the delegation was held to be non-enforceable.

The length of delegation is also relevant to determining whether the board has retained sufficient control (Sherman & Ellisv. Indiana Mutual Casualty Co. (1930).

Directors are prohibited from delegating such control and management to others and any contract so providing is void. By this contract with Kennerson the board has attempted to confer upon him practical control and management of al, corporate powers (management of the Manor Theatre Building) The business of the a corporation should be managed by its board of directors.

Why? What delegation is permissible is a question of degree (how much did they delegate). In all cases of choosing a delegate and supervising the delegate, the directors are bound by their duty of care and their fiduciary duty to act in the best interest of the corporation.

Problem is one of degree: if substantially all corporate powers are delegated, the contract will be held voidable and unenforceable

The result of the cases seems to be that the directors may make a valid decision to enter into a management contract to have the business operated by a third party as long as in doing so they still continue to function as a board of directors with ultimate control over the business.


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17. Remuneration and Indemnification

Casebook 368-373VanDuzer 284-290CBCA 120(5)(b), 124(1)-(5), 125OBCA 132(5)(b), 136, 137

Remuneration

Unless stipulated otherwise in by-laws, articles or USA the directors fix their pay and that of the officers and other employees (CBCA, s. 125). This is a conflict between directors own personal interest and that of the corporation’s to which they have a fiduciary duty to put first (CBCA, s.122). Notwithstanding this conflict, the CBCA and OBCA expressly permit directors to vote on the terms of their compensation. (CBCA, s.120(5)). This does not mean, however, that directors are not required to act in the best interests of the corporation in setting their remuneration.

Radtke v. Machel, [2000]

Where a director had decided upon his salary unilaterally, he had an obligation to ensure that the salary was fair.

Issue: the conflict faced by directors setting their own pay depends on the scale of the corporation. For closely held corporation, where managers, directors, and shareholders are the same individuals, inevitably there will be disagreements among the involved about the amounts of compensation paid to each as well as for example the form of compensation.

Why? because each individual will have differing needs for money from the corporation and will be in a different tax position, each will have her own preferences whether money is paid out as salary or as dividends or is retained in the corporation to increase the value of her investment in the corporations shares. CRA will have a corresponding interest in these decisions.

Problem: The potential for abuse is large and excessive remuneration is a basis to invoke the oppression remedy.(CBCA, s.241). In several cases, the court has found excessive compensation is oppressive (Stech v. Davies (1987).

Why? As the scale of the corporation increases, the identity of manager, directors, and shareholders diverges. Conflicts of interest related to setting compensation in this context can create substantial risks for shareholders. Directors and officers may be tempted to enrich themselves at the expense of the corporation by giving themselves excessive compensation. The payment of excessive compensation diminishes the value of the residuals claims to the corporation’s assets represented by the shareholder’s shares (These are called “agency costs”).


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Shareholder remedies, like oppression, may not be attractive to shareholders where each suffers a small portion of the loss in the reduction of the value of the shares. Each shareholder may decide that the size of the loss does not justify incurring the cost of a lawsuit.

Indemnification (where directors/officers can get money back)

Directors and officers are subject to a wide range of potential liability in connection with fulfilling their responsibilities. This creates a strong disincentive to become a manager since in Canada they are likely to receive modest financial compensation for being a member of the board.’

Liability Concerns: a practice developed for corporations to indemnify managers against liabilities they incur in connection with performing their duties. A scheme for indemnification is now set out in the CBCA (s.124) and OBCA. The scheme seeks a balance: to permit indemnification in sufficiently broad circumstances to encourage responsible people to become directors or officers, and to deny indemnification in circumstances where directors are engaged in improper conduct. It has three parts:

must indemnify directors and officers in certain circumstances; may indemnify in additional circumstances; and may obtain insurance for the benefit of directors and officers in a still broader range of

circumstances.

Mandatory Indemnification

a corporation must indemnify a director or officer of the corporation, as well as anyone acting at the corporation’s request as a director or officer or in a similar capacity, in a partnership, trust, or other entity, against any costs or expenses reasonably incurred by him in connection with the defence of any civil, criminal, administrative, investigative, or other proceeding in which he was involved because of his association with the corporation other entity if the individual:

Was not judged by the court or other competent authority to have committed any fault or omitted to do anything that the individual ought to have done

Complied with his fiduciary duty to act honestly and in Good faith with a view to the best interests of the corporation or the other entity for which the individual acted as a director or officer or in a similar capacity; and

In the case of a criminal or administrative proceeding, has reasonable grounds for believing hid conduct was lawful

Discretionary Indemnity (where possible fault exists)

Even where a person does not meet the first criterion, because he was judged to have committed a fault, a corporation still has a discretion to indemnify the director or officer for the same costs and expenses, including any amount paid to settle an action or settle a judgement, so long as the other two criteria are met.


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The CBCA indemnification provision was broadened to include any individual who is a director or officer or fulfils a similar function in relation to a corporation, partnership, trust or similar, entity at the request of the corporation is eligible to be indemnified. Previously, only managers were capable of being indemnified. Now under the 2001 amendments is the capacity to be indemnified ofr investigative proceedings.

Consolidated Enfield Corporation v. Blair, [1995]

Reliance on legal advice is not a guarantee of indemnification, but if there is reasonablegrounds to rely and it was done in good faith.

Facts: Blair was the president and a director of Consolidated Enfield. At the annual meeting of Enfield, a slate of nominees proposed by management, and including Blair stood for election. Canadian express ltd a major shareholder, nominated a candidate for director to replace Blair. On the basis of the votes cast by Canadian Express and its supporters, the Canadian express candidate would have been elected. Before the meeting, however Blair has been advised by legal counsel that Canadian Express could use its proxies to vote only for the management nominees. After the votes on the election of directors were cast, B was advised by legal cousel for the corporation that he, as chair, had to make a ruling about the results of the vote, notwithstanding that his own election was at stake. Legal counsel also advised that the votes cast by Express and its supporters against B were invalid. Blair took that advice and ruled that the management slate was elected. In subsequent legal proceedings a court ruled that the votes cast in favour of Express nominee were valid and so B had not been re-elected.Blair sought an order that he be indemnified by Enfield for his legal costs in connection with these proceedingsTrial court held that he could not be indemnified because he had not fulfilled his fiduciary duty in connection with the vote. Legal counsel also advised that the votes cast by Canadian express and its supporters against Blair were invalid.

Held: the Supreme Court granted an indemnification order and that the corporation has the obligation to establish that B had not acted in good faith with a view to the best interest of the corporation to avoid an obligation to indemnify. The court also stated that while reliance on legal advice is not a guarantee that indemnification will be available, where the reliance is reasonable and in good faith, the court will conclude that the director acted in compliance with his fiduciary duty. The court held that indemnification in these circumstances was consistent with the broad policy goals underlying the indemnification provisions.

Catalyst Fund General Partner Inc. v. Hollinger Inc., [2009]

A director was denied indemnification for costs incurred in defending an action to remove him.

Held: He was subject to a number of conflicts of interest related ot litigation by the corporation against another corporation that he was involved with and was not acting with a view ot the best interest of the corporation in resisting the action to remove him.


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Bennett v Bennett Environmental Inc

The corporation will have to pay an indemnity where a manager has an honest, and good faith belief the lawfulness of his actions and that he was in compliance with the fiduciary duty.

Facts: CEO and others claim for indemnification because they were prosecuted for failing to disclose a material change under the Ontario Securities Act. He had an informed, honest, and good faith belief that the matter would be resolved in the corporation’s favour and that there was no duty to disclose and that his conduct was lawful.

Held: The court held that the CEO had complied with his fiduciary duty and had reasonable grounds to believe that his conduct was lawful. It ordered that the CEO be indemnified for the $250,000 administrative penalty and $50,000 in costs that he was required to pay under the terms of the settlement.

Insurance

Under the CBCA, a corporation my obtain insurance for the benefit of a manager to be indemnified against any liability incurred by her in her capacity (CBCA, s.124(6)).

Why? Prior to 2001, the CBCA did not allow the corporation to obtain insurance against liabilities involving a failure to comply with the person’s fiduciary duty. This requirement has been eliminated.

Why? Under the new CBCA and OBCA, whether insurance will be so limited now depends on the insurance marketplace alone. In practice insurance companies do not insure directors against their own wrongdoing. No longer any restrictions on when liability insurance can be purchased. (s. 124(6)). A judge does not have the jurisdiction to order an individual not to be indemnified under the act (R. v. Bata Shoes).

The availability of insurance and indemnification are important consideration for prospective directors. To attract directors, corporations often commit in advance in their own by-laws to provide an indemnity to the maximum extent permitted by their governing corporate statute. Sometimes directors will seek a personal guarantee from shareholders in support of corporate indemnification commitments.

Complex issues can arise: since governments have turned imposing personal liability on directors and officers in an effort to improve compliance within environmental and other regulatory schemes. Indemnities and insurance become more and more important as a way of ensuring that competent people are willing to become officers and directors.


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On the other hand, indemnification and insurance will tend to reduce the effectiveness of the legislative scheme by imposing liability on managers to discourage businesses from acting illegally. If directors and officers are fully insulated from liability this will not occur.


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R. v. Bata Industries Ltd., [1995]

Managers will not be indemnified where the corporation is able to insulate them from liability.

Facts: several officers were convicted of offences under the Ontario Water Resources Act consisting of “failing to take all reasonable care to prevent the corporation form causing an unlawful discharge of waste.”

Held: the judge ordered that the accused pay fines and that the corporation, Bata Industries, not indemnify them. The judge indicated that if the corporation could indemnify officers against the consequences of their wrongdoing, the intended effect of the legislative scheme in imposing liability would be undermined.

On appeal the court held that the trial judge had no authority to make such an order because OBCA expressly permitted indemnification in the circumstance of the case.

2 kinds of liability insurance coverage:

Corporate Reimbursement Coverage: to cover losses to the corporation arising from the corporation’s indemnification of a director;

Personal coverage: to cover the liability of a director for which she is not indemnified by the corporation and would otherwise be personally responsible, this assures directors that they will not be forced to bear costs for which the corporation may lawfully indemnify them.

It is through reinsurance that insurers themselves spread their risks and limit their potential liability


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18. Shareholders’ Agreements and Unanimous Shareholder’s Agreements

Casebook 835-850VanDuzer 290-299CBCA 146OBCA 108

Shareholders Agreements:

Where a corporation has few shareholders, they will often want to customise their relationship to create an arrangement that is different form that contemplated in the relevant corporate legislation in several ways, including:

changing shareholder voting entitlements; imposing share transfer requirements; providing for dispute settlement mechanism.

Under common law rules, shareholders could pool their votes by agreeing to specific limitations on how they would vote. Voting rights could even be given to a trustee to be exercised on behalf of shareholders in accordance with the terms of the trust. Under CBCA the shareholders are expressly allowed to contract regarding how they will vote and may even assume the powers of the directors in a unanimous shareholders agreement.

Voting and management

Shareholders may want to allocate their power to vote on a basis different from the votes they have according to their share ownership. To do so, shareholders may, by contract, agree on how they will vote their shares.

Why? as previously aforementioned there is a preference for keeping the share structure simple for several reasons:

There is the cost of drafting specialized share provisions; Shareholders are often reluctant to have their customized arrangements become a matter of

public record by including them in the articles; Shares with customized provisions are more difficult to sell to buyer who wants to assume a

different role than the original shareholder.

Limitation:

Shareholders may not by contract require directors to vote in a certain way.Directors have a fiduciary duty and a duty of care, and their decision making discretion cannot be restricted so as to prevent them from fulfilling their duties. This rule applies even when directors and shareholders are the same person. Shareholders can bind themselves in how they vote their shares but not in how they exercise their discretion as directors. Since the 2001 http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:41 PM

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amendments came into force, this constraint does not apply to unanimous shareholder’ agreements (USA) involving CBCA corporations. Under a USA, all the shareholders agree that certain matters ordinarily falling to the directors will be decided only by the shareholders. The CBCA expressly provides that, where shareholders have taken directors’ power under a USA, they can fetter their discretion as to how they exercise them (CBCA, s.146(6)).

Share transfer

In small corporations, shares are held closely together, and typically the business is tied up with individuals who are the shareholders, this can be problematic.

Why? In a real word situation, shareholders in closely held corporations seek to sell their shares only when they have decided to cease being active in the business. As long as they are working in the business, shareholders are reluctant to sell their shares because they do not want other people involved as shareholders. Once a shareholder decided to leave the business, she will be more interested in selling her shares because she loses her ability to monitor her fellow shareholder managers informally and as a result is not able to ensure that they are doing their best to maximize the value of her investment. By contrast the value of shares in a large publicly traded corporation is independent of who holds them. Most shareholders are not active in the business, and there will be no change in the business on the sale of their shares. As a result shares of a public corporation are much more liquid than the shares in a closely held corporation.

Problem: in small corporations shares are hard to value. There is no market like the TSE for small corporation’s shares to establish prices. Share transfers are also difficult for non-financial reasons. Shareholders who are not selling their share may want some say in who will be able to purchase, and control who becomes a shareholder, and to do so will want some restrictions on share transfer

Why? To address these issues, it is common to make shareholder agreement with restriction to transfer shares in addition to the approval by directors or shareholders usually provided for in the articles. Typically transfers are prohibited except as permitted in the agreement:

Right of first refusal”:

requirement for a shareholder who wants to sell her shares to offer them first to the other shareholders at some price set by the shareholder. The other shareholders then have a limited time to purchase her shares at that price, usually in proportion to their existing share interests. If they do not purchase the shares, the shareholder may offer them for sale to third parties at the same price for a further limited time. The price has to stay the same no matter who buys it. This is to discourage a shareholder from selling at an unreasonably high price.

Transfers may be permitted without triggering transfer mechanisms, such as the right of first refusal. Exceptions may include to a financial institution as security for a loan and transfers to family members and to corporations controlled by the shareholder.


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Mandatory transfers on death:

USA commonly provide that, on the death of a shareholder, his estate must transfer his shares to the other shareholders and the shares go back to the corporation. This is done so the surviving shareholders do not end up with the heirs (shares) of the deceased shareholder as shareholders. These often require the shareholder to maintain some form of life insurance, the proceeds of which will be used to fund the purchase commitment.

Other common situations in which share transfers are mandatory include a shareholder:

Retiring from active participation; Ceasing to be able to perform her duties; Breaching the shareholder’s agreement.

Pre-emptive rights may be included in shareholder’s agreements. Under a pre-emptive right, a corporation cannot issue shares without offering them first to the existing shareholders.

Why? One reason to have such a right in a USA rather than the articles is that the articles are a matter of public record. Shareholders often do not want their private arrangements made public.

Dispute settlement

A shareholders agreement may govern the parties relationships for a long time, but disputes among shareholders will arise. Some form of dispute settlement mechanism if often included in shareholders agreements to avoid the necessity of going to court to resolve such disputes. Arbitration may be included in shareholder agreement to avoid the necessity of going to court. Parties must agree on what disputes will be subject to dispute settlement and what the process for the dispute settlement will be. Alternative dispute resolution procedures is usually more conducive to the continuation of the business relationship.


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Unanimous shareholders’ agreements

USA

When the CBCA was enacted in 1975, it sought to address the needs of closely held corporations by permitting all the shareholders to agree to alter the allocation of power between directors and shareholders provided in the statute. In particular, the CBCA permits decision making power to be transferred from the directors to the shareholders through a USA (s.146).

Distinguishing feature: restricts in whole or in part, the powers of the directors to manage or to supervise the management of the business and affairs of the corporation. Common law liabilities would be transferred from directors to shareholders.

Constitutional documents akin to the company’s articles of incorporation and by-laws, yet they are contractual in nature so they can govern shareholder’s personal or individual rights as well Restricts the powers of the directors to manage the business and affairs of the corporation (CBCA, s.146(5) provides that the shareholders are to the extent they have taken on directors duties and powers, liable as directors would be. Constitutional character of the USA. Desire to have shareholders rather than directors manage a closely held company Expanded scope of the USA.

Why? this transfer permits great flexibility for the corporate organization to be shared to reflect the bargaining among shareholders and allows corporation with few shareholder to dispense with the formal division of powers between directors and shareholders. Although such flexibility is a key objective, the provisions dealing with USAs leave many issues unresolved in terms of how they are to work in practice.

A USA under the CBCA shareholders may restrict “in whole or in part the powers of the directors to manage the business and affairs of the corporation. A shareholder who is party to such an agreement has “all the rights, powers, duties and liabilities of a director.”

Problem: the effect of this transfer of director’s liability is far from clear. E.g. what is the constitutional basis for the federal government to enact a law that purports to remove the liability imposed on directors under a validly enacted provincial law? Prior to the 2001 Amendments to the CBCA, it remained unclear whether the CBCA rules for USAs had corrected the problem associated with the inability of shareholder to fetter the discretion of directors because of the need to retain their freedom to fulfil their duties.

Shareholders may agree as to how they will exercise the powers they have taken from the directors (CBCA, s.146(6) , and OBCA, s. 108(5.1)). However, there are a variety of other unresolved issues regarding how a corporation subject to a USA is to function. E.g does a corporation need a board of directors if all powers and responsibilities have been transferred to shareholders? But it seems as if a board is still required.


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Although shareholders can address some of these issues in their agreement, these uncertainties are bound to result in practitioners avoiding the USA.

Enforcing shareholders’ agreements-s.241 Oppression: The CBCA has a range of remedial options for enforcing USAs. Breach of any agreement may be held to be oppression under s. 241 (Deluce Holdings Inc. v. air Canada, (1992): a provision in a USA was engaged in for the purpose of removing the other shareholder was found to be oppressive.

Compliance Order/: Additional statutory rights benefit USA’s. Under (s.247) a shareholder may make a summary application to have provisions of any USA enforced.

Dissolution Order: Failure to comply with the terms of a USA may be grounds for dissolution of the incorporation (s.214).

A shareholder’s agreement that is not a USA is binding on a transferee, or a person issued shares by the corporation, only if the transferee signs it. Under the CBCA any purchaser or transferee of the shares in a corporation is deemed to be a party to any USA in effect. However, if the transferee received no notice of the agreement and is not aware of its existence, she is entitled to rescind the contract within 30 days of the date she finds out about it (CBCA, s.49(8), 146(3) (4)). Often shareholder agreements require notice.

The rules under the OBCA are similar, but more comprehensive. A USA is enforceable against a person acquiring shares from an existing shareholder whether the transferee is aware of the USA or not. If the transferees share certificate did not contain a reference to the agreement, the transferee may rescind the agreement or demand that the transferor pay “fair value” for the shares (OBCA, s.108(4)(8)(9)(10)(11)). What is considered fair value is to be objectively determined. To exercise the right the transferee must send a notice of objection to the transferor within 60 days of receiving a copy of the USA (OBCA, s.108(7)). In order to ensure that a USA is enforceable against transferees, many USAs provide that a notice of the agreement will be endorsed on all share certificates.

It seems that, under the CBCA and the OBCA, only shareholders agreements that transfer directors powers to the shareholders are USAs and qualify for these enhanced statutory protections. The more limited definition in the CBCA and OBCA can be difficult to apply. Sometimes it may be hard to tell whether an agreement restricts the powers of the directors or not. In an effort to avoid uncertainty, shareholders agreements frequently contain a provision that says whether or not it is intended to be a USA

Used in closely held corporations; promotion of economic efficiency; enabling the shareholders to arrange the organization of their enterprise as they chose; statutory intervention was needed to allow shareholders to choose their corporate control and

management structure.


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Criticisms of the USA

provisions are uncertain; extent of liability imposed on shareholders; loophole for avoiding the Canadian residency requirement for directors; form basically what amounts to an incorporated partnership that has statutory basis and force.

Voting Trusts

Created when the voting rights of some or all of the shares in a company are settled upon trust. Powers of the trust may give the trustees an absolute and unfettered discretion to act as they wish or their authority may be restricted. Means of concentrating control in relatively few hands.

3 situations where voting trust may have special usefulness:

particular circumstances may make the intervention of outside or independent trustees desirable;

where a company is incorporated for object which require continued control of persons holding certain beliefs or opinions;

in very large corporations where membership is great and dispersed, the interests of the shareholders may be more effectively and continuously safeguarded by trustees acting on their behalf than by the efforts of individual members in general meeting.

Valuable independent role. Uunder it shareholder may surrender more of their legal rights and remedies than under almost any other means of concentrating control.

Note on US position

There has been abuse of control of trustees. Limitation periods (the most common being 10 years). To meet these specifications the USA device was introduced into Canada by s.146 CBCA and has been adopted into many provincial statutes. Most contain elaborate dispute resolution mechanisms. Restrictions on the transferability of shares. Require super majority voting approval for the undertaking of fundamental changes like amalgamation, a sale of the corporation’s assets etc (sometimes unanimity will be required


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E. CORPORATE CHANGES

19. Amendments of Articles, By laws and Changes to Stated Capital

Casebook 179-180VanDuzer 302-309CBCA 173-80, 190, 241OBCA 168-72, 185, 248

After a corporation is incorporated, it may be necessary to change its characteristics for a variety of reasons:

New class of shares must be created to meet the needs of new investors; The number of directors needs to be increased so someone can be added; Adjustments to stated capital; Continuing the corporation; Amalgamating the corporation; Selling all or substantially all of the corporation’s assets; Terminating the corporation’s existence.

Some of these changes fundamentally alter the nature of the shareholder’s investment. So, they are subject to special procedures. Changing these characteristics involves amending the articles of the corporation. Thus, adequate disclosure regarding the nature of the change to shareholders’ and shareholder approval are required. Typically, the approval must be a special resolution of shareholders. Where a corporation has multiple classes of shares, if a class is prejudicially affected by the change, holders of shares of that class may be entitled to vote separately as a class, giving them veto right over the change. Shareholders who disagree with a decision have the right to have their shares bought by the corporation. This is called a dissent and appraisal right.

Why: articles of the corporation must be amended to add, change or remove any provision(CBCA, s.173-179).Examples: change corporate name, change province of head office, add provisions re shares, addrestrictions onto shares, change number of directors, change business restrictions.How: must be done by special resolution (2/3 shareholders), but of course, a higher level can bespecified in shareholder agreements or articles. If the corporation has more than 50 shareholdersit must send shareholders a form of proxy and management proxy circular (s.175(1)).Voting: class voting is allowed if the class would be prejudicially affected, essentially giving thatclass a veto.Normally: it is smart for directors to reserve the right to revoke the resolution before they filearticles of amendment so as to see how many dissenting shareholders would need to be boughtout.Exception: if the corporate name is just a number, then changing it can be done by the directorsalone.


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Changes in Corporate Characteristics:

Amendment of articles

The articles must be amended to add, change or remove provisions (CBCA, s. 173-179). Amendment is required to do the following:

Change the corporate name; Change the province of the corporation’s registered office; Add, change, remove provisions relating to the classes of shares of the corporation; Add, change, remove any restriction on the issue, transfer or ownership of shares; Change the number or the minimum or maximum number of directors; Add, change, or remove any restriction on the business the corporation may carry on to on

the powers the corporation may exercise; Add any provision that might have been set out in the articles or by-laws at the time of

incorporation but was not included at that time: (CBCA s.173)

Need shareholder approval

Subject to the exceptions described below, amendment of the articles requires approval by special resolution:not less than two-thirds of the votes cast at the meeting or is consented to in writing by all shareholders entitled to vote. A higher level of approval may be specified in a shareholder’s agreement or in the corporation’s articles.

Notice:

of a meeting to consider a resolution to amend the articles must be sent to the shareholders. It must state the nature of the proposed amendment in sufficient detail to permit shareholders to form a reasoned opinion about whether to vote for or against the amendment and must include the text of the special resolution on which the shareholders will be asked to vote (CBCA, s.149(1)). If the corporation has more than 50 shareholders, the management must send shareholders a form of proxy and a management proxy circular that provide further information (CBCA s.149 (1)). Under the OBCA this requirement applies only to offering corporations (OBCA, s.11)

Shareholders may initiate amendments to articles themselves by making a shareholder proposal :(CBCA, s.175(1)).

Separate voting:

Shareholders who are entitled to vote are permitted to do so. Section 176 lists the specific circumstances when a separate vote is required. Essentially, a class or series is entitled to a separate vote whenever it will be more prejudicially affected by the adoption of the amendment than other classes or series.http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:42 PM

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Example: where an amendment would create a new class that would be entitled to receive dividends before any were paid to holders of shares of an existing class (CBCA, s.176 (1)). A separate vote is required even if the class or series of share would not otherwise have the right to vote (CBCA, s.176 (5)). If a separate vote is required, the amendment is not passed unless it is approved by a special resolution of the class or series entitled to vote separately, in addition to any other required approval (CBCA, s.176(6)). A class entitled to a class vote has a veto over the proposed amendment.

Triggers Dissent and Appraisal Right:

If an amendment is approved by special resolution in circumstances where a class or series was entitled to vote separately, the shareholders of that class or series who voted against the amendment are entitled to have the corporation buy them out for fair value.

The dissent and appraisal right is also available to all shareholders who vote against certain amendments that are nevertheless approved by the requisite special resolution.

The resolution authorizing an amendment may provide that the director may revoke the resolution before they file articles of amendment without further authorization from the shareholders :(CBCA, s.173 (2))

Why? Such a provision might be useful to include in a resolution amending the articles if the directors wanted to see how many dissenters would have to be bought out by the corporation if the resolution passed. If the number was significant and the cost of buying them out was too high, the directors would be able to decide not to go ahead with the amendment.

Filing the amendment:

Once the amendment is approved, the directors must file articles of amendment with the relevant corporate authorities, along with the requisite fee of $200. Filing may be online, by fax, mail, courier, or in person. On receipt of the articles of amendment and any other required documents, the director appointed under the CBCA issues a certificate of amendment.

If the name of the corporation is being changed, the corporation must also file a name-search report for the new name as well as the other required supporting information.

Amendments to articles that may be made without shareholder approval:

a corporation that received only a number for a name when it incorporated may adopt a new name. Director approval is all that is required (CBCA, s.173 (3));

Fixing the rights, privileges, conditions, and restrictions of a series of shares within a class may be done by the directors alone if authorized in the articles (CBCA, s.27).


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Changes to Stated Capital (value of company)

Stated Capital’ = full amount of any consideration received by the corporation in return forissuing shares of the class or series. This information must be kept in stated capital accounts.

When: dividend is to constitute a repayment of capital, decline in corporate assets and capitalimpairment test would not be met.How: if stated capital is in articles then only by amending articles (rarely done). Otherwiseneeds to be done by special resolution.Restrictions: cannot reduce stated capital if corporation is insolvent or if after a dividend is paidout the capital impairment test would fail (s.38(3)) intended to protect creditors.Regular Business: if shares are redeemed or purchased the stated capital accounts needs to bemodified according (s.39). No resolution required, directors just need to pass resolution to issueor buy shares.

Stated capital account

must be maintained for each class and series of shares which records the full amount of any consideration received by the corporation in return for issuing shares of the class or series. Consideration may be for money, property or past services. The stated capital must be reduced when the corporation acquires its own shares and in some other circumstances (CBCA s.38).

Why? may want a reduction for many reasons: in connection with a dividend that is to constitute a repayment of capital to shareholders; where there has been a decline in the value of a corporation’s assets to the point at which

the realizable value of the corporation’s assets exceeds the aggregate of its liabilities plus the stated capital of all classes of shares, and a reduction in stated capital may be necessary to permit the corporation to do certain other things which are prohibited where this financial test (capital impairment test) is not met, such as paying dividends.

Reduction of Stated Capital:

If a corporation’s stated capital is set out in its articles, then a reduction can be accomplished only by articles of amendment (CBCA, s.173 (1) (f)). In practice, this is rarely done. In all other circumstances, a reduction must be approved by a special resolution (CBCA, s. 38(1). A corporation cannot reduce its Stated capital if there are reasonable grounds for believing that it is insolvent., or the realizable value of the corporation’s assets will be less than its liabilities after the reduction (CBCA, s.38(3)).

Why? These constraints are intended to protect creditors. They help to ensure that reductions in stated capital are not part of transactions under which assets are being stripped out of the corporation, reducing the likelihood that creditors’ claims will be paid.

A reduction in capital is permitted, even if these tests (capital impairment and insolvency) are not satisfied, however, where it is intended only to reflect a decline in the realizable value of the corporation’s assets.http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:42 PM

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Where shares are redeemed or purchased, the stated capital account for the class or series of shares redeemed or acquired must be reduced accordingly (CBCA, s.39). The amount that must deducted is determined as follows:The stated capital for the class is multiplied by the number of shares redeemed or purchased and the product obtained is divided by the total number of issued shares in the class prior to the redemption or purchase. No shareholders resolution is required. All that is needed is a directors’ resolution authorizing the redemption or purchase.

Increasing Stated Capitial: this is done if a corporation pays a stock dividend on shares of the class or series. the declared amount of the dividend in money must be added to the stated capital account for the class or series (CBCA, s.43(2)).

Stated capital accounts may have to be adjusted in certain other circumstances including amalgamations and arrangements and the conversion of shares from one class into another (CBCA, s.39 (4)).

By-Laws

‘By-law’ : directors make, amend and repeal them. They become effective once they are passed, but they must be submitted to shareholders at the next meeting. Shareholders can affirm or reject (or amend).

Rejected By-laws: directors cannot make, amend or repeal a by-law having substantially thesame purpose or effect is valid until confirmed by shareholders (s.103).Shareholder Proposals: new by-laws can be put forward this way and are effective once theshareholders agree (s.103(5)).Voting: shareholder approval need only be by regular resolution (103(2)) unless specified in thearticles or USA

They are passed on the incorporation that creates a detailed set of rules regarding things like procedures for directors and shareholders meetings and what offices a corporation will have and what their powers will be Directors have the power to amend, make, or repeal by-laws. Their action is effective as soon as the directors’ resolution is passed, but the director must submit their action to the shareholders at their next meeting whereshareholders may confirm, reject or amend the director’s action. The CBCA requires that by-laws passed by the directors be put to the shareholders at the next meeting of shareholders.

If the directors action is rejected by the shareholders or if the directors fail to submit it to the shareholders that action ceases to have effect on the date of rejection or the meeting when it should have been submitted (CBCA, s.103).

Why? the meaning of this requirement for shareholder approval was addressed in:


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Wells v. Melnyk, [2008]

The CBCA requires that by-laws be passed by the directors be put to the shareholders at the next meeting of shareholders.

Facts: Melnyk wanted a new board of directors. So he sought to elect a new board. Without sufficient support, he revoked his proxy to achieve his aim. The board of directors sought to defend this action with a new by-law concerning the composition of the board, but they did not put the new by-law to a vote a meeting intending to do it at the next meeting. It was too late to send a new notice of meeting to shareholders indicating that approval of the amendment would be voted on at the meeting. The meeting of shareholders went ahead and the directors were re-elected. Melnyk sought a declaration that the by-law was ineffective and the meeting not validly held. He succeeded.

Held: Melnyk had the right to revoke his proxy. The directors could not put off submitting the by-law to shareholders until the next meeting. As the directors had failed to submit it, the by-law ceased to have effect and the meeting and all actions purportedly done at the meeting were deemed invalid.

New by-laws as well as attempts to change or repeal by-laws, can also be initiated by shareholders in a shareholder proposal (CBCA, s.103(5))


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20. Continuation Under the Law of Another Jurisdiction


Basic Requirements: permission of the exporting jurisdiction and shareholder approval.

Import: apply to director of CBCA and file information similar to articles of incorporation(CBCA 187). Legal opinion if from Quebec, Nova Scotia or other country, saying thatjurisdiction there allows for a corporation to apply for continuance.

Export: Must be approved by special resolution (s.188(5)) and should contain director authorityto: apply for continuance, apply to director to authorize, make necessary amendments to conformto laws of importing jurisdiction.

Creditors: affidavit that shareholders and creditors will not be adversely affected and those shareholders have approved the continuance.

Vote: ALL shareholders have right to vote and have dissent and appraisal rights.

The corporate law of most jurisdictions in Canada permits corporations governed by its laws to leave the jurisdiction (the “exporting jurisdiction”) and to be continued under and governed by the corporate laws of anther jurisdiction (the “importing jurisdiction”) (CBCA s. 187-8).

Basic requirement: permission of the exporting jurisdiction and, in the case of export from the CBCA and other Canadian jurisdictions, shareholder approval. A continuance may be desirable to take advantage of some particular provision of the corporate law of the importing jurisdiction. The most common reason to continue a corporation in another jurisdiction is to permit to permit amalgamation. In order to affect this statutory procedure, all the corporations must be governed under the same corporate law.


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Import

If a corporation wanted to become governed by the CBCA, it must make an application to the director in the form of articles of continuance (CBCA ,Form 11), which requires information similar to that required in articles of incorporation (CBCA, s.187). The articles of continuance become the articles of incorporation on continuance, which require some additional information:

Any previous name of the corporation; The name of the exporting jurisdiction; The date of incorporation in the exporting jurisdiction.

In additional to the articles of continuance, it is necessary to file:

a letter (of satisfaction or some other document issued by the exporting jurisdiction) indicating that the corporation is authorized to apply for continuance under the CBCA ;

Initial Registered Office Address and First Board of Directors; A list of the provinces in which the corporation is registered as an extra-provincial

corporation; Required fee of $200; Name search report.

In Ontario, it is necessary to file a legal opinion that:

The laws of the exporting jurisdiction allow the corporation to apply for continuance under CBCA;

Upon continuance the foreign law will cease to apply; and if the other jurisdiction does not issue any form of authorization, whatever authorization is

required under the law of that jurisdiction has been obtained.

A copy of the relevant parts of the legislation under which the corporation is incorporated must also be provided. The CBCA director then refers the question of whether the continuance is properly authorized nad meets the requirements of the CBCA to the Federal Department of Justice. Once all these requirements have been satisfied, the director issues a certificate of continuance which takes the place of the articles of incorporation.


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Export

Under the CBCA, the export of a corporation must be authorized by special resolution of the shareholders (CBCA s.188(5)). The resolution should contain authority for the director to do the following:

Apply for continuance under laws of the importing jurisdiction; To apply to the director under the CBCA to authorize the continuance; and To make all necessary amendments to conform to the laws of the importing jurisdiction.

All shareholders have the right to vote on resolution authorizing a continuance, even if they don’t otherwise have the right to vote (CBCA, s.188(4)). This action also triggers the dissent and appraisal right (CBCA, s.190(1)(d)).

The resolution authorizing continuance may permit the directors to abandon the continuance.

Why? This may be desirable to guard against the risk that so many shareholders will exercise their dissent right that the continuance becomes too expensive for the corporation.

Once the shareholders have approved the continuance, the directors must file an application for permission to continue. Under the CBCA, there is not prescribed form for this purpose so a letter to the director is sufficient ( Under the OBCA, form & must be used).

In order to approve an export continuance, the director must be satisfied that the continuance “will not adversely affect creditors or shareholders of the corporation (CBCA, s. 188(1)(b)).

The CBCA prohibits continuance under the laws of another jurisdiction unless the laws of that jurisdiction provide that:

The property of the corporation continues to be the property of the corporation; The body corporate continues to be liable for the obligations of the corporation; An existing cause of action, claim or liability to prosecution is unaffected; A civil, criminal, or administrative action or proceeding pending by or against the

corporation may be continued to be prosecuted by or against the corporation; A conviction against, or ruling, order or judgement in favour of or against, the

corporation may be enforced by or against the corporation (CBCA s. 188(10)).

Once these requirements have been satisfied, the director issues a document called letter of satisfaction, then the director issues a certificate of discontinuance (form 14) dated retroactively to the date of the continuance in the importing jurisdiction. The CBCA ceases to apply to the corporation on the date shown in the certificate of discontinuance (CBCA, s.188 (9)).

Tax advantages: because it shifts its business operations to the new jurisdiction.


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21. Amalgamation (common in joint ventures)


‘Amalgamation’ = two corporations are merged into one, must be subject to the same corporatestatute. Amalgamation is a procedure provided for under corporate statutes by which two or more corporations (the “amalgamating corporations”) are combined into one corporation (the “amalgamated corporation”) (CBCA s.181-186).

Why? Business and tax reasons, etc…

Tax reason: is to combine a corporation earning taxable income with one that has tax losses, so as to permit the losses to be deducted against the income (Income Tax Act). The effect of amalgamation is that the amalgamated corporation is subject to all the liabilities, owns all the property, and has all the rights of each amalgamating corporation. To carry out an amalgamation all the amalgamating corporations must be governed by the same corporate law.

Where the amalgamating corporations have different shareholders, a “long-form” amalgamation is required (as discussed below). Where amalgamating corporations are affiliated, a short form amalgamation is permitted

A short form vertical amalgamation may be effected between a corporation and one or more subsidiaries that are either wholly owned by the corporation or where the only shares not held by the corporation are owned by one or more of the other amalgamating subsidiaries.

A short form horizontal amalgamation may be affected between subsidiaries that are either wholly owned by a parent corporation or where any shares not held by the parent corporation are held by one of the other amalgamating subsidiaries.

The effect of an amalgamation is a fusion of two corporations, or as two streams flowing together:The old amalgamating corporations do not cease to exist, but continue in the amalgamated corporation. The amalgamated corporation is subject to all the liabilities, owns all the property, and has all the rights of each amalgamating corporation.

Why? To give effect to this conception of amalgamation the CBCA and OBCA expressly provdes that the effect of an amalgamation is as follows:

Property continues to be the property of the amalgamated corporation; Any existing cause of action remains unaffected; A civil, criminal or administrative action may be continued; A conviction against may be enforced; Articles of amalgamation and the certificate of amalgamation is deemed to be the

certificate of incorporationhttp://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:42 PM

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Long Form

The amalgamating corporations need to enter into an amalgamation agreement setting out the terms of the amalgamation. This agreement takes the form of a contract between the amalgamating corporations (CBCA, s.182). The agreement must set out the provisions of the articles of the amalgamated corporation including all the same elements as the articles of incorporation as well as the names and addresses of the directors of the amalgamated corporation.

Amalgamation agreement

Must set out the basis on which the holders of shares will receive money or securities in exchange for their shares. The shareholders of each corporation receive similar shares of equivalent value, but shareholder may receive shares with different characteristics, or cash in lieu of some or all of their shares. The agreement must set out what shares will be issued and what cash, if any will be paid ( this may require seeking ILA). If valuations cannot be completed by the date contemplated, adjustments may have to be made after the amalgamation is completed. Any shares of one of the corporations which are held by another must be cancelled upon the amalgamation (CBCA, s.182(2)).

By-laws will be needed upon amalgamation (CBCA, s.182 (1)(f) and (g)).

Representations and warranties:

if the shareholders are not closely related then each corporation may insist on the other making representations and warranties regarding their assets, liabilities and business (this is common in joint ventures).

Why? the parties will want to know what each is bringing into the amalgamation.

Special Approval

: approval by special resolution: (CBCA, s. 183). All shareholders have the right to vote on the resolution to approve the amalgamation even if they do not otherwise have the right to vote (CBCA, s.183(3) ( No such special right is provided for in the OBCA). Where a class will be prejudiced in some way, such as having its right to dividends subordinated to the dividend rights of another class, there must be s separate class vote under section 176 of the CBCA. The notice of the shareholders’ meeting must include a copy of the amalgamation agreement or a summary of it: (CBCA, s.183(2)(a)).

Dissent and Appraisal Right:

All shareholders have dissent and appraisal rights if they vote against an amalgamation but the amalgamation is nevertheless approved: (CBCA, s. 190(1)(c)).The availability of the dissent and appraisal right must be described in the notice of the meeting (CBCA, 183(2)(b)).


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Completion of Amalgamation:

To complete the amalgamation, articles of amalgamation must be filed with the director.


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Short form: (CBCA, s.184)

Done on a so called “short-form” basis between certain corporations that are affiliated without the approval of their shareholders. For a short form amalgamation, approval is required from the directors only and no amalgamation agreement is necessary (CBCA,s. 184(1) (a) and (2)(a)). These do not trigger dissent and appraisal rights.

Vertical: (CBCA, s.184(1))

Amalgamation is between a corporation and one or more wholly-owned subsidiary corporations. A vertical short form amalgamation may also be used if the subsidiaries are not wholly owned so long as all the shares of each amalgamating subsidiary are held by the parent or by one of the other subsidiaries. In such an amalgamation, the shares of each amalgamating subsidiary are cancelled without any repayment of capital to the shareholders. No securities are issued and no assets are distributed by the amalgamating corporations. Also, the stated capital of the amalgamated corporation remains the same as that of the parent corporation (CBCA, s.184(1)).

The articles of amalgamation must be the same as the articles of the parent corporation (CBCA, s.184(1)(b)(ii)).

Why? if the intention of the parties is for the articles to be different from the parent’s a short form cannot be used. In such a case, it would be necessary to amend the articles of the parent corporation before amalgamation, amend the articles of the amalgamated corporation after the amalgamation, or use a long form. The vertical short-form amalgamation is a simple way to re-organize a corporate group to eliminate unnecessary subsidiaries.

Horizontal :(CBCA, s.184(2)).May be used if the proposed amalgamation is between two or more wholly-owned subsidiaries of one corporation. The shares of all but one of the subsidiaries are cancelled without repayment of capital to the shareholders. The stated capital of the shares of the amalgamating subsidiaries whose shares are cancelled must be added to the stated capital of the subsidiary whose shares are not cancelled: (CBCA, s.184(2)).

The articles of the amalgamated corporation are the same as the articles of incorporation of the amalgamating subsidiary whose shares are not cancelled (CBCA, s.184(2)(b)(ii)).

Procedure after approval of long and short form amalgamations:

Articles of amalgamation (CBCA, form 9), must be prepared and filed with the director along with

the required fee of $200; and Initial Registered Office Address and First Board of Directors (Form 2).


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A name search report must be filed if the name of the amalgamated corporation is not the same as the name of one of the amalgamating corporations. The required name search is identical to that required on incorporation.

The articles of amalgamation must have attached to them a statutory declaration by an officer or director of each amalgamation corporation establishing to the satisfaction of the director that there are reasonable grounds for believing that:

Each amalgamating corporation is and the amalgamated corporation will be solvent, and The realizable value of the amalgamated corporation’s assets will be greater than its

liabilities and the stated capital of its shares

Risk of prejudice to creditors:

Each declaration must state either that there are reasonable grounds for believing that no creditor will be prejudiced by the amalgamation or that adequate notice has been given to all known creditors of the corporations and no creditor objects except on grounds that are frivolous or vexatious (CBCA, 185(2)). There is no caselaw on what constitutes prejudice. Once could argue that the creditors of the financially stronger corporation will always be prejudiced as a result of amalgamating with a financially weaker corporation. The CBCA spells out what will be considered adequate notice to creditors. Notice has been given to all known creditors of the amalgamating corporations: (CBCA, s.185(2)). The statute requires that:

Notice be given to each creditor with a claim exceeding $1000;Published once in a newspaper;Each notice names the corporation (s.185(3)).

Under the OBCA, only creditors owed $2500 or more are entitled to notice. In order for notice to be adequate, it must state that a creditor has the status of complainant for the purpose of seeking relief from oppression (OBCA, s.178(2)(d)(ii)). Under the CBCA, a creditor would have to apply to a court to be granted standing as complainant (CBCA, s.239).

Certificate of Amalgamation:

Once these documents are filed, the CBCA director will issue a certificate of amalgamation. The amalgamated corporation will then have to be organized in much the same way as the newly incorporated corporation. A certificate recording the amalgamation should be filed in any land registry office where any land held by the corporation is registered.Notices should be given to governmental authorities including the Employment Insurance Commission and the Canada Pension Plan. Further, it will be necessary to file final tax returns for the amalgamating corporationsUnder the Income Tax Act, a year-end is deemed to occur for tax purposes immediately before the amalgamation.


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Restrictions on Amalgamation: a declaration by officers of each corporation must state that: each amalgamating and the amalgamated corporation must be solvent and the capital

impairment test of new corporation must be met. They have reasonable grounds to believe that no creditor will be prejudiced or; Adequate notice is given to all known creditors and none have objected.


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22. Arrangements and Reorganizations/Restructuring

VanDuzer 321-324CBCA 191-2OBCA 182-3, 186

Arrangement:

an arrangement under the CBCA is a procedure used to effect certain fundamental changes to the corporation where it is not “practicable” to follow the procedure contemplated in the act for some reason: (CBCA, s.192).

Example 1: is reorganization of share capital of two corporations in different jurisdictions.

Example 2: is the transfer of all the property of a corporation in circumstances where it is impossible to obtain the necessary approval by special resolution, but the transaction is in the interest of the corporation (CBCA s.192).

Example 2: a reorganization of share capital of two corporations where some share interests in one corporation are exchanged for share interests in another. Complex reorganizations may be effected through arrangements where there would be simply too many corporate steps to complete the reorganization in the manner contemplated by the CBCA in a timely way or where there is no way to implement it at all (under the OBCA it is not necessary to show that the other procedures in the Act are not practicable.

Why? the requirement that the subject of the arrangement not be “practicable” to achieve following the procedures contemplated in the Act does not mean that it must be impossible. It is sufficient if following the usual procedure would be inconvenient or less advantageous.

Court Approval

(CBCA): it is necessary to obtain court approval to implement an arrangement. The court may make any order it sees fit, including requiring that the arrangement be approved by shareholders or that shareholders be granted dissent and appraisal rights (CBCA, s. 192(4)). After the requirements of any court order have been satisfied, articles of arrangement (CBCA, Form 14.1). Must be prepared and filed with the director, along with required fee of $200 and a notice of change of registered office and notice of change regarding directors, if relevant.

Arrangement (CBCA, Form 14.1) must be prepared and filed with the director, along with the required fee of $200

OBCA:


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subject to court order, an arrangement must be approved by a special resolution of shareholders (OBCA, s.182). Each separate class is entitled to a class vote if the arrangement contains anything that, if it was in articles of amendment, would require a class vote under section 170 of the OBCA.

Arrangements are being used increasing, especially by corporations whose shares are publicly traded, but are not exactly common.

Why? In part, this due to the cost of court applications and in many cases the corporation is in financial difficulty. Where a corporation is involvement, an arrangement is not permitted (CBCA, s.192(2)). A corporation is insolvent for the purposes of an arrangement when it cannot meet its liabilities as they become due, or the realizable value of its assets is less than the aggregate of its liabilities and stated capital. In these circumstances, it is necessary to proceed under the Bankruptcy and Insolvency Act or the Companies Creditors Arrangement Act. In some cases, arrangements have been allowed where the applicant corporation is solvent but other corporations involved in the arrangement are not.

Common Practice:

The corporation seeking court approval of an arrangement makes an application to court for an interim order dealing with issues such as:

Who needs to receive notice; What approvals are required from shareholders and other stakeholders, such as

debentures holders; and Whether dissent and appraisal rights need to be given. Once the requirements of the

interim order have been fulfilled, the corporation goes back to court to seek a final order approving the arrangement.

Business judgement Test (general approach):

until recently the test employed by the courts to determine if an arrangement should be approved was whether an intelligent and honest person acting in her own best interests would approve the plan. In applying this test the courts looked a various factors, including the level of shareholder approval, compliance with statutory requirements, and whether the arrangement is fair and reasonable (Re T. Eaton Co.(1999)).

This standard for approval of arrangements was reconsidered in:

BCE Inc. v. 1976 Debenture Holdings (2008)

The standard for approval arrangements is whether it is “fair and reasonable.” The court rejected the business judgment rule.

Facts: In that case, a group of debenture holders sought to have the court refuse approval of an arrangement that would have resulted in a change of control of BCE and a reduction in the market value of the debentures. http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:42 PM

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Held: The SCC confirmed that the general approach to the approval of plans of arrangements adopted in prior jurisprudence but it rejected the business judgment test.

Test: In order the grant approval, a court has to be satisfied that:

The statutory procedures have been met; The application is being put forward in good faith; The arrangement is fair and reasonable.

The only issue before the SCC in BCE was whether the transaction subject of the plan of arrangement was fair and reasonable. The court held that what is fair and reasonable must be determined based on the terms and impact of the arrangement rather than on the process by which it was decided on. To conclude that the fair and reasonable test has been met, the court must be satisfied that:

Fair and Reasonable Test:

The arrangement has a valid business purpose; The objections of those whose legal rights are being arranged are being resolved in a fair and

balanced way.

Why? A court must be satisfied that any negative effects on security holders are justified by furthering “the interests of the corporation as a going concern (BCE). The court must ask whether the arrangement is truly necessary to the continued operations of the corporation, in light of the technological, regulatory, and competitive conditions in which the corporation finds itself. The degree of judicial scrutiny and its effects on security holders increases as the importance of the arrangement to the continued operation of the corporation declines.Regarding the second requirement of the fair and reasonable test-objections of those whose legal rights are being arranged are being resolved in a fair and balanced way—the court indicated that a wide variety of factors may be relevant , including the overall fairness of the the arrangement as well as its fairness to individual stakeholders.

In BCE, the court only dealt with whether the second requirement of its test for whether the plan of arrangement was fair and reasonable was met. The court ruled that its responsibility was to ensure that all parties are treated fairly, but went on to conclude that only security holders whose legal rights are likely to be affected need to be considered, absent special circumstances. In BCE, the court held that the rights of the debenture holders were not being arranged. The only effect of the arrangements on them was on the trading value of the debentures. In the court’s view, a reduction in trading value is not an exceptional circumstance that entitled the debenture holders to have their financial interests taken into account. Accordingly, the court approved the plan of arrangement.


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Notice to the CBCA director must be given when a corporation makes an application for approval of an arrangement. The director may appear in court to oppose the proposed arrangement (CBCA, s.192(5)).

Other factors to consider:

Whether the security holders have approved the arrangement; By what majority, and The proportionality of the compromise between security holders.

Policy of CBCA Director:

set out guidelines to be followed with respect to a proposed arrangement. While not binding, the director is unlikely to intervene if the guidelines are satisfied. The policy recognizes that arrangement provisions are intended to facilitate corporate reorganizations. It also indicates that the director will scrutinize an arrangement more closely if:

all shareholders and security holders whose rights are affected are not entitled to vote on the arrangement;

if in connection with such a vote, they are not provided with sufficient information to make a reasoned decision;

shareholders are not permitted to exercise dissent and appraisal rights.


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23. Sales of “All or Substantially All” of the Corporation’s Assets or Shares

VanDuzer 324-325CBCA 189(3) (cannot be done without special shareholder resolution)OBCA 184(3)

Special resolution:

The “sale, lease or exchange of all or substantially all the property of a corporation other than in the ordinary course of business of the corporation” is a fundamental change affecting shareholders’ investments and cannot be completed without the approval of the shareholders by special resolution (CBCA, s. 189(3)-(9)).

Why? the purpose of the special treatment given to such sales is the recognition that they fundamentally change the nature of a shareholder’s investment. Thus, with respect to whether a particular sale meets the “substantially all” standard, the courts must consider both:

Whether the assets being disposed of are quantitatively substantial compared to the total assets of the corporation; and

Whether the assets are integral to the transferring corporation’s core business, such that the disposition strikes at the heart of the business (Canadian Broadcasting Corporation Pension Plan v. BF Realty Holdings (2002).

The courts need to ask whether the shareholder’s investment is qualitatively different after the sale in some fundamental way. A transaction in which all of the assets used to carry on the corporation’s business were sold for cash would meet the “substantially all” standard.

Procedure:

The notice of the shareholder’s meeting called to vote on the disposition of assets must include a copy or summary of the agreement giving effect to the transaction and a statement that shareholders are entitled to dissent from the resolution approving the transaction and to require the corporation to buy their shares for “fair value;

At the meeting, the shareholders may authorize the transaction and may fix, or authorize the directors to fix, any of the terms and conditions of the transaction.

The shareholders may authorize the directors to abandon the transaction without any further approval of the shareholders.

Resolution:

on a resolution to approve a sale of all or substantially all of the assets of the corporation, each class and series of shares has the right to vote whether or not it otherwise has the right to vote. Moreover, any class or series of shares is entitled to a class vote if it is affected any differently from another class or series.


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24. Going Private Transactions

VanDuzer 325-329CBCA ss.2(1)(definition of “squeeze out”), 193-194OBCA s. 190

OBCA: The OBCA has special provisions to deal with certain transactions called “going-private” transactions. While these transactions may take a variety of forms they all result in the extinguishing of a shareholder’s interest in an offering corporation (OBCA, s.190) Special procedures, including enhanced levels of shareholder approval, must be followed to give effect to such a transaction. Similar, but more detailed procedures must be observed by all corporations subject to the Securities Act (Ontario), as provided in the Ontario Securities Commission Rule 61-501. Other corporate provincial statutes do not deal with going-private transactions. They are regulated exclusively under provincial securities law. Nevertheless, shareholders prejudiced by going-private transactions may be able to claims relief under the oppression remedy.

Examples of Going -Private Transactions:

1. Amalgamation Squeeze- Out of Minority Shareholde

r: majority shareholder incorporates another corporation then causes the two to amalgamate. Then states that the minority shareholder gets cash or redeemable shares, which are subsequently redeemed, thus terminating the minority shareholder’s interest.

2. Consolidation at High Ratio:

controlling shareholder approves amendment to articles to consolidate all issues shares at some ratio, like 75:1 and provides that any fractional shares are to be repurchased by the corporation. This arrangement leaves the minority shareholder with only 1/3 of a share. The corporation buys back the fractional share, and the minority shareholder’s interest in the corporation is terminated.

A going private transaction under the OBCA is defined as any amalgamation, arrangement, amendment of articles, or other transaction carried out under that Act which would cause the interest of a holder of a “participating security” to be terminated without the consent of the holder and without the substitution of an interest of equivalent value in another participating security.

Participating Security:

usually means one that has a right to participate in earnings that are not fixed or limited in amount, such as common shares that carry a right to receive dividends when declared by the directors, and a right to receive the remaining property of the corporation on dissolution (OBCA, s.190).


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CBCA: Prior to the 2001 amendments, the CBCA did not deal specifically with going-private transactions. Now, the CBCA provides simply that such transactions involving CBCA corporations must meet the requirements of applicable provincial securities laws (CBCA, s.193). The CBCA also includes a provision dealing with “squeeze out transactions” which are essentially going-private transactions involving non distributing corporations (CBCA, s. 2(1) (“definition of squeeze out transaction”) and (194)). In most cases, these transactions are not subject to provincial securities laws. The CBCA establishes a special approval process for such transactions.

Approval Process (get rid of securities)

1. Independent Valuation:

In order to implement a going-private transaction under the OBCA, it is necessary to obtain an independent valuation of the securities affected indicating the value or a range of values per security (OBCA, s.190 (2)). If the transaction contemplates giving securities in exchange for those extinguished, a valuation is required to show whether the value of these securities combined with any cash to be received by the person whose interest will be extinguished is greater or lesser than that of the affected security (OBCA, s.190 (2)(c)).

2. Shareholder Approval:

Each class of affected securities must approve the transaction. Approval need only be by ordinary resolution of each class of affected securities unless non-cash consideration is being offered to shareholders whose interests are being extinguished or the price being offered is less than the price established by the valuation of the affected securities—in which case a special resolution is required.

Shareholder Vote: the votes of certain security holders with an interest in the transaction are not counted.

“Majority of the Minority” Test

The most common type of going-private transaction results in the controlling shareholder owning 100% of the issued shares of a corporation and the minority shareholders being bought out for cash. Such a transaction must be approved without counting the votes of the controlling shareholder. Approval will require a resolution to be passed by a majority of the minority shareholders. For this reason the going-private transaction approval requirement is often called the “majority of the minority” test, where the minority means the shareholders other than the controlling shareholder.

Affiliates of the corporation and any shareholder who would receive greater consideration or superior rights compared to other shareholders in the class as a result of te transaction are not entitled to vote either (OBCA, s.190(4)).


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3. Notice and Information Circular:

management must send notice of the meeting at which the going-private transaction will be voted on and a management information circular to shareholders not less than 40 days before the meeting. The circular must contain the following information:

A summary of the valuation; A statement that the valuation may be inspected at the registered office of the corporation

and that a shareholder may obtain a copy; A certificate that no material fact relevant to the valuation was not disclosed to the valuer;

What shareholder approval is required; What securities are affected; and What votes will not be taken into account :(OBCA, s.190(3))

Exemption:

The Ontario securities commission may grant an exemption from the application of this procedure (OBCA, s.190 (6)). If a going private transaction is approved by shareholders, any dissenting shareholder may exercise a right to have her shares bought by the corporation for fair value (OBCA s.190 (7)). A shareholder is not precluded from claiming that the transaction is oppressive (OBCA, s.248).

CBCA: The approval process contemplated for squeeze-out transactions under the CBCA is simpler. All such transactions must be approved by simple majority of each class of shares affected by the transaction voting separately as a class, regardless of whether such shares otherwise have the right to vote (CBCA, s.194). Affiliates of the corporation that hold the corporation’s shares, such as controlling shareholder that is a corporation, and anyone receiving greater consideration or superior rights or privileges than other shareholders as a result of the transaction are not permitted to vote on the transaction.

Since the definition of squeeze-out transactions limits them to transactions requiring amendment of the articles, approval by special resolution of all shareholders entitled to vote will be required as well (CBCA, s.2(1) (“definition of squeeze-out transaction”)). A shareholder who votes against a squeeze out transaction is entitled to dissent and have her shares bought for fair value (CBCA, s.190 (1)(f)). Nothing prevents a squeezed out shareholder from seeking relief under the oppression remedy (CBCA, s.241).


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25. Termination of the Corporation’s Existence


There are a variety of circumstances in which it may be desirable to terminate the existence of a corporation:

The business has ceased or been sold; The corporation was being used for a tax-planning purpose that is no longer relevant; The shareholders and managers can no longer agree on how to carry out the business

together and have decided to go their separate ways.

Which method of termination is most appropriate will depend on:

whether the corporation has many assets to dispose of; whether the directors will supervise the termination or an outside professional is needed; Whether the shareholders all agree that termination is desirable; Various other factors.

Insolvency:

You cannot use the CBCA to terminate if the corporation is insolvent (CBCA, s.208). If the corporation is insolvent corporate statutes do not apply, the corporation may be terminated only under the Bankruptcy and Insolvency Act or the Winding Up Act.

Inactive:

in some cases, where the corporation is inactive or is in default of some requirement under its governing statute or some other legislation, the corporation’s existence may be terminated by the corporation’s regulators.

Voluntary dissolution under the CBCA

Voluntary dissolution is the simplest and most common form of termination. It is handled by corporate management or by another person appointed for that purpose. If the corporation has never been issued any shares, it may be dissolved at any time by its directors (CBCA, s.210 (1)).

Why? A corporation that has issued shares but has no property and no liabilities may be dissolved by special resolution of the shareholders or, if the corporation has more than on class of shares, by special resolution of the shareholders of each class, whether they are otherwise entitled to vote or not (CBCA, s.210(2)). If the corporation has assets or liabilities or bot, it may be dissolved with the same level of approval so long as the shareholders also authorize the directors to discharge all the liabilities and distribute any remaining assets (CBCA, s.210(3)) http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:42 PM

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(Liquidation in anticipation if dissolution is sometimes referred to as “winding up” the corporation). In any of these three cases, once the appropriate approval has been obtained and, in the last case, the liabilities of the corporation have been discharged and the assets distributed, the articles of dissolution (Form 17) may be sent to Corporations Canada. The CBCA director then issues a certificate of dissolution (CBCA, s.210(4)-(6)). No fee is charged for termination.

Liquidator:

where the corporation carried on any substantial business dealing with the corporation’s assets and liabilities so as to permit the corporation to be finally dissolved may take time and expertise:

The managers of the corporation may not have the requisite expertise; or They may have their own claims against the corporation that may put them in conflict of

interest in dealing with other claims. Different constituencies within the corporation may have divergent views regarding the

desirability and approach to liquidation and dissolution.

For these reasons, the services of a liquidator may be desirable. In recognition of the challenges associated with liquidating and dissolving a corporation that has substantial assets and liabilities, the CBCA provides alternatives to the simple liquidation and dissolution process described above (CBCA, s.211). One option is simply a more structured voluntary liquidation.

Special Meeting:

on the proposal to dissolve the corporation by any director or shareholder entitled to vote at an annual meeting of the shareholders, a special meeting of shareholders must be held to consider liquidating the corporation’s assets and dissolving the corporation. If liquidation and dissolution is approved by a special resolution or, if the corporation has issued more than one class of shares, it is approved by a special resolution of the holders of each class—regardless of whether or not they are entitled to vote—the corporation must send a Statement of Intent to Dissolve (Form 19) to Corporations Canada. The director appointed under the CBCA must then issue a Certificate of Intent to Dissolve. From the date of the certificate, the corporation may not carry on business except to the extent necessary to complete the liquidation and dissolution.

After the issuance of the dissolution certificate, the corporation must do the following:

send a notice to each known creditor; take reasonable steps to give public notice;

liquidate the business by collecting all the corporations property, discharging its liabilities, and selling off any remaining assets not to be distributed in kind to the shareholders;

distribute the remaining assets, including any cash to the shareholders; prepare and file articles of dissolution.


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Any interested party may apply to have the liquidation supervised by the court (CBCA, s.211(8) and 215)

Once these steps have been completed, the corporation may prepare and file articles of dissolution with Corporations Canada. No fee is required to be filed with the articles of dissolution. On receipt of articles of dissolution, the director issues of certificate of dissolution.

Although it is not required by the CBCA, it is advisable to get approval by Revenue Canada or the directors will be personally liable for unpaid corporate tax or any other amount owed up to the amount distributed to shareholders on dissolution. It is also useful to obtain consent from the provincial tax authorities as well.

Involuntary Dissolution under the CBCA

By court order

Any shareholder, the CBCA Director, or any other interested person such as a creditor, may apply to have a corporation liquidated and dissolved on a variety of grounds set out in (CBCA, s.213 &214)). The grounds include:

failing to comply with certain provisions of the Act; the occurrence of an event that entitles a complaining shareholder to demand dissolution

in accordance with a USA; circumstances in which it is just and equitable to dissolve the corporation.

Oppression:

The CBCA also expressly provides that a court may order dissolution in the same circumstances as relief for oppression may be granted under section 241. The oppression remedy provision provides that liquidation and dissolution may be ordered if oppression is found in an application under that section (CBCA, s.241(3)(1)).

The court may make any order it thinks fit in connections with the liquidation or the dissolution of a corporation, including appointing a liquidator and directing that notice be given or payments be made to identified parties (CBCA s.217). any liquidator appointed by the court has certain powers to assist with the liquidation, such as:

retaining lawyers accountants, and other professionals in connection with the business; bringing lawsuits on behalf of the corporation; carrying on the business as necessary for an orderly liquidation. giving notice to creditors; preparing financial statements at least every 12 months, or more frequently if ordered by

the court (CBCA, s.221 and 222).

Once the liquidation process is complete, the liquidator has submitted its final account, and the court has approved these accounts, the court must order that the articles of dissolution be filed (CBCA , s.223(5)).http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:42 PM

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The liquidator then prepares and files the article, and the CBCA Director issues a certificate of dissolution (CBCA ss.223 (6) and (8)). Such a court supervised process is called “winding up.”

By the Director

Under the CBCA, there are 3 grounds on which the director can issue a certificate of dissolution on her own initiative and dissolve a corporation:

The corporation has not carried on business for 3 years; The corporation is in default in filing any document required to be filed under the act for

one year; or The corporation has no directors (s.212).

Before dissolving the corporation, the director must give at least 120 days’ notice to the corporation and include the notice in the bulletin published by Corporations Canada under the director’s authority (CBCA, s. 212(2)).

Under the OBCA, dissolution may be ordered by the director appointed to administer that Act, but only where the corporation is in default with respect to filings under a number of provincial statutes, including the Securities Act, Corporations Information Act, and various pieces of provincial tax legislation (OBCA, s.241).

Effect of dissolution

If as a result of any of the procedures described above, a certificate of dissolution is issued by the CBCA Director, the corporation ceases to exist on the date of the certificate. Any property not disposed of at the time of dissolution vests in the Crown. This means, in effect, that it becomes the property of the federal government.Nevertheless, legal proceedings existing at the date of the dissolution may be continued and new proceedings may be commenced within 2 years. Each shareholder remains liable for property received on dissolution to satisfy any judgement resulting from such proceedings (CBCA, s.226).

Revival

under the corporate laws of most Canadian jurisdictions, there is a procedure by which dissolved corporations may be revived in some circumstances on the application of any interested person (CBCA, s. 209)Any interested person includes:

A shareholder; A director; A creditor; Anyone else in a contractual relationship with the corporation.

Under the CBCA, the director of can issue conditions for issuing a certificate of revival and retains discretion to issue it or not. Conditions might include:http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:42 PM

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Notice to shareholders and directors of the proposed revival; and Requirements to bring filings up to date.

Under the OBCA, revival is only available where the dissolution was ordered by the director responsible for the administration of the Act.

Retroactive Effect of Revival:

Where a corporation is revived, any assets vesting in the Crown on dissolution are retuned to it or, if the property has been disposed of, a payment of money equal to the value at the date of dissolution is made (CBCA , s. 228(2)). Otherwise the revived corporation is returned to the legal position it had prior to dissolution, with all the same rights and liabilities as if it had never been dissolved (CBCA, s. 209(4)) and (5)). The CBCA was amended in 2001 to make this retroactive effect of revival relatively clear.

Why? Courts interpreting the pre-2001 CBCA and OBCA revival provisions have come to conflicting views about the retroactive nature of revival and its effects. There appears to be an emerging consensus that the effect of revival is to put the corporation in the same position as if it had never been dissolved retroactively. The result is that anything purportedly done on behalf of a revived corporation while it was dissolved is just as effective as if it was in existence. In E.C. Munday Ltd. v. Canada Safeway Ltd. (2004), for example, a statement of claim filed on behalf of a revived corporation under the Manitoba Act (MBCA) after its dissolution and before its revival was held to be retroactively valid.


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DissolutionVoluntary (Form 17, 19) Involuntary (Court Order)

if no shares ever issued, director may dissolve at any time (CBCA s. 210(1));

shares but no property (special resolution);

special meeting of shareholders notify creditors public notice in each province liquidate: collect property Discharge liability, sell off remaining

assets, distribute to shareholders

can be supervised by court (CBCA 211(8)+ 215))

no fee need permission form CRA

any director, shareholder, creditor may apply (CBCA, s. 213-214);

oppression (CBCA, s.241); must give notice to parties (CBCA, s.217); LIQUIDATE! articles of dissolution (CBCA s. 223 (5)) certificate of dissolution (director) (CBCA

s. 223(6) (8)

3 Grounds: no business for 3 years default no directors

(director must give 120 days’ notice in bulletin (CBCA s. 212).

Effect: (CBCA s.209)—they may be revived in some cases.


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F: DIRECTORS’ AND OFFICERS’ DUTIES TO THE CORPORATION

26. Fiduciary Duties

Casebook 375-376VanDuzer 338-345CBCA 102(1), 121, 122(1)(a), (2)(3), 123(4)OBCA 115, 133, 134(1)(a), 135(4)

Fiduciary duty: is owed to the corporation rather than to the shareholders directly.

In all but the smallest corporations, there is some separation between shareholders and directors and officers, in the sense that at least some shareholders are not also directors and or officers. One of the key issues that arises out if this separation is how shareholders can ensure that directors and officers manage the corporation effectively.

In particular:

What protections do shareholders have against directors and officers shirking their management responsibilities or acting in their own self-interest, such as paying themselves excessive salaries?

The law imposes duties on directors and officers that require them to meet certain standards of behaviour. Directors and officers are subject to a fiduciary duty to act “honestly and in good faith with a view to the best interests of the corporation” as well as a duty of care to “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances (CBCA, s. 122(1)).

Why? Old View/theory: Because shareholders are not the direct beneficiaries of this duty, before BCE, the common law courts did not allow shareholders to sue for relief personally when the duty was not complied with. Only the corporation could initiate such an action. New view/theory: The CBCA/OBCA have greatly enhanced access to shareholder remedies by expanding the circumstances in which shareholders can initiate actions for a breach of duty owned to the corporation if the directors refuse to do so.

Until recently, most commentators understood the duty of care to be a duty owed solely to the corporation. The OBCA was recently amended to provide that, the beneficiary of the duty is the corporation (OBCA, s.134(1)(a)). However, under the CBCA, the SCC has said that the statutory duty of care is owed not just to the corporations, but is a general standard of behaviour that reflects the standard of care owed by directors and officers to corporate stakeholders, like creditors (BCE/Peoples Department Stores v. Wise (2004)).

Oppression Remedy:


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creates not only process for obtaining a remedy but also a new substantive standard of behaviour for directors and officers that complements, and overlaps, with the fiduciary duty and duty of care. Where corporations or directors have oppressed their interests, shareholders can obtain relief using this remedy.

Statutory liabilities:

Corporate law statutes also impose a number of more specific obligations on managers. They seek to promote enforcement of corporate obligations by imposing personal liability on managers and employees who are involved in the failure of the corporation to meet its obligations (see statutory liabilities section-28).

Tort:

The courts have held directors and officers liable in tort. This has a broad application erodes the separate legal personality of the corporation (see tort liability section-29)

The fiduciary duty is a general standard of behaviour imposed on managers in relation to their dealings with and on behalf of the corporation. The CBCA provides that: every director and officer of a corporation in exercising their powers and discharging their duties shall….act honestly and in good faith with a view to the best interests of the corporation… (s.122(1)(a)).

Why? Even though many cases have addressed the fiduciary duty, its content and rationale remain elusive:

Agency Cost Analysis: First theory to explain the fiduciary duty. Some commentators argue that the duty is based on agency cost analysis. They argue that any time shareholders are not managing the corporation themselves; there is an incentive for directors and officers to benefit personally at the expense of the corporation. The wide range in self-interested activity in which fiduciaries may engage renders it difficult to negotiate specific commitments to protect them against such behaviour at the time of their investment. It would be simply too costly and too time consuming to specify fully all the types of behaviour that fiduciaries are not allowed to engage in. The imposition of a general statutory standard through corporate law is justified. Thus, the courts must ask: what the shareholders would have agreed to if they had been permitted to bargain and there were no costs associated with the bargaining process.

Basic values of responsibility and integrity: second theory to explain the fiduciary duty.

Managers have the power to expose the corporation to a risk of loss: third theory to explain the fiduciary duty.

Despite these analyses and others, there is no generally accepted theory that clarifies what the obligation requires in any particular case.

Basic Features of the Fiduciary Duty:


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similar to the obligation of a trustees to a beneficiary (at least to the extent that it requires managers not to put their personal interest ahead of the interests of the corporation) are:

Conflict of interest situations:

the manger is involved in some transaction with the corporation in his personal capacity; the manager takes advantage of opportunities personally, which it was her duty to try to

obtain for the corporation; manager competes with the corporation; manager stands to benefit personally by blocking a takeover bid for control of the

corporation.

In almost all cases in which breach of fiduciary duty occurs, the fiduciary has made some profit or received some advantage at the expense of the corporation. The principal remedy granted by the courts where a breach of fiduciary duty has occurred is to require the fiduciary to account for his profits to the corporation

Why? The rationale behind this belief is easy to see: if a fiduciary cannot profit from a breach of his fiduciary duty, he has no incentive to commit the breach. The common law courts developed a rule that the shareholders could agree to absolve a fiduciary of her breach of duty. This is called “ratification” and is no longer effective to relieve a fiduciary of liability for a breach of fiduciary duty under statutes like the CBCA, but shareholder approval may be taken in to account for certain purposes (to be discussed later) including a court’s decision regarding whether to permit a shareholder to bring an action on behalf of a corporation for breach of a directors fiduciary duty.

Key point! Before examining the conflict of interest cases, it is necessary to explore what it means to say that manager must act “in the best interests of the corporation.” Understanding this aspect of the fiduciary duty is especially important in situations where there is no conflict between the personal interests of the fiduciary and those of the corporation, but where directors must resolve conflicts between the interests of shareholders and other corporate stakeholders.

The “Best Interests of the Corporation”

This expression as set out in the CBCA formulation provides limited guidance regarding the content of the duty. The duty to act “honestly” seems straightforward enough; managers are prohibited from acting fraudulently. They must not intend to deprive the corporations of some assets or benefit for their own personal gain. Beyond honesty, managers must try and do what is in the best interests of the corporation. But against what standard?

As the fiduciary duty is expressed as being owed to the corporation, it is not a duty owed directly to the shareholders or to any other stakeholder or group of stakeholders. The content of the duty will be defined by reference to the interests of the corporation on a case- by-case basis. It is often difficult, in the abstract, to think of what the best interest of the corporation are—especially if we think of the corporation as the focus of stakeholder claims, the nature of which will be in conflict with the corporation. http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:42 PM

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Example: the interest of employees in high wages may conflict with creditors’ interests in getting paid. Until recently, many believed that in Canada the courts disregarded the interests of other stakeholders and threated the interests of the corporation as co-extensive with the interests of shareholders in maximizing their share value. This did not mean that other stakeholders interests were irrelevant, managers were simply not allowed to favour the interests of other stakeholders at the expense of share value.

BCE Inc. v. 1976 Debenture Holders, (2008)

While the interests of shareholder and other stakeholders often will be “coextensive” with the interests of the corporation, where they conflict, the duty is to the corporation.

Facts: Court dealt with a challenge by some debenture holders to the acquisition of BCE Inc. by a group led by the Ontario Teachers’ Pension Plan Board. While the transaction promised a premium over the market price for common shareholders, the result of the transaction for the debenture holders was likely to be a reduction in the market value of their debentures of approximately 20%.

Held: the court rejected the denture holders’ challenge finding that the board of directors had adequately taken into account their interests in approving the transaction. As a duty to the corporation, the fiduciary duty is not only an obligation to maximize shareholder value. The court held that the specific content of the duty will depend on the situation citing the following passage from its earlier decision in Peoples Department Stores:

….It may be legitimate, given all the circumstances of a given case, for the board of directors to consider, inter alia, the interests of shareholders, employees, suppliers, creditors, consumers, governments and the environment.

Held: the SCC indicated that it was not “mandatory” for directors to take into account the impact of corporate decisions on stakeholders, and described the obligation of directors where conflicts arise between the interests of stakeholders as an obligation to treat individual stakeholders fairly and to “resolve (conflicts) in accordance with their fiduciary duty to act in the best interests of the corporation viewed as a “good corporate citizen.” Such an obligation to treat stakeholders fairly would seem to suggest that stakeholder interests must be considered.

The courts should apply the “business judgement rule” meaning courts should defer to the business judgement of directors with respect to how they consider and weigh competing stakeholder interests, so long as what the directors did “lies within a range of reasonable alternatives.” (BCE). It remains unresolved how this combination of a fiduciary duty which does not give priority to any stakeholder interest, with the business judgement rule, which gives deference to how managers decide to accommodate conflicting stakeholder interests , will affect the content and enforceability of the fiduciary duty in Canada (the reasons in BCE were only released in December 2008 and so it is too early to speculate about its impact. The Court’s http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:42 PM

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decision in Peoples Department Stores has attracted much criticism). It may be that the effective accountability of managers to shareholders and other stakeholders will be reduced.

It is clear that the fiduciary duty does not require the managers to promote the interests of any specific shareholder. Where some special relationship with a shareholder exists that is distinct from the directors’ or officers position, such as a family relationship or another relationship of trust and dependency, a special obligation to that shareholder may arise that overlaps the corporate fiduciary duty (Malcolm v. Transtec Holding Co, (2001).


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Conflicts of Interests – Transactions with the corporation (Self-Dealing)

Casebook 376-386VanDuzer 345-352CBCA 120, 125, 241OBCA 132, 134, 137

Conflict of Interest:

A conflict of interest that arises when a manager contracts with the corporation and faces an acute conflict between her duty and her personal interest. Even if she is not directly involved in the negotiations on behalf of the corporation as a director, she may be in a position to influence the corporation’s decision-making either directly, as a member of the board, if the contract must be approved by the board, or indirectly, by virtue of her relationship with the corporation and its personnel.

A director of a company is prevented from dealing, on behalf of the company, with himself, and from entering into engagements in which she has a personal interest conflicting, or which possible may conflict with the interests of those whom he is bound by fiduciary duty to protect. The director shall disclose the nature of the interest, and shall not vote in respect of any contract in which he is concerned.

Examples:

Director or officer is involved in some transaction in her personal capacity; The director/officer takes advantage of opportunities personally;

Director/officer competes with the corporation; Director/officer stands to benefit personally by blocking a takeover bid for control of the

corporation

Because of the conflict of interest for directors in such situations, these kinds of transactions are voidable—that is, they could be set aside—at the option of the corporation. It is not relevant whether the transaction is a good or bad one. This rigid standard was described in:

Aberdeen Railway Co. v. Blaikie Bros, [1854]

“It is a rule of universal application that no one having such duties to discharge shall be allowed to enter into engagements in which he has or can have a personal interest conflicting or which possibly may conflict with the interests of those whom he is bound to protect. So strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into.”

Facts: case involving the purchase of some chairs from a partnership in which the director was a partner.http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:42 PM

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Held: It did not matter if the fiduciary’s interest was direct and beneficial, such as where she was dealing with the corporation herself, or her interest was indirect, or as a trustee.

Transvaal Lands Co. v. New Belgium (Transvaal) Land and Development Co., [1914]

It does not matter if there is no direct conflict between the directors’ personal interest and his duty as a director. As a trustee, the director was obliged to safeguard the interests of the beneficiary by ensuring that Corporation B got the highest price for the shares to be sold, just as he would if he were managing his own assets. As a director of corporation A, he was obliged to seek to ensure that the corporation paid the lowest possible price.

Facts: a director of one corporation (corporation A) held certain shares in a second corporation (corporation B) as a trustee for the benefit of his wife under her fathers will. In a transaction in which the director took no active part, all the shares of a third corporation held by corporation B were sold to corporation A.

Held: there was a breach of fiduciary duty. The contract was voidable.

Why? The courts were reluctant to take responsibility for making difficult judgements about when a conflict is a problem. They did not want to have to assess when someone’s personal interest in a transaction was substantial enough to affect their judgement and behaviour. Thus, even transactions in which the directors or officers interest “possibly may conflict” with her duty were a breach or of her duty and voidable.

The CBCA and most other Canadian statutes have modified this rigid rule to permit certain transactions between a director or officer and her corporation which are beneficial to the corporation, provided certain procedural safeguards are observed. This change was motivated by recognition that in some cases the best price or perhaps the only source of supply is a person related in some way to a director or officer (e.g. transactions between affiliated corporations (these are corporations where one controls the other or they are under common control) and closely held corporations. The scheme to be followed is set out in section 120 of the CBCA, which applies where a director or officer of a corporation:

Is a party to a material contract or material transaction whether entered into or proposed with the corporation;

Is a director or officer or an individual acting in a similar capacity of a party to such a contract or transaction; or

Has a material interest in a party to such a contract or transaction.

“Materiality” Threshold:

No definition of material contract, transaction, or interest is found in the CBCA, and few cases have considered the meaning of these expressions. The materiality thresholds would appear to be intended simply to eliminate the need to comply with the requirements of the scheme for such trivial conflicts. Only if the thresholds are met must the procedures in s. 120 be followed.http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:42 PM

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The courts should ask: whether the interest is such that there is any reasonable basis for a concern that it may affect his ability to perform his duty? Nicholls suggests that anything other than an interest that is “trivial or insignificant “would be material.

Zysko v. Thorarinson, [2003]

A material interest was not just a financial interest, but anything more than a de minimus interest.

Held: the court suggested that a good “rule of thumb” is that there should be disclosure whenever the interest might be relevant to the corporation’s decision making.

McAteer v. Devoncraft Devleopments Ltd., [2001]

A director, who was a trustee of a trust that entered into a contract with a corporation of which he was a director, had a material interest, even if the director did not have a beneficial interest in the trust.

Exide Canada Inc. v. Hilts, [2005]

the court held that a close personal relationship such as a friendship, between a director and person negotiating a contract with the corporation was a material interest that had to be disclosed.

Notice

Imperial Mercantile

More than mere disclosure of a conflict of interest is required because mere disclosure is insufficient to alert the corporation to the prospect of abuse by the interested party. Explicit disclosure of an interest is necessary to put the corporation on guard

If s 120 applies to a transaction, an interested director or officer must give written notice to the corporation of the nature and extent of his interest or request to have this information entered in the minutes of a directors meeting (CBCA, s.120(1)). There are specific requirements regarding when notice must be given in section 120(2) and (3).

Officers must disclose immediately after they become interested. Directors must disclose at the first directors meeting after the interest arises or, if the interest arises because of what happens at a meeting, the director should immediately disclose her interest. If the contract is one in which the director has an interest is not one that would normally be approved by directors or shareholders, then the director must disclose her interest as soon as she becomes aware of it.


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There is no precise formula for how much detail must be provided in the notice. It will depend on the nature of the contract proposed and the context in which it arises. Therefore it is necessary to state what the interest is and how far it goes. It must be sufficiently detailed to disclose the costs incurred and the possible profits to be received.

UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc., [2002] aka “Repap” case.

Failure to advise the board of important facts regarding a contract mean that notice is not given as required under the CBCA and will be a breach of fiduciary duty.

Facts: the board approved a very generous compensation package for Berg, a director, chair of the board, and a major shareholder. While the board knew of Berg’s interest in the package

Held: berg was obliged to provide the board with certain information that would have been relevant to its decision. Berg should have made the board aware of several relevant facts:

At an earlier meeting, a board with different members had opposed giving Berg the package;

Senior management at the corporation had opposed giving Berg the package; The opinion of a compensation consultant was of limited value because she had not been

able to do any research or benchmark it against compensation arrangements at comparable companies;

The package that the board was being asked approve was different form one describes to the board in a memo a few days earlier.

General Notice:

In some cases where a director of a corporation is also the director of a corporation that is a customer of the corporation, disclosure would have to be made repeatedly. To address this kind of situation, the CBCA/OBCA permit general notice to be made to the effect that a manager id interested in all contracts with a corporation (CBCA, s.120(6)). There is no express requirement to disclose the nature and extent of ones interest in such a general notice, though it would be consistent with the scheme of 120 to read such a requirement into the provision.

A contract which a manager has an interest must be approved by the directors or shareholders to be enforceable (CBCA, 120(7) and (8)). Subject to some exceptions, a director is prohibited from voting on any contract in which she has an interest at the meeting of directors called to approve the contract (CBCA s.120(5)). These exceptions include:

contracts relating to remuneration as director, officer employee, or agent and her indemnification;

Contracts with affiliated corporations (CBCA, s.120(5)).

Also, such a director may be present at the meeting and may be part of the quorum.


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Notice of conflict of interest test:

proper notice; approval requirements; contract must be fair and reasonable to the corporation.

If all 3 requirements are met the contract is nether void nor voidable (a contract that is void cannot be enforced by either party, if a contract is voidable the contract may be enforced or not at the option of that party.Since the 2001 amendments toe CBCA provides that the common law remedy of an accounting for profits is also excluded. The director or officer cannot be required to pay over to the corporation any benefit received in connection with the transaction.

The CBCA provides an alternative scheme to save contracts where the requirements set out above have not been complied with. The contract may still be rendered enforceable and the director or officer may be free to keep any profits if 3 requirements are met:

The director’s or officer’s interest was disclosed to the shareholders in sufficient detail to indicate its nature;

The contract or transaction was approved by a special resolution of the shareholders, and The contract or transaction was reasonable and fair to the corporation at the time it was

approved (CBCA s120 (7.1))

If any of the above requirements have not been satisfied, the conflict of interest results in a breach of fiduciary duty and the contract is voidable at the option of the corporation

Gray v. New Augarita

Managers are obligated to keep their colleagues “fully formed of the real state of things.”

Facts: issued shares to himself at a discount 80%. Made drawing upon the company’s bank account for his own purposes. Degree of disclosure required of a director who enters into a contract with his own company.Gray made no such disclosure as was required. He came to the meeting under heavy liabilities towards the company. He had been making large profits from the shares that he allotted to himself and making liberal use of the company’s funds for his own purposes

Held: he should have revealed to his colleagues before they voted to settle on 20 cents per share.

Rooney v. Cree Lake Resources, [1998]


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The negotiating process may be considered not fair and reasonable if it is engaged in by parties with conflicts of interest or in undue haste. The substance of the contract and the process by which it is negotiated must be considered.

Facts: The contract contained an early termination provision that required compensation for the remaining balance of the term of more than 50 % of the value of the corporation’s assets.

Held: a five year contract for management services was found not to be fair and reasonable.

Shareholders’ Relief:

A derivative action: on behalf of the corporation to seek relief for breach of fiduciary duty (CBCA s.239).

Apply to the court: Where requirements of s.120 are not met, however the CBCA provides a more direct and expeditious way for shareholders to seek relief. A shareholder may apply directly to a court to set aside the contract. This provision expressly permits a court to make an order directing the director or officer to account for profits (CBCA, s. 120(8). A court is not obliged to grant relief.

It is important to note that compliance with the scheme set out in s.120 is the only way to avoid theconsequences of a fiduciary breach under the CBCA. The fiduciary duty is a statutory duty and the CBCA provides that: “ no provision in a contract, the articles, the by-laws or a resolution relieves a director or officer form the duty to act in accordance with this Act or the regulations or relieves him from liability form a breach thereof .” (CBCA, s.122(3)).


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Taking Corporate Opportunities

Casebook 387-400, 410-416, 419-425VanDuzer 352-361CBCA 122(1)(a)OBCA 134(1)(a)

Corporate Opportunities:

The fiduciary considers investing or otherwise taking advantage of some project or opportunity in which the corporation has an interest. This situation arises frequently since one of the principal tasks of managing is to make choices about what projects the corporation should invest in, such as acquiring an asset, establishing a business or entering a contract.

Why? if fiduciaries were permitted to invest personally in projects to the exclusion of the corporation, there is a risk that, in pursuit of their self-interest, they would appropriate to themselves investment opportunities that they should have sought for the corporation. The fiduciary duty applies to prohibit fiduciaries from allowing their personal interests to conflict with their duty to the corporation in this way.

It is very difficult to establish a bright line distinction in this area of law.

Where a corporation is actively negotiating for an opportunity and has a reasonable prospect of getting it, there is no question that the corporation has an interest in the opportunity and a fiduciary is prohibited from exploiting it in her personal capacity.

Cook v. Deeks, [1916]

Managers cannot take opportunities from the corporation. Where majority have put something in their pockets at the expense of the minority they must account for their profits.

Facts: Three directors of a corporation were negotiating with a railway (Canadian Pacific Railway) to obtain a construction contract for the corporation, as they had done on previous occasions. They held ¾ of the share capital and no longer wanted to continue business relationships with the plaintiff. A contract was made between the directors and railway (Shore Line Contract) on their own behalf. During negotiations, they decided to obtain the contract for themselves, not the corporation. They informed the railway of their plan and eventually, the contract was made between the directors and the railway. Intentionally concealed all circumstances relating to their negotiations until a point had been reached when the whole arrangement had been concluded in their favour.

Held: that the directors had breached their fiduciary duty to the corporation because they had actively promoted their own interests at the expense of the corporation and used their positions with the corporation to do sohttp://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:42 PM

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As a result, they were liable to pay/account for the profits they had obtained from the contract over to the corporation.

Regal (Hastings) Ltd v. Gulliver, [1942] UKHL

Where there is some impediment to the corporation obtaining an opportunity, the courts have held that it nevertheless belongs to the corporation, and fiduciaries can’t exploit it themselves. There doesn’t have to be an actual conflict of interest for there to be a breach of fiduciary duty.

Facts: Regal owned one cinema and was seeking to obtain a lease of two others through a wholly owned subsidiary corporation. The landlord of the two cinemas refused to agree to the lease unless either of two directors guarantees the lease obligation personally or the amount invested in shares of the subsidiary was at least 5000 GBP. Regal had only 2000GBP. At a meeting of the directors it was agreed that they would resolve the problem by personally investing the remaining 3000GBP in shares of the subsidiary. The shares were issued to the directors at a price of 1GBP per share. The directors sold the purchaser shares at the price of 3.16 GBP., giving them a profit of 2.16GBP per share.

Held (HOL): court granted judgement for Regal (new directors). It held that the old directors had used their positions as directors to make a personal profit, which the board was obliged to try to obtain for the corporation. there does not have to be an actual conflict of interest for here to be a breach of fiduciary duty. This reasoning reflects the policy referred to in Aberdeen Railway that fiduciary duty rules should be designed to remove any possible incentive for fiduciaries to put their selfish interests first.

Why? Courts generally do not like to second-guess directors on issues such as whether there is any viable business alternative to the strategy benefiting the directors. They recognize that they do not have business expertise and that their conclusion would be speculative. On the facts of Regal, it seems likely that some alternative could have been found that would have involved the enrichment of the directors. In any event, the rule is clear: the directors’ fiduciary duty precluded them from profiting from the transaction they adopted.

Rule of equity

Which insists on those who use a fiduciary position to make a profit are liable to account for that profit (it doesn’t matter how honest they are). Equity prohibits a trustee from making any profit by his management, directly or indirectly.-HL said that the directors had breached their duties if they received a profit through the acquisition and resale of their shares only by reason of the fact that they were directors and in the course of acting as directors

The HOL held that the directors had breached their duties because they received a profit in the course of acting as directors. What does this when applied to the facts of the case?

It means the opportunity arose only because they were directors; They acted as a board and made the decision to issue the shares;http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:42 PM

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The scope of this test discussed in Regal was narrowed inPeso Silver Mines Ltd v. Cropper, [1965]

Where the manager acquires the opportunity independently of his position as a director, there will be no breach of his fiduciary duty.

Facts: Board of Peso had opportunity to acquire certain mining claims, but because of constrained finances, they rejected it. After a few months Cropper who was a member of the board formed a corporation that acquired them. Peso sued Cropper, alleging breach of fiduciary duty.

Held: Court denied relief on 2 bases: Peso ceased to have an interest in the claims when the board decided not to buy them; the court rejected the notion that merely because Cropper acquired knowledge of the

opportunity by virtue of being a director of Peso, he was thereafter prohibited from taking advantage of the opportunity personallyhe must have had access to the opportunity only because of his position, and even then, the only thing he could not do was take personal advantage of the opportunity through some action in his capacity as a director.

Why? Since here the claims were acquired independently of his position as a director, there could be no breach of his duty. By requiring the fiduciary to have access to an opportunity and to have exploited the opportunity in the course of acting in his capacity as a fiduciary, the court in Peso constrained the classes of cases in which a breach of fiduciary duty could be found

This constraint was shattered in the decision of the Supreme Court in

Canadian Aero Service Ltd v., O Malley, [1973]

Accountability for profits, profit must be disgorged; a director must not be allowed to use his position as such to make a profit, liability to account.

Facts: Canaero was in the business of topographical mapping and geographic exploration. OM the (president) and (Zarzicki) the executive vice president, were assigned to Guyana for the purpose of procuring a contract for mapping the country. They were top management. They stood in fiduciary relationship with the corporation.After working on this project for some time, they resigned from Can Aero and incorporated Terra Surveys to perform work similar to what they had been doing for Can Aero. Subsequently the government of Guyana asked for bids to map the country and Terra’s proposal was accepted over Can Aero’s. Can Aero sued OM and Zarziki alleging that they had breached their duty to the corporation by taking the benefit of the corporate opportunity belonging to Can Aero. Counsel for Zarziki and OM relied on Peso.

Held: They were liable. Supreme Court ultimately held that OM and Zarziki did breach their duty saying that the categories of breach of duty are never closed; the court developed an open-http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:42 PM

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ended analysis based on weighing of various factors that the court said could not be listed exhaustively.

Corporate Opportunity Test:

In relation to a particular opportunity, the purpose of this analysis is to determine the answers to 2 questions:

Does the opportunity belong to the corporation, considering how closely it is connected to the corporation?

What is the relationship of the fiduciaries to the opportunity?

On the first question, the court cited several factors as tending to show that the contract to map Guyana was a corporate opportunity of Can Aero’s. It was a significant opportunity that the corporation had been pursuing for a while and was substantially the same opportunity. They did extensive prep work, they quit to take advantage.On the second question, they did preparatory work relating to the opportunity and negotiated for it on behalf of the corporation. They learned all about the opportunity through their positions.

Star Link Entertainment Inc. v. Star-Quest Entertainment Inc, [2003]

Managers that acquire profits from taking an opportunity from a corporation must disgorge them.

Facts: Two directors became minority shareholders in a another corporation and sought to obtain a licence that Star-link was seeking to acquire. Star-Quest acquired the licence and the director resigned from Star-Link

Held: This was a breach of fiduciary duty and ordered the directors to pay over the profits they would have received as shareholders of Star-Quest. The court held that the two directors were the beneficial owners of the shares.

In summary breach of fiduciary duty arises when a fiduciary takes something belonging to the corporation, putting her personal interest ahead of her duty to act in the best interests of the corporation. The policy of the common law is that such behaviour should be discouraged by requiring that any financial benefit from engaging in the behaviour be turned over to the corporation.

Problem: how do you know when an opportunity belongs to a corporation an cannot be appropriated by a fiduciary? In cases like Cook v. Deeks, it will be obvious that there is a breach, but in many cases, the answer is not always straightforward. Whether a breach will be found depends on a number of factors relating to the nature or strength of the corporation’s interest in the opportunity and the relationship to the opportunity of the person alleged to have breached his duty:


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Relevant Factors to Determining Whether Appropriation of an Opportunity is a Breach of Fiduciary Duty

Nature or Strength of the Corporation’s Interest

Maturity: Had the corporation done anything to develop the corporation? How close was the corporation to acquiring the opportunity?

Specificity: Was the opportunity indentified by the corporation? How precisely? Was it only in the same general business area as the corporation’s business? How closely did the opportunity appropriated resemble the opportunity the corporation was working on?

Significance: Would the opportunity represent a major component of the corporation’s business if acquired? Was it a unique opportunity or merely one of many?

Public or Private Opportunities: was the opportunity publicly advertised or otherwise widely known? Was it one to which the fiduciaries had access only or virtue of their positions? Was it offered to the corporation?

Rejection: had the opportunity been rejected in good faith by the corporation before the fiduciary acquired it?

Relationship of the Fiduciary to the Opportunity

Position of Fiduciary: The higher up the fiduciary is in the organization of the corporation, the higher the level

Relationship between the fiduciary and the opportunity: Was the opportunity in an area of the fiduciary ‘s responsibility? Did the fiduciary negotiate for the opportunity on behalf of the corporation?

Knowledge as a fiduciary: How much knowledge did the fiduciary acquire about the opportunity through her position?

Use of Position: To what extent did the fiduciary accomplish the appropriation of the opportunity through his position?

Time after termination: If the fiduciary took the opportunity after she terminated her relationship with the corporation, how long was it after terminated? What were the circumstances of her termination? Was she fired or did she leave voluntarily? Most importantly, did she leave for the purpose of pursuing the opportunity she had been working on for the corporation?


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In cases where the fiduciary has terminated her relationship with the corporation the fiduciary duty derives not form the statute but from the common law, since the statutory duty applies only while a person is a director or officer.

Criticism

corporate opportunity cases use a loose situation based standard. As an opportunity becomes more remote from the corporation, the likelihood of loss to the corporation is diminished. The argument is that it is inequitable to the corporation to permit the fiduciary to appropriate the opportunity becomes weak

Scale of corporation: this should be taken into account as cited in Can Aero since the ability of shareholder in closely held corporations to choose their fiduciaries and to monitor them is much greater than that of shareholders in public corporations, so a stricter standard should be applied in larger corporations.

Disclosure and Consent: Fiduciary duties are mandatory standards that cannot be avoided even by obtaining the consent of the corporation. Sometimes a fiduciary will have to resign before he will be free to pursue an opportunity, though as Can Aero demonstrates, even resigning will not be sufficient in some circumstances, event though such a strategy will help to reduce the likelihood that conflicts will arise and may influence a courts assessment of whether an opportunity belongs to the corporation.


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Competition by Directors and Officers

Casebook 433-439VanDuzer362-363CBCA 122(1)(a)OBCA 134(1)(a)

General Rule

In general, it is not a breach of duty to terminate one’s relationship with a corporation and go into competition with it; otherwise the fiduciary duty might become an unreasonable restraint of trade, preventing a person form earning a living. What a fiduciary cannot do is to compete with the corporation while she remains in her capacity of as a fiduciary. A competing fiduciary will be forced to pay over all her profits from the competing business to the corporation.

In addition, a fiduciary cannot use her fiduciary position and the opportunities in that position to develop a competing business, the quit to begin competing (e.g. Can Aero: the courts will impose fiduciary obligations extending beyond the termination by the fiduciary).

A fiduciary cannot use confidential information belonging to the corporation, and it is not a breach to use skills, knowhow, experience, and personal goodwill acquired by the fiduciary during his service. If a departing fiduciary attracts customers or other employees by virtue of his qualification or experience, they will not breach their duty, but if he affirmatively solicits customers or employees relying on relationships developed during this time with the corporation, he will be in breach (e.g using confidential customer lists).

Consequently, it is increasingly common for employers and fiduciaries who are employees to agree specifically on what is permitted post-employment in a contract.

Multiple directorships:

Some old English cases held that being a director of two corporations, even if they are competitors, does not constitute breach of fiduciary duty (prohibited from disclosing confidential information about one corporation to the other). The only restriction is that directors are prohibited from disclosing confidential information about one corporation to the other.

Why? this relaxed approach is consistent with the strict approach in Aberdeen Railway and does not accurately state the law in Canada. Canadian cases have held that there is no absolute rule regarding multiple directorships. Each case depends on its facts. The relevant question is: whether the fiduciary could not act in the best interests of both corporations? Where corporations are inactive competition it will be impossible to avoid the conclusion that a director of both corporoations is in a conflict of interest and in breach of his duty.(e.g. director of Hydro One and OPG) On the other hand, it can be possible to be on the board of two corporations that carry on identical businesses, but in geographical areas without facing a conflict of interest.


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London v. Mashonaland, [1891] A director can become interested in a rival concern and may engage in competing business.

Held: A director who joins a rival concern and prefers its interest to those of the first company would likely face and application under s.241 of the CBCA or s.248 OBCA a director of two rival concerns is walking a tightrope and at risk if she fails to deal fairly with both.


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Takeover Bids

Casebook 439-441, 442-450,465-466, 495-509, 519-526VanDuzer 363-371CBCA 122(1)(a)OBCA 134(1)(a)

Takeover Bid

When a bidder offers to purchase a controlling interest in a corporation, often one of the reasons is that the bidder believes that the value of the corporation can be increased by changes in management, typically including the replacement of existing directors and senior managers. Self-interests of the directors and senior managers may encourage them to try and defeat the takeover bid.

Management discipline hypothesis: takeovers are motivated by the gains that an acquirer can realize from displacing opportunistic management with more dedicated and efficient managers, perhaps even the acquirer herself, once is obtained. Target management, fearing the loss of their jobs and reputational capital, will do their best to save off a hostile takeover by using a range of defensive tactics. The tactics may make control acquisition more expensive to an acquirer, or may even deter the takeover altogether. In either case, management resistance dulls the incentive for takeovers.

Hostile Takeover Bids

Enable an outside acquirer to obtain control of a target corporation without having to obtain the assent of target management. An acquirer will make a bid (at some premium above the market price) to the target shareholders for some or all of the voting shares of the target company. If within the prescribed period, the requisite number of shares are tendered by target shareholders into the bid, the shares will be picked up by the acquirer and the bid completed.

Canadian Jurisprudence on Defensive Tactics: The Common Law

Directors have a broad range of power vested in them through legislation, by-laws and articles of association that may be used to react to a hostile takeover bid. Defensive Measures are aimed at defeating a takeover bid and often will be contrary to the interests of shareholders. The courts should apply the fiduciary duty to prohibit all defensive measures.

Concern: abuse of power—what is allowed and isn’t allowed?http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:42 PM

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Why? Takeover bids are often in the best interests of shareholders because takeover bidders typically bid at a substantial premium over market price. However, this creates a conflict of interest because often takeover bids lead to the firing of management. Therefore, it creates incentive for management to defeat takeover bids that may be in the best interests of the shareholders in order to preserve their jobs.

Takeover bidders typically offer a substantial premium over the market price, those who do not sell will reap the benefit of the improvements made by the bidder and the resulting increase in the value of their shares. Shareholders who sell will receive a better price than they could get otherwise, and those who keep them reap the benefit of the improvements.

Question: should management be allowed to take defensive measures??

Yes: there are other motivations for takeovers apart from changing management (amalgamating companies to create a diversified entity, eliminate competing businesses etc) therefore some takeover bids may be in the best interest of the corporation. Also, there may be situations where the bid tender is felt to be too low, in this case preventing directors from taking defensive measure may prevent them from finding a better bid.

No: shareholders will lose the immediate benefits of the bid (share price); disciplinary effect of the market for corporate control will be impaired (if no defensive measures are available, the only way management could prevent a takeover bid would be to manage the corporation so effectively that no bidder could improve value by making the bid). A fiduciary should not be allowed to be involved in situations where her personal interest possibly may conflict with her duty. To permit management to defend against takeover bids puts them in the kind of conflict of interest the common law has sought to avoid.

Takeover bids can increase value of the corporation

Some are even less threatening to management and may encourage them to cooperate. They are referred to as synergy between the bidder and the target. The combination of the two enterprises may lead to more efficient operations through more intensive use of available resources such as: plants. E.g. a bid might be launched to combine a heating and air conditioning business to overcome the opposite seasonal downturns in each business;

A bid may be made to eliminate a competitor; or

Non-economic reasons that may encourage takeovers, such as managerial self-aggrandizement.

Bonisteel: the directors did not violate their fiduciary duty to the company; they nonetheless acted in an illegal manner. The issuance of shares for the purpose of influencing control of the company was merely voidable


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Difficulty in Formulating General Rules:

The diversity of possible motivations for takeover bids means that a takeover bid may have a wide range of possible consequences. This range makes it difficult to create general rules to govern the behaviour of directors and managers when a bid is made or in anticipation of a bid. The simplest example of a problem raised by prohibition on defensive tactics is when a bid price that the directors and officers correctly believe is less than the actual value of the corporation. In such circumstances, some kinds of defensive measures by management will be in the best interests of the corporation and its shareholders

Expanding Range of Measures in Use:

Historically, most common method was for directors to issue shares to persons who would not tender the bid (Hogg v. Crampton Ltd (1966) Recently, some corporations amend their articles to adopt what management calls “shareholder rights plans” and their opponents call

The archetypical model gives the shareholders rights to purchase additional shares at some price higher than the current market price of the shares. If a bidder purchases in excess of a specified percentage of the target’s shares, the price at which the rights are exercisable drops to a level much below the market price. The bidder itself is precluded from exercising these rights and management is given the power to waive these rights. The result is that the bidder must either negotiate with management to get it to exercise its waiver or face a dramatic increase in the cost of the bid as other shareholders exercise their rights

A number of old cases had held that it was improper for directors to issue shares for the sole purpose of defeating an attempt by someone to gain control of the corporation even if they bona fide believed such an action to be in the best interest of the corporation. This approach was rejected in

Teck Corporation v. Millar, [1972]

Directors must be able to act in the best interests of the corporation in responding to a takeover bid.They should be able to consider the consequences of takeover bid and exercise their powers to defeat it if they genuinely believe that the success of the bid would not be in the corporation’s best interests.

Problem: How is the court to determine if the purpose of the directors’ action is to protect the interest of the corporation? In the case above Justice Berger suggested that the courts should ask if there were reasonable grounds for the director’s belief that they were acting in the corporation’s best interests. This approach has been applied in future cases where it has been acknowledged that one of the effects of the directors’ actions has been incidentally to benefit the directors themselves by maintaining their positions.


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Olympia & York Enterprises Ltd. v. Hiram Walker Resources Ltd

the court seemed to suggest that the fiduciary duty to act in the best interests of the corporation imposed a positive duty to take defensive measures if the board believed the successful completion of the bid would not be in the interests of the corporation.

Other cases have taken a more restrictive view:

Exco Corporation v. Nova Scotia Savings & Loan Co., [1987]

The proper test was whether an action taken by the directors was not only in the best interest of the corporation but also inconsistent with any other interest, including the directors’ personal interest.

Problem: these cases provide little assistance to directors faced with a takeover bid. They do not consistently identify the circumstances in which directors are permitted to act to defend a bid. The cases provide little guidance on the second-level questions that must be addressed in order ot assess whether the fiduciary duty has been satisfied in particular situations. E.g.it is still not clear how to determine if a particular defensive measure was reasonable to adopt

National Policy 62-02:

One guiding principal the courts have endorsed is that the shareholders rather than the directors should have the right to determine who whom and on what terms they may sell their shares. Guidance from this principle may be taken from a policy issued by the Canadian Securities Administrators. National policy 62-02 sets out the regulators’ view regarding defensive tactics in takeover bids. Although the policy statement does not purport to offer a code of behaviour for directors, it does express the policy basis for the regulation of takeover bids. It provides that the primary purpose of such regulation is to protect the bona fide interests of the shareholders of the target and to permit takeover bids to proceed in an open and even-handed environment. This policy suggests that defensive measures should not deny shareholders ability to make a decision about whether to sell their shares and that, whenever possible, prior shareholder approval should be obtained for proposed defensive measures such as poison pills. This policy was held to inform the content of directors’ fiduciary duty in

347883 Alberta Ltd v. Producers Pipelines Ltd., [1991]

If directors determine that action is necessary to protect the interest of the corporation, they may act despite being in a conflict of interest. But they must be able to show that whatever action they take is reasonable to the risks associated with the takeover bid.

Held: If possible defensive actions to be taken by directors should have prior approval of shareholders or to be ratified by them after they are adopted. Shareholder’s rights to sell their


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shares to a bidder should not be pre-empted, and defensive actions should be designed to avoid impairing that right.

Example: a poison pill may be reasonable defensive measure if it is used to allow directors a reasonable time to negotiate a higher offer price from the bidder or to find another bidder willing to offer a higher price, but not simply to frustrate the bid.

In recent cases, the requirements of the fiduciary duty in context of takeover bids have been clarified somewhat. The courts have looked at whether the board of a corporation subject to a hostile takeover bid acted reasonably in the circumstances, not perfectly, including taking reasonable steps to minimize the conflict of interest and making an informed judgement as to the best available transaction for the shareholders.

Committee: Often this is done by creating a committee of directors independent of management to make a recommendation to the board regarding how to respond to the bid. Since mangers have the most to lose, the conflict of interest to them is acute. So long as the committee acts reasonably and its recommendations are accepted by the board, the directors will be found to have fulfilled their duty (Pente Investment Management v. Schnieder)

Where directors believe that a bid is too low, it may be reasonable for the directors to canvass the market to see whether other bidders may be encouraged to make a bid at a price higher than the existing bid. In Canada, there is no general duty to set up an auction. In an auction, directors continually try to obtain higher and higher prices from competing bidders. Whether directors are required to try to set up an auction will depend on the circumstances.

Inducements: in some cases directors may give inducements to get other bidders to make an offer. One issue is to what extent a board should be able to entice competing bids to be made by agreeing to pay a fee (called a “break free”) or otherwise compensate the bidder out of assets of the corporation if its bid is ultimately unsuccessful. The courts have approved the use of break fees so long as they are reasonably necessary to introduce the new bid.

Pente Investment Management Ltd. v. Schneider Corp.,[1998]

Provides a good example of the application of these principles including the one that states that takeover bids can have substantial implications for non-shareholder stakeholders.

Facts: 108 year old company. 2 class shares structure. Schnieder family proposed a coattail provision be inserted in the company’s articles and this was passed by the shareholders. The coattail aimed at ensuring equal treatment of the voting shares and non-voting A shares in the event of a takeover bid. Schneider family also wanted a veto over any takeover bids that occurred. Maple Leaf offer for common shares was not an “exclusionary offer’ and that the coattail provisions in Schneider’s articles had not been triggered.

Coattail provisions: are designed to ensure that if the common voting shareholders wish to accept an offer that will lead to a change in control of the price or terms offered to the common http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:43 PM

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voting shareholders are more favourable than those offered to the holders of non-voting shares, the non-voting shareholders get an equal opportunity to participate in any change of control premium. They are intended to encourage non-exclusionary bids and discourage exclusionary offers. When triggered, the non-voting shareholders then have the opportunity to participate in the takeover bid

Standing certificate: gave the Schneider family a veto over any takeover bid. While an acquirer might still make an exclusionary bid for the common shares, it could never gain control of a majority of the common shares, since the family held a majority block and could simply not decide to tender.

Maple Leaf Foods believed that it could acquire control of Schneider by making simultaneous takeover bids that were not entirely identical for the two classes of shares, thus making an “exclusionary offer” that would trigger the coattail provision, giving all of the Class A shares a vote.

Exclusionary offer: offer to purchase common shares of the corporation that is not made concurrently with an offer to purchase Class A non-voting shares.

Special committee: the raison d’etre of a special committee independent of management and the controlling shareholder is to protect the interests of minority shareholders and to bring a measure of objectivity to the assessment of bids. A potential conflict of interest existed because of the active role Dodds played in negotiating with the bidders (but the court ruled that Dodds did not have a conflict of interest).

Family of Schneider said that they wouldn’t sell to the bidder Maple Leaf foods who was their competitor. A controlling block of shares was held in the target bid, Schneider, by a family who said they would not sell to the bidder Maple-Leaf foods. The directors set up an independent committee to decide how to respond to the bid who determined that the bid by Maple Leaf was inadequate. The board decided that Maple leafs bid was inadequate, so the committee decided to canvass the market. It created a data room containing business info.The committee decided to canvas the market and eventually elicited another bid from Smithfield. The family decided to sell to Smithfield, the committee recommended this to the board of directors and the board accepted the offer. Smithfield made a bid, but said they would withdraw if Schneider was using it to get leverage to get a higher bid from others. Eventually, the bid was accepted.

Held: The court found that the court had fulfilled its duty and it was not obliged to go back to Maple Leaf Foods to try and obtain a better offer in the circumstances. In creating a data room the special committee acted independently and reasonably. It made confidential information available to all bidders . In Ontario an auction need not be held every time there is a change in control of a company. There is no single blueprint that directors may follow. When a company is for sale and there are several bidders, an auction is an appropriate mechanism to ensure that the board of target company acts in a neutral manner to achieve the best value available to shareholders


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BCE

Makes clear that the fiduciary duty to act in the best interests of the corporation may require that stakeholder interests be taken into account to some extent.

Issue: was whether the directors had sufficiently taken into account the interests of one group of financial creditors, the debenture holders, as well as the interests of shareholders. What exactly the fiduciary duty require of directors is not clear.

Held: it was sufficient that the board considered the extent to which the legal rights of the debenture holders would be protected. The board was not obliged to take into account the financial interest of the debenture holders in maintaining the value of their debentures. The debenture holders were sophisticated investors and the court held that they could have negotiated for such protection in the trust indenture under which the debentures were issued. It is not clear to what extent directors would have to take into account the interests of other stakeholders or even of creditors in other circumstances. Where there was less prospect for negotiated protection.

So long as the board acted reasonably in that there was “no particular alternative (that) was definitely available and clearly more beneficial to the company than the chosen transaction,” under the business judgement rule, the board’s actions would not be second guessed, providing a high degree of deference to how the directors deal with stakeholder interests.

Business judgement rule: high degree of deference to how directors deal with stakeholder interests

Peoples Department Stores and BCE: the Supreme Court appears to be seeking to protect stakeholder interests more effectively. However, by adopting a very broad conception of what the best interests of the corporation include, the result may be to reduce the accountability of directors.

The issue of Poison Pills:

Chapters Inc.

Not in the best interests of shareholders.

“poison pills” (company tries to stop takeover): A strategy used by corporations to discourage hostile takeovers. With a poison pill, the target company attempts to make its stock less attractive to the acquirer.


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Facts: unsolicited partial bid to acquire 4,888,000 shares of Chapters for cash consideration. Future shop proposed offer: Chapters shareholders had the option to elect to receive consideration equal to $16 in cash or 2 future shop common shares for each Chapters Share.

Held: As a result of the pill, Chapters engaged in a number of defensive tactics. The longer the bid is open increases the bids sensitivity to market risks and the time value of money.

Defensive Tactics Test

Regal test: assessment is a balancing of interests. The commission must consider the balance and the duties of management against the interest of shareholders. The following list of factors:

Whether shareholder approval of the right plan was obtained; When the plan was adopted; Whether there is broad shareholder support for the continued operation of the plan; The size and complexity of the target company; The other defensive tactics; The number of potential viable offerors; The steps taken by the target company to find an alternative bid or transaction that would

be better for the shareholders; The likelihood that it would be better for the shareholders; The likelihood that if given further time the target company will be able to find a better

bid or transaction; The nature of the bid, including whether it is coercive or unfair to the shareholders of the

target company; The likelihood that the bid will not be extended if the rights plan is not terminated.

Shareholder Interest Hypothesis:

Force target shareholders to tender into a low bid. The poison pill is the antidote to this coercion.

Two types of “coercive” activity by bidders:

Two tier bid: is a 100% share acquisition effected in 2 stages. The bidder initially makes a takeover bid for sufficient shares to give the acquirer control of the firm. Remaining shareholders are then forced out in second step amalgamation or similar transaction;

Cash out: price is lower than that offered shareholders on the first step takeover bid.

These have an element of compulsion and involve a lower-valued two-tiered bid or a partial bid for less than all the shares of the corporation, which creates a condition of liquidity in the market for those shares remaining in public hands after the conclusion of the bid.

Management Entrenchment Hypothesis:


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Seeks to preserve managerial tenure. On the announcement of the adoption of poison pills, share prices on average decline. Tender offers are a method of monitoring work of management teams. Prospective bidders monitor the performance of managerial teams by comparing a corporation’s potential value with its value (as reflected by share prices) under current management. Tender offers do not move assets to better managers. Cash can be invested. The acquirer usually invests the cash it obtains in the takeover. Some insecurity of tenure is necessary to spur managers to their best performance. Society benefits from an active takeover market. They have been characterized as “raids” in which the offeror pays a premium for working a majority of the shares in order to loot the firm to the detriment of the minority shareholders. Looting from minority shareholders violates established rules , and a bidder would not be likely to escape detection if it violated these rules

Takeovers create monopolies. Share prices increase as the eventual acquisition becomes more likely , whereby the offers warn management to improve its performance.


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Other Breaches of Fiduciary Duty

VanDuzer 371-373

Canadian Aero Service v. O’Malley

The categories of breach of fiduciary duty are not closed.

There are an unlimited number of possible situations in which, if the fiduciary refers back to the broad statutory formulation in section 122(1)(a) of the CBCA and the principles developed in the caselaw., she may find herself in a situation where her personal interest and her duty conflict or is otherwise in breach of his duty to act honestly and in good faith to the best interests of the corporation.

E.g. the problem of directors deciding their own compensation. or where a director with a majority must make a decision in circumstances where the interests of the majority shareholders and those if minority shareholders conflict. Because the majority shareholders has the statutory right to replace the directors, it will be tempting for a director to act in the way desired by the majority shareholder rather than in the interests of the corporation as a whole—if the director does so, she would be in breach of her duty (Teck Corp).

Even if a director is elected to represent a particular constituency, it does not permit him to favour this constituency. In all her actions such as director, like all directors, must act in the best interests of the corporation, even though this may disappoint the constituency that elected her.


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Limited Defence: Reliance on Management and Others

VanDuzer 373CBCA 123(4)OBCA 135(4)

In discharging their responsibility to manage in the best interest of the corporation, as well as their duty of care, the directors in all but the smallest corporation must rely to some extent on management and other professionals. Under the CBCA/OBCA a limited defence to an alleged breach of fiduciary duty and the duty of care is available to directors who rely on others.

CBCA, s. 123(4): provides that a director is not liable for a breach if he relies in good faith on

Financial statements of the corporation represented to him by an officer or in a written report by the auditor of the corporation to reflect fairly the financial position of the corporation; or

A report of a person whose profession lends credibility to a statement made by a person

This defence is limited to these specific circumstances in which reliance is permitted. It does not allow directors to avoid liability by demonstrating that they acted reasonably in the circumstances. The fiduciary obligation continues to apply, but is subject to the limited reliance expressly permitted.


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Shareholder Ratification of Breach of Fiduciary Duty

Casebook 526-527VanDuzer 373-375CBCA 120(7), 122(3), 124, 239, 241, 242(1)OBCA 132(7), 134(3), 136, 246, 248, 249

Before the CBCA it was possible for shareholders to absolve fiduciaries of the consequences of breach by voting to approve or “ratify” it. The only circumstances in which a breach could not be ratified were where the transaction was:

oppressive to the interest of the minority; or obtained by improper means.

Oppression exception: one had to show that there had been some giveaway of corporate assets to the fiduciary, such as a sale of corporate assets at less than market value or an appropriation of the corporate asset as in Cooks v Deeks. Only such serious actions could not be ratified.

Obtained by Improper means: cases where the appropriate majority specified in a corporation’s by-laws was not obtained, the notice of meeting at which the ratification vote took place was improper, or some other procedural irregularity occurred that tainted the approval process.

Why? the rationale for permitting shareholder ratification was that it was needed to balance the strict application of the common law rules as expressed in Aberdeen Railway v. Blaike. If in any given case, the shareholders decided that a transaction involving breach of duty was acceptable to them, they could approve it.

Problem: conceptually this rationale is suspect, since fiduciary duties flow to the corporation, not the shareholders. The rule was also problematic in application because there was no prohibition against majority shareholders voting their shares to ratify breaches of fiduciary duty in which they were involved personally. (North-West Transportation Co. Ltd and Beatty v. Beatty (1887)). This shortcoming combined with the narrow interpretation given to what would be found to oppress the interests of the minority, gave wide scope for abuse of the ratification process.

For this reason, the CBCA greatly reduced the effect of shareholder approval of fiduciary breaches. Except in accordance with the scheme for rendering self-dealing contracts enforceable under section 120 of the CBCA, a shareholder resolution approving a breach of fiduciary duty does not cure a breach or relieve the fiduciary of liability for the breach (CBCA, s.122(3)).

Legal Effect: the only legal effect of such a resolution is that it may be considered by the court in deciding whether to grant a shareholder the right to bring a derivative action on behalf of the corporation for breach of fiduciary duty (CBCA, s.242(1)), in determining whether any action is oppressive under section 241 of the CBCA, and whether to order dissolution under section 241 of the CBCA.http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:43 PM

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Practically speaking, management may take some comfort from a shareholder resolution approving of their fiduciary breach, but it does not mean that shareholders are precluded from complaining about the breach at a later date. The effect of shareholder approval will also be discussed later in connection with the availability of shareholder remedies.


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27. Duty of Care

Common Law

Casebook 301-309

Re City Equitable Fire Insurance Co. Ltd., [1925]

Standard of the duty of care is the reasonable person given the individual director’s expertise. Thus, the responsibility of the directors varied with the nature of the company on whose board they served.

Facts: concerned the winding up of an insurance company. An investigation showed a deficit of some 1,200,000 GBP at the time there were large trading profits. The losses were the result of investments in securities which had depreciated and of diversion of funds by the managing director into another company in which he was interested. The managing director was jailed for fraud. The liquidator brought an action against the directors and auditors (pursuant to a power equivalent to s.215(1)(b) of the CBCA) alleging negligence and breach of duty.

Held: Fiduciary relationship to the company. It is sometimes said that directors are trustees. Consider the nature of the company’s business . Romer J noted that:

“in order to ascertain the duties that a person appointed to the board of an established company undertakes to perform, it is necessary to consider not only the nature of the company’s business, but also the manner in which the work of the company is in fact distributed between the directors and the other officials of the company, provided always that this distribution is a reasonable one...”

A director must act honestly and exercise skill and diligence, but there is difficulty in determining what is the particular degree of both skill and diligence. There was no clear answer.

In re Brazilian Rubber Plantations and Estates Ltd: it was stated that one cannot say whether a man has been guilty of negligence, gross or otherwise, unless one can determine what is the extent of the duty which he is alleged to have neglected. Romer J cited a difficulty in understanding the difference between negligence and gross negligence

Grill v. General iron Screw Collier Co: if a director is only liable for gross or culpable negligence, this means that he does not owe a duty to his company, to take all possible care.it is some degree less than that. He must take:


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Reasonable care: which is measured by the care an ordinary man might be expected to take in the circumstances on his own behaviour (Neville J confirming what was laid out in Overend & Guerney Co.v. Gibb):

Duty of Care Test :whether or not the directors exceeded their powers entrusted to them, or whether if they did not so exceed their powers they were cognizant of circumstances of such a character, so plain, so manifest and so simple of appreciation that no men with any ordinary degree of prudence, acting on their own behalf, would have entered into such a transaction as they entered into?

Four Other General Propositions A director need not exhibit in the performance of his duties a greater degree of skill than may

reasonably be expected from a person of his knowledge and experience; A directors are not liable for mere errors in judgement; A director is not bound to give continuous attention to the affairs of his company. A director may leave his duties to some other official if allowed by the articles to do so.

His duties are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee of the board.

Romer Js’s judgement is considered the locus classicus on directors’ duty of care. His judgement ensured that an action for breach of duty would rarely succeed. The standard was that of a reasonable person given the director’s expertise. A director was not bound to give her full time to the job and was entitled to rely on the company’s officers

Re Brazilian Rubber Plantations & Estates Ltd., [1911]

Sets the bar low level for directors at reasonable care and personal negligence.

Facts: concerned the correct duty of care of directors in a rubber business, and whether the directors acted without reasonable prudence in adopting the contract on the information which they possessed. They failed to identify misstatements in the prospectus.

Held: One cannot say whether a man has been guilty of negligence, gross or otherwise, unless one can determine what it the extent of the duty which he is alleged to have neglected. Sets the bar at a low level for directors. Director liability for breach of the duty of care is predicated on personal negligence. The directors were not negligent.

“Such reasonable care must, I think, be measured by the care an ordinary man might be expected to take in the same circumstances on his own behalf. He is clearly, I think, not responsible for damages occasioned by errors of judgment…

Section 130(3) of the Ontario Securities Act, provides a number of so-called “due diligence’ defences for liability. They give the directors the ability to demonstrate that they were not negligent in the preparation of the prospectus, and escape liability where they can provide http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:43 PM

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“reasonable grounds for a belief that there had been no misrepresentation. (s.130(5) OSA). On the facts of Re Brazilian, the prior owner’s report on the property would not be considered to be an expert’s report. Thus, the higher standard would apply, and the directors would be required to make a reasonable investigation to confirm the facts in the report or face liability.


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Statutory Reform

Casebook 309-324VanDuzer 375-384CBCA 118(2), 119, 122(1) (b), 125OBCA 130, 131, 134(1) (b), 135

Section 122(1)(b) CBCA: imposes a duty of care on directors and officers in the following terms:

“Every director and officer of a corporation in their existing powers and discharging their duties shall. Exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.”

The content of this duty, like the fiduciary duty is highly fact specific, as evidenced by the reference to “comparable circumstances.” The SCC has confirmed that the duty of care sets an objective standard by referring to the care, diligence, and skill of a reasonably prudent person. (BCE). Thus, this represents a significant departure from the common law, which required directors to exercise only the care that could be reasonably expected for a person of their knowledge and experience (Re City Equitable Fire Insurance). Previously, some Canadian cases found that the statutory standard retained its subjective character and was essentially a codification of the common law. (Soper v. Canada (1998)). Under the subjective common law standard, the honest and diligent but incompetent director had nothing to fear. Under the statute, there is a minimum threshold of competence. The precise standard to be met depends upon the personal knowledge, experience, and position of each director and officer. (Soper).Diligence (care): is simply the degree of attention or care of a person in a given situation. Unskilled person should obtain competent outside advice. The reasonable person standard adjusts to the circumstances and to the individual qualities of the actor (flexible).

Issue related to scope and effect of DOC: is to whom it is owed. Prior to Peoples, it was understood that the duty of care was owed to the corporation. Nevertheless:

BCE: the SCC confirmed that the duty of care is not an obligation owed to the corporation, it represents a standard of behaviour to be observed in relation to creditors and other stakeholders as well. The extent to which the statutory duty can be used to support a claim against the managers is now unclear (BCE). The court in BCE said that the statutory duty of care “does not provide and independent foundation for claims” but may be taken into account by courts in determining that standard of behaviour that is required “in accordance with principles governing the law of tort and extra-contractual liability.”

Subjective common law standard, the honest and diligent but incompetent director had nothing to fear.


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Peoples Department Stores v. Wise., [1992]

Directors must show fair and reasonable diligence in managing the company and act honestly but no more than that, and it has been decided that they need not have personal knowledge. They are personally responsible for the action of the company only if they commit a gross fault. Exercise the care, diligence and skill of a reasonably prudent person would in comparable circumstances

Facts: The Wise brothers (Lionel, Ralph, Harold) were sole shareholders of Wise Inc., which owned a chain of department stores in Quebec. Marks and Spencer rain another chain of department stores, owned by Peoples. Both Companies were incorporated under the CBCA. Mark and Spencer sold the Peoples chain to Wise . However, the contract between the two companies forbade Wise from merging with Peoples until the purchase price was paid. Thus, while Wise ended up owning all the shares in peoples, it had to continue to run Peoples as a subsidiary. Each company had its own inventory system and this was causing major mis ups in ordering, excessive inventory, and deficient inventory. Bankruptcy proceedings. $4M. Inventory procurement policy, resulted in Wise running up large debts to Peoples. This was because Peoples paid for all the inventory that was out on the shelves in both stores, and billed Wise for its share. This resulted in Wise owing money to Peoples. Prejudice to creditors of Peoples since they had to stand in line with all the creditors of Wise. Wise approached Clement VP of finance for Wise to set up an integration system to amalgamate the two inventories under one computer file. Clement made a proposal, which the brothers submitted to the buyers without reviewing it. They relied on Clement’s skills and decided that the proposal would be implemented.

Held (SCC): The brothers acted in good faith and did not breach their duty of care and could rely on the defence in CBCA, s.123(4). Fiduciary duty does not refer to the quality of directors’ management but to their personal conduct and the quality of their decisions (duty of care).

This decision attracted significant criticism. Its approach to the duty of care confuses the traditional duty of care standard (owed to the corporation) with the standard of care required by tort law that is owed to anyone. As a result of the criticism of Peoples and BCE, effective August 1st , 2007, the OBCA was amended to specify that the duty of care is owed only to the corporation under the OBCA. Notwithstanding, this recent reconceptualization of the duty of care, the SCC did not imply that the previous caselaw on the duty of care should be rejected. Thus, duty of care analysis is a synthesis of the existing caselaw dealing with the duty of care as a duty owed to the corporation.

Now: effective 1 August 2007 OBCA was amended to specify that the duty of care is owed only to the corporation.


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The Standard of Care

The standard of care is impossible to define exhaustively. However, the limited case-law on the duty provides some useful guidance to the application of the broadly worded statutory standard.

CBCA: Traditionally the courts viewed the directors’ responsibilities as intermittent in nature, to be performed at periodic board meetings. Although a director should go to meetings, she was not bound to do so. Thus, the general standard of care in the CBCA likely demands a higher level of involvement. The Act contains specific incentives to attend meetings and treat decisions responsibly. Under section 123 a director is deemed to consent to all resolutions passed at a meeting which she was present unless she records her dissent. If the director misses a meeting, she is deemed to have consented to any resolutions passed unless; within seven days she takes certain steps to record her dissent. The effect of this provision is that a director cannot escape responsibility by not attending meetings.

It is inevitable in large corporations, that officers and directors must rely on the advice of experts, including accountants, lawyers, investment dealers and engineers (Soper). Before the enactment of the CBCA directors and officers were entitled to trust employees and others to at honestly in performing their obligations and could rely on what they were told (City Equitable. Reliance on others is now subject to an express statutory standard. Thus, a director is not liable if she in good faith, relies on financial statements and reports of lawyers and other professionals (CBCA s123 (4)).

Peoples Department Stores: SCC held that CBCA, s.123(4) does extend to protect reliance on advice from officers who are not members of a recognized profession. In this case, the reliance by the board on the advice of the VP of finance, who had a degree in commerce and 15 years experience but was not an accountant, was found not to fit within this provision. This was because the VP was not a member of a regulated profession and did not have independent insurance against professional negligence. So, the directors were found to have complied with their duty of care. Even if reliance does not fall within the categories enumerated in the statute, where reliance on others is reasonable in the circumstances, it may be permitted.

Important: No provision in a contract, the articles, the by-laws, or a resolution relieves a director or officer from the statutory duty of care from liability for breaching it (CBCA, s.122(3)).

The substance of the duty of care

Must be gleaned from the case-law. In contrast to the common law standard, the statutory formulation of the duty imposes a minimum standard of competence. Directors must have at least a rudimentary understanding of the business (Francis v. United Jersey Bank). If they don’t have this then they should acquire it or resign. This requirement is often not appreciated in practice. Many board have a number of passive or “dummy” directors who take no interest in the


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affairs of the corporation. The statute is clear that being a nominee does not relieve a director from observing the standard of care.

Monitoring:

In addition to some level of competence, some monitoring of the corporation is required by the duty of care. A director must keep himself informed about the business and affairs of the corporation and attend board meetings regularly.

Financial Affairs:

It is not necessary for directors to audit the financial records; the corporation pays the auditor to do that. Directors must maintain some general familiarity with the financial status of the corporation through regular review of its financial statements. The nature and scope of the review will depend on the corporation and the business. Directors may rely on statements represented to them but if they show some problem, they have a duty to enquire about the problem and in some cases take further action.

Francis v. United Jersey Bank, [1981]

Duty to review the financial statements and see the loans, and also to enquire about any problems in financial statements.

Facts: the financial statements disclosed ballooning loans to her sons that led to the insolvency of the corporation.

Held: Director was found to have breached her duty of care where she paid no attention to a problem appearing clearly on the face of the corporation’s balance sheet. She had a duty to review the financial statements and that if she had she would have seen the loans. On becoming aware of the loans she had a duty to enquire about them and, if they were improper, as they were, to demand that the impropriety be addressed. The court also said that if not action was taken by the wrongdoers; the director may have a duty to resign.

In the above case the court also indicated that there are situations in which it is not enough simply to object and if no adequate response is made, to resign. In some cases the director’s duty will require her to take some further positive action, such as attempting to initiate legal action on the corporation’s behalf to remedy some wrong doing.

What will be expected of a director will be determined, in part, by what strategy would have a reasonable likelihood of success in remedying the breach . thus, there is a breach of duty only where the director’s failure to act where the director’s failure to act was a contributing cause of the injury to the corporation (e.g. failing to seek advice of independent legal counsel to understand the nature of their obligations in particular situations).

UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc., http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:43 PM

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Example of failure to meet the duty of care.

Facts: the board approved a very rich and complex compensation package for Berg, who was a director, the chair of the board, and a major shareholder, the board acted on a recommendation of the Compensation Committee, which was composed of members of the board.

The committee:

Failed to oversee the compensation consultant that the board retained and to ensure that the advice received from the consultant was based on adequate information and was reliable;

Failed to take reasonable steps to inform itself regarding the package before recommending it to the board, including failing to have regard to the report of the consultation consultant or the prior deliberations of the previous Compensation Committee that had expressed serious concerns about the package;

Allowed the other directors to rely on the compensation committee having done a full review of the compensation package when it had failed to do so;

the directors failed to give adequate consideration of the consultant’s report;

Held: the members of the committee, who decided to recommend the package after a 5-7 minute meeting, had not fulfilled their duty of care because it did not have or seek sufficient information to provide the basis for a reasonable judgement. The other directors were also in breach of their duty because they failed to give adequate consideration to the consultant’s report, which raised a number of questions regarding the package. Most had not considered it at all, or the terms of the package itself, which gave Berg compensation that was excessive in relation to the assets of the corporation.

While the duty of care imposes an objective standard, the reference in the statutory formulation to a person “in comparable circumstances” means that the duty retains a kind of subjective or contextual element (Peoples Department Stores)

Subjective Dimension:

means that managers must diligently and carefully apply whatever skills and experience they possess. If a person has significant knowledge, skills or experience, it will result in a higher standard of care being required (Re Standard Trustco Ltd.) Also the standard of care will vary, depending on a person’s position (e.g. auditors of public corporations have a high standard of care. The same is true for officers since they are considered inside or executive directors, as compared to directors who are not part of the management team, often called outside or non-executive directors, because of the greater information that inside directors have access to (Soper).

Has the subjective standard been “objectified?”—Yes!!!!!

No Delegation of Duty of Care Allowed! http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:43 PM

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The Business Judgement Rule

BCE: Where an alleged breach of the duty of care relates to business decisions rather than failing to detect and address wrong doing, the courts have been reluctant to second guess management. This reluctance comes from a variety of sources. The most common is: the court’s lack of business expertise; the courts do not want to set the standard so high as to inhibit people from doing their jobs as

a result of increased personal liability or to discourage people from becoming directors at all; the courts are conscious of trying to avoid what is sometimes referred to as “hindsight bias”

whereby the courts review a decision after the fact when its wisdom may be assessed in light of what has actually occurred.

In Canada, the courts did not explicitly adopt a business judgement rule until the late 1990s. The American version of the rule provides that business decisions are presumed not to be a breach of duty in the absence of fraud, illegality, bad faith, or a conflict of interest is shown, then the rule does not apply. Here the precise content of the rule is not well developed but it does not appear to follow the United States’ model. Instead, the rule here requires courts to: defer to the business judgement of the directors where certain preconditions are met (though

who bears the onus of demonstrating these preconditions is not clear).

In general terms, the rule requires that the court defer to the business judgement of the directors where it has been exercised honestly, prudently, in good faith and on reasonable grounds before it is entitled to the deference required by the business judgement rule. Courts have required that the process for making the decision be reasonable in the circumstances. The actions of directors are to be judged not against the perfect vision of hindsight but against the facts as they existed at the time the decision was made. They are not required to make perfect decision but they must make a reasonable decision in the circumstances. So long as directors have chosen a strategy that is within the range of reasonable alternatives, the business judgement rule applies. Courts should not substitute their own judgement regarding the best business strategy for that of the directors.

UPM-Kymmene Corp: the court refused to apply the business judgement rule because the deference required only applies where the board has “been scrupulous in its deliberations and demonstrated diligence in arriving at decisions.” Neither the compensation committee not the board as a whole had done so. Even though the board was entitled to assume that the committee had done a careful job, which it had not, it is still required to make an informed decision on a reasonable basis, which it failed to do (UPM).

Indemnification is allowed:

Unlike breaches of fiduciary duty, the corporation can indemnify the officers or directors for breaches of the duty of care


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Why? this is an important practical protection for managers, and often corporations provide a committee to indemnify to the maximum extent permitted by the applicable corporate statute in their by-laws. Potential reputational damage resulting from a successful duty of care lawsuit may provide a incentive for directors to comply with their duty of care, even if they need not worry about the financial consequences because of such an indemnification provision.

Brant Investments Ltd. v. KeepRite Inc., [1991]

Application of the business judgement rule.

Facts: This case involved a derivative action by minority shareholders for losses suffered by it as a result of its parent’s actions. They attack the role of the independent committee on the basis that it was not independent and that the advice given by the committee to the directors of Keeprite was not in the best interests of the company and shareholders. The committee indicated that it would not endorse the merger unless the price paid to the public shareholders was increased. It presented a report and proposed a business plan reflecting the consensus view of the senior management of the two companies. The full board approved the transaction on the basis of the changes recommended by the committee. A group of minority shareholders sued, claiming that the transaction was oppressive to the interests of the minority shareholders.

Held: The court held that the committee carried out its function in an appropriate and independent manner. Business decisions, honestly made, should not be subjected to microscopic examination. There should be no interference simply because a decision is unpopular with the minority. The court ought not to usurp the function of the board of directors in managing the company, not should it eliminate or supplant the legitimate exercise of control by the majority. That doesn’t mean that the court should substitute its own business judgement for that of managers, directors or a committee. The TJ did not say that business decisions honestly made should not be subjected to examination. What he said was that they should not be subjected to “microscopic examination.”


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28. Managers’ Statutory Duties and Oppression

Casebook 341-342VanDuzer 384-389CBCA 118, 119, 122(2), 239, 242OBCA 130,131, 246, 249

Personal Liability for directors and officers of corps for:

Employee Wages: directors are jointly and severally liable for up to 6 months of unpaid wages.(s.119(1)). Employees must sue the corporation first and not get enough before going afterdirectors. Must be brought w/in 2 years of directors ceasing to be a director.

Capital Impairment Test not met [s. 118 of CBCA]Payments where solvency and capital impairment test not met Purchase or redemption of shares (ss. 30, 31, 32) Dividend (s. 38) Payments to dissenters (s. 185)

Due Diligence Defence: unique to the CBCA! S.123(4). If director shoes care diligence and skillof a reasonably prudent person in comparable circumstances(ie, non-negligent).

Directors and officers are subject to a wide range of additional duties under corporate statutes and an increasing number of regulatory laws. Some argue that the burden of these statutory duties is so great that they are interfering with the governance of corporations. They argue that the risk of liability discourages people from becoming directors and encourages them to resign in risky situations such as insolvency.

Two negative effects: They represent strong disincentives for director to agree that the corporation should embark

on activities presenting liability risks, no matter how much doing so may be beneficial to its business; and

They encourage directors to become over-involved in the day-to-day operations of the business in order to try and manage their risk.

Unpaid Wages

Directors are liable to employees for up to six months’ unpaid wages if the corporation is either bankrupt or in liquidation proceedings, or the corporation has been successfully sued for the debt and the judgement has been unpaid :(CBCA s.119, OBCA, s.131)

Test: Directors are not liable unless the lawsuit by the employee against the corporation was commenced not more than 6 months after the earliest of:

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The commencement of liquidation and dissolution proceedings; or The bankruptcy of the corporation.

CBC, s.119: A director’s responsibility ceases two years after he ceases to be a director (CBCA, s.119 (3)). If a director is required to pay, he comes entitled to enforce the rights of the employee against the corporation to the extent of the payment and is entitled to contribution from the other directors (CBCA, s.119 (5) & (6)). The Supreme court of Canada has held that liability does not extend to an unsatisfied judgement for wrongful dismissal or other severance or termination payments (Barrette v. Crabtree Estate (1993).

CBCA, s.118: Directors are also personally liable under in the following various circumstances. They are liable if they vote for or consent to a resolution authorizing the following:

purchase or redemption or other acquisition of shares contrary to sections 34, 35, or 36; payment of a dividend contrary to section 42; payment to a shareholder exercising its rights under s. 190 to require the corporation to

purchase its shares for fair value when the shareholder dissents from certain fundamental changes approved by shareholders contrary to section 190 (26);

or a payment to a shareholder for the shareholder for the shareholder’s shares pursuant to a court order made to grant relief from oppression that is contrary to s.241(6);

paying an unreasonable commission on the issuance of shares contrary to section 41; or paying an indemnity where doing so is not permitted under section 124 (CBCA, s.118(2)(a)

(b)(c)(d)(e)).

Each of these provisions prohibits the making of the payment referred to where there are reasonable grounds for believing that either the solvency or capital impairment tests would be breached the solvency test requires that the corporation must be able to pay its liabilities as they become due, capital impairment test requires that the realizable value of its assets must not be less than its liabilities plus its stated capital for all classes of shares.

In each case below there must be reasonable grounds to believe that the indicated version of the capital impairment test is met:

Purchase of shares under section 34 and the payment of dividends under section 42—the realizable value of the assets of the corporation must be at least equal to its liabilities plus its stated capital for all classes of shares (CBCA, s.34(2) and 42).

Exceptional purchases of shares under section 35, such as to eliminate fractional shares or to settle a debt of the corporation—the realizable value of the assets of the corporation must be at least equal to its liabilities plus the amount required to be paid on a redemption or in a liquidation to all holders of shares that have a right to be paid before the holders of shares to be purchased or acquired (CBCA, s.35(3)).

Redemptions of shares under section 36—the realizable value of the assets of the corporation must be at least equal to its liabilities plus the amount required to be paid on the redemption or in liquidation to all holders of the shares to be purchased or acquired (CBCA, s.36(2)).


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Payments to be made to a shareholder upon the exercise of dissent rights or grant relief from oppression—the realizable value of the assets of the corporation must be at least equal to its liabilities. (CBCA, s.190(26) and 241(6)).

In each case, the directors are responsible for repaying the corporation any amounts paid out where these requirements are not met. Each director who has satisfied a judgement under any of these provisions is entitled to contribution from other directors who were liable and has a right to seek a court order compelling the recipient to pay any money received to the director (CBCA, s.118(4) and (5)).

Directors are liable under the CBCA if they vote for or consent to a resolution authorizing the issuance of shares in return for property that is less than the fair equivalent of money the corporation could have received if the shares were issued for money. Where directors are liable they must compensate the corporation to the extent of the shortfall (CBCA, s.118 (1)). Each director is entitled to contribution form the others. Directors are excused if they did not know and could not reasonably have known that the share was issued in return for inadequate consideration (CBCA, s.118(6)). E.g. if the directors relied on an expert valuation that turned out to be wrong.

2001 Amendments Due Diligence Defence

The 2001 Amendments added this sort of excuse, sometimes referred to as “due diligence defence” in relation to liability under s.118 and 119. This defence is also available in relation to alleged breaches of the duty to comply with the act, the regulations and articles, the by-laws, and any unanimous shareholder agreement under s. 122(2). In general, the defence requires directors to do what is reasonable in the circumstances to prevent the offence from occurring.

A director is not liable if she exercised the care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances, including reliance in good faith on:

financial statements of the corporation represented to the director by an officer of the corporation or in a written report of the auditor of the corporation fairly to reflect the financial condition of the corporation; or

a report of a person whose profession lends credibility to a statement made by the professional person (CBCA, s.123(4)).

The circumstances relevant to determining what is reasonable are similar to those relevant to determining the scope of the duty of care. Ontario recently adopted a due diligence defence available in relation to the same liabilities as the CBCA—other than liability for employee wages –but which allows reliance by a director on the following additional categories of information:

an interim or other financial report of the corporation represented to her by an officer of the corporation to represent fairly the financial position of the corporation in accordance with generally accepted accounting principles; and


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a report or advice of an officer or employee of the corporation, where it is reasonable in the circumstances to rely on the report or advice (OBCA, s.135(4)(b)(c)).

Why? By expressly allowing reliance on non-officer employees, the Ontario legislature appears to have intended to expand the scope of permitted reliance beyond what was allowed in the Peoples Department Stores case.

Peoples Department Stores: interpreted the CBCA provision as limited to reliance on a person who is a member of a profession. For some reason, the new Ontario provision does not apply to provide a defence to the alleged breaches of the duty of care and the fiduciary duty.

Director’s Duties and Reliance on Others

OBCA s.135(4): Specific due diligence

Specific due diligence defence to liability under: s.130 (specific actions e.g. dividends when

insolvent) s.134(2) (comply with OBCA) including good faith reliance on

i) financial statements and interim financial reports;

ii) report of person whose profession lends credibility;

iii) report of officer or employee where reasonable

(Broader than CBCA)

CBCA s.123(4): General due diligence

General due diligence defence to liability under: s.118* (specific actions e.g. Dividends when

insolvent); s.119 (employee wages); s.122(2) (comply with CBCA); including good faith reliance on

i) financial statements; ii) report of person whose profession lends

credibility.

CBCA s.123(5) (omitted from OBCA)Defence to liability under s.122(1) (fiduciary duty and duty of care) if good faith reliance on financial statements; report of person whose profession lends credibility

*there is no equivalent provision in the OBCA

Employee wages (s.131)Under s.130: Payments where solvency and capital impairment test not metPurchase or redemption of shares (30-32)Dividend (38)Payments to dissenters (185)Unreasonable commissions (37)Improper indemnity (136)Oppressive payments (248)Issuance of shares for under value (23)Under the CBCA there is a due diligence defence, not under the OBCA


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29. Liability of Directors and Officers for Torts


Intentional Torts/Fraud

In general, management is not responsible for a corporations torts simply by virtue of their positions in the corporation. However, where management commits torts in the course of their employment, they are personally responsible, just as they would be if they were not acting in the course of their employment e.g. the manager who negligently drives a forklift into a customer’s truck may be personally liable in negligence.

Where people are acting outside the scope of their authority from the corporation, it does not do violence to the separateness of the corporation’s existence to hold them liable. By contrast, imposing tort liability on individuals when they are acting on behalf of the corporation can be argued to be inconsistent with the separateness of the corporate personality.

Why? where people acitng in the business are also the shareholders, holding them liable threatens limited liability.

Tension: between the tort principle that each person should be responsible for her own wrongs, and the principle of the separate personality. When management is acting on behalf of the corporation, and they are held personally responsible, it can be argued as inconsistent with separate corporate personality (conflict between tort and corporate law-courts inconsistent on how they reconcile this).

In general, whether a director or officer or employee is responsible for tortuous acts depends on the degree and kind of his personal involvement. Where she has performed, ordered, procured, counselled, aided or abetted the action consulting the tort, he is likely to be found liable. It is not a defence to argue that the tort was committed for the benefit of the corporation or within the course of his duties.

Where a person has only general management responsibilities in the area of operations in which the tort was committed, but no knowledge or involvement in the actions constituting the tort, she is unlikely to be found liable (Evans and Sons).


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Test for Liability for Torts

Board is not liable for corporation’s torts simply by virtue of their positions with the corporation. At the time where managers commit torts in the course of their employment, they are personally responsible, just as they would be if they were not acting in the course of their employment.

Scotia Macleod Inc. v. Peoples Jewellers Inc., [1995]

Test for tortious liability

The Ontario court of appeal suggested a test for liability that provide greater protection to directors and officers acting within the scope of their employment or authority and that gives greater deference to the separateness of the corporation.

Held: court held that for a claim against directors or officers to succeed, it is necessary to allege that they had committed tortuous behaviour outside their formal decision making roles in the corporation. The court identified usual categories of torts giving rise to personal liability as:

Fraud Deceit Dishonesty Or want of authority engaged in behaviour for personal gain

It added: “absent allegations which fit within the categories described above officers or employees of limited companies are protected from personal liability unless it can be shown that their actions are themselves tortuous or exhibit a separate identity or interest from that of the company so as to make the act or conduct complained of their own.”

ADGA Systems International Ltd. v. Valcom Ltd (RAID)

The same court offered clarification to the test in Scotia Macleod Inc. v. Peoples Jewellers.

The requirement that the actions of corporate managers have a “separate identity” from the corporation did not mean that corporate managers could not be held liable for torts when acting in the course of their duties.

Fcats: Both corporations were bidding for a contract with Corrections Canada to supply support and maintenance services for security systems. In order to tender, a bidder had to have at least 25 qualified technicians. ADGA, an experienced contractor, had 45 technicians. Valcom had none. The individual defendants induced 44 of ADGA’s technicians to leave ADGA and join Valcom.


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Held: that two senior employees and the sole director of Valcom were personally liable for inducing breach of contract on the grounds that they raided the staff of Valcom’s competitor ADGA. The court recognized that the defendants were acting in pursuit of the corporations interests, but held that this did not shield them from liability.

It is not a defence to say that the tort was committed to the benefit of the corporation. Good example of a tort that is not an automatic tortious in itself (inducing breach of contract). Managers argued that they were acting in the best interests of the corporation and thus under test in Peoples Jewellers, weren’t personally liable. Court said this wasn’t a defence.

The courts must proceed on a principled basis to establish a framework for further development which recognizes the new realities but preserves the fundamental purpose served by that area of law. Salomon v Salomon—established that a company has a separate legal personality. But that from time to time, litigants have sought to life the corporate veil by seeking to make principals of the corporation liable for the obligations of the corporation.

The consistent line of authority in Canada holds simply that in all events officer, directors and employees of corporations are responsible for their tortious conduct even though that conduct was directed at a bona fide manner to the best interests of the company, always subject to the Said v Butt exception (bona fide). They will be held liable for tortuous conduct causing physical injury, property damage, or a nuisance even when their actions are pursuant to their duties to the corporation.

Generally, personal liability depends on the degree of involvement. A manager will be liable if while acting on behalf of the corporation he performs orders or procures the tort but likely not liable if no knowledge or involvement. According to the Ontario Court of Appeal, intentional torts like fraud appear straightforward.

Policy: holding someone liable for serious intentional torts outweighs concerns about the sanctity of the separate corporate person. The serious and wrongful nature of the intentional behaviour by the manager which constitutes the tort excludes it from being merely an act which can be said to be in the ordinary course of fulfilling one’s duty to the corporation especially where the manager has engaged in the behaviour for personal gain.

Why? the scope of personal liability for torts is an issue that has been repeatedly litigated since the 1990s. the caselaw is moving towards a standard of liability based more on the degree and kinds of their personal involvement in the tort.


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Negligence/Civil Liability

Also depends on degree and kind of personal involvement. Question: does manager have duty to victim? Will be liable if: (Berger-slipped and fell outside ice in workplace-sued President] had responsibility in area in which tort occurred, were aware of danger could have removed and did not

Berger v. Willowdale A.M.C., [1983]

Liability depends on a variety of factors: the size of the corporation, the number of employees, the nature of the business, and whether the danger should have been readily apparent in the manager.

Facts: an employee slipped on the sidewalk while leaving work after a snowstorm. She sued the president personally for liability in negligence and breach of his personal duty. The Workers Compensation Act barred her from suing her employer in tort; she had to rely on compensation scheme in the Act. Because this was not possible, she sued the president personally.

Held: the court found that the sidewalk had not been cleared adequately and that the president had a general responsibility to ensure that the workplace was safe, a responsibility he had failed to discharge. He was in a position to know about the danger and remove it and failed to do so. Thus, he was liable in negligence.

The court held that a personal duty would not arise in every case but would depend on a variety of factors (listed above). One could also argue that this is a classic case of occupiers liability that a person in control of property has a duty of care to people who came onto the property to ensure that they are protected. The significane of the case is that it holds that the person in control of the property is not excused just because he is the president of a corporation that happens to own he property.

With respect to negligence, Welling has suggested that the liability for negligence should be imposed only where the alleged tortfeasor has a duty towards the plaintiff arising out of a relationship to her, not simply by virtue of the corporation having a duty arising out of its relationship to the plaintiff and the tortuous actions occurring in general area of responsibility.

A number of cases have held that employees may be held liable for negligence actions in the course of their employment:


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London Drugs Ltd. v. Kuehne & Nagel International Ltd., [1992]

The leading case on employee liability for negligence

Facts: Two employees were found to have negligently damaged some property belonging to a customer of their corporate employer while moving the property in the course of their employment.

Held: SCC held that they had a personal duty to the corporation’s customer because damage to the customers property was a foreseeable consequence of their failing to take requisite care. Ultimately the employees escaped liability, but only based on an exclusion of liability clause in the employers contract with the plaintiff. The conclusion of the court on the issue of negligence may be justified on the basis of the degree and nature of the employees’ involvement in the activity giving rise to the damage.


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Negligent Misstatement/Civil Liability

NBD Bank, Canada v. Dofasco.,[1997]

Oral and written misrepresentation.

Facts: VP of finance of Algoma Steel made oral and written misrepresentations to the NBD Bank regarding Algoma’s financial health and security for the bank’s loan. The bank advanced additional funds on the basis of the misrepresentation

Held: the officer was liable for the losses the bank sustained. While the officer was acting only in his role as an officer, the direct relationship between the officer and the bank was sufficient to give rise to a personal duty for the officer.

Williams v. Natural Life Health Foods Ltd., [1998] UKHL

Personal liability for negligence will attach only where there is reason to conclude that the victim reasonably relied on an individual undertaking that the individual would be personally liable

Facts: claim that an individual acting for a franchisor had negligently given inaccurate advice regarding the likely financial returns on a franchise business, inducing the plaintiffs to enter into a franchise agreement. The franchise never made any money and the plaintiffs sued.

Held: The standard is higher than the threshold for personal liability currently being applied in Canada in cases like NDB Bank. There was no reliance in this case. Unlike negligence there is no defence in an action for fraud to characterize it as being committed on behalf of the corporation.

Standard Chartered Bank v. Pakistan national Shipping Corp, [2003]

A case involving fraud by a director of a corporation,

HL held the director personally liable.


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Inducing Breach of Contract/Civil Liability

General Rule

This tort of inducing breach of contract has presented special problems. It is committed when a person, knowing that there is a contract between the plaintiff and third party, induces the third party, without justification to break the contract, with the intention of procuring the breach of contract (Quinn v. Leathem).

Why? Where the third party is the corporation that the managers work for, this principle has the potential virtually to eliminate the separate legal personality of the corporation. Every time the corporation breached a contract, the innocent party would have an action for breach of contract against the corporation and a claim in tort against the corporate officer or employee who authorized the corporation to breach. This would result in a double windfall for the innocent party which it had not contracted for.

Exception to this general rule was described in Said v Butt:

“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”

In McFadden v 481782 Ontario Ltd., [1984]

That the effect of this exception was to excuse directors and officers if they were acting “under the compulsion of a duty to the corporation”

Facts: two directors authorized payments to themselves as shareholders that put the corporation in a position where it could not fulfil its contractual obligations to an employee. The employee successfully sued the directors on the basis that they induced the corporation to breach its contract with him.

Held: the directors could not fall within the Said v Butt exception since they were acting with a view to their own interest and not those of the corporation, and so could not be said to be acting under the compulsion of a duty to the corporation. As long as they were bona fide.

Aiken v. Regency Homes Inc., [1991]

Directors and officers of a corporation will be held liable for inducing breach of contract to which the corporation is a party where they act outside the scope of their authority.


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Facts: two individuals carrying on business through a corporation liable for inducing the corporation to breach its contractual commitments to the plaintiff to build a house, in part by directing corporate funds to pay their personal expenses.

Held: their actions were “mala fides and outside the legitimate scope of their authority over the affairs of the corporation.”

Compulsion of Duty Defence:

Recently, the court did allow managers and employees of a parent corporation to rely on the compulsion of duty defence in connection with their participation in a breach of contract not by the parent but by the parent’s subsidiary. The court held that they could rely on the defence so long as they were acting bona fide in the best interests of the subsidiary.

The Ontario Court of Appeal (OCA) in ADGA made it clear that the compulsion of duty defence is available only where the contract that is breached is one to which the corporation for which the managers work is a party.It can never be available where the contract is between two third parties. In ADGA the officers of Valcom were alleged to have induced the breach of the contracts between ADGA and its employees, sothe defence was not available.

Said v Butt Applies Said v Butt Does Not Apply (ADGA)

Corporation – Manager Corporation – Manager | | || | || Interference

Contract| Contract| Third Party Employer --------------

Employees Third Party

Compulsion of duty defence has been held not to be applicable in the context of other torts, including deceit, and negligent misstatement.

Toronto Dominion Bank v. Leigh Instruments Ltd. (trustee of)., [1991]

Said v Butt did not apply in this case. The compulsion of duty defence will not be available where, in addition to breaching a contractual obligation, the individual breaches a fiduciary or other equitable obligation to the innocent party to the contract.

Facts: the court refused to strike out a claim against certain directors and officers of a corporation alleging they had fraudulently given false information to the bank to encourage it to grant the corporation more credit.


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Held: it is no excuse that the defendants were obeying the orders of the employer or that the act was expressly authorized or ratified by the corporation.

Inducing Breach of Contract:

When a person knows there is a K and induces the 3rd party,without justification, to break it, with the intention of procuring the breach.

- Defence: Compulsion of duty-where the management is acting under compulsion of a duty tothe corporation(Said v. Butt).

Limited in ADGA to only where the K that is breached is one that the corporation thatthe managers work for is a party.

Does not apply to other torts (TD Bank) or when K is between P and 3rd party.


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G. SHAREHOLDERS’ REMEDIES

30. Introduction


Free-Rider Problem

All shareholder-initiated litigation suffers from a free-rider program. The incentive of each shareholder is to lie in the grass hoping someone else will expend the time and expense and take the risk of suing.

The shareholder remedies are mechanisms provided in corporate statutes to ensure that shareholders receive the benefit of those entitlements. They are important for shareholders because, unlike some other corporate stakeholders, such as creditors, shareholders do not have contractual rights against the corporation or its directors or officers. Shareholder remedies have a broader scope than contractual rights. They do not just protect legal rights; they can provide relief where shareholders’ economic and other interests have been affected or shareholders have been treated unfairly. Thus, shareholder remedies complement other procedural protections for shareholders’ interests like their ability to vote for the election of director and to put matters on the agenda for discussion at shareholder meetings through shareholder proposals.

Procedures Available to Shareholders

Two main procedures through which a shareholder may assert a claim for relief are:

Derivative action, under which a shareholder may seek the court’s permission to initiate a lawsuit on behalf of the corporation; and

Oppression action, which allows shareholders to seek relief where actions of the corporation or its directors oppress the shareholders’ interests.

In addition to these rights, there are some corporate law rights that belong to shareholders personally. These maybe enforced by a shareholder through an ordinary civil suit. Before the CBCA, shareholder remedies were limited. The derivative action and personal action were subject to certain restrictions, and there was no oppression remedy available in most Canadian jurisdictions. The oppression remedy was first introduced in Canada in 1960 in the BC Companies Act. It was interpreted narrowly until it was amended to add “unfair prejudice” to “oppression” as a ground for relief. The CBCA sets a broader standard, providing that an action of the corporation or its directors that is “oppressive or unfairly prejudicial to or that unfairly disregards” the interest protected under the statute entitle relief.


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Oppression remedy

is more than just a procedure for making a claim. It represents an emerging substantive standard of behaviour that complements and overlaps with the duties imposed on directors and officers. Increasingly, it is the operative measure against which al corporate activities must be judged. This is partly due to the procedural advantages of bringing an oppression claim. The oppression remedy provides a new, more expeditious procedure for defending rights the denial of which would have been actionable at common law. Thus, it has the characteristics of both a right and a remedy.

One of the major objectives of the CBCA was to provide greater access to more effective remedies for minority shareholders. The major limitation on a personal action to enforce such rights is that the most important legal constraints on directors and officers, the fiduciary duty and the duty of care, are obligations owed to the corporation, rather than directly to the shareholder. Under the CBCA, the shareholders may commence a derivative action for any injury to the corporation with leave of a court (s.239) and ratification by shareholders is no longer a bar.

Remedies are the means for ensuring that shareholders are given the rights to which they are entitled such as the right to vote her shares

Personal action:

May be commenced where a shareholder or shareholders have some grievance that is peculiar to herself or themselves, and not shared equally by all other shareholders. In such an action, the remedy would issue in favour of the shareholder(s).


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31. Personal Actions by Shareholders (Grievance Particular to one person)

Casebook 885-892, 897-903VanDuzer404-406

Almost never used!

Personal Actions:

involve the action of the directors or of officers responsible to the directors. “The company cannot sue for my injury, it can only sue for its own.” Once leave is obtained, personal and derivative claims may be joined.” Minority shareholder must demonstrate the injury to him was somehow different from that suffered by other minority shareholders. Where there has been “an oppressive and unjust exercise of powers of the majority shareholders for the promotion of an advantage to themselves to the particular detriment of the minority. Majority must act fairly.

Personal claims arise on the basis of:

interference by the company with the rights of shareholders; varying or abrogating class rights; depriving a member of some right conferred upon him by the articles or by-laws; altering the internal corporate structure in a manner that amounts to fraud on the minority; depriving a member/group of shareholders of her right to vote; primarily affect the shareholder (issue shares, make calls, refuse transfers, solicit proxies) directors assume a fiduciary obligation toward the company as whole, that is to the

shareholders as a general body, to act with an even hand and in good faith, if they breach that duty the shareholders may sue in their individual capacitates for a declaration of their rights or restrain the company from acting;

breaches of the proxy solicitation legislation in Canada give rise to personal action. They are accompanied by information circular that must accompany it. Attempt to provide fuller corporate disclosure on a continuing, consistent basis—notice in the modern form [if the statutory provisions have not been complied with, or if the material is inadequate or misleading, a shareholder has a personal right to sue for a declaration that the meeting and all acts are done at it are void

This is because you must respect the separate existence of the corporation. Owning a share carries with it certain rights that are personal to the holder of the shares, such as:

the right to vote; the right to timely and informative notice of meetings; and the right to inspect the books and records of the corporation.

These personal rights may derive from the governing corporate statute, the articles and by-laws of the corporation, the common law, or a shareholders’ agreement includinghttp://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:43 PM

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Limitation: the most important legal constraints on managers, the fiduciary duty and the duty of care, are not obligations owed to and enforceable directly by shareholders. Consequently, breaches of these duties cannot be the basis of a personal action by a shareholder.

Historically, in order to properly plead its claim, a shareholder had to characterize the claim correctly as either personal, for which it could sue directly, or derivative, which required leave of the court.

General Test/Not Merely Incidental

Developed by the courts to ascertain whether misconduct was a breach of a personal obligation to shareholders or an obligation to the corporation was to:

Ask if the injury to the shareholders was merely incidental to an injury to the corporation. So long as the injury did not occur only because the corporation was injured, the claim was personal to the shareholder and the shareholder would be permitted to proceed.

Injury that is only incidental:

the diminution of value of a shareholder’s shares caused by the appropriation of a corporate asset by the directors in breach of the directors’ fiduciary duty. If a shareholder mixed up a derivative and personal claims in its statement of claim, the statement of claim would be struck out.

Difficulty: drawing a clear and satisfactory distinction between an injury to the shareholder and an injury to the corporation. As the holder of a residual claim to the assets of the corporation, the shareholders’ interests will be substantially affected by an injury to the corporation, as will the interests of many other stakeholders. The coincidence of shareholder and corporate interests is obvious where the shareholder holds all the shares in the corporation, but it will occur in almost every case.

Prior to the CBCA, it was essential to characterize a claim clearly as personal rather than merely incidental to an injury to the corporation if a shareholder was to be able to proceed without being forced to seek relief by a derivative action.

Difficulty: since most actions my managers that are injurious to shareholders could be characterized as a breach of fiduciary duty.

Is it not always contrary to the corporation’s best interests to send out an inadequate notice of a meeting? The courts have given a broad scope to what is considered a breach of directors’ duties to the corporation.

Hercules Management Ltd. v. Ernst & Young, [1997]


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It is not a basis of a personal action by shareholders to claim detrimental reliance on a negligent audit report.

Facts: negligently prepared audit report on which shareholders had relied to their detriment.

Held: Not a breach of an obligation owed to the shareholders individually. The duty of care with respect to the preparation of the audit report was owed by the auditors to the shareholders collectively, which the court equated with and obligation to the corporation. this kind of approach limits the ability of individual shareholders to use the personal action. The SCC held that negligently prepared audit report on which shareholders had relied to their detriment was not a breach an obligation owed to the shareholders individually.

The relief from oppression is to be available whether or not the claim is essentially personal or derivative, so long as the prescribed standard of behaviour has been violated. For this reason, almost all shareholder claims are now brought using the oppression remedy.

The primary purpose of the CBCA was to enhance the ability of shareholders to obtain relief because neither the derivative nor the personal action provided ready access to relief.

Smith v Fawcett: was a personal action by the executor of a deceased shareholder alleging that the directors were exercising their unrestricted power to refuse transfers in bad faith.

Cook v Deeks: where the acts are of a fraudulent character the minority can sue when the wrongdoers are in control.


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32. Derivative Action (on behalf of the corporation)

Casebook 861-867VanDuzer 406-412CBCA 238-40, 242OBCA 244-246, 248

Derivative Action:

where a corporation has been injured by some wrongdoing, a shareholder of the corporation arguably also has been injured through the diminution in value of her shares that is traceable to the corporate injury. The shareholder brings the action which derives from the corporation’s cause of action. This indirect or derivative action is in contrast to the personal or direct action whereby a shareholder enforces his own rights as distinct from those of the corporation.

Wrongs done to corporation, corporation is the victim; Applies where the people who make sure the corporation is sued are the defendants; A complainant can bring a derivative action, as defined in statute, CBCA s. 238, OBCA

s. 245. Usually shareholders but not always, can be CBCA Director and creditors; Is called derivative as person who is bringing the action derives their right to bring the

action from the corporation itself.

Foss v. Harbottle, [1843]

A corporation may only sue for an injury to it

The rule is based on the notion that because the corporation is a separate legal entity, only it should be able to sue for wrongs that it has suffered.

Why? if shareholders were allowed to take action for corporate wrongs it would create the possibility of multiple actions for the same wrong and consequently risk inconsistent results.

This case has been interpreted as saying that the shareholders could approve or ratify breaches of duty to the corporation and as a result it would be inappropriate interference with majority rule


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for courts to permit actions by minority shareholders where the action had been or could be ratified by the majority.

Importance of the court:

Derivative Action: is a wrong is done to the company under which the applicant needs permission (leave) to commence lawsuit. Leave of the court is required to commence an action, and the grounds on which leave may be granted lend themselves to a large degree of judicial discretion. Paramount role is given to the court!

Key Points to Consider:

The class of persons who may launch an action; Grounds for court approval to proceed and the role of the court; The treatment of costs; The range of orders and relief that may be granted by the court.

Derivative Action Test

The rule in Foss v. Harbottle. General rule that only a corporation may sue for an injury to it. Recognizes the separate legal personality of the corporation whereby the wrong alleged was a wrong to the company. The court will interfere if the conduct of the majority is oppressive.

There were only four situations in which a minority shareholder could sue for an injury to the corporation:

Fraud on the minority: This situation was sometimes referred to as oppression of the minority but common law oppression included a much narrower range of activities than oppression under the CBCA and other modern statutes. Essentially it was limited to situations in which management of the corporation was giving corporate assets away, typically to the majority shareholder. In such cases, the courts recognized the permitting majority rule in these circumstances would impose a hardship on the minority shareholder;

Ultra Vires Acts: In situations where the act complained of was outside the limited powers of the corporation or was illegal, the majority was not permitted to ratify it and minority shareholders could be permitted to sue on behalf of the corporation;

Defect in majority approval: In situations where the relevant corporate legislation or the

articles of the corporation required approval by a specified majority of shareholders, and approval at that level was not properly obtained, shareholders could sue on behalf of the corporation;

Personal right: In situations where the personal rights of shareholder were infringed, she could sue for relief. Such a suit is not an action on behalf of the corporation at all, but rather a situation to which the bar on derivative actions does not apply, and so is not really an exception to the general rule.


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Under the CBCA and other modern corporate statutes in Canada, the curative effect of ratification has been abolished (CBCA, s. 122 (3)). The courts may still take shareholder approval of actions by the directors into account in deciding whether to permit a shareholder to bring a derivative action, but its relevance will depend on the circumstances. Shareholder approval may be relevant, for example, where a significant majority of disinterested shareholders who have received appropriate disclosure regarding what the directors have done approve the directors’ actions and the action itself is not manifestly harmful to the corporation. On the other hand, a court would likely disregard an approval by a majority of action taken by that same shareholder in her capacity as a director or where the approval was improperly obtained (there is little Canadian case law on the issue of weight to give shareholder approval).

Standing: Low threshold

Court Approval:

The restrictive condition developed following Foss v. Harbottle have been replaced by a scheme allowing shareholders to proceed with derivative actions subject to court approval. Under the scheme approval will be given if 3 conditions are met:

The shareholder gives not less than 14 days’ notice of intent to the director of the corporation of her intention to apply for leave to bring an action if the directions do fail to do so;

The complainant is acting in good faith; and The action proposed to be initiated by the shareholder appears to be in the interests of the

corporation (CBCA, s. 239, OBCA, 246)

Notice Requirement

The requirement for notice does not mean that a shareholder must specify all the legal bases on which a claim might be made, or the facts or evidence on which the shareholder relies. It is sufficient if the shareholder gives some general information disclosing the nature of the claim (Marc-Jay Investments).

Example a notice that refers to a sale of specific corporate assets at under value without specifying the legal basis of the claim is sufficient (Re Northwest Forest Products Ltd). Failure to give notice is not necessarily fatal to an application for leave if it is obvious that the directors will refuse to act (Winfield v. Daniel).

Good Faith Requirement

An application for leave will be considered to meet the “good faith” requirement so long as no bad faith is shown. If the application is shown to be frivolous or vexatious, it will not be granted.it does not matter that the prospective complainant has a personal interest in the outcome so long as that interest is consistent with the corporation’s interest. (Archibald v. Sutherland).


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Where an applicant a motivated by a potential tactical advantage to be gained by the corporation, the applicant will be found not to be acting in good faith (Vedova v. Garden House Inn Ltd)

Low Threshold of Merit

The requirement that the action “appears to be in the best interests of the corporation” represents a very low threshold of merit.Why? this is justified partly because minority shareholders are not often in a position ot obtain evidence to establish their case. The standard has been held to be less onerous than establishing a prima facie case (e.g. one that, in the absence of contradicting evidence, would be sufficient for the eventual lawsuit for breach of duty to be successful).

Leave should be denied only if it appears that the action is bound to be unsuccessful (Marc-Jay). Some recent cases have suggested that the standard is whether there is an “arguable case” (Archibald)

Claims that a corporate asset has been sold at under value (Bellman); That the directors were subject to a conflict of interest in relation to a particular transaction

they approved (Bellman); or That a mortgage should be found to be held in trust for the corporation (Walter E. Heller

Financial Corp) have all been held to be claims that appear to be in the best interests of the corporation.

Other Aspects of the Scheme:

CBCA: shareholder approval, or the possibility of future shareholder approval, is not determinative of whether a derivative action may proceed (CBCA, s.242(1)), thus eliminating the rule in Foss v Harbottle. As noted shareholder approval may still be taken into account by a court, however, in deciding if leave to commence a derivative action should be given.

Once an application is made, it cannot be stayed, discontinued, or settled without approval of the court (CBCA, s. 242 (2)).

Why? This rule was introduced to prevent “strike suits” where a shareholder brings a frivolous suit to extort a financial settlement form the corporation. the inability of a corporation to settle without court approval should discourage such suits. It may also prevent corporations from buying off a shareholder who has obtained leave of the court to commence an apparently meritorious action for the benefit of the corporation. The approach taken by the court will be to ask if the potential rewards of successful litigation, with its risks and costs are outweighed by the benefits of the proposed settlement (Sparling v. Southam).

contrary to the usual rules of civil procedure, a shareholder making an application for leave to commence a derivative action cannot be required to give security for the corporation’s costs.


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Why? Security for costs is often ordered against plaintiffs in ordinary civil actions on the basis of an application by the defendants. Under such an order, the plaintiff must post money or other security to cover any eventual award of costs by the court to favour the defendant. Such an award would usually be made if the defendant successfully defends against the plaintiff’s claim. The availability of orders to provide security for costs is intended to discourage frivolous lawsuits.

This exemption is intended to assist an impecunious shareholder to take actions in the corporation’s interest (CBCA, s.242 (3)).

Interim Costs

A court may award an impecunious shareholder interim costs to assist her pay counsel to proceed with an action, though she may be required to repay them if she is unsuccessful (CBCA, s. 242(4)). There is such judicial authority to suggest that such costs in derivative actions will be routinely awarded (Wilson v. Conley). Meanwhile other courts have been reluctant to order interim costs where there has been some doubt regarding the merits of the complainants claim.

Barry Estate v. Barry Estate, (2001): the court suggested that whether interim costs should be awarded depended on:

i) the strength of the complainant’s case;ii) whether, in the absence of an order, the complainant’s financial circumstances would

prevent the complainant from bringing the case; andiii) a “connection between the conduct complained of and the (complainant’s) financial ability.”

Complainant

Why? although most people likely to bring an application for leave to commence a derivative action are shareholders, the CBCA permits a much wider class of persons to do so. The CBCA permits applications for leave to be brought by a “complainant.”

Complainant—defined in s.238 as (a) a current or former registered holder or beneficial owner of a security of a corporation or any of its affiliates (b) current or former director or officer of a corporation (c) the director (d) anyone else who the court considers a proper person to make an application.

The CBCA permits applications for leave to be brought by a “complainant”, which is defined to mean:

A current or former registered or beneficial holder of securities of the corporation or any affiliated corporation;

A director or officer of the corporation or any of its affiliates; The director appointed under the CBCA; and http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:43 PM

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And any other person whom a court determines is a proper person to make an application ( CBCA, s 238).

Statutory derivative action in s.239 CBCA :

allows a complainant to apply to a court for leave to bring an action in the name and on behalf of a corporation or any of its subsidiaries for the purpose of prosecuting, defending, or discontinuing an action on behalf of the body corporate.

Notwithstanding the broad scope of the class of persons who potentially, can bring a derivative action, it has been used primarily by shareholders. None of the other identified kids of complainants have made a successful application to date. In several cases, a creditor has sought a court order recognizing it as a complainant, but few have succeeded. (Re Daon Development Corp (1984). A committee of trade creditors of a corporation were held to be a propeor person to be a complainant in Sammi Atlas Inc., Re (1997).

In its 2004 decision in Peoples Department Stores v. Wise, (2004) the SCC suggested that a creditor could be a proper person to bring a derivative action.

Why? the Court noted that where a corporation is prospering, a creditor’s interests as well as shareholders’ interests coincide with the corporation’s interest. But when a corporation approaches insolvency and the value of the shareholders’ residual claims approaches zero, the interests of creditors become more closely tied to the best interest of the corporation. in these circumstances, creditors , not shareholders, have a stake in preserving the assets of the corporation.

Based on these observations ythe Court suggested that courts should exercise their discretion to grant creditors standing to bring a derivative action for breach of fiduciary duty more readily in these circumstances (Peoples Department Stores) it remains to be seen if the court will follow this suggestion.

Once a court has given permission for a complainant to bring a derivative action, the CBCA gives the court an unlimited remedial discretion with respect to the conduct of the action (CBCA, s. 240).

A complainant also defines the class of persons who may seek relief when utilizing the oppression remedy. Unlike derivative action cases, there have been many oppression remedy cases in which non-shareholder complainants, including the CBCA Director and creditors, have sought and obtained relief.


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33. Oppression

Casebook 909-935, 948-958VanDuzer 412-451CBCA 239-242OBCA 246-249

General Rule

Shortly after the oppression remedy was introduced as part of the new CBCA in 1975, Staley Beck described it in the following terms:

“…beyond question, the broadest, most comprehensive and most open-ended shareholder remedy in the common law word…unprecedented in its scope.”

Since the enactment of the CBCA, the accumulated judicial decisions addressing the oppression remedy have shown the accuracy of Beck’s appraisal. The oppression remedy has expanded significantly what conduct by a corporation, its affiliates and their directors gives rise to an oppression claim and what remedies may be sought. Traditional remedies such as the derivative action have been displaced by the flexible and procedurally simple oppression action.

Biggest corporate law remedy in Canada; Is an equity type remedy, you don’t need to show violation of legal rights; Corporation is the wrongdoer, wrongs done to the complainant, more of personal action

than derivative; Three bases for this: unfair prejudice, unfair disregard, oppression; Unfair Prejudice Reasonable expectations (BCE).

The idea was to create a new shareholder remedy which would overcome the limitationsof the personal and derivative remedies: Designed to be one which could be pursued on an expeditious basis: just an application

(affidavit evidence) upon which the court will decide w/o any of the usual proceduralsteps (discovery etc).

The main intended beneficiaries of the oppression remedy were minority shareholders and the overwhelming majority of cases have been caught to shareholders, but the oppression remedy is not only available to shareholders. The CBCA/OBCA provide that other categories of corporate


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stakeholders may seek relief, and the courts have a discretion to allow anyone whom it thinks is a “proper person” to be a complainant for the purposes of bringing an oppression action.

The Statutory Scheme

The key provisions of the CBCA governing the oppression remedy are sections 238, 241, and 242. Section 238 defines “complainant” the class of persons entitled to apply for relief from oppression, and section 242 deals with interim costs and other procedural issues. The substantive standard for oppression is established by section 241:

241. (1) A complainant may apply to a court for an order under this section.

Grounds:(2) If, on an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates:

(a) any act or omission of the corporation or any of its affiliates effects a result;(b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner; or(c) the powers of the directors of the corporation or any of its affiliates are or have been exercised in a mannerthat is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer, the court may make an order to rectify the matters complained of.

Interim Costs

Just like derivative actions, a complainant seeking relief from oppression may apply for an award if interim costs.

Why? the approach of the courts to granting such awards has been more cautious than derivative actions, reflecting the fact that the complainant in an oppression case is typically seeking only relief for itself, rather than for the benefit of the corporation.

Section 242(4) CBCA: provides that in any application for relief from oppression:

“The court may at any time order the corporation or its subsidiary to pay to the complainant interim costs, including legal fees and disbursements, but the complainant may be held accountable for such interim costs on final disposition of the application or action.”

Wilson v. Conley

Oone of the first cases on interim costs.

Facts: the applicant was a minority shareholder of the respondent corporation who claimed to have been oppressed by the respondent shareholders as a result of:http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:43 PM

http://laws.justice.gc.ca/fra/C-44/page-11.html#codese:241-ss:_2_

http://laws.justice.gc.ca/fra/C-44/page-11.html#codese:241

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i) Excessive travel and similar expenses charged to the corporation by the respondents;ii) Excessive remuneration being paid to the respondents; and iii) A complete discontinuance of the past practice of paying regular dividends despite a

substantial increase in profits.

Held: Mr Justice Rosenberg set out the following as the considerations applicable to the motion:

The applicant is in financial difficulty;

The financial difficulty arises out of the alleged oppressive actions of the respondents, and The applicant has made out a strong prima facie case.

Based on the material before him, consisting only of the application and the applicant’s affidavit, he decided these requirements were met and directed the corporation to pay $20,000 in interim costs, even though the principal relief sought by the applicant was that the other shareholders buy her out and no relief was claimed against the corporation other than an order to cease making payments to the shareholder respondent. Rosenberg J also stated that he would have had some concern about ordering costs against the corporation except that there is “ not the usual danger that such advance will not be repaid if later my order is found to be inappropriate,” because the applicant’s shares appeared to be worth “many hundreds of thousands of dollars.”

Allen v. Maurice, [1992]

The interim costs provision was also considered in this case.

Facts: The applicant was a minority and complained of similar oppression—certain shareholders charging excessive bonuses and expenses to the corporation.

Held: Mr, Justice R.A. Blair considered the 3 requirements referred to in Wilson v. Conley.Regarding 1: he found that the applicant was in financial difficulty, having depleted her savings to pay legal fees in connection with pursuing her claim and being unable to pay legal fees in connection with pursuing her claim and being unable to pay significant outstanding fees.

Regarding 2: he disagreed that the financial situation was caused directly by oppression. In his view it would be sufficient if the financial difficulties resulted from the “great drain on her resources” due to her pursuit of the lawsuit. “there is nothing in the language of the statute or in its purpose which, to my mind, requires that the applicant demonstrate a cause and effect relationship between the conduct of the respondents and the need for funding.” Thus, there is no need for the applicant to demonstrate a cause and effect relationship between the conduct of the respondents and the need for funding.

Regarding 3: Mr . Justice Blair was of the view that showing a strong prima facie case, the test for an interlocutory was unduly onerous in his opinion. Rather the applicant need establish only that there is a case of sufficient merit to warrant pursuit. He was satisfied that this requirement


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was met on the facts before him and ordered interim costs in the amount of $55,000 to be paid to the applicant by the corporation.

This approach has been followed in later cases, though there is some uncertainty regarding the strength of the case that the complainant needs to show. In Peretta v. Telecaribe(1999), the burden was described as an “arguable case with a reasonable chance of success.” What is clear is that the difficulty of the complainant must be such that, but for an interim cost order, she would be unable to continue litigation.

Who may claim relief from oppression: the complainant?

Oppression is not just a “shareholder remedy.” It also includes creditors, employees, and even the corporation itself.

Why? Extending access to creditors and others, however, was not contemplated by the Dickerson Committee, which was responsible for drafting the new federal legislation and moreover, it challenges traditional corporate law notions about to whom corporate managers are responsible. Thus, the oppression remedy represent an important enhancement in the position of creditors and other non-shareholder stakeholders seeking relief from corporate conduct.

Unfortunately, most of the cases to date provide little in the way of guidance about the circumstances in which creditors and others will be permitted to claim relief from oppression. Nor has their been much discussion in the cases regarding how to reconcile granting complainant standing to people other than shareholders with traditional corporate theory or the intention of the drafters of the CBCA.

Statutory Complainants

Security Holder, Section 238(a)

First statutory category of complainant is defined as “registered holder or beneficial owner, ownership through trustee, legal representative, agent or other intermediary and a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates.” Some of the terms used in the definition are themselves defined in section 1(1) of the CBCA. “Beneficial ownership” is defined broadly to include:

Any trustee; Legal representative; Agent; or Other intermediary.

“Security” means a “share of any class or series of shares or a debt obligation of a corporation and includes a certificate evidencing such a share or debt obligation”

“Debt Obligation” is defined to mean:


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a bond; debenture; note or other evidence of indebtedness; or Guarantee of a corporation, whether secured or unsecured.”

Why? in drafting the CBCA, the Dickerson Committee did not set about to revolutionize corporate law by permitting creditors and others to seek relief from corporate behaviour directly as opposed to making their claims in contract and tort. Their concern was to protect minority shareholders, and the broad language used in section 242(2) to protect the specific interests of “any security holder, creditor, director or officer” was intended to ensure that shareholder interests were protected in whatever capacity they arose, acknowledging the complex, multi-faceted relationships that shareholders may have with the corporation, especially where it is closely held.

Jacob Zeigel: “it is obvious that the language of s,241(2) does not remotely reflect this limited intention.”

Minority Shareholders:

most oppression cases have been commenced by minority shareholders, and the courts have acknowledged that they have status as complainants under section 238(a) as security holders. The courts have given effect to the express reference to “affiliates” in section 238(a), holding in

Morairity v. Slater, [1989]

A minority shareholder of an affiliate of the corporation in respect of which oppression was alleged may be a complainant.

The ability to commence an action as a shareholder in an affiliate may be important, where a shareholder’s investment is in a holding corporation that owns all the shares of another corporation that carries on an operating business with respect to which the oppression occurs.

Former Shareholders:

The courts have confirmed that former shareholders are complainants within the meaning of section 238(a). for a former shareholder to be successful, the oppression must be occurring at the time the application for relief is brought (Michalak v. Biotech Electronics Ltd.)

Why? A person continues to have status as a complainant under section 238(a) even after the person has invoked her dissent and appraisal rights under section 190 of the CBCA, with the result by virtue of section 190(11), the person loses all rights as a shareholder other than the right to be paod fair value for her shares (Brant Investments Ltd).

Csak v. Aumon, [1990]

The meaning of “beneficial owner” should be interpreted broadly.http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:43 PM

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Facts: Applicants with a contractual claim to be issued shares—a claim that was being denied by the controlling shareholder of the corporation—were beneficial owners of securities of the corporation for the purposes of section 238(a).

Held: the CBCA is remedial legislation and contemplates a “large and …sweeping jurisdiction.” “Security” means more than being the holder of a certificate, and the remedial provisions of the CBCA which contemplate, on a finding of oppression , “an order directing an issue…of securities…” (CBCA, s.241(3)(d)).

It is not a bar to complainant status that the applicant’s claim to be a beneficial owner of shares is disputed. The court said that any issues of fact regarding the claim to be issued shares could be dealt with through a process called a “trial of an issue,” as part of the oppression proceeding and that requiring a party to establish its status in a separate proceeding before coming to court to seek relief from oppression would “multiply litigation to no good purpose.” The court can always use its discretion to grant standing to anyone it deems to be a proper person to be a complainant (CBCA,, s.238(c)),

Further point: even if a person with a contractual claim to be issued a share was entitled to complainant status as a “beneficial owner” of a security under section 238(a), such a person did not have an interest protected under section 241(2), since that section refers only to “security holder,” not beneficial owner. Mr. Justice Lane rejected this argument saying that if a person was entitled to complainant status under section 238(a) the persons interests were deserving of protection under section 241(2).

Majority Shareholders

there is nothing in section 238(a) that expressly precludes a majority shareholder form commencing an oppression action as a complainant since it is quite possible that a majority shareholder could be oppressed by the acts of the corporation (Hui v. Yamato Steakhouse Inc.) The only question is whether the shareholder was oppressed. The availability of the oppression remedy to non-minority shareholders has been recognized in many cases.

Holders of Debt Obligations

the definition of “security” in section 238(a) includes holders of debt obligations. The reference to “registered holders” in section 238(a) suggests a legislative intention to limit claims by debt holders to those holding registered obligations or obligations that are susceptible of registration, such as some bonds, and debentures, to the exclusion of other kinds of debt, such as trade debts, which are not registrable (Welling).

First Edmonton Place

Explains the circumstances in which a debt holder many be a complainant for the purposes of section 238(a), it was held to only holders of registrable obligations have status.


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Held: the court determined that an unpaid landlord was not a “security holder.” In some cases, debenture holders have been recognized as having standing as security holders (BCE). However, some holders of debt that is not registrable have been successful in getting courts to exercise their discretion under section 238(d) to permit them to make an application as a complainant.

Directors and Officers and the Director, Sections 238(b) and (c)

There have been few cases in which each of the other types of complainants expressly referred to in section 238 have sought relief from oppression. Several cases have addressed whether a claim by an officer or director that he was wrongfully dismissed may be the subject of an oppression proceeding. In these cases, the courts have expressed their reluctance to consider wrongful dismissal claims (Naneff).

Naneff v. Con-Crete Holdings Ltd., [1993] You can only protect the interests of a complainant in his capacity as a shareholder, director or officer-not as an employee.

Facts: the applicant was an employee, director, officer, and shareholder of a corporation carrying on a successful family business. His family tried to exclude him from participating in the corporation in all his capacities, not for any reason connected with the business of the corporation, but because the family disapproved of his personal life. They also cut off most of his income from the business. At trial the family’s conduct was deemed to be oppressive and ordered the business to be sold publicly. In this case the claimant asserted that the dismissal was part of an “overall pattern of oppression”, such that the oppression of the applicants interests as an employee were inextricably intertwined with the oppression of his interests in other capacities.

Held: the trial court held that, although “in normal circumstances, the wrongful dismissal of an employee would not of itself provide the basis or standing to make an “oppression remedy” claim, in this case the dismissal was part of an “overall pattern of oppression” such that the oppression of the applicants interests as an employee was inextricably intertwined with the oppression of his interests in other capacities. COA: this analysis was rejected by the Ontario Court of Appeal, which held that a court could protect the interests of the complainant in an oppression action only in his capacity as a shareholder, director, or officer.

The remedy of public sale of this business amounts to an error in principle and is unjust to Mr. Naneff. The court should examine and act on rights, expectations and obligations which actually exist between the principals CBCA, s.248(3) gives the court very broad discretion in:

fashioning a remedy to rectify the oppression; protecting only the person’s interest as a shareholder, director or officer


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The law is clear that when determining whether there has been oppression of a minority shareholder , the court must determine what the reasonable expectations of that person were according to the arrangements which existed between the principals. Shareholder interests appear to be intertwined with shareholder expectations. Thus, the job for the court is to even up the balance, not tip it in favour of the hurt party. It should interfere as little as possible and only to the extent necessary to redress the unfairness. A remedy that rectifies cannot be a remedy which gives a shareholder something that he could never have reasonably expected. The court must rectify oppression, not punish for it.

The TJs order gave Alex something which he knew he could never have while his father was alive –the opportunity to obtain full control of the family business. The remedy constitutes an error in principle because it was unjust to Mr. Naneff (gave alex possibility of taking control of the business).

Murphy v. Phillips, [1993]

Where execution of an employee’s wrongful dismissal judgment is being frustrated by directors stripping assets out of the corporation or otherwise acting in an oppressive way, an employee may be given standing to pursue an oppression claim.

Facts: the general manager of a car dealership, who was not a shareholder (the officer, with his wife, owned all the shares of a corporation that was a minority shareholder) was held to be an officer in given standing as a complainant to pursue a wrongful dismissal claim through the oppression remedy.

Held: the court did not cite any authority in support its conclusion, and the reasoning in Naneff is undoubtedly to be preferred.

Pursuant to section 238(c),the CBCA director has status as a complainant to commence oppression actions. The director has used this status sparingly (Sparling v. Javlin), consistent with the expressed intention of the Dickerson Committee that the CBCA been largely “self-enforcing.”

Discretionary Complainants, Sections 238(d)

The class of complainant contemplated by s.238(d) is “any other person, who in the discretion of a court, is a proper person to make an application” for relief from oppression. Courts has been asked to exercise this discretion by creditors in a number of cases with varying success and, in a few cases, by the corporation itself. This class deals with the remoteness issue.

Creditors

Most creditors can seek relief against corporations that have obligations to them by suing on their contracts with the corporation. Other creditors may have a judgment against the corporation for some other legal wrong committed by the corporation, like a tort. http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:44 PM

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Why? The appeal of an oppression action is often to take advantage of the remedial flexibility to attach liability to someone else, like a shareholder or director, where the corporation has insufficient assets to satisfy their contract claim or their judgment. A creditor’s ability to obtain relief from a corporation may be affected by the actions of the corporation through its directors and shareholder.

Example: when directors transfer assets of the corporation to themselves for the very purpose of defeating the creditors. Yet, if creditors were routinely granted complainant standing and remedies against directors and shareholders, the oppression remedy might threaten to displace other bases of liability.

Judicial reluctance to exercise discretion: to permit an oppression action by a creditor, notwithstanding the express reference to the interests of creditors in section 241(2) . This reluctance was expressed in

Royal Trust Corp. of Canada v. Hordo [1993]

“The court may use its discretion to grant or deny a creditor status as a complainant under s. 238(d). this passage makes the court’s reluctance very clear.

Held: “It does not seem to me that debt actions should be turned into oppression actions... I do not think that the court’s discretion should be used to give “complainant” status to a creditor where the creditor’s interest in the affairs of the corporation is too remote or where the complainants of a creditor have nothing to do with the circumstances giving rise to the debt or if the creditor is not proceeding in good faith. Status should also be refused where the creditors not in a position analogous to that of the minority shareholder and has no “particular legitimate interest in the manner in which the affairs of the company are managed”

Creditors interest in the affairs of the corporation is too remote; Creditor is not in a position analogous to that of a minority shareholder; or Creditor has no particular legitimate interest in the manner in which the affairs of the

company are managed.

Danlychuck v. Wolinsky (2007): Holders of promissory were held to be in a position analogous to minority shareholders with a legitimate interest in how the corporation was managed.

This last standard was fully elaborated in:

First Edmonton Place

Made clear that to grant complainant status there must be some evidence of oppression.

Facts: oppression claim by an unpaid landlord. The landlord had given a substantial sum of money to a corporation as an inducement for it to enter into a lease of some office space. The


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entire sum was paid out of the corporation by the directors to themselves. It had no other assets in the defaulted on the lease payments.

Held: to grant complainant status to a creditor like the landlord there must be some evidence of oppression. The court identified two kinds of circumstances where this would occur (although others may be possible):

An act of the directors or management of the corporation which constitutes using the corporation as a vehicle for committing fraud upon the applicant creditor; and

An act or conduct of the directors or management of the corporation which constitutes a breach of the underlying expectations of the applicant arising from the circumstances in which the applicant’s relationship with the corporation arose.

An example of the second one is that there may be something in the circumstances in which the credit was which prevented the creditor from taking adequate steps to protect its interest against the occurrence of the conduct in respect of which it as now claiming oppression. In First Edmonton the applicant was denied status because there was no such impediment that prevented the landlord from seeking some form of protection against non-payment in its contract with the tenant. The landlord could have obtained a personal guarantee from the corporation’s shareholders. There was no evidence to show that the landlord had any expectation that the corporation would retain the funds paid by the landlord.

Most of the cases in which the courts have granted complainant status to creditors include no such principled analysis and appear to be based simply on the difficulty facing the creditor in enforcing his claim. In general, the courts have granted relief where there has been some action by the corporation, its directors, officers, often intentional which has had the effect of rendering the corporation unable to perform its obligations

Cases where Oppression Remedy was granted

One of the first cases to grant complainant status to a credit is

R. v. Sands Motor Hotel Ltd. [1984]

The Crown was given status as a complainant on the basis of being a creditor under the Income Tax Act where the ability of the crown to recover taxes owed by corporation was impaired because dividends had been paid to shareholders. The Crown sought and obtained an order setting aside the dividend payments.

Canadian Opera Co. v. 670800 Ontario Inc., [1989]

The court granted complainant status to a creditor who had purchased a car from a corporation, but had not obtained possession of it, where the funds paid by the creditor have gone south from the corporation to an associate of the controlling shareholder.


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Prime Computer of Canada ltd. v. Jeffrey, [1991]

A judgment creditor with no hope of recovery against a corporation because of excessive salary payments to the controlling shareholder was permitted to be a complainant. In both Canadian Opera and Prime Computer , on a finding of oppression, the complainant obtained an order directly against the controlling shareholder.

Devry v. Atwood Furniture Showrooms Ltd., [2000]

Some courts have held that a creditor must have been a creditor at the time the oppression occurred.

Held: that it was not appropriate to give a judgment creditor standing as a complainant where the allegedly oppressive dividends were paid before the creditor became a judgement creditor. In other cases however, it has been held that a creditor has a reasonable expectation that a corporation will not engage in conduct during as well at after the trial of any civil action that will render recovery impossible. Where the corporation does so, the creditor should be able to seek relief from oppression.

In most cases where complainant status has been granted, the creditor has already obtained civil judgement, but this is not an absolute prerequisite (Standal’s Patents Ltd).

Why? Courts have expressed more sympathy to an involuntary creditor who could not negotiate contractual protections against oppressive behaviour . As noted in Peoples this may herald new openness to granting complainant status to creditors, though this remains to be seen.

Thus, it appears that the oppression remedy can be a flexible alternative to commencement of an ordinary civil action in pursuing a creditor's claim, as well as being an aid to enforcing a civil judgment. For a creditor there are 2 main advantages of an oppression action over an ordinary civil action:

(1) Because oppression actions may be commenced by way of application without the pleadings and discovery required for a civil action, an oppression action can probably be brought to court faster than a civil action, provided that there are no significant factual issues in dispute; and

(2) The discretionary powers granted to the court under the oppression remedy are much broader than those available in civil action.

The circumstances in which a creditor is likely to be given standing remains unclear. Courts will be reluctant to allow an oppression claim as a substitute for an ordinary civil action. Nevertheless, where the behaviour of the corporation that owes the obligation or its directors and officers threatens to render enforcement of the creditor’s claim futile, relief from oppression may be granted.


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The Corporation

Two Alberta decisions have held that the corporation itself may be a complainant.

Kredl

The Alberta Court of Queen's Bench held that the corporation was a proper person to be a complainant where all the shareholders, other than the respondent who was alleged to have committed the oppression, were joined as plaintiffs in the action.

Gainers Inc. v. Pocklington, [1992]

Corporation is a proper person to be a complainant.

Facts: the Crown had taken over control of the corporation and the complaint related to the acts of the director.

Held: Mr. justice McDonald had refused an application to strikeout a statement of claim on the ground that the corporation was not a proper person to be a complainant.

Fiber Connections Inc. v. SBCM Capital Inc., [2005]

A corporation is a proper person to be a complainant.

Facts: a corporation was also granted standing to bring an action on behalf of the majority of shareholders where the remedy involved a restructuring of the corporation’s share capital.

Held: the court acknowledged that the interests of the corporation are not referred to as interests that may be oppressed, but nevertheless determined that the corporation was a proper person to bring the application of the half of the shareholders and creditors.

The opposite conclusion was reached in:

Cananda (AG) v. Standard Trust Co., [1991]

a trustee cannot be given status as a representative on behalf of the corporation.

Held: the court refused to grant leave to a trustee in bankruptcy to pursue an oppression claim on the basis that the trustee succeeded to the rights of the corporation and the transaction had been unanimously approved by the board such that, in the view of the court, the corporation could not have claimed oppression. The court rejected an argument that the trustee should be given status as a complainant as a representative of the collective interests of the creditors.


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Dylex Ltd. (Trustee of) v. Anderson, [2003]

if the creditor to bring an oppression claim, there impediment to a court permitting a trustee to do so. (Olympia &York Ltd)

Held: the court suggested that the approach in Pocklington was preferable and refused to strike out a claim by a trustee in bankruptcy alleging oppression of the interests of creditors by actions of the corporation its directors. The court acknowledged that the trustee takes the property of the bankrupt corporation as it finds it, but found that the trustee could nevertheless be given standing to assert a claim that creditors interests were oppressed.

The cases so far seem to suggest that the corporation should not be given standing in every case to pursue its own claim, but that an action by a corporation might be permitted where the corporation is in effect representing the interests of others, like shareholders and creditors. Given the broad standard of fairness represented by oppression remedy, granting the corporation status to claim oppression creates the risk that the oppression remedy will completely replace the fiduciary duty, a narrower standard.

Important note: even if the corporation were not permitted to seek relief from oppression directly, remedies expressly enumerated in section 241(3) include “an order compensating an aggrieved person,” which would apparently include the corporation in any event. So a shareholder could initiate an oppression action and seek relief both for themselves and for the corporation

Summary

The intention of Dickerson Committee in proposing the inclusion of the oppression remedy in the CBCA was the protection of minority shareholders in their capacities as shareholders, creditors, directors, and officers. Enhanced protection for shareholders was needed because of the inadequacy of the existing corporate law, which was characterized by a high degree of judicial deference to management decision-making is provided only a very restricted access to limited kinds of remedies. The categories of persons who have standing as complainants to seek relief from oppression under section 238 CBCA are much broader.

Section 238 expressly provides that all security holders, not just shareholders, as well as directors and officers appointed under the CBCA have standing. A court may grant standing to any other person it determines is a “proper person” to seek relief (CBCA, s.238(d)).

First Edmonton Place: the court described this discretion as “a grant to court of a broad power to do justice and equity in the circumstances of a particular case where a person otherwise would not be a ‘complainant’ ought to be permitted to bring an action…. to obtain compensation.” The primary category of persons seeking to have the courts exercise this “power” has been creditors. While courts have been reluctant to turn civil actions into oppression actions, where actions of the Corporation or its directors threaten to defeat the creditor's ability to recover its losses against the Corporation, standing to claim relief from oppression may be granted. It remains difficult to make reliable predictions regarding when the court will do so. The courts have been willing to http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:44 PM

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grant complainant status to various groups that would not have had any status to seek relief under corporate law before the introduction of the oppression remedy:

Former shareholders; persons with a contractual claims to be issued shares; creditors; Dismissed employees.

The Substantive Standard

Any effort to describe what constitutes oppression without regard to the facts of a particular case is problematic since “ each case turns on its own facts. What is oppressive or unfairly prejudicial in one case may not necessarily be so in another. “(Ferguson v. Imax Systems).

General Principles

The general approach to interpretation: Reasonable Expectations

From the earliest cases following the enactment of CBCA, the courts have expressed the view that the oppression remedy should be interpreted broadly to: reform the law applicable to business corporations with a view to improving the protection of minority shareholders. Thus, various courts have made it clear the oppression remedy is intended to protect not just the strict legal rights of shareholders but also their interests and expectations (Westfair Foods Ltd).

Mr. Justice Farley explained this concept of shareholder interests in 820099 Ontario Inc. v. Harold E. Ballard Ltd.:“shareholder interests would appear to be intertwined with shareholder expectations. It does not appear to me that the shareholder expectations which are to be considered are those that shareholder has as his own individual “wish list.” They must be expectations which could be said to have been (or ought to have been considered as) part of the compact of the shareholders.”

Expectations were discussed in B. Welling Corporate Law in Canada the Governing Principles:“Thwarted shareholder expectation is what the oppression remedy is all about. Each shareholder buys his or her shares with certain expectations

Westfair Foods Ltd. v. Watt

The reasonable expectations of shareholders should not be limited to those existing when the relationship first arose. They may change with circumstances.

Held: Expectations may be based on public pronouncements as well as on representations in investment agreements and commitments in shareholder agreements. In assessing reasonable expectations, a court should take into account not just circumstances unique to the relationship between the parties but also the legal rules that govern how the directors and corporations are to operate, including majority rule and a grant of management power to the directors.


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BCE v. 1976 Debenture Holders, [2008]

The SCC confirmed the fundamental role of reasonable expectations in the oppression remedy but provided a much more developed, analytical framework for making determinations about oppression

Facts: the Supreme Court of Canada addressed the nature of the oppression remedy for the first time.

Held: the court said one should ask first if there was evidence to support the reasonable expectation asserted by the complainant. If so, one must go on to ask whether the expectation was breached by conduct that constituted oppression of, under prejudice to, or unfair disregard of an interest protected under the oppression remedy.

How does a complainant prove its reasonable expectations? The court held that all corporate stakeholders-- not just shareholders-- have a reasonable expectation to be treated fairly. What particular expectations may be reasonable and the facts. The court identified the following factors as useful in determining whether a reasonable expectation exists:

Commercial practice; Nature of the corporation, including its size and structure; Relationship between the parties, including their past practices; Agreements, like shareholders agreements, and representations to stakeholders or the public

such as disclosure made under securities legislation; Steps the claimant should have taken to protect itself; and The fair resolution of conflicting interests between stakeholders;

Why? In small, closely held corporations, is more likely that stakeholders will have specific reasonable expectations regarding the operation of the corporation and its governance. This is because reasonable expectations may result from personal relationships between the parties, including family and friendship relationships.

Past Practices

The continuation of past practices often will be a reasonable expectation by not always. The court acknowledged that where “valid commercial reasons” exist for a change from past practice, the directors may deviate from what has been done in the past, so long as the result is not inconsistent with the legal rights of the complainant

Shareholder agreements and representations

by a corporation in prospectuses and other communications to stakeholders and the public can be a source of reasonable expectation.


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Fiduciary duty

is reasonable to expect that directors will treat individual stakeholders equitably and fairly. This expectation derives from the fiduciary duty to act in the best interests of the corporation. The court determined that this basic fairness component of the fiduciary duty is “commensurate with the corporations duties as a responsible corporate citizen.”

Maple Leaf Foods Inc. v. Schneider Corp, [1998]

Courts must grant the degree of deference required by the business judgment rule: “the fact that alternative transactions were rejected by the directors is irrelevant unless it can be shown that a particular alternative was definitely available and clearly more beneficial to the company than the chosen transaction.”

Held: once a breach of reasonable expectations is found, the court must determine the breach is sufficiently serious to constitute oppression considering the statutory language used to define the circumstances in which relieve is available.

Ebrahimi

Huge impact on the way Canadian courts have applied the oppression remedy. Shareholder expectations may be a source of rights as well. Broadening of the grounds challenges may be brought against controlling shareholders. Concept of reasonable expectations.

The statutory language

The oppression remedy is available on proof of an act or omission in respect of a corporation that is “oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer.” The Supreme Court confirmed at the distinct nature of these standards in BCE.

The classic statement of the meaning of “oppression” comes from decision of the HL case in Scottish Co-Operative Wholesale Society Ltd v. Meyer:

1. burdensome, harsh and wrongful;2. lack of probity and fair dealing; 3. prejudice;

This construction requiring a finding of bad faith may infer unfair result, unfairly disregards, unfairly prejudicial and unjustly or without cause

The court acknowledged that the three standards in the oppression provision will often overlap and; that “unfairly disregards” implies that some “disregarding” is fair.


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Brant investments Ltd v. Keep Rite Inc

A finding of bad faith is not required, though; of course such a finding would be highly probative.

It is sufficient if the conduct complained about had an effect contemplated in the statute, even if it was not caused intentionally (Windridge Farms). The Supreme Court in BCE suggested that, “unfair prejudice” would include squeezing out a minority shareholder and preferring him shareholders with management fees. The court determined that “unfair disregard” is “the least serious of the three injuries” and would include improperly reducing a shareholders dividend.”

By referring to “unfairly prejudicial” and “unfairly disregards” Parliament was expressing an intention to permit some prejudice or some disregarding (Brant). Otherwise the courts has given us only general statements about the degree of unfairness required. For example, in Stech v. Davies the court offered the following “ ….. unjustly or without cause…

Westfair Foods Ltd. v. Watt, [1991]

The Alberta Court of Appeal rejected the idea that the different terms used to define the oppression standard could be given a useful meaning favouring a general fairness standard instead.

Facts: public corporations with 2 classes of shares. Long standing policy of paying a regular dividend to its shareholders while retaining much of its earnings. The current law requires a company to respect both rights and interests. The right/expectation to share in distribution of the assets on liquidation created an expectation by class A shareholders that they would share in the “success or failure” of the company.

Held: Justice Kerans said that the standard must be based on values that have been widely accepted as “principles adopted in precedent.” As the Supreme Court acknowledged, the three standards mentioned in the oppression provision overlap and it may be that difference between seeking to give it meaning to them and treating them as a general mandate provide relief against unfairness is more form than substance. Only some kinds of conduct may be oppressive, but all such conduct is likely to meet the standard of “unfairly prejudicial “ or “unfairly disregards.” So the real threshold for relief is “unfair disregard,” the lowest of the three standards. This was the view of the drafters of the CBCA.

The following identify some of the other principles the courts have developed in considering claims for relief from oppression:


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Indicia of Oppressive Conduct

Although, the highly fact specific nature of the oppression remedy precludes anything like an exhaustive list of the factors that suggest oppression in:

Arthur v. Signum Communications Ltd., [1991]

Rule: set out the Indicia of Oppressive Conduct:

Lack of a valid corporate purpose for the transaction (e.g. paying excessive salaries, directors taking corporate assets);

Failure to take reasonable steps to simulate an arm’s length transaction; Lack of good faith on the part of the directors of the corporation; Discrimination among shareholders, with the effect of benefiting the majority shareholder to

the exclusion or to the detriment of minority shareholders; Lack of adequate and proper disclosure of material information to minority shareholders; and Plan or design to eliminate a minority shareholder.

This listing has been cited with approval in several cases.

Actions of Directors

Actions of directors may constitute oppression. Nevertheless the courts have made clear that the essence of the oppression remedy is a claim about behaviour by the corporation. Directors’ actions are oppressive only when they are acting in their capacity as directors. Accordingly, claims the director breached obligations owed personally are not oppression actions (Budd v. Gentra Inc.).

Personal and derivative claims

Traditional view:

where an injury was an injury to the corporation, any injury to the shareholder was only incidental to the corporate injury (Farnham v. Fingold)

Following the creation of the oppression remedy, there was debate about whether a complainant (shareholder in most cases) could seek relief from behaviour that was a breach of the fiduciary duty through the oppression remedy. Most courts rejected the traditional view, citing the broad scope of the statutory language creating the oppression standard.

Pappas v. Acan Windows Inc.: the court has to exercise discretion regarding whether to permit the claim for personal relief under the oppression remedy to proceed and that it should not be permitted to proceed if the claim overall was “so saturated by derivative claims that it cannot be allowed to stand.” Oppression does not arise where the only injury to an applicant is incidental


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to an injury to the corporation. This approach is inconsistent with the clear weight of authority permitting shareholders to claim relief from oppression regardless of whether the conduct could be characterized as an injury to the corporation. In most cases the courts have asked only if the allegedly oppressive behaviour falls within the prohibition in the statute. If so, an application is permitted to proceed.

BCE: No barrier to bringing an oppression claim in relation to actions that are a breach of fiduciary duty. In fact, a director’s fiduciary duty and other duties are relevant to finding of oppression. The court held that compliance with a fiduciary duty is a reasonable expectation and that breach of fiduciary duty can be invoked by a complainant in support of an oppression claim. (This approach has been criticized by some scholars as inappropriately conflating the fiduciary duty with the oppression remedy).

Why? Sometimes the impact of a fiduciary breach contrary to reasonable expectations may not rise to the standards set in the oppression provision-- oppression of, unfair prejudice to, unfair disregard of an interest protected under the oppression remedy-- and so not result in an order granting relief from oppression

Overlap between Oppression Remedy and Fiduciary Duties

The courts are reluctant to characterize the oppression remedy as creating duties of a fiduciary character. They are related but distinct legal doctrines. Because a breach of fiduciary duty is almost certain to be characterized as oppression, the oppression remedy offers a broader cause of action.

Standing to bring an oppression action is the same as derivative action, which is defined under s.238 CBCAThe action is open to all shareholders, directors, and officers of the corporation, as well as those the court considers “proper persons.”

First Edmonton Place: Meaning of “Proper person” includes registered shareholder or beneficial owner or a former registered holder or beneficial owner of a security of a corporation or any of its affiliates of: security debt obligation mortgage security holder, creditor, director or officer, shareholder, widows of deceased shareholders creditors (Peoples Department Stores: directors have an obligation to ensure that insolvent

corporations are properly administrated and its assets are not dissipated in a manner that is prejudicial to the creditors

3 reasons why oppression remedy is preferred to the ordinary civil action:

may be commenced without discovery, more quickly if not factual issues are in dispute; range of relief is broader and more flexible; need for an alternative flexible remedial option.http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:44 PM

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Includes: fraud on the minority; burdensome, harsh and wrongful; oppressive, prejudicial, unfairly disregards; bad faith is not necessary.

Ferguson v. Imax

The majority must act fairly and honestly. Fairness is the touchstone of equitable justice. Case-by-case analysis.

Facts: divorce, ex-husband tried to squeeze her out. She was discharged from Imax and the company refused to declare dividends.

Held:Appeal allowed

What interests are protected?

Section 241 identifies the interest that may not be oppressed as those of any security holder, creditor, director, or officer.

Re Abraham and Inter Wide Investments Ltd, [1985]

Justice Griffiths expressed “essential to the right to relief is the requirement that the company or directors in carrying out the company‘s business or exercising the powers of the directors have been guilty of conduct oppressive or unfairly prejudicial or that unfairly disregards the interest of the complainant.”

Though one may be attracted by the requirement that a complainant have a personal stake in the oppression alleged, such a requirement is not part of the statutory scheme. This was confirmed in Tehemadel Foundation v. Third Canadian Trust Ltd. The courts have held that a complainant must have some legitimate interest based on some relationship with the people who are oppressed.

Csak v. Aumon., [1993]

If a person was entitled to complainant status under s.238(a) the persons interest were deserving of protection under s.241(2).

Facts: Claims By officer or director that he was wrongfully dismissed may be the subject of an oppression proceeding. In these cases the courts have expressed their reluctance to consider wrongful-dismissal claims. It was alleged that even if a person with a contractual claim to be issued a share was entitled to complainant status as a “beneficial owner” of a security under


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section 238(a), such a person did not have an interest protected under section 241(2) since that section refers only to “security holder.”

Held: Justice Lane rejected this argument, holding that in effect, that if a person was entitled to complainant status under s.238(a) the persons interest were deserving of protection under s.241(2).

There is nothing in the section that expressly precludes a majority shareholder from commencing an oppression action as a complainant. The availability of the oppression remedy to non-minority shareholders has been recognized in many cases.

PMSM Investments Ltd. v. Bureau

Although a shareholder of an affiliate of a corporation has status as a complainant under s. 238(a), it could claim relief from oppression only if it has interest as a “security holder, creditor, director or officer” of the corporation that was oppressed.

Held: an interest as a security holder in an affiliate is not included in the list of interests protected from oppression in s.241. Only interests in the corporation are protected. In this case, the corporation is the subsidiary.

Problem in PMSM: to succeed it would be necessary to show that the actions of the directors of the subsidiary oppressed your interest in the parent. The words “of the corporation” do not appear the in CBCA oppression provision that defines interests of security holders that are protected against oppression, and whether a court would take the same approach to interpreting the CBCA oppression provision as was taken with respect to the Ontario provision in PMSM has not been litigated.

Timing Issues

Some cases argue that the interests of a security holder must be currently oppressed and that neither anticipated oppression nor past oppression entitles relief under the CBCA (Goldbelt Mines). Under the CBCA, the language of s.241(2) does not expressly contemplate future acts or omissions. Threatened behaviour can constitute oppression under some provincial statutes. It has been held that a court can grant relief with respect to threatened oppression where it can be shown on the balance of probabilities that the oppression will take place (Greenlight Capital). However, the court should not compensate complainants or otherwise rectify the effect of a transaction that is not complete.

Past actions: would appear to be included based on the language of the provision. “Former” security holders are given complainant standing under s.248(a) . If the oppression is not current or continuing the time of the application, can relief still be sought? Some courts have held that past acts are only relevant if there is ongoing oppression at the time of the application (Michaluk). Other cases reject this view.


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Standing: a related timing issue is whether a person needs to have standing a complainant at the time of the alleged oppression. The statute itself does not help to resolve this interpretive uncertainty. In Royal trust v. Hordo a claim by a person who bought his shares in a corporation after and with full knowledge of the alleged oppressive acts was thrown own as frivolous, vexatious, and an abuse of the court. By contrast, if a person bought shares and was unaware of the past oppression at the time of the purchase and the price was not discounted reflect the oppression, such a person should be permitted to claim relief

Creditors: in cases involving creditors, it has been held that there is no oppression where the credit obligation did not exist at the time of the allegedly oppressive act. In First Edmonton place v. 315888 Alberta Ltd. it was held that the interests of a landlord to whom no rent was owed at the time of the alleged oppressive act was a distribution by the corporation to its shareholders of a cash advance that the landlord had made to the corporation. At the time of the distribution, no rent was owed to the landlord.

Actions against shareholders

Oppression by non-corporate shareholders and corporate shareholders other than affiliates is not included. In at least one case, claims against non-affiliate shareholders have failed (Ruffo). Nevertheless, in other cases courts have not been careful to distinguish between oppression inflicted by the corporation, and that inflicted by the shareholders. Ultimately, this conflict may be reduced to a matter of pleading in cases where the actions of a corporation or its directors or officers are somehow implicated in the action by the shareholder. Under Section 241, it is clear that once there is a finding of oppression, an order may be made against a shareholder.

Oppression and shareholders’ Agreements

Several cases have held that they may be oppressive. Not all breaches of shareholder’s agreements will be oppressive. While the mutual rights and obligations of the parties under the agreement will inform their reasonable expectations and compliance with a shareholder’s agreement is undoubtedly a reasonable expectation in each case the court must determine if the breach is oppressive (Fulmer v. Peter D. Fulmer Holdings Inc.) . However, strict compliance with the agreement doesn’t mean no oppression has taken place

Deluce Holdings Ltd. v. Air Canada., [1992]

Even the exercise of a share-purchase option in strict compliance with the terms of the agreement might be oppressive where it was party of a larger strategy to get rid of a minority shareholder without regard to the best interest of the corporation.

Facts: air Canada argued that an application for relief from oppression was precluded by the shareholders agreement, which required arbitration the parties could not agree on the valuation of the shares repurchased. In accordance with the provisions of the Arbitration Act, an application relating to the matter the parties have agreed to submit must be stayed.


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Held: the real subject matter of the oppression action was not the share valuation that the parties had agreed to submit to arbitration, but other acts of oppression. The court suggested if there had been a provision requiring a general resort to arbitration for all disputes, the result might have been different. This suggestion would seem to indicate a planning opportunity for drafting shareholder agreements.

Beazer v. Hodgeson Robertson Laing Ltd., [1993]

An application for an order directing the purchase of shares is not allowed on the grounds that the parties have already addressed share purchases in the circumstances that have arisen in their shareholders agreement.

It may be possible to minimize the uncertainties associated with potential oppression applications by providing that all disputes between shareholders be submitted to arbitration. While it may seem odd that a court would permit parties to, in effect contract out of their right to seek relief from oppression in all circumstances,

Armstrong v Northern Eyes Inc., [2000]

A very broad arbitration clause was upheld by the court precluding access to the oppression remedy.

Facts: the applicant alleged that he had been excluded from the corporation and dismissed as vice president of sales and marketing.

Held: Because the parties had agreed to submit all disputes between them to arbitration, the court refused to allow an application for relief from oppression to proceed, even though the court acknowledged that the arbitrator would not have the same freedom to grant a remedy that a court would.

In a number of recent cases, courts have upheld provisions in trust indentures under which the debenture holders were precluded from initiating action except in accordance with the procedures in the debenture.

Oppression and Business Judgements

In several cases, complaints have sought relief from oppression in connection with regular business decisions by corporation and their board of directors. The courts have been reluctant to grant relief form oppression in these circumstances.

Why? Business Judgment Rule: the courts are concerned that they are not experts in business and will apply the business judgement rule (BCE) They will not subject the decision to a “microscopic examination” though they will still look to ensure that the decision was made reasonably.


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Brant Investments v. Keeprite

Provides an example of what will be considered reasonable.

Facts: Keep Rite had three groups of shareholders (Brant, ICG, other shareholders). ICG has several subsidiaries (manufacturing and energy products). Keep Rite was in financial difficulty to they decided to acquire assets of the energy products subsidiary (in order to create this synergy business concept). But Brant was concerned that this was a bad deal and that it was an attempt by the shareholder ICG to dump off a bunch of its shares in the subsidiary at too high a price). The board established a committee of director who were independent of the controlling shareholder to make a recommendation regarding the transaction. So they claimed oppression.

Problem: court is being asked to evaluate what is essentially a “business decision”.

Held: Court in Brant addressed how to approach this type of situation where there is a requirement to evaluate business judgments. Focus on process and the need to set up an independent committee. But the job of the committee is to evaluate and consider the proposal in light of the alternatives but not to develop its own alternatives. The court concluded that the committee and the board had acted reasonably in the circumstances and, as a consequence, no oppression was found.

Range of Oppression Remedies

One of the most innovative features of the oppression remedy is the unlimited flexibility granted to the court to fashion remedies.

CBCA, s.241(2): court is generally empowered to make an order “to rectify the matters complained of ”CBCA, s.241(3): the court may make “any interim or final order it thinks fit”. What follows is a lengthy list of Broad remedial powers a court may consider that overlap with virtually all of the other remedial provisions in the CBCA as if to encourage courts to exercise their remedial powers creatively to tailor the remedy to each fact- specific nature of oppression actions. Thus, it is difficult to articulate a principled basis for determining how remedies may be tailored to address precisely the seriousness of the oppression.

Share purchase (buy out)

Most common remedy requested is the share purchase by the corporation or a majority shareholder of the applicant’s shares. Appropriate where the parties have lost confidence in each other and their relationship has become unworkable. It is not appropriate if neither the corporation nor the controlling shareholder are in a financial position to purchase the applicant’s shares. In such cases, where the parties relationship has completely broken down, liquidation and dissolution of the corporation may be the only appropriate solution.http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:44 PM

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A share purchase is also not appropriate where the oppression is the result of a failure to comply with various obligations under the CBCA/OBCA (e.g. the requirement to hold annual meetings and appoint auditors). Various valuation issues that arise in the context of share purchases have been the subject of much judicial consideration.

Liquidation and Dissolution

Where the parties relationship has broken down, this may be the only remedy Courts reluctant to use this remedy

Steel –Van Homes Ltd v Fortini

Winding up of a family business was ordered where the relationship had deteriorated to the point that one party had lost all confidence in the other

Dissolution may also be sought by applications under section 214 of the CBCA on similar grounds.

Remedies against the shareholder and Others

Courts have been willing to grant remedies for oppression directly against shareholders at the instance of creditors where the shareholder has participated in rendering the corporation unable to satisfy the creditor’s claim, though one judge called this a “drastic remedy.” Shareholders have been made to repay money to the corporation, to pay creditors directly and even directing them to purchase the shares of the complainant.

In general, the courts have been willing to make orders against any person, where doing so is necessary to relieve the oppression (Chiu v, Chiu).

Compliance Orders

In cases where there was a failure to prepare and distribute annual financial statements, hold annual meetings, or act in some other way required by the governing statute, all of which effectively exclude the shareholder from a corporation, compliance with the statute was ordered. Compliance orders may also be obtained by application under section 247 of the CBCA.

Other Kinds of Relief

Other orders to address the particular acts or omission constituting oppression in individual cases, including: orders directing the amendment of by-laws and the replacement of management; the appointment of receivers; the amendment of shareholder agreements, Investigations; and the creation of a pre-emptive right.http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:44 PM

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Summary-oppression remedies

It is by no means exhaustive. Oppression is displacing other remedial routes, such as the derivative action, compliance remedy, and liquidation and dissolution. There are still many issues remaining to be resolved

Two Aspects of Change:

the enactment of the oppression remedy has successfully convinced judges to shake off the restrictions imposed on the remedies available to minority shareholders under Canadian corporate law regime before the CBCA and OBCA. Because of the range of circumstances in which courts have provided relief, oppression is displacing other remedial routes, such as a derivative action, compliance remedy, and liquidation and dissolution. This trend has implications for both corporate lawyers and litigators.

The scope of the remedy is potentially exceedingly broad and, while the proliferation of cases in helping to clarify how the oppression remedy will work, they are still many issues remaining to be resolved. The Supreme Court has provided some welcoming guidance in BCE. More cases on oppression decide by the SCC would be helpful.


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34. Compliance and Restraining Orders—to statute, regulations, by-laws and USAs


General Rule

CBCA/OBCA a complainant as defined in section 238, or a creditor, to apply for a court order requiring compliance with or restraining a breach of the act, the regulations, the corporation’s articles or by laws, or a USA (CBCA, s.247). Such an order may be made against the corporation itself as well as against:

any director; officer; employee; agent; auditor; trustee; receiver; receiver-manager; or liquidator of a corporation.

The chief benefit of the compliance action is that it provides a summary procedure to deal with discrete problems of non-compliance. It has been used, for example, to require a corporation to act on the statutory rights of a dissenting shareholder to have his shares bought out (Sky Resources) or to have required disclosure made(Pandora Select Partners).

A compliance remedy cannot be used, if making a finding of non-compliance requires a determination of complex issues of fact or law, such as a claim that there has been a breach of fiduciary duty (Goldhar v. Quebec).

The compliance remedy is noteworthy in several respects. First, creditors have a right to make an application—unlike derivative actions and oppression remedies, where they can make an application only with permission of the court. Also, the compliance remedy extends to a very wide range of people, much wider than any other remedy under the CBCA. It is possible to use this remedy to enforce compliance with a USA (Duha Printers (Western) Ltd. v. R)

They are used to enforce arrogations of the statute, regulations, articles by-laws or a USA, securities law.


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s.247: Any complainant can apply to the court to restrain the corporation from breaching the act, regulations, articles, by-laws or USAs.

Remedy: an order can be made against the corporation in general or any director, officer employee agent etc etc.

Benefit: Although also granted under oppression, if done under this section it is done via summary procedure. However, if complex issues of fact are involved it cannot be used by summary. Creditors also can expressly make this summary application as opposed to needing leave for derivative action or oppression.


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35. Rectification Orders—To Register of Shares

Casebook 965-967VanDuzer 452CBCA 243, 257OBCA 250,266

General Rule

CBCA s.243: Where a person’s name has been wrongly entered or retained in a corporation’s shareholder register or other records of the corporation, security holder or any other aggrieved person can apply to court to have the register or record rectified (CBCA, s.243).

May be made in addition to an oppression action.

Because the records of the corporation may be used to identify who should be given notice of meetings or receive dividends, the court may also restrain the calling or holding of any meeting or the payment of any dividend until the register or record is rectified to ensure that any wrongfully excluded shareholder may participate (CBCA, s.243(3)).

CBCA, s.257:In addition to ensuring notices of meetings and dividends are sent to the correct persons, the right to obtain the rectification of records on an expeditious summary basis is important because corporate registers and other records are, in the absence of evidence to the contrary, proof of what they disclose, including share ownership

Although, the register of members of a company is prima facie evidence of the matters entered in it, it is not conclusive. The courts have placed great importance on the need for speedy removal of a name from the register since its presence may act as an inducement to others to subscribe for shares or to allow the company credit.

The director must be given notice of any application under this section and she is entitled to appear to be heard.They may be made in connection with an oppression action.


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36. Investigations: Purpose is to find facts, not adjudicate legal issues

Casebook 967-974VanDuzer 453-454CBCA 229-237OBCA 161-167

Court ordered aid to litigation.

Part XIX (19) of the CBCA: sets out comprehensive scheme under which investigations into the business and affairs of a corporation or any of its affiliates may be carried out (CBCA, s. 229-36) A court order may order an investigation on the application of a security holder or the CBCA director where it appears to the court that any of the following grounds has been made out and the Director believes that:

The business of the corporation or any of its affiliates is or has been carried on with intent to defraud anyPerson;

The business or affairs of the corporation or any of its affiliates are or have been carried on or conducted, or the powers of the directors are or have been exercised, in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interest of a security holder;

The corporation or any of its affiliates was formed for a fraudulent or unlawful purpose; or Persons concerned with the formation, business, or affairs of the corporation or any of its

affiliates have in connection therewith acted fraudulently or dishonestly (CBCA, s.229(2)).

As with getting leave to commence a derivative action, it is only necessary to show that it “appears” as though any of these grounds exist to provide the basis for a court to order an investigation, Nevertheless the courts have held that they will not exercise their discretion to order an investigation lightly. As well, investigations should not be used to permit the applicant to obtain information that it could have obtained through the regular discovery process in a civil proceeding (Budd).

The CBCA sets out detailed provisions regarding the powers of inspectors, the procedures for hearings, and various other procedural matters (CBCA, s.230). Investigators may be given a wide range of powers, including the power to compel witnesses to attend and be examined under oath. The purpose of an investigation is only to find facts, not adjudicate issues. Normally, the corporation pays the cost of the investigation. (Consolidated Enfield Corp v. Blair)

2 purposes of Investigations:

Protection against management; and Public interest in the proper conduct of corporate affairs.


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The main role of the inspector is to discover facts. The report gives minority shareholders information. It may not be accurate, binds no one, and determines nothing. The whole point in conducting an investigation is to assist shareholders in uncovering the facts that may support litigation. The inspector may be authorized under the CBCA and OBCA to conduct hearings and to examine witnesses under oath as well as to command production of documents. Any person being investigated or being examined at a hearing has a right to be represented by counsel. Relationship of investigation procedure to pre-trial discovery.

An investigation may be authorized in connection with an oppression action (CBCA, s.241(3)). It is a statutory aid

Court ordered investigation of the corporation’s affairs where the shareholder-applicant can satisfy the court that there are circumstances which warrant the court order. Could provide the basis for further remedies in the form of a derivative action, relief from oppression application, compliance order or winding up order.

Part XIX of CBCA: scheme under which investigations are to be completed. Court may orderone on the application of a security holder or the CBCA director if the court believes: the business has been carried on with intent to defraud; The business has been carried out in a way that it oppressive or unfairly disregards etc; Corporation was formed for fraudulent or unlawful purposes; People concerned with business acted fraudulent;

Limit: court will not grant an investigation to find out things that could be determined viadiscovery in the course of normal civil litigation.


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37. Corporate Purchase of Shares of Dissenting Shareholder: “Dissent and appraisal right”

Casebook 975-977VanDuzer454-458CBCA 190OBCA 185

Appraisal Right

Right of a shareholder to require the company to purchase her shares at an appraised price if the company takes certain triggering actions from which she dissents. The right works as a device to reconcile the majority’s need to adjust to changing economic conditions with the right of the members of the minority to refuse to participate in ventures beyond their initial contemplation

Fundamental changes:

Next to dissolution the most drastic step for the shareholder to take and will therefore be used sparingly.

“I don’t agree! So, give me my money!!!” $$$$

CBCA/OBCA provide that shareholders who dissent in relation to a shareholder vote on certain specified matters of fundamental importance to the corporation may require the corporation to buy their shares (CBCA s.190). Shareholder votes on the following fundamental changes trigger this right, referred to as the shareholders’ dissent and appraisal right:

Right:

Dissent and appraisal right occurs when dissent is voted for fundamental changes (s.190).Includes:

Amendment to the corporation’s articles to add, change, or remove any provision restricting or constraining the issue, transfer or ownership of shares of the class held by the dissenter or to add, change or remove any restriction on the business or businesses, that the corporation may carry on;

Amalgamation with other corporations; Continuation of the corporation under the laws of another jurisdiction with the result that

the corporation becomes governed under a corporate statute other than the CBCA; Sale, lease or exchange of all or substantially all of the corporation’s property other than

in the ordinary course of business; or Going-private transaction or a squeeze out transaction (CBCA s.190(1)).

The holder of any shares is entitled to vote separately as a class on any amendment to the articles in accordance with section 176 has dissent and appraisal rights in relation to that vote (CBCA, http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:44 PM

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s.176 and 190(2)). In general terms, class votes are required where amendments of articles affect a class in some way that is different from other classes and potentially prejudicial. the court may also order that dissent and appraisal rights be given in connection with its approval of a plan of arrangements.

All these triggering events are fundamental changes to the nature of a shareholders investment in that they are likely to affect significantly the risk and return characteristics of the shares. Consequently, the shareholder is given an exit right if she does not agree with the change. At the same time, the majority is not prevented from approving a change to the corporation that may be necessary to respond to changing circumstances. The existence of the right, however, also indirectly gives minority shareholders enhanced power to determine whether the corporation goes ahead with one of these fundamental changes. If many shareholders dissent, the resulting purchase obligation may require a substantial expenditure for the corporation. with this in mind management may decide not to put a fundamental change to a shareholder vote, even in circumstances where it knows there will be sufficient votes to pass the special resolution approving it.

Alternatively, if permitted in the resolution itself management may decide not to implement the change after it is approved. Consequently, the dissent and appraisal right gives minority shareholders more leverage to prevent fundamental changes than their votes would indicate. The availability of a dissent and appraisal right must be disclosed to shareholders in the notice of the shareholder meeting at which fundamental change will be voted on

Test: What is fair value?

The issue most frequently before the courts has been the price at which the corporation must buy the dissenting shareholder’s shares. The problem is that there is no definite rule for determining fair value, but that the proper results in each case will depend on the particular circumstances of the corporation involved. The corporation’s obligation is to purchase the shares of a dissenting shareholders for “fair value.”

Upon the exercise of dissent and appraisal rights, the corporation must make an offer of a price at which it will buy the dissenters out. The shareholder may object to the price and request the court to determine fair value. Alternatively, the corporation can apply to the court to determine what fair value is. In a court proceeding, each party should provide evidence to support its position regarding fair value and the court makes a determination based on the evidence (Ashton Mining of Canada Inc. v. Kwantes).

Fair value is not synonymous with fair market value

In determining what fair value is, the dissenting shareholder must be treated equitably, though this does not mean adjusting the value to take into account past wrongs to the shareholder. (Ford). The shareholder may object to the price and request the court to determine fair value. The corporation can also apply to the court to determine what is fair value.


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The basic approach to calculating fair value

is first to determine the value of the entire corporation and then divide that amount by the total number of shares of the corporation to get the per share value. The significance of this approach is that it values minority shareholder interests on the same basis as majority holdings. Due ot shareholder democracy, in the open market it is usually possible t0o retain a higher price per share for a blocvk of shares that represents control of the corporation, whether this is defined as the power to elect the majority of the board of directors or otherwise.

The higher incremental value of a control block is referred to as a “premium for control” and the corresponding reduction in value attributed to minority holdings is called a “minority discount.” In some early cases it had been held that minority discount should be applied to determine fair value. In Brant Investments v. KeepRite Inc. the Ontario COA held that this was not the correct approach. In the same case the COA identified 4 widely accepted methods for valuing all the shares of the corporation:

Market value: The value determined by reference to the price at which shares trade on some market, Toronto Stock Exchange;

Asset value: The value of assets of the corporation, determined either on a going-concern basis or as though the corporation’s assets were being sold as part of the liquidation.

Earnings value: Some sustainable level of earnings is established (such as the average over the last 5 years) and the value of the corporation is calculated as the value today of those earnings received by the corporation in an indefinite number of future years.

Combination method: The fourth method is simply to determine value based on a consideration of the value generated by the other three methods. A common way of doing so is to assign a weight to the value generated by each method and to calculate the average.

Valuation Procedure

The choice of method will depend on the facts since there is no rigid rule about which method is the most appropriate. Valuation must be conducted as of a particular date with reference only to the facts as they were known at the time. In each case, the choice of method will depend on the facts, including the nature of the business and its shareholdings:

where a corporation’s shares are widely held and actively traded, the best method may be to take the market value;

where the trading is thin and dominated by a controlling shareholder the market value approach will not be appropriate;

where a corporation has sold most of its assets and ceases to carry on an operating business, the value of the corporation may be best determined by the value of its remaining assets as if they were sold on liquidation;

If the business will continue to be carried on, it may be more appropriate to value the assets on a going-concern basis or to use the earnings value;


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Where a corporation’s sole asset is a large landholding, with little income flow, it will not be appropriate to determine fair value based on earnings;

In a high technology business that is just getting started, there may be no assets or revenues and only an idea.

Additional Rules for Valuation

Valuations must be conducted as of a particular date with reference only to the facts as they were known at the time. The valuation date is as of the close of business on the day before the resolution from which the shareholder dissents is adopted (CBCA, s190 (3)).

Why? to try and ensure that the effect of the change dissented from is not taken into account in determining fair value. The courts have made clear that any benefit resulting from the transaction dissented from is not to be taken into account. Dissenting shareholders are not entitled to a special premium just because they were dissenting (Brant).

2 criticisms of dissent and appraisal right:

Ill-serves the shareholder who uses it, since legal technique is laborious, slow, technical and expensive and the awards are unpredictable;

Creates a drain on cash flow at a critical time. It frightens creditors and suppliers.

Serves as a check on management and is a last resort by the dissenting shareholders.

Things to consider :

the events giving rise to the appraisal right; the procedure to be followed; the exclusiveness or non-exclusiveness of the right; the treatment of costs arising from exercising the appraisal rights; the conditions under which the appraisal right can be withheld. the appropriate fair value.

Domglass: Four approaches to the valuation of corporate shares: the quoted price of the stock market; the valuation of the net assets of the company at fair market value; the capitalization of manageable earnings; some combination of the preceding three approaches.


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38. Winding up and Dissolution:LAST RESORT AFTER OTHER REMEDIES


General RuleAlso granted as a remedy for when oppression is very serious.

Dissolution:

To terminate a corporation’s existence, after winding up the corporation. This involves selling off or liquidating all the assets of the corporation, using the proceeds to pay off all the corporation’s liabilities, and paying out any surplus to the corporation’s shareholders in accordance with the scheme for the distribution of assets on dissolution set out in the corporation’s articles.

The holders of any shares with a preference on dissolution (preferred shares) will be paid first, and any remaining surplus will be paid to the holders of shares with a claim to the residual assets of the corporation (common shares). After this is completed, the corporation is dissolved, meaning its legal existence is terminated. In addition to permitting a winding up and dissolution order in an oppression action, the CBCA separately provides for an application for a winding up and dissolution (CBCA, ss.213 & 214)

Sections 213&214: Sell off all the assets, pay corporate liabilities, pay out surplus to shareholders according to dissolution scheme in articles.

When: If there is oppression (duplicates s. 241) or if the court feels it is ‘just and equitable’.

4 categories of Winding up and Dissolution

Entitlement in a USA; if there is a justifiable lack of confidence in the conduct of management; loss of substratum, where the court feels it is no longer possible for the corporation to carry

on business; the partnership analogy (deadlock):the corporation is effect a partnership and the partners

disagree (Ebrahimi).

Winding up and dissolution may be obtained if oppression is found. Thus, oppression is defined in the same was as in section 241. The court will only order this where the oppression is very serious and thus it is the most extreme form of shareholder relief. It will not be granted in all cases of oppression.


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On an application for winding up, the court can order other relief, just as in an oppression proceeding (CBCA, s.214 (2)). Consistent with the general approach developing in the courts of seeking to balance the remedy granted with the specific problem creating the oppression, a court will order winding up and dissolution only where the oppression is very serious.

USA: Winding up and dissolution may be ordered where the court is satisfied that the USA entitles the complaining shareholder to demand liquidation and dissolution.

1. Just and Equitable

The other general ground on which a court may order winding up is when “it is just and equitable that the corporation should be liquidated and dissolved” (CBCA, s.214(b)(ii)). This was the primary ground on which the courts would order winding up and dissolution prior to the creation of the oppression remedy. The courts have made it clear that the circumstances in which this requirement may be satisfied may not be defined exhaustively. each case turns on its own facts. Nevertheless, several categories of cases may be identified:

2. Loss of Substratum

Where it is no longer possible for the corporation to carry on the business for which it was created (Piggott);

3. Justifiable Lack of Confidence

Where the shareholder seeking relief has a “justifiable lack of confidence” in the conduct of the management of the corporation (Loch v. John). Here there must be some serious misbehaviour on the part of management including fraud and deliberate violations of corporate policy (e.g. failing to hold annual meetings and attempting to prevent shareholders from exercising their rights to participate in the corporation;

4. Deadlock/the Partnership Analogy:

Where the corporation is in a partnership between two or more persons, with more or less equal power in the corporation, who have come to disagree fundamentally on how the business should be operated (Ebrahimi). This is often referred to as a “deadlock.”

Last Resort

Winding up and dissolution should only be used as a last resort. The purpose of the drafters of the CBCA in including the oppression ground in the winding up and dissolution section was to try to ensure that the courts would grant winding up in more liberal circumstances than they had under the just and equitable rule. But in some ways the opposite has occurred. Because of the flexibility under the oppression remedy to fashion remedies to address the oppressive behaviour, courts have been willing to order a winding up and dissolution only as a last resort.


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Broad discretion must be judicially exercised coupled with a reluctance to interfere (business judgement rule).


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H. PUBLIC CORPORATIONS

39. Corporate Governance Theory and Practice


Corporate Governance

Is defined as the framework of practices and rules through which a corporation is administered and controlled:

Bundle of shareholders’ rights that shares represent including the right to vote, and to receive dividends and the remaining property of the corporation on dissolution;

Corporate law rules regarding the basic allocation of power in the corporation between shareholders, directors and officers;

The procedures through which corporate stakeholders exercise their power; Standards that govern director and officer behaviour: fiduciary duty and duty of care,

prohibition on paying dividends when the corporation is insolvent, and the responsibilities imposed by tort law;

Remedies available to shareholder and other stakeholder groups Securities law rules; Disclosure rules: meetings, insider trading and takeover bids

Two other Aspects of Corporate Governance

The context in which the legal rules for corporate governance operate including the separation of management from shareholders. The costs associated with the risk of management misbehaviour are referred to as “agency costs” because they are costs that result from shareholders having the directors and officers manage the corporation on their behalf, rather than managing it directly.

The role markets play in relation to agency costs. Focuses on the effect of markets on corporate governance.

Because shares represent a claim to the residential value of the corporation, it is difficult for shareholders to specify how management should best protect their interests . Shareholders wantmanagement to do the best job they can to maximize the value of the shareholders’ residualclaim to the assets of the corporation, but how this should be done cannot be described easily.They argue that as a result of the “unique character” of shareholders residual interests,shareholders should be the exclusive beneficiary if the fiduciary duty, not the corporation orother stakeholders.


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Others are sceptical of the effectiveness of markets and assert that governance rules shouldensure that corporations are responsive to the interests of all corporate stakeholders, includingemployees, the community, and the public at large—not just shareholders.

Fundamental Corporate governance issue: to whom should directors and officers be legally accountable? the SCC has stated clearly that the fiduciary duty is owed to the corporation and that no stakeholder interest is to be given priority (BCE).

Overview of the Problem of Agency Costs

How the corporate law rules for management and control operate will vary significantly depending on a corporation’s size. In sole shareholder corporations, there is little risk that the sole participant will favour her interests as a director over her interests as a shareholder since she will have to bear the consequences if she does. This “unity of interest” breaks down as soon as our sole shareholder permits someone else to invest in shares of the corporation. Corporate law provides a variety of such mechanisms in the form of the shareholder voting, approval requirements and shareholder remedies. The costs associated with losses due to opportunistic behaviour by corporate managers, any expenditures by shareholders for the purpose of preventing these losses are referred to as “agency costs.” They are the costs associated with an agent (e.g. someone other than the shareholder) managing the corporation in which the shareholder has her investment.

As the number of shareholders in a corporation increase and the separation between management and share ownership widens , the incentive for manager to engage in opportunistic behaviour also grows. Notwithstanding their access to information rights, shareholders will often lack sufficient information to understand and evaluate management’s performance.

Principal legal mechanisms:

Shareholder voting right, rights to information, and shareholder remedies might be ineffective for a variety of reasons:

Once a year, shareholders are entitled to receive audited statements (annual, quarterly results). Corporations are subject to continuous disclosure obligations under provincial securities laws that require corporation’s to disclose quarterly results and sometimes the management’s analysis of financial results. Material changes to the corporation’s business must be disclosed to the public on a timely basis. But this is often not enough information to effectively keep track of how management is doing. Effective evaluation of what is going on in a business will often require paying for professional advice. Consequently, shareholders will be discouraged from trying to acquire such information. To elect a new board of directors is both difficult and costly. The relatively small financial stake of individual shareholders discourages their investment in organizing collective action. Sometimes this is referred to as “rational apathy.” These problems are somewhat mitigated in the Canadian marketplace where seven out of ten public companies have a controlling shareholder. In this situation, however, accountability concerns remain because minority shareholders face the risk that the controlling shareholder and the corporation will enter into transactions which are not in the best interests of all shareholders.http://canadianlegalreference.yolasite.com/corporate-law.php 18/05/2023 1:15:44 PM

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Directors control the proxy-solicitation process: which makes it hard for shareholders to get together to oppose management (CBCA, s.149). For the most part, the directors determine what goes on the agenda for meetings and how it is described.

The increasingly active participation in the securities markets of institutional investors , such as pension funds and mutual funds with large financial interests in individual firms and the resources and contacts to facilitate coordinated behaviour, may result in more effective monitoring of both opportunistic behaviour by management and collusion between management and controlling shareholders. But while such problems may be reduced by the presence of institutional investors, they are unlikely to be eliminated entirely,

Shareholder litigation to seek the enhanced remedies provided in the CBCA and other modern corporate statutes also faces certain challenges: Litigation is an expensive, time consuming and uncertain exercise (minimize this). The deference to the decisions of directors required by the business judgement rule recently given a string endorsement by the SCC make successful shareholder litigation for oppression or breach of duty more difficult (BCE).

Legal Accountability mechanisms in the CBCA/OBCA focus on the board of directors as the centre of management power and do not speak much of officers at all. In small closely held corporation the formal separation of powers has little significance for how the corporation operates. Although the shareholders must still elect a board and the board chooses the officers, the effective decision makers will be the shareholder managers. Even if the board has a few directors from outside the shareholder group, in most cases they will act merely as advisers. The CBCA now allows shareholders to use USAs to transfer directors’ powers as a way of permitting direct management by shareholders.

In large public corporations, the board of directors seldom exercises the role traditionally ascribed to it either, but for different reasons. Boards tend to be dominated by the full time professional managers of the corporation. Members of the board who are not part of the management team are usually busy professionals or business people who do not have the time to engage in the continuous analysis that would be required to set policy and objectives and to make major decisions regarding the business. Even if they sought to do so , they would be largely dependent on the information and analysis provided by management and so would rarely be in a position to challenge management.

Research has shown that outside directors tend to defer to management because of what Mace has called “a “culture of deference.” Outside directors are picked by management and may receive substantial compensation from the corporation. Similarly, it is common for professionals such as lawyers, accountants, and investment dealers to be on the boards of corporations that are their clients. Such delegation is expressly allowed. Nevertheless, there are factors militating against boards of directors playing the kind of effective supervisory role that the CBCA seems to contemplate, and corporate law rules which assume that they do, may be ineffective. The effectiveness of board of public corporations in Canada was criticized in the Dey Report.


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-Recent reforms have sought to enhance the effectiveness of board oversight by imposing requirements for independent audit committees, setting guidelines for best practice, including boards having a majority of independent directors, having compensation and nomination committees composed of independent directors, and separating the roles of chief executive officer and chair of the board.

The following is some theoretical literature that suggests that the failure of corporate law rules to ensure adequate accountability of management to shareholders may be mitigated through the effects of market forces.

How markets affects agency costs

Where shares are traded in the marketplace, the dynamic of the marketplace itself will impose a certain discipline on management—encouraging them to do their best for shareholders. Product markets and the market for jobs of senior managers may also exert a similar disciplinary effect on management.

Prices are set as a result of supply and demand—the buying and selling activity of people trading in the market. Empirical evidence has demonstrated that prices in market securities tend to reflect accurately all publicly available information. The tendency of markets to reflect existing information is called market efficiency. Because securities markets are relatively efficient, all public information about agency costs should be factored into the price.

Why? in such a market, a shareholder needs to worry less about the risk of management engaging in opportunistic behaviour because the price of the shares she bought was already reduced to reflect that risk at the time she bought them. In the interests of encouraging investors to provide them with funds, managers may try to do things to signal to investors that they will control their behaviour and reduce agency costs. On their own, they may adopt practices likely to reduce the risks of opportunities behaviour, like having a board with a majority of independent directors. These kinds of actions should increase share price if the market views them as credible commitments to reduce agency costs.

There are still residual risks associated with opportunistic behaviour by management because not all risks of such behaviour are foreseeable and so may not be factored into share price. Agency costs known only to corporate insiders will not be factored into share price.

The Market for Corporate Control

The market for corporate control also reduces the impact of agency costs. A corporation that is being managed in the interests of enriching its management represents an opportunity for a takeover bidder. The threat of such a hostile takeover bid which, if successful, will result in the board and the officers losing their positions should discourage management from engaging in behaviour that created the opportunity for the bidder in the first place. Instead, they should be encouraged to manage so as to maximize the value of shareholders investment.


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Several other market mechanisms encourage management to maximize the value of shareholder’s investment. One is the market for manager’s services: a manager will be discouraged from engaging in self-interested behaviour at the expense of shareholders by the adverse effect such behaviour may have on her reputation and consequent prospects for promotion and future employment.

Market-based approach/nexus of contracts

Proponents of a market based approach see the relationships between stakeholders as analogous to contract negotiation. The corporation is conceived as a “nexus of contracts.” One such implication is that corporate law rules will be needed only where the market does not function meaning that stakeholders are not able for some reason, to reach a fully-informed bargain that is optimal for both parties. Shareholders invest in the corporation in return for shares, which represent a claim to receive what is left after all claims of other stakeholders have been paid. Shareholder’s claim varies with the success of the business in generating profits in excess of the fixed claims of other stakeholders. This residual character of shareholder claims suggests that managers should be exclusively committed to maximizing shareholder welfare for 2 main reasons:

(1) only shareholders have a positive interest in maximizing the success of the firm;(2) shareholders cannot easily negotiate protection for their interest because of the positive nature of their claims.

A second implication if the nexus of contracts conception of the corporation is that corporate law rules should be enabling, rather than mandatory to the extent possible so as to permit corporate stakeholders to change the rules if they do not think that they represent the best arrangement for them.

Under what is called the “team production theory” shareholders, creditors, managers and employees are viewed as making investments in the firm that complement each other for the purpose of carrying on the business of the firm. The board of directors plays the role of a “mediating hierarch” allocating benefits from the corporation’s business amongst the stakeholders in a coalition or team. One important implication of this view is that shareholder interests are not privileged over those of other stakeholders. Thus the aim of the corporate law should be to protect the corporate coalition by permitting directors to play their role as mediating hierarch. It is argued that corporate law does this and that is the reason the corporate form dominates economic activity.

Other argue the opposite and that it is not appropriate to use the market as the exclusive model for thinking about what corporate law rules should be. Shareholder primacy cannot be justified simply as a way to correct for defects in the contracting process.

Remember the role of the market and whether corporate governance rules should be mandatory or enabling?


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Other factors affecting corporate governance

a) Business Practices: How boards of directors are organized and conduct themselves;b) Business Ethics: the ethics and values of the officers and directorsc) Criminal rules dealing with corporate Fraud: enforcement of the criminal law to punish and

deter fraud and other illegal activities;d) Independence of Auditors from management;e) Effectiveness of accounting rules;f) Engagement of shareholders: the limited role that shareholders often play in practice

All of the above and other factors interact with corporate and securities law and the market forces. Following Enron and other corporate scandals, there is evidence that some major corporation’s adopted significant reforms to their corporate governance systems beyond what was required by law in the interests of maintaining the confidence of their shareholders; improvements were made in accounting disclosure in attempts to reduce agency costs.

Executive Compensation

Some have advocated that shareholders be given a non-binding advisory vote on the pay of senior officers. A practice of giving shareholders a so-called “say-on pay” in this way has been adopted by some major Canadian corporations

Civil Liability for Misrepresentations in secondary market disclosure.

There has been significant strengthening criminal sanctions at the federal level. There are new criminal offences related to insider trading: new offence is also created for corporations that retaliate against whistle-blowers (people who provide information regarding an offence to law enforcement authorities) and stiffer criminal penalties for capital market-fraud. The Criminal Code now provides that a corporation may be deemed to be a party to a criminal offence committed by one of its representatives if a senior officer was knowingly involved in the offence or was aware of the offence and knowingly failed to take all reasonable measures to stop the representative’s participation in the offence. Unlike common law standard, the senior officer need not be a “directing mind” of the organization. The amendments also enhance the investigatory power of law enforcement officials and set new and tougher sentencing guidelines for capital-market offences and offences committed by corporations

Accounting Changes

Creation of a new Canadian Public Accountability Board responsibility for promoting auditor independence and overseeing the work of auditors of public companies. The CICA (Canadian Institute of Chartered Accoutnants) has issued new guidelines on auditor independence.


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In February 2003, one of the largest institutional investors in Canada, the Canada pension plan investment Board, released its new guidelines, Proxy Voting Principles and Guidelines. This documentation indicated that the Board would take a much more aggressive approach in determining how to vote its shares on a range of corporate governance issues.

In 2003 a number of leading institutional investors formed the Coalition for Good Governance with a mandate to improve corporate governance practices among Canadian corporations inducing eliminating barriers to shareholder democracy, making recommendations for improving board performance, and assessing the corporate governance performance of major Corporations.

Rethinking the Legal Model of Corporate Governance for Public Corporations in Light of Enron and other Corporate Scandals

The collapse of stock markets in Canada and around the world as part of the global financial crisis in 2008 and 2009 sparked renewed concerns regarding the ability of market disciplines to keep management acting in the interests of shareholders, including the bankruptcy of Enron in late 2001. Both these events suggest that, even if reliance on markets is the best approach to ensuring effective corporate governance, it can have great costs.

One possible response to a perceived failure of the market is to impose new rules for corporate governance, making some of the best corporate governance practices mandatory. Proponents of the market disciplines argue that, it is the market that should be relied on to respond to the need for improvements in corporate governance. Changes to legal rules, they claim, will involve significant compliance costs and encourage only technical compliance and searching for loopholes. Only true improvements will be rewarded by the market. The US Congress responded to Enron and other corporate scandals by substantially expanding the legal rules for corporate governance through the Sarbarnes-Oxley Act in 2002. Reliance on market disciplines under Sarbarnes-Oxley Act in 2002 has been substantially diminished and thus it has been widely criticized as imposing excessive costs on businesses, especially smaller public corporations.

Canada adopted an approach to regulating corporate governance that had a few mandatory elements but that placed much greater reliance on disclosure of corporate governance practices against identified standards. Financial reporting, independent audit committees meeting minimum standards of competence were made mandatory. Corporations are required to disclose to what extent they comply with the benchmark, and, if they do not comply, explain how their corporate governance practices meet the same objectives as the benchmark. This scheme retains the freedom for each corporation to decide what corporate governance practices will work best in its unique circumstances.

Canadian approach can be viewed as generally consistent with the nexus-of-contracts approach by permitting directors and shareholders to work out their corporate governance rules on their own.


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Proposed Principled Approach to Corporate Governance in Canada

Recently, Canadian securities regulators have made proposals to modify the corporate governance regime to make it even less prescriptive. It has been proposed to replace the benchmark specific practices in the current policy by a number of broad principles, and then provide multiple examples of different ways to achieve the objective disclosed in the principles. Corporate governance rules should be directed at protecting the interests of securities holders—again, a view consistent with those proponents of the nexus-of-contracts conception of the corporation, who believe that corporation governance rules should seek to maximize the value of the firm for the benefit of the residual claim holders: the shareholders.

Concern: Canadian corporations are smaller than the US, and so the cost of compliance with mandatory rules would be proportionately higher.

One challenge in this regard is the divergence between securities regulators and the SCC regarding the appropriate goal of corporate governance, with securities regulators seeking to have directors and officers protect the interest of securities holders exclusively, while the court has interpreted the fiduciary duty, one of the most important norms for the behaviour of directors and officer, require the protection of all stakeholders. Resolving this conflict will be important to ensure that Canadian corporate governance rules develop in a coherent way.

Peoples Department Stores and BCE: the court has made it clear that the fiduciary duty is owed to the corporation, and that this means that all corporate stakeholders are to be taken into account. While securities law focuses single-mindedly on securities holders, under corporate law, as interpreted by the Supreme Court, no stakeholders interest is to be given priority and all are to be treated fairly


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Summary

Shareholders face significant challenges in seeking to ensure that management acts in the best interests of the corporation and does not shirk its responsibilities. The costs associated with the risk of management misbehaviour are referred to having the directors and officers manage the corporation on their behalf rather than managing directly


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Commentators have reached different conclusions regarding the effect of markets on corporate governance. The unique character of shareholders ‘residual interests mandates that shareholders should be the exclusive beneficiary the fiduciary duty, not the corporation or the other shareholders. Canadian corporate governance rules are influenced by the responses of securities regulators to Enron and other financial scandals.

In Canada, some mandatory rules have been adopted in relation to audit committees, but the general approach has been to identify best practices benchmarks and then require disclosure by corporations regarding how they meet these benchmarks or an explanation of how their practices meet the objectives of the benchmarks.

To whom Should Managers Be Liable?

The important Roles of Directors:

establishing basic objectives, corporate strategies and broad policies; asking discerning questions; selecting the president.

presidents determine what boards do and do not do directors selected are usually heads of equally prestigious organizations with primary

responsibilities of their own most of the boards of directors serve as advisors and counsellors to the presidents most boards of directors serve some sort of discipline for the organization—as corporate

conscience most boards of directors are available to and do make decisions in the event of a crisis a few boards of directors establish company objectives, strategies and broad policies. Most

do not. A few boards of directors ask discerning questions. Most do not. A few boards evaluate and measure the performance of the president and select and de-select

the president. Most do not.

The capital Market Theory

Numerous bond and equity markets but one global capital market. Capital markets play a central role in controlling agency costs. Markets are not efficient with respect to insider information (i.e information respecting the performance of the company that is not publicly available).

The product market Theory

Market in which the corporation’s goods are bought and sold. Dismal product market performance sends a signal to investors about managerial performance, particularly if a corporation is performing poorly while its industry peers are thriving.


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The managerial market Theory

Market where the services of corporate managers are traded. Manager who shirks or diverts will suffer reductions in the salary. Shirking: is failing to render maximum effort in the performance of her duties (slacking on the job)

The Product market Theory

Providing information to shareholders about performance. This can also sanction managers directly for inferior performance. An extreme failure of the company to compete successfully in the product market will result in the bankruptcy of the firm.

The market for corporate control Theory

Transferring control of mismanaged corporations (hostile takeover bids). Concerns poorly managed companies and serves as a powerful countervailing force on management shirking and diversion. The more credible the threat from the control market, the more willing incumbent managers will be able to adopt strategies that reduce the risk of takeover.

Contractarian Model Theory

Corporations are a nexus of contracts. Voting rules are a matter for corporate law. Transaction costs: corporate law reduces transaction costs by providing a “standard form contract” that offers private actors an off the rack set of corporate rules that represent what most parties would want.

Concept of the corporation as a nexus of contractual relationships among the corporations creditors, shareholders, creditors, managers, employees and suppliers. Implicit in these relationships is the delegation from principal to agent of functional authority. The problem of separation of ownership and control gives rise to the agency conflict. Incentives thus exist for corporations to choose sensible governance structures.

Voting—is a powerful control mechanism that may be useful to facilitate the operation of other mechanisms. On its own, the institution of shareholder voting vests owners with the ability to determine the membership of the board of directors. The more informed shareholders are, the more rational and effective their voting.


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Spring 2007 Exam

Business as limited partnership is less advantageous to being a corporation Corp – don’t have to have general partner i.e. no one has to have unlimited liability If limited partner want to take control of business they lose their limited liability Tax advantages as well possibly

Limited partnership advantages instead of a corporation Primary reason is tax Flexibility

ON Business names act – of you are in partnership must register Business names act is purely admin act, doesn’t determine legal relationship. Fact that

didn’t file name makes no difference.

Shareholder having issues with management, trying to decide whether to do proposal or whether to have a proxy battle seeking shareholder support. Compare proxy and proposal –

Proxy -- expensive. Proposal – inexpensive. Call for vote by ballot if show if hands only equals one vote and the person voting holds a

large number of the shares. Voting by ballot would be better than hands vote.

Is not market value, balances not necessarily entered at market value.First question in solving problems – Does the CBCA or OBCA apply?

-oral contract


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