BUSINESS ORGANIZATIONS CAN

TABLE OF CONTENTSTYPES OF BUSINESS ORGANIZATIONS...........................................................................................................................3

Sole Proprietorship:..................................................................................................................................................3

Partnership:.............................................................................................................................................................3

Corporation:.............................................................................................................................................................4

CONSTITUTIONAL/JURISDICITONAL FRAMEWORK........................................................................................................6

AGENCY PRINICPLES.....................................................................................................................................................7Consent:.......................................................................................................................................................................7Agency by Estoppel:.....................................................................................................................................................7Authority:.....................................................................................................................................................................8Control:........................................................................................................................................................................8

PARTNERSHIPS.............................................................................................................................................................9

Creation and Legal Nature of Partnerships:...............................................................................................................9Rules for Determining Partnership:...........................................................................................................................10

Partnership Management:......................................................................................................................................11General Rights and Duties of Partners:.....................................................................................................................11Limited Partnerships:.................................................................................................................................................13Limited Liability Partnerships:...................................................................................................................................14

CORPORATIONS.........................................................................................................................................................15

Corporate Personality and Limited Liability:...........................................................................................................15

Piercing the Corporate Veil:....................................................................................................................................17

Articles of Incorporation and Bylaws......................................................................................................................18Forming a Federal Corporation:.................................................................................................................................19Forming a Corporation in BC:.....................................................................................................................................20Private vs. Public Corporations:.................................................................................................................................21

CORPORATE FINANCE.................................................................................................................................................22

THEORIES OF CORPORATE GOVERNANCE...................................................................................................................26Agency Costs:.............................................................................................................................................................26

PROBLEM OF CORPORATE SOCIAL RESPONSIBILITY.....................................................................................................28

ROLE OF DIRECTORS AND OFFICERS............................................................................................................................30Unanimous Shareholder Agreements:......................................................................................................................31

DIRECTORS DUTIES.....................................................................................................................................................32

Fiduciary Duty:.......................................................................................................................................................32

Duty of Care:..........................................................................................................................................................35

HOSTILE TAKEOVERS AND DEFENSIVE TACTICS...........................................................................................................37

DIRECTORS’ DUTIES IN CONTROL TRANSACTIONS.......................................................................................................38

Delaware:...............................................................................................................................................................38

Canada:..................................................................................................................................................................401

CANADIAN SECURITIES REGULATION..........................................................................................................................41

SHAREHOLDERS RIGHTS.............................................................................................................................................44

SHAREHOLDERS REMEDIES.........................................................................................................................................46Personal Action..........................................................................................................................................................47Derivative Action.......................................................................................................................................................47Oppression Remedy:..................................................................................................................................................48

POWERS AND DUTIES OF CONTROLLING SHAREHOLDERS...........................................................................................49

CLOSELY HELD CORPORATIONS...................................................................................................................................51

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TYPES OF BUSINESS ORGANIZATIONS

Sole Proprietorship:

Sole proprietorship = one owner with prerogative and responsibility for making all decisions- Simplest form of business - No legal distinction between the business and the individual owner liable for all debts and other obligations

incurred by business

Forming a sole proprietorship:- One legal requirement file registration statement with the registrar if you are using a business name (other

than own name) as per s88 BC Partnerships Act- $70 fee to file registration statement

Advantages and Disadvantages of Sole Proprietorships:- Advantages:

o Easy to set upo Minimal legal requirementso Minimal government/legal feeso Simple tax treatment treated same as salary – pay ordinary income tax and any profits = ordinary

income No distinction between you and your business

- Disadvantages: o Unlimited liability: any liabilities that arise from the business = personal responsibility of the proprietor

**Anything beyond most inconsequential business activity should NOT be conducted as sole proprietorship bc high potential for injury, economic loss of others, etc.

Partnership:

Partnership = relationship subsisting between 2 or more persons carrying on a business with a view to profit (BC Partnership Act, s2)

- “persons” can be a human, or another legal entity such as a corporation o Partnership CANNOT be a party to a partnership. A partnership is NOT a separate legal entity and NOT a

legal person - “Business” = “every trade, occupation and profession”- “With a view to profit” does NOT mean profit must be generated- Governed by provincial law BC Partnership Act- Governance structures set out by partnership agreement – form of contract that sets out nature of relationship,

rights and obligations partners owe each other- 3 forms of partnerships:

o General partnership: unlimited liability of each partner jointly or jointly and severally liable for all debts/obligations of the partnership liable for anything your partner does within the parameter of the business

o Limited partnership: limits liability but not involved in any part of direction of the businesso Limited liability partnership (LLP): qualifying professional firms can have LLPs – unlike limited

partnership, can still remain active in the business

Partnership Taxation:- Partnership income taxed as individual income attributable to partners profit attributed proportional to

ownership interest

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- Partners can use partnership losses to offset other sources of individual income- Partnerships = flow-through entities invisible from a tax perspective bc attributable to the individuals

Rules for determining partnership status: (s4 BC PA)- Joint ownership of property does not in and of itself create a partnership (4(a))- Sharing of gross returns does not in and of itself create a partnership (4(b))- Receipt by a person of a share of profits of a business = proof in absence of evidence to the contrary that they

are a partner in the business, with certain exceptions (4(c))o Key = if you are actively involved in the business, law will deem you to be a partner; if passive investor

who provides capital but not actively involved in management, not deemed a partnero Statutory tests for partnership status generally distinguish between active and passive partnership

Forming a Partnership:- Partnerships can arise spontaneously or explicitly – law will recognize partnership relationship if you are acting

as partners- As per BC PA s81, must file a name registration with the registrar (if doing business not in own names) for $70

fee- Failing to register does not negate existence of a partnership

Advantages and Disadvantages of Partnerships:- Advantages:

o Combine talents and resources with business partnerso Easy to create (also disadvantage if implied partnership leads to unexpected liability)o Modest fees and legal requirementso Partners can specify rights and responsibilities with partnership agreement (note: cannot affect rights to

third parties via partnership agreement)o Pass-through taxationo Corporations can form partnerships

- Disadvantages: o Unlimited liability of each partner for all debts and obligations, including liabilities arising from acts of

other partners (BC PA s7) in furtherance of the partnership businesso Unless otherwise agreed to, any partner can unilaterally terminate partnership (BC PA s29)o Difficult to assign partnership interests BC PA s34(1) – cannot assign management rights contingent

to your partnership interest without written permission from other partners; can assign economic interests (rights to profits)

Limited Partnership = business organization in which passive partners have limited liability- Formation provided for under BC PA Part 3- Made up of general partners and limited partners- Limited partners = passive investors; liable only up to amount they contributed; cannot participate in

management; if become active in management, become general partner- General partners = actively manage partnership; unlimited liability; often a limited liability entity

Limited liability partnership = partners generally shielded from liabilities of the partnership (BC PA s104(1))- Formation provided for under BC PA Part 6- Primarily intended for professional service firms - Exceptions WRT liability for acts and omissions in which a partner is complicit (BC PA s104(2))

Corporation:

Business corporation = legal personality separate from shareholders, directors and officers

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- Can sue or be sued in own name, enter into contracts (even with own shareholders), hold property- Shareholders not liable for debts or other obligations of the corp limited liability - Corp has perpetual existence not affected by changes, deaths or retirement of members- Taxed separately from, and in addition to, their shareholders

Forming a corporation:- Corps can be formed under federal or provincial law must seek incorporation from government agency or

official - Must incorporate federally or obtain extra-provincial licence to do business in more than one province- A single individual can form a corporation (CBCA s5, BC BCA s10(1))- Federal CBCA governs federal corps- BC BCA governs BC corps- Incorporation generally involves filing administrative paperwork and paying a moderate fee- No residency requirement – do not need to reside in the province you incorporate in- Federal Incorporation:

o To form a federal corporation, you file articles of incorporation (containing basic information) with the Director (CBCA s5

o Fee of $200o The Director then certifies incorporation

- BC Incorporation: o Incorporators must enter into incorporation agreement simple agreement to taka shares in the corp

(BC BCA s10)o Incorporator(s) then file incorporation application containing “notice of articles”

New corp must also have “articles” signed by incorporator(s)o Fee of $350o Registrar certifies incorporation

Advantages and Disadvantages of Corporations:- Advantages:

o Limited liability shareholders not liable for debts/obligations of the corporation o Corporate assets shielded from shareholders liabilities (entity shielding)

Corporation not liable for the debts/obligations of shareholderso Relatively easy to sell and transfer stocko Perpetual existence

- Disadvantages: o More complicated and expensive government formation processo Nominal info requirementso Registration requirements to do business outside corps home province

Nondiscretionary granto Corp formalities must be complied witho Generally higher legal fees o Separate taxation losses cannot be used to offset personal taxes

Limited Liability Companies:- Don’t exist in Canada American- Combine limited liability of a corp with tax treatment of a partnership- Canada has integrated corporate tax system under which shareholders receive a dividend of gross-up and tax

credit therefore less need for LLCs in Canada- LLCs offer benefit of greater structural flexibility

Unlimited Liability Companies:

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- Offered in certain provinces including BC (BC BCA Part 2.1)- Combines share structure of corp with unlimited liability and tax treatment of general partnership- Created to facilitate investment in Canada by US firms allow US firms to avoid double taxation and offset

Canadian taxes- Benefits limited by recent changes to USA-Canada tax treaty

Community Contribution Companies:- Provided for in BC BCA Part 2.2- Intended to bridge gap between for-profit and not-for-profit enterprises- Must have “community purpose” and limited in ability to pay dividends- Rarely used in practice; significant legal restrictions

CONSTITUTIONAL/JURISDICITONAL FRAMEWORK

Constitutional basis for business corporation law:- Constitution Act 1867 authority to create corps shared by the federal gov and provinces- s92(11) gives provinces exclusive legislative authority to make laws in relation to “the incorporation of

companies with provincial objects”- s91 gives parliament of Canada authority over all subjects in relation to “all matters not coming within the

classes of subjects by this act assigned exclusively to the legislature of provinces- Parliament of Canada has no express authority to create corps

Canadian Corporate Law Today:- Corporations can be formed under federal or provincial law- For most purposes, the powers of federal and provincial corporations are equal in scope- Very large corporations tend to be organized under federal law- Federal corporations generally subject to applicable provincial laws

Corporate Law in USA:- No federal corporation law- Previously American corps generally formed in state they were physically based but “great merger movement”

of 1895-1904 created pressure for states to remove antitrust restrictions to facilitate industrial combos among corps

- New Jersey amended corporation act to facilitate and attract corps did this for tax returns - Delaware copied New Jersey’s corporation act, New Jersey passed antitrust laws that made Delaware the most

competitive state with corporation law that was pro-business and pro-managemento Race to the bottom thesis: Delaware law allows managers to exploit shareholderso Race to the top thesis: Delaware law is economically efficient and benefits shareholderso No empirical evidence to support race to the bottom thesis

Corporation Law – Canada vs USA:- No federal corporation law in USA - USA has significantly more publicly traded companies - USA market for publicly traded shares more liquid and deeper than Canadian market- Canadian market characterized by highly interconnected corporate relationships- Provinces and territories have own business corp legislation but no Delaware phenomenon in Canada- Canada does not have a national securities commission

Why no Delaware phenomenon in Canada?- Inability for provincial govs to realize minimum efficient scale, possibly bc Canadian economy much smaller- Policy preference for uniformity

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- Overlapping provincial securities law- Absence of independent provincial appellate judges- Protectionist legal policies

AGENCY PRINICPLES

Agency = the relationship that exists between two persons when one, called the agent, is considered in law to represent the other, called the principal, in such a way as to be able to affect the principal's legal position by the making of contracts or the disposition of property

- Agent has legal duties to act in the interest of the principal- Agency relationship often gives rise to "fiduciary duties," special duties of care and loyalty owed by an agent

Key elements of agency relationship:1. Consent2. Authority3. Control

Whether an agency relationship exists often determines whether principal is legally responsible for acts of agent

Consent:- Principal must consent for agency to exist- 3 forms of consent:

o Express consent: explicit agreement to act as principal and agento Implied consent: agency relationship implied by parties’ conducto Ratified consent: agency established by principal’s ratification of agent’s actions

Requirements for ratification (Firth v Staines): 1. Agent whose act is sought to be ratified must have purported to act for the principal 2. At time act was done, agent must have had competent principal 3. At time of ratification, principal must have been legally capable of doing the act in

question himselfo i.e. cannot ratify an act that is a legal nullity

Ratification ineffective if 3rd party’s offer to contract was expressly made subject to ratification by the principal this is a conditional offer

Ratification can be proven by express acts or by implication- Consent usually found in form of a contract where consideration is payment by the principal for the agent’s

services can be express or implied; in absence of consideration, agreement that creates agency relationship is considered consensual but gratuitous, not contractual

- Silence = insufficient to imply contractual agency

Agency by Estoppel:- In certain circumstances, a principal can be estopped from disclaiming an agency relationship, even where no

actual agency relationship exists- Requirements for agency by estoppel:

o 1. Representation by the principalo 2. Reliance by a third partyo 3. Alteration of the third party's position

- 2 possible effects:o 1. If at material time no relationship of principal and agent existed, it will be created by doctrine of

estoppel

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o 2. If limited agency in existence but agent exceeds/transcends the limitation, estoppel may operate to cause principal to be bound by agent’s act

Authority:- Even where an agency relationship exists, the principle is only responsible for the agent's authorized acts (acts

w/in scope of relationship)- Scope of agency relationship = the nature and extent of the power possessed by the agent to affect the legal

position of the principal- Three main types of authority:

o 1. Actual authority (express or implied)o 2. Apparent authorityo 3. Presumed authority

Actual Authority:- Agent has authority to act on behalf of principal- 2 types:

o 1. Express authority: explicit direction to perform an action or task (can be found in a document, contract, orally, etc.)

Specifically created and limited by the terms of agency agreement If agent’s express authority contained in a deed, called a power of attorney; 3 rd parties who

know they are dealing with agent acting under POA = notice to 3rd party that there may be limitations on agent’s power and authority

Where document not under seal/given by parol, less stringent o 2. Implied authority: acts not spelled out but that are usual or customary in performing the agent’s

specific duties Agent has implied authority to do everything necessary for and incidental to carrying out

express authority according to usual way authority was executed

Apparent Authority:- Similar in concept to agency by estoppel- Arises when a third party relies on the principal's representations

o Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd.: legal relationship between principal and contractor created by a representation, made by principal to contractor, intended to be and in fact acted upon by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the “apparent” authority, so as to render the principal liable to perform any obligations imposed on him by such contract

- Onus on 3rd party seeking to make principal liable to prove agent had actual or apparent authority

Presumed Authority:- Authority created by operation of law- Ex: at common law, spouses have authority to borrow money against each other’s property

Control:- Alleged agent must be under control of the alleged principal- Least important factor of agency where consent and authority exist, court will generally find sufficient control- May be legal situations where a principal truly lacks control which would negate agency relationship- Ex: trustee acting on behalf of a minor

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Obligations of Agents:- 1. To account agent obliged to keep accounts of what has been done during agency and to account to

principal for all such activitieso Must pay over to principal all money received to the use of the principal even if transaction that

generated $$ was illegal as long as contract of agency wasn’t illegalo Accountable to principal for all profits made from agency relationship even after relationship ends

- 2. To act as fiduciaryFiduciary Duties:

- Agents often, though not necessarily, owe fiduciary duties to their principals- Fiduciary duties constitute a legal obligation to protect the interests of another

o Act in interests of principal duty of loyaltyo Act with fidelity, good faith and honesty

- Duty of loyalty: fiduciary must not let own interests conflict with interests of the principalo Ex: avoid self-dealing or conflicts of interest

- Types of agency relationships in which fiduciary duties are most likely to arise are those characterized by relative vulnerability of the principal

o Attorney and cliento Asset manager and investoro Directors and shareholders

- Concept of fiduciary duty is fundamental to corporate law

Partnership and Agency:- Partners often deemed as agents in a partnership agents for each other AND agents for the partnership

o Depending on circumstances, partner either an agent or principal- Partners responsible for each other’s acts relating to the business of the partnership- Authority of partner to act on behalf of partnership subject to standard principles of agency law

o Thus, a partner's authority may be either actual (express or implied) authority or apparent authorityo Partner’s implied authority: other partners bound by acts done by a partner in ordinary course of

business of partnership unless partner was not authorized by the firm to perform such act AND third party knew (that partner was not authorized) OR did not know or believe the person they were dealing with was a partner

- Contracts by partners = binding on the partnership unless:o Partner’s authority limited and 3rd party has notice of such limitationo Only other partner was dormant partner w/in statutory provisionso Partner contracting not doing so on behalf of the firm

Tortious Conduct by Partners:- Same as general agency law partners liable for tortious acts committed by their partners so long as the

offending partner:o 1. Was acting in ordinary course of partnership’s business, oro 2. Otherwise had the partners’ authority

- Persons admitted as partner to existing firm not liable to creditors of firm for anything done before joining AND firm not liable for anything partner did before joining

Fiduciary Duty of Partners:- Under general legal principles, partners are fiduciaries to each other- Partners must disclose to each other personal business interests- Partners may not accept special business deals that benefit them personally (w/out disclosing to other partners)- Partners may not use confidential partnership information for personal benefit- Partners may not compete with the partnership

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PARTNERSHIPS

Creation and Legal Nature of Partnerships:

Forming a Partnership:- Partnership status doesn’t require specific filing requirement or agreement- Can enter into partnerships unknowingly- Corporations can be partners

Rules for Determining Partnership:- BC PA s4(c): “the receipt by a person of a share of the profits of a business is proof in the absence of evidence to

the contrary that he or she is a partner in the business”o “BUT the receipt of a share, or of a payment contingent on or varying with the profits of a business, does

not of itself make him or her a partner in the business”- Exceptions to partnership:

o BC PA s3: corporations are not partnerships o BC PA s 4(a): "joint tenancy, tenancy in common, joint property, common property or part ownership

does not of itself create a partnership as to any property that is so held or owned, whether the tenants or owners do or do not share any profits made by the use of the property"

Tenancy in common partnershipo BC PA s4(c)(ii): “a contract for the remuneration of an employee or agent of a person engaged in a

business by a share of the profits of the business does not of itself make the employee or agent a partner in the business or liable as a partner”

Profit sharing by employees partnershipo Passive investment partnership

Co-owners or partners?- In determining partnership, court must look at totality of the circumstances (Kamex)- Whether people are partners or not depends on co-owners and their actions; need some indication of intent

(Thrush)- Co-owners may not be partners where everyone involved has intention to treat property as separate property

(maintaining ownership) (Robert Porter & Sons)- Co-ownership does not constitute “carrying on business” (Kamex)- Intent may be important in determining partnership (Kamex)

AE LePage Ltd v Kamex Developments Ltd.: member of group of co-owners (K) signed exclusive listing agreement without authorization; property sold by an agent; L brokered sale and wanted commission; K refused to pay on basis that agent had no authority to sell; was the group of co-owners a partnership such that they are liable for agent’s acts? NO – just a co-ownership; co-owners as per s4(a) of the BC PA; co-owners all had ability to sell interest to 3 rd parties which indicates likely not a partnership; couldn’t sell property as a whole; clear intention of parties to maintain rights as co-owners; RATIO: in determining partnership, court must look at totality of the circumstances

Control not a prerequisite for partnership:- Control over business is not necessary to be deemed a partner (Volke Construction)

o Note: control involvement involvement in the business still crucial to determining partnership - Key indicia of partnership from Volke:

o Sharing of profitso Sharing of costso Joint financingo Dealing with prospective tenants

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o Coordination between the parties

Volke Construction Ltd. v Westlock Foods Ltd.: B and W entered into joint agreement to make improvements to shopping mall; issues arose and when creditors came they claimed to be co-owners as per Kamex but Volke (creditor) arguing W is also a partner bc purchased 20% share from B; is this a partnership? YES – receipt by a person of a share of the profits of a business is proof in the absence of evidence to the contrary that he or she is a partner in the business (BC PA s4(c))); secondary issue WRT control statute doesn’t say anything about control “carrying on business w/common view to profit” doesn’t relate to/require control; key in this case = agreed to share profits and costs, spoke of each other as partners, W sent complaints to B, did financing together, had joint bank account (only B had signing privileges) cooperating with each other; RATIO: control over business is not necessary to be deemed a partner

Partnership not a separate legal entity:- If you are a partner cannot be an employee if your partnership (Thorne)- Partnership not a distinct legal entity (Thorne)- Absence of legal personality can cause legal and practical difficulties for partnerships (Thorne)

Thorne v New Brunswick (Workmen’s Compensation Board): T and R entered agreement to carry on business that was part lumbering part sawmill T in charge of milling, R in charge of wood; agreement noted that they owed each other certain weekly wages as part of their branches, filed for wages, etc.; T injured doing work as part of agreement and applied to WCB for compensation; can you be both employed by the partnership and a partner such that T eligible for WCB compensation? NO – partnerships do not have separate legal existence from their partners so cannot be an employee and a partner; partnership = relationship, not an entity; RATIO: if you are a partner you cannot be an employee of your partnership; under common law, partnership is not a distinct legal entity

Modifications to common law nature of partnerships via BC PA:- Partner may assign their economic interest in a partnership (s34)

o Under traditional common law partners could not assign any interestso Cannot assign management rights w/out consent of other partners

- Partnership of more that 2 partners not automatically dissolved on death, bankruptcy or dissolution of a partner (s36)

- Partner may demand application of partnership assets toward paying debts and liabilities upon dissolution (s42)o If partnership goes into insolvency, any individual partner can claim for accounting of what their

partnership assets are

Partnership Taxation:- Partnership = “conduit” or “pass-through” entity for tax purposes- Partnership’s tax residence determined separately from its partners

o Ex: anything that happens in Canada = Canadian taxes even if no partners reside in Canada

American Partnership Law:- Partnerships = separate entities under American law- Uniform Partnership Act = uniform legislation adopted in most states (including Delaware) “a partnership is

an entity distinct from its partners” o BUT still treated as pass-through for taxationo Partnerships can be sued in own name, have property in own name, have legal personality

Partnership Management:

BC PA ss2-4

Managing the Business of the Partnership:11

- While BC PA sets out principles by which partnerships = governed, partners have legal ability to customize their relationship

General Rights and Duties of Partners:- Rights and duties of partners are outlined in BC PA 27 – Based on four principles:

o Equalityo Consensualism o Utmost good faitho Personal character of the partnership contracto Rules predicated on principles of equality in profits, losses and partnership management, BUT every

aspect of s27 can be modified by express or implied agreement

- 1. Equality: o Partners’ rights and obligations to share equally in profits and losses: PA 27(a)) o Firm must indemnify P for payments & personal liabilities incurred in: PA 27(b))

Ordinary & proper course of business; Done for preservation of business/property of the firm

o P making any payment beyond amount of capital he/she agreed to subscribe entitled to interest at fair rate: PA 27(c)

o P not entitled before ascertainment of profits to interest on capital subscribed by him/her: PA 27(d)o Right to participate in the management of the business: PA 27(e)o P not entitled to remuneration for acting in partnership business (i.e. other partners have to agree to

pay that partner not the firm): PA 27(f)o Cannot introduce person as Partner w/o consent of all existing Partners: PA 27(g)o Any difference re: ordinary matters connected w/ business may be decided by majority of partners but

no change as to nature of business w/o consent of all existing partners: PA 27(h)o Right to have access to the partnership books: PA 27(i))o Partners Must Render Accounts (BC PA S31):

s31: partners are bound to render true accounts and full info of all things affecting the partnership to any partner or his or her legal representatives

Obligation to share partnership info o Assignment (BC PA s34):

s34: a partner may assign his or her partnership interest, but the assignee only receives the economic rights of the interest, not any management rights

Can be overridden by s21 s34 = exception to personal nature of partnership relation

- 2. Consensualism:o Variations of Rights and Duties by Consent (BC PA s21):

s21: the mutual rights and duties of partners, whether ascertained by agreement or defined by this Part, may be varied by the consent of all the partners and the consent may be either express or inferred from a course of dealing

Variations typically effectuated through partnership agreement **Partners cannot alter duties to 3rd parties outside the partnership Typically effectuated through a partnership agreement Ambiguity with implied agreements

o Admission of new partners must be unanimous (PA 27(g))o Changes to the fundamental character of the partnership agreement must be agreed upon unanimously

– ordinary matters can be decided by majority (PA 27(h))o Subject to existence of an agreed upon set term, a partner can end the partnership whenever by giving

notice (PA 29(1))

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o Majority Cannot Expel Partner (BC PA s28): s28: majority of the partners cannot expel any partner unless a power to do so has been

conferred by express agreement between the partners AND the power is exercised in good faith Note that (1) the default rule is a partner cannot be expelled and (2) partners cannot waive the

requirement of good faith- 3. Utmost good faith (fiduciary character): partners have the duty to act with utmost fairness and good faith to

other partners in the business of the firm (PA 22(1))o Duties are in addition to, and not in derogation of, any enactment or rule of law or equity relating to the

duties or liability of partners (PA 22(2)) // Cannot K out of.o Fiduciary Duties:

i) Information: Duty to be proactive in revealing info to the other partners (business opportunities, personal financial issues, etc);

ii) Property: cannot keep for yourself property or benefits part of the partnership (ie. taking up a business opportunity for yourself).

- 4. Personal character of the partnership contract: many of the provisions can be contracted out of a partnership agreement

Liability of Partners (BC PA s19):- Note: A person who becomes a new partner does not become liable to the creditors for things done before they

became a partner (s18(1))- Partners generally liable for partnership debts and obligations - (1)A person who is admitted as a partner into an existing firm does not become liable to the creditors of the

firm for anything done before he or she became a partner.o Partners not liable for obligations incurred before partner became a partner or after the partner ceases

to become a partner- (2)A partner who retires from a firm does not cease to be liable for partnership debts or obligations incurred

before his or her retirement.- (3)A retiring partner may be discharged from any existing liabilities by an agreement to that effect between the

retiring partner and the members of the firm as newly constituted and the creditors.o Retiring partner may be absolved of partnership liabilities with consent of other partners AND creditors

- (4)An agreement under subsection (3) may be either express or inferred as a fact from the course of dealing between the creditors and the firm as newly constituted.

- May be held liable as partner even if never were partner if holding out principle of s15 applies- Deceased partner’s estate not liable for any post-death partnership debts, only those incurred before death

(s16(3))

Ending the Partnership/Dissolution (BC PA s29, 35, 36):- **In absence of an agreement to the contrary, any partner may terminate the partnership at any time**- s29(1): partner may unilaterally terminate a partnership by giving notice to all other partners

o Can override this rule by partnership agreement- s35: subject to any agreement between partners, a partnership dissolves

o (1) Upon expiration of a specified termo (2) Upon termination of a specified adventure of undertaking, oro (3) Upon the decision of one or more partners

- s36(1): the death, bankruptcy or dissolution of a partner dissolves a partnership of two partners- s36(2): if a partner’s interest is charged, the other partner(s) may dissolve the partnership or (if two are more

partners) expel the debtor partner

Limited Partnerships:- Limited partnerships = special statutory form of partnership, which did not exist at common law- Limited partnership provisions = BC PA Part 3

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- Limited partnership = business partnership consisting of at least one general partner and at least one limited partner (s50(2))

- General partner has unlimited liability; liability of limited partner limited to the amount of the limited partner’s investment (s57)

- Limited partners may not participate in managing the partnership if they do, deemed general partners

Forming a Limited Partnership:- Unlike a general partnership (which can be formed w/out any affirmative act), forming a limited partnership

requires filing an info certificate with the provincial registrar (s51)- Partnerships that fail to file this certificate may be deemed general partnerships

Return of a Limited Partner’s Contribution (BC PA s62):- (1) Limited partner not entitled to return of its contribution unless:

o (a) the partnership is solvent,o (b) the consent of all partners is obtained (or all partners are given 6 moths written notice ando (c) the certificate is cancelled or amended to reflect the withdrawal or reduction

- If a limited partner rightly demands return of its contribution, but the partnership is insolvent, the limited partner can demand the winding up and dissolution of the partnership

Use of Limited Partnerships:- Superior for investors who do not want or need to take active role in partnership management- Limited partnerships particularly popular as investment vehicles- Although limited partners cannot be involved in management, fairly strict limits on the management discretion

of general partner can be worked into partnership agreement- Limited partnerships = pass-through entities for tax purposes (which can be advantageous or disadvantageous,

depending on the partner’s tax situation)

Limited partner’s participation in management:- Limited partners will be held liable as general partners if they’re the directing minds and represent themselves

to be management (Haughton Graphic) o In Nordile did NOT hold themselves out to be management

- Cannot be involved in running/ controlling business/ providing services unless roles are kept distinct (Nordile)-

Haughton Graphic Ltd. v Zivot (ON, 1986): Z organized partnership as limited partnership where Z and M were limited partners; Z created a corp which was the general partner; HG sued Z, Z went under and HG wanted $$; was Z taking an active control in management such that he lost his status as a limited partner and can be sued by HG? YES – Z effectively controlled the corp which was the general partner and therefore is liable; Z represented himself to HG as president and doesn’t matter if HG knew or relied on ability to collect from Z as general partner; RATIO: if a limited partner takes control of the business he is liable as a general partner even if 3d party did not rely on him being personally liable; note: court says in obiter that reliance on Z’s representations not a reason for decision (this is against Nordile)

Nordile Holdings Ltd v Breckenridge (BCCA, 1992): B was limited partner of Arman Rental Properties LP and was also minority shareholder and officer/director of Arman and Arbutus Management, the sole GP of Arman. Arman fell into default on a mortgage payable to Nordile. Nordile sued Breckenridge as a partner of Arman for recovery of the unpaid mortgage. Is B shielded from liability as a LP of Arman? YES – acting in their capacity as directors of the general partner

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(A&A), not as general partners themselves in the LP (ARP); RATIO: takes part in the management/control” – determine roles by looking at behavior towards 3rd parties; not liable if you are taking part in the management under another role (ie. officer/director of the GP) instead of as a LP

Limited Liability Partnerships:- Limited liability partnership provisions = BC PA Part 6- Each partner has limited liability except WRT negligent or wrongful acts or omissions committed by the partner

or with his/her knowledge (PA s104)- Designed for sue by professional service firms such as law firms

Joint Ventures: - Joint ventures = agreement by two parties to carry on business, usually restricted to certain project- Elements of a joint venture (Canlan Investment Corp.)

o 1. Must have contractual basiso 2. Contribution by parties of $, property, effort, knowledge, skill/other assets to common undertakingo 3. Joint property interest in the subject matter of the ventureo 4. Right of mutual control or management of the enterpriseo 5. Expectation of profit o 6. Right to participate in profitso 7. Usually, limitation of the objective to a single undertaking or ad hoc expertise

- Joint ventures may be treated as partnership and liability may be extended to participants in joint venture based on actions of participants

CORPORATIONS

Corporate Personality and Limited Liability:

Corporations and their shareholders = distinct legal persons (Salomon)- Limited liability such that obligations of the corp are NOT the obligations of its shareholders

Salomon v Salomon & Co. (House of Lords, 1897): S operating business as sole practitioner; S incorporated statute required 7 shareholders (S was 1, along with his wife and 5 children who each held 1 share); S held 20,000 shares and 10,00 debentures – made him a secured creditor of the corp; company went under and creditors argued S shouldn’t be able to set up a corp so that he is not laible; was the company validly formed (such that S has no personal liability)? YES – corp can be validly formed even if the shareholders have little genuine interest in the company; very formalistic reading of statute; RATIO: corps legal personality separate and distinct from its shareholders

Policy Implications of Salomon:- S sold his business to Salomon & Co. for 36,000 pounds using 20,000 shares, 6,000 in cash and 10,000 of secured

debentures - Secured debentures disadvantaged unsecured creditors bc if the value of the shares equaled the value of the

business (which they did), the secured debentures were granted without consideration which was unfair to unsecured creditors

Limited Liability:15

- Encourages investment in business ventures but may encourage socially harmful risk taking- Halpern, Trebilcock, and Turnbull “An Economic Analysis of Limited Liability in Corporation Law”: limited liability

is the most efficient regime for large corporations with many shareholders- Halpern, Trebilcock, and Turnbull 3 exceptions where unlimited liability may be more efficient:

o 1. Misrepresentation Personal liability should attach to misrepresentations to creditors

o 2. Involuntary Creditors Involuntary creditors = class of creditors who do not make voluntary decision to extend credit to

a corporation Ex: tort victims Involuntary creditors have no way of negotiating their relationship with the corporation ex ante

therefore limited liability may encourage companies to impose costly risks on third partieso 3. Employees

Special class of involuntary creditors Already receive special protection under Canadian bankruptcy law and Wage Earner Protection

Program Corp directors can be held liable for 6 months’ unpaid wages (CBCS s119)

Sources of Creditor Protection:- In reality voluntary creditors can protect themselves from limited liability via private contracting - Sophisticated creditors routinely demand and receive robust protections from corporate borrowers including:

o Security interestso Personal guaranteeso Restrictive covenantso Equity convertibility o Higher interest rates

- Cautionary Suffixes:o Corporation statutes require corps to include words like “corporation” “Incorporated” or “limited” or

the abbreviations “corp” “inc” or “ltd” in their legal name (CBCA s10)o Suffixes warn creditors that they are dealing with a limited liability entity

- Capital Maintenance Requirements:o Corp is required to maintain a certain level of assets/ liquidity for creditors to use in case of

indebtedness – dealt with mostly through securities lawo CBCA prohibits corps from purchasing or redeeming shares if corp is insolvent or if doing so would cause

corp to become insolvent (CBCA ss34-36; BC BCA ss77-79)o Corporation may not pay a dividend if doing so will make it insolvent (CBCA 42)

- Publicity:o Most corp statutes require corps to file and/or maintain corporate and financial records o Filings provide creditors with minimal info about the corpo i.e. Home Office/RO, names of DIRs (BCBCA ss. 10-11; CBCA ss. 19, 263), prescribed records at HO and

made accessible to creditors and SHs (BCBCA 42; CBCA 21)- Director and Officer Liability:

o Some statutes impose liability on directors and officers of corp bc directors and officers responsible for making corporate decisions

Aim to influence decisions by corporate management o Can have negative effect of reducing supply of qualified directors and officers and increasing cost of

insuranceo Directors and officers can be held liable for:

Failure to deduct and remit taxes (due diligence defence available) Unpaid wages Occupational health and safety offenses

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Environmental offenses Personal torts committed by director, officer or employee

- Oppression Remedies:o Designed to overcome restrictive common law rules making it hard for minority shareholders to sue

managemento CBCA s241; BC BCA s227 provides courts with broad powers to rectify any act or omission that is

oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director, or officer

Canadian courts affirmed that this provision allows creditors to bring oppression claims (Re BCE)- Duties in the Vicinity of Insolvency:

o American courts have held that duties of directors shift to protecting the interests of creditors when a corp nears insolvency

Affirmed by Delaware Chancery Court in Credit Lyonnais Bank Nerland, NV v Pathe Communications Corp

o Status of this rule in Canada is unclear- Piercing the Corporate Veil:

o Aka disregard the separate legal existence of the corp and hold its shareholder(s) directly liable o Very rare – reserved for most egregiously abusive cases

Directors’ Liability for Unpaid Wages:- s119 of CBCA imposes liability on directors for up to six months’ unpaid wages- Language of s119 does NOT include other debts owed to an employee, even if related to their employment

(wrongful termination, human rights claim, etc.) (Mesheau)- Many American states (including Delaware) no longer impose liability for unpaid wages- Canadian insolvency law also provides special protections to employees- Policy arguments in favour of imposing directors’ liability on unpaid wages:

o Leaving employees out in the cold unfairo Directors are in the best position to ensure employees get paid o Directors and shareholders are (sometimes) the same parties

- Arguments against imposing directors’ lability on unpaid wages:o Employees are in a better position than involuntary creditorso Subjecting directors to significant liability can itself be unfairo Subjecting directors to liability reduces supply of qualified directors, raises the cost of D&O insurance,

etc.

Piercing the Corporate Veil:

Piercing the corporate veil = disregarding the corporate entity and holding shareholders directly liable- Sham Test – Is the company the mere agent of the controlling promoter/shareholder such that it might be said

the company is a sham or mere ego of the creator? o If a company is formed for express purpose of wrongful/unlawful act you can pierce the veil (Clarkson

Co)o Look at the specific transaction to see if fraud/ sham and should merge multiple entities together

(Clarkson Co)o If the promoter/SH has transferred own assets to corp to avoid existing personal liabilities or made a

secret profit on such a transfer or co. formed for purpose of doing otherwise wrongful act, then it will be found a sham (Clarkson Co)

- Separate personality of a corporation will not be upheld where it would produce results “flagrantly opposed to justice” (Clarkson)

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- Even in cases where it may seem like individual shareholder is using corporate entities in a shady way, the real consideration is how the shareholder interacted with the creditors (Clarkson Co)

Clarkson Co v Zhelka: C argued S had been fraudulent, had (shell) corp Industrial and argued that he created it basically to get rid of his assets; S went bankrupt and defaulted on debts; C trying to get piece of land; was the land owned by Industrial or S should it be distributed to creditors? (If owned by Industrial then the court would need to pierce the corporate veil to gain access to the assets) – land owned by industrial, valid corp; close to the line bc S doing business in sketchy way but no evidence that S formed this entity while he was insolvent/specifically to defraud creditors; key facts:

- S did not form the corp when he was insolvent- No evidence of assets S passed to the corp- No evidence that S’s creditors relied on the availability of the corps assets

Entity Shielding:- Can be equally important to shield corp from shareholders’ liabilities (not just about shielding shareholders from

corporate liabilities)

Piercing the veil of parent/subsidiary corporations: - In wholly-owned subsidiary context, piercing the corporate veil requires: (Transamerica)

o 1. Complete control, extending beyond mere ownership, and o 2. Conduct akin to fraud that would otherwise unjustly deprive claimants of their rights

- Court will not pierce the corporate veil merely bc it would be “just and equitable” to do so (Transamerica)

Transamerica Life Insurance Co of Canada v Canada Life Assurance Co: Transamerica = insurance company with mortgage loans arranged by Canada Life; numerous loans fell through laving Transamerica with $60M in losses; Transamerica argues CLMS (owned by Canada Life) owes duty to do the underwriting and failed in this duty; bc Canada Life is parent of CLMS, is it liable for any liabilities of CLMS? NO – guiding principle is Salomon; complete control (dominance) and conduct akin to fraud is key to pierce corporate veil in this case; no evidence that Canada Life involved with Transamerica and CLMS has own independent existence from Canada Life; RATIO: clarified requirements to pierce corporate veil in context of wholly owned subsidiary

Where flexible approach to piercing veil appropriate:- courts will not respect corporate personality where “it would yield a result too flagrantly opposed to justice”

(Lynch)- More flexible approach appropriate in family law context or other highly sympathetic factual circumstances

(Lynch)

Lynch v Segal: S set up assets in various corps to separate assets from ex-wife (L) transferred property to incorporated companies; L suing for child support and alimony; can L pierce the corporate veil to have access to the assets in S’s corps? YES – no legit business purpose for S shielding assets – just doing it to avoid paying wife; courts will not respect corporate personality where it would yield a result too flagrantly opposed to justice; more flexible approach in family law context; relevant that no third parties had any interest in the corps

Walkovsky v Carlton (NY Court of Appeal): court declined to pierce the corporate veil when one of the taxis owned by Carlton’s taxi business (10 separate corps owning 2 cabs each) negligently injured a pedestrian

Articles of Incorporation and Bylaws

CBCA ss 5-12, 14, 103, 104, 187, 188BC BCA ss10-13, 375-378; Table 1

Corporate Law Federalism:- Under Canadian federal system, corps can be formed either at federal or provincial level

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- Corps formed under laws of one province can do business in another as long as they register- Businesspeople effectively have choice over where to incorporate

Registration:- BC BCA ss375-378 sets forth registration requirements for extra-provincial corps in BC- Licensing requirements only triggered if extra-provincial corp is “carrying on business” in the province- Registration provides basic info so gov and third parties an identify the corp, serve process, etc.- Policy choice of allowing extra-provincial corps largely discretionary and based on comity between provinces

(not constitutionally required)o All provinces have legislation providing that extra-provincial corps can do business in their provinces

provided they follow specific guidelines but cannot discriminate against specific corp – if you meet requirements, you get registration

Registration of Foreign Entities:- Foreign entities and extra-provincial corps must register if carrying on business in BC (with exceptions): BCBCA

375 BUT see BCBCA 376(2) Do not have to register their name - Foreign entity: not registered as a corporation under the BCBCA- “Foreign entities” must register as “extra-provincial co” w/in 2 mo of “carrying on business in BC” (375(1))

o If you don’t register, you are not fully legally recognized and cannot sue- Deemed to be carrying on business in BC:

o (a) Name listed in BC telephone directory AND BC address or number is giveno (b) Ad which lists corp name or business name has a BC address or phone number; o (c) Resident agent, warehouse, or place of business in BC; OR o (d) Otherwise carries on business in BC (BCBCA 375(2))

Aspect of CONTINUITY and INTENTION to determining if a company is “doing business” Ambiguous as to what constitutes “carrying on business” in BC.

- Excluded: o Banking & railroads - essentially business activities governed by federal law (BCBCA 375(3))o A business that has an interest as a limited partner in a limited partnership carrying on business in BC

- Foreign entity need not register if: (BCBCA 375(4))o Its principal business is to operate one or more ships, and o It does not maintain a warehouse, office or place of business in BC

- Application for Registration: BCBCA 376o Step one is to reserve your company name under BCBCA 22 and 26 and then if approved, file a

registration statemento Appoint one or more attorneys if required under BCBCA 386o Submit a registration statement and any other required records

- NOTE: Federal corporations do not have to register their name – rules of names do not apply (BCBCA 376(2))o *One of the reasons to incorporate under CBCA is due to name – you don’t have to have it approved by

any provincial authorities so it is easier to move around from jurisdiction to jurisdiction - If BCBCA 376 is fulfilled, the registrar must, if it is a federal corporation, and may, in any other case, file the

registration statement and register the foreign entity as an extra-provincial company: BCBCA 377- Effects of Registration:

o If it’s noted as an extra-provincial company in the corporate register, it is conclusive evidence that the foreign entity has been duly registered on the date and time shown in the register: BCBCA 378(1)

Permitted to operate in BC from the date of registration forwardo As long as it doesn’t break any laws in BC or this Act, the company can exercise any powers from its

home jurisdiction according to its charter: BCBCA 378(2)o The foreign entity must still comply with its governing documents: BCBCA 378(3)

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o Third party protections – no act of foreign entity (ex: transfer of property) is invalid merely because it violates its governing documents or the entity wasn’t registered at the time: BCBCA 378(4)

While not allowed to do something, this does NOT make the transaction itself invalid. While something is still valid, this does not mean there are no consequences (i.e. may not be a

proper transaction). - BCBCA 379 governs the requirements regarding amalgamation of an extra-provincial company- Federal Corporation – Federally incorporated corps can operate across Canada more easily, but are not exempt

from registration or other requirements of provincial legislation schemes. Provincial legislation cannot impair the status or essential powers conferred on a federal corp.

o However, even though its status or powers cannot be impaired, a federal corporation that fails to register when required to do so by the BCBCA till commits an offence (in contravention of BCBCA 375).

- Provincial Corporations – must register to do business in other provinces.

Forming a Federal Corporation:

Filing Articles of Incorporation:- One or more individuals OR corporations can form a corp by signing and delivering articles of incorp (CBCA s5)- Articles = formation document- Pursuant to CBCA s6, articles of incorporation are required to set forth:

o (a) corporate name (including reservation)o (b) location of registered officeo (c) restrictions on share transfero (d) number of directorso (e) restrictions on business activities

- Articles of incorporation may also set out any other provisions that may be included in the by-laws Corporate Name:

- Corp must have an original and unique name not likely to be confused with existing corp- Must provide notice of corps limited liability status- Corporations Canada requires Form 1 be accompanied by NUANS search which is evidence of reserved corp

name- Director of Corporations Canada may reject a name if too similar to existing corp name

Certificate of Incorporation:- Once articles of incorp properly registered, Director provides certificate of incorp (CBCA s8)- Issuance of certificate of incorp is nondiscretionary - Certificate of incorp = proof that corp exists (important in practice where contracts for business transactions will

require parties delivery certificate of incorp)

Amending the Articles of Incorporation:- Articles of incorporation may be amended by special resolution of shareholders (CBCA s173)- Special resolution = resolution passed by majority of not less than 2/3 of the votes cast by the shareholders who

voted in respect of that resolution or signed by all the shareholders entitled to vote on that resolution

Continuance: - Process by which corp formed under law of one jurisdiction is recognized under the law of another jurisdiction- Requires special resolution- Governed by CBCA ss187-188- 2 step procedure:

o 1. Emigrating corp must obtain consent of the authorities in the jurisdiction of its incorporation (export)o 2. Must meet requirements of federal or provincial act under which it seeks to be continued (import)

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By-Laws:- Main rules and regulations of the corp- Federal corps governed according to their by-laws (CBCA s103)- Initial by-laws generally adopted at corps organizing meeting (CBCA s104(1)(a))- Bylaws created and amended by the board of directors subject to shareholder approval (CBCA s103(2))- Shareholders may propose to create, amend or repeal any bylaws (CBCA s103(5))- To amend bylaws:

o Board of directors passes resolution to change bylawso Once board makes change to bylaws, change effective immediatelyo Subsequent mandatory vote by shareholders at next shareholder meeting where they approve or reject

bylaws. If shareholders don’t approve the change, change is cancelled at date of shareholder vote

Forming a Corporation in BC:- One or more persons must sign incorporation agreement and file incorporation application, which includes

“notice of articles” (BCBCA ss10-11)- Articles of incorporation not part of formation process but notice of articles included in incorporation

application- No bylaws in BC

Incorporation Agreement:- Agreement to subscribe for shares in the company signed by the incorporators - No clear purpose for this requirement

Incorporation Application:- Filed with registrar and must contain notice of articles, which is a list of basic info contained in the articles- Incorporation application must include:

o Names and mailing addresses of incorporators (under the incorp agreement)o Reserved name of the companyo Notice of articles

Corporate Name:- Company’s name must be reserved in advance (BCBCA s22)- Name must not be confusingly similar to existing company and must provide notice that company is a limited

liability entity (BCBCA s23)

Notice of Articles: - Notice of articles must set forth (BCBCA s11):

o Reserved name of the company o Name and addresses of the directorso Registered office of the companyo Authorized share structureo Special rights and restrictions on shares

- Notice of articles attached to incorporation application

Articles:- Constitute the governing document of the company- Articles of the company contain (BCBCA s12):

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o Name of companyo Rules of company conducto Any restrictions on business activityo Special rights and restriction on shares

- Company may adopt Table 1 (with or without alternation) model set of articles- Company can come up with any articles as long as they are valid/meet requirements or can just use table 1- Must be signed by incorporators to become effective- Table 1:

o Default articles if incorporators do not draft own articleso Convenient option if incorporators are only forming basic company/wish to avoid time, complexity and

legal feeso Large companies typically use custom articles

Certificate of Incorporation:- Company incorporated upon filing of incorporated application (BCBCA s13)- Registrar must furnish certificate of incorporation once incorporated

Private vs. Public Corporations:- Privately-held corps = securities not traded on open market- Publicly-traded corps = securities traded on open market- Majority of legal regulation of publicly-traded securities = contained in provincial securities law

Pre-incorporation Contracts:- Incorporators may enter into contracts on behalf of corp before corp comes into existence- Statutory reforms have clarified common law and provided greater protection to incorporators - CBCA 14 (1) Subject to this section, a person who enters into, or purports to enter into, a written contract in the

name of or on behalf of a corporation before it comes into existence is personally bound by the contract and is entitled to its benefits.

o If you sign a contract on behalf of a corp not yet formed, you are on the hook- CBCA 14 (2) A corporation may, within a reasonable time after it comes into existence, by any action or conduct

signifying its intention to be bound thereby, adopt a written contract made before it came into existence in its name or on its behalf, and on such adoption

o (a) the corporation is bound by the contract and is entitled to the benefits thereof as if the corporation had been in existence at the date of the contract and had been a party thereto; and

o (b) a person who purported to act in the name of or on behalf of the corporation ceases, except as provided in subsection (3), to be bound by or entitled to the benefits of the contract.

o Once you form the corp, corp can adopt the contract and then you are “free and clear” no longer liable under contract as an individual

- CBCA 14 (3) Subject to subsection (4), whether or not a written contract made before the coming into existence of a corporation is adopted by the corporation, a party to the contract may apply to a court for an order respecting the nature and extent of the obligations and liability under the contract of the corporation and the person who entered into, or purported to enter into, the contract in the name of or on behalf of the corporation. On the application, the court may make any order it thinks fit.

o Any party to a pre-incorporation contract can apply to court for order specifying/clarifying who is and is not liable under the contract

o Court has fairly broad equitable powers to exercise discretion - CBCA 14 (4) If expressly so provided in the written contract, a person who purported to act in the name of or on

behalf of the corporation before it came into existence is not in any event bound by the contract or entitled to the benefits thereof.

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o Can sign a pre-incorporation contract on behalf of corp and put disclaimer into contract that “I Leah Singer in signing this contract on behalf of Business Organizations Inc. under no circumstances are to be held personally liable under this contract” this disclaimer is valid – if Business Organizations Inc. is never formed/goes sideways, the other party cannot come after you personally for whatever is owed under the contract

CORPORATE FINANCE

Securities = negotiable investment interests- Most common form = stocks and bonds- Can be equity, debt, derivatives or hybrid investments- Primary means by which corps raise money for projects

Securities Regulation:- Securities sold in public markets regulated by securities law- All corps have securities

Equity vs. Debt:- Equity:

o Residual ownership of a firmo Equity holders provide capital in exchange for right to share in corps profits and residual assetso Equity holders entitled to whatever is left over after all claimants paid in full (aka residual interest in the

firm)o Fundamental characters of equity:

1. Unlimited potential return (no cap on upside of equity investment) 2. Subordination to creditors (anyone company owes $ to paid first; risk of getting nothing =

high)o Higher risk, higher potential return

- Debt: o Borrowed money paid back in futureo Lender paid a premium (interest) in compensation for their loano If firm has limited assets, debt holders must be paid back before equity holderso Fundamental characters of debt:

1. Fixed return (max you get back = principle + interest) 2. Priority over equity holders

o Lower risk, lower return

Forms of Equity Financing:- Equity securities represent ownership of the corp- Founders of business usually receive equity in exchange for contribution of capital, assets (ex: IP), and/or

personal effort- Additional capital often solicited from outside investors in various forms

Common Stock: - Aka common shares- Most basic form of equity security- Generally rights include

o Per share voting rightso Common dividendso Share of residual assets upon liquidation

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- Small and large companies have common stock- Stock purchased on public stock exchange typically common stock- Can be issued without voting rights

Preferred Stock: - Senior to common stock but subordinate to debt- Often entitled to:

o Preferred dividendso Liquidation preferenceo Redemption

- Generally does not grant right to vote in general elections

Options, Rights and Warrants:- Companies often grant options (or rights or warrants) to purchase their stock in the future- Option = right to purchase stock at a specified price on or after a specified date- Ex: right to purchase up to 100 shares of Class A stock of Business Organizations Inc. at a price of $10 per share

on or after January 1, 2020- Options can be used by corporations for a variety of purposes, including to raise capital, protect incumbent

shareholders from dilution, or incentivize employees

Forms of Debt Financing:- Debt financing (credit) plays important role in most businesses- Can include trade credit, personal loans, bank loans, commercial paper and bonds- Many small businesses eventually take out a fixed or revolving bank loan- Larger businesses can sell bonds to specialized investors or the public- Debt holders generally do not have voting rights

Bonds, Debentures and Notes:- Generic terms for longer-maturity debt securities- Effectively synonymous, though certain terms can have specific connotations ("bonds" can imply the existence

of security, for example, while "notes" suggests shorter-term securities)- Can have a wide variety of interest and repayment terms and may be sold to private investors or traded on

public securities markets- Bonds, debenture and notes can be issued with variety of special rights, including:

o Convertibility (convert debt into equity if company very successful)o Special voting rightso Restrictive covenants

- All else equal, the greater the debtholders’ rights, the lower the return

Security:- Corps provide limited liability if debtor becomes insolvent creditors have no legal recourse to equity holders’

assets - How do creditors protect themselves?

o Common method = take security interest in borrower’s assets- Security interest (lien) = legally-recognized priority claim on specific assets

Covenants: - Loan agreements almost always include covenants restricting borrower’s business and financial activities, such

as:o Limits on issuing additional debto Limits on purchasing or selling capital assets

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o Restrictions on dividendso Requirements to maintain specified financial levelso Prohibitions on changes of control or other major corporate transactions

- Violations of covenants constitute default and trigger immediate acceleration - However, significant breaches often waived in practice as long as company is viable bc generally in all parties’

interests to max the value of the firmo Ongoing reporting obligations require company to notify lender any time covenant violated

- Lenders will allow control transaction as long as it results in repayment or refinancing

Hybrid Securities:- Sometimes characterizing corporate investments as either debt or equity can be advantageous from accounting,

tax and/or legal perspective led to development of hybrid securities which combine features of debt and equity

Directors’ Duties to Debt and Equity Holders:- Equity holders protected by directors’ fiduciary duties (duty of loyalty, duty of care)- Debt holders generally less protected by fiduciary duties and rely on contractual rights (although directors do

owe duties to debtholders under Canadian law

Startup Financing:- Innovative businesses with significant growth ambitions can often obtain outside financing from specialized

venture capital investors - Venture capital market = mature market with fairly standardized methods of obtaining/structuring financing- Angel Investors:

o Prior to obtaining financing from venture capital firm, start-up may obtain financing from one or more “angel” investors, aka wealthy individuals who take personal interest in company’s business potential

o Angels stand to make huge profit if business is successful bc early investors

Venture Capital: - Venture capital firms provide more than just money – also provide valuable advice and experience, often taking

a management role in the companies they invest in- Venture capital firms tend to be centred in specific geographic markets (most notably, the bay area) and often

prefer to invest in local startups- The hands-on nature of venture capital investment gives rise to complex business and economic issues, which

are addressed through sophisticated legal investment structures- Venture Capital Financing:

o Firms often take investment in form of convertible preferred stocko Common features of venture capital:

Convertibility – ability to convert their notes into common stock Liquidation Preference – preference to either get a multiple of their investment upon liquidation

vs equity if being liquidated for a higher price Redemption rights – if a payout is not imminent, redemption rights allow investors to have the

company buy out their investment to get a payout BCBCA 79: a company cannot redeem shares if it would cause the company to become

insolvent Voting rights – usually a board seat and same voting as common stock Anti-dilution – change the conversion price of a convertible preferred stock to ensure the

venture capital investors are either not diluted at all or diluted less Special Contractual rights:

o Venture capital firms often obtain special rights contained in “shareholder agreements” with founding shareholders in addition to rights embedded in their securities

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o Special rights can include: Guaranteed board representation Special veto powers Right of first refusal Tag-along rights – ability to participate in share sales

- Drag-along rights – ability to force other shareholders to sell shares with you- Control:

o Tension bc founders often wish t retain control of company while venture capital firms often don’t want founders to have control

o Often founders and venture capital firm agree on roughly equal board representation with independent directors jointly selected

- Incentive Equity:o Founders and incumbent employees typically receive “incentive equity” prior to venture capital

investment that vests over period of timeo Can take form of vesting required stock or vesting stock optionso Vests over time – if employee leaves company forfeits unvested equityo Purpose = ensure principals and employees:

1. Stay with the company, and 2. Are properly motivated to ensure company is economically successful

o Details of vesting arrangement subject to negotiation between founders and venture capital firm- Venture capital firms tend to be concentrated in urban geographic areas with lots of tech companies

o Market in Vancouver relatively small- Government sponsored venture capital:

o Canadian gov encourages provincial venture capital funds, often sponsored by union pension planso Investment decisions of the funds can be influenced by political factors which reduces economic

benefits

THEORIES OF CORPORATE GOVERNANCE

CBCA s102(1)

Corporate Management:- Corps owned by their shareholders but not directly managed by shareholders- Shareholders generally elect board of directors to manage/supervise management of the corp

o Boards of large corps often hire professional managers

Duty to Manage or Supervise Management:- CBCA s102(1): subject to any unanimous shareholder agreement, directors shall manage, or supervise the

management of, the business and affairs of a corpo Assigns corporate management to the directors and contemplates delegation of management to

professional execs- Directors’ duties can be circumvented with a unanimous shareholder agreement (CBCA s146)- Similar provision in BC BCA but also requires any transfer of directors’ duties be included in the articles (bc no

unanimous shareholder agreements) (BC BCA ss136-137)

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Corporate Governance:- Fundamental theoretical problem of corporate governance = separation of ownership and control- WRT large corps, those who control the business not generally the same as those who own- Managers hired to run corp on behalf of shareholders shareholders’ agents- Canadian corps – even large public corps – tend to be dominated by family shareholder groups

Separation of Ownership and Control:- Berle and Means with the rise of large, publicly held corps, shareholders exerted little control over

management this resulted in management entrenchment by which professional managers could dominate corps in which they had very little in way of share ownership

- Results in “agency costs”

Agency Costs:- Result of separation of ownership and control- Could arise from the fact that economic interests of principals and agents rarely identical- Agents often tempted to engage in economic behaviour that benefits themselves but does not benefit their

principals - Agency Costs include:

o 1. Losses suffered by principals as result of agency opportunism ORo 2. Costs of investing in safeguards to prevent these losses

Divergent Interests of Principal-Agent:- Interest of shareholders (principal) generally = maximizing corporate financial returns- Interests of managers (agents) include:

o Job securityo High salary and perkso Prestige and recognitiono “empire building” – wanting to grow the company beyond a scope that is efficient for the shareholderso Idiosyncratic interests

- Divergent interests can result in managers failing to max shareholders’ interests- Conflicts of interest less acute for smaller, closely-held corps

How to control agency conflicts in corporations?- Ownership structure: The conflict of interest between management and shareholders is much less significant

with respect to closely-held corporations. Canadian corporations have tended to be controlled by dominant shareholders, reducing the principal-agent conflict.

- Legal instruments: typically restrain managerial opportunism by imposing ex post costs on managers engaging in such activities (significant penalties)

- Role of Financial Markets: Capital Market instruments: furnishing information to the corporation’s principals, enhancing quality of supervision by corporate owners

o If the managers of a corporation fail to maximize firm value, the share price of the corporation will decrease

o A depressed share price makes the corporation attractive to outside buyers, who can purchase its shares at a discount, replace the incumbent management, and reap a profit

o Although the incumbent management can refuse to agree to an acquisition, it may not be able to stop a tender offer. Potential defences:

Appeal to shareholders

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Stock buybacks, including "greenmail" Sale of stock to a "white knight" Sale of the company's "crown jewels" "Poison pill" defense

o Indeed, so-called "hostile takeovers" are some of the most complex, interesting, and dramatic occurrences in corporate law

Now, less common due to: improved corporate governance, increased institutional shareholding and the rise of activist shareholders

o Fear of takeovers plays an important role in disciplining corporate management and reducing agency costs

o In the scholarly literature, the possibility of acquiring a corporation and replacing management is sometimes referred to as the "market for corporate control"

o Also: imposing direct penalties on opportunistic managerial behaviour - Voting: Shareholder voting is at the core of many mechanisms by owners to constrain managerial self-interest

o Determines membership of the board of directors of the corporationso Shareholders also vote on events which may involve substantial changes to the structure of a

corporation - Controlling shareholders have incentives to monitor managers closely and govern behaviour accordingly

o Canada has a significant amount of large corporations with controlling shareholders o However, they may also take advantage of minority shareholders for their own benefit

- Corporate law can facilitate the process by providing a standard form contract

Shareholder Activism:- Hostile takeovers have become less common bc:

o Improved corporate governanceo Increased institutional shareholdingo Rise of activist shareholders

- Threat of hostile action by shareholders = increasingly effective means of disciplining management- Takeover defences increasingly likely to increase shareholder value

Shareholders cannot control the company directly:- Directors responsible for deciding what is in best interests of the corp; even though a majority of SHs feel

something (e.g. sale of assets) is in the best interest of the corp, directors are not compelled to follow that opinion unless they pass a resolution as stipulated in the articles (Automatic Self-Cleansing Filter Syndicate Co Ltd)

- Shareholders are bound by the incorporating documents; corp can customize these docs (Automatic Self-Cleansing Filter Syndicate Co Ltd)

Automatic Self-Cleansing Filter Syndicate Co v Cuninghame: majority of shareholders voted in favour of resolution to sell all assets of the company; board of directors disagrees and refuses to carry it out; typically within board of director’s management of authority to decide to sell assets BUT articles of incorporation stated shareholders could compel board to do something using extraordinary resolution (3/4); is the board bound to carry out the resolution? NO – under general corporate governance principles, directors not bound by votes of shareholders; shareholders only passed through ordinary resolution; although directors are agents, they are agents for all shareholders not just majority; note: this is a default rule corps can customize governance arrangements through articles of incorp, unanimous shareholder agreement, etc.

PROBLEM OF CORPORATE SOCIAL RESPONSIBILITY

CBCA s122BC BCA ss51.91-51.96

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Directors Fiduciary Duties:- CBCA s122: requires corporate directors and officers act honestly and in good faith with a view to the best

interests of the corporation o BC BCA s142 sets out fiduciary duties in BC

- Issue = what is the best interests of the corp?o Bc most corps formed to earn a profit, corporate law traditionally concerned with maximizing

shareholder valueo Alternative view = broader view of corporate social responsibilities such that in addition to

shareholders, should also focus on interests of employees, consumers, environment, and broader socioeconomic interests

Activities that do not max profits:- Dodge said directors have duties to shareholders not general public and purpose of corp = max shareholder

wealth but, not a Canadian case

Dodge v Ford Motor Co. (Michigan): F was highly profitable in the early 1900s; F largest shareholder; D brothers also shareholders; company (F) stopped providing special dividends to shareholders, instead to employ more workers to help them build up their lives and their homes; D brought action against F (defendant corp) to force them to pay more substantial dividend; can shareholders sue to prevent corp from engaging in activities that do not maximize profits? YES – directors have duty to shareholders not the general public; Are courts competent to second-guess business decisions? NO – business judgment rule; court seems to rely on the fact that benefitting the public was an express corporate policy in determining F had to pay dividends; NOTE: modern rule is that corps under no general obligation to distribute dividends

Validity of corporate payments (actions benefitting stakeholders rather than shareholders):- A company’s funds cannot be applied in making ex gratia payments (Parke)- Court will inquire into the motives actuating any gratuitous payment and the objectives which it is intended to

achieve (Parke)- Court will uphold the validity of gratuitous payments if, but only if, after such inquiry, it appears that the tests

enumerated by Eve J are satisfied (Parke); test for performing an action benefitting stakeholders rather than shareholders (as per Eve J in Re Lee, Behrens Co. Ltd.,)

o 1. Is the transaction reasonably incidental to the carrying on of the company’s business?o 2. Is it a bona fide transaction? o 3. Is it done for the benefit and to promote the prosperity of the company?

- Onus of upholding the validity of such payments lies on those who assert it (Parke)

Parke v Daily News Ltd (UK): business was closed and the proceeds of the asset sales were distributed to employees of the company; Can proceeds of an asset sale be distributed to employees? NO – not in line with benefiting the corporation (cannot benefit corporation if the corporation no longer exists; if a company is making gratuitous payments, court will interrogate motives behind them and they must be incidental to the business and in the benefits of the business; these were cash bonuses – not in the best interest of the corp bc the corp is done, just $$ out the window; purely charitable; RATIO: addresses issue of gratuitous payment to employees – business being sold therefore payments were gratuitous

SUMMARY: Dodge and Parke illustrate that corps are intended to generate profits for their owners (i.e. SHs) – SH interests are satisfied when they receive as much profit as possible, as quickly as possible (DIR’s accountable if decisions do not directly benefit Corp/SH’s)

Directors fiduciary duties – key cases:29

- Fiduciary duties (BCBCA 142(1);CBCA 122(1)) owed to the corp itself, not specific stakeholders (Peoples)- Directors may also consider the impact of corporate decisions on shareholders or stakeholders (Peoples)

possibly expands fiduciary duties- Directors are required to act in the best interests of the corporation viewed as a good corporate citizen (Re BCE)

o Directors may be required to consider corporate stakeholders other than shareholders in fulfilling this duty (Re BCE)

o Basically creates obligation to consider and discuss stakeholder interests and to document such discussions (Re BCE)

Peoples Department Store Inc. v Wise: Wise brothers were sued for favouring shareholders over creditors; SCC held that directors’ fiduciary duties are to the corp itself, not specific stakeholders; SCC ruled in favour of defendants and holding suggests possible expansion of directors’ fiduciary duties

Re BCE Inc: plan of arrangements contemplates purchase of shares of BCE – financial buyers would purchase and take off the market; purchase price was $50M; group of financial and other institutions opposed to transaction; was the arrangement unfair and unreasonable? Oppression remedy? NO – board of directors were right, arrangement was fair and not oppression; directors owed fiduciary duty to the corp and duty of care; had to consider creditors interests (they did) but can go gainst them; directors required to act in best interest of corp viewed as good corp citizen may be required to consider corporate stakeholders other than shareholders to fulfill duty; directors in this case fulfilled tuities by considering impact of each takeover bid on debenture holders

Economic Justifications of Profit Maximization:- Social benefits:

o Profitable business activity generally increases social welfare by providing consumers with goods and services that they value

o Businesses have secondary benefits such as creating jobs, developing new technologies, generating tax revenue

o Firms that do not earn sufficient profits lose capital and eventually go out of businesso Business corps not the optimal providers of philanthropy – more efficient for corps to max profits

allowing shareholders to make own decisions as to how to allocate philanthropic giving - Employment:

o Corps sometimes lay off workers to reduce costs and increase profits if there was a rule preventing corps from terminating employees, while in short term employees would be protected, in the long term there would be less investment and fewer overall jobs

- Role of Corporate law: o While market failure may lead to harmful costs on society (ex: pollution), generally more effective to

impose legal activity on such activity directly (ex: through environmental law) and encourage corps to max profits within the established regulatory framework

Benefit Corporations:- Non-profit corps (societies in BC) are dedicated to charitable objects- Benefit corporations are for-profit corps that are expressly permitted to pursue other social goals community

contribution companies in BC, outlined in BC BCA Part 2.2- Community contribution companies must have, as one or more of its corporate objectives, community purposes

(BC BCA s51.92)- Community purposes = purposes beneficial to society at large or to a segment of society that is broader than the

members of the corp itself (BC BCA s51.91)- Officers in a community contribution company must act in furtherance of its community purposes (BC BCA

s51.93)- Unlike standard corporations, a community contribution company may not declare a dividend without the

approval of the shareholders (s 51.94)30

- Immediately prior to dissolution, a community contribution company must distribute its assets to "qualified entities" (defined as charitable or cooperative organizations) (s 51.95)

- Community contribution companies must provide annual community contribution reports to their shareholders that disclose the financial activities of the company and describe its benefit to society (s 51.96)

Governance of Benefit Corporations:- Investors contribute to benefit corporations in order to benefit society (or certain members of society), while

also earning a financial return- Same conflicts of interest between management and shareholders that can exist in a business corporation can

also exist in a benefit corporation- Officers and directors of a benefit corporation may be tempted to divert corporate resources to purposes other

than the corporation's economic or charitable goals- Thus, many corporate governance principles that apply to business corporations also apply to benefit

corporations- Well-known examples of (American) benefit corporations include Patagonia, Inc., Kickstarter, PBC, and JAND,

Inc.- Most benefit corps privately held

ROLE OF DIRECTORS AND OFFICERS

CBCA ss 102(1), 103, 105–107, 109, 111, 114, 115, 117, 121, 122

Role of Directors in Corporate Governance:- Board of directors responsible for managing, or supervising management of, a corp (CBCA s102(1))- In large corporations, the directors are generally responsible for supervising officers

o Sometimes there may be overlap (director and officer)- As the nexus between shareholders and management, the board of directors plays a key role in corporate

governance

By-Laws:- The board of directors may create, amend, or repeal the bylaws of the corporation (CBCA s103(1))- However, shareholders must approve such creation, amendment, or repeal at next shareholder meeting (CBCA

s103(2))- Once created by the board of directors, any bylaw is effective until approved (or not) by the shareholders at the

next meeting (CBCA s103(3))- Shareholders may also propose by-laws directly at shareholder meetings (CBCA s103(5))

Election of Directors:- Directors appointed upon formation of the corp and then elected at each annual meeting of shareholders (CBCA

s106)- Directors may be elected for a term of up to 3 years and need not serve identical terms (“staggered terms”)

o Staggered terms sometimes a means of discouraging takeovers to avoid being able to fire all directors at once with a majority; not very protective in Canada

o Not a great takeover defence, as potential acquirers can use CBCA 143(1) to requisition meetings to elect new directors

Cumulative Voting:- Articles of incorp may provide for “cumulative voting” for the board of directors (CBCA s107)

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- Under cumulative voting, instead of electing directors as a slate each director elected separately- Each shareholder gets a # of votes equal to # of shares they hold multiplied by # of directors to be elected can

distribute votes as they see fit, including cumulating all votes for one or more individual directors to ensure they are voted in

- Provides greater opportunity for minority shareholders to achieve board representation

Removing Directors at Special Meetings:- Shareholders may remove directors by ordinary resolution at a special meeting (CBCA s109(1))

o Ordinary resolution = plain majorityo Special resolution = 2/3 majority

- Articles cannot provide for removal of a director by a greater number of votes than provided in s109 (CBCA s6(4))

- Shareholders can requisition a special meeting (CBCA s143)o Need 5% vote to requisition a special meeting

- Directors elected by cumulative voting cannot be removed this way – would have to essentially go through a voting procedure to remove that replicates cumulative voitn process (CBCA s107(g))

Freedom to customize voting rights:- Companies are free to customize voting rights/their business relationships (Bushnell)

o Note this decision may be more relevant for private companies, but this type of customization may be less justified for public companies where shareholders have no meaningful opportunity to negotiate terms

Bushell v Faith (UK): sister 1 – 100 shares; sister 2 – 100 shares; brother – 100 share; Sisters wanted to remove brother, but he had the supervoting power as director (articles of incorporation: under a resolution to remove a director, that directors’ shares would carry three votes each); is article 9 applicable such that brother not removable or is it void? APPLICABLE – although the guiding principle of interpretation is to implement the will of parliament (in this case preventing director entrenchment), companies have freedom to customize voting rights; parliament could have prevented this with clear language; however this decision frustrates s184(1) in Companies Act

Unanimous Shareholder Agreements: - Bushnell addresses extent to which members of a corp can customize their relationships through corporate

organizational docs- Unanimous shareholder agreements also a means of customizing corporate governance- Provided for in CBCA s146- Directly limits the discretion and/or powers of the board of directors- Must be signed by all shareholders to be effective BUT may bind new shareholders who acquire their share after

the agreement is signed (s146(3))- If notice not given to outside purchaser or transferee of the existence of a unanimous shareholder agreement,

purchaser/transferee may rescind transfer within 30 days of learning of the existence of a unanimous shareholder agreement (s146(4))

Unanimous Shareholder Agreements and the oppression remedy:- Oppression remedy should be interpreted broadly (Bury)- Oppression remedy can be used against conduct authorized in a valid unanimous shareholder agreement (Bury)

Bury v Bell Gouinlock Ltd: P was employee and shareholder; left to work at another brokerage house; mandatory sale of shares if shareholder no longer works for company BUT unanimous shareholder agreement says company can delay sale for 12 months (basically restricts workers for working for other companies bc can only have shares of 1 brokerage firm at a time); can a shareholder obtain an oppression remedy against conduct that is authorized by a valid agreement the shareholders signed? YES – oppression remedy should be interpreted broadly; decision to impose 12 month limitation

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improperly based/seems like punishment; company ordered to buy shares back; RATIO: addresses whether shareholder can obtain oppression remedy against enforcement of valid shareholder agreement

Agency Doctrine and Corporations:- Corps = artificial entities therefore cannot take actions on their own- Corps dependent on agents (officers, employees, representatives) to at on their behalf- Ultra Vires:

o Legal doctrine that no corp may act beyond its legal authority as specified in its organizational docso Archaic doctrine that has been significantly limited such that unless corporate powers are explicitly

restricted, assumed corp has powers of natural person

Indoor Management Rue:- Formalizes modern principle that outsiders to a corporation are not bound by its internal documents (CBCA

ss17-18)- Both statutes have the indoor management rule, whereby outsiders are entitled to assume that their dealings

with a person holding themselves out as a corporate director are valid (CBCA s18(1); BCBCA s146(1)), unless the outsider has notice or ought reasonably to suspect that the person with whom they are dealing does not have the authority they purport to have (CBCA s18(2); BCBCA s146(2)).

- The idea is based on knowledge – that the outsider person is relying on what the corporation has allowed to be put out into the world (CBCA s17)

- A party dealing with the corporation is entitled to adopt the terms of letter at face value because the solicitor held out authority as an agent of the corporation and he had the authority to speak for his clients: (Sherwood Design)

Sherwood Design Services Inc. v 872935 Ontario Ltd.: should a corporation be bound by an agreement given that they never signed it (only 3 individuals signed in on behalf of the corp)? can Ontario Ltd validly adopt the purchase agreement? Did the lawyers correspondence constitute valid adoption of the purchaser agreement? CONTRACT UPHELD – If you sign a contract on behalf of a corporation that has not yet been formed, you are liable under the contract until the corporation has been formed and ratifies the contract such that you are no longer liable. If corporation doesn’t ratify, you are liable for the pre-incorporation contract. In this case it WAS ratified; case of legal incompetence

DIRECTORS DUTIES

Fiduciary Duty:

CBCA ss 120, 122(1)(a)

- CBCA s122(1)(a): every director and officer of a corp in exercising their powers and discharging their duties shall…act honestly and in good faith with a view to the best interests of the corp

o Note: statute says fundamental duty owed to the corp not necessarily the shareholders - Note: In Canada fiduciary duty (duty of loyalty) not the same as duty of care. In USA, you have duty of loyalty

and duty of care, both of which = “the fiduciary duties”- Directors and officers owe the same fiduciary duties (Canadian Aero Services)

To Whom is the Duty Owed?- “Best interests of the corp” not a precise standard in practice fiduciary duty usually owed to shareholders of

the corp- Peoples and Re BCE have expanded this range of interest (both SCC cases)

Interested Transactions/Conflicts of Interest:- BC fiduciary duty = duty of honesty and good faith, directors must put interests of corp before own interests

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- Directors cannot engage in self-interested transactions (absent full disclosure and approval by disinterested directors)

- Directors and officers must disclose to the corp any self-interested transaction (CBCA s120(1))o CBCA s 120(1): "A director or an officer of a corporation shall disclose to the corporation, in writing or by

requesting to have it entered in the minutes of meetings of directors or of meetings of committees of directors, the nature and extent of any interest that he or she has in a material contract or material transaction, whether made or proposed, with the corporation, if the director or officer

(a) is a party to the contract or transaction; (b) is a director or an officer, or an individual acting in a similar capacity, of a party to the

contract or transaction; or (c) has a material interest in a party to the contract or transaction."

- if you make these disclosures, non-interested directors on the board may vote (CBCA s120(7))

Voting:- CBCA s120(5): “A director required to make a disclosure under subsection (1) shall not vote on any resolution to

approve the contract or transaction unless the contract or transactiono (a) relates primarily to his or her remuneration as a director, officer, employee, agent or mandatory of

the corporation or an affiliate; Employment agreement exception director can vote on own employment agreement

o (b) is for indemnity or insurance under section 124; oro (c) is with an affiliate.

Directors can vote on transactions involving affiliates. Large corporations that have dozens of subsidiaries, within the entire corporate structure it is often the same slate of directors for holding company and all subsidiaries

- General rule = directors can’t vote on transactions where they have an interest. S120(5) outlines exceptions

Shareholder Confirmation/Ratification: - Per CBCA s120(7.1), even if disclosure requirements are not met, the shareholders of a corporation can ratify an

interested transaction if the director/officer acted "honestly and in good faith" ando The contract or transaction is approved or confirmed by special resolution at a meeting of the

shareholderso Disclosure of the interest was made prior to the shareholder vote, ANDo The contract or transaction was reasonable and fair to the corporation

- Allows for ex post shareholder ratification of transactions with directors or officers

Corporate Opportunities:- Shareholders generally harmed when directors/officers pursue corporate economic activities in their personal

capacity form of agency cost- Common law standard strict – severely limits usurpation of corporate opportunities

Traditional rule WRT corporate opportunities: (Regal (Hastings))- Directors liable for any profits made by virtue of their position, regardless of their motivations and regardless of

surrounding circumstances (unless disclosure and consent)

Regal (Hastings) Ltd v Gulliver (UK): R owned cinema in Hastings; wanted to sell and make sale more appealing by acquiring 2 other cinemas in the area; R formed subsidiary company for purpose of acquiring the 2 cinemas; didn’t have enough $$ to purchase and landlord wanted personal guarantees – to avoid, chairman of directors, 4 other directors and R’s solicitor promised to find $; 4 shareholders bought shares, chairman and solicitor “found” from others; buyers of R sued directors (chairman + 4) and solicitor for usurping corporate opportunity; did the directors usurp corporate opportunity? 4 who purchased shares/personally profited did, solicitor and chairman did not – directors liable for any profits made by virtue of their position, regardless of motivations/surrounding circumstances; disclosure and consent 34

would have avoided this; solicitor and chairman didn’t get profits therefore not liable; RATIO: sets forth traditional rule against directors’ appropriation of corporate opps

Going back to the strict rule:- Peso Silver Mines Ltd v Cropper had weakened strict rule against appropriation of corporate opps (if opp is

expressly rejected by the Board in good faith then no ursurping)- Canadian Aero Services distinguishes Peso and upholds Regal (Hastings) directors/officers may NOT

appropriate corporate opportunities- Corp does not need to prove loss suffered for liability (Canadian Aero Services)- Under a fiduciary duty even after resignation (Canadian Aero Services)

Canadian Aero Services Ltd. v O’Malley (SCC): defendants resigned from C and incorporated a company to perform identical work as C; defendants won a proposal bid over C; did the defendants breach a corporate opp to C even though they were no longer employed by C? YES – still liable even after you’ve left (one member of the group wasn’t bc never an employee); officers of the company owe same fiduciary duty as directors; defendants stood in fiduciary relationship and breached that duty; expressly distinguishes from Peso/ almost overrules; C doesn’t have to prove they suffered a loss; must give back value of profits

Non-exhaustive factors to be considered when determining whether conflict of interest arisen: (Canadian Aero Services)

- 1. Position or office heldo Ordinary employees don’t generally have fiduciary duty o Did employee sign a non-compete?

- 2. Nature or Strength of the corporation's interest (includes):o Maturity: how far had the corporation gone to develop the opportunity?o Specificity: generally or specifically identified by the corporation?o Special/Private: was the opportunity private or significant to the corporation?o Rejected: had the opportunity been rejected in good faith?

- 3. Defendant's relationship to the opportunity (includes):o Knowledge: how much possessed by D?o Circumstances: how was knowledge obtained?

- 4. If alleged breach occurs after termination of D's relationship with the company (includes):o Time frame: how long after termination did the action occur?o Circumstances: how was the relationship terminated…retirement, resignation, discharge?

Policy Considerations WRT Corporate Opportunities:- Assume corporation cannot pursue an opportunity, but one of the corporation’s directors can pursue the

opportunity on his own account without harming the corporation in any way. o Strict rule would prevent director from acting

- Pro strict rule: o Need to maintain the image of honestyo Hard to determine facts in a particular situation – director will always argue good faith

- Anti strict rule: o Assuming this is all true, this is a net economic loss if nobody makes this investment a welfare

enhancing transaction that didn’t occur – economically inefficient - Does it matter if the corporation is publicly or privately held?

o In private company context it may not make sense to have VERY strict rule for the concern that it might frustrate welfare-enhancing transactions

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o In public company context, strict rule absolutely makes sense because shareholders in public companies have very little power to oversee/police what directors are doing extremely easy for directors to take advantage of shareholders

Competition:- Strangely, the common law did not prohibit a director from serving on the boards of two competing

corporations (London and Mashonaland Exploration Company, Limited v. New Mashonaland Exploration Company, Limited)

- Modern rule on corporate competition: Two-pronged disjunctive test regarding corporate opportunities: a director is liable if (Cranewood)

o 1. the opportunity represents an actual or potential conflict of interest, or o 2. the opportunity was acquired by the director by virtue of his or her positiono very similar to rule on corporate opportunities

Cranewood Financial Corp v Norisawa (BCSC): K lived in Canada and was managing assets on behalf of friend/business partner N; relationship soured and N accused K of starting own companies to compete with pre-existing companies; using the modern test outlined above, this was an actual conflict of interest AND K acquired the info by virtue of his position as director – violated fiduciary duty but made no profit so no damages; follows Regal (Hastings)

Duty of Care:

CBCA ss 122(1)(b), 123(4), 123(5)

- CBCA s122(1)(b): every director and officer of a corp in exercising their powers and discharging their duties shall…exercise the care, diligence and skill that a reasonably prudent person would exercise in similar circumstances

- BC BCA s142(1)(b) A director or officer of a company, when exercising the powers and performing the functions of a director or officer of the company, as the case may be, must…exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances

Safe Harbor:- Directors may rely on financial statements or other representations made by qualified professionals reliance

must be in good faith (CBCA s123(4)(5))

Traditional Common Law Standard: (Re City Equitable Fire)- Applicable duty based on director’s subjective knowledge and experience- Director not bound to give continuous attention to affairs of company- In absence of grounds for suspicion, director justified in trusting corporate officers to perform their duties

honestly

Re City Equitable Fire Insurance Co (UK): company lost $$ in failure of investments and large scale fraud of chairman; liquidator sued other directors for negligence; liable? NO – no obligation by directors to obtain the info about corporate finance – standard = reasonableness; breached reasonableness BUT in this case articles said directors not held liable even if negligent must be willfully (grossly) negligent to be held liable; so would have been liable under reasonableness but exculpatory provision protected them; RATIO: set out traditional common-law standard

Statutory/modern standard:- CBCA s122(1)(b) stricter than common law standard objective, not subjective (Peoples)

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- To receive protection of s123(4)(b), person making the statement must be a qualified “professional” (accountant, lawyer, etc.) (Peoples)

Re Peoples Department Store Ltd.: W owned its affiliate P under complicated inventory management system; both corps went bankrupt and trustee sued directors of P and W for violating duties of care and loyalty; did they breach duty of care? NO – s122(1)(b) is STRICTER than the common law standard but directors’ decision was reasonable at the time and under the circumstances; note: argument that VP finance was a person who lends credibility to a statement as per s123(4)(b) failed bc the person must be a qualified “professional”

Business Judgement Rule: - American rule (Delaware)- Where no evidence of fraud, illegality or conflict of interest WRT a given corporate action, directors are

presumed to have acted in good faith and on a reasonable basiso Courts reluctant to second-guess business decisions

Business Judgment Rule – Delaware: (Smith v Van Gorkom)- Prior to this case, under Delaware law business judgement rule provided broad protection against director

liability- NOW – heightened requirement that directors act on adequate info- No protection for directors who make unintelligent or unadvised judgment- Suggests directors should establish and follow careful procedures essentially mandates requirement for

outside fairness opinions in public M&A transactionso Fairness opinion = expert valuation of a company provided by a financial firm where they get numerous

analysts, run the numbers and come up with a valuation to determine whether a given purchase price is fair

- Delaware legislature later passed amendment to General Corporation Law allowing any corp to limit director liability for breaches of duty of care (no equivalent provision in CBCA but corp may indemnify directors)

Smith v Van Gorkom (Delaware): VG was CEO of Trans Union; VG concluded best option was to sell company proposed sale price of $55/share; VG met with senior managers and encountered strong resistance CFO said determined reasonable price per share to be between $55-65; after meeting with senior managers held a board meeting where VG made oral presentation of the deal and CFO made statement about reasonable price but did not circulate any reports; legal counsel said directors would be sued if they voted against it; shareholders later sued directors for approving deal; business judgment rule apply? NO – applying business judgment rule effectively says they met duty of care directors did NOT meet duty of care; VG didn’t make investigation into proper share price; market price not appropriate bench mark (bc selling control not equivalent to selling a share); directors only considered for 2 hours; CFOs presentation uniformed and not substantive; threat of litigation not sufficient to pursue uninformed course; RATIO: sets out details of business judgment rule

Business Judgment Rule – Canada: (UPM-Kymmene) - Business judgment rule cannot apply where the Board of Directors acts on the advice of a director’s committee

that makes an uninformed recommendation- Directors only protected to the extent that their actions actually evince their business judgment- "The principle of deference presupposes that directors are scrupulous in their deliberations and demonstrate

diligence in arriving at decisions."

UPM-Kymmene Corp. v UPM-Kymmene Miramichi Inc.(Ontario): chairman sought to become senior exec – proposed agreement that included generous compensation; proposal considered at 2 board meetings; 1 st board did not approve

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and directors resigned after meeting; 2nd meeting under new board who approved compensation package but had never met chairman and relied on advice of independent compensation consultant who did insufficient research and knew previous board was strongly against it but did not question reasonableness of agreement; breach duty of care or protected by business judgment rule? BREACHED – did not question or discuss reasonableness of agreement and did not know the chairman; heightened info requirement (similar to Delaware); directors only protected by business judgment rule to extent that their actions actually evidence business judgment!

Duty of Care Analysis:- Distilling the case law, the Canadian and Delaware standards are quite similar

o 1. Is there evidence of fraud, illegality, or conflict of interest? If so, duty of loyalty analysis applies. If not

o 2. Did the directors make a careful, informed business decision? If so, the business judgment rule applies. If not

o 3. The directors may be held liable unless an exculpatory provision in available.

HOSTILE TAKEOVERS AND DEFENSIVE TACTICS

Hostile takeover = acquisition of a corp without consent of the incumbent management- In traditional acquisition, target management cooperates- Primary methods of effecting a hostile takeover:

o 1. Proxy Contest: hostile acquirer solicits proxies from other shareholders to depose the board of directors

o 2. Tender Offer: hostile acquirer issues blanket offer to purchase the shares of other shareholderso 3. Direct Acquisition: hostile acquirer simply obtains controlling block of shares on open market

- Even if management opposes the transaction, these methods effectively circumvent the board

The Market for Corporate Control – Why Hostile Takeovers = Attractive/Necessary:- If management is subpar, target corps stock price will underperform- Enterprising investor can acquire the corp, replace or improve management and reap gains in form of stock

appreciation- Incumbent managers will likely lose their positions therefore have powerful incentives to oppose hostile

transaction

Defensive Tactics:- Management may deploy nonvoting stock, a staggered board (divide board into classes where each class serves

different term), or a shareholder rights plan (“poison pill”)- Deploying defensive tactics implicates directors’ fiduciary duty- Defensive tactics allowed, although self-interested, bc not all hostile takeovers benefit incumbent shareholders - Incumbent directors have considerable discretion in defending against hostile takeovers

Poison Pill (shareholder rights plan):- Developed by Martin Lipton in 1980s- Grant existing shareholders the rights to additional stock, triggered by any shareholder crossing a specified

ownership thresholdo Right entitles holder to purchase one additional share in the company at half the market price of the

company’s stock at time the right is exercised, but only exercisable should any shareholder obtain more than a stated percentage of the company’s stock (typically 20%)

o Existing shareholders purchasing stock dilutes stock bc new shares are issued- Forces a potential bidder/potential acquirer of the company to negotiate with the board of directors board of

directors always has the right to waive the pill WRT any individual bidder - Most effective against tender offers and direct acquisitions

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- Typically - Arguments in favour:

o Can deter coercive offers- Arguments against:

o Entrench management and reduce shareholder valueo Empirical evidence indicates that acquisitions increase shareholder value and poison pills decrease

shareholder value

Telus Corporation – Shareholder Rights Plan Agreement:- Existing shareholders are granted the right to purchase Telus shares at a 50% discount if any person obtains 20%

or more of the voting shares of Telus (Flip-In Event)o Mild poison pill – price for add’l shares, rather than 1¢ (which is common)

- Permitted bids do not trigger the poison pill

Law of Takeovers:- Most traditional takeover defence = issue shares to a friendly party- This defence was held to be an improper purpose at common law Teck Corp changes this- Current legal standard for reviewing takeover defences (Teck Corp): board of directors may resist a hostile

takeover as long as:o 1. They are acting in good faith o 2. They have reasonable grounds to believe the takeover will cause substantial harm to the interests of

the corp- Directories duties are to the company as a whole, not to the shareholders or any group thereof (Teck Corp)

Teck Corp v Millar (BCSC): small mining company frustrated a hostile takeover by entering into lock-up agreement with alternate bidder; were they able to issue new shares to a third party in order to defeat an undesirable offer? YES – did not breach duty of loyalty; directors have discretion to pick and choose buyers assuming they act in good faith; and reasonable grounds for the belief

DIRECTORS’ DUTIES IN CONTROL TRANSACTIONS

Delaware:

Delaware Takeover Jurisprudence:- Has had significant influence on Canadian corporate law- Teck Corp v Millar established legal standard for reviewing takeover defences in Canada

o Higher standard than business judgment ruleo Directors must have reasonable grounds to believe the takeover will cause substantial harm to the

interests of the corp- Under Delaware law, takeover defences evaluated according to business judgment rue until Unocal Corp v Mesa

Business judgment rule in takeover context - Delaware: (Unocal Corp)- Does not necessarily apply in takeover context- Board of directors has power to oppose threats to corp policy, including threats to independence of company - In defending a takeover, 3 conditions for directors to receive protection of business judgment rule

o 1. Directors must have reasonable grounds for believing a danger to corporate policy and effectiveness exists (burden satisfied by “good faith and reasonable investigation”)2. Directors’ actions must not be draconian; AND

o 3. Directors’ actions must be proportional Proportionality test allows directors to consider non-shareholder constituencies*

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- Directors may discriminate against a single shareholderUnocal Corp v Mesa Petroleum Corp: 2-tier offer for U in which acquirer (M) would begin with partial takeover bid and once has control would use that power to effect second step transaction to force out remaining public shareholders; to defend against, U management offered to repurchase shares of U at premium to price from all shareholders except M; can the board of directors legitimately resist a takeover offer? If yes, is that action subject to the business judgment rule? YES – can oppose and business judgment rule applies – business judgment rule only applies if board meets certain criteria; inherent conflict of interest directors must show reasonable grounds for believing danger to corp policy; RATIO: set forth intermediate standard of review in takeover context

Unocal Corp compared to Teck Corp:- Teck Corp requires directors must have reasonable grounds to believe a takeover will cause substantial harm to

a corporation- Unocal Corp requires similar reasonable grounds for rejecting a takeover but ALSO requires directors’ response

be proportionate to the threat posed AND the response cannot be draconian (open to some negotiation)

Directors duties when sale of corp is inevitable: (Revlon)- Revlon heightened judicial review of director actions during auctions (where sale inevitable) - Under Unocal Corp, board of directors may consider variety of corp interests BUT once sale of corp becomes

inevitable, directors’ duties shifts to maximizing shareholder value- To whom are directors’ interests owed?

o Unocal Corp: valid concerns include “inadequacy of the price offered, nature and timing of the offer, questions of illegality, the impact on "constituencies" other than shareholders (i.e., creditors, customers, employees, and perhaps even the community generally), the risk of nonconsummation, and the quality of securities being offered in the exchange”

o Revlon, Inc.: “A board may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to the stockholders.” until sale is inevitable

- When the sale of the corporation becomes inevitable (in an auction scenario), you have to maximize the value for your shareholders, although an auction is not mandatory (Revlon)

Revlon, Inc. v MacAndrews & Forbes Holdings, Inc: R entered into lockup agreement with another seller without holding an auction with Pantry Pride who kept offering higher prices and basically said they would pay more than whatever other bidder offers; R liable? YES – R directors breached duty of care by entering into series of transactions with the other bidder that thwarted efforts of Pantry Pride; different from Unocal bc sale of company was inevitable once sale inevitable, board of directors must consider shareholders only but prior to sale how should they attend to non-shareholder constituencies? May consider them provided that they are rationally related benefits accrued to stockholders; R prioritized interests of noteholders therefore business judgment rule didn’t apply

When do Revlon duties apply? (Paramount Communications)- Revlon duties triggered upon:

o 1) A sale of control, or o 2) A break-up of the corp

- If selling company, must exert maximum effort to get highest bid (max value for shareholders as per Revlon)

Paramount Communications Inc. v QVC Network Inc.: V entered into merger agreement with P; to protect the deal, P agreed to defensive measures: no-shop provision (P agrees not to enter into negotiations with other buyer), termination fee, lock-up option on approx. 20% of P’s common stock (V has floating right to buy 20% of P’s stock at any time); contract has no fiduciary out (which would give company option to take higher bid as part of fiduciary duty); QVC intervened with more generous proposal conditioned on cancellation of defensive measures; P board refused to conduct formal bidding process with QVC on basis it would go against contractual obligations to V; did P board violate fiduciary duty to shareholders by not considering QVC offer? YES – Revlon duties apply; Revlon duties not limited to situations where company being liquidated or broken up – also triggered if you are selling company and it remains intact; if you sell

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company, must exert max effort to get highest bid; fiduciary duties more important than contractual obligations; RATIO: any sale of control of the public company triggers Revlon dutiesCanada:

Canadian Takeover Jurisprudence:- Influenced by, but distinct from, Delaware takeover jurisprudence- Slightly more permissive standard of review in Canada

o The deference a court will grant to a board of directors that is opposing a contested takeover is greater than in Delaware

- Greater latitude to consider non-shareholder interests (i.e., “best interests of the corporation, viewed as a good corporate citizen”)

Standard of review in takeover context: (Pente Investment)- Business judgment rule applies to a control transaction if directors successfully avoid a conflict of interest- Procedural steps required to sanitize the decision ex: independent special committee- Decision must be in good faith and reasonable

Pente Investment Management Ltd (Ontario Court of Appeal): involved attempted takeover and eventual sale of Schneiders; s = publicly traded, family controlled firm; 2 classes of shares S fam owns 70% of voting shares (common shares); class A shares have most of the equity but no voting rights; S fam has only small part of equity but dominates voting; coattail provision asks any bidder to tender to the voting shares and to the non-voting shares designed to prevent someone from buying only common shares and then taking over company; Maple Leaf offered $29 and Smiths offered more; tax advantage made M’s offer similar to Smiths; S board entered into lockup agreement with Smiths; minority shareholders sue saying board didn’t act in best interests of corp; did board violate fiduciary duties by entering into lockup agreement? What is the appropriate standard of analysis? NO and BUSINESS JUDGMENT – don’t need to hold auction to discharge fiduciary duty; during a sale, directors fiduciary duties are owed to the company – directors not the agents of shareholders; board had special independent committee of directors who acted in good faith and made informed decision; decision was reasonable bc S fam has the majority of voting shares – if this is all they would take then it is a good deal

No Auction Required: (Pente Investment)- In ON a corporate auction is NOT required every time a corporation is sold. Board of directors’ actions during the

sale must be elevated in the context of the particular circumstances. o Distinguishes Revlon (through Revlon doesn’t really require corporate auction)o Following Paramount the applicable standard is “the best value reasonably available to shareholders in

the circumstances” (yet the court also states the board of directors is not beholden to shareholders alone)

Board of Directors vs Shareholders: (Pente Investment)- Important to note that board of directors acted upon the recommendations of the special committee- Special committee was constrained by the position of the S fam – since the S fam could veto a deal with Maple

Leaf, the special committee could still be acting in the best interests of all shareholders by accepting the Smithfield deal

- Board of directors was not acting under the domination of the S fam and the S fam owed no specific duty to the other shareholders

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Who do directors need to consider in control transactions?

Re BCE Inc: leveraged buyout of BCE by Ontario Teachers’ Pension Plan and its private equity partners; leverage in the deal would have reduced value of BCE’s debentures; debenture-holders sued to block transaction as oppressive as per CBCA s241; oppression remedy explicitly protects: 1) security holder, 2) creditor, 3) director, 4) officer however court seems to imply all stakeholders entitled to oppression remedy; fiduciary duties owed (according to SCC) to the corporation, not necessarily shareholders BUT following Peoples may consider variety of stakeholder interests in and some cases may be required to; debt holders had no reasonable expectation to be treated as preferential to shareholders; board considered their interests and that was sufficient

To whom are fiduciary duties owed in a control transaction?- Delaware cases say (or at least strongly imply) that duties are owed to shareholders- The Court in Re BCE says duties are not necessarily owed to shareholders, but rather to "the corporation"- Following Peoples Department Stores Inc, directors may consider a variety of stakeholder interests- Directors' discretion in balancing interests is subject to the business judgement rule- The Court in Re BCE also implies that directors may be required to consider stakeholder interests

According to Re BCE…- “Directors, acting in the best interests of the corporation, may be obliged to consider the impact of their

decisions on corporate stakeholders”o Directors need to keep the reasonable expectation in mind when exercising their fiduciary duty to the

corporation Note: in Re BCE, not reasonable for debenture holders to expect more than contractual rights Oppression remedy protects “reasonable expectations of stakeholders” which is simply that

directors act in best interests of the corp this requires considering interests of stakeholders Seems to extend oppression remedy beyond statute

o Fair treatment is most fundamentally what stakeholders are entitled to “reasonably expect”o Expectations of different stakeholders can conflict Directors must try to resolve conflicts in a way that

doesn’t cause undue detriment to one group over the other

CANADIAN SECURITIES REGULATION

Securities Regulation in the Takeover Context:- Positions taken by the securities regulators are not always consistent with positions taken by the Supreme Court

of Canada

Public Interest:- Securities commission of each province has effective jurisdiction over any company that issues securities to

provincial residents- Each provincial securities commission has the power to make orders "in the public interest"- This power allows the provincial securities regulators to effectively enjoin takeovers (as well as takeover

defenses) that are not "in the public interest"o Lots of discretion to regulate takeover bids

National Policy 62-202:- Joint document that was issued by all the securities commissions in Canada together announcing their view of

the appropriate scope of takeover defences in the hostile takeover context in Canada - Focused on interest of shareholders

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o Privileges shareholder choice and shareholder value- No specific rules (though NI 62-104 governs take-over bids)- Primary objective = protection of bona fide interests of the shareholders of the target company

o Also maximizing shareholder choice- Secondary objective = provide regulatory framework within which takeover bids may proceed in open and even-

handed environment - Shareholder approval of a given transaction allays regulatory concerns- Specifically refers to the following defensive tactics that may come under scrutiny:

o issuing shares or optionso selling or purchasing material assetso any other transactions outside the ordinary course of businesso In sum: Buying shares, selling shares or granting an option (poison pill), anything out of the ordinary

course of business- Commission favours auctions bc produce most desirable results in takeover bids; will intervene if auction

frustrated- As a general matter, the securities regulators will not issue advisory decisions will only approve/disapprove of

specific tactics on context of a dispute- Securities commission not bound by stare decisis

Cannot maintain poison pill indefinitely: (Re Chapters)- Shareholders themselves must ultimately decide the fate of competing takeover bids—directors cannot "just say

no"- Directors may maintain a poison pill for as long as there is a "reasonable possibility" of achieving a superior offer- In evaluating a board of directors' decision to maintain a poison pill, a variety of factual considerations may be

relevant from Royal Host Real Estate Investment Trust: o Whether shareholder approval of rights plan obtained; whether plan adopted; whether there is broad

shareholder support for continued operation; size and complexity of target company (large/complex in favour of allowing pill bc takes longer for bidders to assess); other defensive tactics; # of potential, viable offers; steps taken to find alternative bid/better transaction; nature of bid (coercive, unfair?); length of time since bid announcement made; likelihood bid will not be extended if pill not terminated

- In this case, there was no reasonable possibility that maintaining the poison pill would increase shareholder choice and value

Re Chapters Inc: T approached C to negotiate friendly takeover; C rebuffed and adopted tactical poison pill that had permitted bid feature with usual provisions BUT in order to be permitted bid, had to remain open for 45 days; T made hostile bid; C searched for “white knight” bidder Future Shop; FS announces it will make offer that C prefers and says it will waive pill in favour of FS; should poison pill be waived? YES – no reasonable possibility that given a reasonable period of time C would be able to increase shareholder choice or value; no demonstration of broad shareholder support for continuance of pill; C not large or complex; numerous defensive tactics in place; few other viable offers

Departure from Re Chapters – could “just say no”: (Re Neo Material Technologies)- Does Re Neo Material Technologies Inc allow a "just say no" defense?- The Ontario Securities Commission acknowledges that prior decisions do not allow a board of directors to "just

say no"- However, the Commission effectively allows the Neo Material Technologies Inc. board to do just that- Key facts in this case:

o 1. That the target shareholders' approval of the defensive plan was sufficiently informed and non-coerced.

o 2. That the board's refusal to seek out alternative bids was, in the circumstances, an acceptable exercise of the board's business judgment and in keeping with its fiduciary obligations to the company.

- This decision may be fact-specific43

o context of the financial crisiso overwhelming shareholder support for the poison pillo procedurally rigorous decision-making process

- Prof: Prof thinks it’s the right outcome bc of the unusual factual circumstances in which the board of directors were legit trying to protect interests of shareholders in preventing them from being taken advantage of in unusual financial circumstances

Re Neo Material Technologies Inc: P announced intention to acquire additional 20% outstanding common shares of N – complied with existing pill; N adopted new pill that would prohibit partial bids like bid from P; P then amends offer by raising price and decreasing # of shares; N shareholders approve the pill which will exclude P; P applies to securities commission for order to set pill aside; should the pill stand? YES – in this case good pill was adopted as direct response to P’s offer with approval from overwhelming majority of shareholders; shareholders sufficiently informed; no evidence board had not acted in best interest of corp or that shareholders pressured/coerced to vote in favour of pill; board allowed to refuse tender offer without making any effort to solicit a bid could “just say no”

When the pill must go: (Re Baffinland):- Effectively repudiates Neo- Commission holds that it is generally time for a poison pill to be retired when it has served its purpose by

facilitating an auction or otherwise maximizing shareholder value- Re Neo Material Technologies Inc does not mean the board of directors can "just say no"- The decision to maintain a poison pill is not subject to the business judgement rule

Re Baffinland Iron Mines Corp: N and A bidding on B; management of B favoured A bid and entered into support agreement that contained “no shop” clause, break fee of $11M and requirement that B keep pill in place until just prior to expiry of A’s bids; pill in place for 57 days, no shareholders expressed views; does the pill have to go? YES – time to go when rights plan has served purpose by facilitating an auction, encouraging competing bids, or otherwise maxing shareholder value; Chapters factors all relevant;

Securities Regulation and “Stakeholder” Interests:- Do Canadian securities regulations extend to non-shareholder interests? - NP 62-202: "the primary objective of the takeover bid provisions of Canadian securities legislation is the

protection of the bona fide interests of the shareholders of the target company"- Re Chapters Inc: proper focus is on shareholder choice and shareholder value- Re Neo Material Technologies Inc: follows the SCC's opinion in Re BCE Inc—thus potentially allows directors to

consider non-shareholder interests- Re Baffinland Iron Mines Corp: again focuses on shareholder choice

Highlights of the 3 cases:- Re Chapters Inc: a poison pill can only be used to generate strategic alternatives to a hostile offer—the board

cannot "just say no"- Re Neo Material Technologies Inc: allows the board to block a takeover offer, even in the absence of a strategic

alternativeo Probably confined to its specific facts (depressed stock market, specific shareholder approval, etc.)

- Re Baffinland Iron Mines Corp: the board cannot "just say no"

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SHAREHOLDERS RIGHTS

CBCA ss 107, 140, 142, 154, 173, 183, 188, 189, 190

Special resolution = 2/3 majority

Voting:- Primary means by which shareholders affect corporate governance- CBCA s 140(1), "[u]nless the articles otherwise provide, each share of a corporation entitles the holder thereof to

one vote at a meeting of shareholders"o Implies that corporations can issue non-voting or restricted voting shares

- CBCA s 102(1), the board of directors supervises the business and affairs of a corporation—shareholders do not have a direct voice in most business transactions

Resolution in Lieu of a Meeting:- Generally, shareholders vote at shareholder meetings (e.g., annual meetings)- Not all shareholder decisions require a physical (or electronic) meeting- Pursuant to s 142(1), the shareholders may act by unanimous written resolution- Important practical measure for smaller corporations

Fundamental Changes:- In addition to electing the board of directors and amending the by-laws, shareholder approval (by supermajority

vote) is required for a number of "fundamental changes"- The most important of these are

o amending the articles of incorporationo approving an amalgamationo approving a corporate continuationo approving the sale, lease, or exchange of substantially all the corporation's assets

Amending the Articles of Incorporation:- CBCA s 173 a special resolution of shareholders is required to amend the articles of incorporation- Typically, board of directors will propose amendments and the shareholders will vote at a meeting (or sign a

unanimous resolution in lieu of a meeting)

Amalgamation:- In order to amalgamate, each constituent corporation must execute an amalgamation agreement that sets forth

the terms of the amalgamation (CBCA s 182(1))- Once the amalgamation agreement has been signed, the shareholders of each constituent corporation must

approve the amalgamation by special resolution (CBCA s 183(5))- Even non-voting shares have the right to vote to approve an amalgamation (CBCA s 183(3))- Each class of shares is entitled to a separate vote if the amalgamation includes a provision that would entitle the

class to a separate vote under CBCA s 176 (i.e., a provision that would change the rights of that specific class)

Continuation:- Continuation = reorganization of a corp in another jurisdiction or under another corporate act- Articles of continuation can include amendments to the articles of incorporation- Continuance requires the approval of both the original jurisdiction and the new jurisdiction

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- To be effective, the shareholders of the corporation must approve the continuation by special resolution (CBCA s 188(5))

- Even non-voting shares have the right to vote to approve a continuation (CBCA s 188(4))

Sale, Lease or Exchange of Substantially All Assets:- The sale, lease, or exchange of substantially all the assets of a corporation requires a special resolution of

shareholders (CBCA s 189(8))- As with other fundamental changes, even non-voting shares have the right to vote on an extraordinary sale,

lease, or exchange (CBCA s 189(6))- Any class of shares that is affected differently by the sale, lease, or exchange is entitled to a separate vote

thereon (CBCA s 189(7))

Dissent Rights:- Shareholders may dissent from a fundamental change and demand payment of the fair value of their shares

(CBCA s 190(1))- Exercise of dissent rights is relatively uncommon—acquisition agreements often include a provision whereby the

purchaser can back out if more than five to ten percent of dissent rights are exercised

Voting rights within a class of shares must be equal: - Voting rights can differ between classes of shares but NOT within a single class of shares (Jacobson)

o Cannot discriminate among different shareholders within one class. - At least one class of shares must adhere to an unmodified equal voting rule (Jacobson)- All shares within a class must have the same rights (Bowater)

Jacobsen v United Canso Oil & Gas Ltd.: United Canso adopted bylaw capping voting rights at 1,000 shares; provision added to articles of incorp; did the provision contravene the CBCA? YES – while literal reading of relevant statutory provisions might suggest a corp can modify voting rights of a single class of shares, reading statutory framework broadly and with common law suggests voting rights can only differ as between classes of shares

Bowater Canadian Ltd. v R L Crain Inc: articles of incorporation of RL Crain provided for common shares granting 10 votes per share; if common shares transferred, voting rights decreased to 1 vote per share; step-down feature allowed? NO – all shares within a class must be equal; reinforces Jacobson

Rationales for Voting Limits:- Historically, shareholders were often entitled to one vote per person- Voting based on shareholding was considered unfair (or even undemocratic)- Voting limits (and similar voting rules) can be used to protect small shareholders- They can also be used to entrench incumbent control groups

Proxy Voting:- The CBCA grants the right to vote by proxy (s 148)- Proxy = vote on a shareholder's behalf- Proxy voting is the only practical means by which shareholders in public corporations can vote- Since management controls the proxy machinery, proxy voting tends to be very pro-incumbent- Challengers can distribute their own proxy materials in a "proxy fight"- Statutory provisions dealing with proxies = CBCA s147-154 and s32-42 of the Regulations and BCBCA s172-185- Although a letter may state that it is “not requesting proxies”, it might appear to be a solicitation within the

meaning set out in CBCA 147(a)(ii) and (iii) (Brown v Duby)

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Brown v Duby: proxy fight between management and shareholders; shareholders given info about soliciting proxies in future that is “not currently a solicitation of proxies”; info said don’t sign management’s proxies; plaintiffs claimed defendants 2 letters constituted a solicitation of proxies as per CBCA s150(1)(b); does the CBCA rule apply in this case bc it is US residents (of a Canadian corp) sending to other US residents? If yes, can it be nixed for failure to disclose as per CBCA? CBCA APPLIES bc incorporated in Canada; this was a proxy – although letters state “not soliciting proxies at this time” they were solicitation within meaning of CBCA – solicitation is a defined term; requirement violated but balance of convenience favoured defendants so didn’t make sense to issue an injunctionShareholder Proposals:

- Shareholders can directly propose resolutions at shareholder meetings- Actions that shareholders can propose include:

o amendment of the articles of incorporation (CBCA s 175(1))o amendment of the by-laws (CBCA s 103(5))o director nominations (only if the shareholder(s) holds at least five percent of shares) (CBCA s 137(4))o miscellaneous corporate actions (CBCA s 137)

- It is unclear whether general shareholder proposals are binding- CBCA 137(5): a corporation may refuse to distribute a shareholder proposal if "it clearly appears that the

proposal does not relate in a significant way to the business or affairs of the corporation"o E.g. Varity Corp: resisted including the proposal in its circular to shareholders on the ground that the

proposal was primarily for the purpose of promoting a general economic, political, racial, religious, or social cause

Variety Corp. v Jesuit Fathers of Upper Canada: 2 shareholders wanted to request company stop doing business in South Africa due to apartheid regime wanted to include proposal in proxy solicitation to divest from SA; can management refuse to distribute a proposal in the proxy solicitations? YES – management can exclude shareholder proposal where primary purpose is to promote economic, religious or political purposes NOW CHANGED UNDER CBCA 137(5)

SHAREHOLDERS REMEDIES

CBCA ss 190, 239, 241, 242

Dissent Rights:- Recall that shareholders have dissent/payment rights under CBCA s190- These rights can be an important protection against shareholder oppression

Investigation:- Under CBCA s229, a security holder or the director may apply to a court of competent jurisdiction for an

investigation of the corporation o Use fact finding power of a court of law to find out if there is anything shady going on

- Court may order an investigation on evidence of fraud or oppression- Under CBCA s230(1), a court may issue any order in connection with an investigation

Three Main Types of Shareholders Lawsuits:1. Personal action: a shareholder has been injured in a personal, particularistic manner (e.g., the board of directors

denies the rights of a single shareholder)2. Oppression remedy: most often used when a specific group of investors has been discriminated against (e.g.,

the directors deny the rights of minority investors)a. More commonb. Treated unfairly as a group

3. Derivative action: an individual shareholder or group of shareholders sues on behalf of the corporation (e.g., the directors violate their fiduciary duties to the corporation)

a. Ex: board of directors embezzling money – individual shareholder can sue on behalf of the corporation 47

Personal Action- A shareholder has been injured in a personal, particularistic manner (e.g., the board of directors denies the

rights of a single shareholder)o Individual shareholders have no cause of action for wrongs committed against the corporation – can be

brought as a derivative action instead (Hercules Management) similar to how shareholders do not share the corp’s liabilities, they cannot benefit from its right to sue

o Foss v Harbottle: individual shareholders have no cause of action in law for any wrongs done to the corp. If an action is to be brought in respect of such losses, it must be brought either by the corporation itself (through management) or by a derivative action.

o Deloitte Touche v Livent Inc affirms Hercules Management – auditors owe duty of care to corp clients not to individual shareholders

Cannot sue personally for wrongs done to corp as a whole: - The rule of Foss v Harbottle is that individual shareholders have no cause of action for wrongs committed against

the corporation- This is a corollary of separate corporate existence- Cannot sue personally for wrongs committed against corp (Hercules Management)

Hercules Management Ltd. v Ernst & Young: shareholders of H sued E for negligently performing audits and failing to detect malfeasance by officers in the company that was detrimental to equity of the shareholders; shareholders suing EY as shareholders of the company, not on behalf; can shareholders personally sue the corp or must they bring derivative action? MUST BRING DERIVATIVE – if harm done to specific shareholder could bring claim on personal basis but this is not a personal situation

Derivative Action- An individual shareholder or group of shareholders sues on behalf of the corporation (e.g., the directors violate

their fiduciary duties to the corporation)- BC Standard: BCBCA 233(1): derivative action must include reasonable efforts by the complainant to cause the

directors to commence the action, notice, good faith and the requirement that the legal proceeding “appears to the court to be in the best interests of the company”

o Old standard: An applicant for derivative action must bring forward evidence that prima facie shows that the action is in the best interest of the corporation (Re North West Forest Products Ltd)

- CBCA 238: complainant is a current or former shareholder, current or former director or officer, the Director or anyone else who the court considers a proper person to make an application

- CBCA 239(2): must provide notice of intent to apply to the court at least 14 days before it is done, must act in good faith, must be in the interests of the corporation

- Costs are usually awarded at the end (indemnity from the court), but the court will also look at: (Turner v Mailhot)

o Financial inability to carry on – weighs heavily in favour of costs granted o To what extent the complainants who bore the cost will benefit from any awards granted to the

corporation. If it’s a “white knight,” then costs will likely be entirely reimbursed. o If the SHs who launch the action will be the primary beneficiaries if the corporation is successful, then

courts likely won’t give complete indemnity

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Prima Facie Standard: - The prima facie standard of Re Northwest Forest Products Ltd was set forth in the derivative section of the old

Companies Act- This act was replaced by the BC BCA in 2004- Under s 233 of the new BC BCA, the applicable standard is that the legal proceeding "appears to the court to be

in the best interests of the company"

Re Northwest Forest Products Ltd.: Shareholders sought leave to commence a derivative action to prevent the sale of a corporate subsidiary's assets; is the action prima facie in the interests of the corp? YES – evidence averred by the complainants (the sale of assets for less than fair value) establishes prima facie case

Requirements for establishing prima facie claim to indemnification: (Turner)- Same as requirements for establishing prima facie claim to derivative action:

o (1) the board of directors refused to bring the action; o (2) the complainant is acting in good faith; and o (3) the action appears to be in the interests of the corporation

Turner et al v Mailhot et al: P and P’s wife owned 30% shares of corp; defendant owned 70%; disagreement, defendant locked them out, fired them, now P seeking to bring derivative action to get return of lost income that he argues was diverted to defendant unfairly; can they bring derivative action? Can they be indemnified? Yes – court awarded 50% costs

Oppression Remedy:- CBCA s 241 provides a statutory oppression remedy- Available to any “complainant”

o Current or former securities holderso Current or former directors or officerso the Director (of Corporations Canada)o “any other person who, in the discretion of a court, is a proper person to make an application”

- A court may issue any order to remedy corporate action “that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer”

o Can only bring an oppression remedy claim if it relates to a security holder, creditor, director or officer - Oppression remedy available everywhere in Canada and basically same all throughout Canada - Most often used when a specific group of investors has been discriminated against (e.g., the directors deny the

rights of minority investors) and the court may issue any order to remedy the corporate action (action must be brought by the company)

- Confusion between oppression remedy (for all stakeholders, incl. creditors) and directors’ fiduciary duties (for shareholders)

o Oppression remedy is broader than traditional fiduciary duty – breach of fiduciary duty almost always constitutes oppression – most plaintiff will plead both

- Most relevant to corps where there is a controlling shareholder but used in public context as well

Statutory Test for Oppression: CBCA s241 (2):a) any act or omission of the corporation effects a result,b) the business or affairs of the corporation or any of its affiliates have been carried on or conducted in a manner,

orc) the powers of the board of directors have been exercised in a manner that is oppressive or unfairly prejudicial to

or that unfairly disregards the interests of any security holder, creditor, director, or officer

Re BCE and the Oppression Remedy: 2 Pronged Test for Oppression:

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1. the action complained of upsets the "reasonable expectations" of a security holder, creditor, director, or officer, and

a. The "reasonable expectations" prong speaks to general principles of equityb. The concept of "reasonable expectations" is objective and contextual

i. reasonable personii. in the specific circumstances

c. Inquiry is conditioned by the fact that different stakeholders have conflicting expectationsd. Ultimately, stakeholders are entitled to "reasonably expect" fair treatment

2. there is evidence of "oppression," "unfair prejudice," or "unfair disregard"a. oppression = bad faithb. unfair prejudice = harmful, though not necessarily culpablec. unfair disregard = negligence

Breach of Fiduciary Duty or Oppression?- In Re BCE Inc, the Court conflates the oppression remedy and the directors' fiduciary duties- According to Jeffrey MacIntosh, this is problematic for multiple reasons:

o The two remedies were drafted to serve different legislative purposes (protection of minority interests versus protection from self-dealing ). Conflating the two purposes is legally inappropriate.

o The duty of loyalty was traditionally to shareholders. The oppression remedy includes creditors.o How are the "best interests of the corporation" reconciled with particularized oppression claims?o Ultimately confuses both causes of action

POWERS AND DUTIES OF CONTROLLING SHAREHOLDERS

Controlling Shareholders:- Controlling shareholders = two categories shareholders with de jure control and shareholders with de facto

control- De jure control: shareholders hold (or have power to vote) 50% plus 1 of the votes and are therefore able to

secure the passage of an ordinary resolution without the cooperation of any other shareholdero Aka a majority shareholder

- De facto control: only those shares that are actually voted (in person or by proxy) count in determining whether corporate resolutions are passed because not all shareholders in a public corp typically vote, a shareholder with 20% or even 10% can possibly be confident in securing the passage of an ordinary resolution this is the power of de facto control

o Aka a controlling shareholder

The Problem of Opportunism:- Conflict between controlling shareholders and minority shareholders- Controlling shareholders have the power to expropriate corporate value from minority shareholders

o interested transactionso freeze-outs and other oppressive transactionso control premium

- This is a particularly serious issue in Canada, where many public corporations are dominated by controlling family shareholder groups

- Legal evolution has led to courts imposing increasing duties on majority shareholders

Brant Investments v KeepRite Inc: 3 level pyramid ICG at top, ICM in middle, Energy Products at bottom; ICG thought would be good to consolidate ICM, Energy Products and KeepRite under K; controlling shareholders of K (ICG) caused K to purchase assets owned by other subsidiaries; does controlling shareholder owe fiduciary duties? Is this conduct oppressive? Controlling shareholders do NOT owe fiduciary duties but doesn’t matter anyway bc oppression remedy exists and can do the same thing in this case50

Ferguson v Imax Systems Corp: I owned by 3 couples; ex-husband tries to squeeze out ex-wife; oppression? YES – amendments to articles must be done in good faith for benefits of company as a whole as per Allan; need to act fairly as per Goldex (neither Goldex nor Allan impose fiduciary duties); amendment not done in good faith; oppression remedy granted

Pente Investment Management Ltd. v Schneider Corp.: S fam controlled S corp through a dual-class structure. During a corporate auction, S fam favored Smithfield Foods Inc., despite the fact that Maple Leaf promised to make a higher offer; did S fam owe other shareholders fiduciary duty? MAYBE – case dismissed in favour of S fam but suggests there may be fiduciary duty to their specific class if they are voting as suchControl Premium:

- The control premium is the premium over the market value of a corporation's shares that a buyer is willing to pay to obtain control

- The control premium represents the value of being able to manage the company and/or appropriate corporate wealth

o In Pente, the Schneider family was legally able to capture the control premium- The commission will apparently use a quasi-fiduciary analysis in determining whether a transaction is in the

public interest (Re Canadian Tire: cease trade order to stop majority from avoiding coattails provision)

Duties of Controlling Shareholders:- Canadian courts have not held controlling shareholders owe a fiduciary duty to other shareholders (though they

may owe a duty of fairness)- The oppression remedy serves as an alternative to fiduciary duties (and subsumes the duty of fairness)- The securities commissions will apply quasi-fiduciary standards to unfair conduct by controlling shareholders

Shareholder Fiduciary Duty?- Goldex Mines: Majority must act fairly and honorably and if not done, court can step in with its equitable powers

to remedy the situation, but does not specifically say that the majority owes a fiduciary duty to the minorityo Supports proposition of common law recognizing fiduciary dutyo Brant holding in Goldex does NOT say controlling shareholders owe fiduciary duties

- McLaughlin: It is unclear whether majority shareholders owe fiduciary duties to minority shareholders in certain situations

- Re Canadian Tire: Majority shareholders may owe fiduciary duties to minority shareholders- Brant Investments (ICG owned 65% of KeepRite; got KeepRite to buy assets from its subsidiary): No need to

broaden fiduciary duties to include majority shareholders because the oppression remedy is available under the CBCA

- Ferguson (husband used corp to squeeze out wife SH): When dealing with close corporations, court may consider the relationship between shareholders with the actions of the corporation

o Demonstrated how a majority shareholder can use their power over the corporation to oppress another shareholder enough to grant an oppression remedy without having to enforce a fiduciary duty between shareholders

o Actionable oppression for purposes of the oppression remedy need not be illegal per se- Pente v Schneider: The Superior Court of Justice suggests that shareholders may have a fiduciary duty if they are

voting as members of a class

Role of Securities Pricing:- Many Canadian corporations have traditionally featured dual-class share structures- These structures can seem unfair to nonvoting public shareholders- However, the vulnerability of nonvoting shares is impounded into their market price- Given their discounted price, it is not obvious that non-controlling shares should receive special legal protections

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Controlling Shareholders in Canada:- Canadian public corporations are much more likely than American public corporations to have controlling

shareholders- As of 1990s, only 15%– 20% of public Canadian corporations were not controlled by a single shareholder group- This pattern has significant corporate governance implications- The presence of a controlling shareholder mitigates the conflict of interests between management and

shareholders but gives rise to another conflict of interest between controlling and minority shareholders- Empirical evidence indicates that corporations controlled by a single shareholder group are more profitable but

less expensive- This suggests that controlling shareholders effectively monitor management but appropriate value from

minority shareholdersTheoretical Implications WRT Controlling Shareholders:

- The presence of controlling shareholders is the norm, not the exception- Public corporations in most countries (especially civil law countries) tend to be dominated by controlling

shareholders- Economic theory suggests that countries with stronger shareholder rights should have less ownership

concentration- Yet Canada has strong shareholder rights

CLOSELY HELD CORPORATIONS

CBCA ss 145.1, 146

Closely-Held Corporations:- Although most of the largest corporations are public, the vast majority of corps by number are privately held- Many very large and powerful corps are privately held- Governance of private corps is more amenable to private contracting

Securities Law Implications:- Private corps generally exempt from securities law requirements to publicly disclose business and financial info- This = advantageous bc compliance with securities regulations can be very burdensome

o Also it’s a competitive disadvantage to have to continuously disclose the details of your business competitors could use that info against you

Alternative Entities:- Private businesses need not be corps- Other types of entities, including various forms of partnerships, may also be used- In the US, limited liability companies are the most common form of private business

Shareholder Agreements:- Pursuant to CBCA s145.1, any shareholder may enter voting agreements

o Entering into a contract to promise that they will vote their shares so as to implement a given governance structure

- Under s146 all of the shareholders may enter a unanimous shareholder agreemento Ordinary shareholder agreements more common

- These are common means of mediating control of private corps

Restrictions on Transfer:- Shareholder agreements can resist transfer of shares- Owners of closely-held corps often have personal relationships with one another value the personal nature of

their investment relationship

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- It is often undesirable for a stranger to come into the corp- Therefore, most closely-held corps feature restrictions on transfer- These restrictions can be baked into the organizational documents or be included in a shareholder agreement

o Restrictions on transfer valid if included in companies org docs (Case v Edmonton Country Club)- Shareholders have a right to combine their interests + voting powers to secure control of a corporation + ensure

that it is managed by certain persons in a certain manner (Ringuet)

Case v Edmonton Country Club Ltd: C sued E; C inherited common and preferred share in E from his dad; E tries to amend articles to impose ongoing fees on shareholders, etc.; article 20A restricts transfer without consent of director; Cdoesn’t want to pay fees; can corp charge its shareholder fees? NO; can corp adopt article that imposes restrictions on share transfer? YES – not through a bylaw but through articles is fine bc more warning/more say; no evidence board has acted unreasonably/abused discretion WRT restriction on transferRinguet v Bergeron: disagreement arose over shareholder agreement and B sued bc agreement guarantee shareholders certain titles and salaries in the company and he got put out of position and lost salary; Does this shareholder agreement, which puts certain rights and duties beyond corporate law on the shareholders, have public interest implications such that they court can review/strike it down, or is it just a contract like any other that court can review and enforce? Are shareholder agreements valid/enforceable contracts? Contracts don’t raise legal, moral or social issues. Valid

Unanimous Shareholder Agreements:- Unanimous shareholder agreements under the CBCA are different from ordinary shareholder agreements- A unanimous shareholder agreement can restrict (in whole or in part) "the powers of the directors to manage,

or supervise the management of, the business and affairs of the corporation"- Unanimous shareholder agreements have been interpreted to broadly modify corporate governance structures- The existence of a unanimous shareholder agreement can also impose directors' liabilities on shareholders- Thus, ordinary shareholder agreements often specify that they are not unanimous shareholder agreements- Unanimous shareholder agreements do not exist in British Columbia (rather, the articles may set forth an

alternative system of corporate governance)- Courts can amend a USA if it is oppressive (prevented people leaving b/c they would be out of work for a year).

Can both be party to and be oppressed by a USA. (Bury v Bell)

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